E-Z-GO 2007 Annual Report Download - page 43

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22
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Finance
(Dollars in millions) 2007 2006 2005
Revenues $ 875 $ 798 $ 628
Segment profi t $ 222 $ 210 $ 171
Profi t margin 25% 26% 27%
During 2007, our Finance segment’s managed fi nance receivables grew by 9% to $11 billion, while our portfolio quality statistics remained
relatively stable. As a percentage of fi nance receivables, our 60+ day delinquency decreased to 0.43% at the end of 2007 from 0.77% at the end
of 2006, while nonperforming assets as a percentage of fi nance assets increased to 1.34% from 1.28%, respectively. Managed fi nance
receivables include fi nance receivables that are owned and reported on our balance sheet, along with securitized or sold fi nance receivables for
which risks of ownership are retained to the extent of our subordinated interests. In 2008, we expect continued growth in our managed fi nance
receivables at a moderate pace and continued stability in our portfolio quality statistics.
The disruption in the credit market during the second half of 2007 had minimal impact on our Finance segment’s ability to access the capital
markets to refi nance its maturing debt obligations and to fund growth in the fi nance receivable portfolio. However, this disruption in the credit
markets did result in an increase in our borrowing costs. The increase in the spread between the London Interbank Offered Rate (“LIBOR”),
the primary index against which our variable-rate debt is priced, and the Federal Funds rate had an $11 million negative impact on borrowing
spreads. This negative impact was almost completely mitigated by the issuances of new lower cost debt.
Finance Revenues
Revenues in the Finance segment increased $77 million in 2007, compared with 2006. Our revenue growth is primarily attributed to the
following factors:
• Higher average fi nance receivables of $722 million, primarily due to growth in the aviation and resort fi nance businesses, which resulted in
additional revenues of $66 million;
• $21 million gain on the sale of a leveraged lease investment; and
• $20 million increase in securitization income, primarily related to a $588 million increase in the level of receivables sold into the distribution
fi nance revolving securitization.
These increases were partially offset by the following decreases:
• $17 million decrease in portfolio yields related to competitive pricing pressures;
• $13 million in lower leveraged lease earnings due to an unfavorable cumulative earnings adjustment attributable to the recognition of residual
value impairments; and
• $8 million reduction in leveraged lease earnings from the adoption of a new accounting standard.
Revenues in the Finance segment increased $170 million in 2006, compared with 2005. The increase was primarily due to a $103 million
increase related to higher average fi nance receivables and a $90 million increase from the higher interest rate environment, partially offset by
an $18 million decrease in other income, largely due to lower fees and securitization income. Average fi nance receivables increased $1.3 billion
from levels in the corresponding period in 2005, primarily due to growth in the distribution, golf and aviation fi nance businesses.
Finance Segment Profi t
Segment profi t in the Finance segment increased $12 million in 2007, compared with 2006, primarily due to a $30 million increase in net interest
margin, partially offset by an $11 million increase in selling and administrative expenses, largely attributable to fi nance receivable portfolio
growth and a $7 million increase in provision for loan losses, refl ecting an increase in nonperforming assets and net charge-offs in the distribution
fi nance portfolio. Net interest margin increased due to a number of factors, including the following:
• An increase of $56 million in securitization and other fee income as described above, and
• An increase of $30 million related to growth in average fi nance receivables;
• Partially offset by a $17 million decrease in portfolio yields related to competitive pricing pressures;
• Lower leveraged lease earnings of $13 million due to an unfavorable cumulative earnings adjustment attributable to the recognition of residual
value impairments;