E-Z-GO 2005 Annual Report Download - page 73

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53
Notes to the Consolidated Financial Statements
Transactions between Finance and Manufacturing Groups
A portion of Textron Finance’s business involves financing retail purchases and leases for new and used aircraft and equipment manufactured by
Textron Manufacturing. The captive finance receivables for these inventory sales that are included in Textron Finance’s balance sheet are com-
posed of the following:
December 31, January 1,
(In millions)
2005 2005
Installment contracts $ 628 $ 628
Distribution finance 51 42
Finance leases 400 279
Total $ 1,079 $ 949
Operating agreements specify that Textron Finance has recourse to Textron Manufacturing for certain uncollected amounts related to these trans-
actions. For those receivables for which collection has been guaranteed by Textron Manufacturing, reserves have been established for losses on
Textron Manufacturing’s balance sheet and are recorded in current or long-term liabilities. These reserves are established for amounts that are
potentially uncollectible or if the collateral values may be insufficient to cover the outstanding receivable. If an account is deemed uncollectible and
the collateral is repossessed, Textron Finance will charge Textron Manufacturing for any deficiency. In some cases, the collateral is not repossessed
by Textron Finance, and the receivable is transferred to Textron Manufacturing’s balance sheet for additional collection efforts. When this occurs,
any related reserve previously established by Textron Manufacturing is reclassified from current or long-term liabilities to a contra asset account.
In 2005, 2004 and 2003, Textron Finance paid Textron Manufacturing $0.8 billion, $0.9 billion and $0.9 billion, respectively, relating to the sale of
manufactured products to third parties that were financed by Textron Finance, and $41 million, $77 million and $56 million, respectively, for the
purchase of equipment on operating leases. At the end of 2005 and 2004, the amounts guaranteed by Textron Manufacturing totaled $344 million
and $384 million, respectively. In addition, at the end of 2005 and 2004, Textron Finance had recourse to Textron Manufacturing for leases with
Collins and Aikman Corporation (“C&A”) totaling approximately $70 million and $82 million, respectively.
For finance receivables guaranteed by Textron Manufacturing, Textron Finance continues to recognize income on past-due loans that meet the
nonaccrual criteria. Accordingly, these past-due loans are not classified as nonaccrual by Textron Finance. Concurrently, Textron Manufacturing
is charged for its obligation to Textron Finance under the guarantee so that there are no net interest earnings for the loans on a consolidated basis.
At the end of 2005 and 2004, past-due loans guaranteed by Textron Manufacturing totaled $8 million and $31 million, respectively. Reserves for
losses related to these guarantees are included in Textron Manufacturing’s Other Current Liabilities and Other Liabilities and totaled $36 million
and $48 million at the end of 2005 and 2004, respectively.
Securitizations
Textron Finance received proceeds of $0.4 billion in both 2005 and 2004 from the securitization and sale (with servicing rights retained) of
finance receivables. Gains from securitized trust sales were approximately $49 million in 2005, $56 million in 2004 and $43 million in 2003. At
the end of 2005, $2.3 billion in securitized loans were outstanding, with $9 million in past-due loans. Textron Finance has securitized certain
receivables for which it has retained full recourse to Textron Manufacturing.
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 2005, key economic assumptions used in measuring the retained interests at the date of each securitization included
prepayment speeds ranging from 17.5% to 24.3%, weighted-average lives ranging from 0.3 to 3.2 years, expected credit losses ranging from
0.4% to 0.5% and residual cash flows discount rates ranging from 7.1% to 9.2%. At December 31, 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 $ 82 $ 107 $ 10
Weighted-average life (years) 2.3 0.3 2.1
Prepayment speed (annual rate) 25% — 15%
Expected credit losses (annual rate) 0.3% 0.4% —
Residual cash flows discount rate 5.4% 9.3% 5.8%