XRX-9.30.13-10Q




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: September 30, 2013
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 September 30, 2013
Common Stock, $1 par value
 
1,231,114,281 shares

Xerox 2013 Form 10-Q
1




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 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; the risk that subcontractors, software vendors and utility and network providers will not perform in a timely, quality manner; our ability to recover capital investments; the risk that multi-year contracts with governmental entities could be terminated prior to the end of the contract term; the risk that our Services business could be adversely affected if we are unsuccessful in managing the ramp-up of new contracts; development of new products and services; our ability to protect our intellectual property rights; our ability to expand equipment placements; 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; interest rates, cost of borrowing and access to credit markets; 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 factors 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 Reports on Form 10-Q for the quarters ended March 31, 2013 and June 30, 2013 and our 2012 Annual Report on Form 10-K filed with the Securities and Exchange Commission. 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 2013 Form 10-Q
1





XEROX CORPORATION
FORM 10-Q
SEPTEMBER 30, 2013
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 2013 Form 10-Q
2




PART I — FINANCIAL INFORMATION
ITEM 1 — FINANCIAL STATEMENTS

XEROX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(in millions, except per-share data)
 
2013
 
2012
 
2013
 
2012
Revenues
 
 
 
 
 
 
 
 
Sales
 
$
1,372

 
$
1,389

 
$
4,119

 
$
4,268

Outsourcing, maintenance and rentals
 
3,757

 
3,726

 
11,383

 
11,255

Financing
 
133

 
160

 
364

 
451

Total Revenues
 
5,262

 
5,275

 
15,866

 
15,974

Costs and Expenses
 
 
 
 
 
 
 
 
Cost of sales
 
869

 
897

 
2,618

 
2,739

Cost of outsourcing, maintenance and rentals
 
2,698

 
2,668

 
8,184

 
7,983

Cost of financing
 
40

 
49

 
125

 
153

Research, development and engineering expenses
 
145

 
161

 
448

 
495

Selling, administrative and general expenses
 
1,018

 
1,032

 
3,100

 
3,139

Restructuring and asset impairment charges
 
35

 
14

 
60

 
63

Amortization of intangible assets
 
83

 
82

 
249

 
246

Other expenses, net
 
39

 
58

 
115

 
190

Total Costs and Expenses
 
4,927

 
4,961

 
14,899

 
15,008

Income before Income Taxes and Equity Income
 
335

 
314

 
967

 
966

Income tax expense
 
85

 
62

 
203

 
201

Equity in net income of unconsolidated affiliates
 
43

 
34

 
126

 
105

Income from Continuing Operations
 
293

 
286

 
890

 
870

(Loss) income from discontinued operations, net of tax
 
(2
)
 
2

 
(22
)
 
10

Net Income
 
291

 
288

 
868

 
880

Less: Net income attributable to noncontrolling interests
 
5

 
6

 
15

 
20

Net Income Attributable to Xerox
 
$
286

 
$
282

 
$
853

 
$
860

 
 
 
 
 
 
 
 
 
Amounts Attributable to Xerox:
 
 
 
 
 
 
 
 
Net income from continuing operations
 
$
288

 
$
280

 
$
875

 
$
850

Net (loss) income from discontinued operations
 
(2
)
 
2

 
(22
)
 
10

Net Income Attributable to Xerox
 
$
286

 
$
282

 
$
853

 
$
860

 
 
 
 
 
 
 
 
 
Basic Earnings per Share:
 
 
 
 
 
 
 
 
Continuing operations
 
$
0.23

 
$
0.21

 
$
0.70

 
$
0.63

Discontinued operations
 
—

 
—

 
(0.02
)
 
0.01

Total Basic Earnings per Share
 
$
0.23

 
$
0.21

 
$
0.68

 
$
0.64

Diluted Earnings per Share:
 
 
 
 
 
 
 
 
Continuing operations
 
$
0.22

 
$
0.21

 
$
0.68

 
$
0.62

Discontinued operations
 
—

 
—

 
(0.01
)
 
—

Total Diluted Earnings per Share
 
$
0.22

 
$
0.21

 
$
0.67

 
$
0.62


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

Xerox 2013 Form 10-Q
3




XEROX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(in millions)
 
2013
 
2012
 
2013
 
2012
Net income
 
$
291

 
$
288

 
$
868

 
$
880

Less: Net income attributable to noncontrolling interests
 
5

 
6

 
15

 
20

Net Income Attributable to Xerox
 
286

 
282

 
853

 
860

 
 
 
 
 
 
 
 
 
Other Comprehensive Income (Loss), Net(1):
 

 

 

 

Translation adjustments, net
 
269

 
344

 
(178
)
 
181

Unrealized gains (losses), net
 
14

 
(2
)
 
7

 
(11
)
Changes in defined benefit plans, net
 
(38
)
 
(10
)
 
121

 
—

Other Comprehensive Income (Loss), Net Attributable to Xerox
 
245

 
332

 
(50
)
 
170

 
 
 
 
 
 
 
 
 
Comprehensive Income, Net
 
536

 
620

 
818

 
1,050

Less: Comprehensive income, net attributable to noncontrolling interests
 
5

 
6

 
15

 
20

Comprehensive Income, Net Attributable to Xerox
 
$
531

 
$
614

 
$
803

 
$
1,030


(1) Refer to Note 16 - Other Comprehensive Income for gross components of Other Comprehensive Income, reclassification adjustments out of Accumulated Other Comprehensive Loss and related tax effects.


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


Xerox 2013 Form 10-Q
4




XEROX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in millions, except share data in thousands)
 
September 30,
2013
 
December 31,
2012
Assets
 
 
 
 
Cash and cash equivalents
 
$
948

 
$
1,246

Accounts receivable, net
 
2,989

 
2,866

Billed portion of finance receivables, net
 
138

 
152

Finance receivables, net
 
1,584

 
1,836

Inventories
 
1,152

 
1,011

Other current assets
 
1,259

 
1,162

Total current assets
 
8,070

 
8,273

Finance receivables due after one year, net
 
2,957

 
3,325

Equipment on operating leases, net
 
533

 
535

Land, buildings and equipment, net
 
1,485

 
1,556

Investments in affiliates, at equity
 
1,329

 
1,381

Intangible assets, net
 
2,586

 
2,783

Goodwill
 
9,169

 
9,062

Deferred tax assets, long-term
 
643

 
763

Other long-term assets
 
2,244

 
2,337

Total Assets
 
$
29,016

 
$
30,015

Liabilities and Equity
 
 
 
 
Short-term debt and current portion of long-term debt
 
$
1,135

 
$
1,042

Accounts payable
 
1,589

 
1,913

Accrued compensation and benefits costs
 
772

 
741

Unearned income
 
483

 
438

Other current liabilities
 
1,667

 
1,776

Total current liabilities
 
5,646

 
5,910

Long-term debt
 
6,406

 
7,447

Pension and other benefit liabilities
 
2,833

 
2,958

Post-retirement medical benefits
 
847

 
909

Other long-term liabilities
 
755

 
778

Total Liabilities
 
16,487

 
18,002

Series A Convertible Preferred Stock
 
349

 
349

Common stock
 
1,247

 
1,239

Additional paid-in capital
 
5,630

 
5,622

Treasury stock, at cost
 
(162
)
 
(104
)
Retained earnings
 
8,608

 
7,991

Accumulated other comprehensive loss
 
(3,277
)
 
(3,227
)
Xerox shareholders’ equity
 
12,046

 
11,521

Noncontrolling interests
 
134

 
143

Total Equity
 
12,180

 
11,664

Total Liabilities and Equity
 
$
29,016

 
$
30,015

Shares of common stock issued
 
1,247,126

 
1,238,696

Treasury stock
 
(16,012
)
 
(14,924
)
Shares of common stock outstanding
 
1,231,114

 
1,223,772


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

Xerox 2013 Form 10-Q
5




XEROX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(in millions)
 
2013
 
2012
 
2013
 
2012
Cash Flows from Operating Activities:
 
 
 
 
 
 
 
 
Net income
 
$
291

 
$
288

 
$
868

 
$
880

Adjustments required to reconcile net income to cash flows from operating activities:
 
 
 
 
 
 
 
 
Depreciation and amortization
 
340

 
339

 
1,012

 
965

Provision for receivables
 
27

 
23

 
86

 
83

Provision for inventory
 
10

 
9

 
22

 
26

Net (gain) loss on sales of businesses and assets
 
(25
)
 
5

 
(15
)
 
2

Undistributed equity in net income of unconsolidated affiliates
 
(41
)
 
(32
)
 
(85
)
 
(67
)
Stock-based compensation
 
19

 
30

 
78

 
92

Restructuring and asset impairment charges
 
35

 
14

 
60

 
63

Payments for restructurings
 
(34
)
 
(30
)
 
(107
)
 
(113
)
Contributions to defined benefit pension plans
 
(64
)
 
(73
)
 
(162
)
 
(310
)
Increase in accounts receivable and billed portion of finance receivables
 
(55
)
 
(413
)
 
(557
)
 
(1,021
)
Collections of deferred proceeds from sales of receivables
 
140

 
94

 
371

 
350

Increase in inventories
 
(41
)
 
(44
)
 
(182
)
 
(128
)
Increase in equipment on operating leases
 
(79
)
 
(65
)
 
(207
)
 
(200
)
Decrease in finance receivables
 
400

 
412

 
519

 
687

Collections on beneficial interest from sales of finance receivables
 
16

 
—

 
43

 
—

Increase in other current and long-term assets
 
(38
)
 
(34
)
 
(158
)
 
(196
)
(Decrease) increase in accounts payable and accrued compensation
 
(61
)
 
7

 
(123
)
 
(230
)
Increase (decrease) in other current and long-term liabilities
 
77

 
36

 
(34
)
 
(126
)
Net change in income tax assets and liabilities
 
56

 
32

 
95

 
93

Net change in derivative assets and liabilities
 
13

 
7

 
(28
)
 
(2
)
Other operating, net
 
(25
)
 
(11
)
 
(89
)
 
(41
)
Net cash provided by operating activities
 
961

 
594

 
1,407

 
807

Cash Flows from Investing Activities:
 
 
 
 
 
 
 
 
Cost of additions to land, buildings and equipment
 
(84
)
 
(110
)
 
(253
)
 
(283
)
Proceeds from sales of land, buildings and equipment
 
41

 
1

 
52

 
8

Cost of additions to internal use software
 
(18
)
 
(30
)
 
(63
)
 
(100
)
Proceeds from sale of businesses
 
—

 
—

 
11

 
—

Acquisitions, net of cash acquired
 
(24
)
 
(156
)
 
(158
)
 
(243
)
Other investing, net
 
3

 
6

 
9

 
17

Net cash used in investing activities
 
(82
)
 
(289
)
 
(402
)
 
(601
)
Cash Flows from Financing Activities:
 
 
 
 
 
 
 
 
Net (payments) proceeds on debt
 
(610
)
 
199

 
(931
)
 
742

Common stock dividends
 
(77
)
 
(63
)
 
(201
)
 
(177
)
Preferred stock dividends
 
(6
)
 
(6
)
 
(18
)
 
(18
)
Proceeds from issuances of common stock
 
43

 
33

 
96

 
43

Excess tax benefits from stock-based compensation
 
12

 
10

 
13

 
10

Payments to acquire treasury stock, including fees
 
(162
)
 
(361
)
 
(172
)
 
(718
)
Repurchases related to stock-based compensation
 
(44
)
 
(40
)
 
(54
)
 
(41
)
Distributions to noncontrolling interests
 
(27
)
 
(2
)
 
(32
)
 
(63
)
Net cash used in financing activities
 
(871
)
 
(230
)
 
(1,299
)
 
(222
)
Effect of exchange rate changes on cash and cash equivalents
 
11

 
(7
)
 
(4
)
 
(4
)
Increase (decrease) in cash and cash equivalents
 
19

 
68

 
(298
)
 
(20
)
Cash and cash equivalents at beginning of period
 
929

 
814

 
1,246

 
902

Cash and Cash Equivalents at End of Period
 
$
948

 
$
882

 
$
948

 
$
882


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

Xerox 2013 Form 10-Q
6




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 2012 Annual Report to Shareholders, which is incorporated by reference in our 2012 Annual Report on Form 10-K (2012 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 2012 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.”
In the second quarter 2013 we completed the sale of our North American paper business and entered into an agreement to sell our European paper business, which is expected to be completed in the fourth quarter of 2013. Results from these paper-related businesses are reported as discontinued operations and all prior period results have been reclassified to reflect this change. Refer to Note 5 - Divestitures for additional information regarding discontinued operations.

Note 2 – Recent Accounting Pronouncements
Presentation of Comprehensive Income: In February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220) - Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which requires an entity to provide additional information about the amounts reclassified out of Accumulated Other Comprehensive Income by component. This update was effective for us beginning January 1, 2013 and the additional information required by this ASU is included in Note 16 - Other Comprehensive Income.
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. In January 2013, the FASB issued ASU 2013-01, which limited the scope of this guidance to derivatives, repurchase type agreements and securities borrowing and lending transactions. The guidance from these updates was effective for our fiscal year beginning January 1, 2013. We currently report our derivative assets and liabilities on a gross basis in the Balance Sheet and none of our derivative instruments are subject to a master netting agreement. Accordingly, no additional disclosures were required upon adoption of these ASU's.
Cumulative Translation Adjustments: In March 2013, the FASB issued ASU 2013-05, Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. The objective of ASU 2013-05 is to resolve the diversity in practice regarding the release into net income of the cumulative translation adjustment upon derecognition of a subsidiary or group of assets within a foreign entity. The guidance from this update is effective prospectively for our fiscal year beginning January 1, 2014. We do not anticipate that the adoption of this standard will have a material impact on our financial condition or results of operations.

Xerox 2013 Form 10-Q
7




Hedge Accounting: In July 2013, the FASB issued ASU 2013-10, Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes. The update permits the Fed Funds Effective Swap Rate to be used as a U.S. benchmark interest rate for hedge accounting purposes under FASB ASC Topic 815, in addition to the interest rates on direct Treasury obligations of the U.S. government (UST) and the London Interbank Offered Rate (LIBOR). The update also removes the restriction on using different benchmark rates for similar hedges. ASU 2013-10 was effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The adoption of this standard did not have a material impact on our financial condition or results of operations.
Income Taxes: In July 2013, the FASB issued ASU 2013-11, Presentation of Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This update provides that under certain circumstances, unrecognized tax benefits should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. The guidance from this update is effective prospectively for our fiscal year beginning January 1, 2014. Retrospective application is permitted. We are currently assessing the impact, if any, from this update; the principal impact is expected to be related to the presentation and annual disclosures of our Unrecognized Tax Benefits.
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 Document Technology. Our Services segment operations involve delivery of a broad range of services, including business process, document and IT outsourcing. Our Document 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 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 Document Technology segment includes the sale of products that share common technology, manufacturing and product platforms. Our products groupings 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.
Customers range from small and mid-sized businesses to large enterprises. Customers also include graphic communication enterprises as well as channel partners including distributors and resellers. Segment revenues reflect the sale of document systems and supplies, technical services and product financing.

Xerox 2013 Form 10-Q
8




The segment classified as Other includes several units, none of which meet the thresholds for separate segment reporting. This group includes paper sales in our developing market countries, Wide Format Systems, 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.
As discussed in Note 5 - Divestitures, during the second quarter 2013, we completed the sale of our North American Paper business and entered into an agreement to sell our European Paper business. As a result of these transactions, in the second quarter 2013 we began to report these paper-related operations as Discontinued Operations and reclassified their results from the Other segment to Discontinued Operations. All prior periods have been reclassified to conform to this presentation.
Operating segment revenues and profitability were as follows:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
Segment
Revenue
 
Segment Profit (Loss)
 
Segment
Revenue
 
Segment Profit (Loss)
2013
 
 
 
 
 
 
 
Services
$
2,944

 
$
292

 
$
8,820

 
$
866

Document Technology
2,159

 
261

 
6,557

 
692

Other
159

 
(55
)
 
489

 
(186
)
Total
$
5,262

 
$
498

 
$
15,866

 
$
1,372

2012
 
 
 
 
 
 
 
Services
$
2,847

 
$
269

 
$
8,474

 
$
830

Document Technology
2,259

 
245

 
6,967

 
758

Other
169

 
(66
)
 
533

 
(194
)
Total
$
5,275

 
$
448

 
$
15,974

 
$
1,394

 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
Reconciliation to Pre-tax Income
 
2013
 
2012
 
2013
 
2012
Segment Profit
 
$
498

 
$
448

 
$
1,372

 
$
1,394

Reconciling items:
 
 
 
 
 
 
 
 
Restructuring and asset impairment charges
 
(35
)
 
(14
)
 
(60
)
 
(63
)
Restructuring charges of Fuji Xerox
 
(3
)
 
(5
)
 
(8
)
 
(15
)
Amortization of intangible assets
 
(83
)
 
(82
)
 
(249
)
 
(246
)
Litigation matters (Q1 2013 only)
 
—

 
—

 
37

 
—

Equity in net income of unconsolidated affiliates
 
(43
)
 
(34
)
 
(126
)
 
(105
)
Other
 
1

 
1

 
1

 
1

Pre-tax Income
 
$
335

 
$
314

 
$
967

 
$
966



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Note 4 – Acquisitions

In April 2013, we acquired Florida-based Zeno Office Solutions, Inc. (Zeno), one of the Southeast's largest and fastest growing providers of print and IT solutions to small and mid-sized businesses, for approximately $59 in cash. This acquisition furthers our coverage in Florida, building on our strategy of expanding our network of locally-based companies focused on customers' requirements to improve their performance through efficiencies.

In February 2013, we acquired Impika, a leader in the design, manufacture and sale of production inkjet printing solutions used for industrial, commercial, security, label and package printing, for approximately $53 in cash. Impika, which is based in Aubagne, France, offers a portfolio of aqueous (water-based) inkjet presses based on proprietary technology. Through the addition of Impika's aqueous technology to our offerings, we expect to go to market with the industry's broadest range of digital presses, strengthening our leadership in digital color production printing.

Zeno and Impika are included in our Document Technology segment. Additionally, our Document Technology segment acquired one business for approximately $11 in cash and our Services segment acquired three businesses for a total of $31 in cash during the nine months ended September 30, 2013.

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 allocated primarily to intangible assets and goodwill based on third-party valuations and management’s estimates.

Note 5 – Divestitures

During the second quarter 2013, in connection with our decision to exit from the Paper distribution business, we completed the sale of our North American (N.A.) Paper business and entered into an agreement to sell our European Paper business. The decision to exit from the Paper distribution business was largely the result of management's objective to focus more on Services and innovative Document Technology. Net proceeds from the sale of the N.A. Paper business were approximately $10 and are reported as cash flows from investing activities in the Condensed Consolidated Statements of Cash Flows.

As a result of these transactions, we reported these paper-related operations as Discontinued Operations and reclassified their results from the Other segment to Discontinued Operations. All prior periods have accordingly been reclassified to conform to this presentation. The sale of the European Paper business is expected to be completed in the fourth quarter of 2013. The net assets sold or expected to be sold in connection with these transactions are primarily related to working capital (accounts receivables and inventory) utilized in the business. As of September 30, 2013, total net assets held for sale were approximately $47 and are included in Other current assets in the Condensed Consolidated Balance Sheets.

In the second quarter of 2013 we recorded a net pre-tax loss of $23 for the disposition of our N.A. and European Paper businesses. The loss is primarily related to exit and disposal costs associated with these businesses. The disposals are expected to result in a reduction in headcount of approximately 300 employees, primarily in Europe.

The components of Discontinued Operations for the periods presented are as follows:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2013
 
2012
 
2013
 
2012
Revenues
 
$
82

 
$
149

 
$
369

 
$
493

(Loss) Income from operations
 
$
(2
)
 
$
3

 
$
5

 
$
15

Loss on disposal
 
—

 
—

 
(23
)
 
—

Net (Loss) Income Before Income Taxes
 
(2
)
 
3

 
(18
)
 
15

Income tax expense
 
—

 
(1
)
 
(4
)
 
(5
)
(Loss) Income From Discontinued Operations, Net of Tax
 
$
(2
)
 
$
2

 
$
(22
)
 
$
10

* Revenues from discontinued operations for the three months ended September 30, 2013 only reflects revenues from our European Paper business as the sale has not been completed. Revenues from discontinued operations for the nine months ended September 30, 2013 only reflects five months of revenues from our North American Paper business as a result of the completion of the sale on May 31, 2013.

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Note 6 – Accounts Receivable, Net
Accounts receivable, net were as follows:
 
 
September 30,
2013
 
December 31,
2012
Amounts billed or billable
 
$
2,705

 
$
2,639

Unbilled amounts
 
395

 
335

Allowance for doubtful accounts
 
(111
)
 
(108
)
Accounts Receivable, Net
 
$
2,989

 
$
2,866


Unbilled amounts include amounts associated with percentage-of-completion accounting and other earned revenues not currently billable due to contractual provisions. Amounts to be invoiced in the subsequent month for current services provided are included in amounts billable, and at September 30, 2013 and December 31, 2012 were approximately $1,045 and $1,049, respectively.

We perform ongoing credit evaluations of our customers and adjust credit limits based upon customer payment history and current creditworthiness. The allowance for uncollectible accounts receivables is determined principally on the basis of past collection experience as well as consideration of current economic conditions and changes in our customer collection trends.
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 certain accounts receivable without recourse to third-parties. The accounts receivables sold are generally short-term trade receivables with payment due dates of less than 60 days.
All of our arrangements involve the sale of our entire interest in 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 $129 and $116 at September 30, 2013 and December 31, 2012, respectively.
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, $740 and $766 remained uncollected as of September 30, 2013 and December 31, 2012, respectively. Accounts receivables sales were as follows:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Accounts receivable sales
$
814

 
$
725

 
$
2,587

 
$
2,816

Deferred proceeds
125

 
122

 
384

 
525

Loss on sales of accounts receivable
4

 
4

 
13

 
16

Estimated decrease to operating cash flows(1)
(75
)
 
(266
)
 
(42
)
 
(168
)
__________________________
(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. The three months ended September 30, 2012 includes $215 of cash outflows related to our terminated U.S. revolving facility.

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Note 7 - Finance Receivables, Net
Sale of Finance Receivables
2013 Sales:
In September 2013, we sold our entire interest in a group of U.S. lease finance receivables with a net carrying value of $419 to a third-party financial institution for cash proceeds of $384 and a beneficial interest from the purchaser of $60. The lease contracts, including associated service and supply elements, were initially sold to a wholly-owned consolidated bankruptcy-remote limited purpose subsidiary, which in turn sold the principal and interest portions of such contracts to the third-party financial institution (the “ultimate purchaser”). As of September 30, 2013, the principal value of the receivables sold and derecognized from our balance sheet was $416 (sale value of approximately $456).

A pre-tax gain of $25 was recognized on this sale and is net of fees and expenses of approximately $3. We will continue to service the sold receivables for which we will receive a 1% servicing fee. We have concluded that the 1% servicing fee (approximately $7 over the expected life of the associated receivables) is adequate compensation and, accordingly, no servicing asset or liability was recorded.

The beneficial interest represents our right to receive future cash flows from the sold receivables, which exceed the servicing fee as well as the ultimate purchaser's initial investment and associated return on that investment. The beneficial interest was initially recognized at an estimate of fair value based on the present value of the expected future cash flows. The present value of the expected future cash flows was calculated using management's best estimate of key assumptions including credit losses, prepayment rate and an appropriate risk adjusted discount rate (all unobservable Level 3 inputs) for which we utilized annualized rates of 2.1%, 9.3% and 10.0%, respectively. These assumptions are supported by both our historical experience and anticipated trends relative to the particular portfolio of receivables sold. However, to assess the sensitivity on the fair value of the beneficial interest, we adjusted the credit loss rate, prepayment rate and discount rate assumptions individually by 10% and 20% while holding the other assumptions constant. Although the effect of multiple assumption changes was not considered in this analysis, a 10% or 20% adverse variation in any one of these three individual assumptions would each decrease the recorded beneficial interest by approximately $3 or less.
2012 Sales:
In 2012, we sold our entire interest in two separate portfolios of U.S. lease finance receivables with a combined net carrying value of $682 to a third-party financial institution for cash proceeds of $630 and beneficial interests from the purchaser of $101. A pre-tax gain of $44 ($23 in the third quarter 2012) was recognized on these sales and is net of additional fees and expenses of approximately $5. As of September 30, 2013, the principal value of the receivables sold and derecognized from our balance sheet was $445 (sales value of approximately $485).
Summary:
The lease portfolios sold were from our Document Technology segment and the gains on these sales are reported in Financing revenues within our Document Technology segment. The ultimate purchaser has no recourse to our other assets for the failure of customers to pay principal and interest when due beyond our beneficial interests of $133, of which $58 and $75 is included in Other current assets and Other long-term assets, respectively, in the accompanying Condensed Consolidated Balance Sheets at September 30, 2013. The beneficial interests are held by a bankruptcy-remote subsidiary and therefore are not available to satisfy any of our creditor obligations. We report collections on the beneficial interests as operating cash flows in the Condensed Consolidated Statements of Cash Flows because such beneficial interests are the result of an operating activity and the associated interest rate risk is de minimis considering it has a weighted average life of less than 2 years. Collections on the beneficial interest were $16 and $43 for the three and nine months ended September 30, 2013, respectively.


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The net impact from the sales of finance receivables on operating cash flows is summarized below:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(in millions)
 
2013
 
2012
 
2013
 
2012
Net cash received for sales of finance receivables(1)
 
$
384

 
$
311

 
$
384

 
$
311

Impact from prior sales of finance receivables(2)
 
(84
)
 
—

 
(258
)
 
—

Collections on beneficial interest
 
16

 
—

 
43

 
—

Estimated Increase to Operating Cash Flows
 
$
316

 
$
311

 
$
169

 
$
311

____________________________ 
(1)
Net of beneficial interest, fees and expenses.
(2)
Represents cash that would have been collected if we had not sold finance receivables.
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 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.
 

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The following table is a rollforward of the allowance for doubtful finance receivables as well as the related investment in finance receivables:
Allowance for Credit Losses:
 
United States
 
Canada
 
Europe
 
Other(3)
 
Total
Balance at December 31, 2012
 
$
50

 
$
31

 
$
85

 
$
4

 
$
170

Provision
 
2

 
2

 
9

 
—

 
13

Charge-offs
 
(2
)
 
(4
)
 
(15
)
 
—

 
(21
)
Recoveries and other(1)
 
1

 
—

 
(3
)
 
—

 
(2
)
Balance at March 31, 2013
 
$
51

 
$
29

 
$
76

 
$
4

 
$
160

Provision
 
6

 
3

 
10

 
2

 
21

Charge-offs
 
(2
)
 
(3
)
 
(14
)
 
(1
)
 
(20
)
Recoveries and other(1)
 
(1
)
 
—

 
2

 
—

 
1

Balance at June 30, 2013
 
$
54

 
$
29

 
$
74

 
$
5

 
$
162

Provision
 
3

 
3

 
12

 
1

 
19

Charge-offs
 
(3
)
 
(4
)
 
(12
)
 
—

 
(19
)
Recoveries and other(1)
 
1

 
2

 
2

 
(1
)
 
4

Sale of finance receivables
 
(12
)
 
—

 
—

 
—

 
(12
)
Balance at September 30, 2013
 
$
43

 
$
30

 
$
76

 
$
5

 
$
154

Finance receivables as of September 30, 2013 collectively evaluated for impairment(2)
 
$
1,587

 
$
696

 
$
2,279

 
$
270

 
$
4,832

 
 
 
 
 
 
 
 
 
 
 
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

Provision
 
3

 
3

 
9

 
—

 
15

Charge-offs
 
(8
)
 
(5
)
 
(11
)
 
—

 
(24
)
Recoveries and other(1)
 
—

 
2

 
3

 
—

 
5

Sale of finance receivables
 
(9
)
 
—

 
—

 
—

 
(9
)
Balance at September 30, 2012
 
$
59

 
$
31

 
$
84

 
$
3

 
$
177

Finance receivables as of September 30, 2012 collectively evaluated for impairment(2)
 
$
2,384

 
$
811

 
$
2,466

 
$
168

 
$
5,829

 __________________
(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 $1 and $3, and the allowance for credit losses of $154 and $177 at September 30, 2013 and 2012, 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%.

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•
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%.
•
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 and 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:
 
September 30, 2013
 
December 31, 2012
 
Investment
Grade
 
Non-investment
Grade
 
Substandard
 
Total
Finance
Receivables
 
Investment
Grade
 
Non-investment
Grade
 
Substandard
 
Total
Finance
Receivables
Finance and other services
$
182

 
$
75

 
$
35

 
$
292

 
$
252

 
$
147

 
$
59

 
$
458

Government and education
666

 
7

 
5

 
678

 
750

 
15

 
4

 
769

Graphic arts
118

 
58

 
100

 
276

 
92

 
90

 
137

 
319

Industrial
93

 
20

 
15

 
128

 
115

 
31

 
17

 
163

Healthcare
77

 
17

 
16

 
110

 
109

 
37

 
14

 
160

Other
53

 
21

 
29

 
103

 
70

 
39

 
34

 
143

Total United States
1,189

 
198

 
200

 
1,587

 
1,388

 
359

 
265

 
2,012

Finance and other services
128

 
102

 
31

 
261

 
151

 
116

 
40

 
307

Government and education
99

 
10

 
2

 
111

 
117

 
10

 
2

 
129

Graphic arts
34

 
32

 
23

 
89

 
37

 
34

 
30

 
101

Industrial
61

 
39

 
18

 
118

 
66

 
40

 
29

 
135

Other
67

 
39

 
11

 
117

 
75

 
43

 
11

 
129

Total Canada
389

 
222

 
85

 
696

 
446

 
243

 
112

 
801

France
268

 
299

 
117

 
684

 
274

 
294

 
134

 
702

U.K./Ireland
194

 
159

 
43

 
396

 
215

 
155

 
50

 
420

Central(1)
285

 
407

 
45

 
737

 
315

 
445

 
56

 
816

Southern(2)
120

 
191

 
59

 
370

 
139

 
230

 
73

 
442

Nordics(3)
46

 
43

 
3

 
92

 
49

 
36

 
9

 
94

Total Europe
913

 
1,099

 
267

 
2,279

 
992

 
1,160

 
322

 
2,474

Other
215

 
51

 
4

 
270

 
148

 
39

 
7

 
194

Total
$
2,706

 
$
1,570

 
$
556

 
$
4,832

 
$
2,974

 
$
1,801

 
$
706

 
$
5,481

_____________________________
(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:
 
September 30, 2013
 
Current
 
31-90
Days
Past Due
 
>90 Days
Past Due
 
Total Billed
 
Unbilled
 
Total
Finance
Receivables
 
>90 Days
and
Accruing
Finance and other services
$
9

 
$
2

 
$
1

 
$
12

 
$
280

 
$
292

 
$
16

Government and education
21

 
4

 
3

 
28

 
650

 
678

 
27

Graphic arts
14

 
2

 
1

 
17

 
259

 
276

 
10

Industrial
4

 
1

 
1

 
6

 
122

 
128

 
6

Healthcare
3

 
1

 
1

 
5

 
105

 
110

 
5

Other
3

 
1

 
—

 
4

 
99

 
103

 
5

Total United States
54

 
11

 
7

 
72

 
1,515

 
1,587

 
69

Canada
2

 
3

 
3

 
8

 
688

 
696

 
31

France
1

 
—

 
—

 
1

 
683

 
684

 
34

U.K./Ireland
2

 
2

 
2

 
6

 
390

 
396

 
4

Central(1)
5

 
2

 
4

 
11

 
726

 
737

 
25

Southern(2)
19

 
8

 
13

 
40

 
330

 
370

 
65

Nordics(3)
2

 
—

 
—

 
2

 
90

 
92

 
—

Total Europe
29

 
12

 
19

 
60

 
2,219

 
2,279

 
128

Other
6

 
1

 
—

 
7

 
263

 
270

 
—

Total
$
91

 
$
27

 
$
29

 
$
147

 
$
4,685

 
$
4,832

 
$
228

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2012
 
Current
 
31-90
Days
Past Due
 
>90 Days
Past Due
 
Total Billed
 
Unbilled
 
Total
Finance
Receivables
 
>90 Days
and
Accruing
Finance and other services
$
12

 
$
3

 
$
2

 
$
17

 
$
441

 
$
458

 
$
18

Government and education
21

 
5

 
3

 
29

 
740

 
769

 
42

Graphic arts
16

 
1

 
1

 
18

 
301

 
319

 
12

Industrial
5

 
2

 
1

 
8

 
155

 
163

 
6

Healthcare
6

 
2

 
1

 
9

 
151

 
160

 
9

Other
5

 
1

 
1

 
7

 
136

 
143

 
6

Total United States
65

 
14

 
9

 
88

 
1,924

 
2,012

 
93

Canada
2

 
3

 
2

 
7

 
794

 
801

 
30

France
—

 
5

 
1

 
6

 
696

 
702

 
22

U.K./Ireland
2

 
—

 
2

 
4

 
416

 
420

 
2

Central(1)
3

 
2

 
4

 
9

 
807

 
816

 
30

Southern(2)
20

 
8

 
14

 
42

 
400

 
442

 
72

Nordics(3)
1

 
—

 
—

 
1

 
93

 
94

 
—

Total Europe
26

 
15

 
21

 
62

 
2,412

 
2,474

 
126

Other
2

 
1

 
—

 
3

 
191

 
194

 
—

Total
$
95

 
$
33

 
$
32

 
$
160

 
$
5,321

 
$
5,481

 
$
249

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


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Note 8 – Inventories
The following is a summary of Inventories by major category:
 
September 30, 2013
 
December 31, 2012
Finished goods
$
961

 
$
844

Work-in-process
76

 
61

Raw materials
115

 
106

Total Inventories
$
1,152