E-Z-GO 2005 Annual Report Download - page 37

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17
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
In 2003, Textron redeemed its 7.92% Junior Subordinated Deferrable Interest Debentures due 2045. The debentures were held by Textron’s wholly
owned trust, and the proceeds from their redemption were used to redeem all of the $500 million Textron Capital I trust preferred securities. Upon
the redemption, $15 million of unamortized issuance costs were written off and recorded in Special Charges.
Corporate Expenses and Other, Net
Corporate expenses and other, net increased $42 million in 2005, principally due to $16 million for higher compensation and pension costs, $9
million for corporate initiatives and $7 million for the corporate portion of share-based compensation expense recorded under a newly adopted
accounting standard.
Corporate expenses and other, net increased $34 million in 2004 primarily due to $14 million of nonrecurring income in 2003, $6 million in
higher premiums for Directors and Officers insurance, $5 million in funding to Textron’s charitable trust and $4 million in higher executive com-
pensation primarily related to improved operating results. The nonrecurring income in 2003 included $7 million related to an expired royalty
agreement and $7 million in proceeds from life insurance policies.
Income from Continuing Operations
Fluctuations in income from continuing operations are primarily driven by segment profit changes as discussed above. In addition, Textron
recorded certain items that affected the comparability of operating results in the last three years which are summarized in the table below:
(In millions)
2005 2004 2003
Special charges $ 118 $ 59 $ 77
Gain on sale of businesses — — (15)
118 59 62
Income tax benefit on above items (41) (19) (16)
$77$40$46
Gain on sale of businesses includes a gain of $15 million on the sale of Textron’s remaining interest in a previously divested business.
Share-Based Compensation
During the first quarter of 2005, Textron elected to adopt the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123
(Revised 2004), “Share-Based Payment” (“SFAS No. 123-R”), using the modified prospective method. The adoption resulted in recognition of
share-based compensation expense related primarily to the expensing of stock options in continuing operations of approximately $14 million
($10 million after tax) for the year ended December 31, 2005, including the net impact of the cumulative effect of adoption of approximately $1
million in the first quarter, and $2 million ($1 million after tax) in discontinued operations.
Income Taxes
A reconciliation of the federal statutory income tax rate to the effective income tax rate is provided below:
2005 2004 2003
Federal statutory income tax rate 35.0% 35.0% 35.0%
Increase (decrease) in taxes resulting from:
Valuation allowance on contingent receipts 2.1 — —
State income taxes 0.9 1.3 2.0
Special foreign dividend 0.1 2.1 —
Favorable tax settlements — — (3.0)
Employee Stock Ownership Plan dividends (0.9) (1.2) (1.8)
Foreign tax rate differential (5.0) (4.8) (3.4)
Export sales benefit (1.1) (1.0) (1.3)
Other, net (0.9) (0.8) (1.8)
Effective income tax rate 30.2% 30.6% 25.7%
Discontinued Operations
In December 2005, our Board of Directors authorized the divestiture of the Textron Fastening Systems business. With this approval, we have com-
mitted to actively market this business and anticipate no significant changes to the approved plan and the completion of the sale within the next
twelve months.