Attached files
file | filename |
---|---|
EX-12 - EX-12 - TEXTRON FINANCIAL CORP | b81622exv12.htm |
EX-31.2 - EX-31.2 - TEXTRON FINANCIAL CORP | b81622exv31w2.htm |
EX-31.1 - EX-31.1 - TEXTRON FINANCIAL CORP | b81622exv31w1.htm |
EX-32.1 - EX-32.1 - TEXTRON FINANCIAL CORP | b81622exv32w1.htm |
EX-32.2 - EX-32.2 - TEXTRON FINANCIAL CORP | b81622exv32w2.htm |
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 June 30, 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
(Registrants 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 the 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
TABLE OF
CONTENTS
Page | ||||||||
2 | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
19 | ||||||||
19 | ||||||||
22 | ||||||||
23 | ||||||||
EX-12 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 | ||||||||
EX-32.2 |
1
Table of Contents
PART I.
FINANCIAL INFORMATION
Item 1. | Financial Statements |
TEXTRON
FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||||||
June 30, |
June 30, |
June 30, |
June 30, |
|||||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||||||
(In millions) | ||||||||||||||||||||
Finance charges
|
$ | 71 | $ | 104 | $ | 156 | $ | 219 | ||||||||||||
Portfolio losses, net of gains
|
(20 | ) | (50 | ) | (33 | ) | (60 | ) | ||||||||||||
Rental revenues on operating leases
|
7 | 7 | 13 | 15 | ||||||||||||||||
Gains on early extinguishment of debt
|
| 37 | | 39 | ||||||||||||||||
Securitization losses:
|
||||||||||||||||||||
Total
other-than-temporary
impairments
|
| (33 | ) | | (39 | ) | ||||||||||||||
Portion of
other-than-temporary
impairments recognized in Other comprehensive income, before
income taxes
|
| 13 | | 13 | ||||||||||||||||
Net
other-than-temporary
impairments recognized in securitization losses
|
| (20 | ) | | (26 | ) | ||||||||||||||
Other securitization losses
|
| | | (1 | ) | |||||||||||||||
Securitization losses
|
| (20 | ) | | (27 | ) | ||||||||||||||
Other (loss) income
|
(3 | ) | 8 | (8 | ) | 22 | ||||||||||||||
Total revenues
|
55 | 86 | 128 | 208 | ||||||||||||||||
Interest expense
|
33 | 41 | 65 | 95 | ||||||||||||||||
Depreciation of equipment on operating leases
|
5 | 4 | 9 | 9 | ||||||||||||||||
Net interest margin
|
17 | 41 | 54 | 104 | ||||||||||||||||
Provision for losses
|
44 | 87 | 99 | 163 | ||||||||||||||||
Operating and administrative expenses
|
44 | 53 | 85 | 106 | ||||||||||||||||
Restructuring charges
|
3 | 5 | 6 | 8 | ||||||||||||||||
Loss before income taxes and noncontrolling interest
|
(74 | ) | (104 | ) | (136 | ) | (173 | ) | ||||||||||||
Income tax benefit
|
(36 | ) | (39 | ) | (57 | ) | (55 | ) | ||||||||||||
Net loss before noncontrolling interest
|
(38 | ) | (65 | ) | (79 | ) | (118 | ) | ||||||||||||
Noncontrolling interest, net of income taxes
|
| 1 | | 1 | ||||||||||||||||
Net loss
|
$ | (38 | ) | $ | (66 | ) | $ | (79 | ) | $ | (119 | ) | ||||||||
See Notes to the Consolidated Financial Statements.
2
Table of Contents
TEXTRON
FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, |
January 2, |
|||||||||
2010 | 2010 | |||||||||
(In millions) | ||||||||||
Assets
|
||||||||||
Cash and equivalents
|
$ | 171 | $ | 144 | ||||||
Finance receivables held for investment, net of unearned income:
|
||||||||||
Installment contracts
|
2,042 | 2,327 | ||||||||
Golf course, timeshare and hotel mortgages
|
993 | 1,073 | ||||||||
Revolving loans
|
872 | 1,137 | ||||||||
Distribution finance receivables
|
400 | 771 | ||||||||
Leveraged leases
|
281 | 313 | ||||||||
Finance leases
|
263 | 403 | ||||||||
Total finance receivables held for investment
|
4,851 | 6,024 | ||||||||
Allowance for losses on finance receivables held for investment
|
(350 | ) | (339 | ) | ||||||
Finance receivables held for investment net
|
4,501 | 5,685 | ||||||||
Finance receivables held for sale
|
535 | 819 | ||||||||
Equipment on operating leases net
|
202 | 216 | ||||||||
Other assets
|
478 | 460 | ||||||||
Total assets
|
$ | 5,887 | $ | 7,324 | ||||||
Liabilities and equity Liabilities
|
||||||||||
Accrued interest and other liabilities
|
$ | 382 | $ | 423 | ||||||
Amounts due to Textron Inc.
|
670 | 472 | ||||||||
Deferred income taxes
|
152 | 137 | ||||||||
Debt
|
4,055 | 5,488 | ||||||||
Total liabilities
|
5,259 | 6,520 | ||||||||
Shareholders Equity
|
||||||||||
Capital surplus
|
1,633 | 1,487 | ||||||||
Subsidiary preferred stock
|
1 | 1 | ||||||||
Investment in parent company preferred stock
|
(25 | ) | (25 | ) | ||||||
Accumulated other comprehensive loss
|
(77 | ) | (49 | ) | ||||||
Retained deficit
|
(904 | ) | (610 | ) | ||||||
Total shareholders equity
|
628 | 804 | ||||||||
Total liabilities and shareholders equity
|
$ | 5,887 | $ | 7,324 | ||||||
See Notes to the Consolidated Financial Statements.
3
Table of Contents
TEXTRON
FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2010 and 2009
(Unaudited)
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2010 and 2009
(Unaudited)
2010 | 2009 | |||||||||
(In millions) | ||||||||||
Cash flows from operating activities:
|
||||||||||
Net loss
|
$ | (79 | ) | $ | (119 | ) | ||||
Net income attributable to noncontrolling interest
|
| 1 | ||||||||
Net loss before noncontrolling interest
|
(79 | ) | (118 | ) | ||||||
Adjustments to reconcile net loss before noncontrolling interest
to net cash (used) provided by operating activities:
|
||||||||||
Provision for losses
|
99 | 163 | ||||||||
(Decrease) increase in income taxes payable
|
(70 | ) | 73 | |||||||
Portfolio losses, net of gains
|
50 | 60 | ||||||||
Deferred income tax provision
|
(19 | ) | (123 | ) | ||||||
Depreciation and amortization
|
16 | 19 | ||||||||
Decrease in accrued interest and other liabilities
|
(11 | ) | (18 | ) | ||||||
Gains on early extinguishment of debt
|
| (39 | ) | |||||||
Impairments in excess of collections on securitizations and
syndications
|
| 21 | ||||||||
Other net
|
1 | 34 | ||||||||
Net cash (used) provided by operating activities
|
(13 | ) | 72 | |||||||
Cash flows from investing activities:
|
||||||||||
Finance receivables originated or purchased
|
(427 | ) | (2,234 | ) | ||||||
Finance receivables repaid
|
1,341 | 2,905 | ||||||||
Proceeds from receivable sales, including securitizations
|
358 | 184 | ||||||||
Proceeds from disposition of other assets, including repossessed
assets and properties and operating leases
|
82 | 134 | ||||||||
Other investments
|
30 | 60 | ||||||||
Purchase of assets for operating leases
|
(8 | ) | (6 | ) | ||||||
Net cash provided by investing activities
|
1,376 | 1,043 | ||||||||
Cash flows from financing activities:
|
||||||||||
Proceeds from line of credit
|
| 1,740 | ||||||||
Principal payments on long-term debt
|
(1,276 | ) | (877 | ) | ||||||
Net decrease in commercial paper
|
| (743 | ) | |||||||
Principal payments on secured debt
|
(167 | ) | (384 | ) | ||||||
Principal payments on nonrecourse debt
|
(27 | ) | (144 | ) | ||||||
Net increase (decrease) in intercompany loan due to Textron
Inc.
|
198 | (133 | ) | |||||||
Capital contributions from Textron Inc.
|
151 | 93 | ||||||||
Dividends paid to Textron Inc.
|
(220 | ) | (189 | ) | ||||||
Other net
|
5 | 21 | ||||||||
Net cash used by financing activities
|
(1,336 | ) | (616 | ) | ||||||
Effect of exchange rate changes on cash
|
| 6 | ||||||||
Net increase in cash and equivalents
|
27 | 505 | ||||||||
Cash and equivalents at beginning of year
|
144 | 16 | ||||||||
Cash and equivalents at end of period
|
$ | 171 | $ | 521 | ||||||
See Notes to the Consolidated Financial Statements.
4
Table of Contents
TEXTRON
FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)
Investment |
||||||||||||||||||||||||||||||||
in Parent |
Accumulated |
Total |
||||||||||||||||||||||||||||||
Company |
Subsidiary |
Other |
Share- |
Non- |
||||||||||||||||||||||||||||
Capital |
Preferred |
Preferred |
Comprehensive |
Retained |
holders |
controlling |
Total |
|||||||||||||||||||||||||
Surplus | Stock | Stock | 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
|
| | | | (79 | ) | (79 | ) | | (79 | ) | |||||||||||||||||||||
Other comprehensive loss:
|
||||||||||||||||||||||||||||||||
Foreign currency translation, net of income taxes
(1)
|
| | | (32 | ) | | (32 | ) | | (32 | ) | |||||||||||||||||||||
Change in unrealized net losses on hedge contracts, net of
income tax benefit
|
| | | 4 | | 4 | | 4 | ||||||||||||||||||||||||
Other comprehensive loss
|
| | | (28 | ) | | (28 | ) | | (28 | ) | |||||||||||||||||||||
Comprehensive loss
(2)
|
| | | | | (107 | ) | | (107 | ) | ||||||||||||||||||||||
Capital contributions from Textron Inc.
|
151 | | | | | 151 | | 151 | ||||||||||||||||||||||||
Dividends to Textron Inc.
|
(5 | ) | | | | (215 | ) | (220 | ) | | (220 | ) | ||||||||||||||||||||
Balance June 30, 2010
|
$ | 1,633 | $ | (25 | ) | $ | 1 | $ | (77 | ) | $ | (904 | ) | $ | 628 | $ | | $ | 628 | |||||||||||||
(1) | Primarily represents a reduction of the expected tax benefit from previously recognized currency translation adjustment losses related to the Companys investment in one of its wholly-owned Canadian subsidiaries. | |
(2) | Comprehensive loss was $67 million and $107 million for the three and six months ended June 30, 2010 as compared to $72 million and $125 million for the three and six months ended June 30, 2009. |
See Notes to the Consolidated Financial Statements.
5
Table of Contents
TEXTRON
FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 Corporations 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
Financials consolidated financial position at
June 30, 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 conjunction with the plan to exit our Non-captive Finance
business, we announced a restructuring program to downsize and
consolidate our operations. Costs incurred under this plan, all
of which are related to the Non-captive Finance segment for the
periods presented, are summarized in the table below:
Three Months Ended | Six Months Ended | |||||||||||||||||||
June 30, |
June 30, |
June 30, |
June 30, |
|||||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||||||
(In millions) | ||||||||||||||||||||
Severance and pension curtailment costs
|
$ | 2 | $ | 5 | $ | 5 | $ | 7 | ||||||||||||
Contract termination costs
|
1 | | 1 | 1 | ||||||||||||||||
Total Restructuring charges
|
$ | 3 | $ | 5 | $ | 6 | $ | 8 | ||||||||||||
Restructuring charges are generally of a nonrecurring nature and
are not included in Segment loss, which is our measure used for
evaluating performance and for decision-making purposes.
6
Table of Contents
An analysis of our restructuring reserve is presented below:
Severance and |
|||||||||||||||
Pension |
Contract |
||||||||||||||
Curtailment |
Termination |
||||||||||||||
Costs | Costs | Total | |||||||||||||
(In millions) | |||||||||||||||
Balance at January 2, 2010
|
$ | 13 | $ | | $ | 13 | |||||||||
Additions
|
5 | 1 | 6 | ||||||||||||
Cash Paid
|
(9 | ) | | (9 | ) | ||||||||||
Balance at June 30, 2010
|
$ | 9 | $ | 1 | $ | 10 | |||||||||
Restructuring charges since the inception of the program through
June 30, 2010 are summarized below by segment:
Captive Finance | Non-captive Finance | Total | |||||||||||||
(In millions) | |||||||||||||||
Severance and pension curtailment costs
|
$ | 1 | $ | 31 | $ | 32 | |||||||||
Non-cash asset impairments
|
3 | 8 | 11 | ||||||||||||
Contract termination costs
|
| 3 | 3 | ||||||||||||
Total Restructuring charges
|
$ | 4 | $ | 42 | $ | 46 | |||||||||
We expect to incur additional costs to exit the Non-captive
Finance segment of our business over the next 18 months.
These costs are expected to be within a range from
$7 million to $11 million and be primarily
attributable to severance and retention benefits. We expect to
eliminate approximately 850 positions, representing
approximately 80% of our total workforce over the life of the
program. As of June 30, 2010, we have terminated
approximately 660 employees under this program.
Other
Special charges
In connection with the liquidation of one of the Companys
wholly-owned Canadian subsidiaries, we expect to take a non-cash
after-tax charge of approximately $78 million to reclassify
the subsidiarys cumulative currency translation adjustment
account within Other comprehensive loss to the Consolidated
statement of operations. Accordingly, the reclassification of
this amount will have no impact on Shareholders equity.
The timing of this non-cash charge is expected to occur in the
second half of 2010 once we have substantially liquidated the
assets held by the subsidiary.
7
Table of Contents
Note 3. | Finance Receivables |
Managed
Finance Receivables
Managed finance receivable balances and percentages by product
line are presented in the following table:
June 30, |
January 2, |
|||||||||||||||||||
2010 | 2010 | |||||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||
Captive Finance
|
||||||||||||||||||||
Aviation
|
$ | 2,018 | 37% | $ | 2,353 | 34% | ||||||||||||||
Golf Equipment
|
353 | 7% | 417 | 6% | ||||||||||||||||
Non-captive Finance
|
||||||||||||||||||||
Timeshare
|
1,082 | 20% | 1,302 | 19% | ||||||||||||||||
Golf Mortgage
|
844 | 16% | 933 | 14% | ||||||||||||||||
Distribution Finance
|
494 | 9% | 1,076 | 16% | ||||||||||||||||
Structured Capital
|
318 | 6% | 349 | 5% | ||||||||||||||||
Hotel
|
116 | 2% | 182 | 3% | ||||||||||||||||
Asset-Based Lending
|
85 | 2% | 170 | 2% | ||||||||||||||||
Other Liquidating
|
76 | 1% | 91 | 1% | ||||||||||||||||
Total managed finance receivables
|
$ | 5,386 | 100% | $ | 6,873 | 100% | ||||||||||||||
Finance
Receivables Held for Investment
Finance receivables held for investment include approximately
$521 million and $629 million of finance receivables
at June 30, 2010 and January 2, 2010, respectively,
primarily in the Captive Aviation product line that have been
legally sold to special purpose entities (SPEs) which are
consolidated subsidiaries of Textron Financial. The assets of
the SPEs are pledged as collateral for $427 million and
$559 million of debt as of June 30, 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.
In the first quarter of 2010, we increased Captive Golf
Equipment finance receivables held for sale by $144 million
to a total of $225 million, as a result of inquiries we
received to purchase finance receivables in this portfolio.
During the second quarter, we came to a preliminary agreement to
sell approximately $120 million of these finance
receivables. This sale is expected to close in the third quarter
of 2010. As a result, we reclassified the remaining
$105 million of finance receivables to held for investment.
We believe this activity is consistent with our goal of
maximizing the economic value of our portfolio.
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 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
8
Table of Contents
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 | ||||||||||
June 30, |
||||||||||
2010 | January 2, 2010 | |||||||||
(In millions) | ||||||||||
Impaired nonaccrual finance receivables
|
$ | 817 | $ | 984 | ||||||
Impaired accrual finance receivables
|
195 | 217 | ||||||||
Total impaired finance receivables
|
1,012 | 1,201 | ||||||||
Less: Impaired finance receivables without identified reserve
requirements
|
293 | 362 | ||||||||
Impaired nonaccrual finance receivables with identified reserve
requirements
|
$ | 719 | $ | 839 | ||||||
Allowance for losses on impaired nonaccrual finance receivables
|
$ | 181 | $ | 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 | ||||||||||
June 30, |
||||||||||
2010 | January 2, 2010 | |||||||||
(In millions) | ||||||||||
Impaired nonaccrual finance receivables
|
$ | 817 | $ | 984 | ||||||
Nonaccrual homogeneous finance receivables
|
59 | 56 | ||||||||
Total nonaccrual finance receivables
|
$ | 876 | $ | 1,040 | ||||||
A summary of nonaccrual finance receivables, impaired nonaccrual
finance receivables and related allowance for losses by
collateral type is as follows:
June 30, 2010 | January 2, 2010 | ||||||||||||||||||||||||||||
Allowance |
Allowance |
||||||||||||||||||||||||||||
for Losses |
for Losses |
||||||||||||||||||||||||||||
Impaired |
on Impaired |
Impaired |
on 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
|
$ | 175 | $ | 162 | $ | 39 | $ | 286 | $ | 272 | $ | 46 | |||||||||||||||||
Golf equipment
|
23 | 7 | 1 | 16 | 2 | 1 | |||||||||||||||||||||||
Non-captive Finance:
|
|||||||||||||||||||||||||||||
Notes receivable
(1)(2)
|
$ | 255 | $ | 254 | $ | 91 | $ | 259 | $ | 254 | $ | 53 | |||||||||||||||||
Golf course property
|
132 | 131 | 18 | 166 | 165 | 27 | |||||||||||||||||||||||
Resort construction/inventory
(2)
|
106 | 106 | 3 | 104 | 104 | | |||||||||||||||||||||||
Dealer inventory
|
66 | 41 | 2 | 88 | 68 | 14 | |||||||||||||||||||||||
Hotels
|
56 | 56 | 18 | 78 | 78 | 7 | |||||||||||||||||||||||
Marinas
|
51 | 51 | 8 | 12 | 12 | | |||||||||||||||||||||||
Land
|
3 | 3 | 1 | 17 | 17 | 4 | |||||||||||||||||||||||
Other
|
9 | 6 | | 14 | 12 | 1 | |||||||||||||||||||||||
Total
|
$ | 876 | $ | 817 | $ | 181 | $ | 1,040 | $ | 984 | $ | 153 | |||||||||||||||||
(1) | Finance receivables collateralized primarily by timeshare notes receivable may also be collateralized by certain real estate and other assets of our borrowers. |
9
Table of Contents
(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 $164 million in
the first half of 2010 from year end, primarily due to the
resolution of several significant accounts through the
repossession of collateral, restructure of finance receivables
and cash collections, partially offset by new finance
receivables identified as nonaccrual during 2010.
The average recorded investment in impaired nonaccrual finance
receivables during the first six months of 2010 was
$922 million compared to $417 million in the
corresponding period in 2009. The average recorded investment in
impaired accrual finance receivables amounted to
$118 million in the first six months of 2010 compared to
$62 million in the corresponding period in 2009.
The suspension of interest on nonaccrual finance receivables
resulted in Textron Financials finance charges being
reduced by $33 million and $22 million in the first
six months of 2010 and 2009, respectively. We do not recognize
finance charges using the cash basis method.
Three Months Ended | Six Months Ended | |||||||||||||||||||
June 30, |
June 30, |
June 30, |
June 30, |
|||||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||
Allowance for losses on finance receivables held for investment,
beginning of period
|
$ | 363 | $ | 220 | $ | 339 | $ | 191 | ||||||||||||
Provision for losses
|
44 | 87 | 99 | 163 | ||||||||||||||||
Less net charge-offs:
|
||||||||||||||||||||
Captive Finance
|
||||||||||||||||||||
Aviation
|
20 | 8 | 30 | 14 | ||||||||||||||||
Golf Equipment
|
1 | 1 | 3 | 3 | ||||||||||||||||
Non-captive Finance
|
||||||||||||||||||||
Golf Mortgage
|
30 | 1 | 37 | 22 | ||||||||||||||||
Distribution Finance
|
5 | 11 | 11 | 23 | ||||||||||||||||
Timeshare
|
1 | 2 | 1 | 2 | ||||||||||||||||
Hotel
|
| | 4 | | ||||||||||||||||
Other Liquidating
|
| | 2 | 6 | ||||||||||||||||
Total net charge-offs
|
57 | 23 | 88 | 70 | ||||||||||||||||
Allowance for losses on finance receivables held for investment,
end of period
|
$ | 350 | $ | 284 | $ | 350 | $ | 284 | ||||||||||||
Annualized net charge-offs as a percentage of average finance
receivables held for investment
|
4.41 | % | 1.33 | % | 3.23 | % | 2.03 | % | ||||||||||||
June 30, |
||||||||||
2010 | January 2, 2010 | |||||||||
(Dollars in millions) | ||||||||||
Nonaccrual finance receivables as a percentage of finance
receivables held for investment
|
18.06 | % | 17.26 | % | ||||||
Allowance for losses on finance receivables held for investment
as a percentage of finance receivables held for investment
|
7.22 | % | 5.63 | % | ||||||
Allowance for losses on finance receivables held for investment
as a percentage of nonaccrual finance receivables held for
investment
|
40.0 | % | 32.6 | % | ||||||
60+ days contractual delinquency as a percentage of finance
receivables held for investment
|
7.99 | % | 9.51 | % | ||||||
60+ days contractual delinquency
|
$ | 385 | $ | 569 | ||||||
Repossessed assets and properties
|
$ | 147 | $ | 119 | ||||||
Operating assets received in satisfaction of troubled finance
receivables
|
130 | 112 | ||||||||
10
Table of Contents
Note 4. | Other Assets |
Textron Financials 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 June 30,
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, net of 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
six months of 2010, revenues were $17 million and
$7 million from golf courses and other real estate,
respectively, and expenses were $23 million and
$7 million from golf courses and other real estate,
respectively. In the first six months of 2009, revenues and
expenses were $13 million and $16 million from golf
courses, respectively, while revenues and expenses from other
real estate were not significant.
Investments in other marketable securities represent investments
in notes receivable issued by timeshare securitization trusts.
These investments were $59 million and $68 million at
June 30, 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 June 30, 2010, unrealized losses on the
portion of these investments for which fair value was lower than
our carrying value were $4 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 six months 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.
11
Table of Contents
The following table summarizes the Companys significant
derivative activities relating to qualifying hedges of interest
rate risk and foreign currency exposure:
Notional Amount | Fair Value Amount | |||||||||||||||||||||||||||
Assets | Liabilities | |||||||||||||||||||||||||||
June 30, |
January 2, |
June 30, |
January 2, |
June 30, |
January 2, |
|||||||||||||||||||||||
2010 | 2010 | 2010 | 2010 | 2010 | 2010 | |||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||
Fair Value Hedges
|
||||||||||||||||||||||||||||
Interest Rate Exchange Agreements
|
||||||||||||||||||||||||||||
Fixed-rate debt
|
$ | 655 | $ | 946 | $ | 41 | $ | 40 | $ | | $ | | ||||||||||||||||
Fixed-rate receivables
|
366 | 419 | | 3 | (8 | ) | (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 | 29 | 18 | | | ||||||||||||||||||||||
$ | 1,262 | $ | 1,597 | $ | 70 | $ | 61 | $ | (8 | ) | $ | (5 | ) | |||||||||||||||
As a result of our exit plan announced in December 2008, we no
longer view our investment in our Canadian subsidiary as
permanent. Therefore, we began hedging our net investment in
this subsidiary during the fourth quarter of 2008 to prevent any
reduction in the U.S. dollar equivalent cash flows we will
receive upon liquidation of this subsidiary.
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 June 30, 2010 and January 2, 2010,
$251 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 June 30, 2010 and January 2,
2010, respectively. Gains/(losses) on foreign currency forward
exchange agreements were $4 million and $(3) million
for the three and six months ended June 30, 2010,
respectively, and $(52) million for the three and six
months ended June 30, 2009. These gains/(losses) were
largely offset by the translation of the related foreign
currency denominated assets and liabilities, and were recorded
in Operating and administrative expenses.
The effect of derivative instruments in the Consolidated
Statements of Operations is as follows:
Amount of Gain/(Loss) | ||||||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||||||
Gain/(Loss) Location | June 30, 2010 | June 30, 2009 | June 30, 2010 | June 30, 2009 | ||||||||||||||||
(In millions) | ||||||||||||||||||||
Fair Value Hedges
|
||||||||||||||||||||
Interest rate exchange agreements
|
Interest expense | $ | 9 | $ | (19 | ) | $ | 19 | $ | (15 | ) | |||||||||
Interest rate exchange agreements
|
Finance charges | (7 | ) | 8 | (11 | ) | 6 | |||||||||||||
12
Table of Contents
Gains/(losses) included in earnings related to cash flow hedges
were $(10) million for both the three and six months ended
June 30, 2010, and $4 million and $(7) million
for the three and six months ended June 30, 2009,
respectively. These gains/(losses) were largely offset by the
translation of the related 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 three and six months of 2010 or 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
managements 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
We measure our derivative financial instruments, net at fair
value on a recurring basis using Level 2 inputs. The
balance of these derivative financial instruments, net was
$62 million at June 30, 2010. The Companys
derivative contracts are not exchange-traded and 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 Companys credit default swap spread for
liabilities and the counterpartys 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 June 30, 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:
Six Months |
||||||||||||||||||||
Three Months Ended | Ended | |||||||||||||||||||
June 30, |
June 30, |
June 30, |
June 30, |
|||||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||||||
(In millions) | ||||||||||||||||||||
Retained Interests in Securitizations
|
||||||||||||||||||||
Balance, beginning of period
|
$ | | $ | 3 | $ | 3 | $ | 12 | ||||||||||||
Reclassification to Finance receivables held for investment
|
| | (3 | ) | | |||||||||||||||
Net losses for the period:
|
||||||||||||||||||||
Change in value recognized in Other comprehensive income
|
| 2 | | (1 | ) | |||||||||||||||
Impairments recognized in earnings
|
| (2 | ) | | (8 | ) | ||||||||||||||
Balance, end of period
|
$ | | $ | 3 | $ | | $ | 3 | ||||||||||||
13
Table of Contents
Assets
Recorded at Fair Value on a Nonrecurring Basis
The table below presents the balance at June 30, 2010 of
those assets that were measured at fair value on a nonrecurring
basis during the first six months of 2010 and the related
gain/(loss) recorded in the Consolidated Statements of
Operations. These assets were measured using significant
unobservable inputs (Level 3).
Total Gain/(Loss) | ||||||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||||||
June 30, |
June 30, |
June 30, |
||||||||||||||||||
2010 | 2010 | 2010 | ||||||||||||||||||
(In millions) | ||||||||||||||||||||
Impaired finance receivables
|
$ | 519 | $ | (45 | ) | $ | (104 | ) | ||||||||||||
Finance receivables held for sale
|
421 | (5 | ) | (15 | ) | |||||||||||||||
Repossessed assets and properties
|
59 | (8 | ) | (17 | ) | |||||||||||||||
Other investments
|
28 | | (9 | ) | ||||||||||||||||
Total
|
$ | 1,027 | $ | (58 | ) | $ | (145 | ) | ||||||||||||
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, $535 million of finance receivables, net of a
$70 million valuation allowance, have been classified as
held for sale as of June 30, 2010. The finance receivables
held for sale as of June 30, 2010 are primarily assets in
the Golf Mortgage, Distribution Finance and Asset-Based Lending
product lines, but also include $119 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 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 decrease in fair value
of finance receivables held for sale recorded in the
Consolidated Statements of Operations was $11 million and
$12 million for the three and six months ended
June 30, 2009, respectively. During the first six months 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
$17 million for the first six months 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 six months 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.
14
Table of Contents
Impaired
Finance Receivables
Finance receivable impairment is measured by comparing the
expected future cash flows discounted at the finance
receivables 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. 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 three and six months ended
June 30, 2009 on impaired finance receivables resulted in
charges of $85 million and $117 million, respectively,
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
managements 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 developers
underwriting practices and the developers 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
Companys 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 three and six months ended
June 30, 2009, charges on these assets totaled
$18 million and $22 million, respectively, and were
recorded in Portfolio losses, net of gains 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. There were no charges associated with these assets during
the three and six month periods ended June 30, 2009,
respectively.
15
Table of Contents
Assets
and Liabilities Not Recorded at Fair Value
The carrying values and estimated fair values of Textron
Financials financial instruments which are not recorded at
fair value are as follows:
June 30, 2010 | January 2, 2010 | |||||||||||||||||||
Carrying |
Estimated |
Carrying |
Estimated |
|||||||||||||||||
Value | Fair Value | Value | Fair Value | |||||||||||||||||
(In millions) | ||||||||||||||||||||
Assets:
|
||||||||||||||||||||
Installment contracts
|
$ | 1,929 | $ | 1,795 | $ | 2,204 | $ | 2,007 | ||||||||||||
Golf course, timeshare and hotel mortgages
|
918 | 815 | 1,008 | 924 | ||||||||||||||||
Revolving loans
|
761 | 652 | 1,058 | 902 | ||||||||||||||||
Distribution finance receivables
|
361 | 352 | 709 | 690 | ||||||||||||||||
Investment in other marketable securities
|
59 | 57 | 68 | 56 | ||||||||||||||||
Retained interests in securitizations, excluding interest-only
securities
|
| | 6 | 6 | ||||||||||||||||
$ | 4,028 | $ | 3,671 | $ | 5,053 | $ | 4,585 | |||||||||||||
Liabilities:
|
||||||||||||||||||||
Bank line of credit
|
$ | 1,740 | $ | 1,676 | $ | 1,740 | $ | 1,682 | ||||||||||||
Fixed-rate debt
|
1,144 | 1,114 | 1,534 | 1,490 | ||||||||||||||||
Amounts due to Textron Inc.
|
670 | 666 | 472 | 469 | ||||||||||||||||
Variable-rate debt
|
444 | 440 | 1,355 | 1,333 | ||||||||||||||||
Securitized on-balance sheet debt
|
427 | 425 | 559 | 548 | ||||||||||||||||
Subordinated debt
|
300 | 227 | 300 | 207 | ||||||||||||||||
$ | 4,725 | $ | 4,548 | $ | 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 Financials
leveraged leases, finance leases and operating leases
($281 million, $263 million and $202 million,
respectively, at June 30, 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 Companys 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.
16
Table of Contents
Debt
At June 30, 2010 and January 2, 2010, 41% 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.
Income taxes
A reconciliation of the federal statutory income tax rate to the
effective income tax rate is provided below:
Three Months Ended | Six Months Ended | |||||||||||||||||||
June 30, |
June 30, |
June 30, |
June 30, |
|||||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||||||
Federal statutory income tax rate
|
(35.0 | )% | (35.0 | )% | (35.0 | )% | (35.0 | )% | ||||||||||||
Increase (decrease) in taxes resulting from:
|
||||||||||||||||||||
State income taxes
|
(2.2 | ) | (2.4 | ) | (2.6 | ) | (1.4 | ) | ||||||||||||
Foreign tax rate differential
|
(1.4 | ) | (6.6 | ) | (2.0 | ) | (0.5 | ) | ||||||||||||
Canadian dollar functional currency
|
(8.9 | ) | | (4.8 | ) | | ||||||||||||||
Change in state valuation allowance
|
0.3 | 0.2 | 2.0 | (0.3 | ) | |||||||||||||||
Unrecognized tax benefits and interest
|
3.7 | 1.2 | 3.2 | 1.6 | ||||||||||||||||
Tax credits
|
(0.6 | ) | (0.7 | ) | (0.8 | ) | (0.8 | ) | ||||||||||||
Change in status of foreign subsidiary
|
(3.0 | ) | 4.5 | (1.5 | ) | 4.3 | ||||||||||||||
Other, net
|
(0.2 | ) | 0.3 | (0.1 | ) | 0.1 | ||||||||||||||
Effective income tax rate
|
(47.3 | )% | (38.5 | )% | (41.6 | )% | (32.0 | )% | ||||||||||||
For the three months ended June 30, 2010, the difference
between the statutory and the effective tax rate is primarily
attributable to a U.S. tax benefit related to the change of
the functional currency of one of the Companys
wholly-owned Canadian subsidiaries, a decrease in the taxable
amount of a distribution from one of the Companys
wholly-owned Canadian subsidiaries, and a benefit for state
taxes, partially offset by unrecognized tax benefits and
interest, the majority of which is associated with leveraged
leases.
For the six months ended June 30, 2010, the difference
between the statutory and the effective tax rate is primarily
attributable to a U.S. tax benefit related to the change of
the functional currency of one of the Companys
wholly-owned Canadian subsidiaries, a benefit for state taxes, a
change in managements assessment of the realizability of a
deferred tax asset in one of the Companys wholly-owned
Canadian subsidiaries, partially offset by unrecognized tax
benefits and interest, the majority of which is associated with
leveraged leases.
For the three months ended June 30, 2009, the difference
between the statutory and the effective tax rate was primarily
attributable to a change in managements assessment of the
realizability of a deferred tax asset in one of the
Companys wholly-owned Canadian subsidiaries and the
benefit for state taxes, partially offset by an increase in
estimate of the taxable amount of a distribution from one of the
Companys wholly-owned Canadian subsidiaries and
unrecognized tax benefits and interest, the majority of which
was associated with leveraged leases.
For the six months ended June 30, 2009, the difference
between the statutory and the effective tax rate was primarily
attributable to an increase in estimate of the taxable amount of
a distribution from one of the Companys wholly-owned
Canadian subsidiaries and unrecognized tax benefits and
interest, the majority of which was associated with leveraged
leases, partially offset by the benefit for state taxes and tax
credits.
Note 8.
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 Financials financial
position or results of operations.
17
Table of Contents
Note 9.
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 | Six Months Ended | |||||||||||||||||||||||||||||||||||||||
June 30, |
June 30, |
June 30, |
June 30, |
|||||||||||||||||||||||||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||||||||||||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||||||||||||||||||||||
Revenues:
|
||||||||||||||||||||||||||||||||||||||||
Captive Finance
|
$ | 30 | 54 | % | $ | 42 | 49 | % | $ | 66 | 51 | % | $ | 95 | 46% | |||||||||||||||||||||||||
Non-captive Finance
|
25 | 46 | % | 44 | 51 | % | 62 | 49 | % | 113 | 54% | |||||||||||||||||||||||||||||
Total revenues
|
$ | 55 | 100 | % | $ | 86 | 100 | % | $ | 128 | 100 | % | $ | 208 | 100% | |||||||||||||||||||||||||
Loss before income taxes and noncontrolling interest:
(1)(2)
|
||||||||||||||||||||||||||||||||||||||||
Captive Finance
|
$ | (5 | ) | $ | (19 | ) | $ | (15 | ) | $ | (44 | ) | ||||||||||||||||||||||||||||
Non-captive Finance
|
(66 | ) | (80 | ) | (115 | ) | (121 | ) | ||||||||||||||||||||||||||||||||
Segment loss
|
(71 | ) | (99 | ) | (130 | ) | (165 | ) | ||||||||||||||||||||||||||||||||
Restructuring charges
|
3 | 5 | 6 | 8 | ||||||||||||||||||||||||||||||||||||
Loss before income taxes and noncontrolling interest
|
$ | (74 | ) | $ | (104 | ) | $ | (136 | ) | $ | (173 | ) | ||||||||||||||||||||||||||||
June 30, |
January 2, |
|||||||||||
2010 | 2010 | |||||||||||
(In millions) | ||||||||||||
Finance assets: (3)
|
||||||||||||
Captive Finance
|
$ | 2,659 | $ | 3,016 | ||||||||
Non-captive Finance
|
3,309 | 4,404 | ||||||||||
Total finance assets
|
$ | 5,968 | $ | 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 segments interest expense. | |
(2) | Direct operating expenses are included in each segments 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 Financials Consolidated Balance Sheets). |
18
Table of Contents
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.
Managements 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
half of 2010, we liquidated $1.5 billion of managed finance
receivables. These managed finance receivable reductions
occurred in both of our segments and all of our product lines,
but were primarily driven by Non-captive Finance reductions,
including $582 million (54%) in Distribution Finance and
$220 million (17%) in Timeshare. 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, net of gains 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 included $399 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 $2.2 billion of managed finance receivables,
net of originations. We expect a portion of the liquidations,
net of originations, will be in the Captive Finance segment. The
originations of the Captive Finance segment exclude finance
receivables serviced on behalf of another finance subsidiary of
Textron.
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 half of 2010
through an intercompany borrowing arrangement as it has been in
the collective economic interest of Textron Financial and
Textron to do so. We increased our outstanding intercompany loan
balance with Textron to $645 million at June 30, 2010
from $447 million at January 2, 2010. In addition,
during the first half of 2010, we retired $1.4 billion 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 half of 2010, the
Non-captive Finance segment achieved a 93% cash conversion ratio
as compared to 95% for the year ended January 2, 2010. This
performance was primarily driven by a $208 million sale of
finance receivables for a gain of $13 million in the
Distribution Finance product line during the first quarter of
2010. We expect this ratio to continue 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
shareholders equity of no less than $200 million. In
the first half of 2010, Textron Financials fixed charge
coverage ratio was below the required 125%. Textron made cash
payments of $82 million and $71 million on
July 12, 2010 and April 9, 2010, respectively, to
Textron Financial, which were reflected as capital
contributions, to maintain compliance with the fixed charge
coverage ratio.
19
Table of Contents
Results
of Operations
Revenues
Revenues decreased $31 million and $80 million for the
three and six months ended June 30, 2010 as compared to
2009, respectively, primarily due to the following:
Three Months |
Six Months |
|||||||||||
Ended |
Ended |
|||||||||||
2010 vs. 2009 | 2010 vs. 2009 | |||||||||||
(In millions) | ||||||||||||
Lower average finance receivables of $1.9 billion and
$1.8 billion, respectively
|
$ | (27 | ) | $ | (50 | ) | ||||||
Lower gains on early extinguishment of debt
|
(37 | ) | (39 | ) | ||||||||
Decrease in servicing and investment income related to
securitizations
|
(8 | ) | (18 | ) | ||||||||
Impact of variable-rate receivable interest rate floors
|
(7 | ) | (17 | ) | ||||||||
Lower other income
|
(3 | ) | (12 | ) | ||||||||
Suspended earnings on nonaccrual finance receivables
|
(3 | ) | (11 | ) | ||||||||
Portfolio losses, net of gains
|
30 | 27 | ||||||||||
Lower securitization losses, including impairments
|
20 | 27 | ||||||||||
Accretion of valuation allowance
|
5 | 11 | ||||||||||
Loss
before Income Taxes and Noncontrolling Interest
Loss before income taxes and noncontrolling interest decreased
$30 million and $37 million for the three and six
months ended June 30, 2010 as compared to 2009,
respectively, primarily due to the following:
Three Months |
Six Months |
|||||||||||
Ended |
Ended |
|||||||||||
2010 vs. 2009 | 2010 vs. 2009 | |||||||||||
(In millions) | ||||||||||||
Decrease in the provision for loan losses
|
$ | 43 | $ | 64 | ||||||||
Portfolio losses, net of gains
|
30 | 27 | ||||||||||
Lower securitization losses, including impairments
|
20 | 27 | ||||||||||
Lower operating and administrative expenses
|
9 | 21 | ||||||||||
Accretion of valuation allowance
|
5 | 11 | ||||||||||
Lower gains on early extinguishment of debt
|
(37 | ) | (39 | ) | ||||||||
Lower average finance receivables of $1.9 billion and
$1.8 billion, respectively
|
(13 | ) | (19 | ) | ||||||||
Decrease in servicing and investment income related to
securitizations
|
(8 | ) | (18 | ) | ||||||||
Impact of variable-rate receivable interest rate floors
|
(7 | ) | (17 | ) | ||||||||
Lower other income
|
(3 | ) | (12 | ) | ||||||||
Suspended earnings on nonaccrual finance receivables
|
(3 | ) | (11 | ) | ||||||||
The provision for loan losses decreased during the three and six
month periods of 2010 as compared to 2009 primarily due to a
decrease in new accounts identified as nonaccrual during the
period.
Portfolio losses, net of gains decreased during the three and
six month periods of 2010 as compared to 2009 primarily as a
result of a decrease in discounts taken on the early sale or
termination of finance receivable assets associated with the
liquidation of Distribution Finance and Golf Mortgage finance
receivables, lower impairment
20
Table of Contents
charges associated with repossessed aircraft and a
$13 million gain on the sale of one portfolio in the first
quarter of 2010.
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 loans 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.
Income
Tax Benefit
For the three months ended June 30, 2010, the difference
between the statutory and the effective tax rate is primarily
attributable to a U.S. tax benefit related to the change of
the functional currency of one of the Companys
wholly-owned Canadian subsidiaries, a decrease in the taxable
amount of a distribution from one of the Companys
wholly-owned Canadian subsidiaries, and a benefit for state
taxes, partially offset by unrecognized tax benefits and
interest, the majority of which is associated with leveraged
leases.
For the six months ended June 30, 2010, the difference
between the statutory and the effective tax rate is primarily
attributable to a U.S. tax benefit related to the change of
the functional currency of one of the Companys
wholly-owned Canadian subsidiaries, a benefit for state taxes, a
change in managements assessment of the realizability of a
deferred tax asset in one of the Companys wholly-owned
Canadian subsidiaries, partially offset by unrecognized tax
benefits and interest, the majority of which is associated with
leveraged leases.
For the three months ended June 30, 2009, the difference
between the statutory and the effective tax rate was primarily
attributable to a change in managements assessment of the
realizability of a deferred tax asset in one of the
Companys wholly-owned Canadian subsidiaries and the
benefit for state taxes, partially offset by an increase in
estimate of the taxable amount of a distribution from one of the
Companys wholly-owned Canadian subsidiaries and
unrecognized tax benefits and interest, the majority of which
was associated with leveraged leases.
For the six months ended June 30, 2009, the difference
between the statutory and the effective tax rate was primarily
attributable to an increase in estimate of the taxable amount of
a distribution from one of the Companys wholly-owned
Canadian subsidiaries and unrecognized tax benefits and
interest, the majority of which was associated with leveraged
leases, partially offset by the benefit for state taxes and tax
credits.
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, such as the Risk Factors
contained in our Annual Report on
Form 10-K,
our Quarterly Reports on
Form 10-Q
and including 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
21
Table of Contents
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 Commissions 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 Financials internal
control over financial reporting during the quarter ended
June 30, 2010 that have materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting.
22
Table of Contents
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 |
23
Table of Contents
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: July 29, 2010
24