E-Z-GO 2008 Annual Report Download - page 12

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The following notes and calculations pertain to the table contained within the Chairman’s Letter:
(1) Segment profit is an important measure used for evaluating performance and for decision-making purposes. Segment profit for the
manufacturing segments excludes interest expense, certain corporate expenses and special charges. The measurement for the
Finance segment includes interest income and expense and excludes special charges.
(2) The reconciliation of net cash provided by operating activities of continuing operations of the Manufacturing group prepared in
accordance with GAAP (generally accepted accounting principles) to certain non-GAAP financial measures is provided below.
(In millions) 2008 2007
Net cash provided by operating activities of continuing operations before
capital contribution and net dividends from TFC – Non-GAAP $ 899 $ 1,019
Less: Capital contribution to TFC (625) —
Plus: Net dividends from TFC 142 135
Net cash provided by operating activities of continuing operations – GAAP $ 416 $ 1,154
Less: Capital expenditures (542) (375)
Plus: Proceeds on sale of property, plant and equipment 9 6
Free cash flow – Non-GAAP $ (117) $ 785
In 2008, Textron Inc. was required to pay a capital contribution to Textron Financial Corporation (TFC) under a Support Agreement.
This payment is included as a cash outflow from operating activities for the Manufacturing group, while the net dividends received
from Textron Inc.’s investment in TFC are included as operating cash inflow of the Manufacturing group. We believe that net cash
provided by operating activities of continuing operations for the Manufacturing group before this capital contribution to TFC and divi-
dends received from TFC, although not a GAAP financial measure, is useful for investors to understand the cash generated by the
Manufacturing group to fund its activities, as well as obligations under the Support Agreement.
Free cash flow is a measure generally used by investors, analysts and management to gauge a company’s ability to generate cash from
business operations in excess of that necessary to be reinvested to sustain and grow the business. Our definition of free cash flow for
the Manufacturing group uses net cash provided by operating activities of continuing operations, less capital expenditures, net of pro-
ceeds from the sale of plant, property and equipment. In 2008, we changed our definition of free cash flow to exclude adjustments for
capital expenditures financed with capital lease transactions. Prior period information has been recast to reflect this change. We believe
that our free cash flow calculation provides a relevant measure of liquidity and a useful basis for assessing the company’s ability to fund
its activities. Free cash flow is not a financial measure under GAAP and should be used in conjunction with GAAP cash measures pro-
vided in our Consolidated Statements of Cash Flows. Our free cash flow measure may not be comparable with similarly titled measures
reported by other companies, as there is no definitive accounting standard on how the measure should be calculated.
(3) We measure performance based on our return on invested capital (ROIC), which is calculated by dividing ROIC income by average
invested capital. ROIC income includes income from continuing operations and adds back after-tax amounts of interest expense
for the Manufacturing group, special charges and operating results of businesses sold in the year of disposition that are included in
discontinued operations. Operating results from acquisitions in the year of the acquisition are excluded from ROIC income. ROIC is
a non-GAAP financial measure that our management believes is useful to investors as a measure of performance and of the effec-
tiveness of the use of capital in our operations. Management uses ROIC as one measure to monitor and evaluate the performance
of the company, including for executive compensation purposes.
At the beginning of the year, our invested capital represents total shareholders’ equity and Manufacturing group debt, less its cash
and cash equivalents. At the end of the year, we typically adjust ending invested capital for significant events unrelated to our nor-
mal operations for the year, including cash used for acquisitions and proceeds received from dispositions, including any gain/loss
on the sale. In 2008, we also adjusted invested capital to eliminate the impact of the Manufacturing group’s loan to the Finance
group at the end of 2008 and special charges, net of income taxes. Our calculation of ROIC is as follows:
(Dollars in millions) 2008 2007
ROIC income
Income from continuing operations $ 344 $ 879
Interest expense for Manufacturing group, net of income taxes 80 56
Special charges, net of income taxes 446 —
Operating results of Fluid & Power included in discontinued operations, net of income taxes 22 36
Operating income from current year acquisitions — (2)
ROIC income $ 892 $ 969
Invested capital at end of year
Total shareholders’ equity $ 2,366 $ 3,507
Total Manufacturing group debt 2,569 2,146
Loan to Finance group (133) —
Cash and cash equivalents for Manufacturing group (531) (471)
Net cash used by Manufacturing group for acquisitions (109) (1,092)
Eliminate special charges, net of income taxes 446 —
Eliminate net cash proceeds from the sale of Fluid & Power business 380 —
Eliminate gain on sale of Fluid & Power business (111) —
Invested capital at end of year, as adjusted 4,877 4,090
Invested capital at beginning of year 5,184 3,716
Average invested capital $ 5,031 $ 3,903
Return on invested capital 17.7% 24.8%