Finance Receivables, Net

Finance receivables include sales-type leases, direct financing leases and installment loans arising from the marketing of our equipment. These receivables are typically collateralized by a security interest in the underlying assets. Finance receivables, net were as follows:



	December 31,
	2013			2012
Gross receivables	$	5,349		$	6,290
Unearned income	(666		)	(809		)
Subtotal	4,683			5,481
Residual values	1			2
Allowance for doubtful accounts	(154		)	(170		)
Finance Receivables, Net	4,530			5,313
Less: Billed portion of finance receivables, net	113			152
Less: Current portion of finance receivables not billed, net	1,500			1,836
Finance Receivables Due After One Year, Net	$	2,917		$	3,325

Contractual maturities of our gross finance receivables as of December 31, 2013 were as follows (including those already billed of $124):



2014		2015		2016		2017		2018		Thereafter		Total
$	2,010	$	1,504	$	1,023	$	572	$	221	$	19	$	5,349

Transfer and Sale of Finance Receivables

U.S. Lease Finance Receivable Transactions - In 2013 and 2012, we transferred our entire interest in certain groups of U.S. lease finance receivables to a third-party financial institution for cash proceeds and a beneficial interest from the purchaser. The lease contracts, including associated service and supply elements, were initially transferred to a wholly-owned consolidated bankruptcy-remote limited purpose subsidiary, which in turn transferred the principal and interest portions of such contracts to the third-party financial institution (the “ultimate purchaser”). The final transfer met the requirements for derecognition according to ASC Topic 860, Transfers and Servicing and therefore were accounted for as sales. Accordingly, we derecognized the associated lease receivables. The following is a summary of our U.S. activity:



	Year Ended December 31,
	2013		2012		2011
Net carrying value (NCV) sold	$	419	$	682	$	—
Allowance included in NCV	12		18		—
Cash proceeds received	387		630		—
Beneficial interests received	60		101		—
Pre-tax gain on sales	25		44		—
Net fees and expenses	3		5		—

The principal value of the U.S. receivables derecognized from our balance sheet was $761 and $644 at December 31, 2013 and 2012, respectively (sales value of approximately $833 and $715, respectively).

The beneficial interest represents our right to receive future cash flows from the sold receivables, which exceed the servicing fee as well as the ultimate purchaser's initial investment and associated return on that investment. The beneficial interest was initially recognized at an estimate of fair value based on the present value of the expected future cash flows. The present value of the expected future cash flows was calculated using management's best estimate of key assumptions including credit losses, prepayment rate and an appropriate risk adjusted discount rate (all unobservable Level 3 inputs) for which we utilized annualized rates of 2.1%, 9.3% and 10.0%, respectively. These assumptions are supported by both our historical experience and anticipated trends relative to the particular portfolio of receivables sold. However, to assess the sensitivity on the fair value of the beneficial interest, we adjusted the credit loss rate, prepayment rate and discount rate assumptions individually by 10% and 20% while holding the other assumptions constant. Although the effect of multiple assumption changes was not considered in this analysis, a 10% or 20% adverse variation in any one of these three individual assumptions would have decreased the initially recorded beneficial interest by approximately $3 or less for sales in 2013 and $4 or less for sales in 2012.

We will continue to service the sold receivables for which we receive a 1% servicing fee. We have concluded that the 1% servicing fee is adequate compensation and, accordingly, no servicing asset or liability was recorded.

Canada Lease Finance Receivables Transfer: In December 2013, our Canadian subsidiary transferred its entire interest in a group of lease finance receivables to a third-party trust. The transfer was accounted for as a sale and resulted in the derecognition of lease receivables with a net carrying value of $257, net of allowance of $5, the receipt of cash proceeds of $248 and a beneficial interest of $26. A pre-tax gain of $15 was recognized on this transaction and is net of additional fees and expenses of approximately $1. We will continue to service the sold receivables for which we will receive a 1% servicing fee. We have concluded that the 1% servicing fee is adequate compensation and, accordingly, no servicing asset or liability was recorded. The principal value of the Canadian receivables derecognized from our balance sheet was $245 at December 31, 2013 (sale value of approximately $265).

Consistent with the U.S. transfers, the beneficial interest was initially recognized at an estimate of fair value based on the present value of the expected future cash flows. The present value of the expected future cash flows was calculated using management's best estimate of key assumptions including credit losses, prepayment rate and an appropriate risk adjusted discount rate (all unobservable Level 3 inputs) for which we utilized annualized rates of 1.7%, 12.0% and 10.0%, respectively. These assumptions are supported by both our historical experience and anticipated trends relative to the particular portfolio of receivables sold. However, to assess the sensitivity on the fair value of the beneficial interest, we adjusted the credit loss rate, prepayment rate and discount rate assumptions individually by 10% and 20% while holding the other assumptions constant. Although the effect of multiple assumption changes was not considered in this analysis, a 10% or 20% adverse variation in any one of these three individual assumptions would have decreased the initially recorded beneficial interest by approximately $1 or less.

Summary Finance Receivable Sales The lease portfolios transferred and sold were all from our Document Technology segment and the gains on these sales were reported in Financing revenues within the Document Technology segment. The ultimate purchaser has no recourse to our other assets for the failure of customers to pay principal and interest when due beyond our beneficial interests which were $150 and $103 at December 31, 2013 and 2012, respectively, and are included in Other current assets and Other long-term assets accordingly in the accompanying Consolidated Balance Sheets. Beneficial interests of $124 and $103 at December 31, 2013 and 2012, respectively, are held by the bankruptcy-remote subsidiaries and therefore are not available to satisfy any of our creditor obligations. We report collections on the beneficial interests as operating cash flows in the Consolidated Statements of Cash Flows because such beneficial interests are the result of an operating activity and the associated interest rate risk is de minimis considering their weighted average lives of less than 2 years.

The net impact from the sales of finance receivables on operating cash flows is summarized below:



	Year Ended December 31,
	2013			2012			2011
Net cash received for sales of finance receivables⁽¹⁾	$	631		$	625		$	—
Impact from prior sales of finance receivables⁽²⁾	(392		)	(45		)	—
Collections on beneficial interest	58			—			—
Estimated Increase to Operating Cash Flows	$	297		$	580		$	—

_________________


(1)	Net of beneficial interest, fees and expenses.


(2)	Represents cash that would have been collected if we had not sold finance receivables.

Finance Receivables - Allowance for Credit Losses and Credit Quality

Our finance receivable portfolios are primarily in the U.S., Canada and Europe. We generally establish customer credit limits and estimate the allowance for credit losses on a country or geographic basis. Customer credit limits are based upon an initial evaluation of the customer's credit quality and we adjust that limit accordingly based upon ongoing credit assessments of the customer, including payment history and changes in credit quality.

The allowance for doubtful accounts and provision for credit losses represents an estimate of the losses expected to be incurred from the Company's finance receivable portfolio. The level of the allowance is determined on a collective basis by applying projected loss rates to our different portfolios by country, which represent our portfolio segments. This is the level at which we develop and document our methodology to determine the allowance for credit losses. This loss rate is primarily based upon historical loss experience adjusted for judgments about the probable effects of relevant observable data including current economic conditions as well as delinquency trends, resolution rates, the aging of receivables, credit quality indicators and the financial health of specific customer classes or groups. The allowance for doubtful finance receivables is inherently more difficult to estimate than the allowance for trade accounts receivable because the underlying lease portfolio has an average maturity, at any time, of approximately two to three years and contains past due billed amounts, as well as unbilled amounts. We consider all available information in our quarterly assessments of the adequacy of the allowance for doubtful accounts. The identification of account-specific exposure is not a significant factor in establishing the allowance for doubtful finance receivables. Our policy and methodology used to establish our allowance for doubtful accounts has been consistently applied over all periods presented.

Since our allowance for doubtful finance receivables is determined by country, the risk characteristics in our finance receivable portfolio segments will generally be consistent with the risk factors associated with the economies of those countries/regions. Loss rates declined in the U.S. reflecting the effects of improved collections during 2012 and 2013 as well as the lower balance of finance receivables primarily due to sales in 2012 and 2013. The loss rate in Canada was flat in 2013 as compared to the prior year. Since Europe is comprised of various countries and regional economies, the risk profile within our European portfolio segment is somewhat more diversified due to the varying economic conditions among the countries. Charge-offs in Europe were flat in 2013 as compared to the prior years reflecting a stabilization of the credit issues noted in 2011. Loss rates peaked in 2011 as a result of the European economic challenges particularly for those countries in the southern region.

The following table is a rollforward of the allowance for doubtful finance receivables as well as the related investment in finance receivables:



Allowance for Credit Losses:	United States			Canada			Europe			Other⁽³⁾			Total
Balance at December 31, 2011	$	75		$	33		$	91		$	2		$	201
Provision	11			9			52			3			75
Charge-offs	(21		)	(15		)	(59		)	(2		)	(97		)
Recoveries and other⁽¹⁾	3			4			1			1			9
Sale of finance receivables	(18		)	—			—			—			(18		)
Balance at December 31, 2012	50			31			85			4			170
Provision	13			11			53			4			81
Charge-offs	(8		)	(16		)	(60		)	(2		)	(86		)
Recoveries and other⁽¹⁾	2			1			3			—			6
Sale of finance receivables	(12		)	(5		)	—			—			(17		)
Balance at December 31, 2013	$	45		$	22		$	81		$	6		$	154
Finance Receivables Collectively Evaluated for Impairment:
December 31, 2012⁽²⁾	$	2,012		$	801		$	2,474		$	194		$	5,481
December 31, 2013⁽²⁾	$	1,666		$	421		$	2,292		$	304		$	4,683

______________


(1)	Includes the impacts of foreign currency translation and adjustments to reserves necessary to reflect events of non-payment such as customer accommodations and contract terminations.


(2)	Total Finance receivables exclude residual values of $1 and $2 and the allowance for credit losses of $154 and $170 at December 31, 2013 and 2012, respectively.


(3)	Includes developing market countries and smaller units.

In the U.S. and Canada, customers are further evaluated or segregated by class based on industry sector. The primary customer classes are Finance & Other Services, Government & Education; Graphic Arts; Industrial; Healthcare and Other. In Europe, customers are further grouped by class based on the country or region of the customer. The primary customer classes include the U.K./Ireland, France and the following European regions - Central, Nordic and Southern. These groupings or classes are used to understand the nature and extent of our exposure to credit risk arising from finance receivables.

We evaluate our customers based on the following credit quality indicators:

•

Investment grade: This rating includes accounts with excellent to good business credit, asset quality and the capacity to meet financial obligations. These customers are less susceptible to adverse effects due to shifts in economic conditions or changes in circumstance. The rating generally equates to a Standard & Poors (S&P) rating of BBB- or better. Loss rates in this category are normally minimal at less than 1%.


•	Non-investment grade: This rating includes accounts with average credit risk that are more susceptible to loss in the event of adverse business or economic conditions. This rating generally equates to a BB S&P rating. Although we experience higher loss rates associated with this customer class, we believe the risk is somewhat mitigated by

the fact that our leases are fairly well dispersed across a large and diverse customer base. In addition, the higher loss rates are largely offset by the higher rates of return we obtain with such leases. Loss rates in this category are generally in the range of 2% to 4%.

•

Substandard: This rating includes accounts that have marginal credit risk such that the customer’s ability to make repayment is impaired or may likely become impaired. We use numerous strategies to mitigate risk including higher rates of interest, prepayments, personal guarantees, etc. Accounts in this category include customers who were downgraded during the term of the lease from investment and non-investment grade evaluation when the lease was originated. Accordingly there is a distinct possibility for a loss of principal and interest or customer default. The loss rates in this category are around 10%.

Credit quality indicators are updated at least annually, and the credit quality of any given customer can change during the life of the portfolio. Details about our finance receivables portfolio based on industry and credit quality indicators are as follows:



	December 31, 2013								December 31, 2012
	Investment Grade		Non-investment Grade		Sub-standard		Total Finance Receivables		Investment Grade		Non-investment Grade		Sub-standard		Total Finance Receivables
Finance and other services	$	189	$	102	$	34	$	325	$	252	$	147	$	59	$	458
Government and education	656		12		3		671		750		15		4		769
Graphic arts	142		59		108		309		92		90		137		319
Industrial	92		28		15		135		115		31		17		163
Healthcare	74		25		16		115		109		37		14		160
Other	55		27		29		111		70		39		34		143
Total United States	1,208		253		205		1,666		1,388		359		265		2,012
Finance and other services	57		32		19		108		151		116		40		307
Government and education	96		9		1		106		117		10		2		129
Graphic arts	34		28		23		85		37		34		30		101
Industrial	34		22		23		79		66		40		29		135
Other	29		9		5		43		75		43		11		129
Total Canada	250		100		71		421		446		243		112		801
France	282		314		122		718		274		294		134		702
U.K./Ireland	199		171		42		412		215		155		50		420
Central⁽¹⁾	287		394		43		724		315		445		56		816
Southern⁽²⁾	102		187		58		347		139		230		73		442
Nordic⁽³⁾	46		42		3		91		49		36		9		94
Total Europe	916		1,108		268		2,292		992		1,160		322		2,474
Other	226		69		9		304		148		39		7		194
Total	$	2,600	$	1,530	$	553	$	4,683	$	2,974	$	1,801	$	706	$	5,481

_____________


(1)	Switzerland, Germany, Austria, Belgium and Holland.


(2)	Italy, Greece, Spain and Portugal.


(3)	Sweden, Norway, Denmark and Finland.

The aging of our receivables portfolio is based upon the number of days an invoice is past due. Receivables that are more than 90 days past due are considered delinquent. Receivable losses are charged against the allowance when management believes the uncollectibility of the receivable is confirmed and is generally based on individual credit evaluations, results of collection efforts and specific circumstances of the customer. Subsequent recoveries, if any, are credited to the allowance.

We generally continue to maintain equipment on lease and provide services to customers that have invoices for finance receivables that are 90 days or more past due and, as a result of the bundled nature of billings, we also continue to accrue interest on those receivables. However, interest revenue for such billings is only recognized if collectability is deemed reasonably assured. The aging of our billed finance receivables is as follows:



	December 31, 2013
	Current		31-90 Days Past Due		>90 Days Past Due		Total Billed		Unbilled		Total Finance Receivables		>90 Days and Accruing
Finance and other services	$	7	$	2	$	1	$	10	$	315	$	325	$	12
Government and education	17		4		3		24		647		671		34
Graphic arts	12		1		—		13		296		309		5
Industrial	3		1		1		5		130		135		6
Healthcare	3		1		—		4		111		115		5
Other	3		1		—		4		107		111		3
Total United States	45		10		5		60		1,606		1,666		65
Canada	4		3		3		10		411		421		19
France	—		—		—		—		718		718		40
U.K./Ireland	1		1		—		2		410		412		2
Central⁽¹⁾	3		2		3		8		716		724		23
Southern⁽²⁾	21		5		7		33		314		347		45
Nordic⁽³⁾	2		—		—		2		89		91		—
Total Europe	27		8		10		45		2,247		2,292		110
Other	8		1		—		9		295		304		—
Total	$	84	$	22	$	18	$	124	$	4,559	$	4,683	$	194



	December 31, 2012
	Current		31-90 Days Past Due		>90 Days Past Due		Total Billed		Unbilled		Total Finance Receivables		>90 Days and Accruing
Finance and other services	$	12	$	3	$	2	$	17	$	441	$	458	$	18
Government and education	21		5		3		29		740		769		42
Graphic arts	16		1		1		18		301		319		12
Industrial	5		2		1		8		155		163		6
Healthcare	6		2		1		9		151		160		9
Other	5		1		1		7		136		143		6
Total United States	65		14		9		88		1,924		2,012		93
Canada	2		3		2		7		794		801		30
France	—		5		1		6		696		702		22
U.K./Ireland	2		—		2		4		416		420		2
Central⁽¹⁾	3		2		4		9		807		816		30
Southern⁽²⁾	20		8		14		42		400		442		72
Nordic⁽³⁾	1		—		—		1		93		94		—
Total Europe	26		15		21		62		2,412		2,474		126
Other	2		1		—		3		191		194		—
Total	$	95	$	33	$	32	$	160	$	5,321	$	5,481	$	249

________________


(1)	Switzerland, Germany, Austria, Belgium and Holland.


(2)	Italy, Greece, Spain and Portugal.


(3)	Sweden, Norway, Denmark and Finland.