Textron Cutting Back Its Finance Arm

Downsizing reflects sinking of the credit markets.
Stephen TaubOctober 16, 2008

Textron Inc. is downsizing its commercial finance business to reflect “the sustained turmoil in world credit markets.”

In a regulatory filing, the company said, “In recent weeks, volatility and disruption in the capital and credit markets have reached unprecedented levels.”

The conglomerate, which has aircraft and defense businesses that include the Bell Helicopter and Cessna Aircraft brands, said that revenues companywide in the third quarter topped $3.5 billion, up 13.6 percent from $3.1 billion in 2007. A 15.6-percent growth in the manufacturing businesses offset a decline in revenues at the finance business, it said.

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Finance revenues decreased $30 million in the third quarter, due to lower market interest rates partially offset by the benefits of higher volume and interest rate floors. What’s more, profits in the segment decreased $36 million due to an increase in the provision for loan losses and higher borrowing costs.

Meanwhile, Textron said 60-day plus delinquencies increased to 1.06 percent of finance receivables from 0.61 percent at the end of the second quarter. Nonperforming assets increased to 2.67 percent of total finance assets from the second quarter level of 2.31 percent.

“Strength in our aircraft and defense businesses offset weaker than expected performance in the finance business arising from the challenging economic environment,” said Lewis B. Campbell, chairman, president, and CEO. “We remain committed to achieving strong performance results at our aircraft and defense businesses as we work through the issues facing us in our other segments.”

In response, Textron said that it will reduce the size of Textron Financial Corp., its commercial finance business, and the company will exit its Asset Based Lending and Structured Capital segments, along with several additional product lines, through an orderly liquidation over the next two to three years, as market conditions allow. The assets in the businesses to be liquidated represent approximately $2 billion in managed finance receivables within TFC’s $11.4 billion portfolio, it said.

TFC also said that it will limit new originations in its Distribution Finance, Golf, and Resort portfolios.

Textron is one of a number of manufacturers — along with General Electric, the auto makers, Harley-Davidson Inc. and Caterpillar Inc — with finance operations designed ease the customer’s way to buying goods. Reuters noted that some, such as Caterpillar and Harley, have remained focused, and have run into less trouble so far during the current period of credit-market turmoil than have Textron and GE, which ventured farther afield. Still, it’s the rare financing business that has been spared the pain that resulted when the securitization markets they relied on for liquidity dried up, the wire service noted. Harley, for example, said on Thursday that operating profit fell 28 percent at its finance arm, which is involved with about half its motorcycle sales.

As a result of the decision to downsize TFC, Textron said it expects to take a noncash impairment charge in the fourth quarter of up to $169 million, which represents the current goodwill balance at TFC. The company will also incur restructuring charges for headcount reductions and consolidations.

“Going forward, we will continue to carefully evaluate the appropriate range of remaining lending activities at TFC in light of strategic fit and continuing developments in the capital markets, all in a manner that maximizes value for shareholders in any current or future financial market scenarios,” Campbell said.

Meanwhile, Textron said it has suspended its share repurchase program and is exploring a number of options to reduce a portion of its outstanding commercial paper funding.