E-Z-GO 2005 Annual Report Download - page 49

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
At December 31, 2005, Textron Finance had unused commitments to fund new and existing customers under $1.2 billion of committed revolving
lines of credit, compared with $1.0 billion at January 1, 2005. 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 joint venture agreements with external financing arrangements for which Textron has guaranteed approximately $15 million in debt
obligations, including approximately $5 million related to discontinued operations. Textron would be required to make payments under these
guarantees if a joint venture defaults under the debt agreements.
Bell Helicopter and AgustaWestland North America Inc. (“AWNA”) formed the AgustaWestlandBell LLC (“AWB LLC”) in January 2004 for the joint
design, development, manufacture, sale, customer training and product support of the US101 helicopter, recently designated the VH-71 heli-
copter, and certain variations and derivatives thereof, to be offered and sold to departments or agencies of the U.S. Government.
In March 2005, AWB LLC received a $1.2 billion cost reimbursement-type subcontract from Lockheed Martin for the System Development and
Demonstration phase of the U.S. Marine Corps Marine 1 Helicopter Squadron (VH-71) Program. On March 11, 2005, Bell Helicopter guaranteed
to Lockheed Martin the due and prompt performance by AWB LLC of all its obligations under this subcontract, provided that Bell Helicopter’s lia-
bility under the guaranty shall not exceed 49% of AWB LLC’s aggregate liability to Lockheed Martin under the subcontract. AgustaWestland N.V.,
AWNA’s parent company, has guaranteed the remaining 51% to Lockheed Martin. Bell Helicopter and AgustaWestland N.V. have entered into
cross-indemnification agreements in which each party indemnifies the other related to any payments required under these agreements that result
from the indemnifying party’s workshare under any subcontracts received.
For 2005, AWB LLC’s maximum obligation is 20% of the total contract value, which equates to $232 million based on the current contract value of
$1.2 billion. In 2006, AWB LLC’s maximum obligation increases to 40%, or $464 million, and thereafter increases to 50%, or $580 million.
Accordingly, the maximum amount of Bell Helicopter’s liability under the guarantee is $114 million at December 31, 2005 and will be $227 mil-
lion in 2006 and $284 million thereafter through completion.
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 counterparties based upon a number of shares multiplied by the difference between the strike price and the prevailing Textron common stock
price. As of December 31, 2005, the contract was for approximately 1.7 million shares with a strike price of $70.80. The market price of the stock
was $76.98 at December 31, 2005, resulting in a receivable of $10 million, compared with a receivable of $31 million at January 1, 2005.
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 5 to the Consolidated 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 $361 million and $394 million in 2005 and 2004, respectively. Proceeds from securitizations includes proceeds
received related to incremental increases in the level of distribution finance receivables sold and excludes amounts received related to the ongo-
ing replenishment of the outstanding sold balance of these receivables with short durations. 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 rents in 2003 and 2001. The maximum liability at December 31, 2005 was $42 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 instan-
taneous 20% adverse change in these rates would have an insignificant impact on the valuation of this recourse liability.
Termination of Textron Finance’s off-balance sheet financing arrangements would significantly reduce its short-term funding alternatives. 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 arrange-