Accounts Receivable and Finance Receivables

9 Months Ended

Oct. 01, 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:

	October 1,			January 1,
(In millions)	2011			2011
Commercial	$	578		$	496
U.S. Government contracts		368			416
		946			912
Allowance for doubtful accounts		(19	)		(20	)
	$	927		$	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 $172 million at October 1, 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:

	October 1,		January 1,
(Dollars in millions)	2011		2011
Aviation	$	1,927	$	2,120
Golf equipment		141		212
Golf mortgage		703		876
Timeshare		495		894
Structured capital		217		317
Other liquidating		64		207
Total finance receivables		3,547		4,626
Less: Allowance for losses		276		342
Less: Finance receivables held for sale		245		413
Total finance receivables held for investment, net	$	3,026	$	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:

	October 1, 2011											January 1, 2011
(In millions)	Performing			Watchlist			Nonaccrual			Total		Performing			Watchlist			Nonaccrual			Total
Aviation	$	1,591		$	214		$	122		$	1,927	$	1,713		$	238		$	169		$	2,120
Golf equipment		91			38			12			141		138			51			23			212
Golf mortgage		225			133			228			586		163			303			219			685
Timeshare		129			24			214			367		222			77			382			681
Structured capital		212			5			—			217		290			27			—			317
Other liquidating		34			—			30			64		130			11			57			198
Total	$	2,282		$	414		$	606		$	3,302	$	2,656		$	707		$	850		$	4,213
% of Total		69.1	%		12.5	%		18.4	%				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
October 1, 2011
Aviation	$	1,764	$	75	$	35	$	53	$	1,927
Golf equipment		122		8		5		6		141
Golf mortgage		502		11		13		60		586
Timeshare		283		—		—		84		367
Structured capital		217		—		—		—		217
Other liquidating		45		—		—		19		64
Total	$	2,933	$	94	$	53	$	222	$	3,302
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

We had no accrual status loans that were greater than 90 days past due at October 1, 2011 or at January 1, 2011. At October 1, 2011, the 60+ days contractual delinquency as a percentage of finance receivables held for investment was 8.33%, 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 nine months of 2011 or 2010.

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

			Golf		Golf
(In millions)	Aviation		Equipment		Mortgage		Timeshare		Other Liquidating		Total
For the nine months ended October 1, 2011
Impaired loans with a related allowance for losses recorded	$	126	$	4	$	193	$	283	$	19	$	625
Impaired loans with no related allowance for losses recorded		21		—		96		54		15		186
Total	$	147	$	4	$	289	$	337	$	34	$	811
For the nine months ended October 2, 2010
Impaired loans with a related allowance for losses recorded	$	198	$	5	$	184	$	356	$	23	$	766
Impaired loans with no related allowance for losses recorded		14		1		112		70		60		257
Total	$	212	$	6	$	296	$	426	$	83	$	1,023

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
October 1, 2011
Impaired loans with a related allowance for losses recorded:
Recorded investment	$	94	$	2	$	196	$	206	$	23	$	521
Unpaid principal balance		95		2		205		245		30		577
Related allowance		39		—		51		76		12		178
Impaired loans with no related allowance for losses recorded:
Recorded investment		26		—		108		73		4		211
Unpaid principal balance		27		—		114		87		44		272
Total impaired loans:
Recorded investment		120		2		304		279		27		732
Unpaid principal balance		122		2		319		332		74		849
Related allowance		39		—		51		76		12		178
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

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. Modifications often arise in the golf mortgage and timeshare product lines as a result of the lack of financing available to borrowers in these industries. Loans in our golf mortgage product line are typically structured with amortization periods between 20 and 30 years and contractual maturities of between 5 and 10 years, resulting in a significant balloon payment. We modify a significant portion of these loans at, or near the maturity date as a result of this structure.

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.

Finance receivables held for investment that were modified during the three- and nine-month periods of 2011 and are categorized as troubled debt restructurings, excluding related allowances for doubtful accounts and transfers of assets in satisfaction of the loan balance, are summarized below.

			Pre-		Post-
			Modification		Modification		Recorded
	Number of		Recorded		Recorded		Investment at
(Dollars in millions)	Customers		Investment		Investment		October 1, 2011
For the Three Months Ended October 1, 2011
Golf mortgage		7	$	38	$	35	$	35
Timeshare		3		136		136		133
For the Nine Months Ended October 1, 2011
Golf mortgage		21	$	166	$	165	$	163
Timeshare		9		219		219		158

Due to the nature of these restructurings, the financial effect of the modifications included in the above table was insignificant. Modified finance receivables are classified as impaired loans and are evaluated on an individual basis to determine whether reserves are required. Our reserve evaluation includes an estimate of the likelihood that the borrower will be able to perform under the contractual terms of the modification. Subsequent payment defaults or delinquency trends of finance receivables modified as troubled debt restructurings are also factored into the evaluation of impaired loans for reserving purposes as a default decreases the likelihood that the borrower will be able to perform under the terms of future modifications. During the first nine months of 2011, we had four customer defaults in our timeshare product line for finance receivables that had been modified as troubled debt restructurings within the previous twelve months. The recorded investment for these customers totaled $171 million, excluding related allowances for doubtful accounts, at October 1, 2011.

We may foreclose, repossess or receive collateral when a customer no longer has the ability to make payment. These transfers of assets in full or partial satisfaction of the loan balance are also considered troubled debt restructurings if the fair value of the assets transferred is less than our recorded investment. Similar to the troubled debt restructurings described above, these loans typically have been classified as impaired loans prior to the asset transfer; therefore, reserves have already been established related to the loan. As a result, for the three and nine months ended October 1, 2011, respectively, charge-offs of $19 million and $58 million upon the transfer of such assets were largely offset by previously established reserves.

Troubled debt restructurings resulting in transfers of assets in satisfaction of the loan balance that occurred during the three and nine months of 2011 are as follows.

			Pre-
			Modification		Post-
	Number of		Recorded		Modification
(Dollars in millions)	Customers		Investment		Asset Balance
For the Three Months Ended October 1, 2011
Aviation		5	$	17	$	11
Golf mortgage		2		14		7
Timeshare		1		30		24
For the Nine Months Ended October 1, 2011
Aviation		19	$	46	$	27
Golf mortgage		3		23		14
Timeshare		2		96		60

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 $217 million and $281 million of leveraged leases at October 1, 2011 and October 2, 2010, respectively, in accordance with authoritative accounting standards:

													Structured
													Capital and
				Golf			Golf						Other
(In millions)	Aviation			Equipment			Mortgage			Timeshare			Liquidating			Total
For the nine months ended October 1, 2011
Allowance for losses
Beginning balance	$	107		$	16		$	79		$	106		$	34		$	342
Provision for losses		18			(3	)		4			7			1			27
Net charge-offs and transfers		(27	)		(4	)		(11	)		(35	)		(16	)		(93	)
Ending balance	$	98		$	9		$	72		$	78		$	19		$	276
Ending balance based on individual evaluations		39			—			51			76			12			178
Ending balance based on collective evaluation		59			9			21			2			7			98
Finance receivables
Individually evaluated for impairment	$	120		$	2		$	304		$	279		$	27		$	732
Collectively evaluated for impairment		1,807			139			282			88			37			2,353
Balance at end of period	$	1,927		$	141		$	586		$	367		$	64		$	3,085
For the nine months ended October 2, 2010
Allowance for losses
Beginning balance	$	114		$	9		$	65		$	79		$	74		$	341
Provision for losses		27			12			61			37			(9	)		128
Net charge-offs		(36	)		(5	)		(48	)		(5	)		(20	)		(114	)
Ending balance	$	105		$	16		$	78		$	111		$	45		$	355
Ending balance based on individual evaluations		47			2			38			99			7			193
Ending balance based on collective evaluation		58			14			40			12			38			162
Finance receivables
Individually evaluated for impairment	$	180		$	6		$	289		$	442		$	70		$	987
Collectively evaluated for impairment		2,002			194			438			565			266			3,465
Balance at end of period	$	2,182		$	200		$	727		$	1,007		$	336		$	4,452