Financing Receivables and Guarantees
Financing receivables primarily consist of lease receivables, loan receivables, and financed service contracts and other. Lease receivables represent sales-type and direct-financing leases resulting from the sale of the Company’s and complementary third-party products and are typically collateralized by a security interest in the underlying assets. Loan receivables represent financing arrangements related to the sale of the Company’s products and services, which may include additional funding for other costs associated with network installation and integration of the Company’s products and services. Lease receivables consist of arrangements with terms of four years on average, while loan receivables generally have terms of up to three years. The financed service contracts and other category includes financing receivables related to technical support and advanced services, as well as receivables related to financing of certain indirect costs associated with leases. Revenue related to the technical support services is typically deferred and included in deferred service revenue and is recognized ratably over the period during which the related services are to be performed, which typically ranges from one to three years.
A summary of the Company’s financing receivables is presented as follows (in millions):
|
| | | | | | | | | | | | | | | |
July 27, 2013 | Lease Receivables | | Loan Receivables | | Financed Service Contracts and Other | | Total Financing Receivables |
Gross | $ | 3,780 |
| | $ | 1,649 |
| | $ | 3,136 |
| | $ | 8,565 |
|
Unearned income | (273 | ) | | — |
| | — |
| | (273 | ) |
Allowance for credit loss | (238 | ) | | (86 | ) | | (20 | ) | | (344 | ) |
Total, net | $ | 3,269 |
| | $ | 1,563 |
| | $ | 3,116 |
| | $ | 7,948 |
|
Reported as: | | | | | | | |
Current | $ | 1,418 |
| | $ | 898 |
| | $ | 1,721 |
| | $ | 4,037 |
|
Noncurrent | 1,851 |
| | 665 |
| | 1,395 |
| | 3,911 |
|
Total, net | $ | 3,269 |
| | $ | 1,563 |
| | $ | 3,116 |
| | $ | 7,948 |
|
|
| | | | | | | | | | | | | | | |
July 28, 2012 | Lease Receivables | | Loan Receivables | | Financed Service Contracts and Other | | Total Financing Receivables |
Gross | $ | 3,429 |
| | $ | 1,796 |
| | $ | 2,651 |
| | $ | 7,876 |
|
Unearned income | (250 | ) | | — |
| | — |
| | (250 | ) |
Allowance for credit loss | (247 | ) | | (122 | ) | | (11 | ) | | (380 | ) |
Total, net | $ | 2,932 |
| | $ | 1,674 |
| | $ | 2,640 |
| | $ | 7,246 |
|
Reported as: | | | | | | | |
Current | $ | 1,200 |
| | $ | 968 |
| | $ | 1,493 |
| | $ | 3,661 |
|
Noncurrent | 1,732 |
| | 706 |
| | 1,147 |
| | 3,585 |
|
Total, net | $ | 2,932 |
| | $ | 1,674 |
| | $ | 2,640 |
| | $ | 7,246 |
|
As of July 27, 2013 and July 28, 2012, the deferred service revenue related to the financed service contracts and other was $2,036 million and $1,838 million, respectively.
Contractual maturities of the gross lease receivables at July 27, 2013 are summarized as follows (in millions):
|
| | | |
Fiscal Year | Amount |
2014 | $ | 1,656 |
|
2015 | 1,114 |
|
2016 | 632 |
|
2017 | 301 |
|
2018 | 75 |
|
Thereafter | 2 |
|
Total | $ | 3,780 |
|
Actual cash collections may differ from the contractual maturities due to early customer buyouts, refinancings, or defaults.
| |
(b) | Credit Quality of Financing Receivables |
Financing receivables categorized by the Company’s internal credit risk rating as of July 27, 2013 and July 28, 2012 are summarized as follows (in millions): |
| | | | | | | | | | | | | | | | | | | | | | | |
| INTERNAL CREDIT RISK RATING | | | | | | |
July 27, 2013 | 1 to 4 | | 5 to 6 | | 7 and Higher | | Total | | Residual Value | | Gross Receivables, Net of Unearned Income |
Lease receivables | $ | 1,681 |
| | $ | 1,482 |
| | $ | 93 |
| | $ | 3,256 |
| | $ | 251 |
| | $ | 3,507 |
|
Loan receivables | 842 |
| | 777 |
| | 30 |
| | 1,649 |
| | — |
| | 1,649 |
|
Financed service contracts and other | 1,876 |
| | 1,141 |
| | 119 |
| | 3,136 |
| | — |
| | 3,136 |
|
Total | $ | 4,399 |
| | $ | 3,400 |
| | $ | 242 |
| | $ | 8,041 |
| | $ | 251 |
| | $ | 8,292 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| INTERNAL CREDIT RISK RATING | | | | | | |
July 28, 2012 | 1 to 4 | | 5 to 6 | | 7 and Higher | | Total | | Residual Value | | Gross Receivables, Net of Unearned Income |
Lease receivables | $ | 1,532 |
| | $ | 1,342 |
| | $ | 31 |
| | $ | 2,905 |
| | $ | 274 |
| | $ | 3,179 |
|
Loan receivables | 831 |
| | 921 |
| | 44 |
| | 1,796 |
| | — |
| | 1,796 |
|
Financed service contracts and other | 1,552 |
| | 1,030 |
| | 69 |
| | 2,651 |
| | — |
| | 2,651 |
|
Total | $ | 3,915 |
| | $ | 3,293 |
| | $ | 144 |
| | $ | 7,352 |
| | $ | 274 |
| | $ | 7,626 |
|
The Company determines the adequacy of its allowance for credit loss by assessing the risks and losses inherent in its financing receivables by portfolio segment. The portfolio segment is based on the types of financing offered by the Company to its customers: lease receivables, loan receivables, and financed service contracts and other.
The Company’s internal credit risk ratings of 1 through 4 correspond to investment-grade ratings, while credit risk ratings of 5 and 6 correspond to non-investment grade ratings. Credit risk ratings of 7 and higher correspond to substandard ratings and constitute a relatively small portion of the Company’s financing receivables.
In circumstances when collectibility is not deemed reasonably assured, the associated revenue is deferred in accordance with the Company’s revenue recognition policies, and the related allowance for credit loss, if any, is included in deferred revenue. The Company also records deferred revenue associated with financing receivables when there are remaining performance obligations, as it does for financed service contracts. Total allowances for credit loss and deferred revenue as of July 27, 2013 and July 28, 2012 were $2,453 million and $2,387 million, respectively, and were associated with financing receivables (net of unearned income) of $8,292 million and $7,626 million as of their respective period ends. The Company did not modify any financing receivables during the periods presented.
The following tables present the aging analysis of financing receivables as of July 27, 2013 and July 28, 2012 (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| DAYS PAST DUE (INCLUDES BILLED AND UNBILLED) | | | | | | | | |
July 27, 2013 | 31-60 | | 61-90 | | 91+ | | Total Past Due | | Current | | Gross Receivables, Net of Unearned Income | | Nonaccrual Financing Receivables | | Impaired Financing Receivables |
Lease receivables | $ | 85 |
| | $ | 48 |
| | $ | 124 |
| | $ | 257 |
| | $ | 3,250 |
| | $ | 3,507 |
| | $ | 27 |
| | $ | 22 |
|
Loan receivables | 6 |
| | 3 |
| | 11 |
| | 20 |
| | 1,629 |
| | 1,649 |
| | 11 |
| | 9 |
|
Financed service contracts and other | 75 |
| | 48 |
| | 392 |
| | 515 |
| | 2,621 |
| | 3,136 |
| | 18 |
| | 11 |
|
Total | $ | 166 |
| | $ | 99 |
| | $ | 527 |
| | $ | 792 |
| | $ | 7,500 |
| | $ | 8,292 |
| | $ | 56 |
| | $ | 42 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| DAYS PAST DUE (INCLUDES BILLED AND UNBILLED) | | | | | | | | |
July 28, 2012 | 31-60 | | 61-90 | | 91+ | | Total Past Due | | Current | | Gross Receivables, Net of Unearned Income | | Nonaccrual Financing Receivables | | Impaired Financing Receivables |
Lease receivables | $ | 151 |
| | $ | 69 |
| | $ | 173 |
| | $ | 393 |
| | $ | 2,786 |
| | $ | 3,179 |
| | $ | 23 |
| | $ | 14 |
|
Loan receivables | 10 |
| | 8 |
| | 11 |
| | 29 |
| | 1,767 |
| | 1,796 |
| | 4 |
| | 4 |
|
Financed service contracts and other | 89 |
| | 68 |
| | 392 |
| | 549 |
| | 2,102 |
| | 2,651 |
| | 18 |
| | 10 |
|
Total | $ | 250 |
| | $ | 145 |
| | $ | 576 |
| | $ | 971 |
| | $ | 6,655 |
| | $ | 7,626 |
| | $ | 45 |
| | $ | 28 |
|
Past due financing receivables are those that are 31 days or more past due according to their contractual payment terms. The data in the preceding tables are presented by contract and the aging classification of each contract is based on the oldest outstanding receivable, and therefore past due amounts also include unbilled and current receivables within the same contract. The preceding aging tables exclude pending adjustments on billed tax assessment in certain international markets. The balances of either unbilled or current financing receivables included in the category of 91 days plus past due for financing receivables were $406 million and $455 million as of July 27, 2013 and July 28, 2012, respectively.
As of July 27, 2013, the Company had financing receivables of $87 million, net of unbilled or current receivables from the same contract, that were in the category for 91 days plus past due but remained on accrual status. Such balance was $109 million as of July 28, 2012. A financing receivable may be placed on nonaccrual status earlier if, in management’s opinion, a timely collection of the full principal and interest becomes uncertain.
| |
(c) | Allowance for Credit Loss Rollforward |
The allowances for credit loss and the related financing receivables are summarized as follows (in millions):
|
| | | | | | | | | | | | | | | |
| CREDIT LOSS ALLOWANCES |
| Lease Receivables | | Loan Receivables | | Financed Service Contracts and Other | | Total |
Allowance for credit loss as of July 28, 2012 | $ | 247 |
| | $ | 122 |
| | $ | 11 |
| | $ | 380 |
|
Provisions | 21 |
| | (20 | ) | | 10 |
| | 11 |
|
Write-offs, net of recoveries | (30 | ) | | (15 | ) | | (1 | ) | | (46 | ) |
Foreign exchange and other | — |
| | (1 | ) | | — |
| | (1 | ) |
Allowance for credit loss as of July 27, 2013 | $ | 238 |
| | $ | 86 |
| | $ | 20 |
| | $ | 344 |
|
Gross receivables as of July 27, 2013, net of unearned income | $ | 3,507 |
| | $ | 1,649 |
| | $ | 3,136 |
| | $ | 8,292 |
|
|
| | | | | | | | | | | | | | | |
| CREDIT LOSS ALLOWANCES |
| Lease Receivables | | Loan Receivables | | Financed Service Contracts and Other | | Total |
Allowance for credit loss as of July 30, 2011 | $ | 237 |
| | $ | 103 |
| | $ | 27 |
| | $ | 367 |
|
Provisions | 22 |
| | 22 |
| | (13 | ) | | 31 |
|
Write-offs, net of recoveries | (2 | ) | | — |
| | (1 | ) | | (3 | ) |
Foreign exchange and other | (10 | ) | | (3 | ) | | (2 | ) | | (15 | ) |
Allowance for credit loss as of July 28, 2012 | $ | 247 |
| | $ | 122 |
| | $ | 11 |
| | $ | 380 |
|
Gross receivables as of July 28, 2012, net of unearned income | $ | 3,179 |
| | $ | 1,796 |
| | $ | 2,651 |
| | $ | 7,626 |
|
|
| | | | | | | | | | | | | | | |
| CREDIT LOSS ALLOWANCES |
| Lease Receivables | | Loan Receivables | | Financed Service Contracts and Other | | Total |
Allowance for credit loss as of July 31, 2010 | $ | 207 |
| | $ | 73 |
| | $ | 21 |
| | $ | 301 |
|
Provisions | 31 |
| | 43 |
| | 8 |
| | 82 |
|
Write-offs, net of recoveries | (13 | ) | | (18 | ) | | (2 | ) | | (33 | ) |
Foreign exchange and other | 12 |
| | 5 |
| | — |
| | 17 |
|
Allowance for credit loss as of July 30, 2011 | $ | 237 |
| | $ | 103 |
| | $ | 27 |
| | $ | 367 |
|
Gross receivables as of July 30, 2011, net of unearned income | $ | 2,861 |
| | $ | 1,468 |
| | $ | 2,637 |
| | $ | 6,966 |
|
In the ordinary course of business, the Company provides financing guarantees for various third-party financing arrangements extended to channel partners and end-user customers. Payments under these financing guarantee arrangements were not material for the periods presented.
Channel Partner Financing Guarantees The Company facilitates arrangements for third-party financing extended to channel partners, consisting of revolving short-term financing, generally with payment terms ranging from 60 to 90 days. These financing arrangements facilitate the working capital requirements of the channel partners, and, in some cases, the Company guarantees a portion of these arrangements. The volume of channel partner financing was $23.8 billion, $21.3 billion, and $18.2 billion for fiscal 2013, 2012, and 2011, respectively. The balance of the channel partner financing subject to guarantees was $1.4 billion and $1.2 billion as of July 27, 2013 and July 28, 2012, respectively.
End-User Financing Guarantees The Company also provides financing guarantees for third-party financing arrangements extended to end-user customers related to leases and loans, which typically have terms of up to three years. The volume of financing provided by third parties for leases and loans as to which the Company had provided guarantees was $185 million for fiscal 2013, $227 million for fiscal 2012, and $247 million for fiscal 2011.
Financing Guarantee Summary The aggregate amounts of financing guarantees outstanding at July 27, 2013 and July 28, 2012, representing the total maximum potential future payments under financing arrangements with third parties along with the related deferred revenue, are summarized in the following table (in millions):
|
| | | | | | | |
| July 27, 2013 | | July 28, 2012 |
Maximum potential future payments relating to financing guarantees: | | | |
Channel partner | $ | 438 |
| | $ | 277 |
|
End user | 237 |
| | 232 |
|
Total | $ | 675 |
| | $ | 509 |
|
Deferred revenue associated with financing guarantees: | | | |
Channel partner | $ | (225 | ) | | $ | (193 | ) |
End user | (191 | ) | | (200 | ) |
Total | $ | (416 | ) | | $ | (393 | ) |
Maximum potential future payments relating to financing guarantees, net of associated deferred revenue | $ | 259 |
| | $ | 116 |
|
