Accounts Receivable and Finance Receivables

12 Months Ended

Dec. 31, 2011

Accounts Receivable and Finance Receivables [Abstract]

Accounts Receivable and Finance Receivables

Note 4. Accounts Receivable and Finance Receivables

Accounts Receivable

Accounts receivable is composed of the following:

(In millions)	December 31, 2011	January 1, 2011
Commercial	$          528	$	496
U.S. Government contracts	346		416
	874		912
Allowance for doubtful accounts	(18)		(20	)
	$          856	$	892

We have unbillable receivables on U.S. Government contracts that arise when the revenues we have appropriately recognized based on performance cannot be billed yet under terms of the contract. Unbillable receivables within accounts receivable totaled $192 million at December 31, 2011 and $195 million at January 1, 2011.

Finance Receivables

Finance receivables by product line, which includes both finance receivables held for investment and finance receivables held for sale, are presented in the following table by product line:

(In millions)	December 31, 2011	January 1, 2011
Aviation	$        1,876	$	2,120
Golf Equipment	69		212
Golf Mortgage	381		876
Timeshare	318		894
Structured Capital	208		317
Other liquidating	43		207
Total finance receivables	2,895		4,626
Less: Allowance for losses	156		342
Less: Finance receivables held for sale	418		413
Total finance receivables held for investment, net	$        2,321	$	3,871

Aviation primarily includes installment contracts and finance leases provided to purchasers of new and used Cessna aircraft and Bell helicopters and also includes installment contracts and finance leases secured by used aircraft produced by other manufacturers. These agreements typically have initial terms ranging from five to ten years and amortization terms ranging from eight to fifteen years. The average balance of installment contracts and finance leases in Aviation was $1 million at December 31, 2011. Installment contracts 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. Finance leases with no significant residual value at the end of the contractual term are classified as installment contracts, as their legal and economic substance is more equivalent to a secured borrowing than a finance lease with a significant residual value. Golf Equipment primarily includes finance leases provided to purchasers of new E-Z-GO and Jacobsen golf and turf-care equipment.

Golf Mortgage primarily includes golf course mortgages and also includes mortgages secured by hotels and marinas. Mortgages in this product line are secured by real property and are generally limited to 75% or less of the property’s appraised market value at loan origination. These mortgages typically have initial terms ranging from five to ten years with amortization periods from 20 to 30 years. As of December 31, 2011, loans in Golf Mortgage have an average balance of $6 million and a weighted-average contractual maturity of three years. All loans in this portfolio have been classified as held for sale as of December 31, 2011.

Timeshare includes pools of timeshare interval resort notes receivable and revolving loans that are secured by pools of timeshare interval resort notes receivable. The timeshare interval notes receivable typically have terms of 10 to 20 years. Timeshare also includes construction/inventory mortgages secured by timeshare interval inventory, by real property and, in many instances, by the personal guarantee of the principals. Construction/inventory mortgages are typically cross-collateralized with revolving notes receivable loans to the same borrower; loans in this portfolio typically have initial revolving terms of one to three years and final maturity terms of an additional one to five years. Structured Capital primarily includes leveraged leases secured by the ownership of the leased equipment and real property.

Our finance receivables are diversified across geographic region, borrower industry and type of collateral. At December 31, 2011, 54% of our finance receivables were distributed throughout the U.S. compared with 67% at the end of 2010. Finance receivables held for investment are composed of the following types of financing vehicles:

(In millions)	December 31, 2011	January 1, 2011
Installment contracts	$        1,816	$	2,130
Revolving loans	216		501
Leveraged leases	208		279
Finance leases	123		262
Mortgage loans	60		859
Distribution finance receivables	54		182
	$        2,477	$	4,213

At December 31, 2011 and January 1, 2011, these finance receivables included approximately $559 million and $635 million, respectively, of receivables that have been legally sold to special purpose entities (SPE), which are consolidated subsidiaries of TFC. The assets of the SPEs are pledged as collateral for their debt, which is reflected as securitized on-balance sheet debt in Note 8. Third-party investors have no legal recourse to TFC beyond the credit enhancement provided by the assets of the SPEs.

We received total proceeds of $476 million and $655 million from the sale of finance receivables in 2011 and 2010, respectively, resulting in total gains of $4 million and $31 million, respectively.

Credit Quality Indicators and Nonaccrual Finance Receivables

We internally assess the quality of our finance receivables held for investment portfolio based on a number of key credit quality indicators and statistics such as delinquency, loan balance to estimated collateral value, the liquidity position of individual borrowers and guarantors and default rates of our notes receivable collateral in the Timeshare product line. For Golf Mortgage, we also utilized debt service coverage prior to the transfer discussed below. 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 held for investment as nonaccrual if credit quality indicators suggest full collection is doubtful. In addition, we automatically classify accounts as nonaccrual that are contractually delinquent by more than three months unless collection is not doubtful. Cash payments on nonaccrual accounts, including finance charges, generally are applied to reduce the net investment balance. We resume the accrual of interest when the loan becomes contractually current through payment according to the original terms of the loan or, if a loan has been modified, following a period of performance under the terms of the modification, provided we conclude that collection of all principal and interest is no longer doubtful. Previously suspended interest income is recognized at that time.

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 held for investment that do not meet the watchlist or nonaccrual categories are classified as performing.

A summary of finance receivables held for investment categorized based on the credit quality indicators discussed above is as follows:

	December 31, 2011											January 1, 2011
(In millions)	Performing			Watchlist			Nonaccrual			Total		Performing			Watchlist			Nonaccrual			Total
Aviation	$	1,537		$	214		$	125		$	1,876	$	1,713		$	238		$	169		$	2,120
Golf Equipment		21			37			11			69		138			51			23			212
Timeshare		89			25			167			281		222			77			382			681
Structured Capital		203			5			—			208		290			27			—			317
Golf Mortgage		—			—			—			—		163			303			219			685
Other liquidating		25			—			18			43		130			11			57			198
Total	$	1,875		$	281		$	321		$	2,477	$	2,656		$	707		$	850		$	4,213
% of Total		75.7	%		11.3	%		13.0	%				63.0	%		16.8	%		20.2	%

Nonaccrual finance receivables decreased $529 million in 2011, primarily due to the transfer of the remaining Golf Mortgage portfolio to the held for sale classification and a $215 million reduction in Timeshare, largely due to the resolution of several significant accounts and cash collections on several other accounts. These factors were also the primary reason for the improvement in contractual delinquencies reported below.

We measure delinquency based on the contractual payment terms of our loans and leases. 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 held for investment by delinquency aging category is summarized in the table below:

	December 31, 2011										January 1, 2011
(In millions)	Less Than 31 Days Past Due		31-60 Days Past Due		61-90 Days Past Due		Over 90 Days Past Due		Total		Less Than 31 Days Past Due		31-60 Days Past Due		61-90 Days Past Due		Over 90 Days Past Due		Total
Aviation	$	1,705	$	66	$	37	$	68	$	1,876	$	1,964	$	67	$	41	$	48	$	2,120
Golf Equipment		53		3		6		7		69		171		13		9		19		212
Timeshare		238		3		—		40		281		533		14		6		128		681
Structured Capital		208		—		—		—		208		317		—		—		—		317
Golf Mortgage		—		—		—		—		—		543		12		7		123		685
Other liquidating		35		—		—		8		43		166		2		1		29		198
Total	$	2,239	$	72	$	43	$	123	$	2,477	$	3,694	$	108	$	64	$	347	$	4,213

We had no recorded investment in accrual status loans that were greater than 90 days past due in 2011 or in 2010. For the year ended December 31, 2011 and January 1, 2011, 60+ days contractual delinquency as a percentage of finance receivables held for investment was 6.70% and 9.77%, respectively.

Impaired Loans

We evaluate individual finance receivables held for investment in non-homogeneous portfolios and larger accounts in homogeneous loan portfolios for impairment on a quarterly basis. Finance receivables classified as held for sale are reflected at the lower of cost or fair value and are excluded from these evaluations. 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 discussed 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. There was no significant interest income recognized on impaired loans in either 2011 or 2010.

A summary of impaired finance receivables, excluding leveraged leases, at year end and the average recorded investment for the year is provided below:

	Recorded Investment
(In millions)	Impaired Loans with No Related Allowance for Credit Losses		Impaired Loans with Related Allowance for Credit Losses		Total Impaired Loans		Unpaid Principal Balance		Allowance For Losses On Impaired Loans		Average Recorded Investment
December 31, 2011
Aviation	$	47	$	92	$	139	$	142	$	39	$	146
Timeshare		170		57		227		288		38		315
Golf Mortgage		—		—		—		—		—		232
Other liquidating		3		12		15		59		9		30
Total	$	220	$	161	$	381	$	489	$	86	$	723
January 1, 2011
Aviation	$	17	$	147	$	164	$	165	$	45	$	201
Golf Equipment		—		4		4		5		2		6
Timeshare		69		355		424		459		102		426
Golf Mortgage		138		175		313		324		39		300
Other liquidating		30		16		46		104		3		79
Total	$	254	$	697	$	951	$	1,057	$	191	$	1,012

Loan Modifications

Troubled debt restructurings occur when we have either modified the contract terms of finance receivables held for investment for borrowers experiencing financial difficulties or accepted a transfer of assets in full or partial satisfaction of the loan balance. Modifications often arise in Golf Mortgage and Timeshare as a result of the lack of financing available to borrowers in these industries. Golf Mortgage loans are typically structured with amortization periods between 20 and 30 years and contractual maturities of between 5 and 10 years, resulting in a significant balloon payment. We modify a significant portion of these loans at, or near the maturity date as a result of this structure. The types of modifications we typically make include extensions of the original maturity date of the contract, extensions of revolving borrowing periods, delays in the timing of required principal payments, deferrals of interest payments, advances to protect the value of our collateral and principal reductions contingent on full repayment prior to the maturity date. Finance receivables held for investment that were modified during 2011 and are categorized as troubled debt restructurings, excluding related allowances for loan losses, are summarized below:

			Recorded Investment
(Dollars in millions)	Number of Customers		Pre-Modification		Post- Modification		At Dec. 31, 2011
Golf Mortgage		23	$	203	$	191	$	—
Timeshare		10		239		199		138

At December 31, 2011, the recorded investment balance for Golf Mortgage reflects the transfer of finance receivables from held for investment to the held for sale classification. The modifications included above resulted in a reduction in provision for losses of $36 million due to the reversal of allowance for losses related to one significant Timeshare account, partially offset by net portfolio losses of $15 million.

Modified finance receivables are classified as impaired loans and are evaluated on an individual basis to determine whether reserves are required. Our reserve evaluation includes an estimate of the likelihood that the borrower will be able to perform under the contractual terms of the modification. Subsequent payment defaults or delinquency trends of finance receivables modified as troubled debt restructurings are also factored into the evaluation of impaired loans for reserving purposes as a default decreases the likelihood that the borrower will be able to perform under the terms of future modifications. In 2011, we had three customer defaults in Timeshare for finance receivables that had been modified as troubled debt restructurings within the previous twelve months; the recorded investment for these customers totaled $113 million, excluding related allowances for doubtful accounts, at the end of 2011.

We may foreclose, repossess or receive collateral when a customer no longer has the ability to make payment. These transfers of assets in full or partial satisfaction of the loan balance are also considered troubled debt restructurings if the fair value of the assets transferred is less than our recorded investment. Similar to the troubled debt restructurings described above, these loans typically have been classified as impaired loans prior to the asset transfer; therefore, reserves have already been established related to the loan. As a result, for 2011, charge-offs of $73 million upon the transfer of such assets were largely offset by previously established reserves.

Troubled debt restructurings resulting in transfers of assets in satisfaction of the loan balance that occurred in 2011 are as follows:

(Dollars in millions)	Number of Customers		Pre- Modification Recorded Investment		Post- Modification Asset Balance
Aviation		27	$	53	$	32
Golf Mortgage		5		59		39
Timeshare		2		96		60

Allowance for Losses

A rollforward of the allowance for losses on finance receivables held for investment is provided below:

(In millions)	Aviation			Golf Equipment			Golf Mortgage			Timeshare			Other Liquidating			Total
Balance at January 2, 2010	$	114		$	9		$	65		$	79		$	74		$	341
Provision for losses		37			14			66			38			(12	)		143
Net charge-offs		(44	)		(7	)		(52	)		(7	)		(28	)		(138	)
Transfers		—			—			—			(4	)		—			(4	)
Balance at January 1, 2011		107			16			79			106			34			342
Provision for losses		18			(3	)		25			(26	)		(2	)		12
Net charge-offs		(30	)		(4	)		(24	)		(40	)		(4	)		(102	)
Transfers		—			(3	)		(80	)		—			(13	)		(96	)
Balance at December 31, 2011	$	95		$	6		$	—		$	40		$	15		$	156

A summary of the allowance for losses on finance receivables that are evaluated on an individual and on a collective basis is provided below. The finance receivables reported in this table specifically exclude $208 million and $279 million of leveraged leases at December 31, 2011 and January 1, 2011, respectively, in accordance with authoritative accounting standards.

	December 31, 2011										January 1, 2011
	Finance Receivables Evaluated						Allowance Based on Individual Evaluation		Allowance Based on Collective Evaluation		Finance Receivables Evaluated						Allowance Based on Individual Evaluation		Allowance Based on Collective Evaluation
(In millions)	Individually		Collectively		Total						Individually		Collectively		Total
Aviation	$	139	$	1,737	$	1,876	$	39	$	56	$	164	$	1,956	$	2,120	$	45	$	62
Golf Equipment		2		67		69		1		5		4		208		212		2		14
Timeshare		227		54		281		38		2		424		257		681		102		4
Golf Mortgage		—		—		—		—		—		313		372		685		39		40
Other liquidating		15		28		43		9		6		41		195		236		3		31
Total	$	383	$	1,886	$	2,269	$	87	$	69	$	946	$	2,988	$	3,934	$	191	$	151

Captive and Other Intercompany Financing

Our Finance group provides financing for retail purchases and leases for new and used aircraft and equipment manufactured by our Manufacturing group. The captive finance receivables for these inventory sales that are included in the Finance group’s balance sheets are summarized below:

(In millions)	December 31, 2011	January 1, 2011
Installment contracts	$        1,488	$	1,652
Finance leases	121		220
Distribution finance receivables	8		18
Total	$        1,617	$	1,890

In 2011, 2010 and 2009, our Finance group paid our Manufacturing group $284 million, $416 million and $654 million, respectively, related to the sale of Textron-manufactured products to third parties that were financed by the Finance group. Our Cessna and Industrial segments also received proceeds in those years of $2 million, $10 million and $13 million, respectively, from the sale of equipment from their manufacturing operations to our Finance group for use under operating lease agreements. Operating agreements specify that our Finance group has recourse to our Manufacturing group for certain uncollected amounts related to these transactions. At December 31, 2011 and January 1, 2011, the amounts guaranteed by the Manufacturing group totaled $88 million and $69 million, respectively. Our Manufacturing group has established reserves for losses on its balance sheet within accrued and other liabilities for the receivables it guarantees.

In 2009, Textron Inc. agreed to lend TFC funds to pay down maturing debt. The interest rate on this borrowing was 5% at December 31, 2011 and 7% at January 1, 2011. As of December 31, 2011 and January 1, 2011, the outstanding balance due to Textron Inc. for these borrowings was $490 million and $315 million, respectively. These amounts are included in other current assets for the Manufacturing group and other liabilities for the Finance group in the Consolidated Balance Sheets.

Finance Receivables Held for Sale

At the end of 2011 and 2010, approximately $418 million and $413 million of finance receivables were classified as held for sale. At December 31, 2011, finance receivables held for sale primarily include the entire Golf Mortgage portfolio and a portion of the Timeshare portfolio. On a periodic basis, we evaluate our liquidation strategy for the non-captive finance portfolios as we continue to execute our exit plan. In connection with this evaluation, we also review our definition of the foreseeable future. Due to the relative stability of the golf market through the end of 2011, we believe that the foreseeable future now can be extended to a period of one to two years as opposed to the six- to nine-month period we previously used. Based on this change, in the fourth quarter of 2011, we determined that we no longer had the intent to hold the remaining Golf Mortgage portfolio for investment for the foreseeable future, and, accordingly, transferred $458 million of the remaining Golf Mortgage finance receivables, net of an $80 million allowance for loan losses, from the held for investment classification to the held for sale classification. These finance receivables were recorded at fair value at the time of the transfer, resulting in a $186 million charge recorded to Valuation allowance on transfer of Golf Mortgage portfolio to held for sale. Also, in 2011, we transferred a total of $125 million of Timeshare finance receivables to the held for sale classification, based on an agreement to sell a portion of the portfolio that was sold in the fourth quarter of 2011 and interest in other portions of the portfolio. In 2010, we transferred $219 million of Timeshare finance receivables to the held for sale classification as a result of an unanticipated inquiry we have received to purchase these finance receivables; we determined a sale of these finance receivables would be consistent with our goal to maximize the economic value of our portfolio and accelerate cash collections. We received proceeds of $383 million and $582 million in 2011 and 2010, respectively, from the sale of finance receivables held for sale and $10 million and $86 million, respectively, from collections.