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Accounts Receivable and Finance Receivables
 12 Months Ended
Dec. 29, 2012
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:

 

(In millions)

 

December 29,
2012

 

 

December 31,
2011

 

Commercial

 

   $

534

 

 

   $

528

 

U.S. Government contracts

 

314

 

 

346

 

 

 

848

 

 

874

 

Allowance for doubtful accounts

 

(19

)

 

(18

)

Total

 

   $

829

 

 

   $

856

 

 

We have unbillable receivables primarily 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 $149 million at December 29, 2012 and $192 million at December 31, 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.

 

(In millions)

 

December 29,
2012

 

 

December 31,
2011

 

Captive

 

$

1,704

 

 

$

1,945

 

Non-captive:

 

 

 

 

 

 

Golf Mortgage

 

140

 

 

381

 

Structured Capital

 

122

 

 

208

 

Timeshare

 

100

 

 

318

 

Other liquidating

 

8

 

 

43

 

Total finance receivables

 

2,074

 

 

2,895

 

Less: Allowance for losses

 

84

 

 

156

 

Less: Finance receivables held for sale

 

140

 

 

418

 

Total finance receivables held for investment, net

 

$

1,850

 

 

$

2,321

 

 

Captive primarily includes loans and finance leases provided to purchasers of new and used Cessna aircraft and Bell helicopters and also includes loans 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 loans and finance leases in Captive was $1 million at December 29, 2012.  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.  Finance leases with no significant residual value at the end of the contractual term are classified as loans, as their legal and economic substance is more equivalent to a secured borrowing than a finance lease with a significant residual value.  Captive also includes, to a limited extent, 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, which 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 twenty to thirty years.  As of December 29, 2012, loans in Golf Mortgage had an average balance of $7 million and a weighted-average contractual maturity of two years.  All loans in this portfolio are classified as held for sale.  Structured Capital primarily includes leveraged leases secured by the ownership of the leased equipment and real property.  Timeshare includes pools of timeshare interval resort notes that typically have terms of ten to twenty years, as well as term loans secured by timeshare interval inventory.

 

Our finance receivables are diversified across geographic region and borrower industry.  At December 29, 2012, 45% of our finance receivables were distributed throughout the U.S. compared with 54% at the end of 2011.  Finance receivables held for investment are composed primarily of loans.  At December 29, 2012 and December 31, 2011, these finance receivables included $341 million and $559 million, respectively, of receivables, primarily in the Captive product line, that have been legally sold to special purpose entities (SPEs), 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 $116 million and $476 million from the sale of finance receivables in 2012 and 2011, respectively. Total gains resulting from these sales were not material for 2012 and 2011.

 

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 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 held for investment 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.  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 29, 2012

 

 

December 31, 2011

 

(In millions)

 

Performing

 

Watchlist

 

Nonaccrual

 

Total

 

 

Performing

 

Watchlist

 

Nonaccrual

 

Total

 

Captive

 

$

1,476

 

$

130

 

$

98

 

$

1,704

 

 

$

1,558

 

$

251

 

$

136

 

$

1,945

 

Non-captive*

 

185

 

—

 

45

 

230

 

 

317

 

30

 

185

 

532

 

Total

 

$

1,661

 

$

130

 

$

143

 

$

1,934

 

 

$

1,875

 

$

281

 

$

321

 

$

2,477

 

% of Total

 

85.9%

 

6.7%

 

7.4%

 

 

 

 

75.7%

 

11.3%

 

13.0%

 

 

 

 

*Non-captive nonaccrual finance receivables are primarily related to the Timeshare portfolio.

 

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 29, 2012

 

 

December 31, 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

 

Captive

 

  $

 1,531

 

$

87

 

$

55

 

$

31

 

$

1,704

 

 

  $

1,758

 

$

69

 

$

43

 

$

75

 

$

 1,945

 

Non-captive

 

226

 

—

 

1

 

3

 

230

 

 

481

 

3

 

—

 

48

 

532

 

Total

 

  $

 1,757

 

$

87

 

$

56

 

$

34

 

$

1,934

 

 

  $

2,239

 

$

72

 

$

43

 

$

123

 

$

 2,477

 

 

We had no accrual status loans that were greater than 90 days past due at December 29, 2012 or December 31, 2011.  At December 29, 2012 and December 31, 2011, 60+ days contractual delinquency as a percentage of finance receivables held for investment was 4.65% and 6.70%, respectively.

 

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.  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.  The changes effected by modifications made during 2012 and 2011 to finance receivables held for investment were not material.

 

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 2012 or 2011.

 

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 29, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Captive

 

   $

61

 

   $

66

 

$

127

 

$

128

 

$

15

 

$

121

 

Non-captive

 

11

 

33

 

44

 

59

 

12

 

149

 

Total

 

   $

72

 

   $

99

 

$

171

 

$

187

 

$

27

 

$

270

 

December 31, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

Captive

 

   $

47

 

   $

94

 

$

141

 

$

144

 

$

40

 

$

149

 

Non-captive

 

173

 

69

 

242

 

347

 

47

 

577

 

Total

 

   $

220

 

   $

163

 

$

383

 

$

491

 

$

87

 

$

726

 

 

*Non-captive impaired loans are primarily related to the Timeshare portfolio.

 

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 $122 million and $208 million of leveraged leases at December 29, 2012 and December 31, 2011, respectively, in accordance with authoritative accounting standards.

 

 

 

December 29, 2012

 

 

December 31, 2011

 

 

 

Finance
Receivables Evaluated

 

Allowance
Based on
Individual

 

Allowance
Based on
Collective

 

 

Finance
Receivables Evaluated

 

Allowance
Based on
Individual

 

Allowance
Based on
Collective

 

(In millions)

 

Individually

 

Collectively

 

Evaluation

 

Evaluation

 

 

Individually

 

Collectively

 

Evaluation

 

Evaluation

 

Captive

 

$

127

 

$

1,577

 

$

15

 

$

55

 

 

$

141

 

$

1,804

 

$

40

 

$

61

 

Non-captive

 

44

 

64

 

12

 

2

 

 

242

 

82

 

47

 

8

 

Total

 

$

171

 

$

1,641

 

$

27

 

$

57

 

 

$

383

 

$

  1,886

 

$

87

 

$

69

 

 

Allowance for Losses

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

 

(In millions)

 

Captive

 

Golf
Mortgage

 

Timeshare

 

Other
Liquidating

 

Total

 

Balance at January 1, 2011

 

$

123

 

$

79

 

$

106

 

$

34

 

$

342

 

Provision for losses

 

15

 

25

 

(26

)

(2

)

12

 

Charge-offs

 

(43

)

(27

)

(40

)

(14

)

(124

)

Recoveries

 

9

 

3

 

—

 

10

 

22

 

Transfers

 

(3

)

(80

)

—

 

(13

)

(96

)

Balance at December 31, 2011

 

$

101

 

$

—

 

$

40

 

$

15

 

$

156

 

Provision for losses

 

1

 

—

 

2

 

(6

)

(3

)

Charge-offs

 

(42

)

—

 

(32

)

(10

)

(84

)

Recoveries

 

10

 

—

 

1

 

4

 

15

 

Balance at December 29, 2012

 

$

70

 

$

—

 

$

11

 

$

3

 

$

84

 

 

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 29,
2012

 

 

December 31,
2011

 

Loans

 

$

1,389

 

 

$

1,496

 

Finance leases

 

107

 

 

121

 

Total

 

$

1,496

 

 

$

1,617

 

 

In 2012, 2011 and 2010, our Finance group paid our Manufacturing group $309 million, $284 million and $416 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 $19 million, $2 million and $10 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 29, 2012 and December 31, 2011, finance receivables and operating leases subject to recourse to the Manufacturing group totaled $83 million and $88 million, respectively.  Our Manufacturing group has established reserves for losses on its balance sheet within accrued and other liabilities for the amounts it guarantees.

 

Textron lends TFC funds to pay down maturing debt.  The average interest rate on these borrowings was 4.3% and 5.0% during 2012 and 2011, respectively.  At December 29, 2012, there was no outstanding balance due to Textron under this arrangement, and at December 31, 2011, the outstanding balance due to Textron was $490 million.  These amounts are included in other current assets for the Manufacturing group and Due to Manufacturing group for the Finance group in the Consolidated Balance Sheets.

 

Finance Receivables Held for Sale

At the end of 2012 and 2011, $140 million and $418 million of finance receivables were classified as held for sale.  At December 29, 2012, finance receivables held for sale included the entire Golf Mortgage portfolio.  In 2011, we transferred $458 million of the remaining Golf Mortgage portfolio, 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.  We received proceeds of $109 million and $383 million in 2012 and 2011, respectively, from the sale of finance receivables held for sale and $207 million and $10 million, respectively, from payoffs and collections.