E-Z-GO 2004 Annual Report Download - page 46

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Textron Inc.
As shown in the preceding table, cash collections from finance assets are expected to be sufficient to cover maturing debt and
other contractual liabilities. At January 1, 2005, Textron Finance had $2.0 billion in debt and $399 million in other liabilities that
are payable within the next twelve months.
At January 1, 2005, Textron Finance had unused commitments to fund new and existing customers under $1.0 billion of com-
mitted revolving lines of credit, compared with $1.1 billion at January 3, 2004. The decrease is largely related to the continued
liquidation of the non-core syndicated bank loan portfolio in 2004. 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.
Off-Balance Sheet Arrangements
Textron has certain ventures where we have guaranteed debt up to an aggregate amount of approximately $18 million. Textron also
has other guarantee arrangements as more fully discussed in Notes 4 and 16 to the consolidated financial statements.
Bell Helicopter has partnered with The Boeing Company in the development of the V-22 tiltrotor, with Agusta Aerospace Corpora-
tion in the development of the AB139 and BA609, and with AgustaWestland North America Inc. (“AWNA”) in the development of
the US101. These agreements enable us to share expertise and costs, and ultimately the profits, with our partners. Bell and AWNA
formed the AgustaWestlandBell Limited Liability Company (“AWB LLC”) for the joint design, development, manufacture, sale, cus-
tomer training and product support of the US101 Helicopter.
Lockheed Martin, with AWB LLC as its principal subcontractor, has been selected to design, develop, manufacture and support the
Presidential helicopter for the U.S. Marine Corps Marine 1 Helicopter Squadron (VXX) Program. Bell Helicopter has guaranteed to
Lockheed Martin 49% of the performance of AWB LLC under subcontracts received by AWB LLC from Lockheed Martin as more
fully discussed in Note 16 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. As of January 1, 2005, the contract was for approximately 2 million
shares with a strike price of $57.51. The market price of the stock was $73.80 at January 1, 2005, resulting in a receivable of $31
million, compared with a receivable of $25 million at January 3, 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 4 to the consolidated financial statements. Textron
Finance utilizes these off-balance sheet financing arrangements (primarily asset-backed securitizations) to further diversify fund-
ing alternatives. These arrangements are an important source of funding that provided net proceeds from continuing operations of
$394 million and $765 million in 2004 and 2003, respectively. Textron Finance has used the proceeds from these arrangements to
fund the origination of new finance receivables and to retire commercial paper.
Whole-loan finance receivable sales in which Textron Finance maintains a continuing interest differ from securitizations as loans
are sold directly to investors and no portion of the sale proceeds is deferred. Limited credit enhancement is typically provided for
these transactions 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 maxi-
mum liability at January 1, 2005 was $42 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 $10 million. Textron Finance has valued this contingent liability based
on assumptions for annual credit losses and prepayment rates of 0.25% and 7.50%, respectively. An instantaneous 20% adverse
change in these rates would have an insignificant impact on the valuation of this contingent liability.
Termination of Textron Finance’s off-balance sheet financing arrangements would significantly reduce its short-term funding alter-
natives. While these arrangements do not contain provisions that require Textron Finance to repurchase significant balances of
receivables previously sold, there are risks that could reduce the availability of these funding alternatives in the future. Potential
barriers to the continued use of these arrangements include deterioration in finance receivable portfolio quality, downgrades in
Textron Finance’s debt credit ratings and a reduction of new finance receivable originations in the businesses that utilize these
funding arrangements. Textron Finance does not expect any of these factors to have a material impact on its liquidity or income
from continuing operations.