E-Z-GO 2008 Annual Report Download - page 45

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32
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Credit Ratings
Credit ratings are a critical component of our ability to access the public term debt and commercial paper markets and also impact the cost of
those borrowings. Factors that can affect our credit ratings include changes in our operating performance, the economic environment, conditions
in the industries in which we operate, our financial position and changes in our business strategy. Since high-quality credit ratings provide us
with access to a broad base of global investors at an attractive cost, we target a long-term A rating from the independent debt-rating agencies.
While historically we have been able to achieve this target rating, in recent months, the long-term ratings for both borrowing groups were
downgraded several times by all of the debt-rating agencies.
The credit ratings and outlooks of the debt-rating agencies at February 25, 2009 are as follows:
Fitch Ratings Moody’s Standard & Poor’s
Long-term ratings:
Manufacturing BBB- Baa2 BBB+
Finance BBB- Baa2 BBB
Short-term ratings:
Manufacturing F3 P2 A2
Finance F3 P2 A2
Outlook Negative Watch (Negative) Watch (Negative)
The major rating agencies regularly evaluate both borrowing groups, and their ratings of our long-term debt are based on a number of factors,
including our financial strength, and factors outside our control, such as conditions affecting the financial services industry generally. Our long-
term credit ratings have been downgraded several times in recent months, and Fitch Ratings downgraded our short-term credit rating on February
9, 2009. In connection with these rating actions, the rating agencies have cited concerns about the Finance group, including execution risks
associated with our current plan to exit the non-captive finance businesses and the need for Textron Inc. to make capital contributions to Textron
Financial Corporation, as well as lower-than-expected business and financial outlook for 2009, the increase in outstanding debt resulting from
the drawdown on our credit facilities, weak economic conditions and continued liquidity and funding constraints. Failure to maintain investment
grade credit ratings that are acceptable to investors would prevent us from accessing the commercial paper markets, and may adversely affect the
cost and other terms upon which we are able to obtain other financing as well as our access to the capital markets.
Manufacturing Group Cash Flows
The cash flows from continuing operations for the Manufacturing group are summarized below:
(In millions) 2008 2007 2006
Operating activities $ 416 $ 1,154 $ 1,074
Investing activities (642) (1,475) (730)
Financing activities (159) (75) (1,071)
Under a support agreement between Textron Financial Corporation and Textron Inc., Textron Inc. is required to maintain a controlling interest
in Textron Financial Corporation. The agreement also requires Textron Inc. to ensure that Textron Financial Corporation maintains fixed charge
coverage of no less than 125% and consolidated shareholder’s equity of no less than $200 million. Due to a goodwill impairment charge of
$169 million at Textron Financial Corporation, along with other charges resulting from the exit plan discussed above, on December 29, 2008,
Textron Inc. made a cash payment of $625 million to Textron Financial Corporation, which was reflected as a capital contribution, to maintain
compliance with the fixed charge coverage ratio required by the support agreement and to maintain the leverage ratio required by its credit facility.
Due to the nature of this contribution, we classified this contribution within cash flows used by operating activities for the Manufacturing group
resulting in the significant decline in cash provided by operating activities. Capital contributions to support Finance group growth are classified
as cash flows from financing activities. The Finance group’s net income (loss) is excluded from the Manufacturing group’s cash flows, while
dividends from the Finance group are included within cash flows from operating activities for the Manufacturing group as they represent a return
on investment.
Excluding the capital contribution to the Finance group, cash provided by operating activities totaled $1 billion, reflecting consistent cash flow
from the Manufacturing group, even with continued investment in our working capital. Changes in our working capital components resulted in a
$476 million and $101 million use of cash in 2008 and 2007, respectively, and a $123 million source of cash in 2006. A significant use of
operating cash is related to increased production levels during the year and inventory build-up at Bell and Cessna. Cash used for inventories
totaled $657 million, $446 million and $364 million 2008, 2007 and 2006, respectively. Partially offsetting the use of cash for inventories were