Accounts Receivable and Finance Receivables

6 Months Ended

Jun. 29, 2019

Accounts Receivable and Finance Receivables

Note 3.  Accounts Receivable and Finance Receivables

Accounts Receivable

Accounts receivable is composed of the following:

	June 29,		December 29,
(In millions)	2019		2018
Commercial	$	874	$	885
U.S. Government contracts		142		166
		1,016		1,051
Allowance for doubtful accounts		(27)		(27)
Total accounts receivable, net	$	989	$	1,024

Finance Receivables

Finance receivables are presented in the following table:

	June 29,		December 29,
(In millions)	2019		2018
Finance receivables	$	802	$	789
Allowance for losses		(26)		(29)
Total finance receivables, net	$	776	$	760

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 the delinquency aging category are summarized as follows:

	June 29,			December 29,
(Dollars in millions)	2019			2018
Performing	$	732		$	704
Watchlist		39			45
Nonaccrual		31			40
Nonaccrual as a percentage of finance receivables		3.87	%		5.07	%
Less than 31 days past due	$	726		$	719
31-60 days past due		64			56
61-90 days past due		3			5
Over 90 days past due		9			9
60+ days contractual delinquency as a percentage of finance receivables		1.50	%		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 finance receivables and the allowance for 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.  

	June 29,		December 29,
(In millions)	2019		2018
Finance receivables evaluated collectively	$	669	$	630
Finance receivables evaluated individually		31		58
Allowance for losses based on collective evaluation		24		24
Allowance for losses based on individual evaluation		2		5
Impaired finance receivables with no related allowance for losses	$	23	$	43
Impaired finance receivables with related allowance for losses		8		15
Unpaid principal balance of impaired finance receivables		41		67
Average recorded investment of impaired finance receivables		40		61