Attached files
file | filename |
---|---|
EX-12 - EX-12 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES - TEXTRON FINANCIAL CORP | b77503exv12.htm |
EX-32.1 - EX-32.1 SECTION 906 CERTIFICATION OF CEO - TEXTRON FINANCIAL CORP | b77503exv32w1.htm |
EX-32.2 - EX-32.1 SECTION 906 CERTIFICATION OF CFO - TEXTRON FINANCIAL CORP | b77503exv32w2.htm |
EX-31.1 - EX-31.1 SECTION 302 CERTIFICATION OF CEO - TEXTRON FINANCIAL CORP | b77503exv31w1.htm |
EX-31.2 - EX-31.2 SECTION 302 CERTIFICATION OF CFO - TEXTRON FINANCIAL CORP | b77503exv31w2.htm |
Table of Contents
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
Washington, D.C. 20549
Form 10-Q
þ
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
For the fiscal quarter ended September 30, 2009 | ||
OR
|
||
o
|
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
|
05-6008768 | |
(State or other jurisdiction
of incorporation or organization) |
(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 þ. No o.
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 o. No o.
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 o. | Accelerated filer o. | Non-accelerated filer þ. | Smaller reporting company o. |
(Do not check if a 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 o. No þ.
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
(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT
TEXTRON
FINANCIAL CORPORATION
TABLE OF
CONTENTS
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 |
Nine Months Ended |
|||||||||||||||
September 30, |
September 30, |
September 30, |
September 30, |
|||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(In millions) | ||||||||||||||||
Finance charges
|
$ | 108 | $ | 139 | $ | 327 | $ | 421 | ||||||||
Gains on early extinguishment of debt
|
9 | | 48 | | ||||||||||||
Rental revenues on operating leases
|
8 | 9 | 23 | 26 | ||||||||||||
Portfolio (losses) gains
|
(54 | ) | (1 | ) | (114 | ) | 1 | |||||||||
Securitization gains (losses)
|
| 11 | (27 | ) | 51 | |||||||||||
Other income
|
| 26 | 22 | 76 | ||||||||||||
Total revenues
|
71 | 184 | 279 | 575 | ||||||||||||
Interest expense
|
33 | 70 | 128 | 227 | ||||||||||||
Depreciation of equipment on operating leases
|
5 | 5 | 14 | 14 | ||||||||||||
Net interest margin
|
33 | 109 | 137 | 334 | ||||||||||||
Provision for losses
|
43 | 34 | 206 | 101 | ||||||||||||
Selling and administrative expenses
|
54 | 57 | 160 | 160 | ||||||||||||
Special charges
|
1 | | 9 | | ||||||||||||
(Loss) income before income taxes and noncontrolling
interest
|
(65 | ) | 18 | (238 | ) | 73 | ||||||||||
Income tax (benefit) expense
|
(21 | ) | 4 | (76 | ) | 24 | ||||||||||
Net (loss) income before noncontrolling interest
|
(44 | ) | 14 | (162 | ) | 49 | ||||||||||
Noncontrolling interest, net of income taxes
|
(3 | ) | | (2 | ) | | ||||||||||
Net (loss) income
|
$ | (41 | ) | $ | 14 | $ | (160 | ) | $ | 49 | ||||||
See Notes to the Consolidated Financial Statements.
2
Table of Contents
TEXTRON
FINANCIAL CORPORATION
(Unaudited)
September 30, |
January 3, |
|||||||
2009 | 2009 | |||||||
(In millions) | ||||||||
Assets
|
||||||||
Cash and equivalents
|
$ | 616 | $ | 16 | ||||
Finance receivables held for investment, net of unearned income:
|
||||||||
Installment contracts
|
2,458 | 2,787 | ||||||
Revolving loans
|
1,173 | 1,208 | ||||||
Golf course and resort mortgages
|
1,093 | 1,206 | ||||||
Distribution finance receivables
|
481 | 647 | ||||||
Finance leases
|
431 | 608 | ||||||
Leveraged leases
|
359 | 459 | ||||||
Total finance receivables held for investment
|
5,995 | 6,915 | ||||||
Allowance for losses on finance receivables held for investment
|
(302 | ) | (191 | ) | ||||
Finance receivables held for investment net
|
5,693 | 6,724 | ||||||
Finance receivables held for sale
|
998 | 1,658 | ||||||
Equipment on operating leases net
|
220 | 247 | ||||||
Other assets
|
580 | 699 | ||||||
Total assets
|
$ | 8,107 | $ | 9,344 | ||||
Liabilities and equity
|
||||||||
Liabilities
|
||||||||
Accrued interest and other liabilities
|
$ | 338 | $ | 379 | ||||
Amounts due to Textron Inc.
|
47 | 161 | ||||||
Deferred income taxes
|
226 | 337 | ||||||
Debt
|
6,638 | 7,388 | ||||||
Total liabilities
|
7,249 | 8,265 | ||||||
Equity
|
||||||||
Shareholders equity
|
||||||||
Capital surplus
|
1,414 | 1,217 | ||||||
Investment in parent company preferred stock
|
(25 | ) | (25 | ) | ||||
Accumulated other comprehensive loss
|
(48 | ) | (55 | ) | ||||
Retained deficit
|
(502 | ) | (58 | ) | ||||
Total shareholders equity
|
839 | 1,079 | ||||||
Noncontrolling interest
|
19 | | ||||||
Total equity
|
858 | 1,079 | ||||||
Total liabilities and equity
|
$ | 8,107 | $ | 9,344 | ||||
See Notes to the Consolidated Financial Statements.
3
Table of Contents
TEXTRON
FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(Unaudited)
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(Unaudited)
2009 | 2008 | |||||||
(In millions) | ||||||||
Cash flows from operating activities:
|
||||||||
Net (loss) income
|
$ | (160 | ) | $ | 49 | |||
Net income attributable to noncontrolling interest
|
(2 | ) | | |||||
Net (loss) income before noncontrolling interest
|
(162 | ) | 49 | |||||
Adjustments to reconcile net (loss) income before noncontrolling
interest to net cash provided by operating activities:
|
||||||||
Provision for losses
|
206 | 101 | ||||||
Deferred income tax provision
|
(116 | ) | (27 | ) | ||||
Increase (decrease) in income taxes payable
|
99 | (3 | ) | |||||
Portfolio losses
|
114 | 1 | ||||||
Gains on early extinguishment of debt
|
(48 | ) | | |||||
Impairments/gains in excess of collections on securitizations
and syndications
|
25 | (5 | ) | |||||
Depreciation and amortization
|
27 | 31 | ||||||
Decrease in accrued interest and other liabilities
|
(28 | ) | (3 | ) | ||||
Other net
|
19 | 10 | ||||||
Net cash provided by operating activities
|
136 | 154 | ||||||
Cash flows from investing activities:
|
||||||||
Finance receivables originated or purchased
|
(3,044 | ) | (9,489 | ) | ||||
Finance receivables repaid
|
3,937 | 8,602 | ||||||
Proceeds from receivable sales, including securitizations
|
252 | 746 | ||||||
Proceeds from disposition of other assets, including repossessed
assets and properties and operating leases
|
197 | 27 | ||||||
Other investments
|
139 | (90 | ) | |||||
Purchase of assets for operating leases
|
(11 | ) | (21 | ) | ||||
Net cash provided (used) by investing activities
|
1,470 | (225 | ) | |||||
Cash flows from financing activities:
|
||||||||
Proceeds from line of credit
|
1,740 | | ||||||
Proceeds from issuance of long-term debt
|
| 1,161 | ||||||
Principal payments on long-term debt
|
(1,250 | ) | (1,139 | ) | ||||
Net (decrease) increase in commercial paper
|
(743 | ) | 5 | |||||
Net (decrease) increase in other short-term debt
|
(25 | ) | 25 | |||||
Proceeds from issuance of secured debt
|
16 | 300 | ||||||
Principal payments on secured debt
|
(425 | ) | | |||||
Principal payments on nonrecourse debt
|
(148 | ) | (62 | ) | ||||
Net decrease in intercompany loan due to Textron Inc.
|
(115 | ) | | |||||
Proceeds from sale of noncontrolling interest
|
21 | | ||||||
Capital contributions from Textron Inc.
|
204 | 7 | ||||||
Dividends paid to Textron Inc.
|
(291 | ) | (149 | ) | ||||
Net cash (used) provided by financing activities
|
(1,016 | ) | 148 | |||||
Effect of exchange rate changes on cash
|
10 | (1 | ) | |||||
Net increase in cash and equivalents
|
600 | 76 | ||||||
Cash and equivalents at beginning of year
|
16 | 60 | ||||||
Cash and equivalents at end of period
|
$ | 616 | $ | 136 | ||||
See Notes to the Consolidated Financial Statements.
4
Table of Contents
TEXTRON
FINANCIAL CORPORATION
(Unaudited)
Investment |
Accumulated |
|||||||||||||||||||||||||||
In Parent |
Other |
Total |
||||||||||||||||||||||||||
Company |
Comprehensive |
Retained |
Share- |
|||||||||||||||||||||||||
Capital |
Preferred |
Income |
Earnings |
holders |
Noncontrolling |
Total |
||||||||||||||||||||||
Surplus | Stock | (Loss) | (Deficit) | Equity | Interest | Equity | ||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||
Balance December 29, 2007
|
$ | 592 | $ | (25 | ) | $ | 26 | $ | 545 | $ | 1,138 | $ | | $ | 1,138 | |||||||||||||
Comprehensive loss:
|
||||||||||||||||||||||||||||
Net loss
|
| | | (461 | ) | (461 | ) | | (461 | ) | ||||||||||||||||||
Other comprehensive loss:
|
||||||||||||||||||||||||||||
Foreign currency translation, net of income taxes
|
| | (79 | ) | | (79 | ) | | (79 | ) | ||||||||||||||||||
Change in unrealized net losses on hedge contracts, net of
income taxes
|
| | (1 | ) | | (1 | ) | | (1 | ) | ||||||||||||||||||
Change in unrealized net gains on interest-only securities, net
of income taxes
|
| | (1 | ) | | (1 | ) | | (1 | ) | ||||||||||||||||||
Other comprehensive loss
|
| | (81 | ) | | (81 | ) | | (81 | ) | ||||||||||||||||||
Comprehensive loss
|
| | | | (542 | ) | | (542 | ) | |||||||||||||||||||
Capital contributions from Textron Inc.
|
634 | | | | 634 | | 634 | |||||||||||||||||||||
Dividends to Textron Inc.
|
(9 | ) | | | (142 | ) | (151 | ) | | (151 | ) | |||||||||||||||||
Balance January 3, 2009
|
1,217 | (25 | ) | (55 | ) | (58 | ) | 1,079 | | 1,079 | ||||||||||||||||||
Comprehensive loss:
|
||||||||||||||||||||||||||||
Net (loss) income
|
| | | (160 | ) | (160 | ) | (2 | ) | (162 | ) | |||||||||||||||||
Other comprehensive gain:
|
||||||||||||||||||||||||||||
Change in unrealized net losses on retained interests, net of
income tax benefit
|
| | (1 | ) | | (1 | ) | | (1 | ) | ||||||||||||||||||
Foreign currency translation, net of income taxes
|
| | 6 | | 6 | | 6 | |||||||||||||||||||||
Change in unrealized net gain on hedge contracts, net of income
taxes
|
| | 2 | | 2 | | 2 | |||||||||||||||||||||
Other comprehensive gain
|
| | 7 | | 7 | | 7 | |||||||||||||||||||||
Comprehensive loss
|
| | | | (153 | ) | (2 | ) | (155 | ) | ||||||||||||||||||
Capital contributions from Textron Inc.
|
204 | | | | 204 | | 204 | |||||||||||||||||||||
Dividends to Textron Inc.
|
(7 | ) | | | (284 | ) | (291 | ) | | (291 | ) | |||||||||||||||||
Sale of noncontrolling interest
|
| | | | | 21 | 21 | |||||||||||||||||||||
Balance September 30, 2009
|
$ | 1,414 | $ | (25 | ) | $ | (48 | ) | $ | (502 | ) | $ | 839 | $ | 19 | $ | 858 | |||||||||||
See Notes to the Consolidated Financial Statements.
5
Table of Contents
TEXTRON
FINANCIAL CORPORATION
(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 3, 2009. The accompanying
Consolidated Financial Statements include the accounts of
Textron Financial Corporation (Textron Financial or
the Company) and its subsidiaries. All significant
intercompany transactions are eliminated. In the first quarter
of 2009, we sold a 51% residual interest in the Aviation Finance
securitization trust to Textron Inc., which is reflected as a
Noncontrolling interest on our Consolidated Balance Sheets. 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 September 30, 2009, 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. We have evaluated subsequent events
up to the time of our filing with the Securities and Exchange
Commission on October 30, 2009, which is the date that
these financial statements were issued.
In the fourth quarter of 2008, Textron announced a plan to exit
all of our commercial finance business, other than that portion
of the business 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 operations of this
ongoing business. Due to this change, we consolidated the
portion of the Golf Finance segment that finances customer
purchases of
E-Z-GO golf
cars and Jacobsen turf-care equipment into the Aviation Finance
segment, which finances customer purchase of Textron
manufactured aircraft. As a result, the Companys segment
reporting has been adjusted to form a new Captive Finance
segment and the remainder of the former Golf Finance segment,
which historically made mortgage loans for the acquisition and
refinancing of golf courses, has been renamed the Golf Mortgage
Finance segment. All comparative segment information for prior
periods has been recast to reflect this change.
Note 2. | Recent Accounting Pronouncements |
In June 2009, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 166 Accounting for
Transfers of Financial Assets an amendment of FASB
Statement No. 140. This standard eliminates the
concept of a qualifying special purpose entity
(QSPE) and its exclusion from consolidation by the
primary beneficiary in that variable interest entity
(VIE) or the transferor of financial assets to the
VIE. The new accounting guidance also requires that former
QSPEs be reevaluated for consolidation. This standard is
effective beginning in the first quarter of 2010 and early
application is prohibited. The adoption of this standard will
result in the consolidation of any remaining off-balance sheet
securitization trusts, which include securitized finance
receivables and the related debt. The adoption of this standard
will not have a material impact on our financial position,
results of operations or liquidity.
Also in June 2009, the FASB issued SFAS No. 167
Amendments to FASB Interpretation No. 46(R).
This standard changes the approach to determining the primary
beneficiary of a VIE and requires companies to more frequently
assess whether they must consolidate VIEs. This standard is
effective in the first quarter of 2010 and early application is
prohibited. We are currently assessing the impact the adoption
of this standard may have on our financial position, results of
operations or liquidity.
Note 3. | Portfolio (Losses) Gains and Other income |
Portfolio (losses) gains include impairment charges related to
repossessed assets and properties, operating assets received in
satisfaction of troubled finance receivables, investments and
(losses) gains incurred on the sale or early termination of
finance assets.
6
Table of Contents
TEXTRON
FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited)
Other income is summarized below:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, |
September 30, |
September 30, |
September 30, |
|||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(In millions) | ||||||||||||||||
Servicing income
|
$ | 5 | $ | 11 | $ | 22 | $ | 32 | ||||||||
Investment income
|
3 | 8 | 9 | 18 | ||||||||||||
Late charges
|
1 | 1 | 3 | 3 | ||||||||||||
Prepayment income
|
| 1 | (1 | ) | 3 | |||||||||||
Syndication income
|
| | | 2 | ||||||||||||
Other
|
(9 | ) | 5 | (11 | ) | 18 | ||||||||||
Total other income
|
$ | | $ | 26 | $ | 22 | $ | 76 | ||||||||
The Other component of Other income includes adjustments to the
valuation allowance for finance receivables held for sale,
commitment fees, residual gains, insurance fees and other
miscellaneous fees, which are primarily recognized as income
when received.
Note 4. | Special 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. We have incurred
$1 million in severance costs in the third quarter of 2009
under this plan, and $8 million in employee severance and
pension curtailment costs and $1 million in contract
termination costs for the nine months ended September 30,
2009.
We record restructuring costs in Special charges on our
Consolidated Statements of Operations, as these costs 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. Restructuring
costs by segment for the three and nine months ended
September 30, 2009 are summarized below. There were no
restructuring costs recorded in the three and nine months ended
September 30, 2008.
Three Months Ended | Nine Months Ended | |||||||
September 30, |
September 30, |
|||||||
2009 | 2009 | |||||||
(In millions) | ||||||||
Corporate and Other
|
$ | 1 | $ | 7 | ||||
Distribution Finance
|
| 2 | ||||||
Total Restructuring costs
|
$ | 1 | $ | 9 | ||||
7
Table of Contents
TEXTRON
FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited)
An analysis of our restructuring reserve is presented below:
Severance |
||||||||||||
and Pension |
Contract |
|||||||||||
Curtailment |
Termination |
|||||||||||
Costs | Costs | Total | ||||||||||
(In millions) | ||||||||||||
Balance at January 3, 2009
|
$ | 11 | $ | 1 | $ | 12 | ||||||
Additions
|
8 | 1 | 9 | |||||||||
Cash Paid
|
(8 | ) | (2 | ) | (10 | ) | ||||||
Balance at September 30, 2009
|
$ | 11 | $ | | $ | 11 | ||||||
Restructuring costs since the inception of the program through
September 30, 2009 are summarized below by segment:
Distribution |
Captive |
Asset-Based |
Corporate |
|||||||||||||||||
Finance | Finance | Lending | and Other | Total | ||||||||||||||||
(In millions) | ||||||||||||||||||||
Severance and pension curtailment costs
|
$ | 3 | $ | 1 | $ | 1 | $ | 18 | $ | 23 | ||||||||||
Non-cash asset impairments
|
7 | 3 | 1 | | 11 | |||||||||||||||
Contract termination costs
|
2 | | | | 2 | |||||||||||||||
Total Restructuring costs
|
$ | 12 | $ | 4 | $ | 2 | $ | 18 | $ | 36 | ||||||||||
We expect to incur additional costs to exit the non-captive
portion of our business over the next two to three years. These
costs are expected to be primarily attributable to severance and
retention benefits and are not reasonably estimable at this time.
Note 5. | Managed and Serviced Finance Receivables |
Textron Financial manages and services finance receivables for a
variety of investors, participants and third-party portfolio
owners. Managed and serviced finance receivables are summarized
as follows:
September 30, |
January 3, |
|||||||
2009 | 2009 | |||||||
(In millions) | ||||||||
Total managed and serviced finance receivables
|
$ | 8,926 | $ | 12,173 | ||||
Nonrecourse participations
|
(772 | ) | (820 | ) | ||||
Third-party portfolio servicing
|
(348 | ) | (532 | ) | ||||
Total managed finance receivables
|
7,806 | 10,821 | ||||||
Securitized finance receivables
|
(813 | ) | (2,248 | ) | ||||
Finance receivables
|
6,993 | 8,573 | ||||||
Finance receivables held for sale
|
(998 | ) | (1,658 | ) | ||||
Finance receivables held for investment
|
$ | 5,995 | $ | 6,915 | ||||
Nonrecourse participations consist of undivided interests in
loans originated by Textron Financial, primarily in Resort
Finance, Golf Mortgage Finance and Asset-Based Lending, which
are sold to independent investors.
Third-party portfolio servicing largely relates to finance
receivable portfolios of resort developers and loan portfolio
servicing for third-party financial institutions.
8
Table of Contents
TEXTRON
FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited)
On July 14, 2009, a newly formed subsidiary of Textron
entered into a $500 million credit facility with the
Export-Import Bank of the United States. The facility expires in
December 2010. This facility provides funding for the financing
of sales of Cessna Aircraft Company and Bell Helicopter products
to
non-U.S. buyers.
Textron Financial originates and services loans and finance
leases as servicer for the new subsidiary, which is wholly-owned
and consolidated by Textron, and has provided a full guarantee
of the debt obligations under this facility. These loans and
finance leases which totaled $30 million as of
September 30, 2009, are also included in Third-party
portfolio servicing.
Note 6. | Finance Receivables Held for Investment |
Portfolio
Maturities
Portfolio maturities of finance receivables held for investment
outstanding at September 30, 2009, excluding valuation
allowance, were as follows:
Less than |
1-2 |
2-3 |
3-4 |
4-5 |
More than |
|||||||||||||||||||||||
1 year | Years | Years | Years | Years | 5 years | Total | ||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||
Installment contracts
|
$ | 389 | $ | 313 | $ | 345 | $ | 331 | $ | 289 | $ | 791 | $ | 2,458 | ||||||||||||||
Revolving loans
|
183 | 486 | 348 | 177 | 13 | 19 | 1,226 | |||||||||||||||||||||
Golf course and resort mortgages
|
156 | 251 | 223 | 194 | 87 | 195 | 1,106 | |||||||||||||||||||||
Distribution finance receivables
|
405 | 75 | 15 | 3 | 1 | | 499 | |||||||||||||||||||||
Finance leases
|
96 | 93 | 83 | 38 | 9 | 112 | 431 | |||||||||||||||||||||
Leveraged leases
|
(2 | ) | 1 | (6 | ) | (10 | ) | 2 | 374 | 359 | ||||||||||||||||||
Total finance receivables held for investment
|
$ | 1,227 | $ | 1,219 | $ | 1,008 | $ | 733 | $ | 401 | $ | 1,491 | $ | 6,079 | ||||||||||||||
Finance receivables often are repaid or refinanced prior to
maturity, and in some instances payment may be delayed or
extended beyond the scheduled maturity. Accordingly, the above
tabulations should not be regarded as a forecast of future cash
collections. Finance receivable receipts related to distribution
finance receivables and revolving loans are based on historical
cash flow experience. Finance receivable receipts related to
leases and term loans are based on contractual cash flows.
Finance receivables held for investment include approximately
$549 million and $1.1 billion of finance receivables
that have been legally sold to special purpose entities
(SPEs) and are consolidated subsidiaries of Textron
Financial as of September 30, 2009 and January 3,
2009, respectively. The assets of the SPEs are pledged as
collateral for $443 million and $853 million of debt
as of September 30, 2009 and January 3, 2009,
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. Finance receivables held for
investment also include approximately $19 million and
$102 million of finance receivables that were unfunded at
September 30, 2009 and January 3, 2009, respectively,
primarily as a result of holdback arrangements and payables to
manufacturers for inventory financed by dealers. The
corresponding liability is included in Accrued interest and
other liabilities on Textron Financials Consolidated
Balance Sheets.
Following an effort to market the portfolios held for sale in
the first six months of 2009, and the progress made in
liquidating our portfolios, we decided that we will be able to
maximize the economic value of a portion of the finance
receivables held for sale through orderly liquidation rather
than selling the portfolios. Accordingly, since we intended to
hold a portion of these finance receivables for the foreseeable
future, we reclassified $719 million, net of
9
Table of Contents
TEXTRON
FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited)
a $178 million valuation allowance, from the held for sale
classification to held for investment in the second quarter of
2009.
As a result of the significant influence of economic and
liquidity conditions on our business plans, strategies and
liquidity position, and the rapid changes in these and other
factors we utilize to determine which assets are classified as
held for sale, we currently believe the term foreseeable
future represents a time period of six to nine months.
Unanticipated changes in both internal and external factors
affecting our financial performance, liquidity position or the
value and/or
marketability of our finance receivables could result in a
modification of this assessment.
In the third quarter of 2009, we received unanticipated
inquiries to purchase receivable portfolios classified as held
for investment. Due to the nature of these inquiries, we
determined a sale of these portfolios would be consistent with
our goal to maximize the economic value of our portfolio and
accelerate cash collections. As a result, $313 million, net
of a $40 million valuation allowance, of the finance
receivables reclassified from held for sale to held for
investment in the second quarter of 2009 were reclassified as
held for sale in the third quarter of 2009 and $108 million
of additional finance receivables, net of a $3 million
valuation allowance, were also classified as held for sale.
Finance
Receivable Impairment
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 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. In addition, the Company identifies finance
receivables that are considered impaired due to the significant
modification of the original terms to reflect deferred principal
payments generally at market interest rates, but which continue
to accrue finance charges since full 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 10. Fair Value of Financial Instruments.
Impaired
Finance Receivables
September 30, |
January 3, |
|||||||
2009 | 2009 | |||||||
(In millions) | ||||||||
Impaired nonaccrual finance receivables
|
$ | 781 | $ | 234 | ||||
Impaired accrual finance receivables
|
276 | 19 | ||||||
Total impaired finance receivables
|
1,057 | 253 | ||||||
Less: Impaired finance receivables without identified reserve
requirements
|
378 | 71 | ||||||
Impaired nonaccrual finance receivables with identified reserve
requirements
|
$ | 679 | $ | 182 | ||||
Allowance for losses on impaired nonaccrual finance receivables
|
$ | 147 | $ | 43 | ||||
Nonaccrual finance receivables include impaired nonaccrual
finance receivables and accounts in homogeneous portfolios that
are contractually delinquent by more than three months.
10
Table of Contents
TEXTRON
FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited)
Nonaccrual
Finance Receivables
September 30, |
January 3, |
|||||||||
2009 | 2009 | |||||||||
(In millions) | ||||||||||
Impaired nonaccrual finance receivables
|
$ | 781 | $ | 234 | ||||||
Nonaccrual homogeneous finance receivables
|
57 | 43 | ||||||||
Total nonaccrual finance receivables
|
$ | 838 | $ | 277 | ||||||
A summary of nonaccrual finance receivables, impaired nonaccrual
finance receivables and related allowance for losses by
collateral type is as follows:
September 30, 2009 | January 3, 2009 | ||||||||||||||||||||||||||||||||
Allowance for |
Allowance |
||||||||||||||||||||||||||||||||
Losses on |
for Losses |
||||||||||||||||||||||||||||||||
Impaired |
Impaired |
Impaired |
on Impaired |
||||||||||||||||||||||||||||||
Nonaccrual |
Nonaccrual |
Nonaccrual |
Nonaccrual |
Nonaccrual |
Nonaccrual |
||||||||||||||||||||||||||||
Finance |
Finance |
Finance |
Finance |
Finance |
Finance |
||||||||||||||||||||||||||||
Receivables | Receivables | Receivables | Receivables | Receivables | Receivables | ||||||||||||||||||||||||||||
(In millions) | |||||||||||||||||||||||||||||||||
Segment:
|
Collateral Type: | ||||||||||||||||||||||||||||||||
Resort Finance
|
Notes receivable(1) | $ | 303 | $ | 300 | $ | 42 | $ | 78 | $ | 74 | $ | 9 | ||||||||||||||||||||
Hotels | 62 | 62 | 7 | | | | |||||||||||||||||||||||||||
Resort construction and inventory |
67 | 67 | | | | | |||||||||||||||||||||||||||
Land | 17 | 17 | 4 | | | | |||||||||||||||||||||||||||
Distribution Finance |
Dealer inventory | 89 | 67 | 21 | 43 | 34 | 3 | ||||||||||||||||||||||||||
Captive Finance | General aviation aircraft | 139 | 123 | 24 | 17 | 6 | 2 | ||||||||||||||||||||||||||
Golf equipment | 16 | 3 | 1 | 18 | | | |||||||||||||||||||||||||||
Golf Mortgage Finance |
Golf course property | 96 | 95 | 21 | 107 | 107 | 25 | ||||||||||||||||||||||||||
Marinas | 8 | 8 | | | | | |||||||||||||||||||||||||||
Structured Capital |
Capital equipment | 32 | 32 | 27 | | | | ||||||||||||||||||||||||||
Corporate and Other |
Other | 9 | 7 | | 14 | 13 | 4 | ||||||||||||||||||||||||||
Total | $ | 838 | $ | 781 | $ | 147 | $ | 277 | $ | 234 | $ | 43 | |||||||||||||||||||||
(1) | Finance receivables collateralized primarily by timeshare notes receivable may also be collateralized by certain real estate and other assets of our borrowers. |
The increase in nonaccrual finance receivables is primarily
attributable to the lack of liquidity available to borrowers in
the Resort Finance segment, weaker general economic conditions
and weaker aircraft values in the Captive Finance segment. The
increase in Resort Finance included one $212 million
account, which is primarily collateralized by timeshare notes
receivable and several resort properties. The increase in
nonaccrual finance receivables and the allowance for losses on
impaired nonaccrual finance receivables in the Structured
Capital segment is due to a $32 million lease that is
secured by automobile manufacturing equipment.
The average recorded investment in impaired nonaccrual finance
receivables during the first nine months of 2009 was
$508 million compared to $121 million in the
corresponding period in 2008. The average recorded
11
Table of Contents
TEXTRON
FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited)
investment in impaired accrual finance receivables amounted to
$116 million in the first nine months of 2009 compared to
$38 million in the corresponding period in 2008.
Nonaccrual finance receivables resulted in Textron
Financials finance charges being reduced by
$36 million and $10 million in the first nine months
of 2009 and 2008, respectively, as no finance charges were
recognized using the cash basis method.
Note 7. | Other Assets |
September 30, |
January 3, |
|||||||||
2009 | 2009 | |||||||||
(In millions) | ||||||||||
Operating assets received in satisfaction of troubled finance
receivables
|
$ | 168 | $ | 84 | ||||||
Retained interests in securitizations
|
93 | 200 | ||||||||
Derivative financial instruments
|
80 | 133 | ||||||||
Investments in other marketable securities
|
74 | 95 | ||||||||
Repossessed assets and properties
|
74 | 70 | ||||||||
Other long-term investments
|
39 | 30 | ||||||||
Fixed assets net
|
25 | 24 | ||||||||
Other
|
27 | 63 | ||||||||
Total other assets
|
$ | 580 | $ | 699 | ||||||
Interest-only securities within retained interests in
securitizations were $3 million and $12 million at
September 30, 2009 and January 3, 2009, respectively.
Investments in other marketable securities represent investments
in notes receivable issued by timeshare securitization trusts.
We have classified these investments as held to maturity as
management has the intent and ability to hold them until
maturity. At September 30, 2009, unrealized losses on these
investments were $13 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.
Repossessed assets and properties are assets we intend to sell
in a relatively short period of time and are initially recorded
at the lower of net realizable value or the previous carrying
value of the related finance receivable. Subsequent declines in
fair value are recorded in Portfolio (losses) gains.
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
September 30, 2009 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 cash flows related to these assets,
net of investment made for capital improvements, are recorded in
Selling and administrative expenses.
12
Table of Contents
TEXTRON
FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited)
To conform with current presentation, $66 million of assets
previously classified as Other long-term investments and
$18 million of assets previously classified as Repossessed
assets and properties are now classified as Operating assets
received in satisfaction of troubled finance receivables as of
January 3, 2009.
Note 8. | Debt and Credit Facilities |
September 30, |
January 3, |
|||||||||
2009 | 2009 | |||||||||
(In millions) | ||||||||||
Short-term debt:
|
||||||||||
Commercial paper
|
$ | | $ | 743 | ||||||
Other short-term debt
|
| 25 | ||||||||
Total short-term debt
|
| 768 | ||||||||
Line of credit facility:
|
||||||||||
Due 2012 (0.91)%
|
1,740 | | ||||||||
Long-term debt:
|
||||||||||
Fixed-rate notes
|
||||||||||
Due 2009 (weighted-average rates of 5.84% and 5.62%,
respectively)
|
556 | 698 | ||||||||
Due 2010 (weighted-average rates of 4.79% and 4.82%,
respectively)
|
711 | 1,018 | ||||||||
Due 2011 (weighted-average rates of 5.03% and 5.04%,
respectively)
|
370 | 452 | ||||||||
Due 2012 (weighted-average rates of 4.43% and 4.43%,
respectively)
|
52 | 52 | ||||||||
Due 2013 (weighted-average rates of 5.19% and 5.19%,
respectively)
|
478 | 478 | ||||||||
Due 2014 and thereafter (weighted-average rates of 5.79% and
5.68%, respectively)
|
164 | 152 | ||||||||
Total fixed-rate notes
|
2,331 | 2,850 | ||||||||
Variable-rate notes
|
||||||||||
Due 2009 (weighted-average rates of 0.58% and 2.78%,
respectively)
|
199 | 836 | ||||||||
Due 2010 (weighted-average rates of 0.87% and 3.09%,
respectively)
|
1,255 | 1,297 | ||||||||
Due 2011 (weighted-average rates of 0.94% and 3.40%,
respectively)
|
206 | 275 | ||||||||
Due 2013 (weighted-average rates of 1.29% and 3.07%,
respectively)
|
100 | 100 | ||||||||
Total variable-rate notes
|
1,760 | 2,508 | ||||||||
Securitized on-balance sheet debt:
|
||||||||||
Amortization beginning 2009 (weighted-average rates of 1.32% and
3.90%, respectively)
|
443 | 853 | ||||||||
Subordinated debt:
|
||||||||||
Due 2017 and thereafter (6.00%)
|
300 | 300 | ||||||||
Unamortized discount
|
(2 | ) | (3 | ) | ||||||
Fair value adjustments
|
66 | 112 | ||||||||
Total long-term, securitized on-balance sheet and subordinated
debt
|
4,898 | 6,620 | ||||||||
Total debt
|
$ | 6,638 | $ | 7,388 | ||||||
The Company extinguished through open market transactions
$595 million of our medium term notes prior to maturity
during the first nine months ended September 30, 2009.
These transactions resulted in gains of $9 million and
$48 million for the three and nine months ended
September 30, 2009, respectively.
13
Table of Contents
TEXTRON
FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited)
On September 14, 2009, Textron Inc. and Textron Financial
Corporation announced separate cash tender offers for up to
$650 million aggregate principal amount of five separate
series of outstanding debt securities with maturity dates
ranging from November 2009 to June 2012. On October 13,
2009, Textron Financial Corporation extinguished
$319 million of its medium-term notes with maturity dates
ranging from 2009 to 2011 and will recognize a gain on these
early extinguishments of $8 million in the fourth quarter
of 2009.
Note 9. | Comprehensive (Loss) Income |
Comprehensive (loss) income is summarized below:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, |
September 30, |
September 30, |
September 30, |
|||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(In millions) |
||||||||||||||||
Net (loss) income
|
$ | (41 | ) | $ | 14 | $ | (160 | ) | $ | 49 | ||||||
Foreign currency translation, net of income taxes
|
3 | (22 | ) | 6 | (33 | ) | ||||||||||
Net deferred gain (loss) on retained interests, net of income
taxes of $4.2 million and income tax benefits of
$0.3 million, $0.5 million and $0.3 million,
respectively
|
8 | (1 | ) | (1 | ) | (1 | ) | |||||||||
Amortization of deferred losses on hedge contracts, net of
income taxes of $0.4 million and $0.4 million in 2008,
respectively
|
| 1 | | 1 | ||||||||||||
Net deferred gain on hedge contracts, net of income taxes of
$1.0 million, $1.1 million, $0.8 million and
$1.2 million, respectively
|
2 | 2 | 2 | 2 | ||||||||||||
Comprehensive (loss) income
|
$ | (28 | ) | $ | (6 | ) | $ | (153 | ) | $ | 18 | |||||
Note 10. | 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.
14
Table of Contents
TEXTRON
FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited)
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:
September 30, 2009 | ||||||||
(In millions) | ||||||||
Level 2 | Level 3 | |||||||
Derivative financial instruments, net
|
$ | 75 | $ | | ||||
Retained interests in securitizations
|
| 88 | ||||||
Total assets
|
$ | 75 | $ | 88 | ||||
Derivatives
The Companys 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 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 September 30, 2009 as most of our
counterparties are AA-rated and the vast majority of our
derivative instruments are in an asset position.
Retained
Interests in Securitizations
Retained interests represent the Companys subordinated
interest in finance receivables sold to qualified special
purpose trusts and include interest-only securities, seller
certificates, cash reserve accounts and servicing rights and
obligations. These retained interests are initially recorded at
the allocated carrying value, which is determined based on the
relative fair values of the finance receivables sold and the
interests retained. We estimate fair value upon the initial
recognition of the retained interest based on the present value
of expected future cash flows using our best estimates of key
assumptions credit losses, prepayment speeds,
forward interest rate yield curves and discount rates
commensurate with the risks involved. These inputs are
classified as Level 3 since they reflect our own judgment
regarding the assumptions market participants would use in
pricing these assets based on the best information available in
the circumstances as there is no active market for these assets.
We review the fair values of the retained interests quarterly
using a discounted cash flow model and updated assumptions, and
compare such amounts with the amortized cost basis. When a
change in fair value is deemed temporary, we record a
corresponding credit or charge to Other comprehensive income for
any unrealized gains or losses. If a decline in the fair value
is determined to be
other-than-temporary,
we record a corresponding charge to income for the credit
component and to Other comprehensive income for other components
of the difference between fair value and the amortized cost
basis. The credit component is determined based on the
difference between the present value of the current projected
cash flows and the projected cash flows at the time of the last
recognized impairment, at a discount rate equivalent to the rate
used to accrete the retained interests. The remaining difference
between fair value and the amortized cost basis is attributable
to market discount rates. Changes in the assumptions utilized
can have a significant impact on the valuation as described in
Note 12. Receivable Securitizations. During the nine months
ended September 30, 2009, we recorded a $26 million
impairment charge to Securitization (losses) gains on the
retained interests, including interest-only securities
associated with the Distribution Finance revolving
securitization.
15
Table of Contents
TEXTRON
FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited)
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 the three and nine month periods
ended September 30, 2009 and September 30, 2008:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, |
September 30, |
September 30, |
September 30, |
|||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(In millions) | ||||||||||||||||
Retained Interests in Securitizations
|
||||||||||||||||
Balance, beginning of period
|
$ | 3 | $ | 53 | $ | 12 | $ | 43 | ||||||||
Transfers from nonrecurring classification
|
110 | | 110 | | ||||||||||||
Net gains for the period:
|
||||||||||||||||
Increase due to securitization gains on sale of finance
receivables
|
| 17 | | 59 | ||||||||||||
Change in value recognized in Other income
|
| 1 | | 2 | ||||||||||||
Change in value recognized in Other comprehensive Income
|
12 | | 11 | | ||||||||||||
Impairments recognized in earnings
|
| (5 | ) | (8 | ) | (5 | ) | |||||||||
Collections, net
|
(37 | ) | (18 | ) | (37 | ) | (51 | ) | ||||||||
Balance, end of period
|
$ | 88 | $ | 48 | $ | 88 | $ | 48 | ||||||||
Assets
Recorded at Fair Value on a Nonrecurring Basis
The table below presents the assets measured at fair value on a
nonrecurring basis categorized by the level of inputs used in
the valuation of each asset:
September 30, 2009 | ||||
(In millions) | ||||
(Level 3) | ||||
Finance receivables held for sale
|
$ | 998 | ||
Impaired finance receivables
|
532 | |||
Repossessed assets and properties
|
37 | |||
Operating assets received in satisfaction of troubled finance
receivables
|
6 | |||
Total assets
|
$ | 1,573 | ||
Finance
Receivables Held for Sale
Finance receivables held for sale are recorded at the lower of
cost or fair value. As a result of the Companys plan to
exit portions of our commercial finance business through a
combination of orderly liquidation of finance receivables as
they mature and selected sales, $998 million of finance
receivables have been classified as held for sale as of
September 30, 2009. The finance receivables held for sale
as of September 30, 2009 primarily include asset-based
revolving lines of credit, dealer inventory financing and golf
mortgages. The majority of the finance receivables held for sale
were identified at the individual loan level. Golf and resort
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. 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 the fair value of the finance receivables
held for sale was $4 million and $16 million during
the three and nine months ended September 30, 2009,
respectively. See Note 6. Finance Receivables Held for
Investment
16
Table of Contents
TEXTRON
FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited)
regarding the change in classification of certain finance
receivables from held for sale to held for investment during the
first nine months of 2009.
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
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 are included in the table above
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 quarter
and nine months ended September 30, 2009 on impaired
finance receivables resulted in a $26 million and
$143 million charge, respectively, to Provision for losses
in the Consolidated Statement of Operations, and were primarily
related to initial fair value adjustments.
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 nine months ended
September 30, 2009, charges on these assets totaled
$6 million and $28 million, respectively, and were
recorded in Portfolio (losses) gains in the Consolidated
Statement of Operations.
17
Table of Contents
TEXTRON
FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited)
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:
September 30, 2009 | January 3, 2009 | |||||||||||||||
Carrying |
Estimated |
Carrying |
Estimated |
|||||||||||||
Value | Fair Value | Value | Fair Value | |||||||||||||
(In millions) | ||||||||||||||||
Assets:
|
||||||||||||||||
Installment contracts
|
$ | 2,361 | $ | 2,151 | $ | 2,748 | $ | 2,408 | ||||||||
Revolving loans
|
1,086 | 814 | 1,170 | 986 | ||||||||||||
Golf course and resort mortgages
|
1,051 | 909 | 1,150 | 931 | ||||||||||||
Distribution finance receivables
|
443 | 431 | 597 | 503 | ||||||||||||
Investment in other marketable securities
|
74 | 61 | 95 | 78 | ||||||||||||
Retained interests in securitizations, excluding interest-only
securities
|
5 | 5 | 188 | 178 | ||||||||||||
$ | 5,020 | $ | 4,371 | $ | 5,948 | $ | 5,084 | |||||||||
Liabilities:
|
||||||||||||||||
Fixed-rate debt
|
$ | 2,395 | $ | 2,292 | $ | 2,959 | $ | 2,518 | ||||||||
Variable-rate debt
|
1,760 | 1,726 | 2,508 | 2,292 | ||||||||||||
Bank line of credit
|
1,740 | 1,659 | | | ||||||||||||
Securitized on-balance sheet debt
|
443 | 427 | 853 | 824 | ||||||||||||
Subordinated debt
|
300 | 195 | 300 | 105 | ||||||||||||
Short-term debt
|
| | 768 | 768 | ||||||||||||
Amounts due to Textron Inc.
|
47 | 45 | 161 | 156 | ||||||||||||
$ | 6,685 | $ | 6,344 | $ | 7,549 | $ | 6,663 | |||||||||
At September 30, 2009, retained interests in
securitizations totaling $88 million were recorded at fair
value on a recurring basis and, accordingly, are not reflected
in the table above.
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
finance leases, leveraged leases and operating leases
($431 million, $359 million and $220 million,
respectively, at September 30, 2009 and $608 million,
$459 million and $247 million, respectively, at
January 3, 2009), 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.
18
Table of Contents
TEXTRON
FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited)
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 cost.
The estimate of fair value was based on observable market inputs
for similar securitization interests in markets that are
currently inactive.
Debt
At September 30, 2009 and January 3, 2009, 61% and
82%, respectively, of the fair value of term debt was determined
based on observable market transactions. The remaining 39% and
18%, respectively, was determined based on discounted cash flow
analyses using observable market inputs from debt with similar
duration, subordination and credit default expectations. The
fair values of short-term borrowings are assumed to approximate
their carrying values.
Note 11. | 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, foreign currency exchange agreements and interest
rate cap and floor agreements. The Company does not hold or
issue derivative financial instruments for trading or
speculative purposes. The Company recorded a $2 million
gain in earnings during the first nine months of 2009 as a
result of the ineffectiveness of an interest rate exchange
agreement. 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 nine months of 2008. The fair values of derivative
instruments are included in either Other assets or Accrued
interest and other liabilities in the Consolidated Balance
Sheets.
19
Table of Contents
TEXTRON
FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited)
The following table summarizes the Companys derivative
activities relating to qualifying hedges of interest rate risk
and foreign currency exposure as of September 30, 2009 and
January 3, 2009.
Notional Amount |
Fair Value Amount |
|||||||||||||||||||||||
Assets | Liabilities | |||||||||||||||||||||||
September 30, |
January 3, |
September 30, |
January 3, |
September 30, |
January 3, |
|||||||||||||||||||
2009 | 2009 | 2009 | 2009 | 2009 | 2009 | |||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Fair Value Hedges
|
||||||||||||||||||||||||
Interest Rate Exchange Agreements
|
||||||||||||||||||||||||
Fixed-rate debt
|
$ | 1,361 | $ | 2,055 | $ | 51 | $ | 112 | $ | | $ | | ||||||||||||
Fixed-rate receivable
|
329 | 32 | | | (4 | ) | (7 | ) | ||||||||||||||||
Net Investment Hedges
|
||||||||||||||||||||||||
Foreign Currency Forward Exchange Agreements
|
||||||||||||||||||||||||
Foreign-dollar functional currency subsidiary equity
|
82 | 139 | 2 | | | | ||||||||||||||||||
Cash Flow Hedges
|
||||||||||||||||||||||||
Cross-Currency Interest Rate Exchange Agreements
|
||||||||||||||||||||||||
Foreign-dollar denominated variable-rate debt
|
140 | 140 | 24 | 21 | | | ||||||||||||||||||
Foreign-dollar denominated variable-rate receivable
|
4 | 5 | | | (1 | ) | (1 | ) | ||||||||||||||||
$ | 1,916 | $ | 2,371 | $ | 77 | $ | 133 | $ | (5 | ) | $ | (8 | ) | |||||||||||
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.
The following table summarizes the Companys derivatives
relating to interest rate risk and foreign currency exposure,
which have not been designated in hedge relationships as of
September 30, 2009 and January 3, 2009:
Notional Amount |
Fair Value Amount |
|||||||||||||||||||||||
Assets | Liabilities | |||||||||||||||||||||||
September 30, |
January 3, |
September 30, |
January 3, |
September 30, |
January 3, |
|||||||||||||||||||
2009 | 2009 | 2009 | 2009 | 2009 | 2009 | |||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Foreign currency forward exchange agreements
|
$ | 513 | $ | 536 | $ | 3 | $ | | $ | | $ | | ||||||||||||
Interest rate exchange agreements
|
| 336 | | | | (13 | ) | |||||||||||||||||
$ | 513 | $ | 872 | $ | 3 | $ | | $ | | $ | (13 | ) | ||||||||||||
20
Table of Contents
TEXTRON
FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited)
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. Gains and losses related to these instruments are
naturally offset by the translation of the related foreign
currency denominated assets and liabilities.
Textron Financial also enters into
back-to-back
interest rate exchange agreements and interest rate caps in
relation to asset-backed securitizations, which are not included
in the preceding table. Since these instruments are utilized by
Textron Financial to facilitate the securitization transaction,
rather than mitigate risk, and are designed to have an equal and
offsetting impact to the Company, they are not designated in
hedging relationships.
The effect of derivative instruments in the Consolidated
Statements of Operations for the three and nine months ended
September 30, 2009 and 2008 is as follows:
Amount of Gain/(Loss) | ||||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||||
September 30, |
September 30, |
September 30, |
September 30, |
|||||||||||||||
Gain/(Loss) Location | 2009 | 2008 | 2009 | 2008 | ||||||||||||||
(In millions) | ||||||||||||||||||
Fair Value Hedges
|
||||||||||||||||||
Interest rate exchange agreements
|
Interest expense | $ | 2 | $ | 14 | $ | (13 | ) | $ | 27 | ||||||||
Interest rate exchange agreements
|
Finance charges | 2 | | 8 | (1 | ) | ||||||||||||
Non-designated Hedges
|
||||||||||||||||||
Interest rate exchange agreements
|
Other income | $ | | $ | | $ | 1 | $ | | |||||||||
Foreign currency forward
|
Selling and | |||||||||||||||||
exchange agreements
|
administrative expenses | (30 | ) | | (82 | ) | (3 | ) | ||||||||||
Note 12. | Receivable Securitizations |
As of September 30, 2009, we have one significant
off-balance sheet financing arrangement. The Distribution
Finance revolving securitization trust is a master trust that
purchases inventory finance receivables from the Company and
issues asset-backed notes to investors. These finance
receivables typically have short durations, which result in
significant collections of previously purchased finance
receivables and significant additional purchases of replacement
finance receivables from the Company on a monthly basis.
Proceeds from securitizations in the table below include amounts
received related to the incremental increase in the issuance of
asset-backed notes to investors, and exclude amounts received
related to the ongoing replenishment of the outstanding sold
balance of these short-duration finance receivables.
The table below summarizes net pre-tax (losses) gains, including
impairments recognized and certain cash flows received from and
paid to the Distribution Finance revolving securitization trust
during the three and nine months ended September 30, 2009
and September 30, 2008, respectively.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, |
September 30, |
September 30, |
September 30, |
|||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(In millions) | ||||||||||||||||
Net pre-tax (losses) gains, including impairments
|
$ | | $ | 10 | $ | (27 | ) | $ | 40 | |||||||
Proceeds from securitizations
|
| | | 250 | ||||||||||||
Cash flows received on retained interests
|
75 | 15 | 117 | 44 | ||||||||||||
Servicing fees received
|
3 | 8 | 18 | 25 | ||||||||||||
21
Table of Contents
TEXTRON
FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited)
The Company had $103 million and $191 million of
retained interests associated with $775 million and
$2.2 billion of finance receivables in the Distribution
Finance securitization trust as of September 30, 2009 and
January 3, 2009, respectively. The trust had
$978 million of asset-backed notes outstanding as of
September 30, 2009, of which $103 million represent
our retained interests. In connection with the maturity of the
notes, the trust accumulated $203 million of cash during
the third quarter of 2009 from collections of finance
receivables. This cash, combined with cash accumulated during
the first eight days of October 2009, was utilized to repay
$240 million of the notes of third-party investors in
October 2009. Due to required amortization and accumulation
periods associated with the scheduled maturity of the remaining
asset-backed notes, the trusts revolving period ended in
the third quarter of 2009. As of October 2009, due to a
change in required cash distributions, the trust will be
consolidated.
In March 2009, the FASB issued new accounting guidance regarding
the recognition and presentation of
other-than-temporary
impairments, which we adopted in the second quarter of 2009.
This guidance amends the
other-than-temporary
impairment criteria associated with marketable debt securities
and beneficial interests in securitized financial assets. It
requires that an entity evaluate for and record an
other-than-temporary
impairment when it concludes that it does not intend to sell an
impaired security and does not believe it likely that it will be
required to sell the security before recovery of the amortized
cost basis, regardless of the entitys positive intent and
ability to hold the asset to maturity. Once an entity has
determined that an
other-than-temporary
impairment has occurred, it is required to record the credit
loss component of the difference between the securitys
amortized cost basis and the estimated fair value in earnings,
whereas the remaining difference is to be recognized as a
component of Other comprehensive income and amortized over the
remaining life of the security.
In the second quarter of 2009, we determined that our retained
interests in the Distribution Finance securitization were
other-than-temporarily
impaired and recorded an
other-than-temporary
impairment charge of $31 million. A summary of the
other-than-temporary
impairments recognized during the nine months ended
September 30, 2009, including those recognized under
previous generally accepted accounting principles is as follows:
Nine Months Ended | ||||
September 30, |
||||
2009 | ||||
(In millions) | ||||
Total
other-than-temporary
impairment
|
$ | (39 | ) | |
Portion of
other-than-temporary
impairment recognized in Other comprehensive income, before
income taxes
|
13 | |||
Net
other-than-temporary
impairment recognized in earnings
|
$ | (26 | ) | |
The amortized cost basis of our retained interests is
$86 million at September 30, 2009, which represents
our maximum loss exposure. The component of the
other-than-temporary
impairment recorded in earnings is primarily due to credit
losses and the portion recognized in other comprehensive income
is attributable to an increase in market discount rates.
At September 30, 2009, the key economic assumptions used in
measuring the retained interests related to the Distribution
Finance revolving securitization and the potential additional
losses based on the sensitivity of these assumptions are
presented below.
Assumptions at |
||||||||||||
September 30, |
25% Adverse |
50% Adverse |
||||||||||
2009 | Change | Change | ||||||||||
(Dollars in millions) | ||||||||||||
Expected credit losses (annual rate)
|
4.98 | % | $ | (8 | ) | $ | (16 | ) | ||||
Monthly payment rate
|
12.5 | % | (4 | ) | (7 | ) | ||||||
Residual cash flows discount rate
|
10.1 | % | (4 | ) | (8 | ) | ||||||
22
Table of Contents
TEXTRON
FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited)
Net charge-offs as a percentage of distribution finance
receivables were 4.89% and 1.94% for the nine months ended
September 30, 2009 and twelve months ended January 3,
2009, respectively. The 60+ days contractual delinquency
percentage for distribution finance receivables were 6.36% and
2.08% at September 30, 2009 and January 3, 2009,
respectively.
Note 13. | Income Taxes |
A reconciliation of the federal statutory income tax rate to the
effective income tax rate is provided below:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, |
September 30, |
September 30, |
September 30, |
|||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Federal statutory income tax rate
|
(35.0 | )% | 35.0 | % | (35.0 | )% | 35.0 | % | ||||||||
Increase (decrease) in taxes resulting from:
|
||||||||||||||||
State income taxes
|
(4.8 | ) | (1.6 | ) | (2.4 | ) | 8.0 | |||||||||
Foreign tax rate differential
|
0.9 | (6.6 | ) | (0.1 | ) | (6.3 | ) | |||||||||
Canadian dollar functional currency
|
| 0.1 | | 0.1 | ||||||||||||
Change in state valuation allowance
|
7.4 | | 1.8 | (15.3 | ) | |||||||||||
Tax contingencies
|
2.5 | (4.2 | ) | 1.8 | 15.3 | |||||||||||
Tax credits
|
(1.0 | ) | (7.1 | ) | (0.8 | ) | (4.0 | ) | ||||||||
Change in status of foreign subsidiary
|
(3.0 | ) | | 2.3 | | |||||||||||
Other, net
|
0.5 | 3.6 | 0.2 | (0.4 | ) | |||||||||||
Effective income tax rate
|
(32.5 | )% | 19.2 | % | (32.2 | )% | 32.4 | % | ||||||||
For the three months ended September 30, 2009, the
difference between the statutory rate and the effective tax rate
is primarily attributable to the benefit for state taxes and a
decrease in estimate of the taxable amount of a distribution
from the Companys wholly-owned Canadian subsidiary, offset
by a change in managements assessment of the amount of the
state deferred tax asset that is realizable and interest on tax
contingencies, the majority of which is associated with
leveraged leases.
For the nine months ended September 30, 2009, the
difference between the statutory rate and the effective tax rate
is primarily attributable to the benefit for state taxes, offset
by an increase in estimate of the taxable amount of a
distribution from the Companys wholly-owned Canadian
subsidiary, a change in managements assessment of the
amount of the state deferred tax asset that is realizable, and
tax contingencies, the majority of which is associated with
leveraged leases.
For the three months ended September 30, 2008, the
difference between the statutory tax rate and the effective tax
rate is primarily attributable to tax credits, the effects of
events related to cross border financing, and interest on tax
contingencies, the majority of which is associated with
leveraged leases.
For the nine months ended September 30, 2008, the
difference between the statutory tax rate and the effective tax
rate is primarily attributable to a change in managements
assessment of the amount of the state deferred tax asset that is
realizable and the effects of events related to cross border
financing, offset by state taxes and interest on tax
contingencies, the majority of which is associated with
leveraged leases.
Note 14. | 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.
23
Table of Contents
TEXTRON
FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited)
Note 15. | Financial Information about Operating Segments |
The Company operates in six segments aggregated based on similar
product types or industries: Asset-Based Lending, Captive
Finance, Distribution Finance, Golf Mortgage Finance, Resort
Finance and Structured Capital. In addition, the Company
maintains a Corporate and Other segment that includes other
liquidating portfolios, unallocated Corporate expenses and the
impact of recurring charges to both the held for investment and
held for sale valuation allowances on the Consolidated
Statements of Operations.
As described in Note 1. Basis of Presentation, during the
second quarter of 2009 the Company made a change to consolidate
the management of the portion of the Golf Finance segment that
finances customer purchases of
E-Z-GO golf
cars and Jacobsen turf-care equipment with the Aviation Finance
segment to form a new Captive Finance segment. The Company will
continue to originate new customer relationships and finance
receivables in the Captive Finance segment. The segment
information in the table below has been recast to conform with
this modification to the Captive Finance and Golf Mortgage
Finance segments.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, |
September 30, |
September 30, |
September 30, |
|||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(In millions) | ||||||||||||||||
Revenues:
|
||||||||||||||||
Captive Finance
|
$ | 37 | $ | 56 | $ | 132 | $ | 176 | ||||||||
Resort Finance
|
21 | 32 | 73 | 98 | ||||||||||||
Golf Mortgage Finance
|
6 | 19 | 28 | 61 | ||||||||||||
Asset-Based Lending
|
5 | 18 | 25 | 55 | ||||||||||||
Structured Capital
|
(18 | ) | 7 | (28 | ) | 7 | ||||||||||
Distribution Finance
|
| 49 | 4 | 174 | ||||||||||||
Corporate and Other
|
20 | 3 | 45 | 4 | ||||||||||||
Total revenues
|
$ | 71 | $ | 184 | $ | 279 | $ | 575 | ||||||||
Segment (loss) income:(1)(2)
|
||||||||||||||||
Captive Finance
|
$ | (19 | ) | $ | 14 | $ | (63 | ) | $ | 50 | ||||||
Resort Finance
|
| 11 | (21 | ) | 41 | |||||||||||
Golf Mortgage Finance
|
(14 | ) | | (30 | ) | | ||||||||||
Asset-Based Lending
|
1 | 1 | 10 | (7 | ) | |||||||||||
Structured Capital
|
(15 | ) | 4 | (64 | ) | (2 | ) | |||||||||
Distribution Finance
|
(27 | ) | (13 | ) | (79 | ) | (4 | ) | ||||||||
Corporate and Other
|
10 | 1 | 18 | (5 | ) | |||||||||||
Segment (loss) income
|
$ | (64 | ) | $ | 18 | $ | (229 | ) | $ | 73 | ||||||
Special charges
|
1 | | 9 | | ||||||||||||
(Loss) income before income taxes and noncontrolling
interest
|
$ | (65 | ) | $ | 18 | $ | (238 | ) | $ | 73 | ||||||
24
Table of Contents
TEXTRON
FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited)
September 30, |
January 3, |
|||||||
2009 | 2009 | |||||||
(In millions) | ||||||||
Finance assets:(3)
|
||||||||
Captive Finance
|
$ | 3,236 | $ | 3,668 | ||||
Resort Finance
|
1,623 | 1,727 | ||||||
Golf Mortgage Finance
|
1,029 | 1,173 | ||||||
Distribution Finance
|
955 | 1,389 | ||||||
Structured Capital
|
529 | 603 | ||||||
Asset-Based Lending
|
240 | 649 | ||||||
Corporate and Other
|
48 | 90 | ||||||
Total finance assets
|
$ | 7,660 | $ | 9,299 | ||||
(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 allocated matches all variable-rate finance assets with variable-rate debt costs and all fixed-rate finance assets with fixed-rate debt costs. Due to our significant difficulty in accessing the capital markets, the interest rate is partially determined using a theoretical approach. If this allocation results in greater or less interest expense than was actually incurred by the Company, the remaining balance is included in the Corporate and Other segments interest expense. This resulted in the allocation of $9 million and $26 million of interest expense to the six operating segments in excess of the interest expense actually incurred by the Company for the three and nine months ended September 30, 2009, respectively. | |
(2) | Due to managements decision to downsize the commercial finance business of Textron Financial and the resulting variations in personnel levels and job responsibilities, indirect expenses are no longer being allocated to each segment. These indirect expenses of $15 million and $47 million for the three and nine months ended September 30, 2009, respectively, were aggregated in the Corporate and Other segment. Prior to 2009, indirect expenses were allocated to each segment based on the use of such resources and were based primarily upon the segments proportion of net investment in finance assets, headcount, number of transactions, computer resources and senior management time. | |
(3) | Finance assets include: finance receivables; equipment on operating leases, net of accumulated depreciation; repossessed assets and properties; operating assets received in satisfaction of troubled finance receivables; retained interests in securitizations; investment in equipment residuals; acquisition, development and construction arrangements; investments in other marketable securities and other short- and long-term investments (some of which are classified in Other assets on Textron Financials Consolidated Balance Sheets). |
25
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 3, 2009 and those
additional and updated risk factors discussed in our Quarterly
Report on
Form 10-Q
for the fiscal quarter ended March 31, 2009, 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 |
Key
Business Initiatives and Trends
On December 22, 2008, due to continued weakness in the
economy and in order to address Textrons long-term
liquidity position, Textron announced a plan to exit all of the
commercial finance business of Textron Financial, other than
that portion of the business supporting the financing of
customer purchases of products which Textron manufactures. The
current exit plan applies to $4.8 billion of managed
finance receivables within our $7.8 billion managed finance
receivable portfolio. The exit plan will be effected through a
combination of orderly liquidation and selected sales and is
expected to be substantially complete over the next two to three
years. The portion of the business supporting the financing of
customer purchases of products which Textron manufactures is
primarily operated within our Captive Finance segment. The
Captive Finance segment was established during the second
quarter of 2009 based on the management consolidation of the
Aviation Finance segment and the portion of the Golf Finance
segment that finances customer purchases of
E-Z-GO golf
cars and Jacobsen turf-care equipment.
We achieved $3.0 billion of managed finance receivable
reductions during the first nine months of 2009. These managed
finance receivable reductions occurred in all six of our
operating segments, but were primarily driven by a
$1.7 billion (52%) reduction in Distribution Finance, a
$409 million (63%) reduction in Asset-Based Lending and a
$201 million (17%) reduction in Golf Mortgage Finance.
These reductions resulted from the combination of scheduled
finance receivable collections, discounted payoffs of loans,
sales of assets, repossession of collateral and charge-offs. The
Distribution Finance receivable reduction includes a
$418 million (71%) decrease in marine floorplan finance
receivables. These collections were aided by discount programs
which encouraged borrowers to liquidate inventory and resulted
in $40 million of our Portfolio losses for the first nine
months of the year. The reduction in Asset-Based Lending also
included a sale of $109 million of finance receivables at
their carrying value. In both Distribution Finance and
Asset-Based Lending, a significant amount of the reduction also
resulted from the transition of borrowers with revolving lines
of credit to new lenders. Repossession, foreclosure or the
maturity of leveraged leases with residual values represented
$289 million of the managed finance receivable reduction.
However, we also generated $201 million from the collection
or sale of these assets and other investments during the first
nine months of the year.
Our $3.0 billion reduction in managed finance receivables
also included $425 million of liquidations in the Captive
portfolio primarily as a result of reduced loan and lease
originations. The reduction in originations resulted from lower
Cessna Aircraft Company sales, no longer originating non-captive
aircraft loans and leases and the agreement signed by Textron in
the second quarter of 2009 with a subsidiary of The PNC
Financial Services Group to become a provider of financing for a
portion of the sales of
E-Z-GO golf
cars. In July, 2009, a newly formed, wholly-owned finance
subsidiary of Textron entered into a $500 million credit
facility with the Export-Import Bank of the United States. This
facility provides funding for the financing of sales of Cessna
Aircraft Company and Bell Helicopter products to
non-U.S. buyers
and is expected to reduce our originations in future periods. We
will continue to service loans and finance leases as servicer
for the new Textron finance subsidiary and have provided a full
guarantee of the debt obligations under this facility.
As a result of the plan to reduce finance receivables,
$2.9 billion of the managed liquidating receivables were
designated for sale or transfer in December 2008, of which
$1.2 billion were securitized finance receivables and
$1.7 billion were owned assets classified as held for sale.
As of September 30, 2009, $1.4 billion of managed
finance receivables are designated for sale, of which
$429 million are securitized receivables and approximately
$1.0 billion are owned assets classified as held for sale.
The $109 million sale of Asset-Based Lending receivables
represents the
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Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued) |
only significant sale in excess of $50 million during the
first nine months of the year, however we have sold several
other individual and small groups of loans and continue to see
interest in many of the portfolios classified as held for sale.
Following an effort to market the portfolios held for sale in
the first six months of 2009, and the progress made in
liquidating our portfolios, we decided that we will be able to
maximize the economic value of a portion of the finance
receivables held for sale through orderly liquidation rather
than selling the portfolios. Accordingly, since we intended to
hold a portion of these finance receivables for the foreseeable
future, we reclassified $719 million, net of a
$178 million valuation allowance, from the held for sale
classification to held for investment in the second quarter of
2009.
In the third quarter of 2009, we received unanticipated
inquiries to purchase receivable portfolios classified as held
for investment. Due to the nature of these inquiries, we
determined a sale of these portfolios would be consistent with
our goal to maximize the economic value of our portfolio and
accelerate cash collections. As a result, $313 million, net
of a $40 million valuation allowance, of the finance
receivables reclassified from held for sale to held for
investment in the second quarter of 2009 were reclassified as
held for sale in the third quarter of 2009 and $108 million
of additional finance receivables, net of a $3 million
valuation allowance, were also classified as held for sale.
Portfolio quality statistics weakened during the first nine
months of 2009. Nonaccrual finance receivables increased to
$838 million (13.98% as a percentage of finance receivables
held for investment) as of September 30, 2009 from
$277 million (4.01% as a percentage of finance receivables
held for investment) as of January 3, 2009 and 60+ day
delinquency as a percentage of finance receivables held for
investment increased to 7.38% as of September 30, 2009 from
2.59% as of January 3, 2009. This deterioration was most
significant in Resort Finance and the aircraft portfolio within
Captive Finance. We expect the percentages of nonaccrual finance
receivables and delinquency to continue to deteriorate in
subsequent quarters as a result of continued difficult general
economic conditions, the lack of liquidity for borrowers in many
of the industries represented in our portfolios and the
continued implementation of our plan to downsize our non-captive
commercial finance portfolios. We expect the percentage of
nonaccrual finance receivables and delinquency to increase more
substantially than the absolute dollars of nonaccrual and
delinquent accounts since we expect nonaccrual finance
receivables to liquidate more slowly than our performing finance
receivables. As a result of this continued trend, the Allowance
for losses on finance receivables held for investment has
increased $111 million as compared to January 3, 2009.
We measure the success of our exit plan based on the percentage
of finance receivable and other finance asset reductions
converted to cash. This ratio measures the portion of
liquidations derived through cash collection and excludes the
portion derived from charge-offs, discounted payoffs, losses on
sale and impairment charges. During the first nine months of
2009, we have achieved a 94% cash conversion ratio. We expect
this ratio to decline over the duration of our exit plan due to
the slower pace of liquidations associated with nonaccrual
finance receivables.
Financial
Condition
Liquidity
and Capital Resources
Textron Financial has historically mitigated liquidity risk
(i.e., the risk that we will be unable to fund maturing
liabilities or the origination of new finance receivables) by
developing and preserving reliable sources of capital. We have
traditionally used a variety of financial resources to meet
these capital needs. Cash has been provided from finance
receivable collections, sales and securitizations, as well as
the issuance of commercial paper and term debt in the public and
private markets. We have historically utilized both our
$1.75 billion committed bank credit lines and
Textrons $1.25 billion committed bank credit line to
support the issuance of commercial paper. We also borrow
available cash from Textron when it is in the collective
economic interest of Textron Financial and Textron.
Due to the ongoing reduced availability of our traditional
sources of liquidity, we expect to substantially rely on cash
from finance receivable collections to fund maturing debt
obligations. Under the exit plan, we originally expected to
liquidate at least $2.6 billion of managed finance
receivables, net of originations, in 2009, and expected
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Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued) |
to use approximately $2.0 billion of proceeds from
liquidations to pay maturing securitized off-balance sheet debt.
During the first nine months of 2009, we liquidated
$3.0 billion of managed finance receivables, net of
originations, and used approximately $1.2 billion of
liquidation proceeds to pay securitized off-balance sheet debt.
We now expect to reduce managed finance receivables by at least
$3.4 billion, net of originations, in 2009.
On February 3, 2009, we borrowed the $1.74 billion
available balance of the $1.75 billion committed bank
credit line. Textron also borrowed the available balance of its
$1.25 billion committed bank credit line. A portion of
these borrowings were utilized to repay the $743 million of
commercial paper outstanding as of January 3, 2009. The
remaining cash is being utilized to repay portions of our
maturing term debt. Our bank credit line provides funding at
favorable borrowing spreads to LIBOR and has reduced our
interest expense as compared to the borrowing spreads we had
been achieving on commercial paper issuances. Amounts borrowed
under the credit facilities are due in April 2012.
Due to the progress made reducing our managed finance
receivables and the availability of cash from the credit line,
we extinguished through open market transactions
$595 million of our medium term notes prior to maturity
during the nine month period ended September 30, 2009,
resulting in gains of $48 million for the nine month period.
On September 14, 2009, Textron Inc. and Textron Financial
Corporation announced separate cash tender offers for up to
$650 million aggregate principal amount of five separate
series of outstanding debt securities with maturity dates
ranging from November 2009 to June 2012. On October 13,
2009, Textron Financial Corporation extinguished
$319 million of its medium-term notes with maturity dates
ranging from 2009 to 2011 and recognized a gain on these early
extinguishments of $8 million. We intend to continually
evaluate opportunities to strategically repurchase our
outstanding debt if it is in our economic interest, depending on
our cash needs and market conditions.
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Table of Contents
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued) |
The following table summarizes Textron Financials
contractual payments and receipts, including all managed finance
receivables and both on- and off-balance sheet funding sources
as of September 30, 2009, for the specified periods:
Payments / Receipts Due by Period | ||||||||||||||||||||||||||||
Less than |
1-2 |
2-3 |
3-4 |
4-5 |
More than |
|||||||||||||||||||||||
1 Year | Years | Years | Years | Years | 5 Years | Total | ||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||
Payments due:
|
||||||||||||||||||||||||||||
Multi-year credit facilities
|
$ | | $ | | $ | 1,740 | $ | | $ | | $ | | $ | 1,740 | ||||||||||||||
Term debt
|
2,389 | 886 | 53 | 578 | 131 | 54 | 4,091 | |||||||||||||||||||||
Securitized on-balance sheet debt
|
57 | 61 | 85 | 62 | 60 | 118 | 443 | |||||||||||||||||||||
Subordinated debt
|
| | | | | 300 | 300 | |||||||||||||||||||||
Securitized off-balance sheet debt
|
879 | 3 | | | | 31 | 913 | |||||||||||||||||||||
Interest payments on debt
|
115 | 69 | 53 | 36 | 28 | 67 | 368 | |||||||||||||||||||||
Operating lease rental payments
|
4 | 4 | 2 | 1 | 1 | | 12 | |||||||||||||||||||||
Total payments due
|
3,444 | 1,023 | 1,933 | 677 | 220 | 570 | 7,867 | |||||||||||||||||||||
Cash and contractual receipts:
|
||||||||||||||||||||||||||||
Finance receivable receipts held for investment
|
1,227 | 1,219 | 1,008 | 733 | 401 | 1,491 | 6,079 | |||||||||||||||||||||
Finance receivable receipts held for sale
|
418 | 297 | 160 | 173 | 51 | 27 | 1,126 | |||||||||||||||||||||
Securitized off-balance sheet finance receivable and cash
receipts
|
982 | 3 | | | | 31 | 1,016 | |||||||||||||||||||||
Interest receipts on finance receivables
|
406 | 299 | 212 | 151 | 109 | 186 | 1,363 | |||||||||||||||||||||
Operating lease rental receipts
|
25 | 20 | 16 | 10 | 6 | 14 | 91 | |||||||||||||||||||||
Total contractual receipts
|
3,058 | 1,838 | 1,396 | 1,067 | 567 | 1,749 | 9,675 | |||||||||||||||||||||
Cash
|
616 | | | | | | 616 | |||||||||||||||||||||
Total cash and contractual receipts
|
3,674 | 1,838 | 1,396 | 1,067 | 567 | 1,749 | 10,291 | |||||||||||||||||||||
Net cash and contractual receipts (payments)
|
$ | 230 | $ | 815 | $ | (537 | ) | $ | 390 | $ | 347 | $ | 1,179 | $ | 2,424 | |||||||||||||
Cumulative net cash and contractual receipts
|
$ | 230 | $ | 1,045 | $ | 508 | $ | 898 | $ | 1,245 | $ | 2,424 | ||||||||||||||||
This liquidity profile, combined with the excess cash generated
by our borrowing under the committed credit facility, is an
indicator of our ability to repay outstanding funding
obligations, assuming contractual collection of finance
receivables and absent access to new sources of liquidity or
origination of additional finance receivables. This profile
excludes cash which may be generated by the disposal of
operating lease residual assets and Other assets in addition to
cash which may be used to pay future income taxes and Accrued
interest and other liabilities.
Finance receivable receipts are based on contractual cash flows.
These amounts could differ due to sales, prepayments,
charge-offs and other factors, including the inability of
borrowers to repay the balance of the loan at the contractual
maturity date. Finance receivable receipts on the held for sale
portfolio represent the contractual balance of the finance
receivables and therefore exclude the potential negative impact
from selling the portfolio at the estimated fair value. Interest
payments and receipts in the table above reflect the current
interest rate paid or received on the related debt and finance
receivables. They do not include anticipated changes in either
market
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Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued) |
interest rates or changes in borrower performance, which could
have an impact on the interest rate according to the terms of
the related debt or finance receivable contract.
Securitized on-balance sheet and securitized off-balance sheet
debt payments are based on the contractual receipts of the
underlying finance receivables. These payments do not represent
contractual obligations of the Company and we do not provide
legal recourse to investors that purchase interests in Textron
Financials securitizations beyond the credit enhancement
inherent in the retained subordinate interests. Securitized
off-balance sheet finance receivable and cash receipts include
$203 million of cash collections accumulated in the
Distribution Finance revolving securitization trust which was
utilized to pay securitized off-balance sheet debt in October
2009. Due to required amortization and accumulation periods
associated with the scheduled maturity of the remaining
asset-backed notes, the trusts revolving period ended in
the third quarter of 2009. As of October 2009, due to a
change in required cash distributions, the trust will be
consolidated.
At September 30, 2009, Textron Financial had unused
commitments of $515 million to fund new and existing
customers under committed revolving lines of credit,
construction loans and equipment loans and leases. The revolving
line of credit commitments generally have an original duration
of less than three years and funding under these facilities is
dependent on the availability of eligible collateral and
compliance with customary financial covenants. Since many of the
agreements will not be used to the extent committed or will
expire unused, the total commitment amount does not represent
future cash requirements. We also have ongoing customer
relationships, including manufacturers and dealers in the
Distribution Finance segment, which do not contractually
obligate the Company to provide funding, however, we may choose
to fund under these relationships to facilitate an orderly
liquidation and mitigate credit losses. Neither of these
potential types of fundings is included as a contractual
obligation in the table above.
In addition to the liquidity sources contained in the table
above, management continues to pursue multiple avenues for
improving our liquidity profile. These avenues include
additional financing secured by finance receivables, sales of
portfolios classified as held for sale, transfers of existing
funding obligations to new financing providers and loans from
government agencies specializing in assistance with the
financing of the foreign sale of products. The successful
execution of these liquidity solutions would mitigate the
inherent risks associated with collecting our managed finance
receivable portfolio in accordance with its contractual maturity
in the current economic environment and aid in the financing of
Textron manufactured products in the future. Depending on the
success of these initiatives and changes in external factors
affecting the marketability and value of our assets, we may also
consider the sale of assets currently classified as held for
investment.
On July 14, 2009, a newly formed subsidiary of Textron
entered into a $500 million credit facility with the
Export-Import Bank of the United States. The facility expires in
December 2010. This facility provides funding for the financing
of sales of Cessna Aircraft Company and Bell Helicopter products
to
non-U.S. buyers.
Textron Financial originates and services loans and finance
leases as servicer for the new subsidiary, which is wholly-owned
and consolidated by Textron, and has provided a full guarantee
of the debt obligations under this facility.
In April 2009, Textron signed a
3-year
agreement with a subsidiary of The PNC Financial Services Group
to become a provider of financing for a portion of the sales of
E-Z-GO golf
cars. We expect this agreement to reduce finance receivable
originations in our Captive Finance segment.
In June 2009, we signed an agreement with TCF Inventory Finance,
Inc. to transfer the rights to financing programs with two large
manufacturers of lawn and garden products in the Distribution
Finance segment. New fundings under these programs are being
assumed by TCF Bank and reduce the Companys originations.
The major rating agencies regularly evaluate us and our parent
company. Both our long- and short-term credit ratings were
downgraded since the end of 2008. In connection with these
rating actions, the rating agencies have cited execution risks
associated with our decision to exit portions of our commercial
finance business, lower than expected business and financial
outlook for 2009, the increase in outstanding debt resulting
from the borrowing under our credit facilities, weak economic
conditions and continued liquidity and funding constraints. Our
current
30
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Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued) |
credit ratings prevent us from accessing the commercial paper
markets, and may adversely affect the cost and other terms upon
which we are able to obtain other financing as well as our
access to the capital markets. The credit ratings and outlooks
of these three rating agencies are as follows:
Fitch Ratings | Moodys | Standard & Poors | |||||||
Long-term ratings
|
BB+ | Baa3 | BB+ | ||||||
Short-term ratings
|
B | P3 | B | ||||||
Outlook
|
Negative | Negative | Developing | ||||||
Cash flows from operations are summarized below:
Nine Months Ended | ||||||||||
September 30, |
September 30, |
|||||||||
2009 | 2008 | |||||||||
(In millions) | ||||||||||
Operating activities
|
$ | 136 | $ | 154 | ||||||
Investing activities
|
1,470 | (225 | ) | |||||||
Financing activities
|
(1,016 | ) | 148 | |||||||
Cash provided by operating activities remained relatively
unchanged despite a $209 million reduction in net income as
compared to the first nine months of 2008 as a result of the
$113 million and $105 million increase in non-cash
portfolio losses and loss provision, respectively.
Cash flows provided by investing activities during the first
nine months of 2009 increased by $1.7 billion as compared
to the first nine months of 2008. This was primarily due to a
$6.4 billion decrease in finance receivable originations
resulting from our decision to exit portions of our commercial
finance business, partially offset by a $4.7 billion
decrease in finance receivable collections and $494 million
of lower proceeds from receivable sales, including
securitizations.
Cash flows provided by financing activities decreased
$1.2 billion in the first nine months of 2009, as compared
to the first nine months of 2008 as a result of the decrease in
managed finance receivables, which reduced the need to raise
cash from financing activities, partially offset by the
$600 million increase in cash held by the Company as
compared to January 3, 2009. We also generated
$21 million of cash during the first quarter of 2009 from
the sale of a 51% residual interest in the Aviation Finance
securitization trust to Textron, which is reflected as a
Noncontrolling interest on our Consolidated Balance Sheets.
Because the finance business involves the purchase and carrying
of receivables, a relatively high ratio of borrowings to net
worth is customary. Debt as a percentage of total capitalization
was 88% at September 30, 2009 compared to 86% at
January 3, 2009. Textron Financials ratio of earnings
to fixed charges was (0.84)x for the nine months ended
September 30, 2009 compared to 1.32x for the corresponding
period in 2008. Textron made cash payments of $88 million,
$109 million and $73 million on April 14, 2009,
July 10, 2009 and October 9, 2009, respectively, to
maintain compliance with the fixed charge coverage ratio of
1.25x required by the Support Agreement and Textron
Financials credit facility.
During the first nine months of 2009, Textron Financial declared
and paid dividends to Textron of $291 million compared to
dividends declared and paid of $149 million during the
corresponding period of 2008. The payment of these dividends
represents a return of Textrons investment consistent with
maintaining our targeted leverage ratio. Textron also
contributed capital of $7 million to Textron Financial in
both the first nine months of 2009 and 2008, which consisted of
Textrons dividend on preferred stock owned by Textron
Funding Corporation, which is a wholly-owned subsidiary of
Textron Financial.
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Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued) |
Off-Balance
Sheet Arrangements
As of September 30, 2009, we have one significant
off-balance sheet financing arrangement. The Distribution
Finance revolving securitization trust is a master trust that
purchases inventory finance receivables from the Company and
issues asset-backed notes to investors. These finance
receivables typically have short durations, which results in
significant collections of previously purchased finance
receivables and significant additional purchases of replacement
finance receivables from the Company on a monthly basis.
The trust had $978 million of notes outstanding as of
September 30, 2009, of which $103 million represent
our remaining retained interests. During the nine months ended
September 30, 2009, we recognized a $26 million
other-than-temporary
impairment charge. In connection with the maturity of the notes,
the trust accumulated $203 million of cash during the third
quarter of 2009 from collections of finance receivables. This
cash, combined with cash accumulated during the first eight days
of October, was utilized to repay $240 million of the notes
of third-party investors in October 2009. Due to required
amortization and accumulation periods associated with the
scheduled maturity of the remaining asset-backed notes, the
trusts revolving period ended in the third quarter of
2009. As a result, we can no longer fund new finance receivables
by selling them to the trust. As of October 2009, due to a
change in required cash distributions, the trust will be
consolidated.
Critical
Accounting Policies
Finance
Receivables Held for Sale
Finance receivables are classified as held for sale based on a
determination that there is no longer the intent to hold the
finance receivables for the foreseeable future, until maturity
or payoff, or there is no longer the ability to hold the finance
receivables until maturity. Our decision to classify certain
finance receivables as held for sale is based on a number of
factors, including, but not limited to contractual duration,
type of collateral, credit strength of the borrowers, the
existence of continued contractual commitments and the perceived
marketability of the finance receivables. On an ongoing basis,
these factors, combined with our overall liquidation strategy,
determine which finance receivables we have the positive intent
to hold for the foreseeable future and which finance receivables
we will hold for sale. Our current strategy is based on an
evaluation of both our performance and liquidity position and
changes in external factors affecting the value
and/or
marketability of our finance receivables. A change in this
strategy could result in a change in the classification of our
finance receivables. As a result of the significant influence of
economic and liquidity conditions on our business plans,
strategies and liquidity position, and the rapid changes in
these and other factors we utilize to determine which assets are
classified as held for sale, we currently believe the term
foreseeable future represents a time period of six
to nine months. We also believe that unanticipated changes in
both internal and external factors affecting our financial
performance, liquidity position or the value
and/or
marketability of our finance receivables could result in a
modification of this assessment.
Finance receivables held for sale are carried at the lower of
cost or fair value. At the time of transfer to held for sale
classification, a valuation allowance is created for any
shortfall between the carrying value, net of all deferred fees
and costs and fair value. In addition, any allowance for loan
losses previously allocated to these finance receivables is
reclassified to the valuation allowance account, which is netted
within finance receivables held for sale on the Consolidated
Balance Sheets. This valuation allowance is adjusted quarterly
through earnings for any changes in the fair value of the
finance receivables below the carrying value. Fair value changes
can occur based on market interest rates, market liquidity and
changes in the credit quality of the borrower and value of
underlying loan collateral. If we subsequently determine assets
classified as held for sale will not be sold and we have the
intent to hold the finance receivables for the foreseeable
future, until maturity or payoff, and the ability to hold to
maturity, they are reclassified as Finance receivables held for
investment with an initial carrying value equivalent to fair
value.
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Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued) |
Results
of Operations
Revenues
Revenues decreased $113 million and $296 million for
the three and nine months ended September 30, 2009 as
compared to 2008, respectively, primarily due to the following:
Three Months |
Nine Months |
|||||||||
Ended | Ended | |||||||||
2009 vs. 2008 | 2009 vs. 2008 | |||||||||
(In millions) | ||||||||||
Portfolio losses
|
$ | (53 | ) | $ | (115 | ) | ||||
Lower market interest rates
|
(20 | ) | (82 | ) | ||||||
Lower securitization gains
|
(16 | ) | (57 | ) | ||||||
Lower other income
|
(26 | ) | (54 | ) | ||||||
Decrease (increase) in impairments of retained interests in
securitizations
|
5 | (21 | ) | |||||||
Lower average finance receivables of $1.2 billion and
$734 million, respectively
|
(21 | ) | (38 | ) | ||||||
Suspended earnings on nonaccrual finance receivables
|
(8 | ) | (26 | ) | ||||||
Gains on debt extinguishment
|
9 | 48 | ||||||||
Benefit from variable-rate receivable interest rate floors
|
4 | 26 | ||||||||
Accretion of valuation allowance
|
16 | 16 | ||||||||
(Loss)
Income before Income Taxes and Noncontrolling Interest
(Loss) income before income taxes and noncontrolling interest
decreased $83 million and $311 million for the three
and nine months ended September 30, 2009 as compared to
2008, respectively, primarily due to the following:
Three Months |
Nine Months |
|||||||||
Ended | Ended | |||||||||
2009 vs. 2008 | 2009 vs. 2008 | |||||||||
(In millions) | ||||||||||
Portfolio losses
|
$ | (53 | ) | $ | (115 | ) | ||||
Increase in provision for losses
|
(9 | ) | (105 | ) | ||||||
Lower securitization gains
|
(16 | ) | (57 | ) | ||||||
Lower other income
|
(26 | ) | (54 | ) | ||||||
Suspended earnings on nonaccrual finance receivables
|
(8 | ) | (26 | ) | ||||||
Decrease (increase) in impairments of retained interests in
securitizations
|
5 | (21 | ) | |||||||
Lower average finance receivables of $1.2 billion and
$734 million, respectively
|
(10 | ) | (17 | ) | ||||||
Special charges
|
(1 | ) | (9 | ) | ||||||
Gains on debt extinguishment
|
9 | 48 | ||||||||
Benefit from variable-rate receivable interest rate floors
|
4 | 26 | ||||||||
Accretion of valuation allowance
|
16 | 16 | ||||||||
Portfolio losses include discounts taken on the sale or early
termination of finance assets, including discounts associated
with the liquidation of Distribution Finance and Golf Mortgage
Finance receivables ($26 million and $58 million,
respectively) and impairment charges associated with repossessed
aircraft ($5 million and $21 million, respectively)
for the three and nine month periods of 2009. In addition, we
recognized impairment charges of $19 million in the third
quarter of 2009 related to real estate received at the maturity
of a leveraged lease in 2008.
The reduction in other income includes increases to the held for
sale valuation allowance ($4 million and $16 million,
respectively) to reflect the estimated cost to exit certain
portfolios and a decrease in servicing and
33
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Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued) |
investment income related to securitizations ($9 million
and $16 million, respectively) for the three and nine month
periods of 2009.
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.
The increases in provision for loan losses for the three and
nine month periods were primarily the result of increases in the
captive finance portfolio ($22 million and
$79 million, respectively) and the resort finance portfolio
($7 million and $57 million, respectively). The
increase related to captive finance reflects an increase in both
the rate and severity of defaults as a result of weaker general
economic conditions and weaker aircraft values. The increase in
resort finance reflects increased defaults in our
borrowers timeshare note portfolios and the lack of
liquidity available to borrowers in this industry. In addition,
a specific reserve was established during the second quarter on
one automobile manufacturer lease within the structured capital
portfolio ($32 million), which was reduced by
$5 million in the third quarter of 2009. These increases
were partially offset by lower provision for losses in the
distribution finance portfolio ($16 million and
$40 million) and specific reserving actions taken on two
accounts in 2008 ($5 million and $32 million,
respectively).
Income
Taxes
A reconciliation of the federal statutory income tax rate to the
effective income tax rate is provided below:
Three Months Ended | Nine Months Ended | |||||||||||||||||||
September 30, |
September 30, |
September 30, |
September 30, |
|||||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||||||
Federal statutory income tax rate
|
(35.0 | )% | 35.0 | % | (35.0 | )% | 35.0 | % | ||||||||||||
Increase (decrease) in taxes resulting from:
|
||||||||||||||||||||
State income taxes
|
(4.8 | ) | (1.6 | ) | (2.4 | ) | 8.0 | |||||||||||||
Foreign tax rate differential
|
0.9 | (6.6 | ) | (0.1 | ) | (6.3 | ) | |||||||||||||
Canadian dollar functional currency
|
| 0.1 | | 0.1 | ||||||||||||||||
Change in state valuation allowance
|
7.4 | | 1.8 | (15.3 | ) | |||||||||||||||
Tax contingencies
|
2.5 | (4.2 | ) | 1.8 | 15.3 | |||||||||||||||
Tax credits
|
(1.0 | ) | (7.1 | ) | (0.8 | ) | (4.0 | ) | ||||||||||||
Change in status of foreign subsidiary
|
(3.0 | ) | | 2.3 | | |||||||||||||||
Other, net
|
0.5 | 3.6 | 0.2 | (0.4 | ) | |||||||||||||||
Effective income tax rate
|
(32.5 | )% | 19.2 | % | (32.2 | )% | 32.4 | % | ||||||||||||
For the three months ended September 30, 2009, the
difference between the statutory rate and the effective tax rate
is primarily attributable to the benefit for state taxes and a
decrease in the estimate of the taxable amount of a distribution
from the Companys wholly-owned Canadian subsidiary, offset
by a change in managements assessment of the amount of the
state deferred tax asset that is realizable and interest on tax
contingencies, the majority of which is associated with
leveraged leases.
For the nine months ended September 30, 2009, the
difference between the statutory rate and the effective tax rate
is primarily attributable to the benefit for state taxes, offset
by an increase in the estimate of the taxable amount of a
distribution from the Companys wholly-owned Canadian
subsidiary, a change in managements assessment of the
amount of the state deferred tax asset that is realizable, and
tax contingencies, the majority of which is associated with
leveraged leases.
34
Table of Contents
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued) |
For the three months ended September 30, 2008, the
difference between the statutory tax rate and the effective tax
rate is primarily attributable to tax credits, the effects of
events related to cross border financing, and interest on tax
contingencies, the majority of which is associated with
leveraged leases.
For the nine months ended September 30, 2008, the
difference between the statutory tax rate and the effective tax
rate is primarily attributable to a change in managements
assessment of the amount of the state deferred tax asset that is
realizable and the effects of events related to cross border
financing, offset by state taxes and interest on tax
contingencies, the majority of which is associated with
leveraged leases.
Credit
Quality
Nonaccrual
Finance Receivables
We classify finance receivables as nonaccrual and suspend the
recognition of earnings when accounts are contractually
delinquent by more than three months, unless collection of
principal and interest is not doubtful. In addition, earlier
suspension may occur if we have significant doubt about the
ability of the obligor to meet current contractual terms. Doubt
may be created by payment delinquency, reduction in the
obligors cash flows, deterioration in the loan to
collateral value relationship or other relevant considerations.
Nonaccrual finance receivables, Repossessed assets and
properties and Operating assets received in satisfaction of
troubled finance receivables are presented separately as opposed
to combining these as nonperforming assets due to their
increasing significance and inherent differences. Nonaccrual
finance receivables are carried at their amortized cost, net of
the allowance for losses, while repossessed assets and
properties and operating assets received in satisfaction of
troubled finance receivables are both initially recorded at the
lower of their previous carrying value or net realizable value.
In addition, 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.
Finance receivables classified as held for sale are reflected at
fair value and are excluded from the portfolio statistics
presented below. The following table summarizes nonaccrual
finance receivables and the related percentages of each
segments finance receivables held for investment.
September 30, |
January 3, |
|||||||||||||||||||
2009 | 2009 | |||||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||
Resort Finance
|
$ | 449 | 29.12 | % | $ | 78 | 4.96 | % | ||||||||||||
Captive Finance
|
155 | 5.35 | % | 35 | 1.03 | % | ||||||||||||||
Distribution Finance
|
89 | 24.13 | % | 43 | 9.02 | % | ||||||||||||||
Golf Mortgage Finance
|
104 | 14.23 | % | 107 | 12.11 | % | ||||||||||||||
Structured Capital
|
32 | 8.20 | % | | | |||||||||||||||
Corporate and Other
|
9 | 25.51 | % | 14 | 20.46 | % | ||||||||||||||
Total nonaccrual finance receivables
|
$ | 838 | 13.98 | % | $ | 277 | 4.01 | % | ||||||||||||
The increase in nonaccrual finance receivables at
September 30, 2009, compared to January 3, 2009, is
primarily attributable to the lack of liquidity available to
borrowers in the Resort Finance segment and to weaker general
economic conditions and weaker aircraft values in the Captive
Finance segment. The increase in Resort Finance included one
$212 million account, which is primarily collateralized by
timeshare notes receivable and several resort properties. The
increase in nonaccrual finance receivables and the allowance for
losses on impaired nonaccrual finance receivables in the
Structured Capital segment is due to a $32 million
automobile manufacturer lease. Nonaccrual finance receivables by
collateral type are summarized in Note 6. Finance
Receivables Held for Investment.
35
Table of Contents
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued) |
We believe that the percentage of nonaccrual finance receivables
generally will continue to increase as we execute our
liquidation plan under the current economic conditions. We
expect nonaccrual finance receivables to liquidate more slowly
than our performing finance receivables.
Allowance for losses on finance receivables held for investment
is presented in the following table:
Three Months Ended | Nine Months Ended | |||||||||||||||||||
September 30, |
September 30, |
September 30, |
September 30, |
|||||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||||||
(In millions) | ||||||||||||||||||||
Allowance for losses on finance receivables beginning of period
|
$ | 284 | $ | 126 | $ | 191 | $ | 89 | ||||||||||||
Provision for losses
|
43 | 34 | 206 | 101 | ||||||||||||||||
Less net charge-offs:
|
||||||||||||||||||||
Distribution Finance
|
9 | 20 | 32 | 43 | ||||||||||||||||
Asset-Based Lending
|
| 1 | | 5 | ||||||||||||||||
Captive Finance
|
7 | | 24 | 4 | ||||||||||||||||
Golf Mortgage Finance
|
1 | 1 | 23 | 1 | ||||||||||||||||
Resort Finance
|
5 | | 9 | (1 | ) | |||||||||||||||
Corporate and Other
|
1 | 1 | 5 | 1 | ||||||||||||||||
Total net charge-offs
|
23 | 23 | 93 | 53 | ||||||||||||||||
Transfer to valuation allowance on finance receivables held for
sale
|
(2 | ) | | (2 | ) | | ||||||||||||||
Allowance for losses on finance receivables end of period
|
$ | 302 | $ | 137 | $ | 302 | $ | 137 | ||||||||||||
Net charge-offs as a percentage of average finance receivables
held for investment
|
1.43 | % | 1.05 | % | 1.92 | % | 0.81 | % | ||||||||||||
September 30, |
January 3, |
|||||||||
2009 | 2009 | |||||||||
(Dollars in millions) | ||||||||||
Nonaccrual finance receivables as a percentage of finance
receivables held for investment
|
13.98 | % | 4.01 | % | ||||||
Allowance for losses on finance receivables held for investment
as a percentage of finance receivables held for investment
|
5.04 | % | 2.76 | % | ||||||
Allowance for losses on finance receivables held for investment
as a percentage of nonaccrual finance receivables held for
investment
|
36.0 | % | 68.9 | % | ||||||
60+ days contractual delinquency as a percentage of finance
receivables held for investment
|
7.38 | % | 2.59 | % | ||||||
60+ days contractual delinquency
|
$ | 440 | $ | 178 | ||||||
Operating assets received in satisfaction of troubled finance
receivables
|
$ | 168 | $ | 84 | ||||||
Repossessed assets and properties
|
74 | 70 | ||||||||
The ratio of allowance for losses to nonaccrual finance
receivables held for investment decreased primarily as a result
of the Resort Finance and Captive Finance accounts mentioned
above for which specific reserves were either not established or
established at a percentage of the outstanding balance. This
reflects our best estimate of loss based on a detailed review of
our workout strategy and estimates of collateral value.
The increase in operating assets received in satisfaction of
troubled finance receivables primarily reflects an increase in
the number of golf courses whose ownership was transferred from
the borrower and investments in real
36
Table of Contents
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued) |
estate associated with leveraged leases which matured during
2009. We intend to operate and improve the performance of these
properties prior to their eventual disposition.
Managed
Finance Receivables
Managed finance receivables consist of finance receivables held
for investment, finance receivables held for sale and finance
receivables that we continue to service, but have sold in
securitizations or similar structures in which substantial risks
of ownership are retained. The managed finance receivables of
our business segments are presented in the following table:
September 30, |
January 3, |
|||||||||||||||
2009 | 2009 | |||||||||||||||
(Dollars in millions) | ||||||||||||||||
Captive Finance
|
$ | 2,978 | 38 | % | $ | 3,403 | 31 | % | ||||||||
Distribution Finance
|
1,633 | 21 | % | 3,379 | 31 | % | ||||||||||
Resort Finance
|
1,549 | 20 | % | 1,636 | 15 | % | ||||||||||
Golf Mortgage Finance
|
976 | 12 | % | 1,177 | 11 | % | ||||||||||
Structured Capital
|
396 | 5 | % | 508 | 5 | % | ||||||||||
Asset-Based Lending
|
240 | 3 | % | 649 | 6 | % | ||||||||||
Corporate and Other
|
34 | 1 | % | 69 | 1 | % | ||||||||||
Total managed finance receivables
|
$ | 7,806 | 100 | % | $ | 10,821 | 100 | % | ||||||||
Operating
Results by Segment
Segment (loss) income presented in the tables below reflects
amounts before special charges, income taxes and noncontrolling
interest.
Captive
Finance
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, |
September 30, |
September 30, |
September 30, |
|||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(In millions) | ||||||||||||||||
Revenues
|
$ | 37 | $ | 56 | $ | 132 | $ | 176 | ||||||||
Segment (loss) income
|
$ | (19 | ) | $ | 14 | $ | (63 | ) | $ | 50 | ||||||
Revenues decreased $19 million and $44 million for the
three and nine months ended September 30, 2009 as compared
to 2008, respectively, primarily due to an increase in portfolio
losses ($6 million and $22 million, respectively),
lower securitization gains ($2 million and
$10 million, respectively) and a decrease in servicing and
investment income related to securitizations ($2 million
and $6 million, respectively). Portfolio losses primarily
include impairments recorded on repossessed assets as a result
of weaker aircraft values.
Segment income decreased $33 million and $113 million
for the three and nine months ended September 30, 2009 as
compared to 2008, respectively, primarily due to higher loss
provision ($22 million and $79 million, respectively)
and an increase in portfolio losses ($6 million and
$22 million, respectively). Provision for losses increased
primarily as a result of an increase in the rate utilized to
establish the provision for losses ($12 million and
$45 million, respectively) and specific reserving actions
($11 million and $24 million, respectively) reflecting
an increase in both the rate and severity of defaults as a
result of weaker general economic conditions and weaker aircraft
values.
37
Table of Contents
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued) |
Resort
Finance
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, |
September 30, |
September 30, |
September 30, |
|||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(In millions) | ||||||||||||||||
Revenues
|
$ | 21 | $ | 32 | $ | 73 | $ | 98 | ||||||||
Segment income (loss)
|
$ | | $ | 11 | $ | (21 | ) | $ | 41 | |||||||
Revenues decreased $11 million and $25 million for the
three and nine months ended September 30, 2009 as compared
to 2008, respectively, primarily due to the decrease in market
interest rates ($6 million and $24 million,
respectively) and an increase in suspended earnings on
nonaccrual finance receivables ($7 million and
$15 million, respectively). These decreases were partially
offset by a benefit from variable-rate receivable interest rate
floors of $1 million and $7 million for the three and
nine months ended September 30, 2009 as compared to 2008,
respectively.
Segment income decreased $11 million and $62 million
for the three and nine months ended September 30, 2009 as
compared to 2008, respectively, mostly due to an increase in
provision for losses ($7 million and $57 million,
respectively) reflecting the establishment of loss reserves due
to the lack of liquidity available to borrowers in this industry
and continued weakness in our borrowers loan portfolios.
Golf
Mortgage Finance
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, |
September 30, |
September 30, |
September 30, |
|||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(In millions) | ||||||||||||||||
Revenues
|
$ | 6 | $ | 19 | $ | 28 | $ | 61 | ||||||||
Segment loss
|
$ | (14 | ) | $ | | $ | (30 | ) | $ | | ||||||
Revenues decreased $13 million and $33 million for the
three and nine months ended September 30, 2009 as compared
to 2008, respectively, primarily due to a decrease in market
interest rates ($3 million and $12 million,
respectively), an increase in portfolio losses ($5 million
and $11 million, respectively) and lower finance charges
($2 million and $4 million, respectively) associated
with lower average finance receivables of $139 million and
$80 million, respectively.
The increase of $14 million in segment loss for the three
months ended September 30, 2009 as compared to 2008 is
primarily due to higher portfolio losses ($5 million) and
lower interest margin, excluding other income ($5 million),
and a higher provision for losses ($3 million). The
increase in segment loss of $30 million for the nine months
ended September 30, 2009 as compared to 2008 principally
reflects an increase in portfolio losses ($11 million) and
lower interest margin, excluding other income ($11 million).
Loss provision remained relatively unchanged for the three and
nine months ended September 30, 2009 as compared to 2008 as
the impact of a specific reserve related to one account in 2008
was substantially offset by the establishment of specific
reserves related to several loans in 2009.
Asset-Based
Lending
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, |
September 30, |
September 30, |
September 30, |
|||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(In millions) | ||||||||||||||||
Revenues
|
$ | 5 | $ | 18 | $ | 25 | $ | 55 | ||||||||
Segment income (loss)
|
$ | 1 | $ | 1 | $ | 10 | $ | (7 | ) | |||||||
38
Table of Contents
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued) |
Revenues decreased $13 million and $30 million for the
three and nine months ended September 30, 2009 as compared
to 2008, primarily due to lower average finance receivables of
$605 million and $410 million, respectively, as a
result of the continued liquidation of the portfolio.
Segment income was unchanged for the three months ended
September 30, 2009 and increased $17 million for the
nine months ended September 30, 2009 as compared to 2008.
The increase in segment income for the nine months ended
June 30, 2009 was primarily due to lower provision for
losses mostly the result of a $16 million specific
reserving action taken for one account during 2008.
Structured
Capital
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, |
September 30, |
September 30, |
September 30, |
|||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(In millions) | ||||||||||||||||
Revenues
|
$ | (18 | ) | $ | 7 | $ | (28 | ) | $ | 7 | ||||||
Segment (loss) income
|
$ | (15 | ) | $ | 4 | $ | (64 | ) | $ | (2 | ) | |||||
Revenues decreased $25 million and $35 million for the
three and nine months ended September 30, 2009 as compared
to 2008, primarily due to higher portfolio losses
($20 million and $34 million). These portfolio losses
were mostly the result of impairment charges of $19 million
recognized during the third quarter of 2009 related to real
estate received at the maturity of a leveraged lease in 2008.
Segment loss increased $19 million and $66 million for
the three and nine months ended September 30, 2009 as
compared to 2008, respectively, primarily due to higher
portfolio losses ($20 million and $34 million). In
addition, provision for losses increased during the nine months
ended September 30, 2009 as compared to 2008 as a result of
a $32 million specific reserve established for one
automobile manufacturer lease during the second quarter of 2009.
This reserve was reduced by $5 million in the third quarter
of 2009.
Distribution
Finance
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, |
September 30, |
September 30, |
September 30, |
|||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(In millions) | ||||||||||||||||
Revenues
|
$ | | $ | 49 | $ | 4 | $ | 174 | ||||||||
Segment loss
|
$ | (27 | ) | $ | (13 | ) | $ | (79 | ) | $ | (4 | ) | ||||
39
Table of Contents
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued) |
Revenues decreased $49 million and $170 million for
the three and nine months ended September 30, 2009 as
compared to 2008, respectively, primarily due to the following:
Three Months Ended | Nine Months Ended | |||||||
2009 vs. 2008 | 2009 vs. 2008 | |||||||
(In millions) | ||||||||
Lower securitization gains
|
$ | (14 | ) | $ | (45 | ) | ||
Portfolio losses
|
(18 | ) | (42 | ) | ||||
Lower average finance receivables of $640 million and
$643 million, respectively
|
(11 | ) | (35 | ) | ||||
Decrease (increase) in impairments of retained interests in
securitizations
|
5 | (21 | ) | |||||
Lower market interest rates
|
(4 | ) | (21 | ) | ||||
Decrease in servicing and investment income related to
securitizations
|
(7 | ) | (10 | ) | ||||
Suspended earnings on nonaccrual finance receivables
|
| (5 | ) | |||||
Benefit from variable-rate receivable interest rate floors
|
2 | 15 | ||||||
Portfolio losses include $18 million and $40 million
of discounts recorded on the early termination of marine finance
assets during the three and nine months ended September 30,
2009, respectively.
Segment loss increased $14 million and $75 million for
the three and nine months ended September 30, 2009 as
compared to 2008, respectively, primarily due to the following:
Three Months Ended | Nine Months Ended | |||||||
2009 vs. 2008 | 2009 vs. 2008 | |||||||
(In millions) | ||||||||
Lower securitization gains
|
$ | (14 | ) | $ | (45 | ) | ||
Portfolio losses
|
(18 | ) | (42 | ) | ||||
Decrease (increase) in impairments of retained interests in
securitizations
|
5 | (21 | ) | |||||
Lower average finance receivables of $640 million and
$643 million, respectively
|
(6 | ) | (18 | ) | ||||
Decrease in servicing and investment income related to
securitizations
|
(7 | ) | (10 | ) | ||||
Acceleration of amortization of deferred loan origination cost
|
| (8 | ) | |||||
Suspended earnings on nonaccrual finance receivables
|
| (5 | ) | |||||
Provision for losses
|
16 | 40 | ||||||
Lower selling and administrative expenses
|
10 | 28 | ||||||
Benefit from variable-rate receivable interest rate floors
|
2 | 15 | ||||||
Corporate
and Other Segment
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, |
September 30, |
September 30, |
September 30, |
|||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(In millions) | ||||||||||||||||
Revenues
|
$ | 20 | $ | 3 | $ | 45 | $ | 4 | ||||||||
Segment income (loss)
|
$ | 10 | $ | 1 | $ | 18 | $ | (5 | ) | |||||||
40
Table of Contents
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued) |
Revenues increased $17 million and $41 million for the
three and nine months ended September 30, 2009 as compared
to 2008, respectively, primarily due to gains on early debt
extinguishment ($9 million and $48 million,
respectively) and accretion of the valuation allowance of
$16 million during the third quarter of 2009, partially
offset by increases in the valuation allowance for assets held
for sale ($4 million and $16 million, respectively).
Accretion of the 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.
Segment income increased $9 million and $23 million
for the three and nine months ended September 30, 2009 as
compared to 2008, respectively, primarily due to gains on early
debt extinguishment ($9 million and $48 million,
respectively), accretion of the valuation allowance of
$16 million during the third quarter of 2009 and an
increase in interest expense allocated to our segments
($8 million and $28 million, respectively). These
increases were partially offset by increases in the valuation
allowance for assets held for sale ($4 million and
$16 million, respectively) and the impact of not allocating
corporate selling and administrative expenses ($16 million
and $46 million, respectively). Selling and administrative
and interest expense allocation methodologies are more fully
described in Note 15. Financial Information about Operating
Segments.
Selected
Financial Ratios
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, |
September 30, |
September 30, |
September 30, |
|||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net interest margin as a percentage of average net investment(1)
|
1.87 | % | 5.23 | % | 2.40 | % | 5.31 | % | ||||||||
Return on average equity
|
(16.39 | )% | 5.51 | % | (21.19 | )% | 6.16 | % | ||||||||
Return on average assets
|
(1.95 | )% | 0.59 | % | (2.35 | )% | 0.68 | % | ||||||||
Selling and administrative expenses as a percentage of average
managed and serviced finance receivables(2)
|
2.33 | % | 1.80 | % | 2.04 | % | 1.68 | % | ||||||||
Operating efficiency ratio(3)
|
163.6 | % | 52.3 | % | 116.8 | % | 47.9 | % | ||||||||
Net charge-offs as a percentage of average finance receivables
held for investment
|
1.43 | % | 1.05 | % | 1.92 | % | 0.81 | % | ||||||||
September 30, |
January 3, |
|||||||
2009 | 2009 | |||||||
60+ days contractual delinquency as a percentage of finance
receivables held for investment(4)
|
7.38 | % | 2.59 | % | ||||
Nonaccrual finance receivables as a percentage of finance
receivables held for investment
|
13.98 | % | 4.01 | % | ||||
Allowance for losses on finance receivables held for investment
as a percentage of finance receivables held for investment
|
5.04 | % | 2.76 | % | ||||
Allowance for losses on finance receivables held for investment
as a percentage of nonaccrual finance receivables held for
investment
|
36.0 | % | 68.9 | % | ||||
Total debt to equity
|
7.73 | x | 6.85 | x | ||||
(1) | Represents revenues earned less interest expense on borrowings and operating lease depreciation as a percentage of average net investment. Average net investment includes finance receivables plus operating leases, less deferred taxes on leveraged leases. | |
(2) | Average managed and serviced finance receivables include owned receivables, receivables serviced under securitizations, participations and third-party portfolio servicing agreements. |
41
Table of Contents
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued) |
(3) | Operating efficiency ratio is selling and administrative expenses divided by net interest margin. | |
(4) | Delinquency excludes any captive finance receivables with recourse to Textron. Captive finance receivables represent third-party finance receivables originated in connection with the sale or lease of Textron manufactured products. Percentages are expressed as a function of total Textron Financial independent and nonrecourse captive finance receivables. Finance receivables 60+ days contractually delinquent were $440 million and $178 million as of September 30, 2009 and January 3, 2009, respectively. |
Recent
Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 166 Accounting for
Transfers of Financial Assets an amendment of FASB
Statement No. 140. This standard eliminates the
concept of a qualifying special purpose entity
(QSPE) and its exclusion from consolidation by the
primary beneficiary in that variable interest entity
(VIE) or the transferor of financial assets to the
VIE. The new accounting guidance also requires that former
QSPEs be reevaluated for consolidation. This standard is
effective beginning in the first quarter of 2010 and early
application is prohibited. The adoption of this standard will
result in the consolidation of any remaining off-balance sheet
securitization trusts, which include securitized finance
receivables and the related debt. The adoption of this standard
will not have a material impact on our financial position,
results of operations or liquidity.
Also in June 2009, the FASB issued SFAS No. 167
Amendments to FASB Interpretation No. 46(R).
This standard changed the approach to determining the primary
beneficiary of a VIE and requires companies to more frequently
assess whether they must consolidate VIEs. This standard is
effective in the first quarter of 2010 and early application is
prohibited. We are currently assessing the impact the adoption
of this standard may have on our financial position, results of
operations or liquidity.
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
for the year ended January 3, 2009, those additional and
updated risk factors discussed in our Quarterly Report on
Form 10-Q
for the fiscal quarter ended March 31, 2009, 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 offer financing;
(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, including our current restructuring program;
(e) increases in pension expenses and other post-retirement
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) the launching of significant new
products or programs which could result in unanticipated
expenses; (l) risks and uncertainties related to
acquisitions and dispositions, including difficulties or
unanticipated expenses in connection with the consummation of
acquisitions or dispositions, the disruption of current plans
and operations, or the failure to achieve anticipated synergies
and opportunities; (m) the ability to successfully exit
from our commercial finance business, other than the captive
finance business, including effecting an orderly liquidation or
sale of certain portfolios and businesses; (n) uncertainty
in estimating the market value of our Finance receivables held
for sale and our Allowance for losses on finance receivables
held for investment; (o) bankruptcy or other financial
problems
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Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued) |
at major customers that could cause disruptions or difficulty
in collecting amounts owed by such customers;
(p) legislative or regulatory actions impacting our
operations; (q) difficult conditions in the financial
markets which may adversely impact our ability to obtain
financing 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
(r) continued volatility in the economy resulting in a
prolonged downturn in the markets in which we do business.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
For information regarding Textron Financials Quantitative
and Qualitative Disclosure About Market Risk, see Risk
Management in Item 1 and Managements
Discussion and Analysis of Financial Condition and Results of
Operations Interest Rate Sensitivity, in
Item 7 of our 2008 Annual Report on
Form 10-K.
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
September 30, 2009 that have materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting.
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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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: October 30, 2009
44