1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL QUARTER ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 0-27559
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TEXTRON FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 05-6008768
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
40 WESTMINSTER STREET, P.O. BOX 6687, PROVIDENCE, R.I. 02940-6687
(401) 621-4200
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
All of the shares of common stock of the registrant are owned by Textron
Inc.
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TEXTRON FINANCIAL CORPORATION
TABLE OF CONTENTS
PAGE
-----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statement of Income for the three and
nine months ended September 30, 2000 and 1999
(unaudited)............................................... 2
Condensed Consolidated Balance Sheet at September 30, 2000
and January 1, 2000 (unaudited)........................... 3
Condensed Consolidated Statement of Cash Flows for the nine
months ended September 30, 2000 and 1999 (unaudited)...... 4
Condensed Consolidated Statement of Changes in Shareholder's
Equity through September 30, 2000 (unaudited)............. 5
Notes to Condensed Consolidated Financial Statements
(unaudited)............................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 11
Item 3. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................ 17
1
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TEXTRON FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
(IN THOUSANDS)
REVENUES
Finance charges and discounts................. $156,298 $101,297 $439,123 $270,036
Rental revenues on operating leases........... 4,987 3,790 14,293 11,926
Other income.................................. 23,241 17,280 52,807 39,943
-------- -------- -------- --------
184,526 122,367 506,223 321,905
EXPENSES
Interest...................................... 89,692 49,407 247,390 134,874
Selling and administrative.................... 33,156 22,943 90,947 65,638
Provision for losses.......................... 10,536 10,261 25,905 21,967
Depreciation of equipment on operating
leases..................................... 1,954 1,627 6,523 5,192
-------- -------- -------- --------
135,338 84,238 370,765 227,671
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES AND DISTRIBUTIONS ON
PREFERRED SECURITIES.......................... 49,188 38,129 135,458 94,234
Income taxes.................................. 18,429 14,436 51,771 36,124
Distributions on preferred securities (net of
tax benefit of $216 and $648,
respectively).............................. 342 -- 1,026 --
-------- -------- -------- --------
NET INCOME...................................... $ 30,417 $ 23,693 $ 82,661 $ 58,110
======== ======== ======== ========
See notes to condensed consolidated financial statements.
2
4
ITEM 1. FINANCIAL STATEMENTS (Continued)
TEXTRON FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
SEPTEMBER 30, JANUARY 1,
2000 2000
-------------- -----------
(DOLLARS IN THOUSANDS)
ASSETS
Cash and equivalents........................................ $ 10,301 $ 17,379
Finance receivables, net of unearned income:
Installment contracts..................................... 2,169,256 2,227,206
Revolving loans........................................... 1,276,273 1,215,953
Floorplan receivables..................................... 775,775 657,079
Golf course and resort mortgages.......................... 716,006 607,030
Leveraged leases.......................................... 353,065 347,861
Finance leases............................................ 318,760 509,413
Commercial real estate mortgages.......................... 8,079 12,832
---------- ----------
Total finance receivables......................... 5,617,214 5,577,374
Allowance for losses on receivables....................... (116,528) (112,769)
---------- ----------
Finance receivables -- net........................ 5,500,686 5,464,605
---------- ----------
Equipment on operating leases -- net........................ 132,055 133,171
Other assets................................................ 472,712 374,328
---------- ----------
Total assets...................................... $6,115,754 $5,989,483
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
LIABILITIES
Accrued interest and other liabilities.................... $ 212,302 $ 215,925
Amounts due to Textron Inc................................ 20,478 18,065
Deferred income taxes..................................... 283,166 307,035
Debt...................................................... 4,670,444 4,550,758
---------- ----------
Total liabilities................................. 5,186,390 5,091,783
---------- ----------
Textron Financial and Litchfield obligated mandatory
redeemable preferred securities of trust subsidiary
holding solely Litchfield junior subordinated
debentures................................................ 28,142 28,539
SHAREHOLDER'S EQUITY
Common stock ($100 par value, 4,000 shares authorized; 2,500
shares issued and outstanding)............................ 250 250
Capital surplus........................................... 533,676 508,676
Investment in parent company preferred stock.............. (25,000) --
Retained earnings......................................... 392,296 360,235
---------- ----------
Total shareholder's equity........................ 901,222 869,161
---------- ----------
Total liabilities and shareholder's equity........ $6,115,754 $5,989,483
========== ==========
See notes to condensed consolidated financial statements.
3
5
ITEM 1. FINANCIAL STATEMENTS (Continued)
TEXTRON FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
2000 1999
----------- -----------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 82,661 $ 58,110
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for losses................................... 25,905 21,967
Depreciation and amortization.......................... 23,728 12,359
Leveraged lease noncash earnings....................... -- (1,052)
Gain on sale of real estate owned...................... (1,875) --
Increase (decrease) in other liabilities............... (4,032) 23,033
Gain on sale of investment............................. -- (4,710)
Noncash gain on receivable sales or securitizations.... (10,492) --
Increase (decrease) in deferred income taxes........... (16,641) 15,465
Other.................................................. (616) (11,459)
----------- -----------
Net cash provided by operating activities......... 98,638 113,713
CASH FLOWS FROM INVESTING ACTIVITIES:
Finance receivables originated or purchased............... (5,247,352) (3,454,780)
Finance receivables repaid................................ 3,956,017 2,696,720
Proceeds from receivable sales or securitizations......... 1,102,316 110,498
Proceeds from disposition of operating leases and other
assets................................................. 31,115 29,458
Purchase of assets for operating leases................... (35,890) (19,128)
Acquisitions, net of cash acquired........................ -- (103,811)
Proceeds from real estate owned........................... 6,599 3,503
Net proceeds from sale of investment...................... -- 4,501
Other capital expenditures................................ (8,020) (7,320)
Other investments......................................... (7,095) (2,390)
----------- -----------
Net cash used in investing activities............. (202,310) (742,749)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt.................. 1,238,121 1,163,000
Principal payments on long-term debt...................... (783,271) (194,940)
Net decrease in commercial paper.......................... (56,249) (350,762)
Proceeds from issuance of nonrecourse debt................ 137,489 --
Principal payments on nonrecourse debt.................... (112,394) (69,407)
Net increase (decrease) in short-term debt................ (278,915) 103,221
Net increase in amounts due to Textron Inc................ 2,413 11,677
Capital contributions from Textron Inc.................... 2,252 33,805
Dividends paid to Textron Inc............................. (52,852) (35,700)
----------- -----------
Net cash provided by financing activities......... 96,594 660,894
----------- -----------
NET INCREASE (DECREASE) IN CASH............................. (7,078) 31,858
Cash and equivalents at beginning of period................. 17,379 22,396
----------- -----------
Cash and equivalents at end of period....................... $ 10,301 $ 54,254
=========== ===========
See notes to condensed consolidated financial statements.
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6
ITEM 1. FINANCIAL STATEMENTS (Continued)
TEXTRON FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
(UNAUDITED)
INVESTMENT
IN PARENT
COMMON CAPITAL COMPANY RETAINED
STOCK SURPLUS PREF STOCK EARNINGS TOTAL
------ -------- ---------- ---------- --------
(IN THOUSANDS)
BALANCE JANUARY 2, 1999................ $250 $155,171 $ -- $317,031 $472,452
Net income........................... -- -- -- 78,904 78,904
Capital contributions from Textron
Inc............................... -- 353,505 -- -- 353,505
Dividends to Textron Inc............. -- -- -- (35,700) (35,700)
---- -------- -------- -------- --------
BALANCE JANUARY 1, 2000................ 250 508,676 -- 360,235 869,161
Net income........................... -- -- -- 82,661 82,661
Capital contributions from Textron
Inc............................... -- 29,505 (25,000) -- 4,505
Dividends to Textron Inc............. -- (4,505) -- (50,600) (55,105)
---- -------- -------- -------- --------
BALANCE SEPTEMBER 30, 2000............. $250 $533,676 $(25,000) $392,296 $901,222
==== ======== ======== ======== ========
See notes to condensed consolidated financial statements.
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ITEM 1. FINANCIAL STATEMENTS (Continued)
TEXTRON FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The financial statements should be read in conjunction with the financial
statements included in Textron Financial Corporation's Annual Report on Form
10-K for the year ended January 1, 2000. The accompanying unaudited consolidated
financial statements include the accounts of Textron Financial Corporation (the
Company or TFC) and its subsidiaries, all of which are wholly-owned. All
significant intercompany transactions are eliminated. The consolidated financial
statements are unaudited and reflect all adjustments (consisting only of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair presentation of TFC's consolidated financial position at September 30,
2000, and January 1, 2000, and its consolidated results of operations for each
of the respective three and nine month periods ended September 30, 2000 and 1999
and its consolidated cash flows for each of the nine month periods ended
September 30, 2000 and 1999. Certain prior year balances have been reclassified
to conform to the current year presentation. The results of operations for the
interim periods are not necessarily indicative of the results to be expected for
the full year.
NOTE 2. MANAGED FINANCE RECEIVABLES
TFC manages finance receivables for a variety of investors, participants
and third-party portfolio owners.
SEPTEMBER 30, JANUARY 1,
2000 2000
------------- ----------
(IN THOUSANDS)
Owned receivables........................................... $5,617,214 $5,577,374
Securitized receivables..................................... 946,200 408,666
---------- ----------
6,563,414 5,986,040
Nonrecourse participations.................................. 592,305 493,238
Third-party portfolio servicing............................. 373,919 294,701
SBA sales agreements........................................ 33,572 28,280
---------- ----------
Total managed finance receivables........................... $7,563,210 $6,802,259
========== ==========
NOTE 3. LOAN IMPAIRMENT
The Company measures reserves for credit losses on nonhomogeneous impaired
loans based on the present value of expected future cash flows discounted at the
loan's effective interest rate, or at the observable market price or at the fair
value of collateral if the loan is collateral dependent. This evaluation is
inherently subjective, as it requires estimates, including the amount and timing
of future cash flows expected to be received on impaired loans, which are likely
to differ from actual results.
Accrual of interest income is suspended for accounts that are contractually
delinquent by more than three months, unless collection is not doubtful. In
addition, detail reviews of loans may result in earlier suspension if collection
is doubtful. Cash payments on nonaccrual accounts, including finance charges,
generally are applied to reduce loan principal. The Company had nonaccrual loans
and leases totaling $117.1 million at September 30, 2000, as compared to $83.6
million at January 1, 2000, of which approximately $88.7 million and $65.4
million, respectively, were considered impaired, excluding finance leases and
homogeneous loan portfolios. The allowance for losses on receivables related to
impaired loans was $29.8 million at September 30, 2000 and $20.8 million at
January 1, 2000. The average recorded investment in impaired loans during the
first nine months of 2000 was $73.0 million, as compared to $42.0 million in the
corresponding period in 1999. Nonaccrual loans resulted in TFC's revenues being
reduced by approximately $5.4 million and
6
8
ITEM 1. FINANCIAL STATEMENTS (Continued)
TEXTRON FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
$3.3 million for the first nine months of 2000 and 1999, respectively, and by
approximately $1.9 million and $0.9 million for the third quarters of 2000 and
1999, respectively. No interest income was recognized using the cash basis
method.
NOTE 4. OTHER ASSETS
SEPTEMBER 30, JANUARY 1,
2000 2000
------------- ----------
(IN THOUSANDS)
Goodwill -- net............................................. $220,842 $211,378
Securitization related assets............................... 94,740 51,252
Investment in equipment residuals........................... 40,354 --
Acquisition, Development and Construction (ADC)
arrangements.............................................. 36,263 25,811
Fixed assets -- net......................................... 32,389 29,214
Other long-term investments................................. 18,859 14,510
Other....................................................... 29,265 42,163
-------- --------
Total other assets..................................... $472,712 $374,328
======== ========
During 2000, TFC continued to finalize the purchase price allocation for
its fourth quarter 1999 acquisitions. At September 30, 2000, TFC had completed
its review of Green Tree Financial and Litchfield Financial Services
(Litchfield). As a result, TFC has recorded final fair value adjustments to the
assets acquired in these acquisitions of $18.5 million through September 30,
2000.
The $40.4 million investment in equipment residuals represents the
remaining residuals associated with the captive golf finance receivable rental
payments that were securitized in the third quarter. The residuals will
liquidate as the underlying leases terminate.
The cost of fixed assets is being depreciated using the straight-line
method based on the estimated useful lives of the assets.
NOTE 5. DEBT AND CREDIT FACILITIES
SEPTEMBER 30, JANUARY 1,
2000 2000
------------- ----------
(IN THOUSANDS)
Short-term debt:
Commercial paper............................................ $ 947,951 $1,004,200
Short-term debt............................................. 55,906 334,821
---------- ----------
Total short-term debt.................................. 1,003,857 1,339,021
Long-term debt:
5.66% -- 5.86% notes; due 2000 to 2002...................... 233,000 233,000
6.13% -- 6.73% notes; due 2001 to 2003...................... 133,120 112,500
7.13% -- 7.67% notes; due 2002 to 2004...................... 1,080,467 1,140,013
9.3% Litchfield note........................................ -- 21,224
Variable rate notes; due 2001 to 2004....................... 2,220,000 1,705,000
---------- ----------
Total long-term debt................................... 3,666,587 3,211,737
---------- ----------
Total debt............................................. $4,670,444 $4,550,758
========== ==========
Combined commercial paper and short-term debt weighted average interest
rates, before consideration of the effect of interest rate exchange agreements,
have been determined by relating the annualized interest cost to the daily
average dollar amounts outstanding. The combined weighted average interest rate
during the nine
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9
ITEM 1. FINANCIAL STATEMENTS (Continued)
TEXTRON FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
months ended September 30, 2000 was 6.35%. The combined weighted average
interest rate, before consideration of the effect of interest rate exchange
agreements, at September 30, 2000, was 6.61%.
Interest on TFC's variable rate notes is tied predominately to the
three-month LIBOR for U.S. dollar deposits. The weighted average interest rate
on these notes was 6.95% at September 30, 2000.
The terms of certain of the Company's loan agreements and credit
facilities, under the most restrictive covenant, limit the payment of dividends
to $358.6 million at September 30, 2000. In the first nine months of 2000, TFC
declared dividends of $55.1 million and paid dividends of $52.9 million.
NOTE 6. INTEREST RATE EXCHANGE AGREEMENTS
Under interest rate exchange agreements, TFC makes periodic fixed payments
in exchange for periodic variable payments and makes prime based payments in
exchange for LIBOR based payments. TFC has entered into such agreements to
mitigate its exposure to increases in interest rates.
During the second quarter, TFC entered into interest rate exchange
agreements with an aggregate notional amount of $200 million to fix interest
payments on expected issuances of debt and $400 million to fix expected cash
flows associated with certain finance receivables. In the third quarter, TFC
terminated $300 million of these interest rate exchange agreements that were
hedging receivables that were securitized. The result of the termination was
recognized as part of the gain on sale of receivables, which is included in
Other income on TFC's Consolidated Statement of Income.
NOTE 7. CONTINGENCIES
There are pending or threatened lawsuits and other proceedings against TFC
and its subsidiaries. Among these suits and proceedings are some that seek
compensatory, treble or punitive damages in substantial amounts. Those suits and
proceedings are being defended or contested on behalf of TFC and its
subsidiaries. On the basis of information presently available, TFC believes that
these suits and proceedings will not have a material effect on TFC's net income
or financial condition.
NOTE 8. TEXTRON FINANCIAL AND LITCHFIELD OBLIGATED MANDATORY REDEEMABLE
PREFERRED SECURITIES OF TRUST SUBSIDIARY HOLDING SOLELY LITCHFIELD
JUNIOR SUBORDINATED DEBENTURES
Prior to TFC's acquisition of Litchfield on November 3, 1999, a trust,
sponsored and wholly-owned by Litchfield, issued to the public $26.2 million of
mandatory redeemable preferred securities (Preferred Securities). The trust
subsequently invested in $26.2 million aggregate principal amount of Litchfield
10% Series A Junior Subordinated Debentures (Series A Debentures), due 2029. The
Series A Debentures are the sole asset of the trust. The amounts due to the
trust under the Series A Debentures and the related income statement amounts
have been eliminated in TFC's consolidated financial statements.
The Preferred Securities were recorded by TFC at the fair value of $28.6
million as of the acquisition date and the fair value adjustment is being
amortized through June 2004.
The Preferred Securities accrue and pay cash distributions quarterly at a
rate of 10% per annum. The trust's obligation under the Preferred Securities are
fully and unconditionally guaranteed by Litchfield, including, without
limitation, all obligations arising under the Declaration of Trust, the Trust
Preferred Securities, the Indenture, the Debentures and the ancillary agreements
entered into in connection with the foregoing. The trust will redeem all of the
outstanding Preferred Securities when the Series A Debentures are paid at
maturity on June 30, 2029, or otherwise become due. Litchfield will have the
right to redeem 100% of the principal plus accrued and unpaid interest on or
after June 30, 2004.
8
10
ITEM 1. FINANCIAL STATEMENTS (Continued)
TEXTRON FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
As a result of the acquisition, TFC has agreed to make payments to the
holders of the Preferred Securities, when due, to the extent not paid by or on
behalf of the trust or the subsidiary.
NOTE 9. FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
At year-end 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which requires segment data to be measured and analyzed on a basis
that is consistent with how business activities are reported internally for
management. The Company's business segments are organized based on the nature of
products and services provided. The Commercial Real Estate segment is inactive.
The accounting policies for these segments are the same as those described for
the consolidated entity.
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
------------- -------------
(IN THOUSANDS)
Revenues
Term Loans and Leases................................... $ 229,069 $ 185,015
Revolving Credit........................................ 116,887 79,008
Specialty Finance....................................... 160,267 57,822
Commercial Real Estate.................................. -- 60
---------- ----------
Total revenues.............................................. $ 506,223 $ 321,905
========== ==========
Income (loss) before taxes and distributions on preferred
securities(1)(2)
Term Loans and Leases................................... $ 58,373 $ 51,640
Revolving Credit........................................ 27,051 19,310
Specialty Finance....................................... 50,103 25,024
Commercial Real Estate.................................. (69) (1,740)
---------- ----------
Total income before taxes and distributions on preferred
securities................................................ $ 135,458 $ 94,234
========== ==========
SEPTEMBER 30, JANUARY 1,
2000 2000
------------- ----------
(IN THOUSANDS)
Finance assets(3)
Term Loans and Leases....................................... $2,500,139 $2,977,486
Revolving Credit........................................ 1,332,144 1,077,576
Specialty Finance....................................... 2,104,043 1,738,788
Commercial Real Estate.................................. 10,293 17,056
---------- ----------
Total finance assets........................................ $5,946,619 $5,810,906
========== ==========
- ---------------
(1) Interest expense is allocated to each segment in proportion to its net
investment in finance assets. Net investment in finance assets includes
deferred income taxes, security deposits and other specifically identified
liabilities. The interest allocated matches variable rate debt with variable
rate finance assets and fixed rate debt with fixed rate finance assets.
(2) Indirect expenses are allocated to each segment based on the utilization of
such resources. Most allocations are based on the segments' proportion of
net investment in finance assets, headcount, number of transactions,
computer resources and senior management time.
(3) Finance assets include: finance receivables; equipment on operating leases,
net of accumulated depreciation; repossessed assets; real estate owned;
beneficial interests in securitized assets; investment in equipment
residuals; ADC arrangements; and long-term investments (some of which are
classified in Other assets on TFC's Consolidated Balance Sheet). The January
1, 2000, segment balances have been restated to reflect the above definition
of finance assets.
9
11
ITEM 1. FINANCIAL STATEMENTS (Continued)
TEXTRON FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 10. INVESTMENT IN PARENT COMPANY PREFERRED STOCK
On April 12, 2000, Textron made a noncash capital contribution to TFC
consisting of all of the outstanding shares of Textron Funding Corporation
(Textron Funding), a related corporate holding company. Textron Funding's only
asset is 1,522 shares of Textron Inc. Series D cumulative preferred stock,
bearing an annual dividend yield of 5.92%. The preferred stock, which has a face
value of $152.2 million, is carried at its original cost of $25 million and is
presented in a manner similar to treasury stock for financial reporting
purposes. Dividends on the preferred stock are treated as additional capital
contributions from Textron.
NOTE 11. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133 "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 required an entity
to recognize all derivatives as either assets or liabilities and measure those
instruments at fair value. In June 1999, the FASB issued SFAS No. 137, which
deferred the effective date of SFAS No. 133 to all fiscal quarters of years
beginning after June 15, 2000. In June 2000, the FASB issued SFAS No. 138 which
addressed issues causing implementation difficulties with SFAS No. 133 and also
amended the accounting and reporting standards of SFAS No. 133 for certain
derivative instruments and hedging activities. TFC is performing a comprehensive
review of its derivative instruments and is considering the potential effect of
applying the SFAS No. 133 criteria to these instruments. TFC has not yet
finalized this evaluation of all derivatives and as such has not determined
whether these Statements will have an impact on the Company's results of
operations or financial position.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities -- a
Replacement of FASB Statement No. 125." SFAS No. 140 revised criteria for
accounting for securitizations, other financial-asset and collateral transfers
and extinguishments of liabilities. SFAS No. 140 also introduces new disclosure
requirements related to securitizations, collateral and retained interest in
securitized financial assets. The provisions for accounting for collateral by
secured parties and the new disclosure requirements are effective in the fourth
quarter of fiscal 2000. The provisions of SFAS No. 140 related to the transfers
and servicing of financial assets and extinguishments of liabilities are
effective for transactions occurring after March 31, 2001. TFC is evaluating the
potential impact of adopting SFAS No. 140 on its consolidated financial
statements.
10
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
TEXTRON FINANCIAL CORPORATION
FINANCIAL CONDITION
Liquidity and Capital Resources
TFC utilizes a broad base of financial resources for its liquidity and
capital resources. Cash is provided from operations and several different
borrowing sources, including the issuance of commercial paper and short-term
debt, sales of medium-and long-term debt in the U.S. and foreign financial
markets and junior subordinated borrowings under a $100 million line of credit
with Textron Inc. (Textron). For liquidity purposes, TFC has a policy of
maintaining sufficient unused lines of credit to support its outstanding
commercial paper. TFC has bank line of credit agreements of $1.4 billion, of
which $600 million will expire in August 2001 and $800 million will expire in
2003. While none of TFC's total lines of credit were used, those not reserved as
support for commercial paper were $550 million at September 30, 2000, as
compared to $296 million at January 1, 2000.
During the fourth quarter of 1999, TFC filed a Form S-3 registration
statement with the Securities and Exchange Commission. Under this shelf
registration, TFC may issue public debt securities in one or more offerings up
to a maximum of $3 billion. In April 2000, TFC issued $750 million of variable
notes under this facility with $275 million maturing in 18 months; $275 million
maturing in 23 months; and $200 million maturing in 29 months. The proceeds from
the issuance were used to refinance maturing commercial paper and prepay $220
million of variable rate debt, which was prepayable at par. At September 30,
2000, TFC had $1.25 billion available under the shelf registration statement.
During the first nine months of 2000, TFC increased its availability under
its medium-term note facility by $300 million and issued $415 million of
variable rate notes under Rule 144A of the Securities Act of 1933, as amended.
The proceeds from the issuance were used to refinance maturing commercial paper.
TFC also issued a $40 million variable rate note and a 50 million Canadian
dollar-denominated ($33 million U.S. dollar-equivalent as of September 30, 2000)
note through private placements that mature in 2004 and 2003, respectively.
In August and September 2000, TFC securitized approximately $210 million of
captive golf finance receivables (captive receivables) and $482 million of
independent aircraft finance receivables, respectively. In conjunction with the
securitizations, TFC terminated $300 million notional interest rate exchange
agreements that were entered into during the second quarter of fiscal 2000 to
hedge the cash flows associated with the securitizations. These securitizations
provided TFC with an alternate source of financing while maintaining desired
debt to capital ratios. TFC utilized the proceeds from the securitizations to
retire commercial paper.
Cash flows from operations during the first nine months of 2000 were $99
million, as compared to $114 million in the corresponding period last year. The
51% increase in net income before depreciation and amortization was offset by
the timing of income tax payments and payments of accrued interest and other
liabilities. Cash flows used in investing activities were funded from the
collection of receivables, securitization of receivables and through the
issuance of long- and short-term borrowings. Commercial paper and short-term
borrowings decreased by $335 million, while long-term borrowings increased by
$455 million. Borrowings under a junior subordinated facility increased by $2
million reflecting the funding of finance assets related to Textron's
manufacturing divisions.
TFC declared dividends of $55.1 million and paid dividends to Textron of
$52.9 million during the first nine months of 2000, as compared to dividends
paid of $35.7 million in 1999. Textron Inc. contributed capital of $29.5 million
($27.3 million noncash and $2.2 million cash) in the first nine months of 2000
consisting of Textron's contribution of Textron Funding Corporation to TFC.
Because the finance business involves the purchase and carrying of
receivables, a relatively high ratio of borrowings to net worth is necessary.
Debt as a percentage of total capitalization at September 30, 2000 was 84%,
unchanged from year-end.
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13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS (Continued)
TFC's ratio of earnings to fixed charges was 1.54x for the nine months
ended September 30, 2000. Commercial paper and short-term debt as a percentage
of total debt was 21% at September 30, 2000, as compared to 29% at January 1,
2000. The decrease reflects management's continued strategy to match fund the
duration of the receivable portfolio. The Company believes that it has adequate
credit facilities and access to credit markets to meet its financing needs.
Finance Assets
TFC's portfolio of finance assets includes a wide variety of secured loans
and leases to business organizations located primarily in the United States.
Management believes that the portfolio avoids excessive concentration of risk
through diversification across geographic regions, industries, types of
collateral, and among borrowers.
Total finance assets were $5.9 billion at September 30, 2000, up 2% from
$5.8 billion at January 1, 2000. The increase in finance assets was due to
growth in TFC's Revolving Credit and Specialty Finance segments largely offset
by receivable securitizations and portfolio sales in the Term Loans and Leases
segment. The Revolving Credit segment increased by $255 million or 24% largely
due to growth in the floorplan finance portfolio. The Specialty Finance segment
increased by $365 million or 21% principally due to growth in the structured
finance and broadcast media portfolios. The Term Loans and Leases segment
decreased by $477 million or 16% due to $1.0 billion of receivable
securitizations and portfolio sales, partially offset by growth during the
period.
Finance receivable additions for the first nine months of 2000 were $5.2
billion, as compared to $3.5 billion for the corresponding period in 1999. The
increase in additions was due to growth in the Revolving Credit and Specialty
Finance business segments including new business volume related to acquisitions
consummated in 1999. Revolving Credit new business volume increased $993 million
or 61% due to increases in the floorplan finance, asset-based lending and
factoring portfolios. Specialty Finance volume growth was $865 million or 149%,
reflecting growth in receivables finance.
Nonperforming Assets
Nonperforming assets as a percentage of finance assets were 2.14% at
September 30, 2000, as compared to 1.74% at January 1, 2000. Nonperforming
assets were $127.3 million at September 30, 2000, as compared to $101.0 million
at January 1, 2000. The increase was due to additions in the Specialty Finance
and the Revolving Credit segments, partially offset by reductions in the Term
Loans and Leases and the Commercial Real Estate segments.
Interest Rate Sensitivity
The Company's mix of fixed and floating rate debt is continuously monitored
by management and is adjusted, as necessary, based on evaluations of internal
and external factors. Management's strategy of matching interest-sensitive
assets with interest-sensitive liabilities limits the Company's risk to changes
in interest rates and includes entering into interest rate exchange agreements
as part of this matching strategy. At September 30, 2000, TFC's
interest-sensitive assets in excess of interest-sensitive liabilities were $280
million, net of $150 million of fixed rate interest rate exchange agreements.
Interest-sensitive liabilities in excess of interest sensitive assets at January
1, 2000 were $45 million, net of $300 million of fixed rate interest exchange
agreements. The change in the Company's net position does not reflect a change
in management's match funding strategy. During the second quarter, TFC entered
into interest rate exchange agreements with an aggregate notional amount of $200
million to fix interest payments on expected issuances of debt in 2000 and $400
million to fix expected cash flows associated with certain finance receivables.
In the third quarter, TFC terminated $300 million of these interest rate
exchange agreements that were hedging receivables that were securitized. The
result of the termination was recognized as part of the gain on sale of
receivables, which is
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14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS (Continued)
included in Other income on TFC's Consolidated Statement of Income. TFC
anticipates additional asset securitizations in the fourth quarter of fiscal
2000 and has entered $100 million aggregate notional forward starting interest
rate agreements to hedge cash flows of these future transactions.
Management believes that its asset management policy provides adequate
protection against interest rate risk. Increases in interest rates, however,
could have an adverse effect on interest margin. Variable rate receivables
generally are tied to changes in the prime rate offered by major U.S. banks or
LIBOR. Increases in short-term borrowing costs generally precede increases in
variable rate receivable yields. From a quantitative perspective, TFC assesses
its exposure to interest rate changes using an analysis that measures the
potential loss in net income, over a 12 month period, resulting from a
hypothetical increase in interest rates of 100 basis points across all
maturities occurring at the outset of the measurement period (sometimes referred
to as a "shock test"). The Company also assumes in its analysis that:
prospective receivable additions will be match funded, existing portfolios will
not prepay, and all other relevant factors will remain constant. The "shock
test" model, when applied to TFC's asset and liability position at September 30,
2000 indicated no material effect on the Company's net income for the following
twelve-month period.
Financial Risk Management
TFC's results are affected by changes in U.S. and foreign interest rates.
As part of managing this risk, TFC enters into interest rate exchange
agreements. The objective of TFC's use of such agreements is not to speculate
for profit, but generally to convert variable rate debt into fixed rate debt and
vice versa. The overall objective of TFC's interest rate management is to
achieve a prudent balance between floating and fixed rate debt. At September 30,
2000, TFC had $150 million of interest rate exchange agreements (excluding $300
million of forward interest rate exchange agreements) that converted variable
rate debt to fixed rate debt. These interest rate exchange agreements do not
involve a high degree of complexity or risk. TFC does not trade in interest rate
exchange agreements or enter into leveraged interest rate exchange agreements.
TFC has also entered into $715 million of interest rate exchange agreements
involving prime-based payments and LIBOR-based receipts. The objective of these
interest rate exchange agreements is to lock in desired spreads between floating
rate receivables indexed to the prime rate and floating rate liabilities indexed
to LIBOR.
TFC manages its foreign currency exposure by funding most foreign currency
denominated assets with liabilities in the same currency. In addition, as part
of managing its foreign currency exposure, TFC enters into foreign currency
forward exchange contracts. The objective of such agreements is to manage any
remaining exposure to changes in currency rates. The fair market value of the
amounts of outstanding foreign currency contracts at September 30, 2000 was not
material.
RESULTS OF OPERATIONS
FOR THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 VS. SEPTEMBER 30, 1999
Revenues
Three months ended September 30, 2000 vs. September 30, 1999
Third quarter 2000 revenues increased by $62.2 million or 51% as compared
to the corresponding period in 1999. Higher revenues reflect a 54% increase in
finance charges and discounts on a 51% higher level of average finance
receivables, and an increase in portfolio yields to 10.75% from 10.56% in 1999.
Acquisitions completed after the third quarter of 1999 accounted for $37.9
million of the revenue increase. The higher yields reflect an increase in the
interest rate environment for the three months ended September 30, 2000, as
compared to the corresponding period in 1999. The yield in 1999 included higher
leveraged lease income reflecting a cumulative earnings adjustment from changes
in cash flow. Excluding higher leveraged lease income in 1999, the portfolio
yield was 9.91%. The increase in other income primarily reflects an increase in
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15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS (Continued)
syndication and securitization income, partially offset by a sale of an
investment in the corresponding period in 1999. Operating lease rental revenue
increased by $1.2 million due to higher average operating lease assets.
Nine months ended September 30, 2000 vs. September 30, 1999
Revenues for the nine months ended September 30, 2000 increased by $184.3
million or 57% reflecting a higher level of average finance receivables, higher
yields on finance receivables, an increase in other income, and higher rental
revenues on operating leases. Finance charges and discounts increased by $169.1
million or 63% reflecting a 53% higher level of average finance receivables and
an increase in portfolio yield to 10.50% from 9.90% in 1999. Acquisitions
completed in 1999 accounted for $108.6 million of the revenue increase. The
higher yields reflect an increase in the interest rate environment in the first
nine months of 2000 as compared to the corresponding period in 1999. The yield
in 1999 included higher leveraged lease income reflecting a cumulative earnings
adjustment from changes in cash flow. Excluding higher leveraged lease income in
1999, the portfolio yield was 9.67%. The increase in other income is due mostly
to syndication and securitization income partially offset by the sale of an
investment in 1999. Operating lease revenue increased $2.4 million due to higher
average operating lease assets.
Interest Expense
Three months ended September 30, 2000 vs. September 30, 1999
Third quarter 2000 interest expense increased by $40.3 million or 82% on
50% higher average debt outstanding. The higher interest expense also reflected
an increase in the average borrowing rate for the period from 5.87% in 1999 to
7.09% in 2000 attributable to a higher interest rate environment and a reduction
in short-term debt as a percentage of total debt.
Nine months ended September 30, 2000 vs. September 30, 1999
Interest expense for the nine months ended September 30, 2000 increased by
$112.5 million or 83% on 55% higher average debt outstanding. The higher
interest expense also reflected an increase in the average borrowing rate for
the period from 5.74% to 6.79% in 2000 attributable to a higher interest rate
environment and a reduction in short-term debt as a percentage of total debt.
Interest Margin
TFC's earnings are influenced by the interest margin earned on finance
receivables (i.e., the excess of revenues over interest expense on borrowings).
Three months ended September 30, 2000 vs. September 30, 1999
Interest margin for the third quarter of 2000 decreased to 6.52% from 7.60%
for the corresponding period in 1999. The decrease in interest margin resulted
from lower fee income as a percentage of average finance receivables and
competitive pressures in 2000. In 1999, third quarter interest margin included
higher leveraged lease earnings and a gain on sale of an investment.
Nine months ended September 30, 2000 vs. September 30, 1999
Interest margin for the first nine months of 2000 decreased to 6.19% from
6.85% for the corresponding period in 1999. The decrease in margin resulted from
lower fee income as a percentage of average receivables, competitive pressures,
and contractual delays in repricing certain variable rate finance receivables in
a rising interest rate environment in 2000. In 1999, interest margin included
higher leveraged lease earnings and a gain on sale of an investment.
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16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS (Continued)
Operating Expenses
Three months ended September 30, 2000 vs. September 30, 1999
Selling and administrative expenses of $33.2 million increased by $10.2
million in the third quarter of 2000 as compared to the corresponding period in
1999. The increase in 2000 principally reflects higher expenses related to
acquisitions and growth in managed receivables. Selling and administrative
expenses as a percentage of average managed receivables were 1.8% (on an
annualized basis) in the third quarter of 2000, unchanged from the corresponding
period in 1999.
Nine months ended September 30, 2000 vs. September 30, 1999
Selling and administrative expenses for the first nine months increased by
$25.3 million as compared to the corresponding period in 1999. The increase in
2000 principally reflects higher expenses related to acquisitions and growth in
managed receivables. Selling and administrative expenses as a percentage of
average managed receivables decreased to 1.7% (on an annualized basis) for the
first nine months of 2000 as compared to 1.8% for the corresponding period in
1999.
Provision for Losses
Three months ended September 30, 2000 vs. September 30, 1999
The provision for losses of $10.5 million for the third quarter of 2000
increased from $10.3 million for the corresponding period in 1999. The increase
in the provision for losses is primarily due to receivable growth in the
Specialty segment substantially offset by lower provision requirements in the
Revolving and Term Loans and Leases segments.
Nine months ended September 30, 2000 vs. September 30, 1999
The provision for losses of $25.9 million was $3.9 million higher than the
corresponding period in 1999. The increase in the provision for losses is due to
receivable growth. Net charge-offs were $28.4 million during the first nine
months of 2000 as compared to $16.6 million in the corresponding period of 1999.
The increase in net charge-offs reflects $8.4 million for real estate accounts
that were fully reserved (including a $3.7 million charge-off to the real estate
owned valuation allowance). Real estate charge-offs of $2.2 million were
recognized in the corresponding period in 1999.
The allowance for losses on receivables increased to $116.5 million at
September 30, 2000, as compared to $112.8 million at January 1, 2000. The
increase reflects growth in receivables as well as additional reserves for
nonperforming loans. The allowance for losses on receivables as a percentage of
nonperforming assets was 92% at September 30, 2000, as compared to 112% at
January 1, 2000. Allowance for losses on receivables as a percentage of total
finance receivables was 2.1% at September 30, 2000, as compared to 2.0% at
January 1, 2000.
Although management believes it has made adequate provision for anticipated
losses, realization of these assets remains subject to uncertainties. Subsequent
evaluations of nonperforming assets, in light of factors then prevailing,
including economic conditions, may require additional increases in the allowance
for losses for such assets.
Net Income
Three months ended September 30, 2000 vs. September 30, 1999
Third quarter 2000 net income was $30.4 million, $6.7 million or 28% higher
than the corresponding period in 1999. The favorable results were due to higher
average finance assets, higher other income and rental
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17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
revenues on operating leases, partially offset by a lower interest margin,
higher selling and administrative expenses and a higher provision for losses.
Nine months ended September 30, 2000 vs. September 30, 1999
Net income for the first nine months of 2000 was $24.6 million or 42%
higher than the corresponding period in 1999. The favorable results were due to
higher average finance assets, higher other income and rental revenues on
operating leases, partially offset by a lower interest margin, higher selling
and administrative expenses and a higher provision for losses.
Forward-looking Statements
Certain statements in this Form 10-Q and other oral and written statements
made by TFC from time to time, are forward-looking statements, including those
that discuss strategies, goals, outlook or other nonhistorical matters; or
project revenues, income, returns or other financial measures. These
forward-looking statements are subject to risks and uncertainties that may cause
actual results to differ materially from those contained in the statements,
including: (a) the extent to which TFC is able to successfully integrate
acquisitions; (b) changes in worldwide economic and political conditions and
associated impact on interest and foreign exchange rates; (c) the level of sales
of Textron products for which TFC offers financing; (d) the ability to maintain
credit quality and control costs when entering new markets; (e) the actions of
our competitors and our ability to respond; (f) our ability to attract and
retain qualified and experienced personnel; (g) TFC's access to debt financing
at competitive rates; and (h) access to equity in the form of retained earnings
and capital contributions from Textron.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding TFC's Quantitative and Qualitative Disclosure
about Market Risk, see "Interest Rate Sensitivity" in Item 2 of this Form 10-Q.
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18
PART II. OTHER INFORMATION
TEXTRON FINANCIAL CORPORATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
4.1 Indenture dated as of December 9, 1999, between Textron
Financial Corporation and SunTrust Bank (formerly known as
Sun Trust Bank, Atlanta), (including form of debt
securities). Incorporated by reference to Exhibit 4.1 to
Amendment No. 2 to Textron Financial Corporation's
Registration Statement on Form S-3 (No. 333-88509).
4.2 Support Agreement dated as of May 25, 1994, between Textron
Inc. and Textron Financial Corporation. Incorporated by
reference to Exhibit 10.1 to Textron Financial Corporation's
Registration Statement on Form 10 (No. 0-27559).
12.1 Computation of Ratios of Earnings to Fixed Charges
27.1 Financial Data Schedule
REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended September 30,
2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Textron Financial Corporation
Date: November 13, 2000
/s/ THOMAS J. CULLEN
--------------------------------------
Thomas J. Cullen
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer)
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