<PAGE> 1
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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 JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-27559
------------------------
TEXTRON FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<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 AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
All of the shares of common stock of the registrant are owned by Textron
Inc.
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<PAGE> 2
TEXTRON FINANCIAL CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statement of Income for the
three and six months ended June 30, 2000 and 1999
(unaudited)........................................ 2
Condensed Consolidated Balance Sheet at June 30,
2000 and January 1, 2000 (unaudited).............. 3
Condensed Consolidated Statement of Cash Flows for
the six months ended June 30, 2000 and 1999
(unaudited)....................................... 4
Condensed Consolidated Statement of Changes in
Shareholder's Equity through June 30, 2000
(unaudited)....................................... 5
Notes to Condensed Consolidated Financial
Statements (unaudited)............................ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 11
Item 3. Quantitative and Qualitative Disclosures About
Market Risk........................................ 16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................... 17
</TABLE>
1
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TEXTRON FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
REVENUES
Finance charges and discounts................. $147,624 $ 87,323 $282,825 $168,739
Rental revenues on operating leases........... 4,378 4,053 9,306 8,136
Other income.................................. 17,708 11,919 29,566 22,663
-------- -------- -------- --------
169,710 103,295 321,697 199,538
EXPENSES
Interest...................................... 82,426 43,917 157,698 85,467
Selling and administrative.................... 29,837 21,634 57,791 42,695
Provision for losses.......................... 9,908 5,596 15,369 11,706
Depreciation of equipment on operating
leases..................................... 2,708 1,715 4,569 3,565
-------- -------- -------- --------
124,879 72,862 235,427 143,433
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES AND DISTRIBUTIONS ON
PREFERRED SECURITIES.......................... 44,831 30,433 86,270 56,105
Income taxes.................................... 17,330 11,762 33,342 21,688
Distributions on preferred securities (net of
tax benefit of $216 and $432, respectively)... 341 -- 684 --
-------- -------- -------- --------
NET INCOME...................................... $ 27,160 $ 18,671 $ 52,244 $ 34,417
======== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE> 4
ITEM 1. FINANCIAL STATEMENTS (Continued)
TEXTRON FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, JAN. 1,
2000 2000
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and equivalents........................................ $ 27,595 $ 17,379
Finance receivables, net of unearned income:
Installment contracts..................................... 2,549,409 2,227,206
Revolving loans........................................... 1,362,497 1,287,601
Floorplan receivables..................................... 789,857 657,079
Golf course and resort mortgages.......................... 612,046 535,382
Finance leases............................................ 462,926 509,413
Leveraged leases.......................................... 345,074 347,861
Commercial real estate mortgages.......................... 8,091 12,832
---------- ----------
Total finance receivables......................... 6,129,900 5,577,374
Allowance for losses on receivables....................... (114,484) (112,769)
---------- ----------
Finance receivables -- net........................... 6,015,416 5,464,605
---------- ----------
Equipment on operating leases -- net........................ 142,612 133,171
Other assets................................................ 376,590 374,328
---------- ----------
Total assets...................................... $6,562,213 $5,989,483
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
LIABILITIES
Accrued interest and other liabilities.................... $ 207,026 $ 215,925
Amounts due to Textron Inc................................ 18,911 18,065
Deferred income taxes..................................... 284,870 307,035
Debt...................................................... 5,111,427 4,550,758
---------- ----------
Total liabilities................................. 5,622,234 5,091,783
---------- ----------
Mandatorily redeemable preferred securities of subsidiary
trust holding debentures of Litchfield Financial
Services.................................................. 28,274 28,539
SHAREHOLDER'S EQUITY
Common stock ($100 par value, 4,000 shares authorized; 2,500
shares issued and outstanding)............................ 250 250
Capital surplus............................................. 533,676 508,676
Investment in parent company preferred stock................ (25,000) --
Retained earnings........................................... 402,779 360,235
---------- ----------
Total shareholder's equity........................ 911,705 869,161
---------- ----------
Total liabilities and shareholder's equity........ $6,562,213 $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
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 52,244 $ 34,417
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 15,685 7,700
Provision for losses...................................... 15,369 11,706
Increase (decrease) in other liabilities.................. (8,984) 21,206
Increase (decrease) in deferred income taxes.............. (22,165) 8,597
Leveraged lease noncash earnings.......................... -- (701)
Gain on sale of real estate owned......................... (1,875) --
Other..................................................... 5,852 (5,949)
----------- -----------
Net cash provided by operating activities.............. 56,126 76,976
CASH FLOWS FROM INVESTING ACTIVITIES:
Finance receivables originated or purchased................. (3,539,876) (2,129,783)
Finance receivables repaid or sold.......................... 2,959,733 1,837,821
Proceeds from disposition of operating lease and other
assets.................................................... 21,670 17,706
Purchase of assets for operating leases..................... (34,859) (14,302)
Acquisitions, net of cash acquired.......................... -- (53,152)
Proceeds from real estate owned............................. 5,736 2,312
Other capital expenditures.................................. (5,696) (5,059)
Other investments........................................... (6,475) (10,053)
----------- -----------
Net cash used in investing activities.................. (599,767) (354,510)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt.................... 1,185,000 660,000
Principal payments on long-term debt........................ (508,422) (141,472)
Net increase (decrease) in commercial paper................. 134,095 (1,859)
Proceeds from issuance of nonrecourse debt.................. 95,500 --
Principal payments on nonrecourse debt...................... (93,458) (53,271)
Net decrease in short-term debt............................. (250,004) (189,320)
Net increase in amounts due to Textron Inc.................. 846 3,609
Capital contributions from Textron Inc...................... -- 8,300
Dividends paid to Textron Inc............................... (9,700) (18,700)
----------- -----------
Net cash provided by financing activities.............. 553,857 267,287
----------- -----------
NET INCREASE (DECREASE) IN CASH............................. 10,216 (10,247)
Cash and equivalents at beginning of period................. 17,379 22,396
----------- -----------
Cash and equivalents at end of period....................... $ 27,595 $ 12,149
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 6
ITEM 1. FINANCIAL STATEMENTS (Continued)
TEXTRON FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
THROUGH JUNE 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
INVESTMENT
IN PARENT
COMMON CAPITAL COMPANY RETAINED
STOCK SURPLUS PREF STOCK EARNINGS TOTAL
------ -------- ---------- -------- --------
(IN THOUSANDS)
<S> <C> <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............................ -- -- -- 52,244 52,244
Capital contributions from Textron
Inc................................. -- 27,252 (25,000) -- 2,252
Dividends to Textron Inc.............. -- (2,252) -- (9,700) (11,952)
---- -------- -------- -------- --------
BALANCE JUNE 30, 2000................. $250 $533,676 $(25,000) $402,779 $911,705
==== ======== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 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 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 June 30, 2000, and
January 1, 2000, and its consolidated results of operations for each of the
respective three and six month periods ended June 30, 2000 and 1999 and its
consolidated cash flows for each of the six month periods ended June 30, 2000
and 1999. Certain prior year balances have been reclassified to conform to the
current year presentation. The results of operations for the interim periods are
not necessarily indicative of the results to be expected for the full year.
NOTE 2. MANAGED FINANCE RECEIVABLES
TFC manages finance receivables for a variety of investors, participants
and third-party portfolio owners.
<TABLE>
<CAPTION>
JUNE 30, JAN. 1,
2000 2000
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Owned receivables........................................... $6,129,900 $5,577,374
Securitized receivables..................................... 500,048 613,860
---------- ----------
6,629,948 6,191,234
Nonrecourse participations.................................. 592,304 493,238
Third-party portfolio servicing............................. 144,479 89,507
SBA sales agreements........................................ 33,248 28,280
---------- ----------
Total managed finance receivables........................... $7,399,979 $6,802,259
========== ==========
</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 June 30, 2000, the Company had nonaccrual
loans and leases totaling $104.5 million and $83.6 million on January 1, 2000,
of which approximately $78.8 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 $18.6
million at June 30, 2000 and $20.8 million at January 1, 2000. The average
recorded investment in impaired loans during the first six months of 2000 was
$61.5 million and $44.4 million in the corresponding period in 1999. Nonaccrual
loans resulted in TFC's revenues being reduced by approximately $3.5 million and
$2.4 million for the first six months of 2000 and 1999, respectively, and by
approximately $2.4 million and $0.9 million for the second quarters 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. OTHER ASSETS
<TABLE>
<CAPTION>
JUNE 30, JANUARY 1,
2000 2000
-------- ----------
(IN THOUSANDS)
<S> <C> <C>
Goodwill -- net............................................. $218,718 $211,378
Securitization related assets............................... 46,106 51,252
Other long-term investments................................. 46,745 40,321
Fixed assets -- net......................................... 32,027 29,214
Other....................................................... 32,994 42,163
-------- --------
Total other assets..................................... $376,590 $374,328
======== ========
</TABLE>
The cost of fixed assets is being depreciated using the straight-line
method based on estimated useful lives of the assets.
During 2000, TFC continued to finalize the purchase price allocation for
its fourth quarter 1999 acquisitions. TFC has completed its review of Green Tree
Financial and three of the four business units of Litchfield Financial Services
(Litchfield). TFC expects to complete its review of the remaining unit,
Financial Services, in the third quarter.
NOTE 5. DEBT AND CREDIT FACILITIES
<TABLE>
<CAPTION>
JUNE 30, JANUARY 1,
2000 2000
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt:
Commercial paper............................................ $1,138,295 $1,004,200
Short-term debt............................................. 84,817 334,821
---------- ----------
Total short-term debt.................................. 1,223,112 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...................... 1,080,315 1,140,013
9.3% Litchfield note........................................ -- 21,224
Variable rate notes; due 2000 to 2003....................... 2,470,000 1,705,000
---------- ----------
Total long-term debt................................... 3,888,315 3,211,737
---------- ----------
Total debt............................................. $5,111,427 $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 six months ended June 30, 2000 was 6.26%. The combined weighted
average interest rate, before consideration of the effect of interest rate
exchange agreements, at June 30, 2000, was 6.72%.
Interest on TFC's variable rate notes is tied predominately to the
three-month LIBOR for U.S. dollar deposits. The weighted average interest rate
on these notes was 6.82% at June 30, 2000.
7
<PAGE> 9
ITEM 1. FINANCIAL STATEMENTS (Continued)
TEXTRON FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 and prepay $220
million of other variable rate debt.
The terms of certain of the Company's loan agreements and credit
facilities, under the most restrictive covenant, limit the payment of dividends
to $318.4 million at June 30, 2000. In the first six months of 2000, TFC
declared dividends of $12.0 million and paid dividends of $9.7 million.
NOTE 6. INTEREST RATE EXCHANGE AGREEMENTS
Under interest rate exchange agreements, TFC makes periodic fixed payments
in exchange for periodic variable payments and makes prime based payments in
exchange for LIBOR based payments. TFC has entered into such agreements to
mitigate its exposure to increases in interest rates.
During the second quarter, TFC entered into $150 million (notional) of two
year fixed-rate interest rate exchange agreements and simultaneously terminated
$150 million (notional) of existing fixed-rate interest rate exchange
agreements. The gain on termination is being amortized as a yield adjustment to
the underlying debt instrument. Additionally, TFC also entered into interest
rate exchange agreements with an aggregate notional amount of $200 million to
fix interest rate payments on expected issuances of debt and $400 million to fix
expected cash flows associated with certain finance receivables.
NOTE 7. CONTINGENCIES
There are pending or threatened lawsuits and other proceedings against TFC
and its subsidiaries. Among these suits and proceedings are some that seek
compensatory, treble or punitive damages in substantial amounts. Those suits and
proceedings are being defended or contested on behalf of TFC and its
subsidiaries. On the basis of information presently available, TFC believes any
such liability would not have a material effect on TFC's net income or financial
condition.
NOTE 8. 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 Mandatorily
redeemable preferred securities of subsidiary trust holding debentures of
Litchfield Financial Services (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
Series A Debentures are the sole asset of the trust. The amounts due to the
trust under the Series A Debentures and the related income statement amounts
have been eliminated in TFC's consolidated financial statements.
The Preferred Securities were recorded by TFC at the fair value of $28.6
million as of the acquisition date and the fair value adjustment is being
amortized through June 2004.
The Preferred Securities accrue and pay cash distributions quarterly at a
rate of 10% per annum. The trust's obligation under the Preferred Securities are
fully and unconditionally guaranteed by Litchfield. The trust will redeem all of
the outstanding Preferred Securities when the Series A Debentures are paid at
maturity on June 30, 2029, or otherwise become due. Litchfield will have the
right to redeem 100% of the principal plus accrued and unpaid interest on or
after June 30, 2004.
8
<PAGE> 10
ITEM 1. FINANCIAL STATEMENTS (Continued)
TEXTRON FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
As a result of the acquisition, TFC has agreed to make payments to the
holders of the Preferred Securities, when due, to the extent not paid by or on
behalf of the trust or the subsidiary.
NOTE 9. FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
At year-end 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which requires segment data to be measured and analyzed on a basis
that is consistent with how business activities are reported internally for
management. The Company's business segments are organized based on the nature of
products and services provided. The Commercial Real Estate segment is inactive.
The accounting policies for these segments are the same as those described for
the consolidated entity.
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Revenues
Term Loans and Leases..................................... $147,559 $116,802
Revolving Credit.......................................... 74,709 49,960
Specialty Finance......................................... 99,429 32,716
Commercial Real Estate.................................... -- 60
-------- --------
Total revenues.............................................. $321,697 $199,538
======== ========
Income before taxes and distributions on preferred
securities(1)(2)
Term Loans and Leases..................................... $ 38,161 $ 31,901
Revolving Credit.......................................... 17,691 13,721
Specialty Finance......................................... 30,712 12,278
Commercial Real Estate.................................... (294) (1,795)
-------- --------
Total income before taxes and distributions on preferred
securities................................................ $ 86,270 $ 56,105
======== ========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, JAN. 1,
2000 2000
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Finance assets(3)
Term Loans and Leases..................................... $3,012,014 $2,977,486
Revolving Credit.......................................... 1,331,877 1,077,576
Specialty Finance......................................... 2,022,507 1,738,788
Commercial Real Estate.................................... 10,305 17,056
---------- ----------
Total finance assets........................................ $6,376,703 $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 finance assets and fixed rate debt with fixed rate finance assets.
(2) Indirect expenses are allocated to each segment based on the utilization of
such resources. Most allocations are based on the segments' proportion of
net investment in finance assets, headcount, number of transactions,
computer resources and senior management time.
9
<PAGE> 11
ITEM 1. FINANCIAL STATEMENTS (Continued)
TEXTRON FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(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, segment balances have been restated to reflect
the above definition of finance assets.
NOTE 10. INVESTMENT IN PARENT COMPANY PREFERRED STOCK
On April 12, 2000, Textron made a noncash (excluded from the statement of
cash flows for the six months ended June 30, 2000) capital contribution to TFC
consisting of all of the outstanding shares of Textron Funding Corporation, 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.
10
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
TEXTRON FINANCIAL CORPORATION
FINANCIAL CONDITION
Liquidity and Capital Resources
TFC utilizes a broad base of financial resources for its liquidity and
capital resources. Cash is provided from operations and several different
borrowing sources, including the issuance of commercial paper and short-term
debt, sales of medium-and long-term debt in the U.S. and foreign financial
markets and junior subordinated borrowings under a $100 million line of credit
with Textron Inc. (Textron). For liquidity purposes, TFC has a policy of
maintaining sufficient unused lines of credit to support its outstanding
commercial paper. TFC has bank line of credit agreements of $1.2 billion, of
which $400 million will expire in August 2000 and $800 million will expire in
2003. TFC has received commitments to extend the one-year line, for an
additional year. While none of TFC's total lines of credit were used, those not
reserved as support for commercial paper were $161 million at June 30, 2000, as
compared to $296 million at January 1, 2000.
During the first six months of 2000, TFC increased its medium-term note
facility by $300 million and issued $415 million of variable rate notes under
this facility. The proceeds from the issuance were used to refinance maturing
commercial paper. The medium-term note facility was fully utilized at June 30,
2000. TFC also issued an additional $40 million variable rate note through a
private placement that matures in 2004.
During the fourth quarter of 1999, TFC filed a Form S-3 registration
statement with the Securities and Exchange Commission. Under this shelf
registration, TFC may issue public debt securities in one or more offerings up
to a maximum of $3 billion. In April 2000, TFC issued $750 million of variable
notes under this facility with $275 million maturing in 18 months; $275 million
maturing in 23 months; and $200 million maturing in 29 months. The proceeds from
the issuance were used to refinance maturing commercial paper and prepay $220
million of variable rate debt, which was prepayable at par. At June 30, 2000,
TFC had $1.25 billion available under the shelf registration statement.
Cash flows from operations during the first six months of 2000 were $56
million, as compared to $77 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 52% 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 decreased by $116 million, while long-term borrowings
increased by $677 million. Borrowings under a junior subordinated facility
increased by $1 million reflecting the funding of finance assets related to
Textron's manufacturing divisions.
TFC declared dividends of $12.0 million and paid dividends to Textron of
$9.7 million during the first six months of 2000, as compared to $18.7 million
in 1999. The decrease was primarily due to the retention of earnings to support
receivable growth. Textron Inc. contributed capital of $27.3 million (noncash)
in the first six months of 2000 consisting of Textron's contribution of Textron
Funding Corporation to TFC.
Because the finance business involves the purchase and carrying of
receivables, a relatively high ratio of borrowings to net worth is necessary.
Debt as a percentage of total capitalization at June 30, 2000 was 85%, as
compared to 84% at year-end.
TFC's ratio of earnings to fixed charges was 1.54x for the six months ended
June 30, 2000. Commercial paper and short-term debt as a percentage of total
debt was 24% at June 30, 2000, as compared to 29% at January 1, 2000. The
decrease reflects management's decision to utilize a higher ratio of variable
rate term debt 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.
11
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Finance Assets
TFC's portfolio of finance assets includes a wide variety of secured loans
and leases to business organizations located primarily in the United States.
Management believes that the portfolio avoids excessive concentration of risk
through diversification across geographic regions, industries, types of
collateral, and among borrowers.
Total finance assets were $6.4 billion at June 30, 2000, up 10% from $5.8
billion at January 1, 2000. The increase in finance assets was due mostly to
growth in TFC's Revolving Credit and Specialty Finance segments. The Revolving
Credit segment increased by $254 million or 24% largely due to growth in the
floorplan finance portfolio. The Specialty Finance segment increased by $284
million or 16% principally due to growth in the structured finance and broadcast
media portfolios. The Term Loans and Leases segment increased $35 million or 1%
due to increases in the golf finance and aircraft portfolios substantially
offset by a $200 million equipment portfolio sale.
Finance receivable additions for the first six months of 2000 were $3.54
billion, as compared to $2.13 billion for the corresponding period in 1999. The
increase in additions was due to growth in the Revolving Credit and Specialty
Finance business segments including new business volume related to acquisitions
consummated in 1999. Revolving Credit new business volume increased $685 million
or 63% due to increases in the floorplan finance, asset-based lending and
factoring portfolios. Term Loans and Leases new business volume increased $90
million or 11% primarily due to increases in the aircraft finance and golf
finance portfolios. Specialty Finance volume growth was $636 million or 234%,
reflecting growth in receivables finance.
Nonperforming Assets
Nonperforming assets as a percentage of finance assets were 1.86% at June
30, 2000 compared to 1.74% at January 1, 2000. Nonperforming assets were $118.9
million at June 30, 2000, as compared to $101.0 million at January 1, 2000. The
increase, which was largely attributable to the Specialty Finance segment, was
partially offset by a decrease in the Commercial Real Estate segment.
The allowance for losses on receivables as a percentage of nonperforming
assets was 96% at June 30, 2000, as compared to 112% at January 1, 2000. The
lower ratio is due to the higher non-performing asset level, partially offset by
a higher allowance for losses on receivables.
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 June 30, 2000, TFC's interest-sensitive
liabilities in excess of interest-sensitive assets were $265 million, net of
$150 million of fixed rate interest rate exchange agreements. Interest-sensitive
liabilities in excess of interest-sensitive assets at January 1, 2000 were $45
million, net of $300 million of fixed rate interest exchange agreements. The
change in the Company's net position does not reflect a change in management's
match funding strategy. During the second quarter, TFC entered into $600 million
of forward interest rate exchange agreements to hedge certain future
transactions in 2000. The $600 million of forward interest rate exchange
agreements were excluded from TFC's matched funding position at June 30, 2000.
Management believes that its asset management policy provides adequate
protection against interest rate risk. Increases in interest rates, however,
could have an adverse effect on interest margin. Variable rate receivables
generally are tied to changes in the prime rate offered by major U.S. banks or
LIBOR. Increases in short-term borrowing costs generally precede increases in
variable rate receivable yields. From a quantitative perspective, TFC assesses
its exposure to interest rate changes using an analysis that measures the
potential loss in net income, over a
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<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
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 June 30, 2000 indicated no material effect on the Company's net
income for the following twelve-month period.
Financial Risk Management
TFC's results are affected by changes in U.S. and foreign interest rates.
As part of managing this risk, TFC enters into interest rate exchange
agreements. The objective of TFC's use of such agreements is not to speculate
for profit, but generally to convert variable rate debt into fixed rate debt and
vice versa. The overall objective of TFC's interest rate management is to
achieve a prudent balance between floating and fixed rate debt. At June 30,
2000, TFC had $150 million of interest rate exchange agreements (excluding $600
million of forward interest rate exchange agreements) that converted variable
rate debt to fixed rate debt. These interest rate exchange agreements do not
involve a high degree of complexity or risk. TFC does not trade in interest rate
exchange agreements or enter into leveraged interest rate exchange agreements.
TFC also has entered into $715 million of interest rate exchange agreements
involving prime-based payments and LIBOR-based receipts. The objective of these
interest rate exchange agreements is to lock in desired spreads between floating
rate receivables indexed to the prime rate and floating rate liabilities indexed
to LIBOR.
TFC manages its foreign currency exposure by funding most foreign currency
denominated assets with liabilities in the same currency. In addition, as part
of managing its foreign currency exposure, TFC enters into foreign currency
forward exchange contracts. The objective of such agreements is to manage any
remaining exposure to changes in currency rates. The fair market value of the
outstanding foreign currency contracts at June 30, 2000 were not material.
RESULTS OF OPERATIONS
FOR THREE AND SIX MONTHS ENDED JUNE 30, 2000 VS. JUNE 30, 1999
Revenues
Three months ended June 30, 2000 vs. June 30, 1999
Second quarter 2000 revenues increased by $66.4 million or 64% as compared
to the corresponding period in 1999. Higher revenues reflect a 69% increase in
finance charges and discounts on a 57% higher level of average finance
receivables, and an increase in portfolio yields to 10.55% from 9.73% in 1999.
The higher yields reflect an increase in the interest rate environment for the
three months ended June 30, 2000 as compared with the corresponding period in
1999. The increase in other income primarily reflects an increase in syndication
income, partially offset by a decrease in prepayment income. Operating lease
rental revenue increased by $0.3 million due to higher average outstandings.
Acquisitions completed after the second quarter of 1999 accounted for $37.2
million of the revenue increase.
Six months ended June 30, 2000 vs. June 30, 1999
Revenues for the six months ended June 30, 2000 increased by $122.2 million
or 61% reflecting a higher level of finance receivables, higher yields on
finance receivables, an increase in other income, and higher rental revenues on
operating leases. Finance charges and discounts increased by $114.1 million or
68% reflecting a 57% higher level of average finance receivables and an increase
in portfolio yield to 10.32% from 9.61% in 1999. The higher yields reflect an
increase in the interest rate environment in the first six months of 2000 as
compared to the corresponding period in 1999. The increase in other income is
due mostly to syndication
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<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
income and residual gains. Operating lease revenue increased $1.2 million due to
higher average outstandings. Acquisitions completed in 1999 accounted for $69.8
million of the revenue increase.
Interest Expense
Three months ended June 30, 2000 vs. June 30, 1999
Second quarter 2000 interest expense increased by $38.5 million or 88% on
56% higher average debt outstanding. The higher interest expense also reflected
an increase in the average borrowing rate for the period from 5.60% in 1999 to
6.80% in 2000 attributable to a higher interest rate environment and a reduction
in short-term debt as a percentage of total debt.
Six months ended June 30, 2000 vs. June 30, 1999
Interest expense for the six months ended June 30, 2000 increased by $72.2
million or 85% on 58% higher average debt outstanding. The higher interest
expense also reflected an increase in the average borrowing rate for the period
from 5.56% to 6.67% in 2000 attributable to a higher interest rate environment
and a reduction in short-term debt as a percentage of total debt.
Interest Margin
TFC's earnings are influenced by the interest margin earned on finance
receivables (i.e., the excess of revenues over interest expense on borrowings).
Three months ended June 30, 2000 vs. June 30, 1999
Interest margin for the second quarter of 2000 decreased to 6.13% from
6.42% for the corresponding period in 1999. The decrease in interest margin
resulted from lower fee income as a percentage of average receivables,
competitive pressures and contractual delays in repricing certain variable rate
finance receivables in a rising interest rate environment.
Six months ended June 30, 2000 vs. June 30, 1999
Interest margin for the first six months of 2000 decreased to 5.88% from
6.30% for the corresponding period in 1999. The decrease in interest margin
resulted from lower fee income as a percentage of average receivables,
competitive pressures and contractual delays in repricing certain variable rate
finance receivables in a rising interest rate environment.
Operating Expenses
Three months ended June 30, 2000 vs. June 30, 1999
Selling and administrative expenses of $29.8 million increased by $8.2
million in the second 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 1.7% (on an
annualized basis) in the second quarter of 2000 as compared to 1.8% for the
corresponding period in 1999.
Six months ended June 30, 2000 vs. June 30, 1999
Selling and administrative expenses for the first six months increased by
$15.1 million as compared to the corresponding period in 1999. The increase in
2000 principally reflects higher expenses related to acquisitions and growth in
managed receivables. Selling and administrative expenses as a percentage of
average managed receivables decreased to 1.7% (on an annualized basis) for the
first six months of 2000 as compared to 1.8% for the corresponding period in
1999.
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<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Provision for Losses
Three months ended June 30, 2000 vs. June 30, 1999
The provision for losses of $9.9 million for the second quarter of 2000
increased from $5.6 million for the corresponding period in 1999. The increase
in the provision for losses is primarily due to receivable growth and higher net
charge-offs. Net charge-offs were $10.4 million in the second quarter of 2000 as
compared to $4.1 million for the corresponding period in 1999. The increase in
net charge-offs for the second quarter 2000 reflects $8.4 million for real
estate accounts that were fully reserved (including a $3.7 million charge-off to
the real estate owned valuation allowance). No real estate charge-offs were
recognized in the corresponding period in 1999.
Six months ended June 30, 2000 vs. June 30, 1999
The provision for losses of $15.4 million was $3.7 million higher than the
corresponding period in 1999. The increase in the provision for losses is due to
receivable growth. Net charge-offs were $15.3 million during the first six
months of 2000 as compared to $8.9 million in the corresponding period of 1999.
The increase in net charge-offs reflects $8.4 million for real estate accounts
that were fully reserved (including a $3.7 million charge-off to the real estate
owned valuation allowance). No real estate charge-offs were recognized in the
corresponding period in 1999.
The allowance for losses on receivables increased to $114.5 million at June
30, 2000, as compared to $112.8 million at January 1, 2000. Finance receivables
increased $553 million during the first six months of 2000 of which, $233
million was Textron-related with recourse. Excluding the utilization of real
estate reserves previously provided, the allowance for losses increased
proportional to nonrecourse receivable growth.
Although management believes it has made adequate provision for anticipated
losses, realization of these assets remains subject to uncertainties. Subsequent
evaluations of nonperforming assets, in light of factors then prevailing,
including economic conditions, may require additional increases in the allowance
for losses for such assets.
Net Income
Three months ended June 30, 2000 vs. June 30, 1999
Second quarter 2000 net income was $27.2 million, $8.5 million or 45%
higher than the corresponding period in 1999. The favorable results were due to
higher average finance assets, higher other income and rental revenues on
operating leases, partially offset by a lower interest margin, higher selling
and administrative expenses, a higher provision for losses and a higher
provision for income taxes.
Six months ended June 30, 2000 vs. June 30, 1999
Net income for the first six months of 2000 was $17.8 million or 52% higher
than the corresponding period in 1999. The favorable results were due to higher
average finance assets, higher other income and rental revenues on operating
leases, partially offset by a lower interest margin, higher selling and
administrative expenses, higher provision for losses and 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, which defers for one year the effective date of SFAS
No. 133. In June 2000, the FASB issued SFAS No. 138, which addresses issues
15
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
causing implementation difficulties and also amends the accounting and reporting
standards of SFAS No. 133 for certain derivative instruments and hedging
activities. 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 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.
16
<PAGE> 18
PART II. OTHER INFORMATION
TEXTRON FINANCIAL CORPORATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
<TABLE>
<C> <S>
3.1 Amended By-Laws of TFC as of May 2, 2000
4.1 Indenture dated as of December 9, 1999, between Textron
Financial Corporation and SunTrust Bank (formerly known as
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
A report on Form 8-K was filed on June 30, 2000 with respect to TFC's
authorization of its Medium-Term Notes, Series E, due nine months or more from
date of issue.
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<PAGE> 19
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
/s/ THOMAS J. CULLEN
--------------------------------------
Thomas J. Cullen
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer)
Date: August 11, 2000
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