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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
FORM 10-Q
 
     
[x]
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal quarter ended March 31, 2010
OR
[ ]
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission file number 001-15515
 
 
 
 
TEXTRON FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
 
 
 
 
     
Delaware
(State or other jurisdiction of
incorporation or organization)
  05-6008768
(I.R.S. Employer Identification No.)
     
40 Westminster Street, Providence, RI   02940-6687
(Address of principal executive offices)   (Zip code)
 
401-621-4200
(Registrant’s telephone number, including area code)
 
 
 
 
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 ü.  No  .
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  . No  .
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
                 
Large accelerated filer  .
  Accelerated filer  .   Non-accelerated filer ü.   Smaller reporting company  .    
        (Do not check if smaller reporting company)    
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  . No ü.
 
All of the shares of common stock of the registrant are owned by Textron Inc.
 
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H (1) (a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT


 

TEXTRON FINANCIAL CORPORATION
 
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 EX-12
 EX-31.1
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PART I. FINANCIAL INFORMATION
 
Item 1.  Financial Statements
 
TEXTRON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
                     
      Three Months Ended  
      March 31,
      March 31,
 
      2010       2009  
      (In millions)  
Finance charges
    $        85       $        115  
Rental revenues on operating leases
      6         8  
Portfolio losses
      (13 )       (10 )
Securitization losses:
                   
Total other-than-temporary impairments
              (6 )
Portion of other-than-temporary impairments recognized in Other comprehensive income, before income taxes
               
                     
Net other-than-temporary impairment recognized in securitization losses
              (6 )
Other securitization losses
              (1 )
                     
Securitization losses
              (7 )
Other (loss) income
      (5 )       16  
                     
Total revenues
      73         122  
Interest expense
      32         54  
Depreciation of equipment on operating leases
      4         5  
                     
Net interest margin
      37         63  
Provision for losses
      55         76  
Operating and administrative expenses
      41         53  
Restructuring charges
      3         3  
                     
Loss before income taxes
      (62 )       (69 )
Income tax benefit
      (21 )       (16 )
                     
Net loss
    $ (41 )     $ (53 )
                     
 
See Notes to the Consolidated Financial Statements.


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TEXTRON FINANCIAL CORPORATION
(Unaudited)
 
                     
      March 31,
      January 2,
 
      2010       2010  
      (In millions)  
Assets
                   
Cash and equivalents
    $        93       $      144  
Finance receivables held for investment, net of unearned income:
                   
Installment contracts
      2,174         2,327  
Revolving loans
      1,032         1,137  
Golf course, timeshare and hotel mortgages
      1,024         1,073  
Distribution finance receivables
      584         771  
Leveraged leases
      314         313  
Finance leases
      247         403  
                     
Total finance receivables held for investment
      5,375         6,024  
Allowance for losses on finance receivables held for investment
      (363 )       (339 )
                     
Finance receivables held for investment — net
      5,012         5,685  
Finance receivables held for sale
      721         819  
Equipment on operating leases — net
      212         216  
Other assets
      426         460  
                     
Total assets
    $ 6,464       $ 7,324  
                     
Liabilities and equity Liabilities
                   
Accrued interest and other liabilities
    $ 343       $ 423  
Amounts due to Textron Inc. 
      664         472  
Deferred income taxes
      126         137  
Debt
      4,617         5,488  
                     
Total liabilities
      5,750         6,520  
                     
Shareholder’s Equity
                   
Capital surplus
      1,562         1,487  
Subsidiary preferred stock
      1         1  
Investment in parent company preferred stock
      (25 )       (25 )
Accumulated other comprehensive loss
      (48 )       (49 )
Retained deficit
      (776 )       (610 )
                     
Total shareholder’s equity
      714         804  
                     
Total liabilities and shareholder’s equity
    $ 6,464       $ 7,324  
                     
 
See Notes to the Consolidated Financial Statements.


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TEXTRON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2010 and 2009
(Unaudited)
 
                     
      2010     2009
      (In millions)
Cash flows from operating activities:
                   
Net loss
    $  (41 )     $  (53 )
Adjustments to reconcile net loss to net cash provided by operating activities:          
(Decrease) increase in income taxes payable
      (65 )       92  
Provision for losses
      55         76  
Portfolio losses
      28         10  
Decrease in accrued interest and other liabilities
      (26 )       (1 )
Deferred income tax provision
      (9 )       (121 )
Depreciation and amortization
      8         8  
Valuation allowance on finance receivables held for sale
      4          
Restructuring charges
      (1 )       (2 )
Other — net
      (3 )       9  
                     
Net cash (used) provided by operating activities
      (50 )       18  
                     
Cash flows from investing activities:
                   
Finance receivables originated or purchased
      (198 )       (1,325 )
Finance receivables repaid
      655         1,513  
Proceeds from receivable sales, including securitizations
      263         59  
Proceeds from disposition of other assets, including repossessed assets and properties and operating leases
      37         72  
Other investments
      28         11  
Purchase of assets for operating leases
      (5 )       (3 )
                     
Net cash provided by investing activities
      780         327  
                     
Cash flows from financing activities:
                   
Proceeds from line of credit
              1,740  
Principal payments on long-term debt
      (791 )       (221 )
Net decrease in commercial paper
              (735 )
Principal payments on secured debt
      (108 )       (193 )
Principal payments on nonrecourse debt
      (21 )       (129 )
Net increase (decrease) in intercompany loan due to Textron Inc. 
      190         (133 )
Capital contributions from Textron Inc. 
      77         2  
Dividends paid to Textron Inc. 
      (127 )       (86 )
Other — net
              29  
                     
Net cash (used) provided by financing activities
      (780 )       274  
                     
Effect of exchange rate changes on cash
      (1 )       2  
                     
Net (decrease) increase in cash and equivalents
      (51 )       621  
Cash and equivalents at beginning of year
      144         16  
                     
Cash and equivalents at end of period
    $ 93       $ 637  
                     
 
See Notes to the Consolidated Financial Statements.


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TEXTRON FINANCIAL CORPORATION
(Unaudited)
 
                                                                 
          Investment
                                     
          In Parent
          Accumulated
          Total
             
          Company
    Subsidiary
    Other
    Retained
    Share-
    Non-
       
    Capital
    Preferred
    Preferred
    Comprehensive
    Earnings
    holder’s
    controlling
    Total
 
    Surplus     Stock     Stock       Income (Loss)     (Deficit)     Equity     Interest        Equity  
                                                                 
Balance January 3, 2009
  $ 1,217     $ (25 )   $     $ (55 )   $ (58 )   $ 1,079     $     $ 1,079  
                                                                 
Comprehensive loss:
                                                               
                                                                 
Net loss
                            (203 )     (203 )     (2 )     (205 )
                                                                 
Other comprehensive income:
                                                               
                                                                 
Foreign currency translation, net of income taxes
                      7             7             7  
                                                                 
Change in unrealized net losses on retained interests, net of income tax benefit
                      (1 )           (1 )           (1 )
                                                                 
                                                                 
Other comprehensive income
                      6             6             6  
                                                                 
                                                                 
Comprehensive loss
                                  (197 )     (2 )     (199 )
                                                                 
Capital contributions from Textron Inc.      279                               279             279  
                                                                 
Dividends to Textron Inc. 
    (9 )                       (349 )     (358 )           (358 )
                                                                 
Sale of subsidiary preferred stock
                1                   1             1  
                                                                 
Sale of noncontrolling interest
                                        21       21  
                                                                 
Repurchase of noncontrolling interest                                         (19 )     (19 )
                                                                 
                                                                 
Balance January 2, 2010
    1,487       (25 )     1       (49 )     (610 )     804             804  
                                                                 
                                                                 
Comprehensive loss:
                                                               
                                                                 
Net loss
                            (41 )     (41 )           (41 )
                                                                 
Other comprehensive income:
                                                               
                                                                 
Change in unrealized net losses on hedge contracts, net of income tax benefit
                      2             2             2  
                                                                 
Foreign currency translation, net of income taxes
                      (1 )           (1 )           (1 )
                                                                 
                                                                 
Other comprehensive income
                      1             1             1  
                                                                 
                                                                 
Comprehensive loss (1)
                                  (40 )           (40 )
                                                                 
Capital contributions from Textron Inc.      77                               77             77  
                                                                 
Dividends to Textron Inc. 
    (2 )                       (125 )     (127 )           (127 )
                                                                 
                                                                 
Balance March 31, 2010
  $ 1,562     $ (25 )   $ 1     $ (48 )   $ (776 )   $ 714     $     $ 714  
                                                                 
 
 
(1) Comprehensive loss was $40 million for the three months ended March 31, 2010 as compared to $53 million for the three months ended March 31, 2009.
 
See Notes to the Consolidated Financial Statements.


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TEXTRON FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Note 1. Basis of Presentation
 
The Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements included in Textron Financial Corporation’s Annual Report on Form 10-K for the year ended January 2, 2010. The accompanying Consolidated Financial Statements include the accounts of Textron Financial Corporation (Textron Financial, TFC 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, 2010, and its consolidated results of operations and cash flows for each of the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year.
 
In the fourth quarter of 2008, Textron Inc. (Textron) announced a plan to exit all of our commercial finance business, other than the portion supporting the financing of customer purchases of products which Textron manufactures. In the second quarter of 2009, we changed our management structure for the captive business to facilitate the management of its operations. Due to this change, we consolidated the portion of the former Golf Finance segment that finances customer purchases of Textron manufactured golf and turf-care equipment into the former Aviation Finance segment, forming the new Captive Finance segment. In the fourth quarter of 2009, due to further changes in how the performance of our business is measured and consolidation of our management and operational structure, we combined all remaining portions of our former operating segments into a new Non-captive Finance segment, which represents the business we are liquidating. All comparative segment information for prior periods has been recast to reflect this change.
 
Note 2. Special Charges
 
Restructuring charges
 
In the fourth quarter of 2008, Textron announced a plan to exit all of the commercial finance business of Textron Financial, other than that portion supporting the financing of customer purchases of products which Textron manufactures. In conjunction with the exit plan, we announced a restructuring program to downsize and consolidate our operations. Under this plan, we incurred severance costs of $3 million in the first quarter of 2010 and severance costs and contract termination costs of $2 million and $1 million, respectively, in the first quarter of 2009, all of which were related to the Non-captive Finance segment.
 
Restructuring charges are generally of a nonrecurring nature and are not included in Segment (loss) income, which is our measure used for evaluating performance and for decision-making purposes.
 
An analysis of our restructuring reserve is presented below:
 
           
      Severance and
 
      Pension
 
      Curtailment
 
      Costs  
      (In millions)  
Balance at January 2, 2010
    $  13  
Additions
      3  
Cash Paid
      (4 )
           
Balance at March 31, 2010
    $ 12  
           


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Restructuring costs since the inception of the program through March 31, 2010 are summarized below by segment:
 
                               
      Captive
      Non-captive
         
      Finance       Finance       Total  
      (In millions)  
Severance and pension curtailment costs
    $ 1       $ 29       $ 30  
Non-cash asset impairments
      3         8         11  
Contract termination costs
              2         2  
                               
Total Restructuring costs
    $ 4       $ 39       $ 43  
                               
 
We expect to incur additional costs to exit the Non-captive Finance segment of our business over the next two to three years. These costs are expected to be within a range from $10 million to $15 million and be primarily attributable to severance and retention benefits. We expect to eliminate approximately 850 positions, representing approximately 80% of our total workforce since the inception of the program. As of March 31, 2010, we have terminated approximately 600 employees under this program.
 
Note 3. Finance Receivables
 
Managed Finance Receivables
 
Managed finance receivable balances and percentages by product line are presented in the following table:
 
                                         
      March 31,
              January 2,
         
      2010               2010          
      (Dollars in millions)          
Captive Finance
                                       
Aviation
    $      2,189         36%       $   2,353         34%  
Golf Equipment
      391         6%         417         6%  
Non-captive Finance
                                       
Timeshare
      1,202         20%         1,302         19%  
Golf Mortgage
      913         15%         933         14%  
Distribution Finance
      697         11%         1,076         16%  
Structured Capital
      351         6%         349         5%  
Asset-Based Lending
      152         3%         170         2%  
Hotel
      114         2%         182         3%  
Other Liquidating
      87         1%         91         1%  
                                         
Total managed finance receivables
    $ 6,096         100%       $ 6,873         100%  
                                         
 
Finance Receivables Held for Investment
 
Finance receivables held for investment include approximately $570 million and $629 million of finance receivables, primarily in the Captive Aviation product line, that have been legally sold to special purpose entities (SPEs) which are consolidated subsidiaries of Textron Financial as of March 31, 2010 and January 2, 2010, respectively. The assets of the SPEs are pledged as collateral for $481 million and $559 million of debt as of March 31, 2010 and January 2, 2010, respectively, which have been reflected as securitized on-balance sheet debt. Third-party investors have no legal recourse to Textron Financial beyond the credit enhancement provided by the assets of the SPEs.
 
During the first quarter of 2010, we reclassified $144 million of Captive Golf Equipment finance receivables from held for investment to held for sale as a result of inquiries we have received to purchase these finance receivables. We determined a sale of these finance receivables would be consistent with our goal to maximize the economic value of our portfolio and accelerate cash collections.
 
Textron Financial periodically evaluates finance receivables held for investment, excluding homogeneous loan portfolios and finance leases, for impairment. Finance receivables classified as held for sale are reflected at the lower of cost or fair value and are excluded from this assessment. A finance receivable 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 agreement. Impaired finance receivables are classified as either nonaccrual or accrual loans. “Impaired nonaccrual finance receivables” include accounts that are contractually delinquent by more than three months for which the


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accrual of interest income is suspended. “Impaired accrual finance receivables” represent loans with original terms that have been or are expected to be significantly modified to reflect deferred principal payments, generally at market interest rates, for which collection of principal and interest is not doubtful. The Company performs a valuation of the collateral supporting impaired nonaccrual finance receivables on a quarterly basis using the methods described in Note 6. Fair Value of Financial Instruments.
 
                     
Impaired Finance Receivables  
      March 31,
      January 2,
 
      2010       2010  
      (In millions)  
Impaired nonaccrual finance receivables
    $      966       $      984  
Impaired accrual finance receivables
      158         217  
                     
Total impaired finance receivables
      1,124         1,201  
Less: Impaired finance receivables without identified reserve requirements
      347         362  
                     
Impaired nonaccrual finance receivables with identified reserve requirements
    $ 777       $ 839  
                     
Allowance for losses on impaired nonaccrual finance receivables
    $ 174       $ 153  
                     
 
Nonaccrual finance receivables include impaired nonaccrual finance receivables and accounts in homogeneous portfolios that are contractually delinquent by more than three months.
 
                     
Nonaccrual Finance Receivables  
      March 31,
      January 2,
 
      2010       2010  
      (In millions)  
Impaired nonaccrual finance receivables
    $      966       $      984  
Nonaccrual homogeneous finance receivables
      66         56  
                     
Total nonaccrual finance receivables
    $ 1,032       $ 1,040  
                     
 
A summary of nonaccrual finance receivables, impaired nonaccrual finance receivables and related allowance for losses by collateral type is as follows:
 
                                                           
      March 31, 2010       January 2, 2010  
                      Allowance
                    Allowance for
 
                      for Losses
                    Losses on
 
              Impaired
      on Impaired
              Impaired
    Impaired
 
      Nonaccrual
      Nonaccrual
      Nonaccrual
      Nonaccrual
      Nonaccrual
    Nonaccrual
 
      Finance
      Finance
      Finance
      Finance
      Finance
    Finance
 
Collateral Type     Receivables       Receivables       Receivables       Receivables       Receivables     Receivables  
   
      (In millions)  
Captive Finance:
                                                         
General aviation aircraft
    $ 244       $ 232       $ 52       $ 286       $ 272     $ 46  
Golf equipment
      27         6         1         16         2       1  
Non-captive Finance:
                                                         
Notes receivable (1)(2)
    $ 246       $ 245       $ 72       $ 259       $ 254     $ 53  
Golf course property
      200         199         30         166         165       27  
Resort construction/inventory(2)
      105         105                 104         104        
Dealer inventory
      78         52                 88         68       14  
Marinas
      59         59         8         12         12        
Hotels
      58         58         9         78         78       7  
Land
      3         3         1         17         17       4  
Other
      12         7         1         14         12       1  
 
 
Total
    $   1,032       $   966       $   174       $   1,040       $   984     $   153  
 


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(1) Finance receivables collateralized primarily by timeshare notes receivable may also be collateralized by certain real estate and other assets of our borrowers.
 
(2) Timeshare lending relationships often include both revolving loans secured by notes receivable and construction/inventory loans secured by real property. These loan balances have been presented in their respective categories in the table above. These loans are cross-collateralized, therefore the allowance for loan losses related to the entire lending relationship is presented in the Notes receivable collateral type in the table above.
 
Nonaccrual finance receivables decreased $8 million during the first quarter of 2010. This decrease was the result of stabilization in aircraft values and the resolution of several significant accounts through sale, repossession or foreclosure, partially offset by an increase in nonaccrual accounts secured by golf course property and marinas.
 
The average recorded investment in impaired nonaccrual finance receivables during the first quarter of 2010 was $975 million compared to $311 million in the corresponding period in 2009. The average recorded investment in impaired accrual finance receivables amounted to $187 million in the first quarter of 2010 compared to $45 million in the corresponding period in 2009.
 
Nonaccrual finance receivables resulted in Textron Financial’s finance charges being reduced by $17 million and $8 million in the first quarters of 2010 and 2009, respectively. No finance charges were recognized using the cash basis method.
 
                     
      Three Months Ended  
      March 31,
      March 31,
 
      2010
      2009
 
      (Dollars in millions)  
Allowance for losses on finance receivables beginning of period
    $   339       $   191  
Provision for losses
      55         76  
Less net charge-offs:
                   
Captive Finance
                   
Aviation
      10         6  
Golf Equipment
      2         2  
Non-captive Finance
                   
Golf Mortgage
      7         21  
Distribution Finance
      6         12  
Hotel
      4          
Timeshare
      2          
Other Liquidating
              6  
                     
Total net charge-offs
      31         47  
                     
Allowance for losses on finance receivables end of period
      363         220  
                     
Annualized net charge-offs as a percentage of average finance receivables held for investment
      2.18 %       2.82 %
                     
 
                     
      March 31,
      January 2,
 
      2010       2010  
      (Dollars in millions)  
Nonaccrual finance receivables as a percentage of finance receivables held for investment
      19.20 %       17.26 %
Allowance for losses on finance receivables held for investment as a percentage of finance receivables held for investment
      6.75 %       5.63 %
Allowance for losses on finance receivables held for investment as a percentage of nonaccrual finance receivables held for investment
      35.2 %       32.6 %
60+ days contractual delinquency as a percentage of finance receivables held for investment
      9.66 %       9.51 %
60+ days contractual delinquency
    $ 515       $ 569  
                     
Operating assets received in satisfaction of troubled finance receivables
    $ 115       $ 112  
Repossessed assets and properties
      110         119  
                     


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Note 4. Other Assets
 
Textron Financial’s Other assets are primarily composed of operating assets received in satisfaction of troubled finance receivables, repossessed assets and properties, investments in other marketable securities, other long term investments and derivative financial instruments.
 
Operating assets received in satisfaction of troubled finance receivables are assets we intend to operate for a substantial period of time and/or make substantial improvements to prior to sale. As of March 31, 2010, they primarily represent the assets of operating golf courses that have been repossessed and investments in real estate associated with matured leveraged leases. These assets are initially recorded at the lower of net realizable value or the previous carrying value of the related finance receivable. The assets are measured for impairment on an ongoing basis by comparing the estimated future undiscounted cash flows to the current carrying value. If the sum of the undiscounted cash flows is estimated to be less than the carrying value, the Company records a charge to Portfolio (losses) gains for the shortfall between estimated fair value and the carrying amount. The revenues and expenses related to these assets, excluding investments made for capital improvements, are recorded in Operating and administrative expenses. In the first quarter of 2010, revenues were $7 million and $4 million from golf courses and other real estate, respectively, and expenses were $9 million and $4 million from golf courses and other real estate, respectively. In the first quarter of 2009, revenues and expenses from Operating assets received in satisfaction of troubled finance receivables were not significant.
 
Investments in other marketable securities represent investments in notes receivable issued by timeshare securitization trusts. These investments were $63 million and $68 million at March 31, 2010 and January 2, 2010, respectively. We have classified these investments as held to maturity as management has the intent and ability to hold them until maturity. At March 31, 2010, unrealized losses on these investments were $6 million. These investments have been in a continuous, unrealized loss position for greater than twelve months. These unrealized losses are the result of market yield expectations and are considered temporary due to the continued performance of the underlying collateral of the timeshare securitization trusts. In reaching our conclusion that the investments are not other-than-temporarily impaired, we relied on industry analyst reports, credit ratings specific to each investment and information on delinquency, loss and payment experience of the collateral underlying each security.
 
Note 5. Derivative Financial Instruments
 
Textron Financial utilizes derivative instruments to mitigate its exposure to fluctuations in interest rates and foreign currencies. These instruments include interest rate exchange agreements and foreign currency exchange agreements. The Company does not hold or issue derivative financial instruments for trading or speculative purposes. The Company did not experience a significant net gain or loss in earnings as a result of the ineffectiveness, or the exclusion of any component from its assessment of hedge effectiveness, of its derivative financial instruments in the first quarter of 2010 or 2009. The fair values of derivative instruments are included in either Other assets or Accrued interest and other liabilities in the Consolidated Balance Sheets.


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The following table summarizes the Company’s significant derivative activities relating to qualifying hedges of interest rate risk and foreign currency exposure:
 
                                                         
        Notional Amount                          Fair Value Amount                      
                Assets                    Liabilities  
    March 31,
    January 2,
    March 31,
    January 2,
    March 31,
    January 2,
       
    2010     2010     2010     2010     2010     2010        
   
                (In millions)                    
 
Fair Value Hedges
                                                       
Interest Rate Exchange Agreements
                                                       
Fixed-rate debt
  $   946     $   946     $   40     $   40     $   —     $   —          
Fixed-rate receivables
    391       419             3       (3 )     (3 )        
                                                         
Net Investment Hedges
                                                       
Foreign Currency Forward Exchange Agreements
                                                       
Foreign-dollar functional currency subsidiary equity
    101       71                         (2 )        
                                                         
Cash Flow Hedges
                                                       
Cross-Currency Interest Rate Exchange Agreements
                                                       
Foreign-dollar denominated variable-rate debt
    140       161       19       18                      
 
 
    $ 1,578     $ 1,597     $ 59     $ 61     $ (3 )   $ (5 )        
 
As a result of our exit plan announced in December 2008, we no longer view our investments in our Canadian and United Kingdom subsidiaries as permanent. Therefore, we began hedging our net investments in these subsidiaries during the fourth quarter of 2008 to prevent any reduction in the U.S. dollar equivalent cash flows we will receive upon liquidation of these subsidiaries.
 
Foreign currency forward exchange agreements are utilized by the Company to convert foreign currency denominated assets and liabilities into the functional currency of the respective legal entity. At March 31, 2010 and January 2, 2010, $258 million and $531 million, respectively, of these foreign currency forward exchange agreements were not designated in hedge relationships. The fair value of these non-designated derivative instruments were $1 million and $(13) million at March 31, 2010 and January 2, 2010, respectively. Gains and losses related to these derivative instruments are naturally offset by the translation of the related foreign currency denominated assets and liabilities. In the first quarter of 2010, losses on foreign currency forward exchange agreements of $7 million were offset by $6 million of gains resulting from the translation of foreign currency denominated assets and liabilities, respectively. These gains were recorded in Operating and administrative expenses. The Company did not experience a significant impact from these transactions during the first quarter of 2009.
 
The effect of derivative instruments in the Consolidated Statements of Operations is as follows:
 
                                 
          Amount of Gain/(Loss)  
          Three Months Ended  
    Gain/(Loss) Location     March 31, 2010     March 31, 2009        
   
          (In millions)        
 
Fair Value Hedges
                               
Interest rate exchange agreements
    Interest expense     $      10     $      4          
Interest rate exchange agreements
    Finance charges       (4 )     (2 )        
 
The Company did not experience a significant net gain or loss in earnings or Other Comprehensive Income related to cash flow hedges during the first quarter of 2010. In the first quarter of 2009, net losses included in


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earnings related to cash flow hedges of $11 million were offset by $12 million of gains resulting from the translation of foreign currency denominated debt. The Company did not experience a significant gain or loss in Other Comprehensive Income related to cash flow hedges during the first quarter of 2009.
 
Note 6. Fair Value of Financial Instruments
 
We measure fair value at the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We prioritize the assumptions that market participants would use in pricing the asset or liability (the “inputs”) into a three-tier fair value hierarchy. This fair value hierarchy gives the highest priority (Level 1) to quoted prices in active markets for identical assets or liabilities and the lowest priority (Level 3) to unobservable inputs in which little or no market data exists, requiring companies to develop their own assumptions. Observable inputs that do not meet the criteria of Level 1, and include quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets and liabilities in markets that are not active, are categorized as Level 2. Level 3 inputs are those that reflect our estimates about the assumptions market participants would use in pricing the asset or liability, based on the best information available in the circumstances. Valuation techniques for assets and liabilities measured using Level 3 inputs may include methodologies such as the market approach, the income approach or the cost approach, and may use unobservable inputs such as projections, estimates and management’s interpretation of current market data. These unobservable inputs are only utilized to the extent that observable inputs are not available or cost-effective to obtain.
 
Assets Recorded at Fair Value on a Recurring Basis
 
The table below presents the assets measured at fair value on a recurring basis categorized by the level of inputs used in the valuation of each asset:
 
                 
    March 31, 2010        
   
    (In millions)
       
    Level 2        
 
Derivative financial instruments, net
  $   56          
 
Derivatives
 
The Company’s derivative contracts are not exchange-traded. Derivative financial instruments are measured at fair value utilizing widely accepted, third-party developed valuation models. The actual terms of each individual contract are entered into the model in addition to interest rate and foreign exchange rate data which is based on readily observable market data published by third-party leading financial news and data providers. Credit risk is factored into the fair value of derivative assets and liabilities based on the differential between both the Company’s credit default swap spread for liabilities and the counterparty’s credit default swap spread for assets as compared to a standard AA-rated counterparty, however, this had no significant impact on the valuation as of March 31, 2010 and January 2, 2010.
 
Changes in Fair Value for Unobservable Input
 
The table below presents the change in fair value measurements that used significant unobservable inputs (Level 3) during each period presented:
 
                         
    March 31,
    March 31,
       
    2010     2009        
   
    (In millions)  
 
Retained Interests in Securitizations
                       
Balance, beginning of period
  $      3     $      12          
Reclassification to Finance receivables held for investment
    (3 )              
Net losses for the period:
                       
Change in value recognized in Other comprehensive income
          (3 )        
Impairments recognized in earnings
          (6 )        
 
 
Balance, end of period
  $     $ 3          


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Assets Recorded at Fair Value on a Nonrecurring Basis
 
The table below presents those assets that were measured at fair value on a nonrecurring basis that had fair value measurement adjustments during the first quarter of 2010 and the related gain/(loss) recorded in the Consolidated Statements of Operations. These assets were measured using significant unobservable inputs (Level 3).
 
                         
    March 31,
    Total
       
    2010     Gain/(Loss)        
   
    (In millions)  
 
Finance receivables held for sale
  $ 598     $ (10 )        
Impaired finance receivables
    510       (46 )        
Repossessed assets and properties
    37       (8 )        
Other investments
    29       (9 )        
Operating assets received in satisfaction of troubled finance receivables
    1       (1 )        
 
 
Total
  $      1,175     $      (74 )        
 
Finance Receivables Held for Sale
 
Finance receivables held for sale are recorded at the lower of cost or fair value. As a result of our plan to exit the Non-captive Finance segment through a combination of orderly liquidation of finance receivables as they mature and selected sales, $721 million of finance receivables, net of an $86 million valuation allowance, have been classified as held for sale as of March 31, 2010. The finance receivables held for sale as of March 31, 2010 are primarily assets in the Distribution Finance, Golf Mortgage and Asset-Based Lending product lines, but also include $225 million of finance receivables in the Golf Equipment product line within the Captive Finance segment. The majority of the finance receivables held for sale were identified at the individual loan level. Golf course, timeshare and hotel mortgages classified as held for sale were identified as a portion of a larger portfolio with common characteristics based on the intention to balance the sale of certain loans with the collection of others to maximize economic value. Distribution Finance receivables were identified primarily based on the associated manufacturer relationship, which can have a significant impact on the relative value of the finance receivables. These finance receivables are recorded at fair value on a nonrecurring basis during periods in which the fair value is lower than the cost value. The change in fair value of the finance receivables held for sale in the first quarter of 2009 was not significant. During the first quarter of 2010, we sold $208 million of finance receivables classified as held for sale in the Distribution Finance product line and recorded a $13 million gain related to this sale. Total gains related to finance receivable sales were $15 million for the first quarter of 2010. See Note 3. Finance Receivables regarding changes in classification of certain finance receivables between held for sale and held for investment during the first quarter of 2010.
 
There are no active, quoted market prices for our finance receivables. The estimate of fair value was determined based on the use of discounted cash flow models to estimate the exit price we expect to receive in the principal market for each type of loan in an orderly transaction, which includes both the sale of pools of similar assets and the sale of individual loans. The models incorporate estimates of the rate of return, financing cost, capital structure and/or discount rate expectations of prospective purchasers combined with estimated loan cash flows based on credit losses, payment rates and credit line utilization rates. Where available, the assumptions related to the expectations of prospective purchasers are compared to observable market inputs, including bids from prospective purchasers and certain bond market indices for loans of similar perceived credit quality. Although we utilize and prioritize these market observable inputs in our discounted cash flow models, these inputs are rarely derived from markets with directly comparable loan structures, industries and collateral types. Therefore, valuations of finance receivables held for sale involve significant management judgment, which can result in differences between our fair value estimates and those of other market participants.
 
Impaired Finance Receivables
 
Finance receivable impairment is measured by comparing the expected future cash flows discounted at the finance receivable’s effective interest rate, or the fair value of the collateral if the finance receivable is collateral dependent, to its carrying amount. If the carrying amount is higher, we establish a reserve based on this difference.


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This evaluation is inherently subjective, as it requires estimates, including the amount and timing of future cash flows expected to be received on impaired finance receivables and the underlying collateral, which may differ from actual results. Impaired nonaccrual finance receivables represent assets recorded at fair value on a nonrecurring basis since the measurement of required reserves on our impaired finance receivables is significantly dependent on the fair value of the underlying collateral. Fair values of collateral are determined based on the use of appraisals, industry pricing guides, input from market participants, our recent experience selling similar assets or internally developed discounted cash flow models. Fair value measurements recorded during the first quarter of 2009 on impaired finance receivables resulted in charges of $32 million to Provision for losses in the Consolidated Statements of Operations.
 
The evaluation of impaired Revolving loans collateralized by timeshare notes receivable is performed utilizing internally developed cash flow models which incorporate the unique structural features of these loans. Timeshare notes receivables loans are loans to developers of resort properties which are collateralized by pools of consumer notes receivable. These notes receivable are originated by developers in connection with the sale of vacation intervals and typically bear interest at rates in excess of the rate on our loan to the developer. In addition to the interest differential between the consumer notes and our loan to the developers, there are several features of our loans which provide protection from credit losses in the pools of consumer notes. We have a priority interest in all cash flows from these pools of consumer notes, typically advance approximately 90% of the collateral value, have a security interest in either the underlying real estate or the right to use the resort property and often have personal guarantees from the principal of the borrower. Our impairment models incorporate management’s best estimate of credit losses in the pools of consumer notes based on historical trends as adjusted for our understanding of current trends in the developer’s underwriting practices and the developer’s ability to mitigate losses through the repurchase or replacement of defaulted notes.
 
Repossessed Assets and Properties / Operating Assets Received in Satisfaction of Troubled Finance Receivables
 
The fair value of repossessed assets and properties and operating assets received in satisfaction of troubled finance receivables is determined based on the use of appraisals, industry pricing guides, input from market participants, the Company’s recent experience selling similar assets or internally developed discounted cash flow models. For repossessed assets and properties, which are considered assets held for sale, if the carrying amount of the asset is higher than the estimated fair value, the Company records a corresponding charge to income for the difference. For operating assets received in satisfaction of troubled finance receivables, if the sum of the undiscounted cash flows is estimated to be less than the carrying value, the Company records a charge to income for any shortfall between estimated fair value and the carrying amount. During the first quarter of 2009, charges on these assets totaled $4 million and were recorded in Portfolio losses in the Consolidated Statements of Operations.
 
Other Investments
 
Other investments, which are accounted for under the equity method of accounting, are recorded at fair value if the sum of the undiscounted cash flows from the investment is estimated to be less than the carrying value. There are no active, quoted market prices for our equity method investments. The estimates of fair value are determined utilizing internally developed discounted cash flow models, which incorporate assumptions specific to the nature of the investments’ business and underlying assets. These assumptions include industry valuation benchmarks such as discount rates, capitalization rates and cash flow multiples as well as assumptions more specifically related to the amount and timing of the businesses’ operating cash flow.


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Assets and Liabilities Not Recorded at Fair Value
 
The carrying values and estimated fair values of Textron Financial’s financial instruments which are not recorded at fair value are as follows:
 
                                         
    March 31, 2010            January 2, 2010  
    Carrying
    Estimated
    Carrying
    Estimated
       
    Value     Fair Value     Value     Fair Value        
   
          (In millions)        
 
Assets:
                                       
Installment contracts
  $   2,046     $   1,912     $   2,204     $   2,007          
Golf course, timeshare and hotel mortgages
    956       858       1,008       924          
Revolving loans
    938       812       1,058       902          
Distribution finance receivables
    525       514       709       690          
Investment in other marketable securities
    63       57       68       56          
Retained interests in securitizations, excluding interest-only securities
                6       6          
 
 
    $ 4,528     $ 4,153     $ 5,053     $ 4,585          
Liabilities:
                                       
Bank line of credit
  $ 1,740     $ 1,667     $ 1,740     $ 1,682          
Fixed-rate debt
    1,492       1,462       1,534       1,490          
Variable-rate debt
    603       596       1,355       1,333          
Securitized on-balance sheet debt
    482       482       559       548          
Subordinated debt
    300       240       300       207          
Amounts due to Textron Inc. 
    664       660       472       469          
 
 
    $ 5,281     $ 5,107     $ 5,960     $ 5,729          
 
Finance Receivables Held for Investment
 
There are no active, quoted market prices for these finance receivables. The estimate of fair value was determined based on the use of discounted cash flow models which incorporate estimates of the rate of return, financing cost, capital structure and/or discount rate expectations of current market participants combined with estimated loan cash flows based on credit losses, payment rates and credit line utilization rates. Where available, the assumptions related to the expectations of current market participants are compared to observable market inputs, including bids from prospective purchasers of similar loans and certain bond market indices for loans of similar perceived credit quality. Although we utilize and prioritize these market observable inputs in our discounted cash flow models, these inputs are rarely derived from markets with directly comparable loan structures, industries and collateral types. Therefore, all valuations of finance receivables involve significant management judgment, which can result in differences between our fair value estimates and those of other market participants. The carrying amounts of Textron Financial’s leveraged leases, finance leases and operating leases ($314 million, $247 million and $212 million, respectively, at March 31, 2010 and $313 million, $403 million and $216 million, respectively, at January 2, 2010), are specifically excluded from this disclosure under generally accepted accounting principles. As a result, a significant portion of the assets that are included in the Company’s asset and liability management strategy are excluded from this fair value disclosure.
 
Investments in Other Marketable Securities
 
Other marketable securities represent investments in notes receivable issued by securitization trusts which purchase timeshare notes receivable from timeshare developers. These notes are classified as held to maturity and are held at amortized cost. The estimate of fair value was based on observable market inputs for similar securitization interests in markets that are currently inactive.


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Debt
 
At March 31, 2010 and January 2, 2010, 48% and 54%, respectively, of the fair value of debt was determined based on observable market transactions. The remaining fair values were determined based on discounted cash flow analyses using observable market inputs from debt with similar duration, subordination and credit default expectations.
 
Note 7. 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 8. Financial Information about Operating Segments
 
As described in Note 1. Basis of Presentation, the Company now maintains two segments. The Captive Finance segment finances customer purchases of Textron manufactured aviation products and golf and turf-care equipment. The Non-captive Finance segment is composed of the Asset-Based Lending, Distribution Finance, Golf Mortgage, Hotel, Structured Capital, Timeshare and Other Liquidating product lines. The Non-captive Finance segment also includes unallocated corporate expenses and the impact of charges to both the held for investment and held for sale valuation allowances on the Consolidated Statements of Operations.
 
                                         
    Three Months Ended  
    March 31,
    March 31,
       
    2010     2009        
   
    (Dollars in millions)  
 
Revenues:
                                       
Captive Finance
  $        36       49%     $      53       43%          
Non-captive Finance
    37       51%       69       57%          
 
 
Total revenues
  $ 73       100%     $ 122       100%          
                                         
Loss before income taxes: (1)(2)
                                       
Captive Finance
  $ (10 )           $ (25 )                
Non-captive Finance
    (49 )             (41 )                
 
 
Segment loss
    (59 )             (66 )                
Restructuring charges
    3               3                  
 
 
Loss before income taxes
  $ (62 )           $ (69 )                
 
                         
    March 31,
    January 2,
       
    2010     2010        
   
    (In millions)        
 
Finance assets: (3)
                       
Captive Finance
  $      2,839     $   3,016          
Non-captive Finance
    3,803       4,404          
 
 
Total finance assets
  $ 6,642     $ 7,420          
 
(1) Interest expense is allocated to each segment in proportion to its net investment in finance assets. Net investment in finance assets includes finance assets less deferred income taxes, security deposits and other specifically identified liabilities. The interest allocation matches variable-rate finance assets in the Captive Finance segment with variable-rate debt of similar duration and fixed-rate finance assets in the Captive Finance segment with fixed-rate debt of similar duration to the extent possible. The remaining balance of interest expense incurred is included in the Non-captive Finance segment’s interest expense.


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(2) Direct operating expenses are included in each segment’s loss. Due to the plan to exit all of our Non-captive Finance segment and the resulting variations in personnel levels and job responsibilities, indirect corporate oversight expenses, comprised primarily of executive salaries and benefits, are included in the segment loss of the Non-captive Finance segment, although a portion of these expenses relate to oversight of the Captive Finance segment.
 
(3) Finance assets include: finance receivables; equipment on operating leases, net of accumulated depreciation; repossessed assets and properties; operating assets received in satisfaction of troubled finance receivables; investments in other marketable securities; retained interests in securitizations and other short- and long-term investments (some of which are classified in Other assets on Textron Financial’s Consolidated Balance Sheets).
 
Item 1A. Risk Factors
 
Our business, financial condition and results of operations are subject to various risks, including the risk factors discussed in our Annual Report on Form 10-K for the fiscal year ended January 2, 2010, all of which should be carefully considered by investors in our securities. The risks discussed in our SEC filings are those that we believe currently are the most significant, although additional risks not presently known to us or that we currently deem less significant also may impact our business, financial condition or results of operations, perhaps materially.
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Liquidity and Capital Resources
 
In light of our plan to exit the Non-captive Finance business, we expect to substantially rely on cash from finance receivable collections to fund maturing debt obligations. During the first quarter of 2010, we liquidated $777 million of managed finance receivables. These managed finance receivable reductions occurred in both of our segments and eight of our product lines, but were primarily driven by Non-captive Finance reductions, including $379 million (35%) in Distribution Finance, $100 million (8%) in Timeshare and $68 million (37%) in Hotel. These reductions resulted from the combination of scheduled finance receivable collections, sales, discounted payoffs, repossession of collateral, charge-offs and impairment charges recorded as Portfolio Losses in our Consolidated Statements of Operations. Finance receivable reductions in the Distribution Finance product line included a $208 million sale of finance receivables. In addition, the reduction in managed finance receivables also included $190 million of liquidations in the Captive Finance segment primarily as a result of reduced loan and lease originations. During 2010, we expect to liquidate approximately $1.8 billion of managed finance receivables, net of originations, a portion of which we expect will be liquidations in the Captive Finance segment.
 
In order to meet our capital needs, we could access either secured or unsecured debt markets. However, we have borrowed available cash from Textron during the first quarter of 2010 through an intercompany borrowing arrangement as it has been in the collective economic interest of Textron Financial and Textron. We increased our outstanding intercompany loan balance with Textron to $637 million at March 31, 2010 from $447 million at January 2, 2010. In addition, during the first quarter of 2010, we retired $899 million of long-term and securitized on-balance sheet debt.
 
We measure the progress of our exit plan related to the Non-captive Finance segment, in part, based on the percentage of managed finance receivable and other finance asset reductions converted to cash. During the first quarter of 2010, the Non-captive Finance segment achieved a 96% cash conversion ratio. This performance was primarily driven by a $208 million sale of finance receivables in the Distribution Finance product line. We expect this ratio to decline over the duration of our exit plan due to the change in mix from shorter term assets in the Distribution Finance and Asset-Based Lending product lines to longer term assets in our Timeshare, Golf Mortgage and Structured Finance product lines and the existence of a higher concentration of nonaccrual finance receivables.
 
Under a Support Agreement between Textron Financial and Textron, Textron is required to ensure that Textron Financial maintains fixed charge coverage of no less than 125% and consolidated shareholder’s equity of no less than $200 million. In the first quarter of 2010, Textron Financial’s fixed charge coverage ratio was below the required 125%. On April 9, 2010, Textron made a cash payment of $71 million to Textron Financial, which was reflected as a capital contribution, to maintain compliance with the fixed charge coverage ratio.


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Results of Operations
 
Revenues
 
Revenues decreased $49 million in the first quarter of 2010 as compared to 2009, primarily due to the following:
 
                 
    2010
       
    vs. 2009        
   
    (In millions)        
 
Lower average finance receivables of $1.7 billion
  $ (29 )        
Lower other income
    (11 )        
Decrease in servicing and investment income related to securitizations
    (10 )        
Suspended earnings on nonaccrual finance receivables
    (8 )        
Lower securitization losses, including impairments
    7          
Accretion of valuation allowance
    6          
 
Loss before Income Taxes
 
Loss before income taxes decreased $7 million in the first quarter of 2010 as compared to 2009, primarily due to the following:
 
                 
    2010
       
    vs. 2009        
   
    (In millions)        
 
Decrease in the provision for loan losses
  $ 21          
Lower operating and administrative expenses
    12          
Lower securitization losses, including impairments
    7          
Lower borrowing costs relative to market rates
    6          
Accretion of valuation allowance
    6          
Lower average finance receivables of $1.7 billion
    (13 )        
Decrease in servicing and investment income related to securitizations
    (10 )        
Lower other income
    (11 )        
Suspended earnings on nonaccrual finance receivables
    (8 )        
 
The provision for loan losses decreased during the first three months of 2010 as compared to 2009 primarily as a result of an $8 million decrease in nonaccrual finance receivables during the first quarter of 2010 as compared to a $167 million increase in the first quarter of 2009. This reflects stabilization in aircraft values and the resolution of several significant accounts through sale, repossession or foreclosure, partially offset by an increase in nonaccrual accounts in the non-captive golf mortgage portfolio.
 
Operating and administrative expenses decreased during the first three months of 2010 as compared to 2009 mostly due to lower salaries and benefits expense associated with a reduction in workforce as a result of our exit plan.
 
Accretion of valuation allowance represents the recognition of interest earnings in excess of a loan’s contractual rate as a result of the discount rate utilized to record the loan at fair value in previous periods. These interest earnings are recognized over the remaining life of the portfolio to the extent the valuation allowance is not expected to be utilized to absorb losses associated with sales, discounted payoffs or credit losses.
 
The reduction in other income includes an increase to the held for sale valuation allowance of $10 million in the first quarter of 2010 to reflect an increase in the estimated cost to exit certain portfolios.
 
Income Tax Benefit
 
The difference between the statutory rate and the effective tax rate was not significant for the three months ended March 31, 2010.


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For the three months ended March 31, 2009, the difference between the statutory rate of 35% and the effective tax rate of 22% was primarily attributable to the effects of events related to cross border financing and interest on tax contingencies, the majority of which was associated with leveraged leases, partially offset by tax credits and a reduction in the state valuation allowance.
 
Forward-looking Information
 
Certain statements in this Quarterly Report on 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 non-historical matters; or project revenues, income, returns or other financial measures. These forward-looking statements speak only as of the date on which they are made, and we undertake no obligation to update or revise any forward-looking statements. 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 Risk Factors contained in our Annual Report on Form 10-K and the following: (a) changes in worldwide economic, political or regulatory conditions that impact interest and foreign exchange rates; (b) the occurrence of slowdowns or downturns in customer markets in which Textron products are sold or supplied and financed or where we hold finance receivables; (c) the ability to realize full value of finance receivables and investments in securities; (d) the ability to control costs and successful implementation of various cost-reduction programs; (e) increases in pension expenses and other postretirement employee costs; (f) the impact of changes in tax legislation; (g) the ability to maintain portfolio credit quality and certain minimum levels of financial performance required under our committed bank line of credit and under our Support Agreement with Textron; (h) access to financing, including securitizations, at competitive rates; (i) access to equity in the form of retained earnings and capital contributions from Textron; (j) uncertainty in estimating contingent liabilities and establishing reserves to address such contingencies; (k) risks and uncertainties related to dispositions, including difficulties or unanticipated expenses in connection with the consummation of dispositions or the disruption of current plans and operations; (l) the ability to successfully exit from our commercial finance business, other than the captive finance business; (m) uncertainty in estimating the market value of our Finance receivables held for sale and our Allowance for losses on finance receivables held for investment; (n) bankruptcy or other financial problems at major customers that could cause disruptions or difficulty in collecting amounts owed by such customers; (o) legislative or regulatory actions impacting our operations; (p) difficult conditions in the financial markets which may adversely impact our ability to obtain financing which enables us to offer competitive terms for our new finance receivable originations and, with respect to businesses which we are exiting, our customers’ ability to obtain alternative financing negatively impacting their ability to repay amounts owed to us; and (q) continued volatility in the economy resulting in a prolonged downturn in the markets in which we do business.
 
Item 4. Controls and Procedures
 
We have carried out an evaluation, under the supervision and with the participation of our management, including our President and Chief Executive Officer (the “CEO”) and our Executive Vice President and Chief Financial Officer (the “CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Act”)) as of the end of the fiscal quarter covered by this report. Based upon that evaluation, our CEO and CFO concluded that our disclosure controls and procedures are effective in providing reasonable assurance that (a) the information required to be disclosed by us in the reports that we file or submit 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 our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
 
There were no changes in Textron Financial’s internal control over financial reporting during the quarter ended March 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


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PART II. OTHER INFORMATION
 
TEXTRON FINANCIAL CORPORATION
 
Item 6. Exhibits
 
         
         
  12     Computation of Ratio of Earnings to Fixed Charges
         
  31 .1   Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)
         
  31 .2   Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)
         
  32 .1   Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350
         
  32 .2   Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350


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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
Textron Financial Corporation
 
/s/  Thomas J. Cullen
Thomas J. Cullen
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
 
Date:  April 30, 2010


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