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Financing Receivables
 6 Months Ended
Jun. 30, 2018
Financing Receivables  
Financing Receivables

 

5. Financing Receivables: Financing receivables primarily consist of investment in sales-type and direct financing leases, commercial financing receivables and client loan and installment payment receivables (loans). Investment in sales-type and direct financing leases relates principally to the company’s systems products and are for terms ranging generally from two to six years. Commercial financing receivables relate primarily to inventory and accounts receivable financing for dealers and remarketers of IBM and OEM products. Payment terms for inventory and accounts receivable financing generally range from 30 to 90 days. Client loan and installment payment receivables (loans) are provided primarily to clients to finance the purchase of hardware, software and services. Payment terms on these financing arrangements are generally for terms up to seven years. Client loans and installment payment financing contracts are priced independently at competitive market rates.

 

A summary of the components of the company’s financing receivables is presented as follows:

 

 

 

Investment in

 

 

 

Client Loan and

 

 

 

 

 

Sales-Type and

 

Commercial

 

Installment Payment

 

 

 

(Dollars in millions)

 

Direct Financing

 

Financing

 

Receivables/

 

 

 

At June 30, 2018:

 

Leases

 

Receivables

 

(Loans)

 

Total

 

Financing receivables, gross

 

$
6,834

 

$
9,711

 

$
12,874

 

$
29,420

 

Unearned income

 
(523

)
(30

)
(605

)
(1,158

)

 

 

 

 

 

 

 

 

 

 

Recorded Investment

 

$
6,312

 

$
9,681

 

$
12,269

 

$
28,262

 

Allowance for credit losses

 
(110

)
(14

)
(215

)
(339

)

Unguaranteed residual value

 
575

 

—

 

—

 
575

 

Guaranteed residual value

 
91

 

—

 

—

 
91

 

 

 

 

 

 

 

 

 

 

 

Total financing receivables, net

 

$
6,867

 

$
9,667

 

$
12,055

 

$
28,589

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current portion

 

$
2,866

 

$
9,667

 

$
7,273

 

$
19,806

 

Noncurrent portion

 

$
4,001

 

$

—

 

$
4,781

 

$
8,783

 

 

 

 

Investment in

 

 

 

Client Loan and

 

 

 

 

 

Sales-Type and

 

Commercial

 

Installment Payment

 

 

 

(Dollars in millions)

 

Direct Financing

 

Financing

 

Receivables/

 

 

 

At December 31, 2017:

 

Leases

 

Receivables

 

(Loans)

 

Total

 

Financing receivables, gross

 

$
7,128

 

$
11,649

 

$
13,311

 

$
32,087

 

Unearned income

 
(535

)
(32

)
(644

)
(1,210

)

 

 

 

 

 

 

 

 

 

 

Recorded Investment

 

$
6,593

 

$
11,617

 

$
12,667

 

$
30,877

 

Allowance for credit losses

 
(103

)
(21

)
(211

)
(336

)

Unguaranteed residual value

 
630

 

—

 

—

 
630

 

Guaranteed residual value

 
100

 

—

 

—

 
100

 

 

 

 

 

 

 

 

 

 

 

Total financing receivables, net

 

$
7,220

 

$
11,596

 

$
12,456

 

$
31,272

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current portion

 

$
2,900

 

$
11,596

 

$
7,226

 

$
21,721

 

Noncurrent portion

 

$
4,320

 

$

—

 

$
5,230

 

$
9,550

 

 

The company utilizes certain of its financing receivables as collateral for non-recourse borrowings. Financing receivables pledged as collateral for borrowings were $743 million and $773 million at June 30, 2018 and December 31, 2017, respectively.

 

The company did not have any financing receivables held for sale as of June 30, 2018 and December 31, 2017.

 

Financing Receivables by Portfolio Segment

 

The following tables present the recorded investment by portfolio segment and by class, excluding commercial financing receivables and other miscellaneous financing receivables at June 30, 2018 and December 31, 2017. Commercial financing receivables are excluded from the presentation of financing receivables by portfolio segment, as they are short term in nature and the current estimated risk of loss and resulting impact to the company’s financing results are not material. The company determines its allowance for credit losses based on two portfolio segments: lease receivables and loan receivables, and further segments the portfolio into three classes: Americas, Europe/Middle East/Africa (EMEA) and Asia Pacific.

 

(Dollars in millions)

 

 

 

 

 

 

 

 

 

At June 30, 2018:

 

Americas

 

EMEA

 

Asia Pacific

 

Total

 

Recorded Investment

 

 

 

 

 

 

 

 

 

Lease receivables

 

$
3,744

 

$
1,303

 

$
1,264

 

$
6,312

 

Loan receivables

 
6,313

 
3,544

 
2,413

 
12,269

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$
10,057

 

$
4,847

 

$
3,677

 

$
18,581

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recorded investment collectively evaluated for impairment

 

$
9,933

 

$
4,791

 

$
3,599

 

$
18,323

 

Recorded investment individually evaluated for impairment

 

$
125

 

$
56

 

$
77

 

$
258

 

 

 

 

 

 

 

 

 

 

 

Allowance for credit losses

 

 

 

 

 

 

 

 

 

Beginning balance at January 1, 2018

 

 

 

 

 

 

 

 

 

Lease receivables

 

$
63

 

$
9

 

$
31

 

$
103

 

Loan receivables

 
108

 
52

 
51

 
211

 

 

 

 

 

 

 

 

 

 

 

Total

 

$
172

 

$
61

 

$
82

 

$
314

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Write-offs

 

$
(3

)

$
(1

)

$
(2

)

$
(6

)

Recoveries

 
0

 
0

 
2

 
2

 

Provision

 
15

 
10

 
2

 
26

 

Other

 
(8

)
(2

)
(1

)
(12

)

 

 

 

 

 

 

 

 

 

 

Ending balance at June 30, 2018

 

$
175

 

$
68

 

$
82

 

$
325

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease receivables

 

$
68

 

$
11

 

$
31

 

$
110

 

Loan receivables

 

$
107

 

$
57

 

$
51

 

$
215

 

 

 

 

 

 

 

 

 

 

 

Related allowance, collectively evaluated for impairment

 

$
51

 

$
16

 

$
6

 

$
72

 

Related allowance, individually evaluated for impairment

 

$
125

 

$
53

 

$
76

 

$
253

 

 

Write-offs of lease receivables and loan receivables were $4 million and $2 million, respectively, for the six months ended June 30, 2018. Provisions for credit losses recorded for lease receivables and loan receivables were $9 million and $18 million, respectively, for the six months ended June 30, 2018.

 

The average recorded investment of impaired leases and loans for Americas, EMEA and Asia Pacific was $128 million, $55 million and $78 million, respectively, for the three months ended June 30, 2018 and $176 million, $28 million and $132 million, respectively, for the three months ended June 30, 2017.  Both interest income recognized and interest income recognized on a cash basis on impaired leases and loans were immaterial for the three months ended June 30, 2018 and 2017.

 

The average recorded investment of impaired leases and loans for Americas, EMEA and Asia Pacific was $128 million, $56 million and $80 million, respectively, for the six months ended June 30, 2018 and $173 million, $25 million and $141 million, respectively, for the six months ended June 30, 2017.  Both interest income recognized and interest income recognized on a cash basis on impaired leases and loans were immaterial for the six months ended June 30, 2018 and 2017.

 

 

(Dollars in millions)

 

 

 

 

 

 

 

 

 

At December 31, 2017:

 

Americas

 

EMEA

 

Asia Pacific

 

Total

 

Recorded Investment

 

 

 

 

 

 

 

 

 

Lease receivables

 

$
3,911

 

$
1,349

 

$
1,333

 

$
6,593

 

Loan receivables

 
6,715

 
3,597

 
2,354

 
12,667

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$
10,626

 

$
4,946

 

$
3,687

 

$
19,259

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recorded investment collectively evaluated for impairment

 

$
10,497

 

$
4,889

 

$
3,604

 

$
18,990

 

Recorded investment individually evaluated for impairment

 

$
129

 

$
57

 

$
83

 

$
269

 

 

 

 

 

 

 

 

 

 

 

Allowance for credit losses

 

 

 

 

 

 

 

 

 

Beginning balance at January 1, 2017

 

 

 

 

 

 

 

 

 

Lease receivables

 

$
54

 

$
4

 

$
76

 

$
133

 

Loan receivables

 
169

 
18

 
89

 
276

 

 

 

 

 

 

 

 

 

 

 

Total

 

$
223

 

$
22

 

$
165

 

$
410

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Write-offs

 

$
(51

)

$
(1

)

$
(85

)

$
(137

)

Recoveries

 
1

 
1

 
0

 
2

 

Provision

 
(8

)
29

 
(4

)
16

 

Other

 
7

 
11

 
6

 
24

 

 

 

 

 

 

 

 

 

 

 

Ending balance at December 31, 2017

 

$
172

 

$
61

 

$
82

 

$
314

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease receivables

 

$
63

 

$
9

 

$
31

 

$
103

 

Loan receivables

 

$
108

 

$
52

 

$
51

 

$
211

 

 

 

 

 

 

 

 

 

 

 

Related allowance, collectively evaluated for impairment

 

$
43

 

$
15

 

$
6

 

$
64

 

Related allowance, individually evaluated for impairment

 

$
128

 

$
46

 

$
76

 

$
250

 

 

Write-offs of lease receivables and loan receivables were $55 million and $82 million, respectively, for the year ended December 31, 2017.  Provisions for credit losses recorded for lease receivables and loan receivables were $9 million and $7 million, respectively, for the year ended December 31, 2017.

 

When determining the allowances, financing receivables are evaluated either on an individual or a collective basis. For individually evaluated receivables, the company determines the expected cash flow for the receivable and calculates an estimate of the potential loss and the probability of loss. For those accounts in which the loss is probable, the company records a specific reserve. The company considers any receivable with an individually evaluated reserve as an impaired receivable.

 

In addition, the company records an unallocated reserve that is determined by applying a reserve rate to its different portfolios, excluding accounts that have been specifically reserved. This reserve rate is based upon credit rating, probability of default, term, characteristics (lease/loan) and loss history.

 

Past Due Financing Receivables

 

The company considers a client’s financing receivable balance past due when any installment is aged over 90 days. The following table summarizes information about the recorded investment in lease and loan financing receivables, including recorded investments aged over 90 days and still accruing, billed invoices aged over 90 days and recorded investment not accruing.

 

 

 

 

 

 

 

 

Recorded

 

Billed

 

Recorded

 

 

 

Total

 

Recorded

 

Investment

 

Invoices

 

Investment

 

(Dollars in millions)

 

Recorded

 

Investment

 

> 90 Days and

 

> 90 Days and

 

Not

 

At June 30, 2018:

 

Investment

 

> 90 Days (1)

 

Accruing (1)

 

Accruing

 

Accruing (2)

 

Americas

 

$
3,744

 

$
232

 

$
185

 

$
24

 

$
52

 

EMEA

 
1,303

 
20

 
4

 
1

 
16

 

Asia Pacific

 
1,264

 
48

 
18

 
3

 
32

 

 

 

 

 

 

 

 

 

 

 

 

 

Total lease receivables

 

$
6,312

 

$
300

 

$
208

 

$
29

 

$
100

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Americas

 

$
6,313

 

$
326

 

$
245

 

$
31

 

$
101

 

EMEA

 
3,544

 
90

 
12

 
4

 
79

 

Asia Pacific

 
2,413

 
86

 
38

 
7

 
51

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loan receivables

 

$
12,269

 

$
502

 

$
295

 

$
41

 

$
231

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$
18,581

 

$
803

 

$
503

 

$
70

 

$
331

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

At a contract level, which includes total billed and unbilled amounts for financing receivables aged greater than 90 days.

(2)

Of the recorded investment not accruing, $258 million is individually evaluated for impairment with a related allowance of $253 million.

 

 

 

 

 

 

 

Recorded

 

Billed

 

Recorded

 

 

 

Total

 

Recorded

 

Investment

 

Invoices

 

Investment

 

(Dollars in millions)

 

Recorded

 

Investment

 

> 90 Days and

 

> 90 Days and

 

Not

 

At December 31, 2017:

 

Investment

 

> 90 Days (1)

 

Accruing (1)

 

Accruing

 

Accruing (2)(3)

 

Americas

 

$
3,911

 

$
239

 

$
197

 

$
29

 

$
44

 

EMEA

 
1,349

 
32

 
5

 
3

 
27

 

Asia Pacific

 
1,333

 
57

 
23

 
3

 
36

 

 

 

 

 

 

 

 

 

 

 

 

 

Total lease receivables

 

$
6,593

 

$
328

 

$
225

 

$
36

 

$
107

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Americas

 

$
6,715

 

$
345

 

$
254

 

$
38

 

$
96

 

EMEA

 
3,597

 
90

 
17

 
0

 
74

 

Asia Pacific

 
2,354

 
63

 
12

 
3

 
54

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loan receivables

 

$
12,667

 

$
498

 

$
283

 

$
41

 

$
224

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$
19,259

 

$
825

 

$
507

 

$
77

 

$
331

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

At a contract level, which includes total billed and unbilled amounts for financing receivables aged greater than 90 days.

(2)

Of the recorded investment not accruing, $269 million is individually evaluated for impairment with a related allowance of $250 million.

(3)

Recast to conform to current period presentation, which includes billed impaired amounts.

 

Credit Quality Indicators

 

The company’s credit quality indicators, which are based on rating agency data, publicly available information and information provided by customers, are reviewed periodically based on the relative level of risk. The resulting indicators are a numerical rating system that maps to Moody’s Investors Service credit ratings as shown below. The company uses information provided by Moody’s, where available, as one of many inputs in its determination of customer credit ratings.

 

The following tables present the recorded investment net of allowance for credit losses for each class of receivables, by credit quality indicator, at June 30, 2018 and December 31, 2017. Receivables with a credit quality indicator ranging from Aaa to Baa3 are considered investment grade. All others are considered non-investment grade. The credit quality indicators do not reflect mitigation actions that the company takes to transfer credit risk to third parties.

 

 

(Dollars in millions)

 

Lease Receivables

 

Loan Receivables

 

At June 30, 2018:

 

Americas

 

EMEA

 

Asia Pacific

 

Americas

 

EMEA

 

Asia Pacific

 

Credit Ratings:

 

 

 

 

 

 

 

 

 

 

 

 

 

Aaa – Aa3

 

$
390

 

$
51

 

$
101

 

$
658

 

$
137

 

$
194

 

A1 – A3

 
808

 
156

 
477

 
1,364

 
420

 
913

 

Baa1 – Baa3

 
857

 
397

 
320

 
1,446

 
1,072

 
613

 

Ba1 – Ba2

 
784

 
401

 
188

 
1,323

 
1,082

 
359

 

Ba3 – B1

 
479

 
177

 
85

 
808

 
477

 
162

 

B2 – B3

 
320

 
102

 
54

 
540

 
274

 
103

 

Caa – D

 
39

 
9

 
9

 
67

 
24

 
17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$
3,676

 

$
1,292

 

$
1,233

 

$
6,206

 

$
3,487

 

$
2,362

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in millions)

 

Lease Receivables

 

Loan Receivables

 

At December 31, 2017:

 

Americas

 

EMEA

 

Asia Pacific

 

Americas

 

EMEA

 

Asia Pacific

 

Credit Ratings:

 

 

 

 

 

 

 

 

 

 

 

 

 

Aaa – Aa3

 

$
422

 

$
49

 

$
68

 

$
724

 

$
129

 

$
120

 

A1 – A3

 
855

 
190

 
544

 
1,469

 
502

 
961

 

Baa1 – Baa3

 
980

 
371

 
337

 
1,683

 
982

 
596

 

Ba1 – Ba2

 
730

 
448

 
184

 
1,253

 
1,186

 
325

 

Ba3 – B1

 
443

 
192

 
89

 
760

 
508

 
157

 

B2 – B3

 
367

 
77

 
64

 
630

 
204

 
113

 

Caa – D

 
51

 
13

 
18

 
88

 
34

 
31

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$
3,847

 

$
1,340

 

$
1,302

 

$
6,607

 

$
3,545

 

$
2,303

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Troubled Debt Restructurings

 

The company did not have any significant troubled debt restructurings during the six months ended June 30, 2018 or for the year ended December 31, 2017.