E-Z-GO 2002 Annual Report Download - page 31

The liquidity and capital resources of Textron’s operations are best understood by separately consider-
ing its independent borrowing groups, Textron Manufacturing and Textron Finance. Textron Manufactur-
ing consists of Textron Inc., the parent company, consolidated with the entities that operate in the Air-
craft, Fastening Systems, Industrial Components 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 wholly-owned commercial
finance subsidiary, Textron Financial Corporation, consolidated with its subsidiaries. The financial results
of Textron Financial are a reflection of its ability to provide financial services in a competitive market-
place, at appropriate pricing, while managing the associated financial risks. The fundamental differ-
ences between 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 Tex-
tron Inc. to maintain 100% ownership 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.
Operating Cash Flows
Textron’s financial position continued to be strong at the end of 2002. During 2002, cash flows from oper-
ations were the primary source of funds for the operating needs, dividends and capital expenditures of
Textron Manufacturing. The statements of cash flows for each borrowing group detailing the changes in
cash balances are on pages 38 and 39. Management analyzes operating cash flows by tracking Free
Cash Flow, which is calculated using net cash provided by operating activities, adding back after-tax
cash used for restructuring activities, and proceeds on the sale of fixed assets, then subtracting capital
expenditures, including those financed with capital leases.
Financing
Textron Manufacturing’s debt (net of cash) to total capital ratio as of December 28, 2002 was 27%, down
slightly from 28% at December 29, 2001. Textron Manufacturing has established a target debt-to-capital
ratio in the mid to high 20% range. Consistent with the 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 treated as equity capital for the purpose
of calculating leverage pursuant to Textron’s financial targets. In turn, Textron Finance evaluates its
leverage by limiting borrowing 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 is returned to Textron.
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 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 with access to a
broad base of global investors at an attractive cost, we target a long-term A rating from the independent
debt-rating agencies. As of December 28, 2002, our credit ratings remain strong from Standard & Poor’s
(Textron Manufacturing: 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 Moody’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 commercial paper
and long-term debt credit ratings were downgraded from a P1 to P2 and from an A-2 to A-3, respective-
ly, by Moody’s Investors Service and both companies were placed on Negative Outlook by all three rat-
ings agencies. 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 actions of
the rating agencies caused our cost of capital to increase, it did not result in any loss of access to capi-
tal. Textron did not experience any commercial paper or long-term debt credit rating downgrades in
2002. Further downgrades in Textron’s ratings could increase borrowing spreads or limit its access to
the commercial paper, securitization and long-term debt markets. In addition, Textron Finance’s $1.5 bil-
lion revolving bank line of credit agreements contain certain financial covenants that Textron Finance
needs to comply with to maintain its ability to borrow under the facilities. Textron Finance was in full com-
pliance with such covenants at December 28, 2002.
Textron believes that it has adequate credit facilities and access to credit markets to meet its long-term
financing needs.
Liquidity &
Capital
Resources
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