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Note 3. Accounts Receivable and Finance Receivables
Accounts Receivable
Accounts receivable is composed of the following:
(In millions)
January 3,
2015
December 28,
2013
Commercial
$ 765
$ 654
U.S. Government contracts
300
347
1,065
1,001
Allowance for doubtful accounts
(30)
(22)
Total
$ 1,035
$ 979
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 $151 million at January 3, 2015 and $163 million at December 28, 2013.
Finance Receivables
Finance receivables are presented in the following table.
(In millions)
January 3,
2015
December 28,
2013
Finance receivables
$ 1,289
$ 1,548
Allowance for losses
(51)
(55)
Total finance receivables, net
$ 1,238
$ 1,493
Finance receivables primarily includes loans provided to purchasers of new and pre-owned Textron Aviation aircraft and Bell
helicopters. 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 was $1 million at January 3, 2015. 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 receivables also includes held for sale receivables of $35 million and $65 million at January 3, 2015 and
December 28, 2013, respectively. These finance receivables held for sale are recorded at fair value and are not included in the
portfolio quality tables below.
Our finance receivables are diversified across geographic region and borrower industry. At January 3, 2015, 37% of our finance
receivables were distributed throughout the U.S. compared with 41% at the end of 2013. At January 3, 2015 and December 28,
2013, finance receivables included $113 million and $200 million, respectively, of receivables that have been legally sold to a
special purpose entity (SPE), which is a consolidated subsidiary of TFC. The assets of the SPE are pledged as collateral for its
debt, which is reflected as securitized on-balance sheet debt in Note 7. Third-party investors have no legal recourse to TFC beyond
the credit enhancement provided by the assets of the SPE. In addition, at the end of 2014 and 2013, finance receivables of $565
million and $610 million, respectively, have been pledged as collateral for our debt.
Credit Quality Indicators and Nonaccrual Finance Receivables
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. Recognition of interest income is suspended for these accounts
and all cash collections are used 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 that do not meet the watchlist or nonaccrual categories are
classified as performing.
54 Textron Inc. Annual Report • 2014