Accounts Receivable and Finance Receivables

6 Months Ended

Jul. 02, 2011

Accounts Receivable and Finance Receivables [Abstract]

Accounts Receivable and Finance Receivables

Note 6: Accounts Receivable and Finance Receivables

Accounts Receivable

Accounts receivable is composed of the following:

	July 2,			January 1,
(In millions)	2011			2011
Commercial	$	572		$	496
U.S. Government contracts		320			416
		892			912
Allowance for doubtful accounts		(18	)		(20	)
	$	874		$	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 $165 million at July 2, 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:

(Dollars in millions)	July 2, 2011				January 1, 2011
Aviation	$	1,985	52	%	$	2,120	46	%
Golf equipment		167	4			212	5
Golf mortgage		746	20			876	19
Timeshare		543	14			894	19
Structured capital		281	7			317	7
Other liquidating		102	3			207	4
Total finance receivables		3,824	100	%		4,626	100	%
Less: Allowance for losses		299				342
Less: Finance receivables held for sale		180				413
Total finance receivables held for investment, net	$	3,345			$	3,871

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 collateral value, the liquidity position of individual borrowers and guarantors, debt service coverage in the golf mortgage product line and default rates of our notes receivable collateral in the timeshare product line. 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 internally assigned credit quality indicators discussed above is as follows:

	July 2, 2011											January 1, 2011
(In millions)	Performing			Watchlist			Nonaccrual			Total		Performing			Watchlist			Nonaccrual			Total
Aviation	$	1,640		$	203		$	142		$	1,985	$	1,713		$	238		$	169		$	2,120
Golf equipment		110			42			15			167		138			51			23			212
Golf mortgage		192			201			226			619		163			303			219			685
Timeshare		206			27			277			510		222			77			382			681
Structured capital		255			26			—			281		290			27			—			317
Other liquidating		44			2			36			82		130			11			57			198
Total	$	2,447		$	501		$	696		$	3,644	$	2,656		$	707		$	850		$	4,213
% of Total		67.2	%		13.7	%		19.1	%				63.0	%		16.8	%		20.2	%

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 tables below:

	Less Than						Greater Than
	31 Days		31-60 Days		61-90 Days		90 Days
(In millions)	Past Due		Past Due		Past Due		Past Due		Total
July 2, 2011
Aviation	$	1,842	$	44	$	38	$	61	$	1,985
Golf equipment		144		11		3		9		167
Golf mortgage		522		12		—		85		619
Timeshare		425		—		—		85		510
Structured capital		281		—		—		—		281
Other liquidating		59		2		1		20		82
Total	$	3,273	$	69	$	42	$	260	$	3,644
January 1, 2011
Aviation	$	1,964	$	67	$	41	$	48	$	2,120
Golf equipment		171		13		9		19		212
Golf mortgage		543		12		7		123		685
Timeshare		533		14		6		128		681
Structured capital		317		—		—		—		317
Other liquidating		166		2		1		29		198
Total	$	3,694	$	108	$	64	$	347	$	4,213

At July 2, 2011, accrual status loans that were 90 days past due totaled $7 million. We had no accrual status loans that were 90 days past due at January 1, 2011. At July 2, 2011, the 60+ days contractual delinquency as a percentage of finance receivables held for investment was 8.29%, compared with 9.77% at January 1, 2011.

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 the first half of 2011 or 2010.

The average recorded investment in impaired loans for the first half of 2011 and 2010 is provided below:

			Golf		Golf				Other
(In millions)	Aviation		Equipment		Mortgage		Timeshare		Liquidating		Total
For the six months ended July 2, 2011
Impaired loans with a related allowance for losses recorded	$	136	$	4	$	193	$	309	$	18	$	660
Impaired loans with no related allowance for losses recorded		20		—		92		48		18		178
Total	$	156	$	4	$	285	$	357	$	36	$	838
For the six months ended July 3, 2010
Impaired loans with a related allowance for losses recorded	$	210	$	4	$	183	$	357	$	24	$	778
Impaired loans with no related allowance for losses recorded		12		2		116		63		69		262
Total	$	222	$	6	$	299	$	420	$	93	$	1,040

A summary of impaired finance receivables, excluding leveraged leases, and related allowance for losses is provided below:

			Golf		Golf				Other
(In millions)	Aviation		Equipment		Mortgage		Timeshare		Liquidating		Total
July 2, 2011
Impaired loans with a related allowance for losses recorded:
Recorded investment	$	118	$	3	$	198	$	245	$	18	$	582
Unpaid principal balance		120		3		208		281		24		636
Related allowance		43		1		44		86		9		183
Impaired loans with no related allowance for losses recorded:
Recorded investment		22		—		96		77		10		205
Unpaid principal balance		22		—		102		77		51		252
Total impaired loans:
Recorded investment		140		3		294		322		28		787
Unpaid principal balance		142		3		310		358		75		888
Related allowance		43		1		44		86		9		183
January 1, 2011
Impaired loans with a related allowance for losses recorded:
Recorded investment	$	147	$	4	$	175	$	355	$	16	$	697
Unpaid principal balance		144		5		178		385		15		727
Related allowance		45		2		39		102		3		191
Impaired loans with no related allowance for losses recorded:
Recorded investment		17		—		138		69		30		254
Unpaid principal balance		21		—		146		74		89		330
Total impaired loans:
Recorded investment		164		4		313		424		46		951
Unpaid principal balance		165		5		324		459		104		1,057
Related allowance		45		2		39		102		3		191

Allowance for Losses
We maintain the allowance for losses on finance receivables held for investment at a level considered adequate to cover inherent losses in the portfolio based on management’s evaluation and analysis by product line. For larger balance accounts specifically identified as impaired, including large accounts in homogeneous portfolios, a reserve is established based on comparing the carrying value with either a) the expected future cash flows, discounted at the finance receivable’s effective interest rate; or b) the fair value, if the finance receivable is collateral dependent. The expected future cash flows consider collateral value; financial performance and liquidity of our borrower; existence and financial strength of guarantors; estimated recovery costs, including legal expenses; and costs associated with the repossession/foreclosure and eventual disposal of collateral. When there is a range of potential outcomes, we perform multiple discounted cash flow analyses and weight the potential outcomes based on their relative likelihood of occurrence using the probability-weighted approach.

The evaluation of our portfolios is inherently subjective as it requires estimates. These estimates include the amount and timing of future cash flows expected to be received on impaired finance receivables and the underlying collateral, which may differ from actual results. While our analysis is specific to each individual account, the most critical factors included in this analysis vary by product line. For the aviation product line, these factors include industry valuation guides, physical condition of the aircraft, payment history, and existence and financial strength of guarantors. For the golf equipment line, the critical factors are the age and condition of the collateral, while the factors for the golf mortgage line include historical golf course, hotel or marina cash flow performance; estimates of golf rounds and price per round or occupancy and room rates; market discount and capitalization rates; and existence and financial strength of guarantors. For the timeshare product line, the critical factors are the historical performance of consumer notes receivable collateral, real estate valuations, operating expenses of the borrower, the impact of bankruptcy court rulings on the value of the collateral, legal and other professional expenses and borrower’s access to capital.

We also establish an allowance for losses by product line to cover probable but specifically unknown losses existing in the portfolio. For homogeneous portfolios, including the aviation and golf equipment product lines, the allowance is established as a percentage of non-recourse finance receivables, which have not been identified as requiring specific reserves. The percentage is based on a combination of factors, including historical loss experience, current delinquency and default trends, collateral values, and both general economic and specific industry trends. For non-homogeneous portfolios, including the golf mortgage and timeshare product lines, the allowance is established as a percentage of watchlist balances, as defined on page 10, which represents a combination of assumed default likelihood and loss severity based on historical experience, industry trends and collateral values. In establishing our allowance for losses to cover accounts not specifically identified, the most critical factors for the aviation product line include the collateral value of the portfolio, historical default experience and delinquency trends; for golf equipment, factors considered include historical loss experience and delinquency trends; and for golf mortgage, factors include an evaluation of individual loan credit quality indicators such as delinquency, loan balance to collateral value, debt service coverage, existence and financial strength of guarantors, historical progression from watchlist to nonaccrual status and historical loss severity. For the timeshare product line, we evaluate individual loan credit quality indicators such as borrowing base shortfalls for revolving notes receivable facilities, default rates of our notes receivable collateral, borrower’s access to capital, historical progression from watchlist to nonaccrual status and estimates of loss severity based on analysis of impaired loans in the product line.

Finance receivables held for investment are written down to the fair value (less estimated costs to sell) of the related collateral at the earlier of the date when the collateral is repossessed or when no payment has been received for six months unless management deems the receivable collectable. Finance receivables are charged off when the remaining balance is deemed to be uncollectible.

A rollforward of the allowance for losses on finance receivables held for investment and a summary of its composition, based on how the underlying finance receivables are evaluated for impairment, is presented below. The finance receivables reported in the following table specifically exclude $281 million of leveraged leases at both July 2, 2011 and July 3, 2010, in accordance with authoritative accounting standards:

													Structured
													Capital and
				Golf			Golf						Other
(In millions)	Aviation			Equipment			Mortgage			Timeshare			Liquidating			Total
For the six months ended July 2, 2011
Allowance for losses
Beginning balance	$	107		$	16		$	79		$	106		$	34		$	342
Provision for losses		16			(2	)		(1	)		10			1			24
Net charge-offs and transfers		(17	)		(3	)		(4	)		(28	)		(15	)		(67	)
Ending balance	$	106		$	11		$	74		$	88		$	20		$	299
Ending balance based on individual evaluations		43			1			44			86			9			183
Ending balance based on collective evaluation		63			10			30			2			11			116
Finance receivables
Individually evaluated for impairment	$	140		$	3		$	294		$	322		$	28		$	787
Collectively evaluated for impairment		1,845			164			325			188			54			2,576
Balance at end of period	$	1,985		$	167		$	619		$	510		$	82		$	3,363
For the six months ended July 3, 2010
Allowance for losses
Beginning balance	$	114		$	9		$	65		$	79		$	74		$	341
Provision for losses		16			7			51			32			(7	)		99
Net charge-offs		(30	)		(3	)		(41	)		(1	)		(13	)		(88	)
Ending balance	$	100		$	13		$	75		$	110		$	54		$	352
Ending balance based on individual evaluations		39			1			40			99			2			181
Ending balance based on collective evaluation		61			12			35			11			52			171
Finance receivables
Individually evaluated for impairment	$	163		$	7		$	304		$	448		$	85		$	1,007
Collectively evaluated for impairment		2,081			227			484			634			363			3,789
Balance at end of period	$	2,244		$	234		$	788		$	1,082		$	448		$	4,796