3. ACCOUNTS RECEIVABLE, NOTES RECEIVABLE, ALLOWANCE FOR DOUBTFUL ACCOUNTS AND BAD DEBT

Consolidated Accounts and Notes Receivable, net

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


	As of June 30,
	2013			2012
Current, net:
Accounts receivable	$	152.4		$	106.3
Notes receivable		173.8			183.4
Allowance for doubtful accounts		(8.9	)		(6.9	)

Current accounts and notes receivable, net	$	317.3		$	282.8

Long-term, net:
Notes receivable	$	92.5		$	122.3
Allowance for doubtful accounts		—			—

Long-term notes receivable, net	$	92.5		$	122.3

Total accounts and notes receivable, net	$	409.8		$	405.1

Accounts and notes receivable, net from international customers in Argentina, Mexico, Peru and Canada at June 30, 2013, were approximately: $46.3 million, $44.3 million, $39.0 million and $26.7 million, respectively while accounts and notes receivable from international customers in these same countries at June 30, 2012, were approximately: $64.9 million, $40.7 million, $28.7 million and $20.5 million, respectively.

We carry our accounts and notes receivable at face amounts less an allowance for doubtful accounts. On a routine basis, but at least quarterly, we evaluate our accounts and notes receivable individually and collectively, and establish the allowance for doubtful accounts based on a combination of specific customer circumstances, credit conditions and our history of write-offs and collections. We consider a variety of factors in this evaluation, including the accounts and notes receivable aging and trends thereof for customer balances, past experience with customers who pay outside of payment terms, the legal environment and regulatory landscape and news related to individual customers, especially if the news calls into question the customer’s ability to fully pay balances owed. Accounts and notes receivables are evaluated individually for impairment (specific reserves) when collectability becomes uncertain due to events and circumstances that cause an adverse change in a customer’s cash flows or financial condition. Accounts and notes receivable placed on specific reserve are evaluated for probability of collection, which is used to determine the amount of the specific reserve.

Our bad debt expense is most significantly impacted by bankruptcy filings by our casino customers and pre-bankruptcy reported exposures of individual casino customers. Due to our successful collection experience and our continuing operating 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. Uncollectible accounts or notes receivables are written off only when all reasonable collection efforts have been exhausted and we determine that there is minimal chance of any kind of recovery.

For customers in the United States, at the time a customer files for bankruptcy, we typically have a security interest in the gaming machines for that portion of the total accounts and notes receivable, but our accounts and notes receivable related to all other revenue sources are typically unsecured claims. In gaming operations, because we own the participation gaming machines and lease them to the casino operator, in a bankruptcy the customer has to either accept or reject the lease and, if rejected, our gaming machines are returned to us. Due to the significance of our gaming machines to the on-going operations of our casino customers, in a bankruptcy filing we may be designated as a key vendor, which can enhance our position above other creditors in the bankruptcy. For international customers, depending on the country and our historic collection experience with the customer, we may have pledge agreements, bills of exchange, post-dated checks or personal guarantees or other forms of agreement to enhance our ability to collect the receivables.

Beginning in fiscal 2012, the government authorities in Argentina modified the rules related to importing product and limited the exchange of pesos into U.S. dollars and the transfer of funds from Argentina. Our accounts and notes receivable, net from customers in Argentina at June 30, 2013, was $46.3 million, which is denominated in U.S. dollars, although our customers pay us in pesos at the spot exchange rate between the peso and the U.S. dollar on the date of payment. In evaluating the collectability of customer receivables in Argentina, we specifically evaluated the amount of recent payments, receivable aging, the additional security we had (bills of exchange, pledge agreements, etc.) and news related to individual customers’ ability to pay to determine our customers’ ability to pay and concluded that only a minimal amount of bad debt reserves was required. We continue to conduct business in Argentina and our customers have continued to pay us in pesos based on the spot exchange rate to the U.S. dollar on payment date throughout fiscal 2013. We collected approximately $36.5 million of outstanding receivable balances from customers in Argentina during fiscal 2013. In addition, the net activity for the year ended June 30, 2013 resulted in total outstanding receivable balances declining from June 30, 2012, by $18.6 million to $46.3 million.

During the fiscal year ended June 30, 2013, our bad debt expense totaled $3.6 million, or 0.5% of revenues, which compares to $6.7 million of bad debt expense for the prior fiscal year, which represented 1.0% of revenues in the prior fiscal year. The higher bad debt expense in fiscal 2012 was primarily due to increasing the dollar amount of bad debt reserves by $3.6 million following government enforcement action beginning in the September 2011 quarter at certain casinos in Mexico. Our total bad debt reserve was $8.9 million at June 30, 2013, compared to $6.9 million at June 30, 2012.

Notes Receivable and Credit Quality

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


	As of June 30, 2013			Balances that are over 90 days past due
Notes receivable:
Domestic	$	84.8		$	0.7
International		181.5			8.2

Notes receivable subtotal		266.3			8.9
Allowance for doubtful accounts		(5.0	)		(4.0	)

Total notes receivable, net	$	261.3		$	4.9


	As of June 30, 2012			Balances that are over 90 days past due
Notes receivable:
Domestic	$	123.4		$	1.4
International		182.3			5.2

Notes receivable subtotal		305.7			6.6
Allowance for doubtful accounts		(4.3	)		(1.5	)

Total notes receivable, net	$	301.4		$	5.1

At June 30, 2013, 1.9% of our total notes receivable, net was past due over 90 days compared to 1.7% at June 30, 2012.

The following tables detail our evaluation of notes receivable for impairment:


	As of June 30, 2013		Ending Balance Individually Evaluated for Impairment		Ending Balance Collectively Evaluated for Impairment
Notes receivable:
Domestic	$	84.8	$	5.7	$	79.1
International		181.5		75.6		105.9

Total notes receivable	$	266.3	$	81.3	$	185.0


	As of June 30, 2012		Ending Balance Individually Evaluated for Impairment		Ending Balance Collectively Evaluated for Impairment
Notes receivable:
Domestic	$	123.4	$	10.8	$	112.6
International		182.3		60.4		121.9

Total notes receivable	$	305.7	$	71.2	$	234.5

The following table reconciles the current and non-current allowance for doubtful notes receivable from June 30, 2012 to June 30, 2013, and from June 30, 2011 to June 30, 2012:


	Total			Ending Balance Individually Evaluated for Impairment			Ending Balance Collectively Evaluated for Impairment
Balance at June 30, 2012	$	4.3		$	4.3		$	0.0
Charge-offs		(0.6	)		(0.6	)		0.0
Recoveries		0.0			0.0			0.0
Provision		1.3			1.3			0.0

Balance at June 30, 2013	$	5.0		$	5.0		$	0.0


	Total			Ending Balance Individually Evaluated for Impairment			Ending Balance Collectively Evaluated for Impairment
Balance at June 30, 2011	$	2.6		$	2.6		$	0.0
Charge-offs		(3.1	)		(3.1	)		0.0
Recoveries		0.0			0.0			0.0
Provision, primarily amounts recorded for Mexican customers’ notes receivable		4.8			4.8			0.0

Balance at June 30, 2012	$	4.3		$	4.3		$	0.0

Modifications to original financing terms are an exception to our cash collection process and are a function of collection activities with the customer. If a customer requests a modification of financing terms during the collection process, we evaluate the proposed modification in relation to the recovery of our gaming machines, seek additional security and recognize any additional interest income ratably over the remaining new financing term. Additionally, we often take the opportunity to simplify the forward payments by consolidating several notes (each typically representing an individual purchase transaction) into one note. In those instances, the aging of any outstanding receivable balance would be adjusted to reflect the new payment terms. Any such modifications generally do not include a concession as they generally result only in a delay of payments from the original terms. As a result of the financial crisis that began in 2008, such modifications have increased, but in general, the impact of the modifications of original financing terms have not been significant to our total accounts and notes receivable balance.

The following summarizes the notes receivable that had modification of financing terms:


			Year Ended June 30, 2013
	# of Customers		# of Contracts		Pre- Modification Investment		Post- Modification Investment
Financing term modifications:
Domestic(a)		1		1	$	3.5	$	3.5
International(a)		10		31		30.1		30.1

Total financing term modifications		11		32	$	33.6	$	33.6

(a)	Detailed modifications included:

One domestic customer with one note for $3.5 million for which original terms were extended by 19 months;

One international customer for which 20 notes were consolidated into one note aggregating $9.0 million, with an average 13-month extension;

One international customer with one note for $8.3 million for which original terms were extended by two months;

One international customer with one note for $4.8 million for which original terms were extended by eight months;

One international customer for which two notes were consolidated into one note aggregating $2.1 million, with an average 10-month extension;

One international customer with one note for $1.5 million for which original terms were extended by 11 months;

One international customer with one note for $1.4 million for which original terms were extended by 17 months;

One international customer with one note for $1.1 million for which original terms were extended by 28 months;

One international customer with one note for $1.0 million for which original terms were extended by eight months;

One international customer for which two notes were consolidated into one note aggregating $0.6 million, with an average 12-month extension; and

One international customer with one note for $0.3 million for which original terms were extended by 13 months.


	Year Ended June 30, 2012
	# of Customers		# of Notes		Pre- Modification Investment		Post- Modification Investment
Financing term modifications:
Domestic		1		2	$	0.7	$	0.7
International(a)		17		80		53.8		53.8

Total financing term modifications		18		82	$	54.5	$	54.5

(a)	Detailed modifications included:

One international customer with one note for $14.8 million for which original terms were extended by five months;

One international customer in which 16 notes were consolidated into one note aggregating $8.8 million, with an average 12 month extension of terms;

One international customer in which 14 notes were consolidated into three notes aggregating $8.0 million, with an average 14 month extension of terms;

One international customer in which 11 notes were consolidated into one note aggregating $6.4 million, with an average 11 month extension of terms;

The remaining 13 international customers with 38 notes were consolidated into 13 notes aggregating $15.8 million, with an average of 12 month extension of terms; and

One domestic customer in which two notes were consolidated into one note aggregating for $0.7 million for which original terms were extended by 12 months.