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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 MARCH 31, 2000
[ ] 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)
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<S> <C>
DELAWARE 05-6008768
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
40 WESTMINSTER STREET, P.O. BOX 6687, PROVIDENCE, R.I. 02940-6687
(401) 621-4200
(ADDRESS 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
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PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statement of Income for the three
months
ended March 31, 2000 and 1999............................. 2
Condensed Consolidated Balance Sheet at March 31, 2000 and
January 1, 2000........................................... 3
Condensed Consolidated Statement of Cash Flows for the three
months
ended March 31, 2000 and 1999............................. 4
Condensed Consolidated Statement of Changes in Shareholder's
Equity
through March 31, 2000.................................... 5
Notes to Condensed Consolidated Financial Statements........ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results
of Operations............................................. 10
Item 3. Quantitative and Qualitative Disclosures about Market
Risk...................................................... 13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................ 14
</TABLE>
1
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TEXTRON FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
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<CAPTION>
2000 1999
-------- -------
(IN THOUSANDS)
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REVENUES
Finance charges and discounts............................. $135,201 $81,416
Rental revenues on operating leases....................... 4,928 4,083
Other income.............................................. 11,858 10,744
-------- -------
151,987 96,243
EXPENSES
Interest.................................................. 75,272 41,550
Selling and administrative................................ 27,954 21,061
Provision for losses...................................... 5,461 6,110
Depreciation of equipment on operating leases............. 1,861 1,850
-------- -------
110,548 70,571
-------- -------
INCOME BEFORE INCOME TAXES AND DISTRIBUTIONS ON PREFERRED
SECURITIES................................................ 41,439 25,672
Income taxes.............................................. 16,012 9,926
Distributions on preferred securities (net of tax benefit
of $215)............................................... 343 --
-------- -------
NET INCOME.................................................. $ 25,084 $15,746
======== =======
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE> 4
ITEM 1. FINANCIAL STATEMENTS (Continued)
TEXTRON FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
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<CAPTION>
MAR. 31, JAN. 1,
2000 2000
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and equivalents........................................ $ 3,801 $ 17,379
Finance receivables, net of unearned income:
Installment contracts..................................... 2,223,982 2,137,266
Revolving loans........................................... 1,406,896 1,400,063
Floorplan receivables..................................... 800,607 657,079
Golf course and resort mortgages.......................... 574,616 535,382
Finance leases............................................ 427,031 509,413
Leveraged leases.......................................... 342,346 347,861
Commercial real estate mortgages.......................... 12,800 12,832
---------- ----------
Total finance receivables.............................. 5,788,278 5,599,896
Allowance for losses on receivables......................... (113,396) (112,769)
---------- ----------
Finance receivables -- net............................. 5,674,882 5,487,127
---------- ----------
Equipment on operating leases -- net........................ 124,118 133,171
Other assets................................................ 349,806 351,806
---------- ----------
Total assets...................................... $6,152,607 $5,989,483
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
LIABILITIES
Accrued interest and other liabilities.................... $ 204,573 $ 215,925
Amounts due to Textron Inc................................ 23,732 18,065
Deferred income taxes..................................... 286,688 307,035
Debt...................................................... 4,717,362 4,550,758
---------- ----------
Total liabilities................................. 5,232,355 5,091,783
---------- ----------
Mandatorily redeemable preferred securities of subsidiary
trust holding debentures of Litchfield Financial
Services.................................................. 28,407 28,539
SHAREHOLDER'S EQUITY
Common stock ($100 par value, 4,000 shares authorized; 2,500
shares issued and outstanding)............................ 250 250
Capital surplus............................................. 508,676 508,676
Retained earnings........................................... 382,919 360,235
---------- ----------
Total shareholder's equity........................ 891,845 869,161
---------- ----------
Total liabilities and shareholder's equity........ $6,152,607 $5,989,483
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 5
ITEM 1. FINANCIAL STATEMENTS (Continued)
TEXTRON FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
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<CAPTION>
2000 1999
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(IN THOUSANDS)
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 25,084 $ 15,746
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 7,352 3,605
Provision for losses...................................... 5,461 6,110
Increase (decrease) in other liabilities.................. (11,393) 3,256
Increase (decrease) in deferred income taxes.............. (20,347) 12,656
Leveraged lease noncash earnings.......................... -- (351)
Gain on sale of real estate owned......................... (1,175) --
Other..................................................... 10,402 (1,510)
----------- ---------
Net cash provided by operating activities.............. 15,384 39,512
CASH FLOWS FROM INVESTING ACTIVITIES:
Finance receivables originated or purchased................. (1,599,641) (955,456)
Finance receivables repaid or sold.......................... 1,378,061 791,583
Proceeds from disposition of operating lease and other
assets.................................................... 16,741 9,917
Purchase of assets for operating leases..................... (9,170) (2,480)
Acquisitions, net of cash acquired.......................... -- (51,503)
Proceeds from real estate owned............................. 2,945 744
Other capital expenditures.................................. (3,013) (2,719)
Other investments........................................... (1,208) (10,053)
----------- ---------
Net cash used in investing activities.................. (215,285) (219,967)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt.................... 210,000 200,000
Principal payments on long-term debt........................ (288,573) (41,486)
Net increase (decrease) in commercial paper................. 238,111 (543,557)
Proceeds from issuance of nonrecourse debt.................. 95,500 --
Principal payments on nonrecourse debt...................... (79,048) (23,135)
Net increase in short-term debt............................. 7,066 570,274
Net increase in amounts due to Textron Inc.................. 5,667 22,274
Capital contributions from Textron Inc...................... -- 8,300
Dividends paid to Textron Inc............................... (2,400) (11,200)
----------- ---------
Net cash provided by financing activities.............. 186,323 181,470
----------- ---------
NET INCREASE (DECREASE) IN CASH............................. (13,578) 1,015
Cash and equivalents at beginning of year................... 17,379 22,396
----------- ---------
Cash and equivalents at end of period....................... $ 3,801 $ 23,411
=========== =========
</TABLE>
See notes to condensed consolidated financial statements.
4
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ITEM 1. FINANCIAL STATEMENTS (Continued)
TEXTRON FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
THROUGH MARCH 31, 2000
(UNAUDITED)
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<CAPTION>
COMMON CAPITAL RETAINED
STOCK SURPLUS EARNINGS TOTAL
------ -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
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..................................... -- -- 25,084 25,084
Dividends to Textron Inc....................... -- -- (2,400) (2,400)
---- -------- -------- --------
Balance March 31, 2000......................... $250 $508,676 $382,919 $891,845
==== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
5
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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 March 31, 2000,
and January 1, 2000, and its consolidated results of operations for each of the
respective three month periods ended March 31, 2000 and 1999 and its
consolidated cash flows for each of the three month periods ended March 31, 2000
and 1999. 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.
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MAR. 31, JAN. 1,
2000 2000
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(IN THOUSANDS)
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Owned receivables........................................... $5,788,278 $5,599,896
Securitized receivables..................................... 545,266 613,860
---------- ----------
6,333,544 6,213,756
Non-recourse participations................................. 536,993 493,238
Third party portfolio servicing............................. 104,578 89,507
SBA sales agreements........................................ 31,922 28,280
---------- ----------
Total managed finance receivables........................... $7,007,037 $6,824,781
========== ==========
</TABLE>
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. Cash
payments on nonaccrual accounts, including finance charges, generally are
applied to reduce loan principal. At March 31, 2000, the Company had nonaccrual
loans and leases totaling $86.2 million and $83.6 million on January 1, 2000, of
which approximately $59.0 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 $14.9
million at March 31, 2000 and $20.8 million at January 1, 2000. The average
recorded investment in impaired loans during the first three months of 2000 was
$50.0 million and $50.3 million in the corresponding period in 1999. Nonaccrual
loans resulted in TFC's revenues being reduced by approximately $1.1 million and
$1.5 million for the first three months of 2000 and 1999, respectively. No
interest income was recognized using the cash basis method.
6
<PAGE> 8
ITEM 1. FINANCIAL STATEMENTS (Continued)
TEXTRON FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4. DEBT AND CREDIT FACILITIES
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<CAPTION>
MAR. 31, JAN. 1,
2000 2000
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(IN THOUSANDS)
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Short-term debt:
Commercial paper............................................ $1,242,311 $1,004,200
Short-term debt............................................. 341,887 334,821
---------- ----------
Total short-term debt..................................... 1,584,198 1,339,021
Long-term debt:
5.66% -- 5.86% notes; due 2000 to 2002...................... 233,000 233,000
6.13% -- 6.51% notes; due 2000 to 2001...................... 105,000 112,500
7.13% -- 7.67% notes; due 2002 to 2004...................... 1,080,164 1,140,013
9.3% Litchfield note........................................ -- 21,224
Variable rate notes; due 2000 to 2002....................... 1,715,000 1,705,000
---------- ----------
Total long-term debt...................................... 3,133,164 3,211,737
---------- ----------
Total debt................................................ $4,717,362 $4,550,758
========== ==========
</TABLE>
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 months ended March 31, 2000 was 6.06%. The combined weighted
average interest rate, before consideration of the effect of interest rate
exchange agreements, at March 31, 2000, was 6.14%.
Interest on TFC's variable rate notes is tied to the three-month LIBOR for
U.S. dollar deposits. The weighted average interest rate on these notes was
6.38% at March 31, 2000.
In April 2000, TFC issued $750 million of variable notes under its Form S-3
registration statement 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.
The terms of certain of the Company's loan agreements and credit
facilities, under the most restrictive covenant, limit the payment of dividends
to $349.1 million at March 31, 2000. In the first three months of 2000, TFC paid
dividends of $2.4 million.
NOTE 5. 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.
7
<PAGE> 9
ITEM 1. FINANCIAL STATEMENTS (Continued)
TEXTRON FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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<CAPTION>
MAR. 31,
2000
-----------
(DOLLARS IN
THOUSANDS)
<S> <C>
Weighted average original term.............................. 1.4 years
NOTIONAL PRINCIPAL.......................................... $300,000
Fixed weighted average interest rate (paid)................. 5.76%
Variable weighted average interest rate (received).......... 6.26%
NOTIONAL PRINCIPAL-BASIS SWAP............................... $350,000
Float based on LIBOR or commercial paper (received)......... 6.89%
Float based on the prime rate (paid)........................ 6.91%
</TABLE>
NOTE 6. 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 any
such liability would not have a material effect on TFC's net income or financial
condition.
NOTE 7. MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST HOLDING
DEBENTURES
Prior to TFC's acquisition of Litchfield on November 3, 1999, a trust,
sponsored and wholly-owned by Litchfield, issued $26.2 million of preferred
securities to the public. 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 debentures are the sole asset of
the trust. The amounts due to the trust under the subordinated 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. At March 31, 2000, the
preferred securities were $28.4 million.
The preferred securities accrue and pay cash distributions quarterly at a
rate of 10% per annum. The trust's obligation under the Series A Preferred
Securities are fully and unconditionally guaranteed by Litchfield. The trust
will redeem all of the outstanding Series A 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, TFC has agreed on a subordinated basis 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 8. 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.
8
<PAGE> 10
ITEM 1. FINANCIAL STATEMENTS (Continued)
TEXTRON FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
MAR. 31, MAR. 31,
2000 1999
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Revenues
Term Loans and Leases..................................... $ 71,878 $ 55,999
Revolving Credit.......................................... 34,295 23,958
Specialty Finance......................................... 45,814 16,286
---------- ----------
Total revenues.............................................. $ 151,987 $ 96,243
========== ==========
Income before taxes and distributions on preferred
securities(1)(2)
Term Loans and Leases..................................... $ 18,298 $ 14,914
Revolving Credit.......................................... 8,123 6,219
Specialty Finance......................................... 14,369 6,131
Commercial Real Estate.................................... 649 (1,592)
---------- ----------
Total income before taxes and distributions on preferred
securities................................................ $ 41,439 $ 25,672
========== ==========
</TABLE>
<TABLE>
<CAPTION>
MAR. 31, JAN. 1,
2000 2000
---------- ----------
<S> <C> <C>
Finance assets(3)
Term Loans and Leases..................................... $2,867,062 $2,977,486
Revolving Credit.......................................... 1,299,180 1,077,576
Specialty Finance......................................... 1,804,119 1,738,788
Commercial Real Estate.................................... 17,024 17,056
---------- ----------
Total finance assets........................................ $5,987,385 $5,810,906
========== ==========
</TABLE>
- ---------------
(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; real estate owned;
beneficial interests in securitized assets; and long-term investments (some
of which are classified in Other assets on TFC's consolidated balance
sheet). The January 1, 2000 balance has been restated to reflect the above
definition of finance assets.
9
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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 $1.2 billion, of
which $400 million will expire in August 2000 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 $53 million at March 31, 2000, as compared to
$296 million at January 1, 2000.
During the first quarter of 2000, TFC issued $210 million of one-year
variable rate notes under its medium-term note facility. The proceeds of the
issuance were used to refinance maturing commercial paper. TFC has fully
utilized this facility at March 31, 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. At March 31, 2000, TFC had $2 billion available
under this facility. 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.
Cash flows from operations during the first three months of 2000 were $15
million, as compared to $40 million in the corresponding period last year. The
decrease in operating cash flows is due mostly to the timing of income tax
payments and the timing of the payments of accrued interest and other
liabilities, partially offset by a 59% increase in net income. Cash flows used
in investing activities were funded from the collection of receivables and
through the issuance of long- and short-term borrowings. Commercial paper and
short-term borrowings increased by $245 million, while long-term borrowings
decreased by $79 million. Borrowings under a junior subordinated facility
increased by $6 million reflecting the funding of finance assets related to
Textron's manufacturing divisions.
TFC paid dividends to Textron of $2.4 million during the first three months
of 2000, as compared to $11.2 million in 1999. The decrease was primarily due to
the retention of earnings to support receivable growth. There were no capital
contributions from Textron during the first three months of 2000.
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 was 84%, unchanged from year-end.
Commercial paper and short-term debt as a percentage of total debt was 34%
at March 31, 2000, as compared to 29% at January 1, 2000. The increase reflected
management's decision in late 1999 to limit commercial paper and short-term debt
at year-end to reduce illiquidity and interest rate volatility. 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.
10
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Total finance assets were $6.0 billion at March 31, 2000, up 3% from $5.8
billion at January 1, 2000. The increase in finance assets was related to growth
in TFC's Revolving Credit and Specialty Finance segments, partially offset by a
decrease in the Term Loans and Leases segment. The Revolving Credit segment
increased by $222 million or 21% largely due to growth in the floorplan finance
portfolio. The Specialty Finance segment increased by $65 million or 4%
principally due to growth in the broadcast media portfolio. The Term Loans and
Leases segment decreased $110 million or 4% due to a $200 million equipment
portfolio sale, partially offset by growth in the aircraft finance and golf
finance portfolios.
Finance receivable additions for the first three months of 2000 were $1.6
billion, as compared to $955 million for the corresponding period in 1999. The
increase in additions was due to growth in all three active business segments
including new business volume related to acquisitions consummated in 1999.
Revolving Credit new business volume increased $339 million or 64% due to
increases in the floorplan finance, asset-based lending and factoring
portfolios. Term Loans and Leases new business volume increased $80 million or
26% primarily due to increases in aircraft finance and golf finance portfolios.
Specialty Finance segment growth was $225 million or 184%, reflecting growth in
receivables finance.
Nonperforming Assets
Nonperforming assets as a percentage of finance assets were 1.7% at March
31, 2000, and January 1, 2000. Nonperforming assets were $102 million at March
31, 2000, as compared to $101 million at January 1, 2000. An increase in the
Term Loans and Leases segment was partially offset by a decrease in the
Specialty Finance segment.
The allowance for losses on receivables as a percentage of nonperforming
assets was 111% at March 31, 2000, relatively unchanged from 112% at January 1,
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 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 March 31, 2000, TFC's interest-sensitive
assets in excess of interest-sensitive liabilities were $2 million, net of $300
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. 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 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,
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 March 31,
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
11
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS (Continued)
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 March 31, 2000, TFC had $300 million of 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 $350 million of interest rate exchange agreements
involving prime-based payments and LIBOR- or commercial paper-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 or commercial paper.
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 notional amounts of
outstanding foreign currency contracts at March 31, 2000, was not material.
RESULTS OF OPERATIONS
FOR THREE MONTHS ENDED MARCH 31, 2000 VS. MARCH 31, 1999
Revenues
First quarter 2000 revenues increased by $55.7 million or 58% as compared
to the corresponding period in 1999. The higher revenues reflect a higher level
of average finance receivables, higher yields on finance receivables, higher
other income and higher rental revenue on operating leases. Acquisitions
completed after the first quarter of 1999 accounted for $32.9 million of the
revenue increase.
Finance charge revenues increased 66% for the first three months of 2000 as
compared to the corresponding period in 1999 on a 59% higher level of average
finance receivables. Yields increased from 9.59% in 1999 to 10.00% in 2000
principally due to the higher interest rate environment. First quarter rental
revenues from operating leases increased by $0.8 million on 8% higher average
operating lease assets. Other income increased $1.1 million largely due to
increases in residual gains, gains on the sale of real estate owned and
syndication fees, partially offset by a loss on the sale of an equipment
portfolio.
Interest Expense
First quarter 2000 interest expense increased by $33.7 million or 81% on
60% higher average debt outstanding. The higher interest expense reflected an
increase in the average borrowing rate for the period from 5.74% in 1999 to
6.54% 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).
Interest margin for the first quarter of 2000 decreased to 5.55% from 6.24% for
the corresponding period in 1999. The decrease in interest margin primarily
resulted from contractual delays in repricing certain variable rate finance
receivables in a rising interest rate environment. To a lesser extent, the lower
interest margin also reflected lower fee income as a percentage of average net
receivables.
12
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Operating Expenses
Selling and administrative expenses of $28.0 million increased by $6.9
million in the first 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 decreased to 1.6% (on an
annualized basis) in the first quarter of 2000 as compared to 1.8% for the
corresponding period in 1999.
Provision for Losses
The provision for loss of $5.5 million for the first quarter of 2000
decreased from $6.1 million for the corresponding period in 1999. The decrease
in the provision for losses is primarily related to a lower provision in the
commercial real estate segment partially offset by higher net charge-offs. Net
charge-offs were $4.9 million in the first quarter of 2000 as compared to $4.7
million for the corresponding period in 1999.
The allowance for losses on receivables increased to $113.4 million at
March 31, 2000, as compared to $112.8 million at January 1, 2000. Finance
receivables increased $188 million during the first three months of 2000. The
increase was principally attributable to growth in the Textron-related
portfolios of $182 million.
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 2000 net income was $25.1 million, $9.3 million or 59% 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, and a lower provision for losses, partially offset by a lower interest
margin, higher selling and administrative expenses and a higher provision for
income taxes.
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 requires an entity
to recognize all derivatives as either assets or liabilities and measure those
instruments at fair value. SFAS No. 133 was scheduled to become effective for
all fiscal quarters of years beginning after June 15, 1999. In June 1999, the
FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133," which
defers for one year the effective date of SFAS No. 133. TFC is evaluating the
potential impact of SFAS No. 133 on future reporting.
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
13
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
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.
14
<PAGE> 16
PART II. OTHER INFORMATION
TEXTRON FINANCIAL CORPORATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
<TABLE>
<S> <C>
4.1 Indenture dated as of December 9, 1999, between Textron
Financial Corporation and SunTrust 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
</TABLE>
REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended March 31, 2000.
15
<PAGE> 1
Exhibit 12.1
TEXTRON FINANCIAL CORPORATION
STATEMENT SETTING FORTH COMPUTATION OF
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
March 31,
2000
--------
<S> <C>
Income before income taxes and distributions on preferred securities $ 41,439
--------
Fixed Charges:
Interest on debt 75,272
Estimated interest portion of rents 456
--------
Total fixed charges 75,728
--------
Adjusted Income 117,167
Ratio of earnings to fixed charges 1.55x
========
</TABLE>
The ratio of earnings to fixed charges has been computed by dividing income
before income taxes and distributions on preferred securities and fixed charges
by fixed charges. Fixed charges consist of interest on debt and one-third rental
expense as representative of interest portion of rentals.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 3,801
<SECURITIES> 0
<RECEIVABLES> 5,788,278
<ALLOWANCES> 113,396
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,152,607
<CURRENT-LIABILITIES> 0
<BONDS> 4,717,362
0
0
<COMMON> 250
<OTHER-SE> 891,595
<TOTAL-LIABILITY-AND-EQUITY> 6,152,607
<SALES> 0
<TOTAL-REVENUES> 151,987
<CGS> 0
<TOTAL-COSTS> 29,815
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 5,461
<INTEREST-EXPENSE> 75,272
<INCOME-PRETAX> 41,439
<INCOME-TAX> 16,012
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,084
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
