Accounts and Notes Receivable and Credit Quality of Receivables

Accounts and Notes Receivable

Accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts and notes receivable is our best estimate of the amount of probable credit losses in our existing receivables. Changes in circumstances relating to the collectability of accounts and notes receivable may result in the need to increase or decrease our allowance for doubtful accounts and notes receivable in the future. We determine the allowances based on historical experience, current market trends and, for larger customer accounts, our assessment of the ability of the customers to pay outstanding balances. Past due balances and other higher risk amounts are reviewed individually for collectability. Account balances are charged against the allowances after all collection efforts have been exhausted and the potential for recovery is considered remote.

The timing of our invoices does not always coincide with revenue recognized under the contract. We have unbilled accounts receivable which represent revenue recorded in excess of amounts invoiced under the contract and generally become billable at contractually specified dates. We had $61.2 million and $59.7 million of unbilled accounts receivable as of December 31, 2017 and 2016, respectively.

The following summarizes the components of current and long-term accounts and notes receivable, net:



	As of December 31,
	2017			2016
Current:
Accounts receivable	$	551.5		$	508.1
Notes receivable	164.1			140.0
Allowance for doubtful accounts	(31.2		)	(27.7		)
Current accounts and notes receivable, net	$	684.4		$	620.4
Long-term:
Accounts and notes receivable, net of allowance of $0.2 and $0.4	52.8			48.1
Total accounts and notes receivable, net	$	737.2		$	668.5

We have provided extended payment terms and development financing to certain customers with some of these arrangements being evidenced by a note. We carry notes receivable at face amounts less an allowance for doubtful accounts and imputed interest, if any. Our notes receivable portfolio consists of domestic and international receivables with installment payment terms ranging from 90 days to four years or single payment terms greater than 12 months. Interest income, if any, is recognized ratably over the life of the note receivable and any related fees or costs to establish the notes are charged to selling, general and administrative expense as incurred, as they are immaterial. Actual or imputed interest, if any, is determined based on current market rates at the time the note originated and is recorded in other income and expense, net, ratably over the payment period, which approximates the effective interest method. We generally impute interest income on all notes receivable with terms greater than one year that do not contain a stated interest rate.

Credit Quality of Receivables

The interest rates on our outstanding accounts and notes receivable ranged from 3.0% to 10.4% at December 31, 2017 and 3.25% to 10.4% at December 31, 2016. Our general policy is to recognize interest on such receivables until the receivable is deemed non-performing, which we define as payments being overdue by 180 days beyond the agreed-upon terms. When a receivable is deemed to be non-performing, the item is placed on non-accrual status and interest income is recognized on a cash basis. The amount of such non-performing receivables was immaterial at December 31, 2017 and 2016.

In certain international jurisdictions, we offer extended payment terms ranging between 18 to 36 months. Sales with extended payment terms typically result in a higher selling price and, if extended over periods longer than one year, incur interest.

In our Gaming machine sales business, we file UCC-1 financing statements domestically in order to retain a security interest in the gaming machines that underlie a significant portion of our domestic accounts and notes receivable until the receivable balance is fully paid. However, the value of the gaming machines, if repossessed, may be less than the balance of the outstanding receivable. For international customers, depending on the country and our historic collection experience with the customer, we may obtain pledge agreements, bills of exchange, guarantees, post-dated checks or other forms of security agreements designed to enhance our ability to collect the receivables, although a majority of our international accounts and notes receivables do not have these features. In our Gaming operations business, because we own the Participation gaming machines that are leased or otherwise provided to the customer, in a bankruptcy the customer has to generally either accept or reject the lease or other agreement and, if rejected, our gaming machines are returned to us. Our accounts and notes receivable related to revenue earned on Participation gaming machines and all other revenue sources are typically unsecured claims.

Due to the significance of our gaming machines to the on-going operations of our casino customers, we may be designated as a key vendor in any bankruptcy filing by a casino customer, which can enhance our position above other creditors in the bankruptcy. Due to our successful collection experience and our continuing relationship with casino customers and their businesses, it is infrequent that we repossess gaming machines from a customer in partial settlement of outstanding accounts or notes receivable balances. In those unusual instances where repossession occurs to mitigate our exposure on the related receivable, the repossessed gaming machines are subsequently resold in the used gaming machine market; however, we may not fully recover the receivable from this re-sale.

We evaluate our exposure to credit loss on receivables on both a collective and individual basis. In addition, we evaluate such receivables on a geographic basis and take into account any other factors (such as general economic conditions, other macroeconomic considerations, etc.) that could impact our collectability of such receivables individually or in the aggregate. Accordingly, receivables may be evaluated under multiple methodologies, and the resulting allowance is not determined based on one specific methodology taking all factors into consideration. Where possible, we seek payment deposits, collateral, pledge agreements, bills of exchange, foreign bank letters of credit, post-dated checks or personal guarantees with respect to receivables from our customers.

We continuously assess our receivables using the information stated above for impairment, especially in cases where macroeconomic conditions could indicate that our ability to collect all amounts due under our contractual agreements is unlikely. Consistent with our policy with respect to past due receivables, for impaired notes receivable, we generally recognize interest on notes receivable until the note receivable is deemed impaired, which we define as a note where payments have not been received within 180 days of the agreed-upon terms. When a note receivable is deemed to be impaired, we write the note down to its net realizable value, which approximates fair value. Accordingly, on impaired notes we cease recognizing interest income and instead recognize any payments on a cash basis.

We have certain concentrations of outstanding notes receivable in international locations that impact our assessment of the credit quality of our notes receivable. We monitor the macroeconomic and political environment in each of these locations in our assessment of the credit quality of our notes receivable. We have not identified changes in the aforementioned factors in the twelve months ended December 31, 2017 that require a reassessment of our receivable balances. The international locations with significant concentrations (generally deemed to be exceeding 10%) of our receivables with terms longer than one year are as follows:


•	Mexico - Our notes receivable, net, from certain customers in Mexico at December 31, 2017 was $25.9 million. We collected $40.9 million of outstanding receivables from these customers during the year ended December 31, 2017.


•	Peru - Our notes receivable, net, from certain customers in Peru at December 31, 2017 was $22.2 million. We collected $15.0 million of outstanding receivables from these customers during the year ended December 31, 2017.


•	Argentina - Our notes receivable, net, from customers in Argentina at December 31, 2017 was $26.5 million, which are denominated in USD. Our customers are required to and have continued to pay us in pesos at the spot exchange rate on the date of payment. We collected $26.4 million of outstanding receivables from customers in Argentina during the year ended December 31, 2017.

The following summarizes the components of total notes receivable, net:



	December 31, 2017			Balances over 90 days past due			December 31, 2016			Balances over 90 days past due
Notes receivable:
Domestic	$	93.5		$	9.2		$	45.1		$	1.1
International	123.6			33.2			143.0			38.7
Total notes receivable	217.1			42.4			188.1			39.8

Notes receivable allowance
Domestic	(4.0		)	(4.0		)	(1.0		)	(0.9		)
International	(16.8		)	(16.8		)	(14.0		)	(14.0		)
Total notes receivable allowance	(20.8		)	(20.8		)	(15.0		)	(14.9		)

Notes receivable, net	$	196.3		$	21.6		$	173.1		$	24.9

At December 31, 2017, 11.0% of our total notes receivable, net, was past due by over 90 days compared to 14.4% at December 31, 2016.

The activity in our allowance for notes receivable for each of the years ended December 31, 2017 and 2016 is as follows:



	December 31, 2017			December 31, 2016
Beginning allowance for notes receivable	$	(15.0	)	$	(13.2	)
Provision	(7.3		)	(5.3		)
Charge-offs and recoveries	1.5			3.5
Ending allowance for notes receivable	$	(20.8	)	$	(15.0	)

The fair value of notes receivable is estimated by discounting future cash flows using current interest rates at which similar loans would be made to borrowers with similar credit ratings and remaining maturities. At December 31, 2017 and 2016, the fair value of the notes receivable, net, approximated the carrying value due to contractual terms of notes receivable generally being under 24 months.