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applicable. We recognize net tax-related interest and penalties for continuing operations in income tax expense. If we do not
believe that it is more likely than not that a tax benefit will be sustained, no tax benefit is recognized. However, our future results
may include favorable or unfavorable adjustments to our estimated tax liabilities due to settlement of income tax examinations,
new regulatory or judicial pronouncements, or other relevant events. As a result, our effective tax rate may fluctuate significantly
on a quarterly and annual basis.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Exchange Risks
Our financial results are affected by changes in foreign currency exchange rates in the various countries in which our products are
manufactured and/or sold. For our manufacturing operations, we manage exposures to foreign currency assets and earnings
primarily by funding certain foreign currency-denominated assets with liabilities in the same currency so that certain exposures are
naturally offset. We primarily use borrowings denominated in British pound sterling for these purposes. In managing our foreign
currency transaction exposures, we also enter into foreign currency exchange contracts. These contracts generally are used to fix
the local currency cost of purchased goods or services or selling prices denominated in currencies other than the functional
currency. The notional amount of outstanding foreign currency exchange contracts was approximately $696 million and $636
million at the end of 2014 and 2013, respectively. The impact of foreign currency exchange rate changes on revenues and segment
profit for 2014 and 2013 from the prior year was not significant.
Interest Rate Risks
Our financial results are affected by changes in interest rates. As part of managing this risk, we seek to achieve a prudent balance
between floating- and fixed-rate exposures. We continually monitor our mix of these exposures and adjust the mix, as necessary.
For our Finance group, we limit our risk to changes in interest rates with a strategy of matching floating-rate assets with floating-
rate liabilities.
Quantitative Risk Measures
In the normal course of business, we enter into financial instruments for purposes other than trading. To quantify the market risk
inherent in our financial instruments, we utilize a sensitivity analysis. The financial instruments that are subject to market risk
(interest rate risk and foreign exchange rate risk) include finance receivables (excluding leases), debt (excluding lease obligations)
and foreign currency exchange contracts.
Presented below is a sensitivity analysis of the fair value of financial instruments outstanding at year-end. We estimate the fair
value of the financial instruments using discounted cash flow analysis and indicative market pricing as reported by leading
financial news and data providers. This sensitivity analysis is most likely not indicative of actual results in the future. The
following table illustrates the sensitivity to a hypothetical change in the fair value of the financial instruments assuming a 10%
decrease in interest rates and a 10% strengthening in exchange rates against the U.S. dollar.
2014
2013
(In millions)
Carrying
Value*
Fair
Value*
Sensitivity of
Fair Value
to a 10%
Change
Carrying
Value*
Fair
Value*
Sensitivity of
Fair Value
to a 10%
Change
Manufacturing group
Foreign exchange rate risk
Debt
$ (236)
$ (277)
$ (28)
$ (249)
$ (275)
$ (27)
Foreign currency exchange contracts
(11)
(11)
52
(12)
(12)
33
$ (247)
$ (288)
$ 24
$ (261)
$ (287)
$ 6
Interest rate risk
Debt
$ (2,742)
$ (2,944)
$ (21)
$ (1,854)
$ (2,027)
$ (13)
Finance group
Interest rate risk
Finance receivables
$ 1,039
$ 1,056
$ 20
$ 1,296
$ 1,356
$ 24
Debt, including intergroup
(1,063)
(1,051)
9
(1,256)
(1,244)
(4)
* The value represents an asset or (liability).
36 Textron Inc. Annual Report • 2014