Accounts Receivable and Finance Receivables

3 Months Ended

Apr. 04, 2020

Accounts Receivable and Finance Receivables

Accounts Receivable and Finance Receivables

Note 3.  Accounts Receivable and Finance Receivables

Accounts Receivable

Accounts receivable is composed of the following:

	April 4,		January 4,
(In millions)	2020		2020
Commercial	$	720	$	835
U.S. Government contracts		189		115
		909		950
Allowance for credit losses		(39)		(29)
Total accounts receivable, net	$	870	$	921

Finance Receivables

Finance receivables are presented in the following table:

	April 4,		January 4,
(In millions)	2020		2020
Finance receivables	$	706	$	707
Allowance for credit losses		(25)		(25)
Total finance receivables, net	$	681	$	682

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.

In March 2020, due to the economic impact of the COVID-19 pandemic and at the request of certain of our customers, we began working with them to provide temporary payment relief through loan modifications. 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. Loan modifications in the first quarter of 2020 were not significant, however, we are working on modifications for approximately 30% of our total finance receivables. 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:

	April 4,			January 4,
(Dollars in millions)	2020			2020
Performing	$	554		$	664
Watchlist		115			4
Nonaccrual		37			39
Nonaccrual as a percentage of finance receivables		5.24	%		5.52	%
Current and less than 31 days past due	$	622		$	637
31-60 days past due		29			53
61-90 days past due		35			7
Over 90 days past due		20			10
60+ days contractual delinquency as a percentage of finance receivables		7.79	%		2.40	%

At April 4, 2020, 31% of our performing finance receivables were originated since the beginning of 2019 and 35% were originated from 2016 to 2018. For finance receivables categorized as watchlist, 36% were originated since the beginning of 2019 and 23% from 2016 to 2018.

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.  

	April 4,		January 4,
(In millions)	2020		2020
Finance receivables evaluated collectively	$	489	$	564
Finance receivables evaluated individually		113		39
Allowance for credit losses based on collective evaluation		22		22
Allowance for credit losses based on individual evaluation		3		3
Impaired finance receivables with no related allowance for credit losses	$	96	$	22
Impaired finance receivables with related allowance for credit losses		17		17
Unpaid principal balance of impaired finance receivables		124		50
Allowance for credit losses on impaired loans		3		3
Average recorded investment of impaired finance receivables		76		40