E-Z-GO 2003 Annual Report Download - page 51

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Included in the finance receivables guaranteed by Textron Manufacturing are past due loans of $69 mil-
lion and $85 million at the end of 2003 and 2002, respectively, that meet the non-accrual criteria but are
not classified as non-accrual by Textron Finance due to the guarantee. Textron Finance continues to rec-
ognize 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 consoli-
dated basis. Textron Manufacturing has established reserves for losses related to these guarantees that
are included in other current liabilities.
Textron Finance received proceeds of $0.7 billion in 2003 and $0.7 billion in 2002 from the securitization
and sale (with servicing rights retained) of finance receivables. Pretax gains from securitized trust sales
were approximately $43 million in 2003, $45 million in 2002 and $43 million in 2001. At the end of 2003,
$2.2 billion in securitized loans were outstanding with $32 million in past due loans. Textron Finance has
securitized certain receivables generated by Textron Manufacturing for which it has retained full
recourse to Textron Manufacturing.
Textron Finance retained subordinated interests in the trusts which are approximately 2% to 10% of the
total trust. Servicing fees range from 50 to 150 basis points. During 2003, key economic assumptions
used in measuring the retained interests at the date of each securitization included prepayment speeds
ranging from 7.5% to 23%, weighted average lives ranging from 0.2 to 2.1 years, expected credit losses
ranging from 0.3% to 4.7%, and residual cash flows discount rates ranging from 4.7% to 7.0%. At Janu-
ary 3, 2004, key economic assumptions used in measuring these retained interests were as follows:
(Dollars in millions)
Carrying amount of retained interests in
securitizations, net $ 100 $ 121 $ 17 $ 17
Weighted average life (in years) 1.8 2.4 1.3
Prepayment speed (annual rate) 21.4% — 20.0% 15.0%
Expected credit losses (annual rate) 0.5% 0.3% 3.0% 4.4%
Residual cash flows discount rate 4.1% 5.7% 5.5% 5.1%
Hypothetical adverse changes of 10% and 20% to either the prepayment speed, expected credit losses
and residual cash flows discount rates assumptions would not have a material impact on the current fair
value of the residual cash flows associated with the retained interests. These hypothetical sensitivities
should be used with 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, a change in one factor
may result in a change in another factor that may magnify or counteract the sensitivities losses. For
example, increases in market interest rates may result in lower prepayments and increased credit losses.
December 28,
(In millions) 2002
Finished goods $ 688 $ 751
Work in process 681 810
Raw materials 209 191
1,578 1,752
Less progress payments and customer deposits 139 186
$ 1,439 $ 1,566
Textron Manufacturing provides a guarantee to a securitization trust sponsored by a third-party financial
institution that purchases timeshare note receivables from Textron Finance. The guarantee requires Tex-
tron Manufacturing to make payments to the trust should the cash flows from the timeshare notes fall
below a minimum level. The maximum potential payment required under the credit enhancement agree-
ment is $31 million. At January 3, 2004, Textron has a fair value liability recorded of approximately $0.2
million that was established upon the sale of additional timeshare note receivables into the trust.
Textron has not been required to make any payments to the trust under the credit enhancement
agreement, and based on historical experience with the collateral in the trust, no additional liability
is considered necessary.
0.2