E-Z-GO 2001 Annual Report Download - page 47

Transactions Betw een Finance and M anufacturing Groups
A portion of Textron Finance’s business involves financing retail purchases and leases for new and used
aircraft and equipment manufactured by Textron M anufacturing’s Aircraft and Industrial Products
segments. In 2001, 2000 and 1999, Textron Finance paid Textron M anufacturing $1.3 billion, $1.4 billion,
and $1.3 billion, respectively, for receivables and operating lease equipment. Operating agreements
specify that Textron Finance generally has recourse to Textron Manufacturing for outstanding balances
from these transactions. At year-end 2001 and 2000, the amounts guaranteed by Textron M anufacturing
totaled $652 million and $903 million, respectively. Included in the finance receivables guaranteed by
Textron Manufacturing are past due loans of $90 million at the end of 2001 ($105 million at year-end 2000)
that meet the non-accrual criteria but are not classified as non-accrual by Textron Finance due to the
guarantee. Textron Finance continues to recognize income on these loans. Concurrently, Textron
Manufacturing is charged for their obligation to Textron Finance under the guarantee so that there are no
net interest earnings for the loans on a consolidated basis. Textron M anufacturing has established reserves
for losses related to these guarantees which are included in other current liabilities.
Securitizations
Textron Finance securitized and sold (with servicing rights retained) $1.3 billion and $1.2 billion of finance
receivables in 2001 and 2000, respectively. Gains from securitized trust sales w ere approximately $43
million and $22 million in 2001 and 2000, respectively, and proceeds w ere approximately $1.3 billion and
$1.1 billion, respectively. At year-end 2001, $2.3 billion in securitized loans were outstanding w ith $69
million in past due loans. Textron Finance has securitized certain receivables generated by Textron
Manufacturing for w hich it has retained full recourse to Textron M anufacturing.
Textron Finance retained subordinated interests in the trusts which are approximately 2% to 10% of the total
trust. Servicing fees range from 30 to 150 basis points. During 2001, key economic assumptions used in
measuring the retained interests at the date of each securitization included prepayment speeds ranging
from 7.5% to 20% , weighted average lives ranging from 0.3 to 8.9 years, expected credit losses ranging
from 0.2% to 1.5% , and residual cash flow s discount rates ranging from 7.1% to 11% . At year-end 2001,
key economic assumptions used in measuring these retained interests w ere as follows:
Equipment
Loans Land
Aircraft and Franchise Loan Floorplan
(Dollars in millions) Loans Leases Loans Receivables Loans
Carrying amount of retained
interests in securitizations, net $ 67 $41 $ 37 $ 20 $ 68
Weighted-average life (in years) 3.6 1.8 8.0 8.9 0.3
Prepayment speed (annual rate) 21.0)%6.6)%8.0)%20.0)% –
Expected credit losses (annual rate) 0.2)%0.2)%0.3)%1.5)%1.0%
Residual cash flow s discounted at 8.2)%7.0)%9.0)%11.0)%9.0%
Hypothetical adverse changes of 10% and 20% to either the prepayment speed, expected credit losses
and residual cash flows discount rates assumptions w ould not have a material impact on the current fair
value of the residual cash flow s associated w ith the retained interests. These hypothetical sensitivities
should be used w ith caution as the effect of a variation in a particular assumption on the fair value of the
retained interest is calculated without changing any other assumption. In reality, changes in one factor
may result in another that may magnify or counteract the sensitivities losses, such as increases in market
interest rates may result in lower prepayments and increased credit losses.
December 29),December 30),
(In millions) 2001 2000
Finished goods $719 $727
Work in process 856 930
Raw materials 377 454
1,952 2,111
Less progress payments and customer deposits 225 240
$1,727 $1,871
Inventories aggregating $1.0 billion and $1.2 billion at year-end 2001 and 2000, respectively, w ere valued
by the last-in, first-out (LIFO) method. Had such LIFO inventories been valued at current costs, their
carrying values would have been approximately $188 million and $192 million higher at those respective
dates. During the fourth quarter of 2001, certain inventory quantities w ere reduced, which resulted in a
liquidation of LIFO inventory layers carried at lower costs from prior years. The effect of the liquidation w as
4. Inventories
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