E-Z-GO 1998 Annual Report Download - page 30

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Discontinued Operations
In August 1998, Textron announced that it had reached an agreement to sell Avco
Financial Services (AFS) to Associates First Capital Corporation. The sale was completed
on January 6, 1999. AFS has been classified as a discontinued operation for all periods.
1998 vs. 1997
Income from discontinued operations of $165 million was $21 million lower than 1997’s
income from discontinued operations of $186 million. The decrease was due to (a)
lower earnings in the U.S. Finance business as a result of an increase in the provision
for receivables (receivables increased in 1998 while receivables decreased in 1997) and
a decrease in the gain on sales of receivables, (b) lower earnings in Hong Kong due to a
weakening economy and (c) the unfavorable impact of foreign exchange rates primarily
in Australia and Canada. This unfavorable impact was partially offset by an increase in
insurance earnings due to improved loss experience and an increase in capital gains.
1997 vs. 1996
PIncome from discontinued operations of $186 million was $6 million lower than 1996’s
income from discontinued operations of $192 million. The decrease reflects first quarter
1996 income of $16 million related to Paul Revere which was disposed of in early 1997.
Income from Avco Financial Services increased $10 million reflecting the benefit from
the gains on the sale of certain underperforming branches, a higher level of finance
receivables outstanding, improved independent insurance operations, and a decrease in
the average cost of borrowed funds. These benefits were offset by an increase in the pro-
vision for net credit losses, a decrease in the yields on finance receivables, and higher
operating expenses related to international expansion and the start-up of centralized
sales processing centers in the U.S. and Canada.
The liquidity and capital resources of Textron’s (Textron or the Company) operations are
best understood by separately considering its independent borrowing groups (Textron
Manufacturing and Textron Finance). Textron Manufacturing consists of Textron’s manu-
facturing businesses, whose financial results are a reflection of the ability to manage and
finance the development, production and delivery of tangible goods and services. Textron
Finance business involves commercial financing activities. Textron Finance’s financial
results are a reflection of its ability to provide financial services in a competitive mar-
ketplace, at the appropriate pricing, while managing the associated financial risks. The
fundamental differences between each borrowing group’s activities result in different
measures used by investors, rating agencies and analysts.
Operating Cash Flows
Textron’s financial position continued to be strong at the end of 1998. During 1998, cash
flows from operations was the primary source of funds for operating needs and capital
expenditures of Textron Manufacturing. Operating activities have generated increased
cash flow in each of the past three years. The Statement of Cash Flows for each borrow-
ing group detailing the changes in cash balances are on page 36. Textron Manufacturing’s
operating cash flow includes dividends received from Textron Finance and from AFS
which is a discontinued operation. In addition, 1998 operating cash flow includes $100
million received from a joint venture partner. Beginning in late 1997, the methodology
used to determine the amount of dividends to be paid to Textron Manufacturing
changed from payments based on a percentage of net income to payments based on
Textron Finance maintaining a leverage ratio of 6.5 to 1. Now that Textron’s finance
operations no longer include consumer finance, this leverage ratio will be re-evaluated
in 1999.
Financing
Borrowings have historically been a secondary source of funds for Textron
Manufacturing and, along with the collection of finance receivables, are a primary source
of funds for Textron Finance. Both Textron Manufacturing and Textron Finance have
Liquidity &
Capital Resources
Discontinued
Operations
26 1998 TEXTRON ANNUAL REPORT