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, 2015
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, 2015 | |
Common Stock, $1 par value | 1,102,169,187 shares | |
Xerox 2015 Form 10-Q
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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. Such 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; our ability to successfully develop new products, technologies and service offerings and to protect our intellectual property rights; the risk that multi-year contracts with governmental entities could be terminated prior to the end of the contract term and that civil or criminal penalties and administrative sanctions could be imposed on us if we fail to comply with the terms of such contracts and applicable law; the risk that our bids do not accurately estimate the resources and costs required to implement and service very complex, multi-year governmental and commercial contracts, often in advance of the final determination of the full scope and design of such contracts or as a result of the scope of such contracts being changed during the life of such contracts; the risk that subcontractors, software vendors and utility and network providers will not perform in a timely, quality manner; service interruptions; actions of competitors and our ability to promptly and effectively react to changing technologies and customer expectations; 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 individually identifiable information of customers, clients and employees could be inadvertently disclosed or disclosed as a result of a breach of our security systems; the risk in the hiring and retention of qualified personnel; the risk that unexpected costs will be incurred; 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; the collectibility of our receivables for unbilled services associated with very large, multi-year contracts; reliance on third parties, including subcontractors, for manufacturing of products and provision of services; our ability to expand equipment placements; interest rates, cost of borrowing and access to credit markets; the risk that our products may not comply with applicable worldwide regulatory requirements, particularly environmental regulations and directives; 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, as well as in our 2014 Annual Report on Form 10-K filed with the Securities and Exchange Commission. Xerox 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.
On December 18, 2014, Xerox announced that it had entered into an agreement to sell its Information Technology Outsourcing (ITO) business to Atos S.E. The transaction is subject to customary closing conditions and regulatory approval and is expected to close in the second quarter of 2015. As a result of the pending sale of the ITO business and having met applicable accounting requirements, Xerox is reporting the ITO business as a discontinued operation. The forward looking statements contained in this report are subject to the risk that the sale of the ITO business may not occur on the terms, within the time frame and/or in the manner previously disclosed, if at all.
Xerox 2015 Form 10-Q
1
XEROX CORPORATION
FORM 10-Q
MARCH 31, 2015
TABLE OF CONTENTS
Page | ||
Item 1. | ||
Condensed Consolidated Statements of Comprehensive (Loss) Income | ||
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 2015 Form 10-Q
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ITEM 1 — FINANCIAL STATEMENTS
XEROX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended March 31, | ||||||||
(in millions, except per-share data) | 2015 | 2014 | ||||||
Revenues | ||||||||
Sales | $ | 1,126 | $ | 1,257 | ||||
Outsourcing, maintenance and rentals | 3,253 | 3,414 | ||||||
Financing | 90 | 100 | ||||||
Total Revenues | 4,469 | 4,771 | ||||||
Costs and Expenses | ||||||||
Cost of sales | 674 | 778 | ||||||
Cost of outsourcing, maintenance and rentals | 2,368 | 2,454 | ||||||
Cost of financing | 33 | 36 | ||||||
Research, development and engineering expenses | 141 | 145 | ||||||
Selling, administrative and general expenses | 915 | 945 | ||||||
Restructuring and asset impairment charges | 14 | 26 | ||||||
Amortization of intangible assets | 77 | 77 | ||||||
Other expenses, net | 46 | 39 | ||||||
Total Costs and Expenses | 4,268 | 4,500 | ||||||
Income before Income Taxes and Equity Income | 201 | 271 | ||||||
Income tax expense | 39 | 42 | ||||||
Equity in net income of unconsolidated affiliates | 34 | 42 | ||||||
Income from Continuing Operations | 196 | 271 | ||||||
Income from discontinued operations, net of tax | 34 | 15 | ||||||
Net Income | 230 | 286 | ||||||
Less: Net income attributable to noncontrolling interests | 5 | 5 | ||||||
Net Income Attributable to Xerox | $ | 225 | $ | 281 | ||||
Amounts Attributable to Xerox: | ||||||||
Net income from continuing operations | $ | 191 | $ | 266 | ||||
Net income from discontinued operations, net of tax | 34 | 15 | ||||||
Net Income Attributable to Xerox | $ | 225 | $ | 281 | ||||
Basic Earnings per Share: | ||||||||
Continuing operations | $ | 0.17 | $ | 0.22 | ||||
Discontinued operations | 0.03 | 0.01 | ||||||
Total Basic Earnings per Share | $ | 0.20 | $ | 0.23 | ||||
Diluted Earnings per Share: | ||||||||
Continuing operations | $ | 0.16 | $ | 0.22 | ||||
Discontinued operations | 0.03 | 0.01 | ||||||
Total Diluted Earnings per Share | $ | 0.19 | $ | 0.23 | ||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
Xerox 2015 Form 10-Q
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XEROX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (UNAUDITED)
Three Months Ended March 31, | ||||||||
(in millions) | 2015 | 2014 | ||||||
Net income | $ | 230 | $ | 286 | ||||
Less: Net income attributable to noncontrolling interests | 5 | 5 | ||||||
Net Income Attributable to Xerox | 225 | 281 | ||||||
Other Comprehensive (Loss) Income, Net(1): | ||||||||
Translation adjustments, net | (509 | ) | (1 | ) | ||||
Unrealized gains, net | 29 | 26 | ||||||
Changes in defined benefit plans, net | 98 | (84 | ) | |||||
Other Comprehensive Loss, Net | (382 | ) | (59 | ) | ||||
Less: Other comprehensive loss, net attributable to noncontrolling interests | (1 | ) | — | |||||
Other Comprehensive Loss, Net Attributable to Xerox | (381 | ) | (59 | ) | ||||
Comprehensive (Loss) Income, Net | (152 | ) | 227 | |||||
Less: Comprehensive income, net attributable to noncontrolling interests | 4 | 5 | ||||||
Comprehensive (Loss) Income, Net Attributable to Xerox | $ | (156 | ) | $ | 222 | |||
(1) Refer to Note 16 - Other Comprehensive Loss for gross components of Other Comprehensive (Loss) 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 2015 Form 10-Q
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XEROX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in millions, except share data in thousands) | March 31, 2015 | December 31, 2014 | ||||||
Assets | ||||||||
Cash and cash equivalents | $ | 872 | $ | 1,411 | ||||
Accounts receivable, net | 2,721 | 2,652 | ||||||
Billed portion of finance receivables, net | 117 | 110 | ||||||
Finance receivables, net | 1,313 | 1,425 | ||||||
Inventories | 1,009 | 934 | ||||||
Assets of discontinued operations | 1,324 | 1,260 | ||||||
Other current assets | 1,002 | 1,082 | ||||||
Total current assets | 8,358 | 8,874 | ||||||
Finance receivables due after one year, net | 2,558 | 2,719 | ||||||
Equipment on operating leases, net | 496 | 525 | ||||||
Land, buildings and equipment, net | 1,087 | 1,123 | ||||||
Investments in affiliates, at equity | 1,383 | 1,338 | ||||||
Intangible assets, net | 1,947 | 2,031 | ||||||
Goodwill | 8,723 | 8,805 | ||||||
Other long-term assets | 2,105 | 2,243 | ||||||
Total Assets | $ | 26,657 | $ | 27,658 | ||||
Liabilities and Equity | ||||||||
Short-term debt and current portion of long-term debt | $ | 1,333 | $ | 1,427 | ||||
Accounts payable | 1,471 | 1,584 | ||||||
Accrued compensation and benefits costs | 770 | 754 | ||||||
Unearned income | 424 | 431 | ||||||
Liabilities of discontinued operations | 353 | 371 | ||||||
Other current liabilities | 1,380 | 1,509 | ||||||
Total current liabilities | 5,731 | 6,076 | ||||||
Long-term debt | 6,265 | 6,314 | ||||||
Pension and other benefit liabilities | 2,797 | 2,847 | ||||||
Post-retirement medical benefits | 850 | 865 | ||||||
Other long-term liabilities | 419 | 498 | ||||||
Total Liabilities | 16,062 | 16,600 | ||||||
Series A Convertible Preferred Stock | 349 | 349 | ||||||
Common stock | 1,113 | 1,124 | ||||||
Additional paid-in capital | 4,151 | 4,283 | ||||||
Treasury stock, at cost | (147 | ) | (105 | ) | ||||
Retained earnings | 9,631 | 9,491 | ||||||
Accumulated other comprehensive loss | (4,540 | ) | (4,159 | ) | ||||
Xerox shareholders’ equity | 10,208 | 10,634 | ||||||
Noncontrolling interests | 38 | 75 | ||||||
Total Equity | 10,246 | 10,709 | ||||||
Total Liabilities and Equity | $ | 26,657 | $ | 27,658 | ||||
Shares of common stock issued | 1,113,217 | 1,124,354 | ||||||
Treasury stock | (11,048 | ) | (7,609 | ) | ||||
Shares of Common Stock Outstanding | 1,102,169 | 1,116,745 | ||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
Xerox 2015 Form 10-Q
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XEROX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended March 31, | ||||||||
(in millions) | 2015 | 2014 | ||||||
Cash Flows from Operating Activities: | ||||||||
Net income | $ | 230 | $ | 286 | ||||
Adjustments required to reconcile net income to cash flows from operating activities: | ||||||||
Depreciation and amortization | 296 | 345 | ||||||
Provision for receivables | 18 | 16 | ||||||
Provision for inventory | 6 | 10 | ||||||
Net gain on sales of businesses and assets | (12 | ) | (30 | ) | ||||
Undistributed equity in net income of unconsolidated affiliates | (31 | ) | (42 | ) | ||||
Stock-based compensation | 22 | 26 | ||||||
Restructuring and asset impairment charges | 14 | 27 | ||||||
Payments for restructurings | (31 | ) | (36 | ) | ||||
Contributions to defined benefit pension plans | (41 | ) | (37 | ) | ||||
Increase in accounts receivable and billed portion of finance receivables | (239 | ) | (239 | ) | ||||
Collections of deferred proceeds from sales of receivables | 72 | 120 | ||||||
Increase in inventories | (126 | ) | (60 | ) | ||||
Increase in equipment on operating leases | (70 | ) | (57 | ) | ||||
Decrease in finance receivables | 72 | 36 | ||||||
Collections on beneficial interest from sales of finance receivables | 15 | 21 | ||||||
Increase in other current and long-term assets | (71 | ) | (94 | ) | ||||
(Decrease) increase in accounts payable and accrued compensation | (17 | ) | 8 | |||||
Decrease in other current and long-term liabilities | (26 | ) | (26 | ) | ||||
Net change in income tax assets and liabilities | 32 | 29 | ||||||
Net change in derivative assets and liabilities | (12 | ) | (1 | ) | ||||
Other operating, net | 12 | (16 | ) | |||||
Net cash provided by operating activities | 113 | 286 | ||||||
Cash Flows from Investing Activities: | ||||||||
Cost of additions to land, buildings and equipment | (75 | ) | (84 | ) | ||||
Proceeds from sales of land, buildings and equipment | 16 | 33 | ||||||
Cost of additions to internal use software | (20 | ) | (19 | ) | ||||
Proceeds from sale of businesses | 3 | — | ||||||
Acquisitions, net of cash acquired | (28 | ) | (54 | ) | ||||
Other investing, net | 6 | 4 | ||||||
Net cash used in investing activities | (98 | ) | (120 | ) | ||||
Cash Flows from Financing Activities: | ||||||||
Net (payments) proceeds on debt | (150 | ) | 4 | |||||
Common stock dividends | (70 | ) | (68 | ) | ||||
Preferred stock dividends | (6 | ) | (6 | ) | ||||
Proceeds from issuances of common stock | 10 | 20 | ||||||
Excess tax benefits from stock-based compensation | 2 | 3 | ||||||
Payments to acquire treasury stock, including fees | (216 | ) | (275 | ) | ||||
Repurchases related to stock-based compensation | (1 | ) | (1 | ) | ||||
Distributions to noncontrolling interests | (54 | ) | (16 | ) | ||||
Other financing | — | (10 | ) | |||||
Net cash used in financing activities | (485 | ) | (349 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents | (69 | ) | (14 | ) | ||||
Decrease in cash and cash equivalents | (539 | ) | (197 | ) | ||||
Cash and cash equivalents at beginning of period | 1,411 | 1,764 | ||||||
Cash and Cash Equivalents at End of Period | $ | 872 | $ | 1,567 | ||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
Xerox 2015 Form 10-Q
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XEROX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per-share data and where otherwise noted)
Note 1 – Basis of Presentation
References herein to “we,” “us,” “our,” the “Company” and “Xerox” refer to Xerox Corporation and its consolidated subsidiaries unless the context suggests otherwise.
We have prepared the accompanying unaudited Condensed Consolidated Financial Statements in accordance with the accounting policies described in our 2014 Annual Report on Form 10-K (2014 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 2014 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 December 2014 we announced an agreement to sell our Information Technology Outsourcing (ITO) business to Atos SE (Atos); the sale is expected to close in the second quarter 2015. As a result of the pending sale and having met applicable accounting requirements, we reported the ITO business as held for sale and a discontinued operation at December 31, 2014. In 2014 we also completed the disposal of two smaller businesses - Xerox Audio Visual Solutions, Inc. (XAV) and Truckload Management Services (TMS) - that were also reported as discontinued operations. All prior periods have been reclassified to conform to the presentation of these businesses as discontinued operations. 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.
Intangibles - Goodwill and Other - Internal Use Software: In April 2015, the FASB issued ASU 2015-05, Intangibles-Goodwill and Other-Internal Use Software. The update provides guidance on fees paid by an entity in a cloud computing arrangement and whether an arrangement includes a license to the underlying software. If a cloud computing arrangement includes a software license, then the entity should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the entity should account for the arrangement as a service contract. The guidance in this update does not change GAAP for an entity's accounting for service contracts. Additionally, this update does not change the accounting guidance for a provider of cloud computing services. This update is effective for our fiscal year beginning January 1, 2016. The adoption of this standard is not expected to have a material effect on our financial condition, results of operations or cash flows.
Interest: In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The update requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Debt issuance costs are currently reported as a deferred charge in Other long-term asset and were $34 at March 31, 2015. This update is effective for our fiscal year beginning January 1, 2016 with early adoption permitted. The adoption of this standard is not expected to have a material effect on our financial condition, results of operations or cash flows.
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Consolidation: In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. This update reduces the number of consolidation models by changing the evaluation of (a) limited partnerships and similar entities, (b) whether fees paid to a decision maker or service provider that are variable interests in a variable interest entity, and (c) variable interests in a VIE held by related parties. This update is effective for our fiscal year beginning January 1, 2016 with early adoption permitted, and is applied on a retrospective or modified retrospective basis. The adoption of this standard is not expected to have a material effect on our financial condition, results of operations or cash flows.
Income Statement: In January 2015, the FASB issued ASU 2015-01 Income Statement-Extraordinary and Unusual Items (Subtopic 225-20) - Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. ASU 2015-01 eliminates from GAAP the concept of extraordinary items. ASU 2015-01 is effective for our fiscal year beginning January 1, 2016, with early adoption 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.
Derivatives and Hedging: In November 2014, the FASB issued ASU 2014-16, Derivatives and Hedging (Topic 815) - Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity. ASU 2014-16 does not change the current criteria in GAAP for determining when separation of certain embedded derivative features in a hybrid financial instrument is required. The amendments clarify how current GAAP should be interpreted in evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. ASU 2014-16 is effective for our fiscal year beginning January 1, 2016, with early adoption permitted. The adoption of this standard is not expected to have a material impact on our financial condition or results of operations.
Disclosures of Going Concern Uncertainties: In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40); Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. ASU 2014-15 provides guidance regarding management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective for our fiscal year beginning January 1, 2016, with early adoption permitted. We do not expect the adoption of this standard to have an impact 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 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.
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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 was effective prospectively for our fiscal year beginning January 1, 2015. 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.
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 was effective for our fiscal year beginning January 1, 2015. The adoption of this standard did not have a material effect 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 and document 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 two outsourcing service offerings:
• | Business Process Outsourcing (BPO) |
• | Document Outsourcing (which includes Managed Print Services) (DO) |
Business process outsourcing services include service arrangements where we manage a customer’s business activity or process. We provide multi-industry offerings such as customer care, transaction processing, finance and accounting, and human resources, as well as industry-focused offerings in areas such as healthcare, transportation, financial services, retail and telecommunications. 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.
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
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revenues, Global Imaging Systems (GIS) 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 March 31, | |||||||
Segment Revenue | Segment Profit (Loss) | ||||||
2015 | |||||||
Services | $ | 2,514 | $ | 189 | |||
Document Technology | 1,830 | 203 | |||||
Other | 125 | (62 | ) | ||||
Total | $ | 4,469 | $ | 330 | |||
2014 | |||||||
Services | $ | 2,585 | $ | 222 | |||
Document Technology | 2,044 | 249 | |||||
Other | 142 | (50 | ) | ||||
Total | $ | 4,771 | $ | 421 | |||
Three Months Ended March 31, | ||||||||
Reconciliation to Pre-tax Income | 2015 | 2014 | ||||||
Segment Profit | $ | 330 | $ | 421 | ||||
Reconciling items: | ||||||||
Restructuring and related costs(1) | (18 | ) | (29 | ) | ||||
Restructuring charges of Fuji Xerox | (1 | ) | (3 | ) | ||||
Amortization of intangible assets | (77 | ) | (77 | ) | ||||
Equity in net income of unconsolidated affiliates | (34 | ) | (42 | ) | ||||
Other | 1 | 1 | ||||||
Pre-tax Income | $ | 201 | $ | 271 | ||||
__________________________
(1) | Includes Restructuring and asset impairment charges of $14 and $26 for the three months ended March 31, 2015 and 2014, respectively, and Business transformation costs of $4 and $3 for the three months ended March 31, 2015 and 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 January 2015, we acquired Intrepid Learning Solutions, Inc. (Intrepid), a Seattle-based company, for $28 in cash. Intrepid provides outsourced learning services primarily in the aerospace manufacturing and technology industries. The acquisition of Intrepid will solidify the position of Xerox's Learning Services unit as a leading provider of end-to-end outsourced learning services, and adds key vertical market expertise in the aerospace industry. Intrepid 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 has initially been allocated primarily to goodwill based on preliminary third-party valuations and management’s estimates. These estimated values are not yet finalized and are subject to change. We will finalize the amounts recognized as we obtain the information necessary to complete the analysis.
Note 5 – Divestitures
Information Technology Outsourcing (ITO)
In December 2014 we announced an agreement to sell our ITO business to Atos for $1,050. The final sales price is subject to closing balance sheet related adjustments as well as the potential for additional consideration of $50 contingent on the condition of certain assets at closing. The transaction is subject to customary closing conditions and regulatory approval and is expected to close in the second quarter 2015.
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As a result of this pending transaction and having met applicable accounting requirements, we are reporting the ITO business (disposal group) as held for sale and a Discontinued Operation.
In fourth quarter 2014, we recorded a net pre-tax loss of $181 related to the pending sale, reflecting the write-down of the carrying value of the ITO disposal group, inclusive of goodwill, to its estimated fair value less costs to sell. In first quarter 2015, we recorded an additional net pre-tax loss of $4 related to the adjustment of estimates regarding asset values and related expenses associated with the disposal. In addition, upon final disposal of the business, we expect to record additional tax expense of approximately $75 within Discontinued Operations primarily related to the difference between the book basis and tax basis of allocated goodwill. All of the assets and liabilities of the ITO business are reported as held for sale at March 31, 2015 and are included in Assets and Liabilities of Discontinued Operations, respectively, in the Condensed Consolidated Balance Sheet at March 31, 2015.
Other Discontinued Operations:
Other discontinued operations includes the 2014 closure of Xerox Audio Visual Solutions, Inc. (XAV) and the 2014 sale of our Truckload Management Services, Inc. (TMS) business.
Summarized financial information for our Discontinued Operations is as follows:
Three Months Ended March 31, | ||||||||||||||||||||||||
2015 | 2014 | |||||||||||||||||||||||
ITO | Other | Total | ITO | Other | Total | |||||||||||||||||||
Revenues | $ | 311 | $ | — | $ | 311 | $ | 328 | $ | 22 | $ | 350 | ||||||||||||
Income (loss) from operations (1)(2) | 61 | — | 61 | 21 | (1 | ) | 20 | |||||||||||||||||
(Loss) gain on disposal | (4 | ) | — | (4 | ) | — | 2 | 2 | ||||||||||||||||
Net income before income taxes | $ | 57 | $ | — | $ | 57 | $ | 21 | $ | 1 | $ | 22 | ||||||||||||
Income tax expense | (23 | ) | — | (23 | ) | (7 | ) | — | (7 | ) | ||||||||||||||
Income from discontinued operations, net of tax | $ | 34 | $ | — | $ | 34 | $ | 14 | $ | 1 | $ | 15 | ||||||||||||
_______________
(1) | ITO Income from operations for first quarter 2015 excludes approximately $39 of depreciation and amortization expenses (including $7 of Intangibles amortization) since the business is held for sale. |
(2) | ITO Income from operations for first quarter 2014 includes intangible amortization and other expenses of approximately $8. |
The following is a summary of the major categories of assets and liabilities of the ITO business held for sale at March 31, 2015 and December 31, 2014:
March 31, 2015 | December 31, 2014 | |||||||
Accounts receivable, net | $ | 219 | $ | 213 | ||||
Other current assets | 190 | 146 | ||||||
Land, buildings and equipment, net | 229 | 220 | ||||||
Intangible assets, net | 197 | 197 | ||||||
Goodwill | 337 | 337 | ||||||
Other long-term assets | 152 | 147 | ||||||
Total Assets of Discontinued Operations | $ | 1,324 | $ | 1,260 | ||||
Current portion of long-term debt | $ | 29 | $ | 31 | ||||
Accounts payable | 24 | 32 | ||||||
Accrued pension and benefit costs | 8 | 9 | ||||||
Unearned income | 68 | 64 | ||||||
Other current liabilities | 103 | 112 | ||||||
Long-term debt | 40 | 44 | ||||||
Pension and other benefit liabilities | 22 | 25 | ||||||
Other long-term liabilities | 59 | 54 | ||||||
Total Liabilities of Discontinued Operations | $ | 353 | $ | 371 | ||||
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Note 6 – Accounts Receivable, Net
Accounts receivable, net were as follows:
March 31, 2015 | December 31, 2014 | |||||||
Amounts billed or billable | $ | 2,473 | $ | 2,421 | ||||
Unbilled amounts | 330 | 318 | ||||||
Allowance for doubtful accounts | (82 | ) | (87 | ) | ||||
Accounts Receivable, Net | $ | 2,721 | $ | 2,652 | ||||
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, 2015 and December 31, 2014 were approximately $933 and $945, 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 $63 and $73 at March 31, 2015 and December 31, 2014, respectively.
Under most of the arrangements, we continue to service the sold accounts receivable. When applicable, a servicing liability is recorded for the estimated fair value of the servicing. The amounts associated with the servicing liability were not material.
Of the accounts receivable sold and derecognized from our balance sheet, $563 and $580 remained uncollected as of March 31, 2015 and December 31, 2014, respectively.
Accounts receivable sales were as follows:
Three Months Ended March 31, | |||||||
2015 | 2014 | ||||||
Accounts receivable sales | $ | 602 | $ | 822 | |||
Deferred proceeds | 62 | 124 | |||||
Loss on sales of accounts receivable | 3 | 4 | |||||
Estimated increase to operating cash flows(1) | 17 | 11 | |||||
__________________________
(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. |
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Note 7 - Finance Receivables, Net
Sale of Finance Receivables
In 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 were accounted for as sales with derecognition of the associated lease receivables. There were no finance receivable transfers in the three months ended March 31, 2015 or the year ending December 31, 2014. 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 - there were no sales in 2015 or 2014:
Year Ended December 31, | ||||||||
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 finance receivables derecognized from our balance sheet was $450 and $549 (sales value of approximately $487 and $596) at March 31, 2015 and December 31, 2014, 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 $66 and $77 at March 31, 2015 and December 31, 2014, respectively, and are included in Other current assets and Other long-term assets in the accompanying Condensed Consolidated Balance Sheets. Beneficial interests of $56 and $64 at March 31, 2015 and December 31, 2014, 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.
The net impact from the sales of finance receivables on operating cash flows is summarized below:
Three Months Ended March 31, | ||||||||
2015 | 2014 | |||||||
Impact from prior sales of finance receivables(1) | $ | (105 | ) | $ | (149 | ) | ||
Collections on beneficial interest | 18 | 26 | ||||||
Estimated Decrease to Operating Cash Flows | $ | (87 | ) | $ | (123 | ) | ||
____________________________
(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.
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The following table is a rollforward of the allowance for doubtful finance receivables as well as the related investment in finance receivables:
Allowance for Credit Losses: | United States | Canada | Europe | Other(3) | Total | |||||||||||||||
Balance at December 31, 2014 | $ | 41 | $ | 20 | $ | 58 | $ | 12 | $ | 131 | ||||||||||
Provision | 2 | 1 | 5 | 3 | 11 | |||||||||||||||
Charge-offs | — | (3 | ) | (1 | ) | (1 | ) | (5 | ) | |||||||||||
Recoveries and other(1) | — | — | (6 | ) | — | (6 | ) | |||||||||||||
Balance at March 31, 2015 | $ | 43 | $ | 18 | $ | 56 | $ | 14 | $ | 131 | ||||||||||
Finance receivables as of March 31, 2015 collectively evaluated for impairment(2) | $ | 1,711 | $ | 386 | $ | 1,606 | $ | 416 | $ | 4,119 | ||||||||||
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 | ||||||||||
__________________
(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 $131 and $158 at March 31, 2015 and 2014, 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%. |
• | 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%. |
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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, 2015 | December 31, 2014 | ||||||||||||||||||||||||||||||
Investment Grade | Non-investment Grade | Substandard | Total Finance Receivables | Investment Grade | Non-investment Grade | Substandard | Total Finance Receivables | ||||||||||||||||||||||||
Finance and other services | $ | 194 | $ | 165 | $ | 58 | $ | 417 | $ | 195 | $ | 159 | $ | 55 | $ | 409 | |||||||||||||||
Government and education | 567 | 11 | 3 | 581 | 589 | 13 | 3 | 605 | |||||||||||||||||||||||
Graphic arts | 144 | 82 | 86 | 312 | 148 | 79 | 90 | 317 | |||||||||||||||||||||||
Industrial | 91 | 42 | 18 | 151 | 92 | 41 | 18 | 151 | |||||||||||||||||||||||
Healthcare | 86 | 26 | 15 | 127 | 84 | 26 | 14 | 124 | |||||||||||||||||||||||
Other | 52 | 44 | 27 | 123 | 55 | 38 | 29 | 122 | |||||||||||||||||||||||
Total United States | 1,134 | 370 | 207 | 1,711 | 1,163 | 356 | 209 | 1,728 | |||||||||||||||||||||||
Finance and other services | 52 | 31 | 11 | 94 | 54 | 31 | 12 | 97 | |||||||||||||||||||||||
Government and education | 66 | 8 | 2 | 76 | 76 | 8 | 2 | 86 | |||||||||||||||||||||||
Graphic arts | 51 | 42 | 29 | 122 | 58 | 49 | 36 | 143 | |||||||||||||||||||||||
Industrial | 24 | 12 | 4 | 40 | 24 | 13 | 4 | 41 | |||||||||||||||||||||||
Other | 33 | 18 | 3 | 54 | 34 | 19 | 4 | 57 | |||||||||||||||||||||||
Total Canada | 226 | 111 | 49 | 386 | 246 | 120 | 58 | 424 | |||||||||||||||||||||||
France | 221 | 208 | 108 | 537 | 253 | 234 | 129 | 616 | |||||||||||||||||||||||
U.K./Ireland | 238 | 94 | 2 | 334 | 255 | 101 | 6 | 362 | |||||||||||||||||||||||
Central(1) | 185 | 247 | 31 | 463 | 230 | 278 | 30 | 538 | |||||||||||||||||||||||
Southern(2) | 44 | 120 | 44 | 208 | 60 | 148 | 36 | 244 | |||||||||||||||||||||||
Nordics(3) | 21 | 42 | 1 | 64 | 25 | 49 | 1 | 75 | |||||||||||||||||||||||
Total Europe | 709 | 711 | 186 | 1,606 | 823 | 810 | 202 | 1,835 | |||||||||||||||||||||||
Other | 196 | 168 | 52 | 416 | 195 | 163 | 40 | 398 | |||||||||||||||||||||||
Total | $ | 2,265 | $ | 1,360 | $ | 494 | $ | 4,119 | $ | 2,427 | $ | 1,449 | $ | 509 | $ | 4,385 | |||||||||||||||
_____________________________
(1) | Switzerland, Germany, Austria, Belgium and Holland. |
(2) | Italy, Greece, Spain and Portugal. |
(3) | Sweden, Norway, Denmark and Finland. |
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The aging of our billed finance receivables is based upon the number of days an invoice is past due and is as follows:
March 31, 2015 | |||||||||||||||||||||||||||
Current | 31-90 Days Past Due | >90 Days Past Due | Total Billed | Unbilled | Total Finance Receivables | >90 Days and Accruing | |||||||||||||||||||||
Finance and other services | $ | 8 | $ | 2 | $ | 1 | $ | 11 | $ | 406 | $ | 417 | $ | 11 | |||||||||||||
Government and education | 15 | 4 | 3 | 22 | 559 | 581 | 28 | ||||||||||||||||||||
Graphic arts | 13 | 2 | 1 | 16 | 296 | 312 | 8 | ||||||||||||||||||||
Industrial | 4 | 1 | 1 | 6 | 145 | 151 | 7 | ||||||||||||||||||||
Healthcare | 3 | 1 | 1 | 5 | 122 | 127 | 5 | ||||||||||||||||||||
Other | 3 | 1 | — | 4 | 119 | 123 | 4 | ||||||||||||||||||||
Total United States | 46 | 11 | 7 | 64 | 1,647 | 1,711 | 63 | ||||||||||||||||||||
Canada | 10 | 2 | 1 | 13 | 373 | 386 | 13 | ||||||||||||||||||||
France | — | 1 | 2 | 3 | 534 | 537 | 28 | ||||||||||||||||||||
U.K./Ireland | 2 | 1 | — | 3 | 331 | 334 | — | ||||||||||||||||||||
Central(1) | 5 | 2 | — | 7 | 456 | 463 | 8 | ||||||||||||||||||||
Southern(2) | 15 | 2 | 3 | 20 | 188 | 208 | 12 | ||||||||||||||||||||
Nordics(3) | 1 | — | — | 1 | 63 | 64 | 4 | ||||||||||||||||||||
Total Europe | 23 | 6 | 5 | 34 | 1,572 | 1,606 | 52 | ||||||||||||||||||||
Other | 12 | 1 | 1 | 14 | 402 | 416 | — | ||||||||||||||||||||
Total | $ | 91 | $ | 20 | $ | 14 | $ | 125 | $ | 3,994 | $ | 4,119 | $ | 128 | |||||||||||||
December 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 | $ | 7 | $ | 2 | $ | 1 | $ | 10 | $ | 399 | $ | 409 | $ | 13 | |||||||||||||
Government and education | 14 | 4 | 3 | 21 | 584 | 605 | 25 | ||||||||||||||||||||
Graphic arts | 12 | 1 | 1 | 14 | 303 | 317 | 6 | ||||||||||||||||||||
Industrial | 4 | 1 | 1 | 6 | 145 | 151 | 9 | ||||||||||||||||||||
Healthcare | 3 | 1 | — | 4 | 120 | 124 | 5 | ||||||||||||||||||||
Other | 3 | 1 | — | 4 | 118 | 122 | 6 | ||||||||||||||||||||
Total United States | 43 | 10 | 6 | 59 | 1,669 | 1,728 | 64 | ||||||||||||||||||||
Canada | 9 | 2 | 1 | 12 | 412 | 424 | 17 | ||||||||||||||||||||
France | — | 1 | 2 | 3 | 613 | 616 | 35 | ||||||||||||||||||||
U.K./Ireland | 1 | — | — | 1 | 361 | 362 | 1 | ||||||||||||||||||||
Central(1) | 2 | 2 | 1 | 5 | 533 | 538 | 15 | ||||||||||||||||||||
Southern(2) | 14 | 4 | 4 | 22 | 222 | 244 | 17 | ||||||||||||||||||||
Nordics(3) | 1 | — | — | 1 | 74 | 75 | 2 | ||||||||||||||||||||
Total Europe | 18 | 7 | 7 | 32 | 1,803 | 1,835 | 70 | ||||||||||||||||||||
Other | 13 | 1 | — | 14 | 384 | 398 | — | ||||||||||||||||||||
Total | $ | 83 | $ | 20 | $ | 14 | $ | 117 | $ | 4,268 | $ | 4,385 | $ | 151 | |||||||||||||
_____________________________
(1) | Switzerland, Germany, Austria, Belgium and Holland. |
(2) | Italy, Greece, Spain and Portugal. |
(3) | Sweden, Norway, Denmark and Finland. |
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Note 8 – Inventories
The following is a summary of Inventories by major category:
March 31, 2015 | December 31, 2014 | ||||||
Finished goods | $ | 839 | $ | 778 | |||
Work-in-process | 60 | 58 | |||||
Raw materials | 110 | 98 | |||||
Total Inventories | $ | 1,009 | $ | 934 | |||
Note 9 – Investment in Affiliates, at Equity
Our equity in net income of our unconsolidated affiliates was as follows:
Three Months Ended March 31, | |||||||
2015 | 2014 | ||||||
Fuji Xerox | $ | 31 | $ | 39 | |||
Other investments | 3 | 3 | |||||
Total Equity in Net Income of Unconsolidated Affiliates | $ | 34 | $ | 42 | |||
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, | |||||||
2015 | 2014 | ||||||
Summary of Operations: | |||||||
Revenues | $ | 2,731 | $ | 3,021 | |||
Costs and expenses | 2,520 | 2,801 | |||||
Income before income taxes | 211 | 220 | |||||
Income tax expense | 66 | 58 | |||||
Net Income | 145 | 162 | |||||
Less: Net income – noncontrolling interests | 2 | 1 | |||||
Net Income – Fuji Xerox | $ | 143 | $ | 161 | |||
Weighted Average Exchange Rate(1) | 119.29 | 102.67 | |||||
_____________________________
(1) | Represents Yen/U.S. Dollar exchange rate used to translate. |
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Note 10 – Restructuring Programs
During the three months ended March 31, 2015, we recorded net restructuring and asset impairment charges of $14, which included approximately $21 of severance costs related to headcount reductions of approximately 580 employees worldwide and $1 of lease cancellations. These costs were offset by $8 of net reversals, primarily resulting from changes in estimated reserves from prior period initiatives.
Information related to restructuring program activity during the three months ended March 31, 2015 is outlined below:
Severance and Related Costs | Lease Cancellation and Other Costs | Asset Impairments(2) | Total | ||||||||||||
Balance at December 31, 2014 | $ | 93 | $ | 4 | $ | — | $ | 97 | |||||||
Provision | 21 | 1 | — | 22 | |||||||||||
Reversals | (8 | ) | — | — | (8 | ) | |||||||||
Net Current Period Charges(1) | 13 | 1 | — | 14 | |||||||||||
Charges against reserve and currency | (36 | ) | (1 | ) | — | (37 | ) | ||||||||
Balance at March 31, 2015 | $ | 70 | $ | 4 | $ | — | $ | 74 | |||||||
_____________________________
(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, | |||||||
2015 | 2014 | ||||||
Charges against reserve | $ | (37 | ) | $ | (41 | ) | |
Asset impairments | — | 4 | |||||
Effects of foreign currency and other non-cash items | 6 | 1 | |||||
Restructuring Cash Payments | $ | (31 | ) | $ | (36 | ) | |
The following table summarizes the total amount of costs incurred in connection with these restructuring programs by segment:
Three Months Ended March 31, | |||||||
2015 | 2014 | ||||||
Services (1) | $ | 5 | $ | 9 | |||
Document Technology | 9 | 16 | |||||
Other | — | 1 | |||||
Total Net Restructuring Charges | $ | 14 | $ | 26 | |||
_____________________________
(1) | The three months ended March 31, 2014 excludes $1 related to our ITO business, which is held for sale and reported as a discontinued operation as of March 31, 2015. Refer to Note 5 - Divestitures for additional information regarding this pending sale. |
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Note 11 – Debt
Senior Notes
In March 2015, we issued $400 of 2.75% Senior Notes due 2020 (the "2020 Senior Notes") at 99.879% of par and $250 of 4.80% Senior Notes due 2035 (the "2035 Senior Notes") at 99.428% of par, resulting in aggregate net proceeds of approximately $648. Interest on the Senior Notes is payable semi-annually. Debt issuance costs of $6 were paid and deferred in connection with the issuances of these Senior Notes. The proceeds were used for general corporate purposes, which included repayment of a portion of our outstanding borrowings.
Interest Expense and Income
Interest expense and interest income were as follows:
Three Months Ended March 31, | |||||||
2015 | 2014 | ||||||
Interest expense(1),(2) | $ | 89 | $ | 99 | |||
Interest income(3) | 92 | 102 | |||||
____________
(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) | The three months ended March 31, 2015 and 2014 exclude $1 and $1, respectively, of interest on capital lease obligations related to our ITO business, which is held for sale and reported as a discontinued operation as of March 31, 2015. These obligations are expected to be assumed by the purchaser of the ITO business. Refer to Note 5 - Divestitures for additional information regarding this pending sale. |
(3) | 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 (payments) proceeds on debt as shown on the Condensed Consolidated Statements of Cash Flows were as follows:
Three Months Ended March 31, | ||||||||
2015 | 2014 | |||||||
Net proceeds on short-term debt | $ | 204 | $ | 1 | ||||
Proceeds from issuance of long-term debt | 663 | 18 | ||||||
Payments on long-term debt(1) | (1,017 | ) | (15 | ) | ||||
Net (payments) proceeds on debt | $ | (150 | ) | $ | 4 | |||
____________
(1) | Includes current maturities. |
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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, 2015, pay variable/receive fixed interest rate swaps with notional amounts of $300 and net asset fair value of $9 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.
The following is a summary of our fair value hedges at March 31, 2015:
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 | $ | 9 | 2.43 | % | 4.5 | % | Libor | 2021 | |||||||||
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, 2015, we had outstanding forward exchange and purchased option contracts with gross notional values of $2,894, which is reflective of the amounts that are normally outstanding at any point during the year. Approximately 67% of these contracts mature within three months, 9% in three to six months, 23% in six to twelve months, and 1% in more than twelve months.
The following is a summary of the primary hedging positions and corresponding fair values as of March 31, 2015:
Currency Hedged (Buy/Sell) | Gross Notional Value | Fair Value Asset (Liability)(1) | |||||
Euro/U.K. Pound Sterling | $ | 839 | $ | 5 | |||
Japanese Yen/U.S. Dollar | 453 | (22 | ) | ||||
Japanese Yen/Euro | 303 | 11 | |||||
Canadian Dollar/Euro | 267 | 8 | |||||
U.S. Dollar/Euro | 230 | 10 | |||||
U.S. Dollar/U.K. Pound Sterling | 175 | 7 | |||||
U.K. Pound Sterling/Euro | 138 | — | |||||
Swiss Franc/Euro | 91 | 1 | |||||
Indian Rupee/U.S. Dollar | 58 | — | |||||
Mexican Peso/U.S. Dollar | 48 | (2 | ) | ||||
Philippine Peso/U.S. Dollar | 47 | — | |||||
Euro/U.S. Dollar | 44 | — | |||||
Mexican Peso/Euro | 29 | — | |||||
Euro/Canadian Dollar | 23 | (1 | ) | ||||
Euro/Danish Krone | 20 | — | |||||
All Other | 129 | — | |||||
Total Foreign Exchange Hedging | $ | 2,894 | $ | 17 | |||
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(1) | Represents the net receivable (payable) amount included in the Condensed Consolidated Balance Sheet at March 31, 2015. |
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. The net liability fair value of these contracts was $2 and $30 as of March 31, 2015 and December 31, 2014, respectively.
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, 2015 | December 31, 2014 | |||||||
Derivatives Designated as Hedging Instruments | ||||||||||
Foreign exchange contracts – forwards | Other current assets | $ | 16 | $ | 7 | |||||
Other current liabilities | (23 | ) | (39 | ) | ||||||
Foreign currency options | Other current assets | 5 | 2 | |||||||
Interest rate swaps | Other long-term assets | 9 | 5 | |||||||
Net Designated Derivative Asset (Liability) | $ | 7 | $ | (25 | ) | |||||
Derivatives NOT Designated as Hedging Instruments | ||||||||||
Foreign exchange contracts – forwards | Other current assets | $ | 27 | $ | 13 | |||||
Other current liabilities | (8 | ) | (19 | ) | ||||||
Net Undesignated Derivative Asset (Liability) | $ | 19 | $ | (6 | ) | |||||
Summary of Derivatives | Total Derivative Assets | $ | 57 | $ | 27 | |||||
Total Derivative Liabilities | (31 | ) | (58 | ) | ||||||
Net Derivative Asset (Liability) | $ | 26 | $ | (31 | ) | |||||
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 table provides a summary of gains (losses) on derivative instruments:
Three Months Ended March 31, | ||||||||
Gain (Loss) on Derivative Instruments | 2015 | 2014 | ||||||
Fair Value Hedges - Interest rate contracts | ||||||||
Derivative gain (loss) recognized in interest expense | $ | 4 | $ | (3 | ) | |||
Hedged item (loss) gain recognized in interest expense | (4 | ) | 3 | |||||
Cash Flow Hedges - Foreign exchange forward contracts and options | ||||||||
Derivative gain recognized in OCI (effective portion) | $ | 31 | $ | 18 | ||||
Derivative loss reclassified from AOCI to income - Cost of sales (effective portion) | (10 | ) | (21 | ) | ||||
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During the three months ended March 31, 2015 and March 31, 2014, no amount of ineffectiveness was recorded in earnings 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, 2015, a net after-tax gain of $7 was 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.
Non-Designated Derivative Instruments Gains (Losses)