Accounts and Notes Receivable and Credit Quality of Receivables

3 Months Ended

Mar. 31, 2020

Accounts and Notes Receivable and Credit Quality of Receivables

Receivables

Receivables are recorded at the invoiced amount less allowance for credit losses and imputed interest, if any. For a portion of our receivables, we have provided extended payment terms with installment payment terms greater than 12 months and in certain international jurisdictions up to 36 months. We have a total of $157 million in gross receivables with extended payment terms as of March 31, 2020. Interest income, if any, is recognized ratably over the life of the receivable, and any related fees or costs to establish the receivables 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 receivables with extended payment terms originated and is recorded ratably over the payment period, which approximates the effective interest method. We generally impute interest income on all receivables with payment terms greater than one year that do not contain a stated interest rate. Our general policy is to recognize interest on receivables until a 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. Accrued interest, non-performing receivables and interest income were immaterial for all periods presented. Effective January 1, 2020, we changed our receivables presentation and combined accounts receivable and notes receivable into a single line item on our balance sheets due to their similar characteristics and have reclassified the prior period balances to conform to the current year presentation.

The following table summarizes the components of current and long-term receivables, net:


	As of
	March 31, 2020		December 31, 2019
Current:
Receivables	$	685	$	791
Allowance for credit losses	(61)		(36)
Current receivables, net	624		755
Long-term:
Receivables	57		53
Allowance for credit losses	(9)		—
Long-term receivables, net	48		53
Total receivables, net	$	672	$	808

Allowance for Credit Losses

As described in Note 1, results for reporting periods effective January 1, 2020 are presented in accordance with ASC 326 while prior period amounts continue to be reported in accordance with previously applicable U.S. GAAP. We recorded a net increase to accumulated loss of $6 million for the cumulative effect of adopting ASC 326, which was primarily related to incremental allowance for credit losses associated with our current receivables and contract assets that were not required under previously applicable U.S. GAAP. The adoption impact of this standard to our consolidated statements of operations, balance sheets, and cash flows during the quarter ended March 31, 2020 was not material.

The receivables allowance for credit losses is our best estimate of the amount of expected credit losses in our existing receivables over the contractual term. We evaluate our exposure to credit loss on both a collective and individual basis. We evaluate such receivables on a geographic basis and take into account any relevant available information, which begins with historical credit loss experience and consideration of current and expected conditions and market trends (such as general economic conditions, other microeconomic and macroeconomic considerations, etc.) and reasonable and supportable forecasts that could impact the collectability of such receivables over the contractual term individually or in the aggregate. Changes in circumstances relating to these factors may result in the need to increase or decrease our allowance for credit losses in the future.

We manage our receivable portfolios using both geography and delinquency as key credit quality indicators. The following summarizes geographical delinquencies of total receivables, net:


	As of
	March 31, 2020		Balances over 90 days past due		December 31, 2019		Balances over 90 days past due
Receivables:
U.S. and Canada	$	456	$	82	$	534	$	65
International	286		63		310		55
Total receivables	742		145		844		120

Receivables allowance:
U.S. and Canada	(29)		(21)		(13)		(8)
International	(41)		(25)		(23)		(23)
Total receivables allowance	(70)		(46)		(36)		(31)
Receivables, net	$	672	$	99	$	808	$	89

Account balances are charged against the allowances after all collection efforts have been exhausted and the potential for recovery is considered remote.

The activity in our allowance for receivable credit losses for each of the three-month periods ended March 31, 2020 and 2019 is as follows:


	Three Months Ended March 31,
	2020								2019
	Total		U.S. and Canada		International		Total
Beginning allowance for credit losses⁽¹⁾	$	(42)	$	(14)	$	(28)	$	(40)
Provision	(28)		(15)		(13)		(1)
Charge-offs and recoveries	—		—		—		3
Ending allowance for credit losses	$	(70)	$	(29)	$	(41)	$	(38)

(1) Reflects $6 million related to implementation of ASC 326 for the beginning balance of the three months ended March 31, 2020.

At March 31, 2020, 15% of our total receivables, net, were past due by over 90 days compared to 11% at December 31, 2019.

Credit Quality of Receivables

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 receivables 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 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 receivables 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 ongoing 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 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 have certain concentrations of outstanding receivables in international locations that impact our assessment of the credit quality of our receivables. We monitor the macroeconomic and political environment in each of these locations in our assessment of the credit quality of our receivables. 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 receivables, net, from certain customers in Mexico at March 31, 2020 was $25 million. We collected $7 million of outstanding receivables from these customers during the three months ended March 31, 2020.

•Peru - Our receivables, net, from certain customers in Peru at March 31, 2020 was $7 million. We collected $1 million of outstanding receivables from these customers during the three months ended March 31, 2020.

•Argentina - Our receivables, net, from customers in Argentina at March 31, 2020 was $12 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 $4 million of outstanding receivables from customers in Argentina during the three months ended March 31, 2020.

During the first quarter, we increased our allowance for credit losses by $28 million. This increase was primarily related to Gaming customers in Latin America (which transact with both domestic and international subsidiaries) as we expect those customers to be particularly affected by COVID-19 closures of gaming operations establishments. As noted above, we have concentrations of receivables in Latin America, where customers generally take longer to pay us than those from other geographies. In addition, customers in this region expect and have often been granted extended payment terms as described above. Our customers in Argentina, Colombia and Peru have been and are expected to continue to be affected by the

COVID-19-related closures of gaming operations establishments and the resulting impact on both their specific financial situations and the general macroeconomic environments in which they operate.

The fair value of receivables is estimated by discounting expected future cash flows using current interest rates at which similar loans would be made to borrowers with similar credit ratings and remaining maturities. As of March 31, 2020 and December 31, 2019, the fair value of receivables, net, approximated the carrying value due to contractual terms of receivables generally being under 24 months.