Finance Receivables, Net

3 Months Ended

Mar. 31, 2014

Accounts Receivable, Net

Accounts receivable, net were as follows:



	March 31, 2014			December 31, 2013
Amounts billed or billable	$	2,772		$	2,651
Unbilled amounts	364			390
Allowance for doubtful accounts	(104		)	(112		)
Accounts Receivable, Net	$	3,032		$	2,929

Unbilled amounts include amounts associated with percentage-of-completion accounting and other earned revenues not currently billable due to contractual provisions. Amounts to be invoiced in the subsequent month for current services provided are included in amounts billable, and at March 31, 2014 and December 31, 2013 were approximately $1,049 and $1,054, respectively.

We perform ongoing credit evaluations of our customers and adjust credit limits based upon customer payment history and current creditworthiness. The allowance for uncollectible accounts receivable is determined principally on the basis of past collection experience as well as consideration of current economic conditions and changes in our customer collection trends.

Accounts Receivable Sales Arrangements

Accounts receivable sales arrangements are utilized in the normal course of business as part of our cash and liquidity management. We have facilities in the U.S., Canada and several countries in Europe that enable us to sell certain accounts receivable without recourse to third-parties. The accounts receivable sold are generally short-term trade receivables with payment due dates of less than 60 days.

All of our arrangements involve the sale of our entire interest in groups of accounts receivable for cash. In most instances a portion of the sales proceeds are held back by the purchaser and payment is deferred until collection of the related receivables sold. Such holdbacks are not considered legal securities nor are they certificated. We report collections on such receivables as operating cash flows in the Condensed Consolidated Statements of Cash Flows because such receivables are the result of an operating activity and the associated interest rate risk is de minimis due to its short-term nature. Our risk of loss following the sales of accounts receivable is limited to the outstanding deferred purchase price receivable. These receivables are included in the caption “Other current assets” in the accompanying Condensed Consolidated Balance Sheets and were $125 and $121 at March 31, 2014 and December 31, 2013, respectively.

Under most of the arrangements, we continue to service the sold accounts receivable. When applicable, a servicing liability is recorded for the estimated fair value of the servicing. The amounts associated with the servicing liability were not material.

Of the accounts receivable sold and derecognized from our balance sheet, $736 and $723 remained uncollected as of March 31, 2014 and December 31, 2013, respectively. Accounts receivable sales were as follows:



	Three Months Ended March 31,
	2014		2013
Accounts receivable sales	$	822	$	854
Deferred proceeds	124		115
Loss on sales of accounts receivable	4		4
Estimated increase to operating cash flows⁽¹⁾	11		16

__________________________


(1)	Represents the difference between current and prior period receivable sales adjusted for the effects of: (i) the deferred proceeds, (ii) collections prior to the end of the quarter and (iii) currency.

Finance Receivables, Net

Sale of Finance Receivables

In the third and fourth quarters of 2013 and 2012, we transferred our entire interest in certain groups of lease finance receivables to third-party entities for cash proceeds and beneficial interests. The transfers met the requirements for derecognition according to ASC Topic 860, Transfers and Servicing and therefore were accounted for as sales with derecognition of the associated lease receivables. There were no finance receivable transfers in the three months ending March 31, 2014 and 2013. We continue to service the sold receivables and record servicing fee income over the expected life of the associated receivables. The following is a summary of our prior sales activity:



	Year Ended December 31,
(in millions)	2013		2012
Net carrying value (NCV) sold	$	676	$	682
Allowance included in NCV	17		18
Cash proceeds received	635		630
Beneficial interests received	86		101
Pre-tax gain on sales	40		44
Net fees and expenses	5		5

The principal value of the finance receivables derecognized from our balance sheet was $874 and $1,006 at March 31, 2014 and December 31, 2013, respectively (sale value of approximately $952 and $1,098, respectively).

Summary

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 $130 and $150 at March 31, 2014 and December 31, 2013, respectively, and are included in Other current assets and Other long-term assets in the accompanying Condensed Consolidated Balance Sheets. Beneficial interests of $108 and $124 at March 31, 2014 and December 31, 2013, respectively, are held by 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:



	Three Months Ended March 31,
(in millions)	2014			2013
Net cash received for sales of finance receivables	$	—		$	—
Impact from prior sales of finance receivables⁽¹⁾	(149		)	(91		)
Collections on beneficial interest	26			2
Estimated Decrease to Operating Cash Flows	$	(123	)	$	(89	)

____________________________


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

Finance Receivables – Allowance for Credit Losses and Credit Quality

Finance receivables include sales-type leases, direct financing leases and installment loans. 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. Our policy and methodology used to establish our allowance for doubtful accounts has been consistently applied over all periods presented.

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, 2013	$	45		$	22		$	81		$	6		$	154
Provision	3			2			7			3			15
Charge-offs	(1		)	(4		)	(5		)	(2		)	(12		)
Recoveries and other⁽¹⁾	1			—			—			—			1
Balance at March 31, 2014	$	48		$	20		$	83		$	7		$	158
Finance receivables as of March 31, 2014 collectively evaluated for impairment⁽²⁾	$	1,676		$	402		$	2,242		$	316		$	4,636

Balance at December 31, 2012	$	50		$	31		$	85		$	4		$	170
Provision	2			2			9			—			13
Charge-offs	(2		)	(4		)	(15		)	—			(21		)
Recoveries and other⁽¹⁾	1			—			(3		)	—			(2		)
Balance at March 31, 2013	$	51		$	29		$	76		$	4		$	160
Finance receivables as of March 31, 2013 collectively evaluated for impairment⁽²⁾	$	1,991		$	756		$	2,304		$	211		$	5,262

__________________


(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 $158 and $160 at March 31, 2014 and 2013, respectively.


(3)	Includes developing market countries and smaller units.

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 on 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 status 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:



	March 31, 2014								December 31, 2013
	Investment Grade		Non-investment Grade		Substandard		Total Finance Receivables		Investment Grade		Non-investment Grade		Substandard		Total Finance Receivables
Finance and other services	$	191	$	112	$	46	$	349	$	189	$	102	$	34	$	325
Government and education	632		8		4		644		656		12		3		671
Graphic arts	138		70		102		310		142		59		108		309
Industrial	93		30		16		139		92		28		15		135
Healthcare	73		24		20		117		74		25		16		115
Other	58		29		30		117		55		27		29		111
Total United States	1,185		273		218		1,676		1,208		253		205		1,666
Finance and other services	45		19		11		75		46		18		11		75
Government and education	87		8		2		97		96		9		1		106
Graphic arts	53		54		41		148		56		52		48		156
Industrial	21		12		4		37		23		12		6		41
Other	31		10		4		45		29		9		5		43
Total Canada⁽¹⁾	237		103		62		402		250		100		71		421
France	279		304		145		728		282		314		122		718
U.K./Ireland	201		162		39		402		199		171		42		412
Central⁽²⁾	260		391		44		695		287		394		43		724
Southern⁽³⁾	105		178		47		330		102		187		58		347
Nordics⁽⁴⁾	26		60		1		87		46		42		3		91
Total Europe	871		1,095		276		2,242		916		1,108		268		2,292
Other	214		86		16		316		226		69		9		304
Total	$	2,507	$	1,557	$	572	$	4,636	$	2,600	$	1,530	$	553	$	4,683

_____________________________

(1)

Historically the Company has included certain Canadian customers with graphic arts activity in their industry sector. In 2014, these customers were reclassified to Graphic Arts to better reflect their primary business activity. The December 31, 2013 amounts have been reclassified to move $33 of graphic arts customers out of Finance and Other Services and to move $38 out of Industrial to be consistent with the March 31, 2014 presentation.


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


(3)	Italy, Greece, Spain and Portugal.


(4)	Sweden, Norway, Denmark and Finland.

The aging of our billed finance receivables is based upon the number of days an invoice is past due and is as follows:



	March 31, 2014
	Current		31-90 Days Past Due		>90 Days Past Due		Total Billed		Unbilled		Total Finance Receivables		>90 Days and Accruing
Finance and other services	$	9	$	2	$	1	$	12	$	337	$	349	$	12
Government and education	17		4		3		24		620		644		29
Graphic arts	13		2		1		16		294		310		9
Industrial	4		1		1		6		133		139		6
Healthcare	4		1		—		5		112		117		5
Other	3		1		—		4		113		117		4
Total United States	50		11		6		67		1,609		1,676		65
Canada	3		3		3		9		393		402		20
France	2		1		3		6		722		728		42
U.K./Ireland	—		3		1		4		398		402		3
Central⁽¹⁾	3		3		3		9		686		695		20
Southern⁽²⁾	26		5		6		37		293		330		32
Nordics⁽³⁾	2		—		—		2		85		87		3
Total Europe	33		12		13		58		2,184		2,242		100
Other	8		1		—		9		307		316		—
Total	$	94	$	27	$	22	$	143	$	4,493	$	4,636	$	185

	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
Nordics⁽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

_____________________________


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


(2)	Italy, Greece, Spain and Portugal.


(3)	Sweden, Norway, Denmark and Finland.

- Definition

The entire disclosure for claims held for amounts due a entity, excluding financing receivables. Examples include, but are not limited to, trade accounts receivables, notes receivables, loans receivables. Includes disclosure for allowance for credit losses.

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