TEXTRON FINANCIAL CORP - 10-Q Quarterly Report

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UNITED STATES
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, 2003

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 0-27559

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TEXTRON FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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DELAWARE 05-6008768
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

40 WESTMINSTER STREET, P.O. BOX 6687, PROVIDENCE, R.I. 02940-6687
(401) 621-4200
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)

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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

1

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TEXTRON FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED)

See notes to condensed consolidated financial statements (unaudited).
2

ITEM 1. FINANCIAL STATEMENTS (CONTINUED)

TEXTRON FINANCIAL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

See notes to condensed consolidated financial statements (unaudited).
3

ITEM 1. FINANCIAL STATEMENTS (CONTINUED)

TEXTRON FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED)

See notes to condensed consolidated financial statements (unaudited).
4

ITEM 1. FINANCIAL STATEMENTS (CONTINUED)

TEXTRON FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
(UNAUDITED)

See notes to condensed consolidated financial statements (unaudited).
5

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 28, 2002. The accompanying unaudited
consolidated financial statements include the accounts of Textron Financial
Corporation (Textron Financial or the Company) and its subsidiaries. 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, 2003 and December 28, 2002, and its consolidated results of operations
and cash flows for each of the respective three-month periods ended March 31,
2003 and 2002. The results of operations for the interim periods are not
necessarily indicative of the results to be expected for the full year. Certain
prior year balances have been reclassified to conform to the current year
presentation.

NOTE 2. OTHER INCOME

The Other component of Other income includes custodial fees, commitment
fees, residual gains, insurance fees and other miscellaneous fees, which are
primarily recognized as income when received.

NOTE 3. ALLOWANCE FOR LOSSES ON RECEIVABLES

NOTE 4. MANAGED AND SERVICED FINANCE RECEIVABLES

Textron Financial manages finance receivables for a variety of investors,
participants and third-party portfolio owners.

6

ITEM 1. FINANCIAL STATEMENTS (CONTINUED)

TEXTRON FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

Nonrecourse participations consist of undivided interests in loans
originated by Textron Financial, primarily in vacation interval resorts and golf
finance, which are sold to independent investors.

Third-party portfolio servicing largely relates to finance receivable
portfolios of resort developers, third-party securitization servicing as well as
private label bank and leasing company portfolio servicing.

Owned receivables include approximately $38 million of finance receivables
that were unfunded at March 31, 2003, as a result of holdback arrangements. The
corresponding liability is included in Accrued interest and other liabilities on
Textron Financial's Condensed Consolidated Balance Sheets.

NOTE 5. LOAN IMPAIRMENT

Textron Financial periodically evaluates finance receivables, excluding
homogeneous loan portfolios and finance leases, for impairment. A loan is
considered impaired when it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. Impairment is measured by comparing the fair value of a loan to its
carrying cost. Fair value is based on the present value of expected future cash
flows discounted at the loan's effective interest rate, the loan's observable
market price or, if the loan is collaterally dependent, at the fair value of the
collateral. If the fair value of the loan is less than its carrying amount, the
Company establishes a reserve based on this difference. 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, that may differ
from actual results.

The Company suspends the accrual of interest income 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 applied to reduce principal. The
Company had $180.4 million of nonaccrual finance receivables at March 31, 2003,
compared to $181.6 million at December 28, 2002. Nonaccrual finance receivables
resulted in Textron Financial's revenues being reduced by approximately $4.7
million and $3.8 million for the first three months of 2003 and 2002,
respectively. No interest income was recognized using the cash basis method.
Excluding homogeneous loan portfolios and finance leases, the Company had
impaired loans of $124.8 million and $122.1 million at March 31, 2003 and
December 28, 2002, respectively. Impaired loans with identified reserve
requirements were $116.8 million and $109.9 million at March 31, 2003 and
December 28, 2002, respectively. The allowance for losses on receivables related
to impaired loans with identified reserve requirements was $39.3 million and
$32.7 million at March 31, 2003 and December 28, 2002, respectively. The average
recorded investment in impaired loans during the first three months of 2003 was
$123.4 million compared to $61.6 million in the corresponding period in 2002.

7

ITEM 1. FINANCIAL STATEMENTS (CONTINUED)

TEXTRON FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

NOTE 6. GOODWILL

On December 30, 2001, Textron Financial adopted SFAS No. 142, "Goodwill and
Other Intangible Assets," which required companies to stop amortizing goodwill
and certain intangible assets with indefinite useful lives and requires an
annual review for impairment. All existing goodwill as of December 30, 2001 was
required to be tested for impairment on a reporting unit basis with the adoption
of this standard. Goodwill is considered to be impaired when the net book value
of a reporting unit exceeds its estimated fair value. Fair values were
established using a discounted cash flow methodology.

Upon adoption, Textron Financial recorded an after-tax transitional
impairment charge of $15.4 million ($23.7 million, pre-tax) in the second
quarter of 2002, which was retroactively recorded in the first quarter of 2002.
This charge is included in the caption "Cumulative effect of change in
accounting principle, net of income taxes" in Textron Financial's Condensed
Consolidated Statements of Income. This after-tax charge related to the
Franchise Finance division within the Other segment and was primarily the result
of decreasing loan volumes and an unfavorable securitization market.

NOTE 7. OTHER ASSETS

The Investment in equipment residuals represents the remaining equipment
residual values principally with Textron golf and turf equipment lease payments
that were securitized in 2002, 2001 and 2000.

The cost of fixed assets is being depreciated using the straight-line
method based on the estimated useful lives of the assets.

8

ITEM 1. FINANCIAL STATEMENTS (CONTINUED)

TEXTRON FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

NOTE 8. DEBT AND CREDIT FACILITIES

The weighted average interest rates on short-term borrowings have been
determined by relating the annualized interest cost to the daily average dollar
amounts outstanding. The combined weighted average interest rate was 1.60%
during the three months ended March 31, 2003, and 1.48% at March 31, 2003.

Interest on Textron Financial's variable rate notes is predominately tied
to the three-month LIBOR for U.S. dollar deposits. The weighted average interest
rate on these notes, before consideration of the effect of interest rate
exchange agreements, was 2.12% at March 31, 2003.

The fair value adjustment to designated fixed rate debt in accordance with
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
was $66 million and $67 million at March 31, 2003 and December 28, 2002,
respectively.

Textron Financial has bank lines of credit of $1.5 billion, of which $500
million expires in the third quarter of 2003 and $1.0 billion expires in 2006.
Textron Financial's lines of credit, including the $100 million line of credit
with Textron, not reserved as support for commercial paper or utilized for
letters of credit at March 31, 2003, were $358 million. The Company also
maintains a C$50 million committed facility under which it can borrow an
additional C$50 million on an uncommitted basis. At March 31, 2003, the Company
had used C$35 million of the committed portion of the facility. Textron
Financial also has a $25 million multi-currency facility, of which $12 million
remains unused at March 31, 2003. Both the Canadian and multi-currency
facilities expire in the third quarter of 2003. Textron Financial generally pays
fees in support of these lines.

Through its subsidiary, Textron Financial Canada Funding Corp. (Textron
Canada Funding), the Company may periodically issue debt securities. Textron
Financial owns 100% of the common stock of Textron Canada Funding. Textron
Canada Funding is a financing subsidiary of Textron Financial with no
operations, revenues or cash flows other than those related to the issuance,
administration and repayment of debt securities that are fully and
unconditionally guaranteed by Textron Financial.

Securitizations are an important source of liquidity for Textron Financial
and involve the periodic transfer of finance receivables to qualified special
purpose trusts. At March 31, 2003, and December 28, 2002, the

9

ITEM 1. FINANCIAL STATEMENTS (CONTINUED)

TEXTRON FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

outstanding amount of debt issued by these qualified special purpose trusts was
$2.0 billion and $2.3 billion, respectively.

The terms of certain of the Company's loan agreements and credit
facilities, under the most restrictive covenant, limit the payment of dividends
to $355.0 million at March 31, 2003. In the first quarter of 2003, Textron
Financial declared and paid dividends of $37.3 million.

NOTE 9. 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 obligations under the Preferred Securities
are fully and unconditionally guaranteed by Litchfield, including, without
limitation, all obligations arising under the Declaration 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 10. ACCUMULATED OTHER COMPREHENSIVE LOSS AND COMPREHENSIVE INCOME

Accumulated other comprehensive loss is as follows:

10

ITEM 1. FINANCIAL STATEMENTS (CONTINUED)

TEXTRON FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

Comprehensive income is summarized below:

NOTE 11. CONTINGENCIES

There are pending or threatened lawsuits and other proceedings against
Textron Financial and its subsidiaries. Some of these suits and proceedings seek
compensatory, treble or punitive damages in substantial amounts. These suits and
proceedings are being defended by, or contested on behalf of, Textron Financial
and its subsidiaries. On the basis of information presently available, Textron
Financial believes any such liability would not have a material effect on
Textron Financial's financial position or results of operations.

NOTE 12. NEW ACCOUNTING PRONOUNCEMENTS

In January 2003, the FASB issued Interpretation No. 46 "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51" (FIN 46). FIN 46
requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is effective for all
new variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim or annual period
beginning after June 15, 2003. Management is currently evaluating the impact of
the adoption of FIN 46 and does not anticipate that it will have a material
effect on Textron Financial's results of operations or financial position.

NOTE 13. FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

During the third quarter of 2002, the Company made a strategic decision to
realign its business units into seven operating segments based on the markets
serviced and the products offered: Aircraft Finance, Asset-Based Lending,
Distribution Finance, Golf Finance, Resort Finance, and Structured Capital. In
addition, the Company maintains an Other segment that includes franchise
finance, media finance and small business finance in addition to liquidating
portfolios related to a strategic realignment of the Company's business and
product lines in 2001. As a result of these segment changes, the financial
information for March 31, 2002, has been recast reflecting the realignment of
the segments.

11

ITEM 1. FINANCIAL STATEMENTS (CONTINUED)

TEXTRON FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

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(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, to the extent possible,
variable rate debt with variable rate finance assets and fixed rate debt
with fixed rate finance assets.

12

ITEM 1. FINANCIAL STATEMENTS (CONTINUED)

TEXTRON FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

(2) Indirect expenses are allocated to each segment based on the use of such
resources. Most allocations are based on the segment's 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 and properties; retained
interests in securitizations; interest-only securities; investment in
equipment residuals; and short and long-term investments (some of which are
classified in Other assets on Textron Financial's Condensed Consolidated
Balance Sheets).

13

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 or the Company) uses a
broad base of financial resources for its liquidity and capital needs. Cash is
provided from operations and several sources of borrowings, including the
issuance of commercial paper and other short-term debt, sales of medium and
long-term debt in the U.S. and foreign public and private 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 lines of credit of $1.5 billion, of which $500
million expires in the third quarter of 2003 and $1.0 billion expires in 2006.
The $500 million facility includes a one-year term out option, effectively
extending its expiration into 2004. None of these lines of credit were used at
March 31, 2003, or December 28, 2002. Textron Financial also maintains a C$50
million committed facility, under which it can borrow an additional C$50 million
on an uncommitted basis. At March 31, 2003, Textron Financial had used C$35
million of the committed portion of the facility. Textron Financial also has a
$25 million multi-currency facility, of which $12 million remains unused at
March 31, 2003. Both the Canadian and multi-currency facilities expire in the
third quarter of 2003. Lines of credit, including the $100 million line of
credit with Textron, not reserved as support for commercial paper or utilized
for letters of credit were $358 million at March 31, 2003, compared to $716
million at December 28, 2002. The decrease in the unreserved portion of the
lines of credit is principally attributable to growth in Distribution Finance
and the liquidation of the small business finance receivable securitization
conduit.

Under a shelf registration statement filed with the Securities and Exchange
Commission, Textron Financial may issue public debt securities in one or more
offerings up to a total maximum offering of $3.0 billion. Under this facility,
Textron Financial issued $200 million of term notes during the first quarter of
2003 that mature in 2005. The proceeds from these issuances were used to
refinance maturing commercial paper and long-term debt at par. At March 31,
2003, Textron Financial had $900 million available under this facility.

Securitizations remain an important source of funding for the Company.
During the first quarter of 2003, Textron Financial continued to utilize a
revolving securitization conduit to fund a portfolio of Distribution Finance
receivables. Textron Financial did not enter into any term securitization
transactions during the quarter. Cash collections on prior period securitization
gains were $10.2 million and $12.3 million, for the three-month periods ended
March 31, 2003 and March 31, 2002. Textron Financial anticipates that it will
enter into additional securitization transactions during the remainder of 2003.

During the first quarter of 2003, Textron Financial's short and long-term
debt credit ratings were downgraded from F1 to F2 and from A to A-,
respectively, by Fitch, and the Company was placed on CreditWatch with negative
implications by Standard & Poor's. The economic environment and its potential
impact on the financial performance of the Company's finance receivable
portfolios were listed as contributing factors. While the actions of the rating
agencies caused the Company's cost of capital to increase, it did not result in
any loss of access to capital. Further downgrades in Textron Financial's ratings
could increase borrowing spreads or limit its access to the commercial paper,
securitization and long-term debt markets. In addition, Textron Financial's $1.5
billion revolving bank line of credit agreements contain certain financial
covenants that Textron Financial needs to comply with to maintain its ability to
borrow under the facilities. Textron Financial was in full compliance with such
covenants at March 31, 2003.

Textron Financial believes that it has adequate credit facilities and
access to credit markets to meet its long-term financing needs.

14

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)

Cash flows provided by operations were $79 million during the first quarter
of 2003, compared to $26 million in the corresponding period last year. The
increase was due principally to the timing of payments of accrued interest and
other liabilities and an increase in the deferred income tax provision.

Cash flows used in investing activities were funded primarily from the
collection of receivables and through the issuance of debt. The decrease in
proceeds from receivable sales largely reflects the decline in securitization
activity during the first quarter of 2003.

Textron Financial declared and paid dividends to Textron of $37.3 million
during the first quarter of 2003, compared to $55.3 million of dividends
declared and paid during the corresponding period of 2002. The decrease in 2003
was due to the retention of capital to support finance receivable growth.

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 84% at March 31, 2003, up from
83% at December 28, 2002. Textron Financial's ratio of earnings to fixed charges
was 1.52x for the three months ended March 31, 2003, compared to 1.49x for the
corresponding three months in 2002. Commercial paper and Other short-term debt
as a percentage of total debt was 23% at March 31, 2003, compared to 19% at
December 28, 2002. Textron Financial has a policy of matching the duration of
its assets with its debt. Changes in short and long-term debt are directly
related to the duration of Textron Financial's assets and liabilities.

Finance Assets

Textron Financial's financing activities are confined almost exclusively to
secured lending and leasing to commercial markets. Management believes that the
portfolio avoids excessive concentration of risk through diversification across
geographic regions, industries and types of collateral, and among borrowers.

Total finance assets, which includes finance receivables, equipment on
operating leases -- net of accumulated depreciation, repossessed assets and
properties, retained interests in securitizations, interest-only securities,
investment in equipment residuals and other long-term investments (some of which
are classified in Other assets on Textron Financial's Condensed Consolidated
Balance Sheets), were $7.1 billion at March 31, 2003, up 9% from $6.5 billion at
December 28, 2002. The increase in finance assets was mostly due to Distribution
Finance ($213 million), net of a revolving securitization conduit, small
business finance within the Other segment ($164 million), which was the result
of a voluntary termination and liquidation of a revolving securitization conduit
through a receivables repurchase, Resort Finance ($91 million), and Aircraft
Finance ($88 million).

Finance receivable additions for the first quarter of 2003 were $2.1
billion, compared to $1.9 billion in the corresponding period last year. The
majority of the growth in finance receivable additions was from Distribution
Finance ($188 million).

Nonperforming Assets

Nonperforming assets, which includes independent and nonrecourse captive
finance assets, as a percentage of finance assets decreased to 3.23% ($229
million) at March 31, 2003, from 3.33% ($218 million) at December 28, 2002. The
$11 million increase in nonperforming assets at March 31, 2003, compared to
December 28, 2002, was due to increases in Resort Finance ($15 million) and the
Other segment ($20 million), partially offset by a decrease in Golf Finance ($8
million), Asset-Based Lending ($13 million) and Distribution Finance ($2
million). The Other segment represents 25% of owned receivables and 45% of
nonperforming assets at March 31, 2003. The Company believes that nonperforming
assets will generally be in the range of 2% to 4% of finance assets depending on
economic conditions. The Company expects modest improvements in portfolio
quality as it liquidates portfolios included in the Other segment. However, a
prolonged economic downturn could have a negative effect on the Company's
overall portfolio quality.

15

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)

Interest Rate Sensitivity

Textron Financial'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 Textron Financial's risk to changes in
interest rates, and includes entering into interest rate exchange agreements. At
March 31, 2003, interest-sensitive assets in excess of interest-sensitive
liabilities were $734 million, net of $1.3 billion of interest rate exchange
agreements on long-term debt and $322 million of interest rate exchange
agreements on finance receivables. However, classified within interest-sensitive
assets are approximately $715 million of floating rate loans with rate floors
that are generally 162 basis points above the rate that would otherwise be
applicable with reference to the benchmark index (predominately the prime rate).
As a consequence, these assets have become interest-insensitive, and will remain
so until the prime rate increases by more than 162 basis points. The Company's
match-funded position at March 31, 2003, inclusive of the effects of the rate
floors was consistent with year-end 2002.

Management believes that its asset/liability 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. Changes in short-term borrowing costs generally precede
changes in variable rate receivable yields. 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
change 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").
Textron Financial 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. This shock test model, when applied
to Textron Financial's asset and liability position at March 31, 2003, indicates
that an increase in interest rates of 100 basis points would have a beneficial
impact on Textron Financial's net income and cash flows for the following
twelve-month period, whereas, a decrease in interest rates of 100 basis points
reduces Textron Financial's net income and cash flow by $3.2 million for the
following twelve-month period, excluding the effects of the rate floors that
mitigate this exposure.

Financial Risk Management

Textron Financial's results are affected by changes in U.S. and, to a
lesser extent, 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.

Textron Financial manages its foreign currency exposure by funding most
foreign currency denominated assets with liabilities in the same currency. The
Company may enter into foreign currency exchange agreements to convert foreign
currency denominated assets and liabilities into functional currency denominated
assets and liabilities. In addition, as part of managing its foreign currency
exposure, Textron Financial may enter 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 forward exchange contracts were nominal.

16

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)

RESULTS OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2003 VS. MARCH 31, 2002

REVENUES

First quarter 2003 revenues increased by $6.7 million, or 4.6%, compared to
the corresponding period in 2002. The increase in revenues principally reflects
higher finance charges and discounts ($6.2 million) due to a higher level of
average finance receivables ($5.6 million). The higher level of average finance
receivables ($348 million) was primarily due to growth in Distribution Finance.

INTEREST EXPENSE

First quarter 2003 interest expense decreased by $1.0 million, or 2.2% on
1.7% higher average debt outstanding. The lower interest expense reflects a
decrease in the average borrowing rate to 3.65% from 3.79%, primarily
attributable to a lower interest rate environment and the maturity of higher
cost debt.

INTEREST MARGIN

Textron Financial's earnings are influenced by the interest margin earned
on finance receivables (i.e., revenues earned less interest expense on
borrowings and operating lease depreciation).

Interest margin increased $6.7 million, or 8 basis points (6.87% versus
6.79%) for the first quarter of 2003 compared to the corresponding period in
2002. The increase in interest margin was primarily due to higher finance
charges and discounts from higher average finance receivables and higher
receivable pricing, and a lower borrowing cost.

SELLING AND ADMINISTRATIVE EXPENSES

Selling and administrative expenses of $47.3 million increased $6.3 million
in the first quarter of 2003 compared to the corresponding period in 2002. The
increase in 2003 principally reflects higher legal and collection expenses ($4.0
million) and higher telecommunication expense ($0.9 million). Selling and
administrative expenses as a percentage of average managed and serviced finance
receivables were 2.05% (on an annualized basis) in the first quarter of 2003,
compared to 1.79% in 2002.

PROVISION FOR LOSSES

The provision for losses of $29.7 million for the first quarter of 2003
decreased from $30.4 million for the corresponding period in 2002. The decrease
reflects slightly lower net charge-offs.

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.

OPERATING RESULTS BY SEGMENT

Segment income below represents income before special charges, income
taxes, distributions on preferred securities and cumulative effect of change in
accounting principle.

Distribution Finance income increased $6.6 million reflecting higher
interest margin ($15.2 million), offset by higher operating expenses ($4.6
million) and higher provision for losses ($4.0 million). The higher interest
margin was principally due to higher average finance assets ($405 million).

Golf Finance income increased $2.0 million reflecting higher interest
margin ($3.2 million) due to higher fee income ($2.0 million) and higher average
finance assets ($81 million). This increase in interest margin was partially
offset by higher operating expenses ($1.1 million).
17

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)

Resort Finance income decreased $4.2 million primarily reflecting lower
interest margin ($3.7 million) and higher operating expenses ($0.6 million). The
decrease in interest margin largely reflects lower pricing despite higher
average finance assets ($92 million).

Aircraft Finance income decreased by $3.4 million largely reflecting lower
interest margin ($3.8 million). The decrease in interest margin is primarily due
to a write-down of retained interests in securitized assets ($2.2 million)
reflecting lower expected realization on defaulted assets within the trust, the
inability to pass on higher relative borrowing costs related to an increase in
interest rate spreads to benchmark borrowing rates (such as U.S. Treasury rates
and LIBOR) and a decrease in average finance assets ($43 million).

Asset-Based Lending income increased $2.7 million primarily reflecting
lower provision for loan losses ($3.2 million).

Structured Capital income increased $1.8 million primarily reflecting lower
provision for loan losses ($1.4 million).

Other segment income decreased $4.5 million reflecting lower interest
margin ($4.3 million) on lower average finance assets ($139 million), and higher
operating expenses ($0.8 million), partially offset by lower provision for
losses ($0.6 million).

INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE

First quarter 2003 income before cumulative effect of change in accounting
principle was $15.5 million, $1.4 million or 9.7% higher than the corresponding
period in 2002. The increase reflects higher interest margin ($6.7 million), a
lower provision for losses ($0.6 million) and a lower effective tax rate, offset
by higher selling and administrative expenses ($6.3 million).

SELECTED FINANCIAL RATIOS

- ---------------

(1) Represents revenues earned less interest expense on borrowings and operating
lease depreciation as a percentage of average net investment. Average net
investment includes finance receivables plus operating leases, less deferred
taxes on leveraged leases.

(2) Return on average equity excludes the cumulative effect of change in
accounting principle.

18

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)

(3) Return on average assets excludes the cumulative effect of change in
accounting principle.

(4) Average managed and serviced finance receivables include owned receivables,
receivables serviced under securitizations, participations and third-party
portfolio servicing agreements.

(5) Operating efficiency ratio is selling and administrative expenses divided by
net interest margin.

(6) Delinquency excludes captive receivables with recourse to Textron. Captive
receivables represent third-party finance receivables originated in
connection with the sale or lease of Textron manufactured products.
Percentages are expressed as a function of total Textron Financial
independent and nonrecourse captive receivables.

(7) Finance assets include: finance receivables; equipment on operating leases,
net of accumulated depreciation; repossessed assets and properties; retained
interests in securitizations; interest-only securities; investment in
equipment residuals; and short and long-term investments (some of which are
classified in Other assets on Textron Financial's Condensed Consolidated
Balance Sheets). Nonperforming assets include independent and nonrecourse
captive finance assets.

(8) Tangible shareholder's equity equals Shareholder's equity, excluding
Accumulated other comprehensive income or loss, less Goodwill.

NEW ACCOUNTING PRONOUNCEMENTS

In January 2003, the FASB issued Interpretation No. 46 "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51" (FIN 46). FIN 46
requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is effective for all
new variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim or annual period
beginning after June 15, 2003. Management is currently evaluating the impact of
the adoption of FIN 46 and does not anticipate that it will have a material
effect on Textron Financial's results of operations or financial position.

FORWARD-LOOKING INFORMATION

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 the following: (a) changes in worldwide economic and political
conditions that impact interest and foreign exchange rates; (b) the occurrence
of further downturns in customer markets to which Textron products are sold or
supplied and financed or where Textron Financial offers financing; (c) the
ability to control costs and successful implementation of various cost reduction
programs; (d) the ability to maintain portfolio credit quality; (e) Textron
Financial's access to debt financing at competitive rates; (f) access to equity
in the form of retained earnings and capital contributions from Textron; and (g)
uncertainty in estimating contingent liabilities and establishing reserves
tailored to address such contingencies.

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" and "Financial
Risk Management" in Item 2 of this Form 10-Q.

19

ITEM 4. CONTROLS AND PROCEDURES

Within the 90 days prior to the date of this report, Textron Financial
carried out an evaluation, under the supervision and with the participation of
Textron Financial's management, including its Chairman and Chief Executive
Officer (the "CEO") and its Executive Vice President and Chief Financial Officer
(the "CFO"), of the effectiveness of the design and operation of Textron
Financial's disclosure controls and procedures (as defined in Rule 13a-14(c)
under the Securities Exchange Act of 1934 (the "Act")). Based upon that
evaluation, the CEO and CFO concluded that Textron Financial's disclosure
controls and procedures are effective in providing reasonable assurance that (a)
the information required to be disclosed by Textron Financial in the reports
that it files or submits under the Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms, and (b) such information is accumulated and
communicated to Textron Financial's management, including its CEO and CFO, as
appropriate to allow timely decisions regarding required disclosure.

There have been no significant changes in Textron Financial's internal
controls or in other factors that could significantly affect these controls
subsequent to the date the CEO and CFO completed their evaluation.

20

PART II. OTHER INFORMATION

TEXTRON FINANCIAL CORPORATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(A) 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 Indenture dated as of November 30, 2001, between Textron
Financial Canada Funding Corp. and SunTrust Bank, guaranteed
by Textron Financial Corporation. Incorporated by reference
to Exhibit 4.2 to amendment No. 1 to Textron Financial
Corporation's Registration Statement on Form S-3 (No.
333-72676).
12 Computation of Ratios of Earnings to Fixed Charges
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(B) REPORTS ON FORM 8-K

No reports on Form 8-K were filed during the quarter ended March 31, 2003.

21

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.

Date: May 6, 2003 TEXTRON FINANCIAL CORPORATION

/s/ THOMAS J. CULLEN
--------------------------------------
Thomas J. Cullen
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer)

22

CERTIFICATIONS

I, Stephen A. Giliotti, Chairman and Chief Executive Officer of Textron
Financial Corporation (the "Company") certify that:

1. I have reviewed this quarterly report on Form 10-Q of Textron Financial
Corporation;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:

a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;

b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and

c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):

a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.

Date: May 6, 2003

/s/ STEPHEN A. GILIOTTI
--------------------------------------
Stephen A. Giliotti
Chairman and Chief Executive Officer

A signed original of this written statement required by Section 906 has been
provided to Textron Financial and will be retained by Textron Financial and
furnished to the Securities and Exchange Commission or its staff upon request.
23

I, Thomas J. Cullen, Executive Vice President and Chief Financial Officer of
Textron Financial Corporation (the "Company") certify that:

1. I have reviewed this quarterly report on Form 10-Q of Textron Financial
Corporation;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:

a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;

b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and

c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):

a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.

Date: May 6, 2003

/s/ THOMAS J. CULLEN
--------------------------------------
Thomas J. Cullen
Executive Vice President and Chief
Financial Officer

A signed original of this written statement required by Section 906 has been
provided to Textron Financial and will be retained by Textron Financial and
furnished to the Securities and Exchange Commission or its staff upon request.
24