Accounts Receivable and Finance Receivables

6 Months Ended

Jun. 30, 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)	June 30, 2012			December 31, 2011
Commercial	$	577		$	528
U.S. Government contracts	358			346
	935			874
Allowance for doubtful accounts	(18		)	(18		)
Total accounts receivable, net	$	917		$	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 $213 million at June 30, 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.  Beginning this quarter, we are reporting our captive business as one product line, which primarily includes aviation finance receivables, and to a limited extent, golf equipment finance receivables.

(In millions)	June 30, 2012		December 31, 2011
Captive	$	1,753	$	1,945
Golf Mortgage	244		381
Timeshare	203		318
Structured Capital	149		208
Other liquidating	23		43
Total finance receivables	2,372		2,895
Less: Allowance for losses	122		156
Less: Finance receivables held for sale	244		418
Total finance receivables held for investment, net	$	2,006	$	2,321

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, the liquidity position of individual borrowers and guarantors 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 once they 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 credit quality indicators discussed above is as follows:

	June 30, 2012											December 31, 2011
(In millions)	Performing			Watchlist			Nonaccrual			Total		Performing			Watchlist			Nonaccrual			Total
Captive	$	1,491		$	150		$	112		$	1,753	$	1,558		$	251		$	136		$	1,945
Timeshare	73			4			126			203		89			25			167			281
Structured Capital	144			5			—			149		203			5			—			208
Other liquidating	9			—			14			23		25			—			18			43
Total	$	1,717		$	159		$	252		$	2,128	$	1,875		$	281		$	321		$	2,477
% of Total	80.7		%	7.5		%	11.8		%			75.7		%	11.3		%	13.0		%

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 are summarized in the table below:

	June 30, 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	$	1,571	$	43	$	71	$	68	$	1,753	$	1,758	$	69	$	43	$	75	$	1,945
Timeshare	171		10		—		22		203		238		3		—		40		281
Structured Capital	149		—		—		—		149		208		—		—		—		208
Other liquidating	15		—		—		8		23		35		—		—		8		43
Total	$	1,906	$	53	$	71	$	98	$	2,128	$	2,239	$	72	$	43	$	123	$	2,477

We had no accrual status loans that were greater than 90 days past due at June 30, 2012 or at December 31, 2011.  At June 30, 2012, the 60+ days contractual delinquency as a percentage of finance receivables held for investment was 7.94%, compared with 6.70% at December 31, 2011.

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 the first half of 2012 to finance receivables held for investment were not material, primarily as a result of the reclassification of the Golf Mortgage finance receivables from the held for investment classification to the held for sale classification at December 31, 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 2012 or 2011.

A summary of impaired finance receivables, excluding leveraged leases, 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
June 30, 2012
Captive	$	28	$	85	$	113	$	119	$	23	$	121
Timeshare	95		62		157		214		29		195
Other liquidating	1		12		13		23		9		14
Total	$	124	$	159	$	283	$	356	$	61	$	330
December 31, 2011
Captive	$	47	$	94	$	141	$	144	$	40	$	149
Timeshare	170		57		227		288		38		315
Golf Mortgage	—		—		—		—		—		232
Other liquidating	3		12		15		59		9		30
Total	$	220	$	163	$	383	$	491	$	87	$	726

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 of the underlying collateral, 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.

The evaluation of our portfolios is inherently subjective, as it requires estimates, including the amount and timing of future cash flows expected to be received on impaired finance receivables and the estimated fair value of the underlying collateral, which may differ from actual results.  While our analysis is specific to each individual account, critical factors included in this analysis vary by product line and include the following:

·Captive - industry valuation guides, age and physical condition of the collateral, payment history, and existence and financial strength of guarantors.

·Timeshare - 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 Captive, 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, such as Timeshare, 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 estimating our allowance for losses to cover accounts not specifically identified, critical factors vary by product line and include the following:

·Captive - the collateral value of the portfolio, historical default experience and delinquency trends.

·Timeshare - 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 when the collateral is repossessed and are charged off when the remaining balance is deemed to be uncollectible.

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

(In millions)	Captive			Golf Mortgage			Timeshare			Other liquidating			Total
For the six months ended June 30, 2012
Beginning balance	$	101		$	—		$	40		$	15		$	156
Provision for losses	—			—			2			(5		)	(3		)
Charge-offs	(26		)	—			(13		)	(1		)	(40		)
Recoveries	7			—			—			2			9
Ending balance	$	82		$	—		$	29		$	11		$	122
For the six months ended July 2, 2011
Beginning balance	$	123		$	79		$	106		$	34		$	342
Provision for losses	14			(1		)	10			1			24
Charge-offs	(26		)	(4		)	(28		)	(10		)	(68		)
Recoveries	6			—			—			8			14
Transfers	—			—			—			(13		)	(13		)
Ending balance	$	117		$	74		$	88		$	20		$	299

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 $149 million and $281 million of leveraged leases at June 30, 2012 and July 2, 2011, respectively, in accordance with authoritative accounting standards.

	June 30, 2012								July 2, 2011
					Allowance		Allowance						Allowance		Allowance
	Finance				Based on		Based on		Finance				Based on		Based on
	Receivables Evaluated				Individual		Collective		Receivables Evaluated				Individual		Collective
(In millions)	Individually		Collectively		Evaluation		Evaluation		Individually		Collectively		Evaluation		Evaluation
Captive	$	113	$	1,640	$	23	$	59	$	143	$	2,009	$	44	$	73
Timeshare	157		46		29		—		322		188		86		2
Golf Mortgage	—		—		—		—		294		325		44		30
Other liquidating	13		10		9		2		28		54		9		11
Total	$	283	$	1,696	$	61	$	61	$	787	$	2,576	$	183	$	116