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: March 31, 2014
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 March 31, 2014 | |
Common Stock, $1 par value | 1,167,321,219 shares | |
Xerox 2014 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 and the relocation of our service delivery centers; the risk that multi-year contracts with governmental entities could be terminated prior to the end of the contract term; the risk in the hiring and retention of qualified personnel; 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 our Services business could be adversely affected if we are unsuccessful in managing the start-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; service interruptions; interest rates, cost of borrowing and access to credit markets; reliance on third parties, including subcontractors, 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 and our 2013 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 2014 Form 10-Q
1
XEROX CORPORATION
FORM 10-Q
MARCH 31, 2014
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 2014 Form 10-Q
2
ITEM 1 — FINANCIAL STATEMENTS
XEROX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended March 31, | ||||||||
(in millions, except per-share data) | 2014 | 2013 | ||||||
Revenues | ||||||||
Sales | $ | 1,272 | $ | 1,293 | ||||
Outsourcing, maintenance and rentals | 3,749 | 3,792 | ||||||
Financing | 100 | 117 | ||||||
Total Revenues | 5,121 | 5,202 | ||||||
Costs and Expenses | ||||||||
Cost of sales | 790 | 815 | ||||||
Cost of outsourcing, maintenance and rentals | 2,748 | 2,758 | ||||||
Cost of financing | 36 | 43 | ||||||
Research, development and engineering expenses | 144 | 154 | ||||||
Selling, administrative and general expenses | 961 | 1,040 | ||||||
Restructuring and asset impairment charges | 27 | (8 | ) | |||||
Amortization of intangible assets | 84 | 83 | ||||||
Other expenses, net | 40 | 17 | ||||||
Total Costs and Expenses | 4,830 | 4,902 | ||||||
Income before Income Taxes and Equity Income | 291 | 300 | ||||||
Income tax expense | 49 | 50 | ||||||
Equity in net income of unconsolidated affiliates | 42 | 47 | ||||||
Income from Continuing Operations | 284 | 297 | ||||||
Income from discontinued operations, net of tax | 2 | 3 | ||||||
Net Income | 286 | 300 | ||||||
Less: Net income attributable to noncontrolling interests | 5 | 4 | ||||||
Net Income Attributable to Xerox | $ | 281 | $ | 296 | ||||
Amounts Attributable to Xerox: | ||||||||
Net income from continuing operations | $ | 279 | $ | 293 | ||||
Net income from discontinued operations | 2 | 3 | ||||||
Net Income Attributable to Xerox | $ | 281 | $ | 296 | ||||
Basic Earnings per Share: | ||||||||
Continuing operations | $ | 0.23 | $ | 0.23 | ||||
Discontinued operations | — | — | ||||||
Total Basic Earnings per Share | $ | 0.23 | $ | 0.23 | ||||
Diluted Earnings per Share: | ||||||||
Continuing operations | $ | 0.23 | $ | 0.23 | ||||
Discontinued operations | — | — | ||||||
Total Diluted Earnings per Share | $ | 0.23 | $ | 0.23 | ||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
Xerox 2014 Form 10-Q
3
XEROX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended March 31, | ||||||||
(in millions) | 2014 | 2013 | ||||||
Net income | $ | 286 | $ | 300 | ||||
Less: Net income attributable to noncontrolling interests | 5 | 4 | ||||||
Net Income Attributable to Xerox | 281 | 296 | ||||||
Other Comprehensive (Loss) Income, Net(1): | ||||||||
Translation adjustments, net | (1 | ) | (363 | ) | ||||
Unrealized gains (losses), net | 26 | (8 | ) | |||||
Changes in defined benefit plans, net | (84 | ) | 103 | |||||
Other Comprehensive Loss, Net Attributable to Xerox | (59 | ) | (268 | ) | ||||
Comprehensive Income, Net | 227 | 32 | ||||||
Less: Comprehensive income, net attributable to noncontrolling interests | 5 | 4 | ||||||
Comprehensive Income, Net Attributable to Xerox | $ | 222 | $ | 28 | ||||
(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 2014 Form 10-Q
4
XEROX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in millions, except share data in thousands) | March 31, 2014 | December 31, 2013 | ||||||
Assets | ||||||||
Cash and cash equivalents | $ | 1,567 | $ | 1,764 | ||||
Accounts receivable, net | 3,032 | 2,929 | ||||||
Billed portion of finance receivables, net | 134 | 113 | ||||||
Finance receivables, net | 1,501 | 1,500 | ||||||
Inventories | 1,044 | 998 | ||||||
Other current assets | 1,184 | 1,207 | ||||||
Total current assets | 8,462 | 8,511 | ||||||
Finance receivables due after one year, net | 2,844 | 2,917 | ||||||
Equipment on operating leases, net | 541 | 559 | ||||||
Land, buildings and equipment, net | 1,438 | 1,466 | ||||||
Investments in affiliates, at equity | 1,384 | 1,285 | ||||||
Intangible assets, net | 2,436 | 2,503 | ||||||
Goodwill | 9,243 | 9,205 | ||||||
Other long-term assets | 2,520 | 2,590 | ||||||
Total Assets | $ | 28,868 | $ | 29,036 | ||||
Liabilities and Equity | ||||||||
Short-term debt and current portion of long-term debt | $ | 2,109 | $ | 1,117 | ||||
Accounts payable | 1,568 | 1,626 | ||||||
Accrued compensation and benefits costs | 803 | 734 | ||||||
Unearned income | 517 | 496 | ||||||
Other current liabilities | 1,603 | 1,713 | ||||||
Total current liabilities | 6,600 | 5,686 | ||||||
Long-term debt | 5,896 | 6,904 | ||||||
Pension and other benefit liabilities | 2,310 | 2,136 | ||||||
Post-retirement medical benefits | 766 | 785 | ||||||
Other long-term liabilities | 611 | 757 | ||||||
Total Liabilities | 16,183 | 16,268 | ||||||
Series A Convertible Preferred Stock | 349 | 349 | ||||||
Common stock | 1,186 | 1,210 | ||||||
Additional paid-in capital | 5,040 | 5,282 | ||||||
Treasury stock, at cost | (204 | ) | (252 | ) | ||||
Retained earnings | 9,039 | 8,839 | ||||||
Accumulated other comprehensive loss | (2,838 | ) | (2,779 | ) | ||||
Xerox shareholders’ equity | 12,223 | 12,300 | ||||||
Noncontrolling interests | 113 | 119 | ||||||
Total Equity | 12,336 | 12,419 | ||||||
Total Liabilities and Equity | $ | 28,868 | $ | 29,036 | ||||
Shares of common stock issued | 1,186,278 | 1,210,321 | ||||||
Treasury stock | (18,957 | ) | (22,001 | ) | ||||
Shares of common stock outstanding | 1,167,321 | 1,188,320 | ||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
Xerox 2014 Form 10-Q
5
XEROX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended March 31, | ||||||||
(in millions) | 2014 | 2013 | ||||||
Cash Flows from Operating Activities: | ||||||||
Net income | $ | 286 | $ | 300 | ||||
Adjustments required to reconcile net income to cash flows from operating activities: | ||||||||
Depreciation and amortization | 345 | 329 | ||||||
Provision for receivables | 16 | 26 | ||||||
Provision for inventory | 10 | 9 | ||||||
Net gain on sales of businesses and assets | (30 | ) | — | |||||
Undistributed equity in net income of unconsolidated affiliates | (42 | ) | (47 | ) | ||||
Stock-based compensation | 26 | 31 | ||||||
Restructuring and asset impairment charges | 27 | (8 | ) | |||||
Payments for restructurings | (36 | ) | (38 | ) | ||||
Contributions to defined benefit pension plans | (37 | ) | (45 | ) | ||||
Increase in accounts receivable and billed portion of finance receivables | (239 | ) | (363 | ) | ||||
Collections of deferred proceeds from sales of receivables | 120 | 115 | ||||||
Increase in inventories | (60 | ) | (107 | ) | ||||
Increase in equipment on operating leases | (57 | ) | (59 | ) | ||||
Decrease in finance receivables | 36 | 96 | ||||||
Collections on beneficial interest from sales of finance receivables | 21 | 2 | ||||||
Increase in other current and long-term assets | (94 | ) | (101 | ) | ||||
Increase (decrease) in accounts payable and accrued compensation | 8 | (94 | ) | |||||
Decrease in other current and long-term liabilities | (26 | ) | (66 | ) | ||||
Net change in income tax assets and liabilities | 29 | 17 | ||||||
Net change in derivative assets and liabilities | (1 | ) | (47 | ) | ||||
Other operating, net | (16 | ) | (37 | ) | ||||
Net cash provided by (used in) operating activities | 286 | (87 | ) | |||||
Cash Flows from Investing Activities: | ||||||||
Cost of additions to land, buildings and equipment | (84 | ) | (85 | ) | ||||
Proceeds from sales of land, buildings and equipment | 33 | 3 | ||||||
Cost of additions to internal use software | (19 | ) | (22 | ) | ||||
Acquisitions, net of cash acquired | (54 | ) | (53 | ) | ||||
Other investing, net | 4 | 4 | ||||||
Net cash used in investing activities | (120 | ) | (153 | ) | ||||
Cash Flows from Financing Activities: | ||||||||
Net proceeds on debt | 4 | 57 | ||||||
Common stock dividends | (68 | ) | (52 | ) | ||||
Preferred stock dividends | (6 | ) | (6 | ) | ||||
Proceeds from issuances of common stock | 20 | 22 | ||||||
Excess tax benefits from stock-based compensation | 3 | 1 | ||||||
Payments to acquire treasury stock, including fees | (275 | ) | (10 | ) | ||||
Repurchases related to stock-based compensation | (1 | ) | (10 | ) | ||||
Distributions to noncontrolling interests | (16 | ) | (3 | ) | ||||
Other financing | (10 | ) | — | |||||
Net cash used in financing activities | (349 | ) | (1 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents | (14 | ) | (12 | ) | ||||
Decrease in cash and cash equivalents | (197 | ) | (253 | ) | ||||
Cash and cash equivalents at beginning of period | 1,764 | 1,246 | ||||||
Cash and Cash Equivalents at End of Period | $ | 1,567 | $ | 993 | ||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
Xerox 2014 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 suggests otherwise.
We have prepared the accompanying unaudited Condensed Consolidated Financial Statements in accordance with the accounting policies described in our 2013 Annual Report on Form 10-K (2013 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 2013 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
Except for the Accounting Standard Updates (ASU's) discussed below, the new ASU's issued by the FASB during the last year did not have any significant impact on the Company.
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. This update was effective prospectively for our fiscal year beginning January 1, 2014, and did not have nor is it expected to have a material impact on our financial condition, results of operations or cash flows.
Income Taxes: In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This update provides guidance on the financial statement presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss or a tax credit carryforward, exists. This update was effective prospectively for our fiscal year beginning January 1, 2014. Upon adoption of this standard, we reclassified approximately $180 of liabilities for unrecognized tax benefits against deferred tax assets.
Service Concession Arrangements: In January 2014, the FASB issued ASU 2014-05, Service Concession Arrangements (Topic 853). This update specifies that an entity should not account for a service concession arrangement within the scope of this update as a lease in accordance with Topic 840, Leases. The update does not provide specific accounting guidance for various aspects of service concession arrangements but rather indicates that an entity should refer to other Topics as applicable to account for various aspects of a service concession arrangement. The update is effective for our fiscal year beginning January 1, 2015. The adoption of this standard is not expected to have a material effect on our financial condition, results of operation or cash flows.
Discontinued Operations: In April 2014, the FASB issued ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The update changes the requirements for reporting discontinued operations in Subtopic 205-20. A discontinued operation may include a component of an entity or a group of components of an entity, or a business. A disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. Examples include a disposal of a major geographic area, a major line of business or a major equity method investment.
Xerox 2014 Form 10-Q
7
Additionally, the update requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income and expenses of discontinued operations. This update is effective prospectively for our fiscal year beginning January 1, 2015 and early adoption is permitted. The standard primarily involves presentation and disclosure and therefore is not expected to have a material impact on our financial condition, results of operations or cash flows.
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.
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, Global Imaging Systems network integration solutions and electronic presentation systems, non-allocated corporate items including non-financing interest, and other items included in Other expenses, net.
Xerox 2014 Form 10-Q
8
Operating segment revenues and profitability were as follows:
Three Months Ended March 31, | |||||||
Segment Revenue | Segment Profit(Loss) | ||||||
2014 | |||||||
Services | $ | 2,923 | $ | 251 | |||
Document Technology | 2,045 | 250 | |||||
Other | 153 | (51 | ) | ||||
Total | $ | 5,121 | $ | 450 | |||
2013 | |||||||
Services | $ | 2,920 | $ | 273 | |||
Document Technology | 2,135 | 187 | |||||
Other | 147 | (70 | ) | ||||
Total | $ | 5,202 | $ | 390 | |||
Three Months Ended March 31, | ||||||||
Reconciliation to Pre-tax Income | 2014 | 2013 | ||||||
Segment Profit | $ | 450 | $ | 390 | ||||
Reconciling items: | ||||||||
Restructuring and related costs(1) | (30 | ) | 8 | |||||
Restructuring charges of Fuji Xerox | (3 | ) | (4 | ) | ||||
Amortization of intangible assets | (84 | ) | (83 | ) | ||||
Litigation matters (Q1 2013 only) | — | 37 | ||||||
Equity in net income of unconsolidated affiliates | (42 | ) | (47 | ) | ||||
Other | — | (1 | ) | |||||
Pre-tax Income | $ | 291 | $ | 300 | ||||
__________________________
(1) | First quarter 2014 includes Restructuring and asset impairment charges of $27 and Business transformation costs of $3. Business transformation costs represent incremental costs incurred directly in support of our business transformation and restructuring initiatives. |
Note 4 – Acquisitions
In January 2014, we acquired Invoco Holding GmbH (Invoco), a German company, for approximately $54 (€40 million) in cash. The acquisition of Invoco expands our European customer care services and provides our global customers immediate access to German-language customer care services and provides Invoco's existing customers access to our broad business process outsourcing capabilities. Invoco is included in our Services segment.
The operating results of this acquisition are not material to our financial statements and are included within our results from the acquisition date. The purchase price was allocated primarily to intangible assets and goodwill based on third-party valuations and management’s estimates.
Note 5 – Divestitures
In 2013, in connection with our decision to exit from the Paper distribution business, we completed the sale of our North American and European Paper businesses. 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 in 2013. We recorded a net pre-tax loss on disposal of $25 in 2013 for the disposition of these businesses - $23 in third quarter 2013 and $2 in the fourth quarter 2013. In the first quarter 2014, we recorded net income of $2 in Discontinued Operation primarily representing adjustments of amounts previously recorded due to changes in estimates.
Xerox 2014 Form 10-Q
9
The components of Discontinued Operations for the periods presented are as follows:
Three Months Ended March 31, | ||||||||
2014 | 2013 | |||||||
Revenues | $ | — | $ | 154 | ||||
Income from operations | $ | — | $ | 5 | ||||
Gain on disposal | 2 | — | ||||||
Net Income Before Income Taxes | 2 | 5 | ||||||
Income tax expense | — | (2 | ) | |||||
Income From Discontinued Operations, Net of Tax | $ | 2 | $ | 3 | ||||
Note 6 – Accounts Receivable, Net
Accounts receivable, net were as follows:
March 31, 2014 | December 31, 2013 | |||||||
Amounts billed or billable | $ | 2,772 | $ | 2,651 | ||||
Unbilled amounts | 364 | 390 | ||||||
Allowance for doubtful accounts | (104 | ) | (112 | ) | ||||
Accounts Receivable, Net | $ | 3,032 | $ | 2,929 | ||||
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 March 31, 2014 and December 31, 2013 were approximately $1,049 and $1,054, 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 receivable 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 receivable 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 receivable 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 $125 and $121 at March 31, 2014 and December 31, 2013, 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.
Xerox 2014 Form 10-Q
10
Of the accounts receivable sold and derecognized from our balance sheet, $736 and $723 remained uncollected as of March 31, 2014 and December 31, 2013, respectively. Accounts receivable sales were as follows:
Three Months Ended March 31, | |||||||
2014 | 2013 | ||||||
Accounts receivable sales | $ | 822 | $ | 854 | |||
Deferred proceeds | 124 | 115 | |||||
Loss on sales of accounts receivable | 4 | 4 | |||||
Estimated increase to operating cash flows(1) | 11 | 16 | |||||
__________________________
(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. |
Note 7 - Finance Receivables, Net
Sale of Finance Receivables
In the third and fourth quarters of 2013 and 2012, we transferred our entire interest in certain groups of lease finance receivables to third-party entities for cash proceeds and beneficial interests. The transfers met the requirements for derecognition according to ASC Topic 860, Transfers and Servicing and therefore were accounted for as sales with derecognition of the associated lease receivables. There were no finance receivable transfers in the three months ending March 31, 2014 and 2013. We continue to service the sold receivables and record servicing fee income over the expected life of the associated receivables. The following is a summary of our prior sales activity:
Year Ended December 31, | ||||||||
(in millions) | 2013 | 2012 | ||||||
Net carrying value (NCV) sold | $ | 676 | $ | 682 | ||||
Allowance included in NCV | 17 | 18 | ||||||
Cash proceeds received | 635 | 630 | ||||||
Beneficial interests received | 86 | 101 | ||||||
Pre-tax gain on sales | 40 | 44 | ||||||
Net fees and expenses | 5 | 5 | ||||||
The principal value of the finance receivables derecognized from our balance sheet was $874 and $1,006 at March 31, 2014 and December 31, 2013, respectively (sale value of approximately $952 and $1,098, respectively).
Summary
The lease portfolios transferred and sold were all from our Document Technology segment and the gains on these sales were reported in Financing revenues within the 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 which were $130 and $150 at March 31, 2014 and December 31, 2013, respectively, and are included in Other current assets and Other long-term assets in the accompanying Condensed Consolidated Balance Sheets. Beneficial interests of $108 and $124 at March 31, 2014 and December 31, 2013, respectively, are held by bankruptcy-remote subsidiaries 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 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 their weighted average lives of less than 2 years.
Xerox 2014 Form 10-Q
11
The net impact from the sales of finance receivables on operating cash flows is summarized below:
Three Months Ended March 31, | ||||||||
(in millions) | 2014 | 2013 | ||||||
Net cash received for sales of finance receivables | $ | — | $ | — | ||||
Impact from prior sales of finance receivables(1) | (149 | ) | (91 | ) | ||||
Collections on beneficial interest | 26 | 2 | ||||||
Estimated Decrease to Operating Cash Flows | $ | (123 | ) | $ | (89 | ) | ||
____________________________
(1) | 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.
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, 2013 | $ | 45 | $ | 22 | $ | 81 | $ | 6 | $ | 154 | ||||||||||
Provision | 3 | 2 | 7 | 3 | 15 | |||||||||||||||
Charge-offs | (1 | ) | (4 | ) | (5 | ) | (2 | ) | (12 | ) | ||||||||||
Recoveries and other(1) | 1 | — | — | — | 1 | |||||||||||||||
Balance at March 31, 2014 | $ | 48 | $ | 20 | $ | 83 | $ | 7 | $ | 158 | ||||||||||
Finance receivables as of March 31, 2014 collectively evaluated for impairment(2) | $ | 1,676 | $ | 402 | $ | 2,242 | $ | 316 | $ | 4,636 | ||||||||||
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 | ||||||||||
Finance receivables as of March 31, 2013 collectively evaluated for impairment(2) | $ | 1,991 | $ | 756 | $ | 2,304 | $ | 211 | $ | 5,262 | ||||||||||
__________________
(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 $2, and the allowance for credit losses of $158 and $160 at March 31, 2014 and 2013, 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%. |
Xerox 2014 Form 10-Q
12
• | 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:
March 31, 2014 | December 31, 2013 | ||||||||||||||||||||||||||||||
Investment Grade | Non-investment Grade | Substandard | Total Finance Receivables | Investment Grade | Non-investment Grade | Substandard | Total Finance Receivables | ||||||||||||||||||||||||
Finance and other services | $ | 191 | $ | 112 | $ | 46 | $ | 349 | $ | 189 | $ | 102 | $ | 34 | $ | 325 | |||||||||||||||
Government and education | 632 | 8 | 4 | 644 | 656 | 12 | 3 | 671 | |||||||||||||||||||||||
Graphic arts | 138 | 70 | 102 | 310 | 142 | 59 | 108 | 309 | |||||||||||||||||||||||
Industrial | 93 | 30 | 16 | 139 | 92 | 28 | 15 | 135 | |||||||||||||||||||||||
Healthcare | 73 | 24 | 20 | 117 | 74 | 25 | 16 | 115 | |||||||||||||||||||||||
Other | 58 | 29 | 30 | 117 | 55 | 27 | 29 | 111 | |||||||||||||||||||||||
Total United States | 1,185 | 273 | 218 | 1,676 | 1,208 | 253 | 205 | 1,666 | |||||||||||||||||||||||
Finance and other services | 45 | 19 | 11 | 75 | 46 | 18 | 11 | 75 | |||||||||||||||||||||||
Government and education | 87 | 8 | 2 | 97 | 96 | 9 | 1 | 106 | |||||||||||||||||||||||
Graphic arts | 53 | 54 | 41 | 148 | 56 | 52 | 48 | 156 | |||||||||||||||||||||||
Industrial | 21 | 12 | 4 | 37 | 23 | 12 | 6 | 41 | |||||||||||||||||||||||
Other | 31 | 10 | 4 | 45 | 29 | 9 | 5 | 43 | |||||||||||||||||||||||
Total Canada(1) | 237 | 103 | 62 | 402 | 250 | 100 | 71 | 421 | |||||||||||||||||||||||
France | 279 | 304 | 145 | 728 | 282 | 314 | 122 | 718 | |||||||||||||||||||||||
U.K./Ireland | 201 | 162 | 39 | 402 | 199 | 171 | 42 | 412 | |||||||||||||||||||||||
Central(2) | 260 | 391 | 44 | 695 | 287 | 394 | 43 | 724 | |||||||||||||||||||||||
Southern(3) | 105 | 178 | 47 | 330 | 102 | 187 | 58 | 347 | |||||||||||||||||||||||
Nordics(4) | 26 | 60 | 1 | 87 | 46 | 42 | 3 | 91 | |||||||||||||||||||||||
Total Europe | 871 | 1,095 | 276 | 2,242 | 916 | 1,108 | 268 | 2,292 | |||||||||||||||||||||||
Other | 214 | 86 | 16 | 316 | 226 | 69 | 9 | 304 | |||||||||||||||||||||||
Total | $ | 2,507 | $ | 1,557 | $ | 572 | $ | 4,636 | $ | 2,600 | $ | 1,530 | $ | 553 | $ | 4,683 | |||||||||||||||
_____________________________
(1) | Historically the Company has included certain Canadian customers with graphic arts activity in their industry sector. In 2014, these customers were reclassified to Graphic Arts to better reflect their primary business activity. The December 31, 2013 amounts have been reclassified to move $33 of graphic arts customers out of Finance and Other Services and to move $38 out of Industrial to be consistent with the March 31, 2014 presentation. |
(2) | Switzerland, Germany, Austria, Belgium and Holland. |
(3) | Italy, Greece, Spain and Portugal. |
(4) | Sweden, Norway, Denmark and Finland. |
Xerox 2014 Form 10-Q
13
The aging of our billed finance receivables is based upon the number of days an invoice is past due and is as follows:
March 31, 2014 | |||||||||||||||||||||||||||
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 | $ | 337 | $ | 349 | $ | 12 | |||||||||||||
Government and education | 17 | 4 | 3 | 24 | 620 | 644 | 29 | ||||||||||||||||||||
Graphic arts | 13 | 2 | 1 | 16 | 294 | 310 | 9 | ||||||||||||||||||||
Industrial | 4 | 1 | 1 | 6 | 133 | 139 | 6 | ||||||||||||||||||||
Healthcare | 4 | 1 | — | 5 | 112 | 117 | 5 | ||||||||||||||||||||
Other | 3 | 1 | — | 4 | 113 | 117 | 4 | ||||||||||||||||||||
Total United States | 50 | 11 | 6 | 67 | 1,609 | 1,676 | 65 | ||||||||||||||||||||
Canada | 3 | 3 | 3 | 9 | 393 | 402 | 20 | ||||||||||||||||||||
France | 2 | 1 | 3 | 6 | 722 | 728 | 42 | ||||||||||||||||||||
U.K./Ireland | — | 3 | 1 | 4 | 398 | 402 | 3 | ||||||||||||||||||||
Central(1) | 3 | 3 | 3 | 9 | 686 | 695 | 20 | ||||||||||||||||||||
Southern(2) | 26 | 5 | 6 | 37 | 293 | 330 | 32 | ||||||||||||||||||||
Nordics(3) | 2 | — | — | 2 | 85 | 87 | 3 | ||||||||||||||||||||
Total Europe | 33 | 12 | 13 | 58 | 2,184 | 2,242 | 100 | ||||||||||||||||||||
Other | 8 | 1 | — | 9 | 307 | 316 | — | ||||||||||||||||||||
Total | $ | 94 | $ | 27 | $ | 22 | $ | 143 | $ | 4,493 | $ | 4,636 | $ | 185 | |||||||||||||
December 31, 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 | $ | 7 | $ | 2 | $ | 1 | $ | 10 | $ | 315 | $ | 325 | $ | 12 | |||||||||||||
Government and education | 17 | 4 | 3 | 24 | 647 | 671 | 34 | ||||||||||||||||||||
Graphic arts | 12 | 1 | — | 13 | 296 | 309 | 5 | ||||||||||||||||||||
Industrial | 3 | 1 | 1 | 5 | 130 | 135 | 6 | ||||||||||||||||||||
Healthcare | 3 | 1 | — | 4 | 111 | 115 | 5 | ||||||||||||||||||||
Other | 3 | 1 | — | 4 | 107 | 111 | 3 | ||||||||||||||||||||
Total United States | 45 | 10 | 5 | 60 | 1,606 | 1,666 | 65 | ||||||||||||||||||||
Canada | 4 | 3 | 3 | 10 | 411 | 421 | 19 | ||||||||||||||||||||
France | — | — | — | — | 718 | 718 | 40 | ||||||||||||||||||||
U.K./Ireland | 1 | 1 | — | 2 | 410 | 412 | 2 | ||||||||||||||||||||
Central(1) | 3 | 2 | 3 | 8 | 716 | 724 | 23 | ||||||||||||||||||||
Southern(2) | 21 | 5 | 7 | 33 | 314 | 347 | 45 | ||||||||||||||||||||
Nordics(3) | 2 | — | — | 2 | 89 | 91 | — | ||||||||||||||||||||
Total Europe | 27 | 8 | 10 | 45 | 2,247 | 2,292 | 110 | ||||||||||||||||||||
Other | 8 | 1 | — | 9 | 295 | 304 | — | ||||||||||||||||||||
Total | $ | 84 | $ | 22 | $ | 18 | $ | 124 | $ | 4,559 | $ | 4,683 | $ | 194 | |||||||||||||
_____________________________
(1) | Switzerland, Germany, Austria, Belgium and Holland. |
(2) | Italy, Greece, Spain and Portugal. |
(3) | Sweden, Norway, Denmark and Finland. |
Xerox 2014 Form 10-Q
14
Note 8 – Inventories
The following is a summary of Inventories by major category:
March 31, 2014 | December 31, 2013 | ||||||
Finished goods | $ | 872 | $ | 837 | |||
Work-in-process | 65 | 60 | |||||
Raw materials | 107 | 101 | |||||
Total Inventories | $ | 1,044 | $ | 998 | |||
Note 9 – Investment in Affiliates, at Equity
Our equity in net income of our unconsolidated affiliates was as follows:
Three Months Ended March 31, | |||||||
2014 | 2013 | ||||||
Fuji Xerox | $ | 39 | $ | 44 | |||
Other investments | 3 | 3 | |||||
Total Equity in Net Income of Unconsolidated Affiliates | $ | 42 | $ | 47 | |||
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.
Condensed financial data of Fuji Xerox was as follows:
Three Months Ended March 31, | |||||||
2014 | 2013 | ||||||
Summary of Operations: | |||||||
Revenues | $ | 3,021 | $ | 3,028 | |||
Costs and expenses | 2,801 | 2,784 | |||||
Income before income taxes | 220 | 244 | |||||
Income tax expense | 58 | 61 | |||||
Net Income | 162 | 183 | |||||
Less: Net income – noncontrolling interests | 1 | 1 | |||||
Net Income – Fuji Xerox | $ | 161 | $ | 182 | |||
Weighted Average Exchange Rate(1) | 102.67 | 92.64 | |||||
_____________________________
(1) | Represents Yen/U.S. Dollar exchange rate used to translate. |
Note 10 – Restructuring Programs
During the three months ended March 31, 2014, we recorded net restructuring and asset impairment charges of $27, which included approximately $28 of severance costs related to headcount reductions of approximately 1,250 employees worldwide, $1 of lease cancellations and $4 of asset impairments. These costs were offset by $6 of net reversals, primarily resulting from changes in estimated reserves from prior period initiatives.
Xerox 2014 Form 10-Q
15
Information related to restructuring program activity during the three months ended March 31, 2014 is outlined below:
Severance and Related Costs | Lease Cancellation and Other Costs | Asset Impairments(2) | Total | ||||||||||||
Balance at December 31, 2013 | $ | 109 | $ | 7 | $ | — | $ | 116 | |||||||
Provision | 28 | 1 | 4 | 33 | |||||||||||
Reversals | (6 | ) | — | — | (6 | ) | |||||||||
Net Current Period Charges(1) | 22 | 1 | 4 | 27 | |||||||||||
Charges against reserve and currency | (35 | ) | (2 | ) | (4 | ) | (41 | ) | |||||||
Balance at March 31, 2014 | $ | 96 | $ | 6 | $ | — | $ | 102 | |||||||
_____________________________
(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 March 31, | |||||||
2014 | 2013 | ||||||
Charges against reserve | $ | (41 | ) | $ | (37 | ) | |
Asset impairments | 4 | — | |||||
Effects of foreign currency and other non-cash items | 1 | (1 | ) | ||||
Restructuring Cash Payments | $ | (36 | ) | $ | (38 | ) | |
The following table summarizes the total amount of costs incurred in connection with these restructuring programs by segment:
Three Months Ended March 31, | |||||||
2014 | 2013 | ||||||
Services | $ | 10 | $ | (2 | ) | ||
Document Technology | 16 | (6 | ) | ||||
Other | 1 | — | |||||
Total Net Restructuring Charges | $ | 27 | $ | (8 | ) | ||
Note 11 – Debt
Credit facility
On March 18, 2014, we entered into an Amended and Restated Credit Agreement that extended the maturity date of our $2.0 billion unsecured revolving Credit Facility to March 18, 2019 from December 2016. The amendment also included modest improvements in pricing and minor changes in the composition of the group of lenders. The amended and restated Credit Facility retains certain provisions from the existing Credit Facility including the $300 letter of credit sub-facility and the accordion feature that would allow us to increase (from time to time, with willing lenders) the overall size of the facility up to an aggregate amount not to exceed $2.75 billion. We also have the right to request a one year extension on each of the first and second anniversary of the amendment date.
We deferred $7 of debt issuance costs in connection with this amendment, which includes approximately $4 of unamortized deferred debt issue costs associated with the existing Credit Facility. The write-off of debt issuance costs associated with lenders that reduced their participation in the amended and restated Credit Facility was not material.
At March 31, 2014, we had no outstanding borrowings or letters of credit under our Credit Facility.
Xerox 2014 Form 10-Q
16
Interest Expense and Income
Interest expense and interest income were as follows:
Three Months Ended March 31, | |||||||
2014 | 2013 | ||||||
Interest expense(1) | $ | 100 | $ | 104 | |||
Interest income(2) | 102 | 120 | |||||
____________
(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:
Three Months Ended March 31, | ||||||||
2014 | 2013 | |||||||
Net proceeds on short-term debt | $ | 1 | $ | 36 | ||||
Proceeds from issuance of long-term debt | 18 | 25 | ||||||
Payments on long-term debt(1) | (15 | ) | (4 | ) | ||||
Net Proceeds on Debt | $ | 4 | $ | 57 | ||||
____________
(1) | Includes current maturities. |
Note 12 – 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
As of March 31, 2014, pay variable/receive fixed interest rate swaps with notional amounts of $300 and net liability fair value of $3 were designated and accounted for as fair value hedges. The swaps were structured to hedge the fair value of related debt by converting them from fixed rate instruments to variable rate instruments. No ineffective portion was recorded to earnings during 2014. We did not have any interest rate swaps outstanding at December 31, 2013.
The following is a summary of our fair value hedges at March 31, 2014:
Debt Instrument | Year First Designated | Notional Amount | Net Fair Value | Weighted Average Interest Rate Paid | Interest Rate Received | Basis | Maturity | |||||||||||||
Senior Note 2021 | 2014 | $ | 300 | $ | (3 | ) | 2.42 | % | 4.5 | % | Libor | 2021 | ||||||||
Xerox 2014 Form 10-Q
17
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 purchased 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 March 31, 2014, we had outstanding forward exchange and purchased option contracts with gross notional values of $2,994, which is reflective of the amounts that are normally outstanding at any point during the year. Approximately 68% of these contracts mature within three months, 9% in three to six months and 23% in six to twelve months.
The following is a summary of the primary hedging positions and corresponding fair values as of March 31, 2014:
Currency Hedged (Buy/Sell) | Gross Notional Value | Fair Value Asset (Liability)(1) | |||||
Euro/U.K. Pound Sterling | $ | 769 | $ | (4 | ) | ||
Japanese Yen/U.S. Dollar | 487 | (8 | ) | ||||
Canadian Dollar/Euro | 409 | (4 | ) | ||||
U.S. Dollar/Euro | 397 | (1 | ) | ||||
Japanese Yen/Euro | 378 | (11 | ) | ||||
U.K. Pound Sterling/Euro | 167 | — | |||||
Philippine Peso/U.S. Dollar | 52 | — | |||||
Mexican Peso/U.S. Dollar | 47 | 1 | |||||
Swiss Franc/Euro | 44 | — | |||||
Indian Rupee/U.S. Dollar | 41 | 3 | |||||
Euro/Danish Krone | 29 | — | |||||
Mexican Peso/Euro | 24 | — | |||||
All Other | 150 | (1 | ) | ||||
Total Foreign Exchange Hedging | $ | 2,994 | $ | (25 | ) | ||
__________________
(1) | Represents the net receivable (payable) amount included in the Condensed Consolidated Balance Sheet at March 31, 2014. |
Foreign Currency Cash Flow Hedges
We designate a portion of our foreign currency derivative contracts as cash flow hedges of our foreign currency-denominated inventory purchases, sales and expenses. No amount of ineffectiveness was recorded in the Condensed Consolidated Statements of Income for these designated cash flow hedges and all components of each derivative’s gain or loss was included in the assessment of hedge effectiveness. The net liability fair value of these contracts was $16 and $50 as of March 31, 2014 and December 31, 2013, respectively.
Xerox 2014 Form 10-Q
18
Summary of Derivative Instruments Fair Value
The following table provides a summary of the fair value amounts of our derivative instruments:
Designation of Derivatives | Balance Sheet Location | March 31, 2014 | December 31, 2013 | |||||||
Derivatives Designated as Hedging Instruments | ||||||||||
Foreign exchange contracts – forwards | Other current assets | $ | 4 | $ | 1 | |||||
Other current liabilities | (20 | ) | (51 | ) | ||||||
Interest rate swaps | Other long-term liabilities | (3 | ) | — | ||||||
Net Designated Derivative Liability | $ | (19 | ) | $ | (50 | ) | ||||
Derivatives NOT Designated as Hedging Instruments | ||||||||||
Foreign exchange contracts – forwards | Other current assets | $ | 5 | $ | 5 | |||||
Other current liabilities | (14 | ) | (19 | ) | ||||||
Net Undesignated Derivative Liability | $ | (9 | ) | $ | (14 | ) | ||||
Summary of Derivatives | Total Derivative Assets | $ | 9 | $ | 6 | |||||
Total Derivative Liabilities | (37 | ) | (70 | ) | ||||||
Net Derivative Liability | $ | (28 | ) | $ | (64 | ) | ||||
Summary of Derivative Instruments Gains (Losses)
Derivative gains (losses) affect the income statement based on whether such derivatives are designated as hedges of underlying exposures. The following is a summary of derivative gains (losses).
Designated Derivative Instruments Gains (Losses)
The following tables provide a summary of gains (losses) on derivative instruments:
Derivatives in Fair Value Hedging Relationships | Location of Gain (Loss) Recognized in Income | Derivative Gain (Loss) Recognized in income | Hedged Item Gain (Loss) Recognized in Income | |||||||||||||||
Three Months Ended March 31, | Three Months Ended March 31, | |||||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||||
Interest Rate Contracts | Interest Expense | $ | (3 | ) | $ | — | $ | 3 | $ | — | ||||||||
Derivatives in Cash Flow Hedging Relationships | Derivative Gain (Loss) Recognized in OCI (Effective Portion) | Location of Derivative Gain (Loss) Reclassified from AOCI into Income (Effective Portion) | Gain (Loss) Reclassified from AOCI to Income (Effective Portion) | |||||||||||||||
Three Months Ended March 31, | Three Months Ended March 31, | |||||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||||
Foreign exchange contracts – forwards | $ | 18 | $ | (34 | ) | Cost of sales | $ | (21 | ) | $ | (17 | ) | ||||||
No amount of ineffectiveness was recorded in the Condensed Consolidated Statements of Income for these designated cash flow hedges and all components of each derivative’s gain (loss) was included in the assessment of hedge effectiveness. In addition, no amount was recorded for an underlying exposure that did not occur or was not expected to occur.
At March 31, 2014, net after-tax losses of $11 were recorded in accumulated other comprehensive loss associated with our cash flow hedging activity. The entire balance is expected to be reclassified into net income within the next 12 months, providing an offsetting economic impact against the underlying anticipated transactions.
Xerox 2014 Form 10-Q
19
Non-Designated Derivative Instruments Gains (Losses)
Non-designated derivative instruments are primarily instruments used to hedge foreign currency-denominated assets and liabilities. They are not designated as hedges since there is a natural offset for the re-measurement of the underlying foreign currency-denominated asset or liability.
The following table provides a summary of gains (losses) on non-designated derivative instruments:
Derivatives NOT Designated as Hedging Instruments | Three Months Ended March 31, | |||||||||
Location of Derivative Gain (Loss) | 2014 | 2013 | ||||||||
Foreign exchange contracts – forwards | Other expense – Currency losses, net | $ | — | $ | (15 | ) | ||||
During the three months ended March 31, 2014 and March 31, 2013, Currency (loss) gains, net were $(1) and $4, respectively. Net Currency gains and losses are included in Other expenses, net and include the mark-to market adjustments of the derivatives not designated as hedging instruments and the related cost of those derivatives, as well as the re-measurement of foreign currency-denominated assets and liabilities.
Note 13 – Fair Value of Financial Assets and Liabilities
The following table represents assets and liabilities measured at fair value on a recurring basis. The basis for the measurement at fair value in all cases is Level 2 – Significant Other Observable Inputs.
March 31, 2014 | December 31, 2013 | ||||||
Assets: | |||||||
Foreign exchange contracts-forwards | $ | 9 | $ | 6 | |||
Deferred compensation investments in cash surrender life insurance | 90 | 88 | |||||
Deferred compensation investments in mutual funds | 30 | 28 | |||||
Total | $ | 129 | $ | 122 | |||
Liabilities: | |||||||
Foreign exchange contracts-forwards | $ | 34 | $ | 70 | |||
Interest rate swaps | 3 | — | |||||
Deferred compensation plan liabilities | 127 | 125 | |||||
Total | $ | 164 | $ | 195 | |||
We utilize the income approach to measure the fair value for our derivative assets and liabilities. The income approach uses pricing models that rely on market observable inputs such as yield curves, currency exchange rates and forward prices, and therefore are classified as Level 2.
Fair value for our deferred compensation plan investments in Company-owned life insurance is reflected at cash surrender value. Fair value for our deferred compensation plan investments in mutual funds is based on quoted market prices for actively traded investments similar to those held by the plan. Fair value for deferred compensation plan liabilities is based on the fair value of investments corresponding to employees’ investment selections, based on quoted prices for similar assets in actively traded markets.
Xerox 2014 Form 10-Q
20
Summary of Other Financial Assets and Liabilities Not Measured at Fair Value on a Recurring Basis
The estimated fair values of our other financial assets and liabilities not measured at fair value on a recurring basis were as follows:
March 31, 2014 | December 31, 2013 | ||||||||||||||
Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||
Cash and cash equivalents | $ | 1,567 | $ | 1,567 | $ | 1,764 | $ | 1,764 | |||||||
Accounts receivable, net | 3,032 | 3,032 | 2,929 | 2,929 | |||||||||||
Short-term debt | 2,109 | 2,114 | 1,117 | 1,126 | |||||||||||
Long-term debt | 5,896 | 6,374 | 6,904 | 7,307 | |||||||||||
The fair value amounts for Cash and cash equivalents and Accounts receivable, net, approximate carrying amounts due to the short maturities of these instruments. The fair value of Short- and Long-term debt was estimated based on quoted market prices for publicly-traded securities or on the current rates offered to us for debt of similar maturities. The difference between the fair value and the carrying value represents the theoretical net premium or discount we would pay or receive to retire all debt at such date.
Note 14 – Employee Benefit Plans
The components of Net periodic benefit cost and other changes in plan assets and benefit obligations were as follows for the three months ended March 31:
Pension Benefits | |||||||||||||||||||||||
U.S. Plans | Non-U.S. Plans | Retiree Health | |||||||||||||||||||||
2014 | 2013 | 2014 | 2013 | 2014 | 2013 | ||||||||||||||||||
Components of Net Periodic Benefit Costs: | |||||||||||||||||||||||
Service cost | $ | 2 | $ | 2 | $ | 9 | $ | 22 | $ | 2 | $ | 2 | |||||||||||
Interest cost | 40 | 37 | 69 | 64 | 9 | 9 | |||||||||||||||||
Expected return on plan assets | (38 | ) | (44 | ) | (87 | ) | (77 | ) | — | — | |||||||||||||
Recognized net actuarial loss | 2 | 7 | 14 | 19 | — | ||||||||||||||||||