E-Z-GO 2003 Annual Report Download - page 30

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portfolio in 2003. Since many of the agreements will not be used to the extent committed or will expire
unused, the total commitment amount does not necessarily represent future cash requirements.
Textron has certain ventures where we have guaranteed debt and lease obligations up to an aggregate
amount of approximately $93 million. Included in this amount is our guarantee of one-half of Citation-
Share’s debt and lease obligations up to a maximum of $70 million, of which $33 million in such obliga-
tions were outstanding as of January 3, 2004.
Textron also participates in two joint ventures for the development of certain aircraft for which Textron
has not guaranteed any debt obligations. Bell Helicopter has partnered with The Boeing Company in the
development of the V-22 tiltrotor and with Agusta in the development of the BA609 and AB139. These
agreements enable us to share expertise and costs, and ultimately the profits, with our partners in these
ventures.
Textron has also entered into other guarantee arrangements as more fully discussed in Notes 3 and 15
to the consolidated financial statements.
Textron Manufacturing enters into a forward contract in Textron common stock on an annual basis. The
contract is intended to hedge the earnings and cash volatility of stock-based incentive compensation
indexed to Textron stock. The forward contract requires annual cash settlement between the counter
parties based upon a number of shares multiplied by the difference between the strike price and the
prevailing Textron common stock price. At the end of 2003, this forward contract was for approximately 2
million shares with a strike price of $44.88. The market price of the stock was $57.19 at January 3, 2004,
resulting in a receivable of $25 million. A cash payment was received of approximately $26 million on
this contract on January 22, 2004.
Textron Finance sells finance receivables utilizing both securitizations and whole-loan sales. As a result
of these transactions, finance receivables are removed from the balance sheet, and the proceeds
received are used to reduce the recorded debt levels. Despite the reduction in the recorded balance
sheet position, Textron Finance generally retains a subordinate interest in the finance receivables sold
through securitizations, which may affect operating results through periodic fair value adjustments.
These retained interests are more fully discussed in the securitizations section of Note 3 to the consoli-
dated financial statements. Textron Finance utilizes these off-balance sheet financing arrangements
(primarily asset-backed securitizations) to further diversify funding alternatives. These arrangements are
an important source of funding that provided net proceeds from continuing operations of $765 million
and $707 million in 2003 and 2002, respectively.
Textron Finance also sells receivables in whole-loan sales in which it maintains a continuing interest
through limited credit enhancement in the form of a contingent liability related to finance receivable
credit losses and, to a lesser extent, prepayment risk. Textron Finance has a contingent liability related
to the sale of equipment lease rental streams in 2003 and 2001. The maximum liability at January 3,
2004 was $45 million, and in the event Textron Finance’s credit rating falls below BBB, it is required to
pledge a related pool of equipment residuals that amount to $103 million. Textron Finance has valued
this contingent liability based on assumptions for annual credit losses and prepayment rates of 0.25%
and 7.5%, respectively. An instantaneous 20% adverse change in these rates would have a $0.3 million
impact on the valuation of this recourse liability.
The preparation of our consolidated financial statements in conformity with generally accepted account-
ing principles requires management to make complex and subjective judgments in the selection and
application of accounting policies. The accounting policies that we believe are most critical to the por-
trayal of Textron’s financial condition and results of operations, and that require management’s most diffi-
cult, subjective and complex judgments in estimating the effect of inherent uncertainties are listed
below. This section should be read in conjunction with Note 1 to the consolidated financial statements,
which includes other significant accounting policies.
We evaluate the collectibility of our commercial and finance receivables based on a combination of fac-
tors. In circumstances where we are aware of a specific customer’s inability to meet its short-term finan-
cial obligations to us (e.g., bankruptcy filings, substantial downgrading of credit scores, geographic
economic conditions, etc.), we record a specific reserve for bad debts for amounts we estimate to be
potentially uncollectible. Receivables are charged off when deemed uncollectible. For homogeneous