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Finance Receivables, Net

12 Months Ended

Dec. 31, 2019

Accounts Receivable, Net

Accounts receivable, net were as follows:



	December 31,
	2019			2018
Invoiced	$	980		$	992
Accrued	311			334
Allowance for doubtful accounts	(55		)	(56		)
Accounts receivable, net	$	1,236		$	1,270

Accrued receivables includes amounts to be invoiced in the subsequent quarter for current services provided.

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. The accounts receivable sold are generally short-term trade receivables with payment due dates of less than 60 days. We have one facility in Europe that enables us to sell accounts receivable associated with our distributor network on an ongoing basis without recourse. Under this arrangement, we sell our entire interest in the related accounts receivable for cash and no portion of the payment is held back or deferred by the purchaser.

Of the accounts receivable sold and derecognized from our balance sheet, $165 and $131 remained uncollected as of December 31, 2019 and 2018, respectively. Accounts receivable sales activity was as follows:



	Year Ended December 31,
	2019		2018		2017
Accounts receivable sales⁽¹⁾	$	393	$	405	$	1,733
Deferred proceeds ⁽²⁾	—		—		164
Loss on sale of accounts receivable	3		3		10

_____________

(1)

Customers may also enter into structured-payable arrangements that require us to sell our receivables from that customer to a third-party financial institution, which then makes payments to us to settle the customer's receivable. In these instances, we ensure the sale of the receivables are bankruptcy-remote and the payment made to us is without recourse. The activity associated with these arrangements is not reflected in this disclosure, as payments under these arrangements have not been material and these are customer directed arrangements.

(2)

During 2017, we terminated all accounts receivable sales arrangements in North America and all but one arrangement in Europe, In these terminated arrangements, a portion of the sales proceeds was normally held back by the purchaser and payment was deferred until collection of the related sold receivables.

Finance Receivables, Net

Finance receivables include sales-type leases and installment loans arising from the marketing of our equipment. These receivables are typically collateralized by a security interest in the underlying equipment. Amounts disclosed below at December 31, 2018 were accounted for under ASC 840, Leases, which was superseded by ASC 842, Leases, which was adopted effective January 1, 2019. Differences upon adoption were not material. Refer to Note 1 - Basis of Presentation and Summary of Significant Accounting Policies, New Accounting Standards and Accounting Changes for additional information. Finance receivables, net were as follows:



	December 31,
	2019			2018
Gross receivables	$	3,865		$	4,003
Unearned income	(425		)	(439		)
Subtotal	3,440			3,564
Residual values	—			—
Allowance for doubtful accounts	(89		)	(92		)
Finance Receivables, Net	3,351			3,472
Less: Billed portion of finance receivables, net	111			105
Less: Current portion of finance receivables not billed, net	1,158			1,218
Finance Receivables Due After One Year, Net	$	2,082		$	2,149

A summary of our gross finance receivables' future contractual maturities, including those previously billed, is as follows:



	December 31,
	2019		2018
12 Months⁽¹⁾	$	1,490	$	1,543
24 Months	1,052		1,108
36 Months	728		755
48 Months	422		425
60 Months	158		158
Thereafter	15		14
Total	$	3,865	$	4,003

_____________


(1)	Includes amounts previously billed of $115 and $107 as of December 31, 2019 and 2018, respectively.

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. Charge-offs in the U.S. remained steady and did not change significantly during 2019 and 2018. 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 and within the countries. Charge-offs in Europe were $14 in 2019 as compared to $18 in 2018, with the decrease reflecting the stabilization of the Europe portfolio segment.

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⁽¹⁾		Total
Balance at December 31, 2017	$	56		$	15		$	35		$	2	$	108
Provision	12			3			9			—		24
Charge-offs	(17		)	(6		)	(18		)	—		(41		)
Recoveries and other⁽²⁾	2			—			(1		)	—		1
Balance at December 31, 2018	$	53		$	12		$	25		$	2	$	92
Provision	20			1			7			—		28
Charge-offs	(15		)	(5		)	(14		)	—		(34		)
Recoveries and other⁽²⁾	1			2			—			—		3
Balance at December 31, 2019	$	59		$	10		$	18		$	2	$	89
Finance Receivables Collectively Evaluated for Impairment:
December 31, 2018⁽³⁾⁽⁴⁾	$	1,946		$	335		$	1,239		$	44	$	3,564
December 31, 2019⁽³⁾	$	1,922		$	320		$	1,155		$	43	$	3,440

_____________


(1)	Includes developing market countries and smaller units.


(2)	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.


(3)	Total Finance receivables exclude the allowance for credit losses of $89 and $92 at December 31, 2019 and 2018, respectively.


(4)	As a result of an internal reorganization, XBS amounts, previously classified as Other, were reclassified to the U.S. in first quarter 2019. Prior year amounts have also been reclassified to conform to the current year presentation.

In the U.S., customers are further evaluated by class based on the type of lease origination. The primary categories are direct, which primarily includes leases originated directly with end customers through bundled lease arrangements, and indirect, which includes lease financing to end-user customers who purchased equipment we sold to distributors or resellers. Indirect also includes leases originated through our XBS sales channel, which utilizes a combination of internal and third party leasing in its lease arrangements with end customers.

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 within the various classes based on the following credit quality indicators:

•

Investment grade: This rating includes accounts with excellent to good business credit, asset quality and 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 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 5%.

•

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 generally in the range of 7% to 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 geography and credit quality indicators are as follows:



	December 31, 2019								December 31, 2018
	Investment Grade		Non-investment Grade		Sub-standard		Total Finance Receivables		Investment Grade		Non-investment Grade		Sub-standard		Total Finance Receivables
Direct	$	640	$	331	$	132	$	1,103	$	785	$	348	$	104	$	1,237
Indirect	258		445		116		819		162		400		147		709
Total United States⁽¹⁾	898		776		248		1,922		947		748		251		1,946
Total Canada	163		91		66		320		162		99		74		335
France	206		137		24		367		232		157		29		418
U.K/Ireland	154		79		8		241		150		87		7		244
Central⁽²⁾	176		113		9		298		196		123		8		327
Southern⁽³⁾	65		125		15		205		52		136		17		205
Nordic⁽⁴⁾	23		19		2		44		28		15		2		45
Total Europe⁽⁵⁾	624		473		58		1,155		658		518		63		1,239
Other	31		12		—		43		31		13		—		44
Total	$	1,716	$	1,352	$	372	$	3,440	$	1,798	$	1,378	$	388	$	3,564

_____________


(1)	As a result of an internal reorganization, XBS amounts, previously classified as Other, were reclassified to the U.S. in first quarter 2019. Prior year amounts have also been reclassified to conform to the current year presentation.


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


(3)	Italy, Greece, Spain and Portugal.


(4)	Sweden, Norway, Denmark and Finland.


(5)	Prior year amounts have been recasted to conform to the current year presentation.

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, 2019
	Current		31-90 Days Past Due		>90 Days Past Due		Total Billed		Unbilled		Total Finance Receivables		>90 Days and Accruing
Direct	$	37	$	11	$	8	$	56	$	1,047	$	1,103	$	57
Indirect	25		5		3		33		786		819		—
Total United States	62		16		11		89		1,833		1,922		57
Canada	8		1		1		10		310		320		17
France	3		—		—		3		364		367		15
U.K./Ireland	2		—		—		2		239		241		—
Central⁽¹⁾	2		—		1		3		295		298		13
Southern⁽²⁾	3		1		1		5		200		205		4
Nordic⁽³⁾	—		—		—		—		44		44		—
Total Europe	10		1		2		13		1,142		1,155		32
Other	2		1		—		3		40		43		—
Total	$	82	$	19	$	14	$	115	$	3,325	$	3,440	$	106



	December 31, 2018
	Current		31-90 Days Past Due		>90 Days Past Due		Total Billed		Unbilled		Total Finance Receivables		>90 Days and Accruing
Direct	$	38	$	11	$	7	$	56	$	1,181	$	1,237	$	54
Indirect	18		4		2		24		685		709		—
Total United States	56		15		9		80		1,866		1,946		54
Canada	7		2		1		10		325		335		22
France	5		—		—		5		413		418		14
U.K./Ireland	2		—		—		2		242		244		—
Central⁽¹⁾	1		1		1		3		324		327		6
Southern⁽²⁾	3		1		1		5		200		205		6
Nordic⁽³⁾	—		—		—		—		45		45		—
Total Europe	11		2		2		15		1,224		1,239		26
Other	2		—		—		2		42		44		—
Total	$	76	$	19	$	12	$	107	$	3,457	$	3,564	$	102

_____________


(1)	As a result of an internal reorganization, XBS amounts, previously classified as Other, were reclassified to the U.S. in first quarter 2019. Prior year amounts have also been reclassified to conform to the current year presentation.


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


(3)	Italy, Greece, Spain and Portugal.

(4)

Sweden, Norway, Denmark and Finland.