XRX-6.30.13-10Q




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-Q
_______________
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2013
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                        to
Commission File Number 001-04471
  
XEROX CORPORATION
(Exact Name of Registrant as specified in its charter)
New York
 
16-0468020
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
P.O. Box 4505, 45 Glover Avenue
Norwalk, Connecticut
 
06856-4505
(Address of principal executive offices)
 
(Zip Code)
(203) 968-3000
(Registrant’s telephone number, including area code)
_________________________________________________  
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by a check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x Accelerated filer o Non-accelerated filer o Smaller reporting company o
Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No ý
Class
 
Outstanding at June 30, 2013
Common Stock, $1 par value
 
1,232,532,642 shares

Xerox 2013 Form 10-Q
1




FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q and any exhibits to this Report may contain "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “will,” “should” and similar expressions, as they relate to us, are intended to identify forward-looking statements. These statements reflect management's current beliefs, assumptions and expectations and are subject to a number of factors that may cause actual results to differ materially. These factors include but are not limited to: changes in economic conditions, political conditions, trade protection measures, licensing requirements and tax matters in the United States and in the foreign countries in which we do business; changes in foreign currency exchange rates; actions of competitors; our ability to obtain adequate pricing for our products and services and to maintain and improve cost efficiency of operations, including savings from restructuring actions; the risk that unexpected costs will be incurred; the risk that subcontractors, software vendors and utility and network providers will not perform in a timely, quality manner; our ability to recover capital investments; the risk that multi-year contracts with governmental entities could be terminated prior to the end of the contract term; the risk that our Services business could be adversely affected if we are unsuccessful in managing the ramp-up of new contracts; development of new products and services; our ability to protect our intellectual property rights; our ability to expand equipment placements; the risk that individually identifiable information of customers, clients and employees could be inadvertently disclosed or disclosed as a result of a breach of our security; interest rates, cost of borrowing and access to credit markets; reliance on third parties for manufacturing of products and provision of services; our ability to drive the expanded use of color in printing and copying; the outcome of litigation and regulatory proceedings to which we may be a party; and other factors that are set forth in the “Risk Factors” section, the “Legal Proceedings” section, the “Management's Discussion and Analysis of Financial Condition and Results of Operations” section and other sections of this Quarterly Report on Form 10-Q, our Quarterly Report on Form 10-Q for the quarter ended March 31, 2013 and our 2012 Annual Report on Form 10-K filed with the Securities and Exchange Commission. The Company assumes no obligation to update any forward-looking statements as a result of new information or future events or developments, except as required by law.

 

Xerox 2013 Form 10-Q
1





XEROX CORPORATION
FORM 10-Q
June 30, 2013
TABLE OF CONTENTS
 
 
Page
 
Item 1.
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
Item 4.
 
 
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 5.
Other Information
Item 6.
For additional information about Xerox Corporation and access to our Annual Reports to Shareholders and SEC filings, free of charge, please visit our website at www.xerox.com/investor. Any information on or linked from the website is not incorporated by reference into this Form 10-Q.
 

Xerox 2013 Form 10-Q
2




PART I — FINANCIAL INFORMATION
ITEM 1 — FINANCIAL STATEMENTS

XEROX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(in millions, except per-share data)
 
2013
 
2012
 
2013
 
2012
Revenues
 
 
 
 
 
 
 
 
Sales
 
$
1,454

 
$
1,462

 
$
2,747

 
$
2,879

Outsourcing, maintenance and rentals
 
3,834

 
3,763

 
7,626

 
7,529

Financing
 
114

 
143

 
231

 
291

Total Revenues
 
5,402

 
5,368

 
10,604

 
10,699

Costs and Expenses
 
 
 
 
 
 
 
 
Cost of sales
 
934

 
940

 
1,749

 
1,842

Cost of outsourcing, maintenance and rentals
 
2,728

 
2,626

 
5,486

 
5,315

Cost of financing
 
42

 
51

 
85

 
104

Research, development and engineering expenses
 
149

 
161

 
303

 
334

Selling, administrative and general expenses
 
1,042

 
1,057

 
2,082

 
2,107

Restructuring and asset impairment charges
 
33

 
29

 
25

 
49

Amortization of intangible assets
 
83

 
82

 
166

 
164

Other expenses, net
 
59

 
75

 
76

 
132

Total Costs and Expenses
 
5,070

 
5,021

 
9,972

 
10,047

Income before Income Taxes and Equity Income
 
332

 
347

 
632

 
652

Income tax expense
 
68

 
64

 
118

 
139

Equity in net income of unconsolidated affiliates
 
36

 
31

 
83

 
71

Income from Continuing Operations
 
300

 
314

 
597

 
584

(Loss) income from discontinued operations, net of tax
 
(23
)
 
2

 
(20
)
 
8

Net Income
 
277

 
316

 
577

 
592

Less: Net income attributable to noncontrolling interests
 
6

 
7

 
10

 
14

Net Income Attributable to Xerox
 
$
271

 
$
309

 
$
567

 
$
578

 
 
 
 
 
 
 
 
 
Amounts attributable to Xerox:
 
 
 
 
 
 
 
 
Net income from continuing operations
 
$
294

 
$
307

 
$
587

 
$
570

Net (loss) income from discontinued operations
 
(23
)
 
2

 
(20
)
 
8

Net Income Attributable to Xerox
 
$
271

 
$
309

 
$
567

 
$
578

 
 
 
 
 
 
 
 
 
Basic Earnings per Share:
 
 
 
 
 
 
 
 
Continuing operations
 
$
0.24

 
$
0.23

 
$
0.47

 
$
0.42

Discontinued operations
 
(0.02
)
 
—

 
(0.02
)
 
—

Total Basic Earnings per Share
 
$
0.22

 
$
0.23

 
$
0.45

 
$
0.42

Diluted Earnings per Share:
 
 
 
 
 
 
 
 
Continuing operations
 
$
0.23

 
$
0.22

 
$
0.46

 
$
0.41

Discontinued operations
 
(0.02
)
 
—

 
(0.02
)
 
—

Total Diluted Earnings per Share
 
$
0.21

 
$
0.22

 
$
0.44

 
$
0.41


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

Xerox 2013 Form 10-Q
3




XEROX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(in millions)
 
2013
 
2012
 
2013
 
2012
Net income
 
$
277

 
$
316

 
$
577

 
$
592

Less: Net income attributable to noncontrolling interests
 
6

 
7

 
10

 
14

Net Income Attributable to Xerox
 
271

 
309

 
567

 
578

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

 

 

 

Translation adjustments, net
 
(84
)
 
(323
)
 
(447
)
 
(163
)
Unrealized gains (losses), net
 
1

 
34

 
(7
)
 
(9
)
Changes in defined benefit plans, net
 
56

 
64

 
159

 
10

Other Comprehensive Loss, Net
 
(27
)
 
(225
)
 
(295
)
 
(162
)
Less: Other comprehensive loss, net attributable to noncontrolling interests
 
—

 
(1
)
 
—

 
—

Other Comprehensive Loss, Net Attributable to Xerox
 
(27
)
 
(224
)
 
(295
)
 
(162
)
 
 
 
 
 
 
 
 
 
Comprehensive Income, Net
 
250

 
91

 
282

 
430

Less: Comprehensive income, net attributable to noncontrolling interests
 
6

 
6

 
10

 
14

Comprehensive Income, Net Attributable to Xerox
 
$
244

 
$
85

 
$
272

 
$
416


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


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


Xerox 2013 Form 10-Q
4




XEROX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in millions, except share data in thousands)
 
June 30,
2013
 
December 31,
2012
Assets
 
 
 
 
Cash and cash equivalents
 
$
929

 
$
1,246

Accounts receivable, net
 
3,039

 
2,866

Billed portion of finance receivables, net
 
144

 
152

Finance receivables, net
 
1,731

 
1,836

Inventories
 
1,109

 
1,011

Other current assets
 
1,260

 
1,162

Total current assets
 
8,212

 
8,273

Finance receivables due after one year, net
 
3,188

 
3,325

Equipment on operating leases, net
 
516

 
535

Land, buildings and equipment, net
 
1,499

 
1,556

Investments in affiliates, at equity
 
1,273

 
1,381

Intangible assets, net
 
2,656

 
2,783

Goodwill
 
9,064

 
9,062

Deferred tax assets, long-term
 
667

 
763

Other long-term assets
 
2,252

 
2,337

Total Assets
 
$
29,327

 
$
30,015

Liabilities and Equity
 
 
 
 
Short-term debt and current portion of long-term debt
 
$
1,783

 
$
1,042

Accounts payable
 
1,731

 
1,913

Accrued compensation and benefits costs
 
699

 
741

Unearned income
 
471

 
438

Other current liabilities
 
1,621

 
1,776

Total current liabilities
 
6,305

 
5,910

Long-term debt
 
6,366

 
7,447

Pension and other benefit liabilities
 
2,841

 
2,958

Post-retirement medical benefits
 
849

 
909

Other long-term liabilities
 
743

 
778

Total Liabilities
 
17,104

 
18,002

Series A Convertible Preferred Stock
 
349

 
349

Common stock
 
1,233

 
1,239

Additional paid-in capital
 
5,614

 
5,622

Treasury stock, at cost
 
—

 
(104
)
Retained earnings
 
8,400

 
7,991

Accumulated other comprehensive loss
 
(3,522
)
 
(3,227
)
Xerox shareholders’ equity
 
11,725

 
11,521

Noncontrolling interests
 
149

 
143

Total Equity
 
11,874

 
11,664

Total Liabilities and Equity
 
$
29,327

 
$
30,015

Shares of common stock issued
 
1,232,533

 
1,238,696

Treasury stock
 
—

 
(14,924
)
Shares of common stock outstanding
 
1,232,533

 
1,223,772


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

Xerox 2013 Form 10-Q
5




XEROX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(in millions)
 
2013
 
2012
 
2013
 
2012
Cash Flows from Operating Activities:
 
 
 
 
 
 
 
 
Net income
 
$
277

 
$
316

 
$
577

 
$
592

Adjustments required to reconcile net income to cash flows from operating activities:
 
 
 
 
 
 
 
 
Depreciation and amortization
 
343

 
313

 
672

 
626

Provision for receivables
 
33

 
33

 
59

 
60

Provision for inventory
 
3

 
7

 
12

 
17

Net loss (gain) on sales of businesses and assets
 
10

 
(2
)
 
10

 
(3
)
Undistributed equity in net income of unconsolidated affiliates
 
3

 
(4
)
 
(44
)
 
(35
)
Stock-based compensation
 
28

 
31

 
59

 
62

Restructuring and asset impairment charges
 
33

 
29

 
25

 
49

Payments for restructurings
 
(35
)
 
(44
)
 
(73
)
 
(83
)
Contributions to defined benefit pension plans
 
(53
)
 
(158
)
 
(98
)
 
(237
)
Increase in accounts receivable and billed portion of finance receivables
 
(139
)
 
(156
)
 
(502
)
 
(608
)
Collections of deferred proceeds from sales of receivables
 
116

 
160

 
231

 
256

Increase in inventories
 
(34
)
 
(50
)
 
(141
)
 
(84
)
Increase in equipment on operating leases
 
(69
)
 
(68
)
 
(128
)
 
(135
)
Decrease in finance receivables
 
23

 
111

 
119

 
275

Collections on beneficial interest from sales of finance receivables
 
25

 
—

 
27

 
—

Increase in other current and long-term assets
 
(19
)
 
(61
)
 
(120
)
 
(162
)
Increase (decrease) in accounts payable and accrued compensation
 
32

 
(93
)
 
(62
)
 
(237
)
Decrease in other current and long-term liabilities
 
(45
)
 
(127
)
 
(111
)
 
(162
)
Net change in income tax assets and liabilities
 
22

 
18

 
39

 
61

Net change in derivative assets and liabilities
 
6

 
(30
)
 
(41
)
 
(9
)
Other operating, net
 
(27
)
 
3

 
(64
)
 
(30
)
Net cash provided by operating activities
 
533

 
228

 
446

 
213

Cash Flows from Investing Activities:
 
 
 
 
 
 
 
 
Cost of additions to land, buildings and equipment
 
(84
)
 
(82
)
 
(169
)
 
(173
)
Proceeds from sales of land, buildings and equipment
 
8

 
3

 
11

 
7

Cost of additions to internal use software
 
(23
)
 
(33
)
 
(45
)
 
(70
)
Proceeds from sale of businesses
 
11

 
—

 
11

 
—

Acquisitions, net of cash acquired
 
(81
)
 
—

 
(134
)
 
(87
)
Other investing, net
 
2

 
14

 
6

 
11

Net cash used in investing activities
 
(167
)
 
(98
)
 
(320
)
 
(312
)
Cash Flows from Financing Activities:
 
 
 
 
 
 
 
 
Net (payments) proceeds on debt
 
(378
)
 
(455
)
 
(321
)
 
543

Common stock dividends
 
(72
)
 
(57
)
 
(124
)
 
(114
)
Preferred stock dividends
 
(6
)
 
(6
)
 
(12
)
 
(12
)
Proceeds from issuances of common stock
 
31

 
3

 
54

 
10

Payments to acquire treasury stock, including fees
 
—

 
(307
)
 
(10
)
 
(357
)
Repurchases related to stock-based compensation
 
—

 
(1
)
 
(10
)
 
(1
)
Distributions to noncontrolling interests
 
(2
)
 
(4
)
 
(5
)
 
(61
)
Net cash (used in) provided by financing activities
 
(427
)
 
(827
)
 
(428
)
 
8

Effect of exchange rate changes on cash and cash equivalents
 
(3
)
 
(3
)
 
(15
)
 
3

Decrease in cash and cash equivalents
 
(64
)
 
(700
)
 
(317
)
 
(88
)
Cash and cash equivalents at beginning of period
 
993

 
1,514

 
1,246

 
902

Cash and Cash Equivalents at End of Period
 
$
929

 
$
814

 
$
929

 
$
814


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

Xerox 2013 Form 10-Q
6




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

Note 1 – Basis of Presentation
References herein to “we,” “us,” “our,” the “Company” and “Xerox” refer to Xerox Corporation and its consolidated subsidiaries unless the context specifically requires otherwise.
We have prepared the accompanying unaudited Condensed Consolidated Financial Statements in accordance with the accounting policies described in our 2012 Annual Report to Shareholders, which is incorporated by reference in our 2012 Annual Report on Form 10-K (2012 Annual Report), and the interim reporting requirements of Form 10-Q. Accordingly, certain information and note disclosures normally included in our annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. You should read these Condensed Consolidated Financial Statements in conjunction with the Consolidated Financial Statements included in our 2012 Annual Report.
In our opinion, all adjustments which are necessary for a fair statement of financial position, operating results and cash flows for the interim periods presented have been made. These adjustments consist of normal recurring items. Interim results of operations are not necessarily indicative of the results of the full year.
For convenience and ease of reference, we refer to the financial statement caption “Income before Income Taxes and Equity Income” as “pre-tax income.”
We recently completed the sale of our North American paper business and entered into an agreement to sell our European paper business. Beginning with the second quarter 2013, we are reporting results from these paper-related businesses as discontinued operations. The prior period results have been reclassified to reflect this change. Refer to Note 5 - Divestitures for additional information regarding discontinued operations.

Note 2 – Recent Accounting Pronouncements
Presentation of Comprehensive Income: In February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220) - Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which requires an entity to provide additional information about the amounts reclassified out of Accumulated Other Comprehensive Income by component. This update was effective for us beginning January 1, 2013 and the additional information required by this ASU is included in Note 16 - Other Comprehensive Income.
Balance Sheet Offsetting: In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210), Disclosures about Offsetting Assets and Liabilities. ASU 2011-11 requires entities to disclose both gross information and net information about both instruments and transactions eligible for offset in the Balance Sheet and instruments and transactions subject to an agreement similar to a master netting arrangement to enable users of their financial statements to understand the effects of offsetting and related arrangements on their financial position. In January 2013, the FASB issued ASU 2013-01 which limited the scope of this guidance to derivatives, repurchase type agreements and securities borrowing and lending transactions. The guidance from these updates was effective for our fiscal year beginning January 1, 2013. We currently report our derivative assets and liabilities on a gross basis in the Balance Sheet and none of our derivative instruments are subject to a master netting agreement. Accordingly, no additional disclosures were required upon adoption of these ASU's.
Cumulative Translation Adjustments: In March 2013, the FASB issued ASU 2013-05, Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. The objective of ASU 2013-05 is to resolve the diversity in practice regarding the release into net income of the cumulative translation adjustment upon derecognition of a subsidiary or group of assets within a foreign entity. The guidance from this update is effective prospectively for our fiscal year beginning January 1, 2014. We do not anticipate that the adoption of this standard will have a material impact on our financial condition or results of operations.

Xerox 2013 Form 10-Q
7




Hedge Accounting: In July 2013, the FASB issued ASU 2013-10, Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes. The update permits the Fed Funds Effective Swap Rate to be used as a U.S. benchmark interest rate for hedge accounting purposes under FASB ASC Topic 815, in addition to the interest rates on direct Treasury obligations of the U.S. government (UST) and the London Interbank Offered Rate (LIBOR). The update also removes the restriction on using different benchmark rates for similar hedges. ASU 2013-10 is effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. We do not anticipate that the adoption of this standard will have a material impact on our financial condition or results of operations.
Income Taxes: In July 2013, the FASB issued ASU 2013-11, Presentation of Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This update provides 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. The guidance from this update is effective prospectively for our fiscal year beginning January 1, 2014. Retrospective application is permitted. We are currently assessing the impact, if any, from this update; the principal impact is expected to be related to the presentation and annual disclosures of our Unrecognized Tax Benefits.
Note 3 – Segment Reporting
Our reportable segments are aligned with how we manage the business and view the markets we serve. We report our financial performance based on the following two primary reportable segments – Services and Document Technology. Our Services segment operations involve delivery of a broad range of services including business process, document and IT outsourcing. Our Document Technology segment includes the sale and support of a broad range of document systems from entry level to high-end.
The Services segment is comprised of three outsourcing service offerings:
 
•
Business Process Outsourcing (BPO)
•
Document Outsourcing (which includes Managed Print Services) (DO)
•
Information Technology Outsourcing (ITO)
Business process outsourcing services include service arrangements where we manage a customer’s business activity or process. Document outsourcing services include service arrangements that allow customers to streamline, simplify and digitize document-intensive business processes through automation and deployment of software applications and tools and the management of their printing needs. Document outsourcing services also include revenues from our partner print services offerings. Information technology outsourcing services include service arrangements where we manage a customer’s IT-related activities, such as application management and application development, data center operations or testing and quality assurance.
Our Document Technology segment includes the sale of products that share common technology, manufacturing and product platforms. Our products groupings range from:
 
•
“Entry,” which includes A4 devices and desktop printers; to
•
“Mid-range,” which includes A3 devices that generally serve workgroup environments in midsize to large enterprises and includes products that fall into the following market categories: Color 41+ ppm priced at less than $100K and Light Production 91+ ppm priced at less than $100K; to
•
“High-end,” which includes production printing and publishing systems that generally serve the graphic communications marketplace and large enterprises.
Customers range from small and mid-sized businesses to large enterprises. Customers also include graphic communication enterprises as well as channel partners including distributors and resellers. Segment revenues reflect the sale of document systems and supplies, technical services and product financing.

Xerox 2013 Form 10-Q
8




The segment classified as Other includes several units, none of which meet the thresholds for separate segment reporting. This group includes paper sales in our developing market countries, Wide Format Systems, licensing revenues, GIS network integration solutions and electronic presentation systems and non-allocated corporate items including non-financing interest, as well as other items included in Other expenses, net.
As discussed in Note 5 - Divestitures, during the second quarter 2013, we completed the sale of our North American Paper business and entered into an agreement to sell our European Paper business. As a result of these transactions, in the second quarter 2013 we reported these paper-related operations as Discontinued Operations and reclassified their results from the Other segment to Discontinued Operations. All prior periods have been reclassified to conform to this presentation.
Operating segment revenues and profitability were as follows: 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
Segment
Revenue
 
Segment Profit (Loss)
 
Segment
Revenue
 
Segment Profit (Loss)
2013
 
 
 
 
 
 
 
Services
$
2,956

 
$
301

 
$
5,876

 
$
574

Document Technology
2,263

 
244

 
4,398

 
431

Other
183

 
(61
)
 
330

 
(131
)
Total
$
5,402

 
$
484

 
$
10,604

 
$
874

2012
 
 
 
 
 
 
 
Services
$
2,806

 
$
298

 
$
5,627

 
$
561

Document Technology
2,370

 
268

 
4,708

 
513

Other
192

 
(71
)
 
364

 
(128
)
Total
$
5,368

 
$
495

 
$
10,699

 
$
946

 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
Reconciliation to Pre-tax Income
 
2013
 
2012
 
2013
 
2012
Segment Profit
 
$
484

 
$
495

 
$
874

 
$
946

Reconciling items:
 
 
 
 
 
 
 
 
Restructuring and asset impairment charges
 
(33
)
 
(29
)
 
(25
)
 
(49
)
Restructuring charges of Fuji Xerox
 
(1
)
 
(6
)
 
(5
)
 
(10
)
Amortization of intangible assets
 
(83
)
 
(82
)
 
(166
)
 
(164
)
Litigation matters (Q1 2013 only)
 
—

 
—

 
37

 
—

Equity in net income of unconsolidated affiliates
 
(36
)
 
(31
)
 
(83
)
 
(71
)
Other
 
1

 
—

 
—

 
—

Pre-tax Income
 
$
332

 
$
347

 
$
632

 
$
652



Xerox 2013 Form 10-Q
9




Note 4 – Acquisitions

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

In February 2013, we acquired Impika, a leader in the design, manufacture and sale of production inkjet printing solutions used for industrial, commercial, security, label and package printing for approximately $52 in cash. Impika, which is based in Aubagne, France, offers a portfolio of aqueous (water-based) inkjet presses based on proprietary technology. Through the addition of Impika's aqueous technology to our offerings, we expect to go to market with the industry's broadest range of digital presses, strengthening our leadership in digital color production printing.

Zeno and Impika are included in our Document Technology segment. Additionally, our Services segment acquired two businesses during the six months ended June 30, 2013 for a total of $20 in cash.

The operating results of these acquisitions are not material to our financial statements and are included within our results from the respective acquisition dates. The purchase prices were allocated primarily to intangible assets and goodwill based on third-party valuations and management’s estimates.

Note 5 – Divestitures

During the second quarter 2013, in connection with our decision to exit from the Paper distribution business, we completed the sale of our North American (N.A.) Paper business and entered into an agreement to sell our European Paper business. The decision to exit from the Paper distribution business was largely the result of management's objective to focus more on Services and innovative Document Technology. Net proceeds from the sale of the N.A. Paper business were approximately $11 and are reported as cash flows from investing activities in the Condensed Consolidated Statements of Cash Flows.

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

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

The components of Discontinued Operations for the periods presented are as follows:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in millions)
 
2013
 
2012
 
2013
 
2012
Revenues*
 
$
134

 
$
173

 
$
287

 
$
344

 
 
 
 
 
 
 
 
 
Income from operations
 
$
2

 
$
3

 
$
7

 
$
12

Loss on disposal
 
(23
)
 
—

 
(23
)
 
—

Net (Loss) Income Before Income Taxes
 
(21
)
 
3

 
(16
)
 
12

Income tax expense
 
(2
)
 
(1
)
 
(4
)
 
(4
)
(Loss) Income From Discontinued Operations, Net of Tax
 
$
(23
)
 
$
2

 
$
(20
)
 
$
8

* 2013 revenue from discontinued operations reflects only two and five months for the quarter and year-to-date periods, respectively, of North American paper revenue as a result of the completion of the sale to Domtar Corporation on May 31, 2013.


Xerox 2013 Form 10-Q
10




Note 6 – Accounts Receivable, Net
Accounts receivable, net were as follows:
 
 
June 30,
2013
 
December 31,
2012
Amounts billed or billable
 
$
2,790

 
$
2,639

Unbilled amounts
 
362

 
335

Allowance for doubtful accounts
 
(113
)
 
(108
)
Accounts Receivable, Net
 
$
3,039

 
$
2,866


Unbilled amounts include amounts associated with percentage-of-completion accounting and other earned revenues not currently billable due to contractual provisions. Amounts to be invoiced in the subsequent month for current services provided are included in amounts billable, and at June 30, 2013 and December 31, 2012 were approximately $1,059 and $1,049, respectively.

We perform ongoing credit evaluations of our customers and adjust credit limits based upon customer payment history and current creditworthiness. The allowance for uncollectible accounts receivables is determined principally on the basis of past collection experience as well as consideration of current economic conditions and changes in our customer collection trends.
Accounts Receivable Sales Arrangements
Accounts receivable sales arrangements are utilized in the normal course of business as part of our cash and liquidity management. We have facilities in the U.S., Canada and several countries in Europe that enable us to sell certain accounts receivable without recourse to third-parties. The accounts receivables sold are generally short-term trade receivables with payment due dates of less than 60 days.
All of our arrangements involve the sale of our entire interest in groups of accounts receivables for cash. In most instances a portion of the sales proceeds are held back by the purchaser and payment is deferred until collection of the related receivables sold. Such holdbacks are not considered legal securities nor are they certificated. We report collections on such receivables as operating cash flows in the Condensed Consolidated Statements of Cash Flows because such receivables are the result of an operating activity and the associated interest rate risk is de minimis due to its short-term nature. Our risk of loss following the sales of accounts receivable is limited to the outstanding deferred purchase price receivable. These receivables are included in the caption “Other current assets” in the accompanying Condensed Consolidated Balance Sheets and were $144 and $116 at June 30, 2013 and December 31, 2012, respectively.
Under most of the arrangements, we continue to service the sold accounts receivable. When applicable, a servicing liability is recorded for the estimated fair value of the servicing. The amounts associated with the servicing liability were not material.
Of the accounts receivable sold and derecognized from our balance sheet, $817 and $766 remained uncollected as of June 30, 2013 and December 31, 2012, respectively. Accounts receivables sales were as follows:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2013
 
2012
 
2013
 
2012
Accounts receivable sales
$
919

 
$
1,215

 
$
1,773

 
$
2,090

Deferred proceeds
144

 
256

 
259

 
403

Loss on sales of accounts receivable
5

 
6

 
9

 
12

Estimated increase to operating cash flows(1)
17

 
169

 
33

 
100

__________________________
(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 2012, we sold our entire interest in two separate portfolios of U.S. finance receivables from our Document Technology segment with a combined net carrying value of $682 to a third-party financial institution for cash proceeds of $630 and beneficial interests from the purchaser of $101. As of June 30, 2013, the principal value of the receivables sold and derecognized from our balance sheet was $510 (sales value of approximately $555).
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 interest of $84 of which $39 and $45 is included in Other current assets and Other long-term assets, respectively, in the accompanying Condensed Consolidated Balance Sheets at June 30, 2013. The beneficial interest is held by a bankruptcy-remote subsidiary and therefore is not available to satisfy any of our creditor obligations. We report collections on the beneficial interest as operating cash flows in the Condensed Consolidated Statements of Cash Flows because such beneficial interests are the result of an operating activity and the associated interest rate risk is de minimis considering it has a weighted average life of less than 2 years. Collections on the beneficial interest were $25 and $27 for the three and six months ended June 30, 2013, respectively.
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, 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

 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2011
 
$
75

 
$
33

 
$
91

 
$
2

 
$
201

Provision
 
2

 
1

 
12

 
—

 
15

Charge-offs
 
(4
)
 
(3
)
 
(12
)
 
—

 
(19
)
Recoveries and other(1)
 
1

 
2

 
2

 
1

 
6

Balance at March 31, 2012
 
$
74

 
$
33

 
$
93

 
$
3

 
$
203

Provision
 
3

 
2

 
11

 
1

 
17

Charge-offs
 
(5
)
 
(4
)
 
(15
)
 
—

 
(24
)
Recoveries and other(1)
 
1

 
—

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

 
$
31

 
$
83

 
$
3

 
$
190

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

 
$
791

 
$
2,423

 
$
149

 
$
6,102

 __________________

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12




(1)
Includes the impacts of foreign currency translation and adjustments to reserves necessary to reflect events of non-payment such as customer accommodations and contract terminations.
(2)
Total Finance receivables exclude residual values of $1 and $4, and the allowance for credit losses of $162 and $190 at June 30, 2013 and 2012, respectively.
(3)
Includes developing market countries and smaller units.
We evaluate our customers based on the following credit quality indicators:
•
Investment grade: This rating includes accounts with excellent to good business credit, asset quality and the capacity to meet financial obligations. These customers are less susceptible to adverse effects due to shifts in economic conditions or changes in circumstance. The rating generally equates to a Standard & Poors (S&P) rating of BBB- or better. Loss rates in this category are normally minimal at less than 1%.
•
Non-investment grade: This rating includes accounts with average credit risk that are more susceptible to loss in the event of adverse business or economic conditions. This rating generally equates to a BB S&P rating. Although we experience higher loss rates associated with this customer class, we believe the risk is somewhat mitigated by the fact that our leases are fairly well dispersed across a large and diverse customer base. In addition, the higher loss rates are largely offset by the higher rates of return we obtain on such leases. Loss rates in this category are generally in the range of 2% to 4%.

Xerox 2013 Form 10-Q
13




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

Credit quality indicators are updated at least annually and the credit quality of any given customer can change during the life of the portfolio. Details about our finance receivables portfolio based on industry and credit quality indicators are as follows:
 
June 30, 2013
 
December 31, 2012
 
Investment
Grade
 
Non-investment
Grade
 
Substandard
 
Total
Finance
Receivables
 
Investment
Grade
 
Non-investment
Grade
 
Substandard
 
Total
Finance
Receivables
Finance and other services
$
255

 
$
178

 
$
59

 
$
492

 
$
252

 
$
147

 
$
59

 
$
458

Government and education
705

 
12

 
5

 
722

 
750

 
15

 
4

 
769

Graphic arts
132

 
67

 
120

 
319

 
92

 
90

 
137

 
319

Industrial
116

 
40

 
17

 
173

 
115

 
31

 
17

 
163

Healthcare
105

 
26

 
22

 
153

 
109

 
37

 
14

 
160

Other
75

 
38

 
38

 
151

 
70

 
39

 
34

 
143

Total United States
1,388

 
361

 
261

 
2,010

 
1,388

 
359

 
265

 
2,012

Finance and other services
130

 
106

 
32

 
268

 
151

 
116

 
40

 
307

Government and education
103

 
11

 
2

 
116

 
117

 
10

 
2

 
129

Graphic arts
34

 
32

 
26

 
92

 
37

 
34

 
30

 
101

Industrial
62

 
39

 
21

 
122

 
66

 
40

 
29

 
135

Other
68

 
37

 
10

 
115

 
75

 
43

 
11

 
129

Total Canada
397

 
225

 
91

 
713

 
446

 
243

 
112

 
801

France
265

 
295

 
115

 
675

 
274

 
294

 
134

 
702

U.K./Ireland
191

 
144

 
43

 
378

 
215

 
155

 
50

 
420

Central(1)
293

 
403

 
45

 
741

 
315

 
445

 
56

 
816

Southern(2)
125

 
194

 
68

 
387

 
139

 
230

 
73

 
442

Nordics(3)
45

 
42

 
3

 
90

 
49

 
36

 
9

 
94

Total Europe
919

 
1,078

 
274

 
2,271

 
992

 
1,160

 
322

 
2,474

Other
177

 
47

 
6

 
230

 
148

 
39

 
7

 
194

Total
$
2,881

 
$
1,711

 
$
632

 
$
5,224

 
$
2,974

 
$
1,801

 
$
706

 
$
5,481

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



Xerox 2013 Form 10-Q
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The aging of our billed finance receivables is based upon the number of days an invoice is past due and is as follows:
 
June 30, 2013
 
Current
 
31-90
Days
Past Due
 
>90 Days
Past Due
 
Total Billed
Finance
Receivables
 
Unbilled
Finance
Receivables
 
Total
Finance
Receivables
 
Finance
Receivables
>90 Days
and
Accruing
Finance and other services
$
11

 
$
2

 
$
1

 
$
14

 
$
478

 
$
492

 
$
16

Government and education
19

 
4

 
3

 
26

 
696

 
722

 
27

Graphic arts
15

 
1

 
1

 
17

 
302

 
319

 
10

Industrial
5

 
1

 
1

 
7

 
166

 
173

 
6

Healthcare
5

 
1

 
—

 
6

 
147

 
153

 
5

Other
4

 
1

 
—

 
5

 
146

 
151

 
4

Total United States
59

 
10

 
6

 
75

 
1,935

 
2,010

 
68

Canada
3

 
3

 
2

 
8

 
705

 
713

 
29

France
(1
)
 
—

 
—

 
(1
)
 
676

 
675

 
39

U.K./Ireland
2

 
2

 
3

 
7

 
371

 
378

 
4

Central(1)
5

 
2

 
4

 
11

 
730

 
741

 
18

Southern(2)
26

 
7

 
11

 
44

 
343

 
387

 
48

Nordics(3)
2

 
—

 
—

 
2

 
88

 
90

 
—

Total Europe
34

 
11

 
18

 
63

 
2,208

 
2,271

 
109

Other
6

 
1

 
—

 
7

 
223

 
230

 
—

Total
$
102

 
$
25

 
$
26

 
$
153

 
$
5,071

 
$
5,224

 
$
206

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

 
$
3

 
$
2

 
$
17

 
$
441

 
$
458

 
$
18

Government and education
21

 
5

 
3

 
29

 
740

 
769

 
42

Graphic arts
16

 
1

 
1

 
18

 
301

 
319

 
12

Industrial
5

 
2

 
1

 
8

 
155

 
163

 
6

Healthcare
6

 
2

 
1

 
9

 
151

 
160

 
9

Other
5

 
1

 
1

 
7

 
136

 
143

 
6

Total United States
65

 
14

 
9

 
88

 
1,924

 
2,012

 
93

Canada
2

 
3

 
2

 
7

 
794

 
801

 
30

France
—

 
5

 
1

 
6

 
696

 
702

 
22

U.K./Ireland
2

 
—

 
2

 
4

 
416

 
420

 
2

Central(1)
3

 
2

 
4

 
9

 
807

 
816

 
30

Southern(2)
20

 
8

 
14

 
42

 
400

 
442

 
72

Nordics(3)
1

 
—

 
—

 
1

 
93

 
94

 
—

Total Europe
26

 
15

 
21

 
62

 
2,412

 
2,474

 
126

Other
2

 
1

 
—

 
3

 
191

 
194

 
—

Total
$
95

 
$
33

 
$
32

 
$
160

 
$
5,321

 
$
5,481

 
$
249

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


Xerox 2013 Form 10-Q
15




Note 8 – Inventories
The following is a summary of Inventories by major category:
 
June 30, 2013
 
December 31, 2012
Finished goods
$
907

 
$
844

Work-in-process
87

 
61

Raw materials
115

 
106

Total Inventories
$
1,109

 
$
1,011


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,
 
2013
 
2012
 
2013
 
2012
Fuji Xerox
$
33

 
$
28

 
$
77

 
$
65

Other investments
3

 
3

 
6

 
6

Total Equity in Net Income of Unconsolidated Affiliates
$
36

 
$
31

 
$
83

 
$
71

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,
 
2013
 
2012
 
2013
 
2012
Summary of Operations:
 
 
 
 
 
 
 
Revenues
$
2,716

 
$
3,064

 
$
5,744

 
$
6,394

Costs and expenses
2,506

 
2,856

 
5,290

 
5,940

Income before income taxes
210

 
208

 
454

 
454

Income tax expense
64

 
81

 
125

 
178

Net Income
146

 
127

 
329

 
276

Less: Net income – noncontrolling interests
2

 
1

 
3

 
2

Net Income – Fuji Xerox
$
144

 
$
126

 
$
326

 
$
274

Weighted Average Exchange Rate(1)
98.56

 
80.09

 
95.45

 
79.90

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


Xerox 2013 Form 10-Q
16




Note 10 – Restructuring Programs
During the six months ended June 30, 2013, we recorded net restructuring and asset impairment charges from continuing operations of $25, which included approximately $40 of severance costs related to headcount reductions of approximately 1,200 employees primarily in North America. These costs were offset by $15 of net reversals, primarily resulting from changes in estimated reserves from prior period initiatives.
Information related to restructuring program activity during the six months ended June 30, 2013 is outlined below:
 
Severance and
Related Costs
 
Lease Cancellation
and Other Costs
 
Asset Impairments(2)
 
Total
Balance at December 31, 2012
$
123

 
$
7

 
$
—