E-Z-GO 1999 Annual Report Download - page 36

established a two billion Euro medium term note facility. Textron Finance also has a
medium-term note facility of which $115 million is available at year-end 1999. The
Company believes that both borrowing groups, individually and in the aggregate, have
adequate credit facilities and have available access to capital markets to meet their
long-term financing needs.
Dispositions
On January 6, 1999, Textron completed its sale of Avco Financial Services to Associated
First Capital Corporation for $3.9 billion in cash. Net after-tax proceeds were approxi-
mately $2.9 billion, resulting in an after-tax gain of $1.65 billion. Proceeds from the AFS
disposition had a significant short-term impact on Textron’s capital structure. Textron
assessed the potential incremental benefits that it could earn from investing the AFS
proceeds (within the Company’s established investment policies) versus the interest cost
avoidance from the retirement of borrowings and determined that the latter provided
the greatest value to shareholders. Therefore, in early 1999, the Company used the
proceeds to repay long-term and short-term borrowings of Textron Manufacturing and
Textron Finance commercial paper. Interest rate swaps designated as hedges of retired
borrowings were also terminated.
Uses of Capital
Textron measures its existing businesses, and evaluates proposed capital projects and
acquisitions on the basis of their ability to achieve a return on invested capital (ROIC)
of at least 15 percent. ROIC measures the ability of a business or project to achieve an
acceptable return on its capital irrespective of how it is financed. Textron sets rigorous
financial criteria for evaluating potential acquisitions. Potential acquisitions must:
◗Contribute to EPS immediately, or have significant earnings growth potential.
◗Achieve “economic profit” – earnings over and above the cost of capital, which Textron esti-
mates at 10 percent after tax for domestic manufacturing (13 percent for domestic finance) –
within a three-year time period. If an acquisition cannot produce an economic profit
within this time frame, it must have a sound strategic justification (such as protecting
an existing business with acceptable returns on capital) or the capital is better returned
to shareholders.
◗Have a capability to achieve an ROIC of at least 15 percent (18% for Textron Finance).
Acquisitions by Textron Manufacturing are evaluated on an enterprise basis, so that the
capital employed is equal to the price paid for the target company’s equity plus any debt
assumed. During the past three years, Textron acquired 30 companies in the Manufacturing
segments for an aggregate cost of $2.8 billion, including notes issued for approximately
$234 million, treasury stock issued for $32 million and $571 million of debt assumed.
Acquisitions of Textron Finance are evaluated on the basis of the amount of Textron
parent company capital that Textron would have to set aside so that the acquisition
could be levered at a debt to tangible equity ratio with the Finance Company of 7.5 to 1.
During the past three years, Textron Finance acquired six companies. The capital required
for these acquisitions was $387 million. The actual cost of the acquisitions was $1.5 billion,
including debt assumed of $595 million.
Capital spending increased in 1999 by approximately $57 million. This increase was
primarily used to expand aircraft and industrial capacity. Capital spending for 2000 is
expected to increase from 1999, as a result of initiatives to increase aircraft and automo-
tive capacity and to expand fluid and power capabilities.
In 1999, Textron repurchased 9.8 million shares of common stock under its Board
authorized share repurchase program at an aggregate cost of $751 million. Textron’s
Board of Directors raised the annual dividend per common share to $1.30 in 1999 from
$1.14 in 1998. In 1999, dividend payments to shareholders included four payments as
opposed to 1998 when three payments were paid. Dividend payments to shareholders
in 1999 amounted to $192 million, an increase of $49 million from 1998.
34 Consistent Growth