1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
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 MARCH 31, 2001
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
-----------------------------
TEXTRON FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
-----------------------------
DELAWARE 05-6008768
(I.R.S. EMPLOYER
(STATE OR OTHER JURISDICTION OF IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
TEXTRON FINANCIAL CORPORATION
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statement of Income for the three
months ended March 31, 2001 and 2000 (unaudited).......... 2
Condensed Consolidated Balance Sheet at March 31, 2001 and
December 30, 2000 (unaudited)............................. 3
Condensed Consolidated Statement of Cash Flows for the three
months ended March 31, 2001 and 2000 (unaudited).......... 4
Condensed Consolidated Statement of Changes in Shareholder's
Equity through March 31, 2001 (unaudited)................. 5
Notes to Condensed Consolidated Financial Statements
(unaudited)............................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 14
Item 3. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................ 18
1
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TEXTRON FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED)
2001 2000
-------- --------
(IN THOUSANDS)
REVENUES
Finance charges and discounts............................. $139,261 $135,201
Rental revenues on operating leases....................... 4,756 4,928
Other income.............................................. 26,685 11,858
-------- --------
170,702 151,987
EXPENSES
Interest.................................................. 77,764 75,272
Selling and administrative................................ 33,893 27,954
Provision for losses...................................... 11,181 5,461
Depreciation of equipment on operating leases............. 1,829 1,861
-------- --------
124,667 110,548
-------- --------
INCOME BEFORE INCOME TAXES AND DISTRIBUTIONS ON PREFERRED
SECURITIES................................................ 46,035 41,439
Income taxes.............................................. 17,258 16,012
Distributions on preferred securities (net of tax benefit
of $207 and $215, respectively)........................ 351 343
-------- --------
NET INCOME.................................................. $ 28,426 $ 25,084
======== ========
See notes to condensed consolidated financial statements.
2
4
ITEM 1. FINANCIAL STATEMENTS (Continued)
TEXTRON FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
MARCH 31, DECEMBER 30,
2001 2000
---------- ------------
(DOLLARS IN THOUSANDS)
ASSETS
Cash and equivalents........................................ $ 8,041 $ 6,498
Finance receivables, net of unearned income:
Installment contracts..................................... 2,147,650 1,985,304
Revolving loans........................................... 1,331,056 1,304,591
Golf course and resort mortgages.......................... 712,385 678,409
Floorplan receivables..................................... 523,277 894,037
Leveraged leases.......................................... 376,753 360,982
Finance leases............................................ 339,136 360,639
Commercial real estate mortgages.......................... 5,450 5,450
---------- ----------
Total finance receivables......................... 5,435,707 5,589,412
Allowance for losses on receivables....................... (112,980) (115,953)
---------- ----------
Finance receivables -- net........................ 5,322,727 5,473,459
Equipment on operating leases -- net........................ 129,406 135,356
Other assets................................................ 586,970 515,483
---------- ----------
Total assets...................................... $6,047,144 $6,130,796
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
LIABILITIES
Accrued interest and other liabilities.................... $ 215,675 $ 190,921
Amounts due to Textron Inc................................ 33,635 19,998
Deferred income taxes..................................... 319,341 315,322
Debt...................................................... 4,529,410 4,666,869
---------- ----------
Total liabilities................................. 5,098,061 5,193,110
---------- ----------
Textron Financial and Litchfield obligated mandatory
redeemable preferred securities of trust subsidiary
holding solely Litchfield junior subordinated
debentures................................................ 27,877 28,009
SHAREHOLDER'S EQUITY
Common stock ($100 par value, 4,000 shares authorized; 2,500
shares issued and outstanding)............................ 250 250
Capital surplus........................................... 533,676 533,676
Investment in parent company preferred stock.............. (25,000) (25,000)
Accumulated other comprehensive loss...................... (3,497) --
Retained earnings......................................... 415,777 400,751
---------- ----------
Total shareholder's equity........................ 921,206 909,677
---------- ----------
Total liabilities and shareholder's equity........ $6,047,144 $6,130,796
========== ==========
See notes to condensed consolidated financial statements.
3
5
ITEM 1. FINANCIAL STATEMENTS (Continued)
TEXTRON FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED)
2001 2000
----------- -----------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 28,426 $ 25,084
Adjustments to reconcile net income to net cash provided
by operating activities:
Increase (decrease) in accrued interest and other
liabilities........................................... 19,159 (11,393)
Provision for losses................................... 11,181 5,461
Depreciation and amortization.......................... 8,575 7,352
Deferred income tax provision.......................... 6,117 (20,347)
Gain on sale of real estate owned...................... -- (1,175)
Gain on securitizations................................ (5,170) --
Other.................................................. (23,465) 10,402
----------- -----------
Net cash provided by operating activities......... 44,823 15,384
CASH FLOWS FROM INVESTING ACTIVITIES:
Finance receivables originated or purchased............... (1,860,819) (1,628,981)
Finance receivables repaid................................ 1,258,849 1,407,401
Proceeds from receivable sales, including
securitizations........................................ 694,729 --
Proceeds from disposition of operating leases and other
assets................................................. 5,364 16,741
Purchase of assets for operating leases................... (108) (9,170)
Proceeds from real estate owned........................... -- 2,945
Other capital expenditures................................ (3,237) (3,013)
Other investments......................................... (1,518) (1,208)
----------- -----------
Net cash (used in) provided by investing
activities..................................... 93,260 (215,285)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt.................. 297,054 210,000
Principal payments on long-term debt...................... (409,849) (288,573)
Net increase (decrease) in commercial paper............... (41,128) 238,111
Proceeds from issuance of nonrecourse debt................ 60,177 95,500
Principal payments on nonrecourse debt.................... (59,495) (79,048)
Net increase in short-term debt........................... 16,464 7,066
Net increase in amounts due to Textron Inc................ 13,637 5,667
Capital contributions from Textron Inc.................... 2,252 --
Dividends paid to Textron Inc............................. (15,652) (2,400)
----------- -----------
Net cash (used in) provided by financing
activities..................................... (136,540) 186,323
----------- -----------
NET INCREASE (DECREASE) IN CASH............................. 1,543 (13,578)
Cash and equivalents at beginning of period................. 6,498 17,379
----------- -----------
Cash and equivalents at end of period....................... $ 8,041 $ 3,801
=========== ===========
See notes to condensed consolidated financial statements.
4
6
ITEM 1. FINANCIAL STATEMENTS (Continued)
TEXTRON FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDER'S EQUITY
(UNAUDITED)
INVESTMENT ACCUMULATED
IN PARENT OTHER
COMMON CAPITAL COMPANY COMPREHENSIVE RETAINED
STOCK SURPLUS PREF. STOCK LOSS EARNINGS TOTAL
------ -------- ----------- ------------- -------- --------
BALANCE JANUARY 1, 2000...... $250 $508,676 $ -- $ -- $360,235 $869,161
Net Income................. -- -- -- -- 118,016 118,016
Capital contributions from
Textron Inc............. -- 31,757 (25,000) -- -- 6,757
Dividends to Textron
Inc..................... -- (6,757) -- -- (77,500) (84,257)
---- -------- -------- ------- -------- --------
BALANCE DECEMBER 30, 2000.... 250 533,676 (25,000) -- 400,751 909,677
Net Income................. -- -- -- -- 28,426 28,426
Other comprehensive loss... -- -- -- (3,497) -- (3,497)
Capital contributions from
Textron Inc............. -- 2,252 -- -- -- 2,252
Dividends to Textron
Inc..................... -- (2,252) -- -- (13,400) (15,652)
---- -------- -------- ------- -------- --------
BALANCE MARCH 31, 2001....... $250 $533,676 $(25,000) $(3,497) $415,777 $921,206
==== ======== ======== ======= ======== ========
See notes to condensed consolidated financial statements.
5
7
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 December 30, 2000. The accompanying unaudited
consolidated financial statements include the accounts of Textron Financial
Corporation (Textron Financial or the Company) 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 Textron Financial's
consolidated financial position at March 31, 2001, and December 30, 2000, and
its consolidated results of operations for each of the respective three month
periods ended March 31, 2001 and 2000 and its consolidated cash flows for each
of the three month periods ended March 31, 2001 and 2000. 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
Textron Financial manages finance receivables for a variety of investors,
participants and third-party portfolio owners.
MARCH 31, DECEMBER 30,
2001 2000
---------- ------------
(IN THOUSANDS)
Owned receivables........................................... $5,435,707 $5,589,412
Securitized receivables..................................... 1,813,229 1,324,089
---------- ----------
7,248,936 6,913,501
Nonrecourse participations.................................. 501,337 573,157
Third-party portfolio servicing............................. 445,326 445,207
SBA sales agreements........................................ 34,868 33,222
---------- ----------
Total managed finance receivables........................... $8,230,467 $7,965,087
========== ==========
Nonrecourse participations consist of undivided interests in loans
originated by Textron Financial, primarily in golf finance and receivables
finance, which are sold to independent investors.
The third-party portfolio servicing amounts largely represent finance
receivable portfolios of resort developers and third-party securitizations as
well as banks and leasing companies.
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, 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, detailed reviews of loans may result in earlier suspension if
collection is doubtful. Cash payments on nonaccrual accounts, including finance
charges, generally are
6
8
ITEM 1. FINANCIAL STATEMENTS (Continued)
TEXTRON FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
applied to reduce loan principal. The Company had nonaccrual loans and leases
totaling $95.1 million at March 31, 2001, as compared to $101.9 million at
December 30, 2000, of which approximately $45.1 million and $76.4 million,
respectively, were considered impaired, excluding finance leases and homogeneous
loan portfolios. The allowance for losses on receivables related to impaired
loans was $13.1 million at March 31, 2001 and $34.1 million at December 30,
2000. The average recorded investment in impaired loans during the first three
months of 2001 was $72.2 million, as compared to $50.0 million in the
corresponding period in 2000. Nonaccrual loans resulted in Textron Financial's
revenues being reduced by approximately $2.0 million and $1.1 million for the
first three months of 2001 and 2000, respectively. No interest income was
recognized using the cash basis method.
NOTE 4. OTHER ASSETS
MARCH 31, DECEMBER 30,
2001 2000
--------- ------------
(IN THOUSANDS)
Goodwill -- net............................................. $212,597 $215,608
Securitization related assets............................... 158,809 129,608
Investment in equipment residuals........................... 64,942 51,204
Fixed assets -- net......................................... 36,876 36,382
Acquisition, Development and Construction (ADC)
arrangements.............................................. 27,422 32,619
Other....................................................... 86,324 50,062
-------- --------
Total other assets..................................... $586,970 $515,483
======== ========
The $64.9 million investment in equipment residuals represents the
remaining equipment residual values associated with the Textron golf and turf
equipment lease payments that were securitized.
NOTE 5. DEBT AND CREDIT FACILITIES
MARCH 31, DECEMBER 30,
2001 2000
---------- ------------
(IN THOUSANDS)
Short-term debt:
Commercial paper............................................ $ 914,684 $ 955,812
Short-term debt............................................. 26,454 9,990
---------- ----------
Total short-term debt.................................. 941,138 965,802
Long-term debt:
5.66% -- 5.95% notes; due 2001 to 2004...................... 417,334 218,000
6.13% -- 6.73% notes; due 2003.............................. 31,749 133,264
7.13% -- 7.37% notes; due 2002 to 2004...................... 1,080,769 1,080,618
Variable rate notes; due 2001 to 2004....................... 2,058,420 2,269,185
---------- ----------
Total long-term debt................................... 3,588,272 3,701,067
---------- ----------
Total debt............................................. $4,529,410 $4,666,869
========== ==========
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 three
7
9
ITEM 1. FINANCIAL STATEMENTS (Continued)
TEXTRON FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
months ended March 31, 2001 was 5.87%. The combined weighted average interest
rate, before consideration of the effect of interest rate exchange agreements,
at March 31, 2001, was 5.38%.
Interest on Textron Financial'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 5.68% at March 31, 2001.
The terms of certain of the Company's loan agreements and credit
facilities, under the most restrictive covenant, limit the payment of dividends
to $386.1 million at March 31, 2001. In the first three months of 2001, Textron
Financial declared and paid dividends of $15.7 million.
NOTE 6. INTEREST RATE EXCHANGE AGREEMENTS
Under interest rate exchange agreements, Textron Financial makes periodic
fixed payments in exchange for periodic variable payments and vice versa.
Textron Financial has entered into such agreements to mitigate its exposure to
changes in interest rates.
Interest rate exchange agreements were designated against specific short-
and long-term notes, against specifically identified receivable portfolios and
to mitigate interest rate exposure on its interest-only securities resulting
from securitizations. In the first quarter of 2001, Textron Financial terminated
$200 million of fixed rate interest rate exchange agreements. The termination
premium will be amortized over the remaining original term of the agreements.
MARCH 31, DECEMBER 30,
2001 2000
----------- ------------
(DOLLARS IN THOUSANDS)
DESIGNATED AGAINST VARIABLE RATE DEBT:
Notional principal.......................................... $ 150,000 $ 150,000
Weighted average original term.............................. 2.0 years 2.0 years
Fixed weighted average interest rate (paid)................. 6.52% 6.52%
Variable weighted average interest rate (received).......... 5.74% 6.77%
DESIGNATED AGAINST FIXED RATE RECEIVABLES:
Notional principal.......................................... $ 99,300 $ 100,000
Weighted average original term.............................. 12.6 years 12.6 years
Variable weighted average interest rate (paid).............. 6.36% 7.91%
Fixed weighted average interest rate (received)............. 8.14% 8.14%
NOTIONAL PRINCIPAL-BASIS INTEREST RATE EXCHANGE
AGREEMENTS................................................ $ -- $ 715,000
Weighted average original term.............................. -- 0.8 years
Float based on LIBOR (received)............................. -- 6.77%
Float based on prime rate (paid)............................ -- 6.77%
NOTIONAL PRINCIPAL-FORWARD STARTING INTEREST RATE EXCHANGE
AGREEMENTS................................................ $ -- $ 228,800
Weighted average original term.............................. -- 7.6 years
Fixed weighted average interest rate (paid)................. -- 7.31%
Variable weighted average interest rate (received).......... -- LIBOR
DESIGNATED AGAINST INTEREST-ONLY SECURITIES:
PRIME RATE BASED:
Notional principal.......................................... $ 149,200 $ 172,500
Weighted average original term.............................. 14.2 years 13.2 years
Fixed weighted average interest rate (paid)................. 9.04% 8.98%
Variable weighted average interest rate (received).......... 8.16% 9.65%
8
10
ITEM 1. FINANCIAL STATEMENTS (Continued)
TEXTRON FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, DECEMBER 30,
2001 2000
----------- ------------
(DOLLARS IN THOUSANDS)
LIBOR RATE BASED:
Notional principal.......................................... $ 186,100 $ 145,100
Weighted average original term.............................. 6.6 years 6.4 years
Variable weighted average interest rate (paid).............. 6.44% 7.39%
Fixed weighted average interest rate (received)............. 5.87% 6.79%
Interest rate floor agreements, entered into through AAA-rated
counterparties to the Textron Financial Corporation Receivables Trust (the
Trusts), provide a minimum interest rate on variable rate receivables held by
the Trusts and are tied to both the prime rate and one- and six-month LIBOR. The
Trusts receive payments when the floor rate exceeds the corresponding index
interest rate. These interest rate floor agreements are adjusted periodically to
match the amortization of the variable rate contracts in the securitized
portfolio and are summarized as follows:
MARCH 31, DECEMBER 30,
2001 2000
--------- ------------
(DOLLARS IN MILLIONS)
Prime rate.................................................. 8.00% 9.50%
One-month LIBOR............................................. 5.06% 6.56%
Six-month LIBOR............................................. 4.64% 6.20%
DESIGNATED AGAINST INTEREST-ONLY SECURITIES:
PRIME RATE BASED:
Notional principal tied to the prime rate................... $143.7 $145.8
Floor Rate.................................................. 8.75% 8.75%
Notional principal tied to the prime rate................... $ 13.4 $ 26.6
Floor Rate.................................................. 8.50% 8.50%
ONE-MONTH LIBOR BASED:
Notional principal tied to the one-month LIBOR.............. $ 13.1 $ 13.6
Floor Rate.................................................. 5.34% 5.34%
The Company has entered into a foreign currency exchange agreement with a
third-party to convert a $32.5 million variable rate note to a C$50 million
variable rate note. This agreement also includes the exchange of receipts
indexed to three-month LIBOR for payments based on BA-CDOR.
NOTE 7. CONTINGENCIES
There are pending or threatened lawsuits and other proceedings against
Textron Financial 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 Textron
Financial and its subsidiaries. On the basis of information presently available,
Textron Financial believes that these suits and proceedings will not have a
material effect on Textron Financial's net income or financial condition.
9
11
ITEM 1. FINANCIAL STATEMENTS (Continued)
TEXTRON FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8. TEXTRON FINANCIAL AND LITCHFIELD OBLIGATED MANDATORY REDEEMABLE
PREFERRED SECURITIES OF TRUST SUBSIDIARY HOLDING SOLELY LITCHFIELD
JUNIOR SUBORDINATED DEBENTURES
Prior to Textron Financial'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 Textron Financial's consolidated financial
statements.
The Preferred Securities were recorded by Textron Financial 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.
As a result of the acquisition, Textron Financial 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
Textron Financial has five reportable segments: Small Business, Middle
Markets, Specialty Finance, Structured Capital and Commercial Real Estate. The
Company ceased commercial real estate lending activities in 1993 and began an
orderly liquidation of that portfolio. The Company's reportable segments are
strategically aligned based on the markets served and the products offered. The
accounting policies for these segments are the same as those described for the
consolidated entity.
10
12
ITEM 1. FINANCIAL STATEMENTS (Continued)
TEXTRON FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, MARCH 31,
2001 2000
--------- ------------
(IN THOUSANDS)
Revenues
Small Business......................................... $ 55,602 $ 62,502
Middle Markets......................................... 47,882 34,453
Specialty Finance...................................... 44,575 41,812
Structured Capital..................................... 22,643 13,220
Commercial Real Estate................................. -- --
-------- --------
Total revenues.............................................. $170,702 $151,987
======== ========
Income before income taxes and distributions on preferred
securities(1)(2)
Small Business......................................... $ 12,230 $ 16,382
Middle Markets......................................... 14,444 5,816
Specialty Finance...................................... 11,442 13,597
Structured Capital..................................... 7,497 4,995
Commercial Real Estate................................. 422 649
-------- --------
Total income before income taxes and distributions on
preferred securities...................................... $ 46,035 $ 41,439
======== ========
MARCH 31, DECEMBER 30,
2001 2000
---------- ------------
(IN THOUSANDS)
Finance assets(3)
Small Business......................................... $2,046,258 $1,909,856
Middle Markets......................................... 1,312,506 1,685,282
Specialty Finance...................................... 1,613,464 1,561,473
Structured Capital..................................... 871,047 805,565
Commercial Real Estate................................. 5,450 5,450
---------- ----------
Total finance assets........................................ $5,848,725 $5,967,626
========== ==========
- ---------------
(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 financing assets and fixed rate debt with fixed rate financing 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; beneficial interests in
securitized assets; investment in equipment residuals; ADC arrangements; and
long-term investments (some of which are classified in Other assets on
Textron Financial's Consolidated Balance Sheet).
11
13
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 Textron
Financial 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. ACCUMULATED OTHER COMPREHENSIVE LOSS AND COMPREHENSIVE INCOME
Accumulated other comprehensive loss is as follows:
THREE MONTHS ENDED
--------------------
MAR. 31, MAR. 31,
2001 2000
-------- --------
(IN THOUSANDS)
Beginning of period......................................... $ -- $ --
Cumulative effect of change in accounting principle due to
SFAS No. 133, net of taxes................................ (11,580) --
Termination of hedge contracts, net of taxes................ 10,437 --
Net deferred loss on hedge contracts, net of taxes.......... (2,354) --
-------- -------
End of period............................................... $ (3,497) $ --
======== =======
THREE MONTHS ENDED
--------------------
MAR. 31, MAR. 31,
2001 2000
-------- --------
(IN THOUSANDS)
Net income.................................................. $28,426 $25,084
Other comprehensive loss.................................... (3,497) --
------- -------
Comprehensive income........................................ $24,929 $25,084
======= =======
NOTE 12. NEW ACCOUNTING PRONOUNCEMENTS
Effective December 31, 2000, Textron Financial adopted Statement of
Financial Accounting Standards (SFAS) No. 133. "Accounting for Derivative
Instruments and Hedging Activities," as amended, which requires that all
derivative instruments be reported on the balance sheet at fair value and
establishes criteria for designation and effectiveness of hedging relationships.
The cumulative effect of adopting SFAS No. 133 as of December 31, 2000, was not
material to the Company's financial statements. Textron Financial is exposed to
market risk, primarily changes in interest rates and currency exchange rates. To
manage the volatility relating to these exposures, Textron Financial nets the
exposures on a consolidated basis to take advantage of natural offsets.
Designation is performed on a specific exposure basis to support hedge
accounting. The changes in fair value of these hedging instruments are offset in
part or in whole by corresponding changes in the fair value or cash flows of the
underlying exposures being hedged. Textron Financial does not hold or issue
derivative financial instruments for trading or speculative purposes.
12
14
ITEM 1. FINANCIAL STATEMENTS (Continued)
TEXTRON FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Textron Financial's strategy is to match interest-sensitive assets with
interest-sensitive liabilities to limit the Company's exposure to changes in
interest rates. As part of managing this matching strategy, Textron Financial
has entered into interest rate exchange agreements, including basis swaps, to
lock-in desired spreads between certain interest-earning assets and certain
interest-bearing liabilities. Textron Financial has both cash flow and fair
value hedges. For cash flow hedges, during the first quarter of 2001, Textron
Financial has recorded a charge of $3.5 million, net of a $2.1 million tax
benefit, to accumulated other comprehensive loss and no impact to the statement
of income. For fair value hedges, at March 31, 2001, Textron Financial had
interest exchange agreements with a fair value liability of $7.9 million
designated as fair value hedges of a fixed rate receivable portfolio. The fair
value hedges are highly effective and therefore, there was an immaterial net
impact to earnings due to hedge ineffectiveness.
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 interests in
securitized financial assets. The provisions for accounting for collateral by
secured parties and the new disclosure requirements were effective in the fourth
quarter of fiscal 2000, as required by the statement. 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. Based upon current activities, the adoption of this statement
will not have a material effect on the Company's results of operations or
financial position.
13
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
TEXTRON FINANCIAL CORPORATION
FINANCIAL CONDITION
Liquidity and Capital Resources
Textron Financial Corporation (Textron Financial) utilizes a broad base of
financial resources for its liquidity and capital resources. Cash is provided
from operations and several different sources of borrowings, 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, Textron Financial has a policy of maintaining sufficient
unused lines of credit to support its outstanding commercial paper. Textron
Financial has bank line of credit agreements of $1.4 billion, of which $600
million will expire in 2001 and $800 million will expire in 2003. While none of
Textron Financial's total lines of credit were used, those not reserved as
support for commercial paper were $573 million at March 31, 2001, as compared to
$544 million at December 30, 2000. Additionally, Textron Financial maintains a
fully available C$50 million Canadian facility, and a fully available $25
million UK facility, both of which will expire in 2001.
Textron Financial filed a Form S-3 registration statement with the
Securities and Exchange Commission in 1999. Under this shelf registration,
Textron Financial may issue public debt securities in one or more offerings up
to a total maximum offering of $3 billion and has established a medium-term note
program of $1.125 billion within the facility. In March 2001, Textron Financial
issued $300 million of fixed notes under this facility maturing in 2004. The
proceeds from the issuance were used to refinance maturing commercial paper and
prepay $100 million of fixed rate debt, which was prepayable at par. At March
31, 2001, Textron Financial had $950 million available under this facility.
During the first quarter, Textron Financial securitized approximately $543
million of floorplan finance receivables and $56 million of Textron golf and
turf finance receivables. Securitization gains for the first quarter were $5.2
million. These securitizations provided Textron Financial with an alternate
source of financing while maintaining desired debt-to-capital ratios. Textron
Financial utilized the proceeds from the securitizations to retire commercial
paper. Textron Financial anticipates that it will enter into additional
securitization transactions during the remainder of 2001.
Cash flows provided by operations were $45 million in the first three
months of 2001, as compared to $15 million in the corresponding period last
year. The increase is primarily due to the timing of payments in accrued
interest and other liabilities and income tax payments, partially offset by an
increase in other assets and gains on securitizations. Cash flows used in
investing activities were funded from the collection of receivables, and the
syndication and securitization of receivables. Short-term borrowings decreased
by $25 million and long-term debt decreased by $113 million. Borrowings under a
junior subordinated facility increased by $14 million reflecting the funding of
assets related to Textron's manufacturing divisions.
Textron Financial declared and paid dividends to Textron of $15.7 million
during the first three months of 2001, as compared to $2.4 million of dividends
declared and paid for the corresponding period in 2000. The increase reflects
the retention of capital in support of receivable growth during 2000. Textron
contributed capital of $2.3 million to Textron Financial during the first three
months of 2001, while there was no capital contribution during the corresponding
period of 2000.
Because the finance business involves the purchase and carrying of
receivables, a relatively high ratio of borrowings to net worth is customary.
Debt as a percentage of total capitalization was 83% at March 31, 2001.
Textron Financial's ratio of earnings to fixed charges was 1.59x for the
three months ended March 31, 2001. Commercial paper and short-term debt as a
percentage of total debt was 21% at March 31, 2001, unchanged from that of
December 30, 2000. The Company believes that it has adequate credit facilities
and access to credit markets to meet its long-term financing needs.
14
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Finance Assets
Textron Financial's portfolio includes a wide variety of secured loans and
leases to customers 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 $5.8 billion at March 31, 2001, down 2% from $6.0
billion at December 30, 2000. The decrease in finance assets was due mostly to
decreases in the floorplan finance and the asset-based lending portfolios,
partially offset by increases in the structured finance, equipment and aircraft
portfolios. The floorplan portfolio decreased by $344 million or 42% due to a
portfolio securitization. The asset-based lending portfolio decreased by $84
million or 22%. The structured finance portfolio increased by $67 million or 11%
resulting from the addition of a new leveraged lease and to organic growth in
its syndicated bank line portfolio. The equipment and aircraft portfolios grew
by $115 million or 10% due to organic growth, partially offset by a $56 million
equipment securitization.
Finance receivable additions for the first three months of 2001 were $1.9
billion, as compared to $1.6 billion in 2000. Floorplan additions increased by
$137 million or 34% due to organic growth. Factoring additions increased by $78
million or 22% due to organic growth. Structured finance increased by $68
million or 64% due to the addition of a leveraged lease and organic growth in
the syndicated bank lines. The remaining portfolios accounted for a decrease of
$51 million or 7%.
Nonperforming Assets
Nonperforming assets decreased to $110 million (1.90%) at March 31, 2001
from $111 million (1.86%) at December 30, 2000. Decreases in nonperforming
aircraft finance, asset-based lending and factoring assets, were partially
offset by increases in nonperforming finance company services, franchise finance
and tax lien finance assets. The allowance for losses on receivables as a
percentage of nonperforming assets was 103% at March 31, 2001, as compared to
104% at December 30, 2000.
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 evaluation 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 March 31, 2001, Textron Financial's
interest-sensitive assets in excess of interest-sensitive liabilities were $386
million, including $150 million of fixed rate interest rate exchange agreements
designated for Textron Financial's debt and $100 million of variable rate
interest rate exchange agreements on finance receivables. Interest-sensitive
assets in excess of interest-sensitive liabilities were $415 million at December
30, 2000, including $150 million of fixed rate interest rate exchange agreements
designated for Textron Financial's debt and $100 million of variable rate
interest rate exchange agreements on finance receivables. The change in the
Company's net position does not reflect a change in management's match funding
strategy. Subsequent to March 31, 2001, Textron Financial terminated $150
million of fixed rate interest rate exchange agreements and contemporaneously
entered into $150 million of variable rate interest rate exchange agreements
designated for the Company's debt.
Management believes that its asset management policy provides adequate
protection against interest rate risks. Increases in interest rates, however,
could have an adverse effect on interest margin. Variable rate receivables are
generally 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, Textron
Financial assesses its exposure to interest rate changes using an analysis that
measures the potential loss in net income, over a twelve-month period, resulting
from a hypothetical increase
15
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
or decrease 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
receivables additions will be match funded, existing portfolios will not prepay,
and all other relevant factors will remain constant. This "shock test" model,
when applied to Textron Financial's asset and liability position at March 31,
2001, indicated no material effect on the Company's net income and cash flows
for the following twelve-month periods, or fair value at March 31, 2001.
Financial Risk Management
Textron Financial's results are affected by changes in U.S. and foreign
interest rates. As part of managing this risk, Textron Financial enters into
interest rate exchange agreements. Textron Financial's objective of entering
into 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
Textron Financial's interest rate risk management is to achieve a prudent
balance between floating and fixed rate debt. These agreements do not involve a
high degree of complexity or risk. Textron Financial does not trade in interest
rate exchange agreements or enter into leveraged interest rate exchange
agreements.
During the first quarter of 2001, Textron terminated $200 million of fixed
rate interest rate exchange agreements. These agreements were terminated in
conjunction with the issuance of $300 million of fixed rate term debt. The
termination premium will be amortized over the remaining original term of the
agreements.
During the first quarter of 2001, $715 million of interest rate exchange
agreements involving prime-based payments and LIBOR-based receipts matured. The
objective of these interest rate exchange agreements was to lock in the net
interest rate margin each period by eliminating the basis risk between
LIBOR-based debt obligations and prime-based loan receivables. Textron Financial
has not replaced these interest rate exchange agreements.
Textron Financial 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, Textron Financial
enters into foreign currency forward exchange contracts. The objective of such
agreements is to manage any remaining exposure to changes in currency rates. The
notional amounts of outstanding foreign exchange contracts are not material. In
the fourth quarter of 2000, Textron Financial entered into a foreign currency
exchange agreement to convert $32.5 million of variable rate U.S. dollar debt to
C$50 million of variable rate Canadian dollar debt.
RESULTS OF OPERATIONS
FOR THREE MONTHS ENDED MARCH 31, 2001 VS. MARCH 31, 2000
Revenues
First quarter 2001 revenues increased by $18.7 million or 12.3% as compared
to the corresponding period in 2000. Higher revenues reflect a 3.0% increase in
finance charges and discounts on a 1.7% higher level of average finance
receivables, and an increase in portfolio yields to 10.27% from 10.14% in 2000.
Other income increased by $14.8 million due to higher securitization and
syndication income, servicing fee income, and earnings on retained interests in
the securitized portfolios, as compared to a nonrecurring loss on the sale of an
equipment portfolio, partially offset by a gain on real estate owned during the
corresponding period in 2000.
Interest Expense
First quarter 2001 interest expense increased by $2.5 million or 3.3% on
3.3% higher average debt outstanding. The average borrowing rate was unchanged
at 6.54%. The decrease in short term borrowing costs was offset by the effects
of maturing long-term lower rate debt.
16
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Interest Margin
Textron Financial's earnings are influenced by the interest margin earned
on finance receivables (i.e., the excess of revenues over interest expense on
borrowings).
Interest margin for the first quarter of 2001 increased to 6.76% from 5.66%
for the corresponding period in 2000. The increase in interest margin resulted
from higher fee income as a percentage of average finance receivables and higher
portfolio yields.
Operating Expenses
Selling and administrative expenses of $33.9 million increased by $5.9
million in the first quarter of 2001 as compared to the corresponding period in
2000. The increase in 2001 principally reflects higher expenses related to new
initiatives and growth in managed receivables. Selling and administrative
expenses as a percentage of average managed receivables were 1.69% (on an
annualized basis) in the first quarter of 2001, as compared to 1.65% in 2000.
Provision for Losses
The provision for losses of $11.2 million for the first quarter of 2001
increased from $5.5 million for the corresponding period in 2000. The increase
in the provision for losses in 2001 reflects higher net charge-offs and higher
provision requirements. Net charge-offs were $16.4 million in the first quarter
of 2001 as compared to $4.9 million in the corresponding period of 2000. The
increase was mostly due to the charge-off of a fully reserved account in the
asset-based lending portfolio.
The allowance for losses on receivables as a percentage of total finance
receivables remained unchanged at 2.1% at March 31, 2001. The allowance for
losses on receivables decreased to $113 million at March 31, 2001, as compared
to $116 million at December 30, 2000. The allowance for losses on receivables as
a percentage of nonperforming assets was 103% at March 31, 2001, as compared to
104% at December 30, 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
First quarter 2001 net income was $28.4 million, $3.3 million or 13.3%
higher than the corresponding period in 2000. The favorable results were due to
higher average finance assets, higher fee income and a lower effective tax rate,
partially offset by higher selling and administrative expenses and a higher loss
provision.
Forward-looking Statements
Certain statements in this Form 10-Q and other oral and written statements
made by Textron Financial 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 Textron Financial 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 Textron Financial 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) Textron
Financial'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 Textron Financial's Quantitative and Qualitative
Disclosure about Market Risk, see "Interest Rate Sensitivity" in Item 2 of this
Form 10-Q.
17
19
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
REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended March 31, 2001.
18
20
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: May 8, 2001
/s/ THOMAS J. CULLEN
--------------------------------------
Thomas J. Cullen
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer)
19