XRX-6.30.14-10Q




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-Q
_______________
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 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 June 30, 2014
Common Stock, $1 par value
 
1,153,152,810 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, our Quarterly Report on Form 10-Q for the quarter ended March 31, 2014 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
JUNE 30, 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




PART I — FINANCIAL INFORMATION
ITEM 1 — FINANCIAL STATEMENTS

XEROX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(in millions, except per-share data)
 
2014
 
2013
 
2014
 
2013
Revenues
 
 
 
 
 
 
 
 
Sales
 
$
1,359

 
$
1,454

 
$
2,630

 
$
2,747

Outsourcing, maintenance and rentals
 
3,835

 
3,823

 
7,574

 
7,605

Financing
 
98

 
114

 
198

 
231

Total Revenues
 
5,292

 
5,391

 
10,402

 
10,583

Costs and Expenses
 
 
 
 
 
 
 
 
Cost of sales
 
847

 
934

 
1,637

 
1,749

Cost of outsourcing, maintenance and rentals
 
2,781

 
2,718

 
5,520

 
5,467

Cost of financing
 
36

 
42

 
72

 
85

Research, development and engineering expenses
 
142

 
149

 
286

 
303

Selling, administrative and general expenses
 
972

 
1,041

 
1,932

 
2,080

Restructuring and asset impairment charges
 
38

 
33

 
65

 
25

Amortization of intangible assets
 
84

 
83

 
168

 
166

Other expenses, net
 
68

 
59

 
107

 
76

Total Costs and Expenses
 
4,968

 
5,059

 
9,787

 
9,951

Income before Income Taxes and Equity Income
 
324

 
332

 
615

 
632

Income tax expense
 
81

 
68

 
130

 
118

Equity in net income of unconsolidated affiliates
 
33

 
36

 
75

 
83

Income from Continuing Operations
 
276

 
300

 
560

 
597

Loss from discontinued operations, net of tax
 
(4
)
 
(23
)
 
(2
)
 
(20
)
Net Income
 
272

 
277

 
558

 
577

Less: Net income attributable to noncontrolling interests
 
6

 
6

 
11

 
10

Net Income Attributable to Xerox
 
$
266

 
$
271

 
$
547

 
$
567

 
 
 
 
 
 
 
 
 
Amounts Attributable to Xerox:
 
 
 
 
 
 
 
 
Net income from continuing operations
 
$
270

 
$
294

 
$
549

 
$
587

Net loss from discontinued operations
 
(4
)
 
(23
)
 
(2
)
 
(20
)
Net Income Attributable to Xerox
 
$
266

 
$
271

 
$
547

 
$
567

 
 
 
 
 
 
 
 
 
Basic Earnings per Share:
 
 
 
 
 
 
 
 
Continuing operations
 
$
0.22

 
$
0.24

 
$
0.46

 
$
0.47

Discontinued operations
 
—

 
(0.02
)
 
—

 
(0.02
)
Total Basic Earnings per Share
 
$
0.22

 
$
0.22

 
$
0.46

 
$
0.45

Diluted Earnings per Share:
 
 
 
 
 
 
 
 
Continuing operations
 
$
0.22

 
$
0.23

 
$
0.45

 
$
0.46

Discontinued operations
 
—

 
(0.02
)
 
—

 
(0.02
)
Total Diluted Earnings per Share
 
$
0.22

 
$
0.21

 
$
0.45

 
$
0.44


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
June 30,
 
Six Months Ended
June 30,
(in millions)
 
2014
 
2013
 
2014
 
2013
Net income
 
$
272

 
$
277

 
$
558

 
$
577

Less: Net income attributable to noncontrolling interests
 
6

 
6

 
11

 
10

Net Income Attributable to Xerox
 
266

 
271

 
547

 
567

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

 

 

 

Translation adjustments, net
 
92

 
(84
)
 
91

 
(447
)
Unrealized gains (losses), net
 
15

 
1

 
41

 
(7
)
Changes in defined benefit plans, net
 
(70
)
 
56

 
(154
)
 
159

Other Comprehensive Income (Loss), Net
 
37

 
(27
)
 
(22
)
 
(295
)
Less: Other comprehensive income, net attributable to noncontrolling interests
 
1

 
—

 
1

 
—

Other Comprehensive Income (Loss), Net Attributable to Xerox
 
36

 
(27
)
 
(23
)
 
(295
)
 
 
 
 
 
 
 
 
 
Comprehensive Income, Net
 
309

 
250

 
536

 
282

Less: Comprehensive income, net attributable to noncontrolling interests
 
7

 
6

 
12

 
10

Comprehensive Income, Net Attributable to Xerox
 
$
302

 
$
244

 
$
524

 
$
272


(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)
 
June 30,
2014
 
December 31,
2013
Assets
 
 
 
 
Cash and cash equivalents
 
$
1,007

 
$
1,764

Accounts receivable, net
 
3,097

 
2,929

Billed portion of finance receivables, net
 
127

 
113

Finance receivables, net
 
1,497

 
1,500

Inventories
 
1,077

 
998

Other current assets
 
1,174

 
1,207

Total current assets
 
7,979

 
8,511

Finance receivables due after one year, net
 
2,826

 
2,917

Equipment on operating leases, net
 
535

 
559

Land, buildings and equipment, net
 
1,433

 
1,466

Investments in affiliates, at equity
 
1,403

 
1,285

Intangible assets, net
 
2,388

 
2,503

Goodwill
 
9,431

 
9,205

Other long-term assets
 
2,513

 
2,590

Total Assets
 
$
28,508

 
$
29,036

Liabilities and Equity
 
 
 
 
Short-term debt and current portion of long-term debt
 
$
1,355

 
$
1,117

Accounts payable
 
1,597

 
1,626

Accrued compensation and benefits costs
 
705

 
734

Unearned income
 
524

 
496

Other current liabilities
 
1,509

 
1,713

Total current liabilities
 
5,690

 
5,686

Long-term debt
 
6,354

 
6,904

Pension and other benefit liabilities
 
2,353

 
2,136

Post-retirement medical benefits
 
764

 
785

Other long-term liabilities
 
593

 
757

Total Liabilities
 
15,754

 
16,268

Series A Convertible Preferred Stock
 
349

 
349

Common stock
 
1,165

 
1,210

Additional paid-in capital
 
4,846

 
5,282

Treasury stock, at cost
 
(148
)
 
(252
)
Retained earnings
 
9,226

 
8,839

Accumulated other comprehensive loss
 
(2,802
)
 
(2,779
)
Xerox shareholders’ equity
 
12,287

 
12,300

Noncontrolling interests
 
118

 
119

Total Equity
 
12,405

 
12,419

Total Liabilities and Equity
 
$
28,508

 
$
29,036

Shares of common stock issued
 
1,165,234

 
1,210,321

Treasury stock
 
(12,081
)
 
(22,001
)
Shares of common stock outstanding
 
1,153,153

 
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
June 30,
 
Six Months Ended
June 30,
(in millions)
 
2014
 
2013
 
2014
 
2013
Cash Flows from Operating Activities:
 
 
 
 
 
 
 
 
Net income
 
$
272

 
$
277

 
$
558

 
$
577

Adjustments required to reconcile net income to cash flows from operating activities:
 
 
 
 
 
 
 
 
Depreciation and amortization
 
376

 
343

 
721

 
672

Provision for receivables
 
22

 
33

 
38

 
59

Provision for inventory
 
4

 
3

 
14

 
12

Net loss (gain) on sales of businesses and assets
 
1

 
10

 
(29
)
 
10

Undistributed equity in net income of unconsolidated affiliates
 
2

 
3

 
(40
)
 
(44
)
Stock-based compensation
 
24

 
28

 
50

 
59

Restructuring and asset impairment charges
 
38

 
33

 
65

 
25

Payments for restructurings
 
(36
)
 
(35
)
 
(72
)
 
(73
)
Contributions to defined benefit pension plans
 
(68
)
 
(53
)
 
(105
)
 
(98
)
Increase in accounts receivable and billed portion of finance receivables
 
(150
)
 
(139
)
 
(389
)
 
(502
)
Collections of deferred proceeds from sales of receivables
 
106

 
116

 
226

 
231

Increase in inventories
 
(43
)
 
(34
)
 
(103
)
 
(141
)
Increase in equipment on operating leases
 
(66
)
 
(69
)
 
(123
)
 
(128
)
Decrease in finance receivables
 
18

 
23

 
54

 
119

Collections on beneficial interest from sales of finance receivables
 
21

 
25

 
42

 
27

Increase in other current and long-term assets
 
(24
)
 
(19
)
 
(118
)
 
(120
)
(Decrease) increase in accounts payable and accrued compensation
 
(96
)
 
32

 
(88
)
 
(62
)
Decrease in other current and long-term liabilities
 
(82
)
 
(45
)
 
(108
)
 
(111
)
Net change in income tax assets and liabilities
 
43

 
22

 
72

 
39

Net change in derivative assets and liabilities
 
(20
)
 
6

 
(21
)
 
(41
)
Other operating, net
 
(17
)
 
(27
)
 
(33
)
 
(64
)
Net cash provided by operating activities
 
325

 
533

 
611

 
446

Cash Flows from Investing Activities:
 
 
 
 
 
 
 
 
Cost of additions to land, buildings and equipment
 
(102
)
 
(84
)
 
(186
)
 
(169
)
Proceeds from sales of land, buildings and equipment
 
2

 
8

 
35

 
11

Cost of additions to internal use software
 
(21
)
 
(23
)
 
(40
)
 
(45
)
Proceeds from sale of businesses
 
15

 
11

 
15

 
11

Acquisitions, net of cash acquired
 
(227
)
 
(78
)
 
(281
)
 
(131
)
Other investing, net
 
7

 
2

 
11

 
6

Net cash used in investing activities
 
(326
)
 
(164
)
 
(446
)
 
(317
)
Cash Flows from Financing Activities:
 
 
 
 
 
 
 
 
Net payments on debt
 
(299
)
 
(378
)
 
(295
)
 
(321
)
Common stock dividends
 
(73
)
 
(72
)
 
(141
)
 
(124
)
Preferred stock dividends
 
(6
)
 
(6
)
 
(12
)
 
(12
)
Proceeds from issuances of common stock
 
19

 
31

 
39

 
53

Excess tax benefits from stock-based compensation
 
3

 
—

 
6

 
1

Payments to acquire treasury stock, including fees
 
(204
)
 
—

 
(479
)
 
(10
)
Repurchases related to stock-based compensation
 
—

 
—

 
(1
)
 
(10
)
Distributions to noncontrolling interests
 
(1
)
 
(2
)
 
(17
)
 
(5
)
Other financing
 
—

 
(3
)
 
(10
)
 
(3
)
Net cash used in financing activities
 
(561
)
 
(430
)
 
(910
)
 
(431
)
Effect of exchange rate changes on cash and cash equivalents
 
2

 
(3
)
 
(12
)
 
(15
)
Decrease in cash and cash equivalents
 
(560
)
 
(64
)
 
(757
)
 
(317
)
Cash and cash equivalents at beginning of period
 
1,567

 
993

 
1,764

 
1,246

Cash and Cash Equivalents at End of Period
 
$
1,007

 
$
929

 
$
1,007

 
$
929


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.”
In the second quarter 2014, we completed the sale of our Truckload Management Services business. Results from this business are reported as discontinued operations and all prior periods have been reclassified to reflect this change. Refer to Note 5 - Divestitures for additional information regarding discontinued operations.

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.

Xerox 2014 Form 10-Q
7




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.
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.
Revenue Recognition: In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers: (Topic 606), to supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing U.S. GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014- 09 is effective for our fiscal year beginning January 1, 2017 using either of two methods: (i) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-09; or (ii) retrospective with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures as defined per ASU 2014-09. We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements.
Stock Compensation: In June 2014, the FASB issued ASU 2014-12, Compensation - Stock Compensation (Topic 718): Accounting for Share- Based Payments When the Terms of an Award Provide that a Performance Target Could be Achieved after the Requisite Service Period. ASU 2014-12 requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update is effective for our fiscal year beginning January 1, 2016 and early adoption is permitted. We do not expect the adoption of this standard to have a material impact on our financial condition, results of operation 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)

Xerox 2014 Form 10-Q
8




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.
Operating segment revenues and profitability were as follows:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
Segment
Revenue
 
Segment Profit (Loss)
 
Segment
Revenue
 
Segment Profit(Loss)
2014
 
 
 
 
 
 
 
Services
$
2,992

 
$
257

 
$
5,904

 
$
507

Document Technology
2,125

 
306

 
4,170

 
556

Other
175

 
(76
)
 
328

 
(127
)
Total
$
5,292

 
$
487

 
$
10,402

 
$
936

2013
 
 
 
 
 
 
 
Services
$
2,946

 
$
301

 
$
5,855

 
$
573

Document Technology
2,263

 
244

 
4,398

 
431

Other
182

 
(61
)
 
330

 
(131
)
Total
$
5,391

 
$
484

 
$
10,583

 
$
873


Xerox 2014 Form 10-Q
9




 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
Reconciliation to Pre-tax Income
 
2014
 
2013
 
2014
 
2013
Segment Profit
 
$
487

 
$
484

 
$
936

 
$
873

Reconciling items:
 
 
 
 
 
 
 
 
Restructuring and related costs(1)
 
(45
)
 
(33
)
 
(75
)
 
(25
)
Restructuring charges of Fuji Xerox
 
1

 
(1
)
 
(2
)
 
(5
)
Amortization of intangible assets
 
(84
)
 
(83
)
 
(168
)
 
(166
)
Litigation matters (Q1 2013 only)
 
—

 
—

 
—

 
37

Equity in net income of unconsolidated affiliates
 
(33
)
 
(36
)
 
(75
)
 
(83
)
Other
 
(2
)
 
1

 
(1
)
 
1

Pre-tax Income
 
$
324

 
$
332

 
$
615

 
$
632

__________________________
(1)
Includes Restructuring and asset impairment charges of $38 and $65 for the three and six months ended June 30, 2014, respectively, and Business transformation costs of $7 and $10 for the three and six months ended June 30, 2014, respectively. Business transformation costs represent incremental costs incurred directly in support of our business transformation and restructuring initiatives such as compensation costs for overlapping staff, consulting costs and training costs.

Note 4 – Acquisitions

In May 2014, we acquired ISG Holdings, Inc. (ISG) for approximately $225 in cash. The acquisition of ISG enhances our Services segment by providing a comprehensive workers' compensation suite of offerings to the property and casualty sector. In addition, the acquisition expands our services to property and casualty insurance carriers, third-party administrators, managed care services providers, governments and self-administered employers who require comprehensive reviews of medical bills and implementation of care management plans stemming from workers’ compensation claims.

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.

ISG and Invoco are included in our Services segment. Additionally, our services segment acquired one additional business for approximately $2 in cash during the six months ended June 30, 2014.

The operating results of these acquisitions are not material to our financial statements and are included within our results from their 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

In May 2014, we sold our Truckload Management Services (TMS) business for $15 and recorded a net pre-tax loss on disposal of $1. TMS provided document capture and submission solutions as well as campaign management, media buying and digital marketing services to the long haul trucking and transportation industry. As a result of this transaction we reported this business as a Discontinued Operation and reclassified its results from the Services segment to Discontinued Operations in the second quarter 2014.

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 second quarter and $2 in the fourth quarter. In 2014, we recorded net income of $1 in Discontinued Operations primarily representing adjustments of amounts previously recorded for the loss on disposal due to changes in estimates.


Xerox 2014 Form 10-Q
10




Summarized financial information for our Discontinued Operations related to the Paper and TMS businesses is as follows:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2014
 
2013
 
2014
 
2013
Revenues
 
$
7

 
$
144

 
$
17

 
$
308

Income from operations
 
$
—

 
$
2

 
$
—

 
$
7

Loss on disposal
 
(2
)
 
(23
)
 
—

 
(23
)
Net Loss Before Income Taxes
 
(2
)
 
(21
)
 
—

 
(16
)
Income tax expense
 
2

 
2

 
2

 
4

Loss From Discontinued Operations, Net of Tax
 
$
(4
)
 
$
(23
)
 
$
(2
)
 
$
(20
)


Note 6 – Accounts Receivable, Net
Accounts receivable, net were as follows:
 
 
June 30,
2014
 
December 31,
2013
Amounts billed or billable
 
$
2,828

 
$
2,651

Unbilled amounts
 
371

 
390

Allowance for doubtful accounts
 
(102
)
 
(112
)
Accounts Receivable, Net
 
$
3,097

 
$
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 June 30, 2014 and December 31, 2013 were approximately $1,050 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 $115 and $121 at June 30, 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
11




Of the accounts receivable sold and derecognized from our balance sheet, $695 and $723 remained uncollected as of June 30, 2014 and December 31, 2013, respectively. Accounts receivable sales were as follows:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
Accounts receivable sales
$
726

 
$
919

 
$
1,548

 
$
1,773

Deferred proceeds
96

 
144

 
220

 
259

Loss on sales of accounts receivable
4

 
5

 
8

 
9

Estimated (decrease) increase to operating cash flows(1)
(31
)
 
17

 
(20
)
 
33

__________________________
(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 six months ending June 30, 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 $766 and $1,006 at June 30, 2014 and December 31, 2013, respectively (sales value of approximately $834 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 $112 and $150 at June 30, 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 $92 and $124 at June 30, 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 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 their weighted average lives of less than 2 years.


Xerox 2014 Form 10-Q
12




The net impact from the sales of finance receivables on operating cash flows is summarized below:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(in millions)
 
2014
 
2013
 
2014
 
2013
Impact from prior sales of finance receivables(1)
 
$
(137
)
 
$
(83
)
 
$
(286
)
 
$
(174
)
Collections on beneficial interest
 
25

 
25

 
51

 
27

Estimated Decrease to Operating Cash Flows
 
$
(112
)
 
$
(58
)
 
$
(235
)
 
$
(147
)
____________________________ 
(1)
Represents cash that would have been collected had we 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

Provision
 
1

 
2

 
11

 
1

 
15

Charge-offs
 
—

 
(4
)
 
(8
)
 
1

 
(11
)
Recoveries and other(1)
 
—

 
2

 
—

 
—

 
2

Balance at June 30, 2014
 
$
49

 
$
20

 
$
86

 
$
9

 
$
164

Finance receivables as of June 30, 2014 collectively evaluated for impairment(2)
 
$
1,684

 
$
421

 
$
2,170

 
$
339

 
$
4,614

 
 
 
 
 
 
 
 
 
 
 
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

Finance receivables as of June 30, 2013 collectively evaluated for impairment(2)
 
$
2,010

 
$
713

 
$
2,271

 
$
230

 
$
5,224

 __________________
(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 $0 and $1, and the allowance for credit losses of $164 and $162 at June 30, 2014 and 2013, respectively.
(3)
Includes developing market countries and smaller units.

Xerox 2014 Form 10-Q
13




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

Credit quality indicators are updated at least annually and the credit quality of any given customer can change during the life of the portfolio. Details about our finance receivables portfolio based on industry and credit quality indicators are as follows:
 
June 30, 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
$
189

 
$
123

 
$
53

 
$
365

 
$
189

 
$
102

 
$
34

 
$
325

Government and education
614

 
8

 
4

 
626

 
656

 
12

 
3

 
671

Graphic arts
138

 
74

 
99

 
311

 
142

 
59

 
108

 
309

Industrial
96

 
33

 
16

 
145

 
92

 
28

 
15

 
135

Healthcare
71

 
26

 
21

 
118

 
74

 
25

 
16

 
115

Other
57

 
33

 
29

 
119

 
55

 
27

 
29

 
111

Total United States
1,165

 
297

 
222

 
1,684

 
1,208

 
253

 
205

 
1,666

Finance and other services
48

 
23

 
12

 
83

 
46

 
18

 
11

 
75

Government and education
87

 
9

 
2

 
98

 
96

 
9

 
1

 
106

Graphic arts
56

 
53

 
40

 
149

 
56

 
52

 
48

 
156

Industrial
23

 
13

 
5

 
41

 
23

 
12

 
6

 
41

Other
33

 
13

 
4

 
50

 
29

 
9

 
5

 
43

Total Canada(1)
247

 
111

 
63

 
421

 
250

 
100

 
71

 
421

France
281

 
307

 
129

 
717

 
282

 
314

 
122

 
718

U.K./Ireland
202

 
163

 
38

 
403

 
199

 
171

 
42

 
412

Central(2)
249

 
368

 
37

 
654

 
287

 
394

 
43

 
724

Southern(3)
78

 
186

 
48

 
312

 
102

 
187

 
58

 
347

Nordics(4)
27

 
56

 
1

 
84

 
46

 
42

 
3

 
91

Total Europe
837

 
1,080

 
253

 
2,170

 
916

 
1,108

 
268

 
2,292

Other
207

 
109

 
23

 
339

 
226

 
69

 
9

 
304

Total
$
2,456

 
$
1,597

 
$
561

 
$
4,614

 
$
2,600

 
$
1,530

 
$
553

 
$
4,683

_____________________________
(1)
Historically, the Company had 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 revised to reclassify $33 of graphic arts customers from Finance and Other Services and to reclassify $38 from Industrial to be consistent with the June 30, 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
14





The aging of our billed finance receivables is based upon the number of days an invoice is past due and is as follows:
 
June 30, 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

 
$
353

 
$
365

 
$
11

Government and education
18

 
4

 
2

 
24

 
602

 
626

 
23

Graphic arts
15

 
1

 
1

 
17

 
294

 
311

 
9

Industrial
4

 
1

 
1

 
6

 
139

 
145

 
7

Healthcare
4

 
1

 
—

 
5

 
113

 
118

 
4

Other
4

 
1

 
—

 
5

 
114

 
119

 
3

Total United States
54

 
10

 
5

 
69

 
1,615

 
1,684

 
57

Canada
3

 
2

 
2

 
7

 
414

 
421

 
20

France
1

 
2

 
3

 
6

 
711

 
717

 
41

U.K./Ireland
—

 
2

 
—

 
2

 
401

 
403

 
1

Central(1)
5

 
2

 
1

 
8

 
646

 
654

 
20

Southern(2)
21

 
6

 
6

 
33

 
279

 
312

 
26

Nordics(3)
1

 
—

 
—

 
1

 
83

 
84

 
4

Total Europe
28

 
12

 
10

 
50

 
2,120

 
2,170

 
92

Other
8

 
1

 
—

 
9

 
330

 
339

 
—

Total
$
93

 
$
25

 
$
17

 
$
135

 
$
4,479

 
$
4,614

 
$
169

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
15




Note 8 – Inventories
The following is a summary of Inventories by major category:
 
June 30, 2014
 
December 31, 2013
Finished goods
$
902

 
$
837

Work-in-process
68

 
60

Raw materials
107

 
101

Total Inventories
$
1,077

 
$
998


Note 9 – Investment in Affiliates, at Equity
Our equity in net income of our unconsolidated affiliates was as follows:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
Fuji Xerox
$
31

 
$
33

 
$
70

 
$
77

Other investments
2

 
3

 
5

 
6

Total Equity in Net Income of Unconsolidated Affiliates
$
33

 
$
36

 
$
75

 
$
83

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
June 30,
 
Six Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
Summary of Operations:
 
 
 
 
 
 
 
Revenues
$
2,707

 
$
2,716

 
$
5,728

 
$
5,744