Accounts Receivable and Finance Receivables

9 Months Ended

Oct. 02, 2021

Accounts Receivable and Finance Receivables

Accounts Receivable

Accounts receivable is composed of the following:


(In millions)	October 2, 2021		January 2, 2021
Commercial	$	671	$	668
U.S. Government contracts	131		155
	802		823
Allowance for credit losses	(29)		(36)
Total accounts receivable, net	$	773	$	787

Finance Receivables

Finance receivables are presented in the following table:


(In millions)	October 2, 2021		January 2, 2021
Finance receivables	$	621	$	779
Allowance for credit losses	(25)		(35)
Total finance receivables, net	$	596	$	744

Finance Receivable Portfolio Quality

We internally assess the quality of our finance receivables based on a number of key credit quality indicators and statistics such as delinquency, loan balance to estimated collateral value and the financial strength of individual borrowers and guarantors. Because many of these indicators are difficult to apply across an entire class of receivables, we evaluate individual loans on a quarterly basis and classify these loans into three categories based on the key credit quality indicators for the individual loan. These three categories are performing, watchlist and nonaccrual.

We classify finance receivables as nonaccrual if credit quality indicators suggest full collection of principal and interest is doubtful. In addition, we automatically classify accounts as nonaccrual once they are contractually delinquent by more than three months unless collection of principal and interest is not doubtful. Accounts are classified as watchlist when credit quality indicators have deteriorated as compared with typical underwriting criteria, and we believe collection of full principal and interest is probable but not certain. All other finance receivables that do not meet the watchlist or nonaccrual categories are classified as performing.

We measure delinquency based on the contractual payment terms of our finance receivables. In determining the delinquency aging category of an account, any/all principal and interest received is applied to the most past-due principal and/or interest amounts due. If a significant portion of the contractually due payment is delinquent, the entire finance receivable balance is reported in accordance with the most past-due delinquency aging category.

Since the first quarter of 2020, the Finance segment has worked with certain customers impacted by the pandemic to provide payment relief through loan modifications. The types of temporary payment relief we offered to these customers included delays in the timing of required principal payments, deferrals of interest payments and/or interest-only payments. The majority of these modified loans have returned to paying principal and interest. For loan modifications that cover payment-relief periods in excess of six months, even if the loan was previously current, the loan is deemed a troubled debt restructuring and considered impaired. These impaired loans are classified as either nonaccrual or watchlist based on a review of the credit quality indicators as discussed above.

During the first nine months of 2021, we modified finance receivable contracts for 21 customers with an outstanding balance at October 2, 2021 totaling $76 million, which were all categorized as troubled debt restructurings. Of these modifications, $71 million were previously modified in 2020. Due to the nature of these restructurings, the financial effects were not significant. We had no customer defaults during the last twelve months related to finance receivables previously modified as a troubled debt restructuring. We believe our allowance for credit losses adequately covers our exposure on these loans as our estimated collateral values largely exceed the outstanding loan amounts.

Finance receivables categorized based on the credit quality indicators and by the delinquency aging category are summarized as follows:


(Dollars in millions)	October 2, 2021		January 2, 2021
Performing	$	511	$	612
Watchlist	—		74
Nonaccrual	110		93
Nonaccrual as a percentage of finance receivables	17.71%		11.94%
Current and less than 31 days past due	$	604	$	738
31-60 days past due	5		12
61-90 days past due	3		11
Over 90 days past due	9		18
60+ days contractual delinquency as a percentage of finance receivables	1.93%		3.72%

At October 2, 2021, 30% of our performing finance receivables were originated since the beginning of 2020 and 32% were originated from 2017 to 2019. For finance receivables categorized as nonaccrual, 63% were originated from 2017 to 2019.

On a quarterly basis, we evaluate individual larger balance accounts for impairment. A finance receivable is considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement based on our review of the credit quality indicators described above. Impaired finance receivables include both nonaccrual accounts and accounts for which full collection of principal and interest remains probable, but the account’s original terms have been, or are expected to be, significantly modified. If the modification specifies an interest rate equal to or greater than a market rate for a finance receivable with comparable risk, the account is not considered impaired in years subsequent to the modification.

A summary of finance receivables and the allowance for credit losses, based on the results of our impairment evaluation, is provided below. The finance receivables included in this table specifically exclude leveraged leases in accordance with U.S. generally accepted accounting principles.


(In millions)	October 2, 2021		January 2, 2021
Finance receivables evaluated collectively	$	416	$	521
Finance receivables evaluated individually	110		163
Allowance for credit losses based on collective evaluation	21		28
Allowance for credit losses based on individual evaluation	4		7
Impaired finance receivables with specific allowance for credit losses	$	34	$	46
Impaired finance receivables with no specific allowance for credit losses	76		117
Unpaid principal balance of impaired finance receivables	124		175
Allowance for credit losses on impaired finance receivables	4		7
Average recorded investment of impaired finance receivables	123		126