XRX-6.30.12-10Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________ 
FORM 10-Q
_________________________________________________  
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2012
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                        to
Commission File Number 001-04471
  
XEROX CORPORATION
(Exact Name of Registrant as specified in its charter)
_________________________________________________  
New York
 
16-0468020
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
P.O. Box 4505, 45 Glover Avenue
Norwalk, Connecticut
 
06856-4505
(Address of principal executive offices)
 
(Zip Code)
(203) 968-3000
(Registrant’s telephone number, including area code)
_________________________________________________  
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by a check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x Accelerated filer o Non-accelerated filer o Smaller reporting company o
Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No ý
Class
 
Outstanding at June 30, 2012
Common Stock, $1 par value
 
1,307,202,831 shares
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q and any exhibits to this Report may contain "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “will,” “should” and similar expressions, as they relate to us, are intended to identify forward-looking statements. These statements reflect management’s current beliefs, assumptions and expectations and are subject to a number of factors that may cause actual results to differ materially. These factors include but are not limited to: changes in economic conditions, political conditions, trade protection measures, licensing requirements, environmental regulations and tax matters in the United States and in the foreign countries in which we do business; changes in foreign currency exchange rates; actions of competitors; our ability to obtain adequate pricing for our products and services and to maintain and improve cost efficiency of operations, including savings from restructuring actions; the risk that unexpected costs will be incurred; our ability to expand equipment placements; the risk that subcontractors, software vendors and utility and network providers will not perform in a timely, quality manner; the risk that individually identifiable information of customers, clients and employees could be inadvertently disclosed or disclosed as a result of a breach of our security; our ability to recover capital investments; development of new products and services; our ability to protect our intellectual property rights; interest rates, cost of borrowing and access to credit markets; the risk that multi-year contracts with governmental entities could be terminated prior to the end of the contract term; reliance on third parties for manufacturing of products and provision of services; our ability to drive the expanded use of color in printing and copying; the outcome of litigation and regulatory proceedings to which we may be a party; and other risks that are set forth in the “Risk Factors” section, the “Legal Proceedings” section, the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and other sections of this Quarterly Report on Form 10-Q, our Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 and our 2011 Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”). The Company assumes no obligation to update any forward-looking statements as a result of new information or future events or developments, except as required by law.
 

Xerox 2012 Form 10-Q
1

XEROX CORPORATION
FORM 10-Q
June 30, 2012
TABLE OF CONTENTS
 
 
Page
 
Item 1.
 
 
 
 
 
Item 2.
 
 
 
Item 3.
Item 4.
 
 
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 6.
For additional information about Xerox Corporation and access to our Annual Reports to Shareholders and SEC filings, free of charge, please visit our website at www.xerox.com/investor. Any information on or linked from the website is not incorporated by reference into this Form 10-Q.
 

Xerox 2012 Form 10-Q
2

PART I — FINANCIAL INFORMATION
ITEM 1 — FINANCIAL STATEMENTS

XEROX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(in millions, except per-share data)
 
2012
 
2011
 
2012
 
2011
Revenues
 
 
 
 
 
 
 
 
Sales
 
$
1,635

 
$
1,720

 
$
3,223

 
$
3,391

Outsourcing, service and rentals
 
3,763

 
3,731

 
7,530

 
7,363

Finance income
 
143

 
163

 
291

 
325

Total Revenues
 
5,541

 
5,614

 
11,044

 
11,079

Costs and Expenses
 
 
 
 
 
 
 
 
Cost of sales
 
1,092

 
1,139

 
2,144

 
2,229

Cost of outsourcing, services and rentals
 
2,625

 
2,538

 
5,315

 
5,052

Equipment financing interest
 
51

 
60

 
104

 
120

Research, development and engineering expenses
 
161

 
175

 
334

 
359

Selling, administrative and general expenses
 
1,076

 
1,119

 
2,144

 
2,238

Restructuring and asset impairment charges
 
29

 
(9
)
 
46

 
(24
)
Amortization of intangible assets
 
82

 
87

 
164

 
172

Other expenses, net
 
74

 
104

 
129

 
182

Total Costs and Expenses
 
5,190

 
5,213

 
10,380

 
10,328

Income before Income Taxes and Equity Income
 
351

 
401

 
664

 
751

Income tax expense
 
66

 
108

 
143

 
203

Equity in net income of unconsolidated affiliates
 
31

 
34

 
71

 
68

Net Income
 
316

 
327

 
592

 
616

Less: Net income attributable to noncontrolling interests
 
7

 
8

 
14

 
16

Net Income Attributable to Xerox
 
$
309

 
$
319

 
$
578

 
$
600

Basic Earnings per Share
 
$
0.23

 
$
0.22

 
$
0.42

 
$
0.42

Diluted Earnings per Share
 
$
0.22

 
$
0.22

 
$
0.41

 
$
0.41


The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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XEROX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(in millions)
 
2012
 
2011
 
2012
 
2011
Net Income
 
$
316

 
$
327

 
$
592

 
$
616

Less: Net income attributable to noncontrolling interests
 
7

 
8

 
14

 
16

Net Income Attributable to Xerox
 
$
309

 
$
319

 
$
578

 
$
600

 
 
 
 
 
 
 
 
 
Other Comprehensive (Loss) Income(1):
 

 

 

 

Translation adjustments, net
 
$
(323
)
 
$
153

 
$
(163
)
 
$
450

Unrealized gains (losses), net
 
34

 
6

 
(9
)
 
(15
)
Changes in defined benefit plans, net
 
64

 
14

 
10

 
(22
)
Other Comprehensive (Loss) Income, net
 
(225
)
 
173

 
(162
)
 
413

Less: Other comprehensive loss attributable to noncontrolling interests
 
(1
)
 
—

 
—

 
—

Other Comprehensive (Loss) Income Attributable to Xerox
 
$
(224
)
 
$
173

 
$
(162
)
 
$
413

 
 
 
 
 
 
 
 
 
Comprehensive Income, net
 
$
91

 
$
500

 
$
430

 
$
1,029

Less: Comprehensive income attributable to noncontrolling interests
 
6

 
8

 
14

 
16

Comprehensive Income Attributable to Xerox
 
$
85

 
$
492

 
$
416

 
$
1,013


(1) Refer to Note 14 - Comprehensive Income for gross components of comprehensive income, reclassification adjustments out of accumulated other comprehensive income and related tax effects.


The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.


Xerox 2012 Form 10-Q
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XEROX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in millions, except share data in thousands)
 
June 30,
2012
 
December 31,
2011
Assets
 
 
 
 
Cash and cash equivalents
 
$
814

 
$
902

Accounts receivable, net
 
2,776

 
2,600

Billed portion of finance receivables, net
 
100

 
166

Finance receivables, net
 
2,036

 
2,165

Inventories
 
1,073

 
1,021

Other current assets
 
1,213

 
1,058

Total current assets
 
8,012

 
7,912

Finance receivables due after one year, net
 
3,780

 
4,031

Equipment on operating leases, net
 
519

 
533

Land, buildings and equipment, net
 
1,553

 
1,612

Investments in affiliates, at equity
 
1,367

 
1,395

Intangible assets, net
 
2,904

 
3,042

Goodwill
 
8,848

 
8,803

Deferred tax assets, long-term
 
598

 
672

Other long-term assets
 
2,260

 
2,116

Total Assets
 
$
29,841

 
$
30,116

Liabilities and Equity
 
 
 
 
Short-term debt and current portion of long-term debt
 
$
1,099

 
$
1,545

Accounts payable
 
1,712

 
2,016

Accrued compensation and benefits costs
 
675

 
757

Unearned income
 
404

 
432

Other current liabilities
 
1,492

 
1,631

Total current liabilities
 
5,382

 
6,381

Long-term debt
 
8,061

 
7,088

Pension and other benefit liabilities
 
2,194

 
2,487

Post-retirement medical benefits
 
916

 
925

Other long-term liabilities
 
793

 
861

Total Liabilities
 
17,346

 
17,742

Series A Convertible Preferred Stock
 
349

 
349

Common stock
 
1,348

 
1,353

Additional paid-in capital
 
6,347

 
6,317

Treasury stock, at cost
 
(303
)
 
(124
)
Retained earnings
 
7,496

 
7,046

Accumulated other comprehensive loss
 
(2,878
)
 
(2,716
)
Xerox shareholders’ equity
 
12,010

 
11,876

Noncontrolling interests
 
136

 
149

Total Equity
 
12,146

 
12,025

Total Liabilities and Equity
 
$
29,841

 
$
30,116

Shares of common stock issued
 
1,348,042

 
1,352,849

Treasury stock
 
(40,839
)
 
(15,508
)
Shares of common stock outstanding
 
1,307,203

 
1,337,341


The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
 

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XEROX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(in millions)
 
2012
 
2011
 
2012
 
2011
Cash Flows from Operating Activities:
 
 
 
 
 
 
 
 
Net income
 
$
316

 
$
327

 
$
592

 
$
616

Adjustments required to reconcile net income to cash flows from operating activities:
 
 
 
 
 
 
 
 
Depreciation and amortization
 
313

 
298

 
626

 
589

Provision for receivables
 
33

 
29

 
60

 
54

Provision for inventory
 
7

 
6

 
17

 
19

Net gain on sales of businesses and assets
 
(2
)
 
(7
)
 
(3
)
 
(8
)
Undistributed equity in net income of unconsolidated affiliates
 
(4
)
 
(7
)
 
(35
)
 
(40
)
Stock-based compensation
 
31

 
31

 
62

 
63

Restructuring and asset impairment charges
 
29

 
(9
)
 
46

 
(24
)
Payments for restructurings
 
(44
)
 
(63
)
 
(83
)
 
(120
)
Contributions to defined benefit pension plans
 
(158
)
 
(79
)
 
(237
)
 
(123
)
Increase in accounts receivable and billed portion of finance receivables
 
(156
)
 
(15
)
 
(608
)
 
(286
)
Collections of deferred proceeds from sales of receivables
 
160

 
95

 
256

 
182

Increase in inventories
 
(50
)
 
(37
)
 
(84
)
 
(137
)
Increase in equipment on operating leases
 
(68
)
 
(68
)
 
(135
)
 
(129
)
Decrease in finance receivables
 
111

 
65

 
275

 
160

Increase in other current and long-term assets
 
(61
)
 
(44
)
 
(162
)
 
(123
)
Decrease in accounts payable and accrued compensation
 
(93
)
 
(145
)
 
(237
)
 
(378
)
Decrease in other current and long-term liabilities
 
(127
)
 
(89
)
 
(162
)
 
(175
)
Net change in income tax assets and liabilities
 
18

 
47

 
61

 
168

Net change in derivative assets and liabilities
 
(30
)
 
1

 
(9
)
 
24

Other operating, net
 
3

 
11

 
(27
)
 
(15
)
Net cash provided by operating activities
 
228

 
347

 
213

 
317

Cash Flows from Investing Activities:
 
 
 
 
 
 
 
 
Cost of additions to land, buildings and equipment
 
(82
)
 
(94
)
 
(173
)
 
(165
)
Proceeds from sales of land, buildings and equipment
 
3

 
2

 
7

 
4

Cost of additions to internal use software
 
(33
)
 
(41
)
 
(70
)
 
(81
)
Acquisitions, net of cash acquired
 
—

 
(94
)
 
(87
)
 
(137
)
Net change in escrow and other restricted investments
 
11

 
(7
)
 
8

 
(8
)
Other investing, net
 
3

 
19

 
3

 
19

Net cash used in investing activities
 
(98
)
 
(215
)
 
(312
)
 
(368
)
Cash Flows from Financing Activities:
 
 
 
 
 
 
 
 
Net (payments) proceeds on debt
 
(455
)
 
690

 
543

 
703

Payment of liability to subsidiary trust issuing preferred securities
 
—

 
(670
)
 
—

 
(670
)
Common stock dividends
 
(57
)
 
(59
)
 
(114
)
 
(119
)
Preferred stock dividends
 
(6
)
 
(6
)
 
(12
)
 
(12
)
Proceeds from issuances of common stock
 
3

 
12

 
10

 
31

Excess tax benefits from stock-based compensation
 
—

 
2

 
—

 
4

Payments to acquire treasury stock, including fees
 
(307
)
 
—

 
(357
)
 
—

Repurchases related to stock-based compensation
 
(1
)
 
(3
)
 
(1
)
 
(6
)
Distributions to noncontrolling interests
 
(4
)
 
(5
)
 
(61
)
 
(12
)
Net cash (used in) provided by financing activities
 
(827
)
 
(39
)
 
8

 
(81
)
Effect of exchange rate changes on cash and cash equivalents
 
(3
)
 
5

 
3

 
19

(Decrease) increase in cash and cash equivalents
 
(700
)
 
98

 
(88
)
 
(113
)
Cash and cash equivalents at beginning of period
 
1,514

 
1,000

 
902

 
1,211

Cash and Cash Equivalents at End of Period
 
$
814

 
$
1,098

 
$
814

 
$
1,098


The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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XEROX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per-share data and where otherwise noted)

Note 1 – Basis of Presentation
References herein to “we,” “us,” “our,” the “Company” and “Xerox” refer to Xerox Corporation and its consolidated subsidiaries unless the context specifically requires otherwise.
We have prepared the accompanying unaudited Condensed Consolidated Financial Statements in accordance with the accounting policies described in our 2011 Annual Report to Shareholders, which is incorporated by reference in our 2011 Annual Report on Form 10-K (“2011 Annual Report”), and the interim reporting requirements of Form 10-Q. Accordingly, certain information and note disclosures normally included in our annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. You should read these Condensed Consolidated Financial Statements in conjunction with the Consolidated Financial Statements included in our 2011 Annual Report.
In our opinion, all adjustments which are necessary for a fair statement of financial position, operating results and cash flows for the interim periods presented have been made. These adjustments consist of normal recurring items. Interim results of operations are not necessarily indicative of the results of the full year.
For convenience and ease of reference, we refer to the financial statement caption “Income before Income Taxes and Equity Income” as “pre-tax income.”

Note 2 – Recent Accounting Pronouncements
Fair Value Accounting: In May 2011, the FASB issued ASU 2011-04, which amended Fair Value Measurements and Disclosures - Overall (ASC Topic 820-10) to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are consistent between U.S. GAAP and International Financial Reporting Standards. This update changed certain fair value measurement principles and enhanced the disclosure requirements, particularly for level 3 fair value measurements. We adopted this update prospectively effective for our fiscal year beginning January 1, 2012. This update did not have a material effect on our financial condition, results of operations or disclosures.
Balance Sheet Offsetting: In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210), Disclosures about Offsetting Assets and Liabilities. ASU 2011-11 requires entities to disclose both gross information and net information about both instruments and transactions eligible for offset in the Balance Sheet and instruments and transactions subject to an agreement similar to a master netting arrangement to enable users of their financial statements to understand the effects of offsetting and related arrangements on their financial position. This update is effective for our fiscal year beginning January 1, 2013 and must be applied retrospectively. The principal impact from this update will be to expand disclosures regarding our financial instruments. We currently report our derivative assets and liabilities on a gross basis in the Balance Sheet even in those instances where offsetting may be allowed under a master netting agreement.

Note 3 – Segment Reporting
Our reportable segments are aligned with how we manage the business and view the markets we serve. We report our financial performance based on the following two primary reportable segments – Services and Technology. Our Services segment operations involve delivery of a broad range of services including business process, document and IT outsourcing. Our Technology segment includes the sale and support of a broad range of document systems from entry level to high-end.
The Services segment is comprised of three outsourcing service offerings:
 
•
Business Process Outsourcing ("BPO")
•
Document Outsourcing (which includes Managed Print Services) ("DO")
•
Information Technology Outsourcing ("ITO")
Business process outsourcing services include service arrangements where we manage a customer’s business activity or process. Document outsourcing services include service arrangements that allow customers to streamline, simplify and digitize document-intensive business processes through automation and deployment of software applications and tools and the management of their printing needs. Document outsourcing services also include revenues from our

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partner print services offerings. Information technology outsourcing services include service arrangements where we manage a customer’s IT-related activities, such as application management and application development, data center operations or testing and quality assurance.
Our Technology segment is centered on strategic product groups, which share common technology, manufacturing and product platforms. This segment includes the sale of document systems and supplies, technical services and product financing. Our products range from:
 
•
“Entry,” which includes A4 devices and desktop printers; to
•
“Mid-range,” which includes A3 devices that generally serve workgroup environments in midsize to large enterprises and includes products that fall into the following market categories: Color 41+ ppm priced at less than $100K and Light Production 91+ ppm priced at less than $100K; to
•
“High-end,” which includes production printing and publishing systems that generally serve the graphic communications marketplace and large enterprises.
The segment classified as Other includes several units, none of which meet the thresholds for separate segment reporting. This group primarily includes Global Paper and Supplies Distribution Group (predominantly paper sales), licensing revenues, GIS network integration solutions and electronic presentation systems and non-allocated Corporate items including non-financing interest, as well as other items included in Other expenses, net.
Operating segment revenues and profitability were as follows:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
Segment Revenue
 
Segment Profit (Loss)
 
Segment Revenue
 
Segment Profit (Loss)
2012
 
 
 
 
 
 
 
Services
$
2,806

 
$
298

 
$
5,627

 
$
561

Technology
2,370

 
268

 
4,708

 
513

Other
365

 
(68
)
 
709

 
(120
)
Total
$
5,541

 
$
498

 
$
11,044

 
$
954

2011
 
 
 
 
 
 
 
Services
$
2,672

 
$
322

 
$
5,256

 
$
588

Technology
2,552

 
300

 
5,047

 
566

Other
390

 
(73
)
 
776

 
(139
)
Total
$
5,614

 
$
549

 
$
11,079

 
$
1,015

 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
Reconciliation to Pre-tax Income
 
2012
 
2011
 
2012
 
2011
Segment Profit
 
$
498

 
$
549

 
$
954

 
$
1,015

Reconciling items:
 
 
 
 
 
 
 
 
Restructuring and asset impairment charges
 
(29
)
 
9

 
(46
)
 
24

Restructuring charges of Fuji Xerox
 
(6
)
 
(4
)
 
(10
)
 
(15
)
Amortization of intangible assets
 
(82
)
 
(87
)
 
(164
)
 
(172
)
Equity in net income of unconsolidated affiliates
 
(31
)
 
(34
)
 
(71
)
 
(68
)
Loss on early extinguishment of liability
 
—

 
(33
)
 
—

 
(33
)
Other
 
1

 
1

 
1

 
—

Pre-tax Income
 
$
351

 
$
401

 
$
664

 
$
751



Note 4 – Acquisitions

In February 2012, we acquired R.K. Dixon, a leading provider of IT services, copiers, printers and managed print services for approximately $58. The acquisition furthers our coverage of central Illinois and eastern Iowa, building on

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our strategy to create a nationwide network of locally-based companies focused on customers' needs to improve business performance through efficiencies.

R.K. Dixon is included within our Technology segment. Additionally, our Services segment acquired two businesses during the six months ended June 30, 2012 for a total of $29 in cash. The operating results of these acquisitions are not material to our financial statements and are included within our results from the respective acquisition dates. The purchase prices were primarily allocated to intangible assets and goodwill based on third-party valuations and management’s estimates.

Note 5 – Receivables, Net
Accounts Receivable Sales Arrangements
Accounts receivable sales arrangements are utilized in the normal course of business as part of our cash and liquidity management. We have facilities in the U.S., Canada and several countries in Europe that enable us to sell to third-parties, on an on-going basis, certain accounts receivable without recourse. The accounts receivables sold are generally short-term trade receivables with payment due dates of less than 60 days.
One of the facilities in the U.S. enables us to sell a designated pool of receivables on a revolving basis to a wholly-owned consolidated bankruptcy-remote limited purpose subsidiary, which in turn sells such receivables to third-party commercial paper conduit purchasers (collectively, the "Purchasers") for cash and a deferred purchase price receivable. The Purchasers' maximum cash investment in the receivables at any time is $265 and new receivables are purchased from cash collections on previously sold receivables. This facility terminates in June 2014. During the three and six months ended June 30, 2012, receivables of $474 and $566, respectively, were sold under this revolving facility program.
All of our arrangements involve the sale of entire groups of accounts receivables for cash. In most instances a portion of the sales proceeds are held back by the purchaser and payment is deferred until collection of the related receivables sold. Such holdbacks are not considered legal securities nor are they certificated. We report collections on such receivables as operating cash flows in the Condensed Consolidated Statements of Cash Flows because such receivables are the result of an operating activity and the associated interest rate risk is de minimis due to its short-term nature. Our risk of loss following the sales of accounts receivable is limited to the outstanding deferred purchase price receivable. These receivables are included in the caption “Other current assets” in the accompanying Condensed Consolidated Balance Sheets and were $244 and $97 at June 30, 2012 and December 31, 2011, respectively. The balance at June 30, 2012 includes receivables of $150 held by the bankruptcy-remote subsidiary, noted in the revolving arrangement above, which were not available to satisfy any of our creditor obligations.
Under most of the arrangements, we continue to service the sold accounts receivable. When applicable, a servicing liability is recorded for the estimated fair value of the servicing. The amounts associated with the servicing liability were not material.
Of the accounts receivable sold and derecognized from our Balance Sheet, $1,049 and $815 remained uncollected as of June 30, 2012 and December 31, 2011, respectively. Accounts receivables sales were as follows:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2012
 
2011
 
2012
 
2011
Accounts receivable sales
$
1,215

 
$
819

 
$
2,090

 
$
1,549

Deferred proceeds
256

 
103

 
403

 
197

Fees associated with sales
6

 
5

 
12

 
9

Estimated increase to operating cash flows(1)
169

 
29

 
100

 
5

 ____________________________
(1)
Represents the difference between current and prior period receivable sales adjusted for the effects of: (i) the deferred proceeds, (ii) collections prior to the end of the quarter and (iii) currency.
Finance Receivables – Allowance for Credit Losses and Credit Quality
Finance receivables include sales-type leases, direct financing leases and installment loans. Our finance receivable portfolios are primarily in the U.S., Canada and Europe. We generally establish customer credit limits and estimate

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9

the allowance for credit losses on a country or geographic basis. Our policy and methodology used to establish our allowance for doubtful accounts has been consistently applied over all periods presented.
 
The following table is a rollforward of the allowance for doubtful finance receivables as well as the related investment in finance receivables:
 
 
United States
 
Canada
 
Europe
 
Other(3)
 
Total
Allowance for Credit Losses:
 
 
 
 
 
 
 
 
 
Balance at December 31, 2011
$
75

 
$
33

 
$
91

 
$
2

 
$
201

Provision
2

 
1

 
12

 
—

 
15

Charge-offs
(4
)
 
(3
)
 
(12
)
 
—

 
(19
)
Recoveries and other(1)
1

 
2

 
2

 
1

 
6

Balance at March 31, 2012
74

 
33

 
93

 
3

 
203

Provision
3

 
2

 
11

 
1

 
17

Charge-offs
(5
)
 
(4
)
 
(15
)
 
—

 
(24
)
Recoveries and other(1)
1

 
—

 
(6
)
 
(1
)
 
(6
)
Balance at June 30, 2012
$
73

 
$
31

 
$
83

 
$
3

 
$
190

Finance receivables as of June 30, 2012 collectively evaluated for impairment(2)
$
2,739

 
$
791

 
$
2,423

 
$
149

 
$
6,102

 
 
 
 
 
 
 
 
 
 
Allowance for Credit Losses:
 
 
 
 
 
 
 
 
 
Balance at December 31, 2010
$
91

 
$
37

 
$
81

 
$
3

 
$
212

Provision
7

 
4

 
11

 
—

 
22

Charge-offs
(10
)
 
(5
)
 
(8
)
 
—

 
(23
)
Recoveries and other(1)
(1
)
 
2

 
3

 
—

 
4

Balance at March 31, 2011
87

 
38

 
87

 
3

 
215

Provision
1

 
3

 
14

 
—

 
18

Charge-offs
(6
)
 
(5
)
 
(11
)
 
—

 
(22
)
Recoveries and other(1)
(1
)
 
—

 
(1
)
 
—

 
(2
)
Balance at June 30, 2011
$
81

 
$
36

 
$
89

 
$
3

 
$
209

Finance receivables as of June 30, 2011 collectively evaluated for impairment(2)
$
2,979

 
$
867

 
$
2,919

 
$
88

 
$
6,853

 _____________________________
(1)
Includes the impacts of foreign currency translation and adjustments to reserves necessary to reflect events of non-payment such as customer accommodations and contract terminations.
(2)
Total Finance receivables exclude residual values of $4 and $9, and the allowance for credit losses of $190 and $209 at June 30, 2012 and 2011, respectively.
(3)
Includes developing market countries and smaller units.
We evaluate our customers based on the following credit quality indicators:
 
•
Investment grade: This rating includes accounts with excellent to good business credit, asset quality and the capacity to meet financial obligations. These customers are less susceptible to adverse effects due to shifts in economic conditions or changes in circumstance. The rating generally equates to a Standard & Poors (S&P) rating of BBB- or better. Loss rates in this category are normally minimal at less than 1%.

•
Non-investment grade: This rating includes accounts with average credit risk that are more susceptible to loss in the event of adverse business or economic conditions. This rating generally equates to a BB S&P rating. Although we experience higher loss rates associated with this customer class, we believe the risk is somewhat mitigated by the fact that our leases are fairly well dispersed across a large and diverse customer base. In addition, the higher loss rates are largely offset by the higher rates of return we obtain on such leases. Loss rates in this category are generally in the range of 2% to 4%.


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•
Substandard: This rating includes accounts that have marginal credit risk such that the customer’s ability to make repayment is impaired or may likely become impaired. We use numerous strategies to mitigate risk including higher rates of interest, prepayments, personal guarantees, etc. Accounts in this category include customers who were downgraded during the term of the lease from investment and non-investment grade status when the lease was originated. Accordingly, there is a distinct possibility for a loss of principal and interest or customer default. The loss rates in this category are around 10%.

Credit quality indicators are updated at least annually and the credit quality of any given customer can change during the life of the portfolio. Details about our finance receivables portfolio based on industry and credit quality indicators are as follows:
 
 
June 30, 2012
 
Investment
Grade
 
Non-investment
Grade
 
Substandard
 
Total Finance
Receivables
Finance and Other Services
$
352

 
$
340

 
$
123

 
$
815

Government and Education
747

 
17

 
2

 
766

Graphic Arts
103

 
159

 
195

 
457

Industrial
152

 
88

 
26

 
266

Healthcare
120

 
41

 
24

 
185

Other
98

 
96

 
56

 
250

Total United States
1,572

 
741

 
426

 
2,739

Finance and Other Services
148

 
109

 
45

 
302

Government and Education
116

 
9

 
4

 
129

Graphic Arts
37

 
37

 
31

 
105

Industrial
59

 
41

 
30

 
130

Other
74

 
40

 
11

 
125

Total Canada
434

 
236

 
121

 
791

France
237

 
324

 
88

 
649

U.K./Ireland
206

 
155

 
54

 
415

Central(1)
287

 
437

 
76

 
800

Southern(2)
165

 
250

 
52

 
467

Nordics(3)
52

 
37

 
3

 
92

Total Europe
947

 
1,203

 
273

 
2,423

Other
108

 
36

 
5

 
149

Total
$
3,061

 
$
2,216

 
$
825

 
$
6,102

 
 
 
 
 
 
 
 
 
December 31, 2011
 
Investment
Grade
 
Non-investment
Grade
 
Substandard
 
Total Finance
Receivables
Finance and Other Services
$
349

 
$
380

 
$
160

 
$
889

Government and Education
821

 
20

 
4

 
845

Graphic Arts
126

 
200

 
172

 
498

Industrial
180

 
83

 
32

 
295

Healthcare
130

 
42

 
28

 
200

Other
97

 
93

 
76

 
266

Total United States
1,703

 
818

 
472

 
2,993

Finance and Other Services
153

 
118

 
51

 
322

Government and Education
121

 
9

 
4

 
134

Graphic Arts
36

 
39

 
35

 
110

Industrial
56

 
41

 
34

 
131


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Other
74

 
42

 
12

 
128

Total Canada
440

 
249

 
136

 
825

France
246

 
354

 
92

 
692

U.K./Ireland
201

 
162

 
54

 
417

Central(1)
330

 
494

 
57

 
881

Southern(2)
219

 
256

 
63

 
538

Nordics(3)
60

 
39

 
3

 
102

Total Europe
1,056

 
1,305

 
269

 
2,630

Other
75

 
26

 
7

 
108

Total
$
3,274

 
$
2,398

 
$
884

 
$
6,556

_____________________________
(1)
Switzerland, Germany, Austria, Belgium and Holland.
(2)
Italy, Greece, Spain and Portugal.
(3)
Sweden, Norway, Denmark and Finland.


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The aging of our billed finance receivables is based upon the number of days an invoice is past due and is as follows:
 
June 30, 2012
 
Current
 
31-90
Days
Past Due
 
>90 Days
Past Due
 
Total Billed
Finance
Receivables
 
Unbilled
Finance
Receivables
 
Total
Finance
Receivables
 
Finance
Receivables
>90 Days
and
Accruing
Finance and Other Services
$
1

 
$
2

 
$
1

 
$
4

 
$
811

 
$
815

 
$
23

Government and Education
15

 
4

 
4

 
23

 
743

 
766

 
43

Graphic Arts
2

 
1

 
—

 
3

 
454

 
457

 
12

Industrial
1

 
1

 
—

 
2

 
264

 
266

 
11

Healthcare
1

 
1

 
—

 
2

 
183

 
185

 
10

Other
—

 
1

 
—

 
1

 
249

 
250

 
8

Total United States
20

 
10

 
5

 
35

 
2,704

 
2,739

 
107

Canada
5

 
3

 
1

 
9

 
782

 
791

 
22

France
2

 
1

 
—

 
3

 
646

 
649

 
10

U.K./Ireland
2

 
1

 
3

 
6

 
409

 
415

 
3

Central(1)
5

 
5

 
3

 
13

 
787

 
800

 
29

Southern(2)
28

 
5

 
8

 
41

 
426

 
467

 
79

Nordics(3)
1

 
—

 
—

 
1

 
91

 
92

 
—

Total Europe
38

 
12

 
14

 
64

 
2,359

 
2,423

 
121

Other
3

 
—

 
—

 
3

 
146

 
149

 
—

Total
$
66

 
$
25

 
$
20

 
$
111

 
$
5,991

 
$
6,102

 
$
250

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2011
 
Current
 
31-90
Days
Past Due
 
>90 Days
Past Due
 
Total Billed
Finance
Receivables
 
Unbilled
Finance
Receivables
 
Total
Finance
Receivables
 
Finance
Receivables
>90 Days
and
Accruing
Finance and Other Services
$
18

 
$
4

 
$
1

 
$
23

 
$
866

 
$
889

 
$
15

Government and Education
21

 
5

 
2

 
28

 
817

 
845

 
29

Graphic Arts
16

 
2

 
1

 
19

 
479

 
498

 
7

Industrial
7

 
2

 
1

 
10

 
285

 
295

 
6

Healthcare
5

 
2

 
—

 
7

 
193

 
200

 
5

Other
8

 
1

 
—

 
9

 
257

 
266

 
4

Total United States
75

 
16

 
5

 
96

 
2,897

 
2,993

 
66

Canada
3

 
2

 
1

 
6

 
819

 
825

 
27

France
1

 
1

 
1

 
3

 
689

 
692

 
16

U.K./Ireland
3

 
2

 
3

 
8

 
409

 
417

 
4

Central(1)
7

 
2

 
3

 
12

 
869

 
881

 
46

Southern(2)
31

 
4

 
13

 
48

 
490

 
538

 
82

Nordics(3)
1

 
—

 
—

 
1

 
101

 
102

 
—

Total Europe
43

 
9

 
20

 
72

 
2,558

 
2,630

 
148

Other
2

 
1

 
—

 
3

 
105

 
108

 
—

Total
$
123

 
$
28

 
$
26

 
$
177

 
$
6,379

 
$
6,556

 
$
241

 _____________________________
(1)
Switzerland, Germany, Austria, Belgium and Holland.
(2)
Italy, Greece, Spain and Portugal.
(3)
Sweden, Norway, Denmark and Finland.



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Note 6 – Inventories
The following is a summary of Inventories by major category:
 
 
June 30, 2012
 
December 31, 2011
Finished goods
$
902

 
$
866

Work-in-process
70

 
58

Raw materials
101

 
97

Total Inventories
$
1,073

 
$
1,021


Note 7 – Investment in Affiliates, at Equity
Our equity in net income of our unconsolidated affiliates was as follows:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2012
 
2011
 
2012
 
2011
Fuji Xerox
$
28

 
$
31

 
$
65

 
$
62

Other investments
3

 
3

 
6

 
6

Total Equity in Net Income of Unconsolidated Affiliates
$
31

 
$
34

 
$
71

 
$
68

Fuji Xerox
Equity in net income of Fuji Xerox is affected by certain adjustments required to reflect the deferral of profit associated with intercompany sales. These adjustments may result in recorded equity income that is different from that implied by our 25% ownership interest. Equity income for the six months ended June 30, 2012 and 2011 includes after-tax restructuring charges of $10 and $15, respectively, primarily reflecting Fuji Xerox’s continued cost-reduction initiatives.
Condensed financial data of Fuji Xerox was as follows:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2012
 
2011
 
2012
 
2011
Summary of Operations:
 
 
 
 
 
 
 
Revenues
$
3,064

 
$
2,852

 
$
6,394

 
$
5,944

Costs and expenses
2,856

 
2,645

 
5,940

 
5,542

Income before income taxes
208

 
207

 
454

 
402

Income tax expense
81

 
64

 
178

 
124

Net Income
127

 
143

 
276

 
278

Less: Net income – noncontrolling interests
1

 
1

 
2

 
2

Net Income – Fuji Xerox
$
126

 
$
142

 
$
274

 
$
276

Weighted Average Rate(1)
80.09

 
81.59

 
79.90

 
81.87

_____________________________
(1)
Represents Yen/U.S. Dollar exchange rate used to translate.


Note 8 – Restructuring Programs
During the six months ended June 30, 2012, we recorded net restructuring and asset impairment charges of $46, which included approximately $47 of severance costs related to headcount reductions of approximately 1,100 employees primarily in North America and $7 of lease cancellation and asset impairment charges. These costs were partially offset by $8 of net reversals for changes in estimated reserves from prior period initiatives.
Information related to restructuring program activity during the six months ended June 30, 2012 is outlined below:
 

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Severance and
Related Costs
 
Lease Cancellation
and Other Costs
 
Asset Impairments(2)
 
Total
Balance December 31, 2011
$
116

 
$
7

 
$
—

 
$
123

Restructuring provision
47

 
5

 
2

 
54

Reversals of prior accruals
(8
)
 
—

 
—

 
(8
)
Net current period charges(1)
39

 
5

 
2

 
46

Charges against reserve and currency
(81
)
 
(2
)
 
(2
)
 
(85
)
Balance June 30, 2012
$
74

 
$
10

 
$
—

 
$
84

 _____________________________
(1)
Represents net amount recognized within the Condensed Consolidated Statements of Income for the period shown.
(2)
Charges associated with asset impairments represent the write-down of the related assets to their new cost basis and are recorded concurrently with the recognition of the provision.
Reconciliation to the Condensed Consolidated Statements of Cash Flows:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2012
 
2011
 
2012
 
2011
Charges against reserve
$
(46
)
 
$
(67
)
 
$
(85
)
 
$
(120
)
Asset impairment
—

 
—

 
2

 
—

Effects of foreign currency and other non-cash items
2

 
4

 
—

 
—

Cash Payments for Restructurings
$
(44
)
 
$
(63
)
 
$
(83
)
 
$
(120
)

The following table summarizes the total amount of costs incurred in connection with these restructuring programs by segment:

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2012
 
2011
 
2012
 
2011
Services
$
16

 
$
1

 
$
19

 
$
—

Technology
12

 
(7
)
 
$
29

 
$
(19
)
Other
1

 
(3
)
 
(2
)
 
(5
)
Total Net Restructuring Charges
$
29

 
$
(9
)
 
$
46

 
$
(24
)

 

Note 9 – Debt
Debt Exchange
In February 2012, we completed an exchange of our 5.71% Zero Coupon Notes due 2023 with an accreted book value at the date of the exchange of $303, for $362 of our 4.50% Senior Notes due 2021. Accordingly, this increased the principal amount for our 4.50% Senior Notes due 2021 from $700 to $1,062. The exchange was conducted to retire high-interest, long-dated debt in a favorable interest rate environment. The debt exchange was accounted for as a non-revolving debt modification and, therefore, it did not result in any gain or loss. The difference between the book value of our Zero Coupon Notes and the principal value of the Senior Notes issued in exchange will be accreted over the remaining term of the Senior Notes. Upfront fees paid to third parties in connection with the exchange were not material and were expensed as incurred.
Senior Notes
In March 2012, we issued $600 of Floating Rate Senior Notes due 2013 (the “2013 Floating Rate Notes”) and $500 of 2.95% Senior Notes due 2017 (the “2017 Senior Notes”). The 2013 Floating Rate Notes were issued at par and the 2017 Senior Notes were issued at 99.875% of par, resulting in aggregate net proceeds for both notes of approximately $1,093. The 2013 Floating Rate Notes accrue interest at a rate per annum, reset quarterly, equal to the three-month LIBOR plus 1.400% and are payable quarterly. The 2017 Senior Notes accrue interest at a rate of 2.95% per annum and are payable semi-annually. As a result of the discount, they have a weighted average

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effective interest rate of 2.977%. In connection with the issuance of these Senior Notes, debt issuance costs of $6 were deferred. This debt issuance partially pre-funded the May 2012 maturity of our $1,100 of 5.59% Senior Notes.

Interest Expense and Income
Interest expense and interest income were as follows:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2012
 
2011
 
2012
 
2011
Interest expense(1)
$
109

 
$
124

 
$
218

 
$
251

Interest income(2)
147

 
168

 
298

 
337

____________________________
(1)
Includes Equipment financing interest, as well as non-financing interest expense that is included in Other expenses, net in the Condensed Consolidated Statements of Income.
(2)
Includes Finance income, as well as other interest income that is included in Other expenses, net in the Condensed Consolidated Statements of Income.

Net (Payments) Proceeds on Debt
Net proceeds on debt as shown on the Condensed Consolidated Statements of Cash Flows was as follows:  
 
 
Six Months Ended
June 30,
 
 
2012
 
2011
Net proceeds (payments) on short-term debt
 
$
550

 
$
(297
)
Net proceeds from issuance of long-term debt
 
1,105

 
1,018

Net payments on long-term debt
 
(1,112
)
 
(18
)
Net Proceeds on Debt
 
$
543

 
$
703


Note 10 – Financial Instruments
Interest Rate Risk Management
We use interest rate swap agreements to manage our interest rate exposure and to achieve a desired proportion of variable and fixed rate debt. These derivatives may be designated as fair value hedges or cash flow hedges depending on the nature of the risk being hedged.
Fair Value Hedges
At June 30, 2012 and December 31, 2011, we did not have any interest rate swaps outstanding.
Foreign Exchange Risk Management
We are a global company that is exposed to foreign currency exchange rate fluctuations in the normal course of our business. As a part of our foreign exchange risk management strategy, we use derivative instruments, primarily forward contracts and purchase option contracts, to hedge the following foreign currency exposures, thereby reducing volatility of earnings or protecting fair values of assets and liabilities:
 
•
Foreign currency-denominated assets and liabilities
•
Forecasted purchases and sales in foreign currency
Summary of Foreign Exchange Hedging Positions
At June 30, 2012, we had outstanding forward exchange and purchased option contracts with gross notional values of $2,823, which is reflective of the amounts that are normally outstanding at any point during the year. Approximately 81% of these contracts mature within three months, 11% in three to six months and 8% in six to twelve months.
 
The following is a summary of the primary hedging positions and corresponding fair values as of June 30, 2012:
 

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Currency Hedged (Buy/Sell)
Gross
Notional
Value
 
Fair  Value
Asset
(Liability)(1)
Euro/U.K. Pound Sterling
$
589

 
$
(3
)
U.S. Dollar/Euro
471

 
15

Japanese Yen/U.S. Dollar
452

 
(1
)
Japanese Yen/Euro
418

 
17

U.K. Pound Sterling/Euro
193

 
4

Canadian Dollar/Euro
167

 
—

Mexican Peso/U.S. Dollar
69

 
—

Indian Rupee/U.S. Dollar
61

 
(5
)
Euro/U.S. Dollar
58

 
(1
)
Euro/Swiss Franc
56

 
—

Philippine Peso/U.S. Dollar
40

 
—

U.S. Dollar/Canadian Dollar
25

 
—

Euro/Peruvian Nuevo Sol
23