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61 Textron Inc. Annual Report • 2013
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
We manufacture and sell our products in a number of countries throughout the world, and, therefore, we are exposed to
movements in foreign currency exchange rates. We utilize foreign currency exchange contracts to manage this volatility. Our
foreign currency exchange contracts are measured at fair value using the market method valuation technique. The inputs to this
technique utilize current foreign currency exchange forward market rates published by third-party leading financial news and data
providers. These are observable data that represent the rates that the financial institution uses for contracts entered into at that
date; however, they are not based on actual transactions so they are classified as Level 2. At December 28, 2013 and December
29, 2012, we had foreign currency exchange contracts with notional amounts upon which the contracts were based of $636 million
and $664 million, respectively. At December 28, 2013, the fair value amounts of our foreign currency exchange contracts were a
$2 million asset and a $15 million liability. At December 29, 2012, the fair value amounts of our foreign currency exchange
contracts were a $9 million asset and a $5 million liability.
We primarily utilize forward exchange contracts which have maturities of no more than three years. These contracts qualify as
cash flow hedges and are intended to offset the effect of exchange rate fluctuations on forecasted sales, inventory purchases and
overhead expenses. At December 28, 2013, we had a net deferred loss of $10 million in Accumulated other comprehensive loss
related to these cash flow hedges. Net gains and losses recognized in earnings and Accumulated other comprehensive loss on
these cash flow hedges, including gains and losses related to hedge ineffectiveness, amounted to a $16 million net loss in 2013 and
were not significant in 2012. We expect to reclassify a $10 million net loss from Accumulated other comprehensive loss to
earnings in the next twelve months.
We hedge our net investment position in major currencies and generate foreign currency interest payments that offset other
transactional exposures in these currencies. To accomplish this, we borrow directly in foreign currency and designate a portion of
foreign currency debt as a hedge of a net investment. We record changes in the fair value of these contracts in other comprehensive
income to the extent they are effective as cash flow hedges. Currency effects on the effective portion of these hedges, which are
reflected in the foreign currency translation adjustments within Accumulated other comprehensive loss, produced a $2 million
after-tax gain in 2013, resulting in an accumulated net gain balance of $6 million at December 28, 2013. There was no
ineffectiveness recorded related to these hedges during 2013.
Our Finance group has entered into interest rate exchange contracts to mitigate exposure to changes in the fair value of its fixed-
rate receivables and debt due to fluctuations in interest rates. These interest rate exchange contracts are not exchange traded and
are measured at fair value utilizing widely accepted, third-party developed valuation models. The actual terms of each individual
contract are entered into a valuation model, along with interest rate data, which is based on readily observable market data
published by third-party leading financial news and data providers. At December 28, 2013 and December 29, 2012, we had
interest rate exchange contracts with notional amounts upon which the contracts were based of $229 million and $671 million,
respectively. The fair value amounts of our interest rate exchange contracts recorded at December 28, 2013, were a $2 million
asset and a $5 million liability. At December 29, 2012, the fair value amounts of our interest rate exchange contracts were an $8
million asset and an $8 million liability.
Our exposure to loss from nonperformance by the counterparties to our derivative agreements at the end of 2013 was minimal. We
do not anticipate nonperformance by counterparties in the periodic settlements of amounts due. We historically have minimized
this potential for risk by entering into contracts exclusively with major, financially sound counterparties having no less than a long-
term bond rating of A. The credit risk generally is limited to the amount by which the counterparties’ contractual obligations
exceed our obligations to the counterparty. We continuously monitor our exposures to ensure that we limit our risks.
Assets Recorded at Fair Value on a Nonrecurring Basis
During 2013 and 2012, certain assets in the Finance Group were measured at fair value on a nonrecurring basis using significant
unobservable inputs (Level 3). The table below sets forth the balance of those assets at the end of the year in which a fair value
adjustment was taken.
(In millions)
December 28,
2013
December 29,
2012
Finance receivables held for sale $ 65 $ 140
Impaired finance receivables 45 72
Other assets 35 76