E-Z-GO 2008 Annual Report Download - page 76

Textron Inc.
Operating agreements specify that our Finance group has recourse to our Manufacturing group for certain uncollected amounts related to these
transactions. Our Manufacturing group has established reserves for losses on its balance sheet within accrued and other liabilities for the
receivables it guarantees. These reserves are established for amounts that potentially are uncollectible or if the collateral values are considered
insufficient to cover the outstanding receivable. If an account is deemed uncollectible and the collateral is repossessed by our Finance group, our
Manufacturing group is charged for the deficiency. If the collateral is not repossessed, the receivable is transferred from the Finance group’s
balance sheet to the Manufacturing group’s balance sheet. The Manufacturing group then is responsible for any additional collection efforts.
When this occurs, any related reserve previously established by the Manufacturing group is reclassified from accrued or other liabilities and
netted against the receivable or asset transferred from the Finance group.
In 2008, 2007 and 2006, our Finance segment paid our manufacturing segments $1.0 billion, $1.2 billion and $1.0 billion, respectively, related
to the sale of Textron-manufactured products that it financed. Our Cessna and Industrial segments also received proceeds in those years of
$18 million, $27 million and $63 million, respectively, from the sale of equipment from their manufacturing operations to our Finance segment
for use under operating lease agreements. At the end of 2008 and 2007, the amounts guaranteed by the Manufacturing group totaled $206 million
and $254 million, respectively. The Manufacturing group has total reserves for losses on these of $21 million at the end of 2008 and $22 million
at the end of 2007.
During the fourth quarter of 2008, we utilized our commercial paper borrowings for the Manufacturing group to lend cash to the Finance group.
A portion of these borrowings was repaid in the fourth quarter, primarily with funds from a $625 million cash payment made by Textron Inc. to
Textron Financial Corporation, which was reflected as a capital contribution. At January 3, 2009, the Finance group owed the Manufacturing
group $133 million related to these borrowings. This receivable is recorded in other current assets in our balance sheet.
Securitizations
Our Finance group sells its distribution finance receivables to a qualified special purpose trust through securitization transactions. Distribution
finance receivables represent loans secured by dealer inventories that typically are collected upon the sale of the underlying product. Through a
revolving securitization, the proceeds from collection of the principal balance of these loans are used by the trust to purchase additional
distribution finance receivables from us each month. This revolving securitization accounted for approximately 86% and 93% of our
securitization gains in 2008 and 2007, respectively.
We received proceeds from securitizations of $473 million in 2008, $731 million in 2007 and $50 million in 2006. For the revolving
securitization, these proceeds include only amounts received related to incremental increases in the level of receivables sold into the
securitization. Gains from securitizations were approximately $42 million in 2008, $62 million in 2007 and $42 million in 2006. At the end of
2008, past due securitized loans totaled $24 million, compared with $17 million at the end of 2007.
Generally, we retain an interest in the assets sold in the form of servicing responsibilities and subordinated interests, including interest-only
securities, seller certificates and cash reserves. At the end of 2008, we had $200 million in retained interest recorded in other assets, which
included $191 million in distribution finance receivables. In comparison, retained interest totaled $203 million at the end of 2007. Cash flows
received on these retained interests totaled $126 million in 2008, $71 million in 2007 and $63 million in 2006. Key economic assumptions used
in measuring our retained interests at the date of sale are as follows: a weighted-average life of four months, expected annual credit loss of 1.0%,
residual cash flows discount rate of 7.3% and monthly payment rate of 19.4%. At January 3, 2009, the key assumptions used are as follows: a
weighted-average life of four months, expected annual credit loss of 1.3%, residual cash flows discount rate of 13.7% and monthly payment rate
of 18.4%.
During the fourth quarter of 2008, the Finance group modified the terms of the Aviation Finance securitization to permit repurchase of the
receivables from the securitization trust. This modification will provide additional flexibility in the management of the receivable portfolio, and it
also required consolidation of the securitization trust on our balance sheet. As a result, the $589 million of receivables and $553 million of debt
held by the securitization trust are now reflected as finance receivables held for investment and debt in the balance sheet. This modification also
resulted in the reclassification of $58 million of retained interests in securitizations associated with this structure to finance receivables held for
investment from other assets. We also extended the revolving term of our Aviation Finance securitization in December 2008 by one year, which we
expect will provide additional liquidity of approximately $100 million during 2009 as the current portfolio securing this funding source matures
and is replaced with additional finance receivables.
63