E-Z-GO 2007 Annual Report Download - page 50

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Textron Inc.
Off-Balance Sheet Arrangements
Performance Guarantee
In 2004, through our Bell Helicopter business, we formed AgustaWestlandBell LLC (“AWB LLC”) with AgustaWestland North America Inc.
(“AWNA”). This venture was created for the joint design, development, manufacture, sale, customer training and product support of the
VH-71 helicopter, 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 Helicopter Squadron Program. We guaranteed to Lockheed Martin the due and prompt
performance by AWB LLC of all its obligations under this subcontract, provided that our liability 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. We have entered into cross-indemnifi cation agreements with AgustaWestland N.V. in which each party indemnifi es the
other related to any payments required under these agreements that result from the indemnifying party’s workshare under any subcontracts
received. AWB LLC’s maximum obligation is 50% of the total contract value, which equates to $613 million, for a maximum amount of our liability
under the guarantee of $300 million at December 29, 2007 through completion.
Finance Receivable Sales and Securitizations
Our Finance group sells fi nance receivables utilizing both whole-loan sales and securitizations, primarily utilizing asset-backed securitization
structures. As a result of these transactions, fi nance 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, we generally retain a subordinated interest in the fi nance
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. We utilize these off-balance sheet
fi nancing arrangements to further diversify funding alternatives. These arrangements provided net proceeds of $731 million, $50 million and
$361 million in 2007, 2006 and 2005, respectively, and net pre-tax gains of $62 million, $42 million and $49 million, respectively. Proceeds from
securitizations include amounts received related to incremental increases in the level of distribution fi nance receivables sold into a revolving
conduit and exclude amounts received related to the ongoing replenishment of the outstanding sold balance of these short-duration receivables.
As of December 29, 2007, our Finance group had two signifi cant off-balance sheet fi nancing arrangements: the distribution fi nance revolving
securitization trust and the aviation fi nance securitization trust. The distribution fi nance revolving securitization trust is a master trust that
purchases inventory fi nance receivables from the Finance group and issues asset-backed notes to investors. The distribution fi nance revolving
securitization trust had $2.0 billion of one-month LIBOR-based variable-rate asset-backed notes outstanding as of December 29, 2007. These
notes each have a three-year term and mature in May 2008, 2009 and 2010. The aviation fi nance securitization trust purchases fi nance leases and
installment contracts secured by general aviation aircraft. This trust is funded through a commercial paper conduit commitment of a $600 million
revolving credit facility which expires in December 2008. As of December 31, 2007, the aviation securitization trust had $433 million outstanding
under its facility. The amount of pre-tax gains recorded upon the ongoing sale of receivables in these arrangements and the value of our
subordinated interest are impacted by the pricing of the investor notes issued by the distribution fi nance securitization trust and the interest rate
obtained by the commercial paper conduit which funds the aviation fi nance securitization trust. The trusts have not experienced any material
disruption to their funding; however, the commercial paper conduit, which provides funding to the aviation fi nance securitization trust, did
experience an increase in borrowing spreads in 2007.
Critical Accounting Policies
To prepare our Consolidated Financial Statements to be in conformity with generally accepted accounting principles, we must make complex and
subjective judgments in the selection and application of accounting policies. The accounting policies that we believe are most critical to the
portrayal of our fi nancial condition and results of operations are listed below. We believe these policies require our most diffi cult, subjective and
complex judgments in estimating the effect of inherent uncertainties. This section should be read in conjunction with Note 1 to the Consolidated
Financial Statements, which includes other signifi cant accounting policies.
Allowance for Losses on Finance Receivables
Our allowance for losses on fi nance receivables is intended to provide for losses inherent in the portfolio, which requires the application of
estimates and signifi cant judgment as to the ultimate outcome of collection efforts and realization of collateral values, among other factors.
Therefore, changes in economic conditions or credit metrics, including past due and nonperforming accounts, or other events affecting specifi c
obligors or industries may require additions or reductions to our reserves.