E-Z-GO 2001 Annual Report Download - page 29

The liquidity and capital resources of Textron’s operations are best understood by separately considering
its independent borrow ing groups, Textron M anufacturing and Textron Finance. Textron M anufacturing
consists of Textron Inc., the parent company, consolidated w ith the entities w hich operate in the Aircraft,
Automotive, Fastening Systems and Industrial Products business segments, 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 consists of Textron’s w holly-ow ned commercial finance subsidiary,
Textron Financial Corporation, consolidated w ith its subsidiaries. The financial results of Textron Financial
are a reflection of its ability to provide financial services in a competitive marketplace, at the appropriate
pricing, w hile managing the associated financial risks. The fundamental differences betw een each
borrowing group’s activities result in different measures used by investors, rating agencies and analysts.
Textron Inc. provides a support agreement to Textron Finance that requires Textron Inc. to maintain 100%
ow nership of Textron Finance. The agreement also requires Textron Finance to maintain fixed charge
coverage of 125% and consolidated shareholder’s equity of no less than $200 million. Textron Finance’s
bank agreements prohibit the termination of the support agreement under any circumstances.
Operating Cash Flow s
Textron’s financial position continued to be strong at the end of 2001. During 2001, cash flows from
operations w as the primary source of funds for the operating needs, dividends and capital expenditures
of Textron M anufacturing. The statements of cash flows for each borrow ing group detailing the changes
in cash balances are on pages 36-37. Textron M anufacturing's operating cash flow includes dividends
received from Textron Finance of $51 million and $82 million during 2001 and 2000, respectively.
Financing
Textron Manufacturing’s debt (net of cash) to total capital ratio w as 28% at December 29, 2001 dow n
slightly from 29% at December 30, 2000. We have established a financial target of a debt to capital ratio
in the high 20% range. Consistent w ith the analytical methodology used by members of the financial
community, leverage of the manufacturing operations excludes the debt of Textron Finance. In addition,
the obligated mandatorily redeemable preferred securities are not treated as debt, but are included as
capital for the purposes of calculating leverage pursuant to Textron's financial targets. In turn, Textron
Finance evaluates its leverage by limiting borrow ing so that its leverage will not exceed a ratio of debt to
tangible equity of 7.5 to 1. As a result, surplus capital of Textron Finance will be returned to Textron, and
additional capital required for grow th w ill be infused or left in the business, assuming Textron Finance's
returns are consistent with our standards.
Borrowings have historically been a secondary source of funds for Textron Manufacturing and, along w ith
the collection of finance receivables, are a primary source of funds for Textron Finance. Both Textron
Manufacturing and Textron Finance utilize a broad base of financial sources for their respective liquidity
and capital needs. Our credit ratings are predominantly a function of our ability to generate operating cash
flow and satisfy certain financial ratios. Since high-quality credit ratings provide us w ith access to a broad
base of global investors at an attractive cost, w e target a long-term A rating from the independent debt-rating
agencies. Our credit ratings remain strong from Standard & Poor’s (Textron M anufacturing: A Long-Term; A1
Short-Term and Textron Finance: A Long-Term; A2 Short-Term). Our credit ratings for Textron Manufacturing
and Textron Finance are also strong from M oody’s Investors Service (A3 Long-Term; P2 Short-Term) and
Fitch (A Long-Term; F1 Short-Term).
During the second half of 2001, both Textron Manufacturing’s and Textron Finance’s credit ratings were
placed on Negative Outlook by all three rating agencies and were dow ngraded from an A-2 to an A-3 rating
by M oody’s Investors Service. The economic environment and its potential impact on the financial
performance from the aerospace and financial services industries were listed as contributing factors.
While the action of the rating agencies did cause our cost of capital to increase modestly, it did not cause
us to lose access to capital. For example, Textron M anufacturing issued $300 million of seven-year term
financing at 6.375% in November 2001, and both borrow ing groups have continued to issue commercial
paper to investors with the revised credit ratings. Although Textron Finance’s borrow ing spreads have
increased as a result of the dow ngrades, Textron Finance has not experienced any change in its access
to the commercial paper and securitization markets. Additional dow ngrades in Textron Finance’s ratings
could further increase its borrow ing spreads or limit its access to the commercial paper, securitization and
long-term debt markets.
Liquidity &
Capital
Resources
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