E-Z-GO 2004 Annual Report Download - page 71

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Securitizations
Textron Finance received proceeds of $0.4 billion in 2004 and $0.7 billion in 2003 from the securitization and sale (with servicing
rights retained) of finance receivables. Pre-tax gains from securitized trust sales were approximately $56 million in 2004, $43 mil-
lion in 2003 and $45 million in 2002. At the end of 2004, $2.3 billion in securitized loans were outstanding, with $17 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 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 Textron 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 agreement is $31 million. At January 1, 2005, 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.
Textron Finance retained subordinated interests in the trusts which are approximately 2% to 10% of the total trust. Servicing fees
range from 75 to 150 basis points. During 2004, key economic assumptions used in measuring the retained interests at the date of
each securitization included prepayment speeds ranging from 12.4% to 23.0%, weighted-average lives ranging from 0.3 to 3.3
years, expected credit losses ranging from 0.5% to 2.8%, and residual cash flows discount rates ranging from 5.0% to 7.3%. At
January 1, 2005, key economic assumptions used in measuring these retained interests were as follows:
Distribution Vacation
Aircraft Finance Interval
(Dollars in millions) Loans Receivables Loans
Carrying amount of retained interests in securitizations, net $ 98 $ 121 $ 14
Weighted-average life (years) 2.4 0.3 2.0
Prepayment speed (annual rate) 23.0% — 20.0%
Expected credit losses (annual rate) 0.2% 0.7% 3.7%
Residual cash flows discount rate 4.2% 4.8% 4.5%
Hypothetical adverse changes of 10% and 20% to either the prepayment speed, expected credit losses or residual cash flows dis-
count 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 assump-
tion 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.
Note 5 Inventories
January 1, January 3,
(In millions) 2005 2004
Finished goods $ 643 $ 686
Work in process 1,206 681
Raw materials 231 202
2,080 1,569
Less progress/milestone payments 338 66
$ 1,742 $ 1,503
Inventories aggregating $1.1 billion and $1.0 billion at the end of 2004 and 2003, respectively, were 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
$238 million and $224 million higher at those respective dates. The remaining inventories, other than those related to certain
long-term contracts, are valued primarily by the first-in, first-out (“FIFO”) method. Inventories related to long-term contracts, net
of progress/milestone payments were $259 million at the end of 2004 and $137 million at the end of 2003.
Notes to Consolidated Financial Statements