E-Z-GO 2005 Annual Report Download - page 69

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Textron Manufacturing generally uses a centralized approach to the cash management and financing of its operations and, accordingly, does not
allocate debt or interest expense to its discontinued businesses. Any debt and related interest expense of a specific entity within a business is
recorded by the respective entity. General corporate overhead previously allocated to the businesses for reporting purposes is excluded from
amounts reported as discontinued operations.
Textron Fastening Systems – During 2005, the Textron Fastening Systems business experienced declining sales volumes and profits. Volumes
were down due to soft demand in the automotive market and operating difficulties. Profits were down due to the lower volumes, a lag in the ability
to recover higher steel costs and inefficiencies associated with the consolidation of manufacturing operations in North America. Due to the con-
tinuation of these conditions, further softening of demand in the North American automotive market and an expected decline in the European auto-
motive market, Textron’s Management Committee initiated a special review at the end of August to consider strategic alternatives for the segment,
including the potential sale of all or portions of its operations.
On September 6, 2005, Textron’s Board of Directors approved management’s recommendation to explore strategic alternatives for the segment.
Based on the approval of this recommendation and the likelihood of execution, Textron determined on September 6, 2005 that an impairment
indicator existed for both the Fastening Systems’ goodwill and its long-lived assets. In its assessment of potential impairment of the goodwill,
management estimated the fair value of the business using independent third-party valuations. This fair value amount was then compared to the
carrying amount of the segment. As the carrying amount exceeded the fair value, management then measured the amount of goodwill impairment
loss. The excess of the fair value of the segment over the fair value amounts assigned to its assets and liabilities represents the implied fair value
of goodwill. The carrying amount of the goodwill exceeded the implied fair value of that goodwill, resulting in an impairment loss of $335 million
recorded in the third quarter of 2005.
In December 2005, Textron’s Board of Directors authorized the divestiture of the Textron Fastening Systems business. With this approval, Textron
has committed to actively market the segment and anticipates no significant changes to the approved plan and the completion of the sale within
the next twelve months. Textron recorded an after-tax charge of approximately $52 million in the fourth quarter of 2005, which includes $37 mil-
lion related to previously deferred foreign currency translation losses and $2 million of tax charges, both related to the non-U.S.-based business,
as well as $7 million related to curtailment losses for employee retirement plans. After these charges, management assessed the estimated fair
value of the business and determined that no further adjustment to the carrying value was required. In addition, approximately $6 million in after-
tax deal-related costs primarily for professional services and advisory fees were incurred during the quarter.
InteSys – Textron reached a final decision in the fourth quarter of 2004 to sell the remainder of its InteSys operations, which was previously
included in the Industrial segment. The carrying value of this business approximated fair value at the date of the decision to sell. Textron sold this
business in February 2005 and recorded an after-tax gain of approximately $49 million, primarily related to a tax benefit.
OmniQuip – On August 1, 2003, Textron consummated the sale of its remaining OmniQuip business to JLG Industries, Inc. for $100 million. Prior
to this consummation, Textron recorded $30 million for the impairment of $15 million in intangible assets and $15 million in goodwill based on
the fair value implied by the sale price under negotiation at that time.
Textron Manufacturing retained certain liabilities of the OmniQuip business. These liabilities totaled approximately $23 million at December 31,
2005 and included reserves related to a recourse liability to cover potential losses on approximately $30 million in finance receivables held by
Textron Finance. See Note 5 for further discussion on transactions between Textron’s Manufacturing and Finance borrowing groups.
Small Business Direct – In 2003, Textron Finance sold its small business direct portfolio for $421 million in cash. Based upon the terms of the
transaction, no gain or loss was recorded. Textron Finance entered into a loss-sharing agreement related to the sale, which requires Textron
Finance to reimburse the purchaser for 50% of losses incurred on the portfolio above a 4% annual level. Due to the nature of the loss-sharing
agreement, there is no maximum guarantee amount related to the remaining $380 million portfolio. Textron Finance originally recorded a liability
of $14 million representing the estimated fair value of the guarantee, which expires in 2008. As of December 31, 2005, Textron Finance has reim-
bursed the purchaser a total of $4 million under this agreement, and has recorded an additional $4 million liability based on revisions to the esti-
mated fair value of the guarantee. These revisions reflect management’s best estimate of the amounts potentially reimbursable to the purchaser
based on historical loss experience and the estimated attrition of the portfolio. At December 31, 2005, the estimated fair value of the guarantee
was a $13 million liability.
Notes to the Consolidated Financial Statements