Accounts Receivable and Finance Receivables

12 Months Ended

Jan. 04, 2020

Accounts Receivable and Finance Receivables

Accounts Receivable and Finance Receivables

Note 4. Accounts Receivable and Finance Receivables

Accounts Receivable

Accounts receivable is composed of the following:

	January 4,		December 29,
(In millions)	2020		2018
Commercial	$	835	$	885
U.S. Government contracts		115		166
		950		1,051
Allowance for doubtful accounts		(29)		(27)
Total	$	921	$	1,024

Finance Receivables

Finance receivables are presented in the following table:

	January 4,		December 29,
(In millions)	2020		2018
Finance receivables	$	707	$	789
Allowance for losses		(25)		(29)
Total finance receivables, net	$	682	$	760

Finance receivables primarily includes loans provided to purchasers of new and pre-owned Textron Aviation aircraft and Bell helicopters.  These loans typically have initial terms ranging from five to twelve years, amortization terms ranging from eight to fifteen years and an average balance of $1 million at January 4, 2020. Loans generally require the customer to pay a significant down payment, along with periodic scheduled principal payments that reduce the outstanding balance through the term of the loan.

Our finance receivables are diversified across geographic region and borrower industry. At both January 4, 2020 and December 29, 2018, 59% of our finance receivables were distributed internationally and 41% throughout the U.S. At January 4, 2020 and December 29, 2018 finance receivables of $148 million and $201 million, respectively, have been pledged as collateral for TFC’s debt of $87 million and $119 million, respectively.

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.

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

	January 4,			December 29,
(Dollars in millions)	2020			2018
Performing	$	664		$	704
Watchlist		4			45
Nonaccrual		39			40
Nonaccrual as a percentage of finance receivables		5.52	%		5.07	%
Less than 31 days past due	$	637		$	719
31-60 days past due		53			56
61-90 days past due		7			5
Over 90 days past due		10			9
60+ days contractual delinquency as a percentage of finance receivables		2.40	%		1.77	%

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 impaired finance receivables, excluding leveraged leases, and the average recorded investment is provided below:

	January 4,		December 29,
(In millions)	2020		2018
Recorded investment:
Impaired loans with related allowance for losses	$	17	$	15
Impaired loans with no related allowance for losses		22		43
Total	$	39	$	58
Unpaid principal balance	$	50	$	67
Allowance for losses on impaired loans		3		5
Average recorded investment		40		61

A summary of the allowance for losses on finance receivables based on how the underlying finance receivables are evaluated for impairment, is provided below.  The finance receivables reported in this table specifically exclude $104 million and $101 million of leveraged leases at January 4, 2020 and December 29, 2018, respectively, in accordance with U.S. generally accepted accounting principles.

	January 4,		December 29,
(In millions)	2020		2018
Allowance based on collective evaluation	$	22	$	24
Allowance based on individual evaluation		3		5
Finance receivables evaluated collectively		564		630
Finance receivables evaluated individually		39		58