XRX-9.30.12-10Q




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-Q
_______________
  
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2012
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                        to
Commission File Number 001-04471
  
XEROX CORPORATION
(Exact Name of Registrant as specified in its charter)
_________________________________________________  
New York
 
16-0468020
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
P.O. Box 4505, 45 Glover Avenue
Norwalk, Connecticut
 
06856-4505
(Address of principal executive offices)
 
(Zip Code)
(203) 968-3000
(Registrant’s telephone number, including area code)
_________________________________________________  
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by a check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x Accelerated filer o Non-accelerated filer o Smaller reporting company o
Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No ý
Class
 
Outstanding at September 30, 2012
Common Stock, $1 par value
 
1,272,546,910 shares

Xerox 2012 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, environmental regulations 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; our ability to expand equipment placements; the risk that subcontractors, software vendors and utility and network providers will not perform in a timely, quality manner; 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; our ability to recover capital investments; development of new products and services; our ability to protect our intellectual property rights; interest rates, cost of borrowing and access to credit markets; the risk that multi-year contracts with governmental entities could be terminated prior to the end of the contract term; 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 risks that are set forth in the “Risk Factors” section, the “Legal Proceedings” section, the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and other sections of this Quarterly Report on Form 10-Q, our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2012 and June 30, 2012 and our 2011 Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”). 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 2012 Form 10-Q
2


XEROX CORPORATION
FORM 10-Q
September 30, 2012
TABLE OF CONTENTS
 
 
Page
 
Item 1.
 
 
 
 
 
Item 2.
 
 
 
Item 3.
Item 4.
 
 
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 6.
For additional information about Xerox Corporation and access to our Annual Reports to Shareholders and SEC filings, free of charge, please visit our website at www.xerox.com/investor. Any information on or linked from the website is not incorporated by reference into this Form 10-Q.
 

Xerox 2012 Form 10-Q
3


PART I — FINANCIAL INFORMATION
ITEM 1 — FINANCIAL STATEMENTS

XEROX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(in millions, except per-share data)
 
2012
 
2011
 
2012
 
2011
Revenues
 
 
 
 
 
 
 
 
Sales
 
$
1,537

 
$
1,738

 
$
4,760

 
$
5,129

Outsourcing, service and rentals
 
3,727

 
3,689

 
11,257

 
11,052

Finance income
 
159

 
156

 
450

 
481

Total Revenues
 
5,423

 
5,583

 
16,467

 
16,662

Costs and Expenses
 
 
 
 
 
 
 
 
Cost of sales
 
1,026

 
1,154

 
3,170

 
3,383

Cost of outsourcing, service and rentals
 
2,668

 
2,545

 
7,983

 
7,597

Equipment financing interest
 
49

 
56

 
153

 
176

Research, development and engineering expenses
 
161

 
183

 
495

 
542

Selling, administrative and general expenses
 
1,050

 
1,109

 
3,194

 
3,347

Restructuring and asset impairment charges
 
14

 
(4
)
 
60

 
(28
)
Amortization of intangible assets
 
82

 
87

 
246

 
259

Other expenses, net
 
56

 
86

 
185

 
268

Total Costs and Expenses
 
5,106

 
5,216

 
15,486

 
15,544

Income before Income Taxes and Equity Income
 
317

 
367

 
981

 
1,118

Income tax expense
 
63

 
81

 
206

 
284

Equity in net income of unconsolidated affiliates
 
34

 
43

 
105

 
111

Net Income
 
288

 
329

 
880

 
945

Less: Net income attributable to noncontrolling interests
 
6

 
9

 
20

 
25

Net Income Attributable to Xerox
 
$
282

 
$
320

 
$
860

 
$
920

Basic Earnings per Share
 
$
0.21

 
$
0.23

 
$
0.64

 
$
0.65

Diluted Earnings per Share
 
$
0.21

 
$
0.22

 
$
0.62

 
$
0.63


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

Xerox 2012 Form 10-Q
4





XEROX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(in millions)
 
2012
 
2011
 
2012
 
2011
Net Income
 
$
288

 
$
329

 
$
880

 
$
945

Less: Net income attributable to noncontrolling interests
 
6

 
9

 
20

 
25

Net Income Attributable to Xerox
 
$
282

 
$
320

 
$
860

 
$
920

 
 
 
 
 
 
 
 
 
Other Comprehensive Income (Loss)(1):
 

 

 

 

Translation adjustments, net
 
$
344

 
$
(383
)
 
$
181

 
$
67

Unrealized (losses) gains, net
 
(2
)
 
28

 
(11
)
 
13

Changes in defined benefit plans, net
 
(10
)
 
44

 

 
22

Other Comprehensive Income (Loss) Attributable to Xerox
 
$
332

 
$
(311
)
 
$
170

 
$
102

 
 
 
 
 
 
 
 
 
Comprehensive Income, net
 
$
620

 
$
18

 
$
1,050

 
$
1,047

Less: Comprehensive income attributable to noncontrolling interests
 
6

 
9

 
20

 
25

Comprehensive Income Attributable to Xerox
 
$
614

 
$
9

 
$
1,030

 
$
1,022


(1) Refer to Note 14 - Comprehensive Income for gross components of comprehensive income, reclassification adjustments out of accumulated other comprehensive income and related tax effects.


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


Xerox 2012 Form 10-Q
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XEROX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in millions, except share data in thousands)
 
September 30,
2012
 
December 31,
2011
Assets
 
 
 
 
Cash and cash equivalents
 
$
882

 
$
902

Accounts receivable, net
 
3,190

 
2,600

Billed portion of finance receivables, net
 
187

 
166

Finance receivables, net
 
1,877

 
2,165

Inventories
 
1,128

 
1,021

Other current assets
 
1,122

 
1,058

Total current assets
 
8,386

 
7,912

Finance receivables due after one year, net
 
3,591

 
4,031

Equipment on operating leases, net
 
526

 
533

Land, buildings and equipment, net
 
1,566

 
1,612

Investments in affiliates, at equity
 
1,442

 
1,395

Intangible assets, net
 
2,857

 
3,042

Goodwill
 
9,042

 
8,803

Deferred tax assets, long-term
 
454

 
672

Other long-term assets
 
2,375

 
2,116

Total Assets
 
$
30,239

 
$
30,116

Liabilities and Equity
 
 
 
 
Short-term debt and current portion of long-term debt
 
$
1,893

 
$
1,545

Accounts payable
 
1,591

 
2,016

Accrued compensation and benefits costs
 
795

 
757

Unearned income
 
446

 
432

Other current liabilities
 
1,488

 
1,631

Total current liabilities
 
6,213

 
6,381

Long-term debt
 
7,458

 
7,088

Pension and other benefit liabilities
 
2,206

 
2,487

Post-retirement medical benefits
 
879

 
925

Other long-term liabilities
 
768

 
861

Total Liabilities
 
17,524

 
17,742

Series A Convertible Preferred Stock
 
349

 
349

Common stock
 
1,322

 
1,353

Additional paid-in capital
 
6,095

 
6,317

Treasury stock, at cost
 
(361
)
 
(124
)
Retained earnings
 
7,716

 
7,046

Accumulated other comprehensive loss
 
(2,546
)
 
(2,716
)
Xerox shareholders’ equity
 
12,226

 
11,876

Noncontrolling interests
 
140

 
149

Total Equity
 
12,366

 
12,025

Total Liabilities and Equity
 
$
30,239

 
$
30,116

Shares of common stock issued
 
1,322,428

 
1,352,849

Treasury stock
 
(49,881
)
 
(15,508
)
Shares of common stock outstanding
 
1,272,547

 
1,337,341


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

Xerox 2012 Form 10-Q
6





XEROX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(in millions)
 
2012
 
2011
 
2012
 
2011
Cash Flows from Operating Activities:
 
 
 
 
 
 
 
 
Net income
 
$
288

 
$
329

 
$
880

 
$
945

Adjustments required to reconcile net income to cash flows from operating activities:
 
 
 
 
 
 
 
 
Depreciation and amortization
 
339

 
301

 
965

 
890

Provision for receivables
 
23

 
45

 
83

 
99

Provision for inventory
 
9

 
13

 
26

 
32

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

 

 
2

 
(8
)
Undistributed equity in net income of unconsolidated affiliates
 
(32
)
 
(43
)
 
(67
)
 
(83
)
Stock-based compensation
 
30

 
29

 
92

 
92

Restructuring and asset impairment charges
 
14

 
(4
)
 
60

 
(28
)
Payments for restructurings
 
(30
)
 
(42
)
 
(113
)
 
(162
)
Contributions to defined benefit pension plans
 
(73
)
 
(225
)
 
(310
)
 
(348
)
Increase in accounts receivable and billed portion of finance receivables
 
(413
)
 
(262
)
 
(1,021
)
 
(548
)
Collections of deferred proceeds from sales of receivables
 
94

 
105

 
350

 
287

Increase in inventories
 
(44
)
 
(141
)
 
(128
)
 
(278
)
Increase in equipment on operating leases
 
(65
)
 
(76
)
 
(200
)
 
(205
)
Decrease in finance receivables
 
412

 
74

 
687

 
234

Increase in other current and long-term assets
 
(34
)
 
(61
)
 
(196
)
 
(184
)
Increase (decrease) in accounts payable and accrued compensation
 
7

 
181

 
(230
)
 
(197
)
Increase (decrease) in other current and long-term liabilities
 
36

 
78

 
(126
)
 
(97
)
Net change in income tax assets and liabilities
 
32

 
52

 
93

 
220

Net change in derivative assets and liabilities
 
7

 
19

 
(2
)
 
43

Other operating, net
 
(11
)
 
(6
)
 
(38
)
 
(21
)
Net cash provided by operating activities
 
594

 
366

 
807

 
683

Cash Flows from Investing Activities:
 
 
 
 
 
 
 
 
Cost of additions to land, buildings and equipment
 
(110
)
 
(80
)
 
(283
)
 
(245
)
Proceeds from sales of land, buildings and equipment
 
1

 
5

 
8

 
9

Cost of additions to internal use software
 
(30
)
 
(41
)
 
(100
)
 
(122
)
Acquisitions, net of cash acquired
 
(156
)
 
(51
)
 
(243
)
 
(188
)
Net change in escrow and other restricted investments
 
6

 
(1
)
 
14

 
(9
)
Other investing, net
 

 
1

 
3

 
20

Net cash used in investing activities
 
(289
)
 
(167
)
 
(601
)
 
(535
)
Cash Flows from Financing Activities:
 
 
 
 
 
 
 
 
Net proceeds (payments) on debt
 
199

 
(101
)
 
742

 
602

Payment of liability to subsidiary trust issuing preferred securities
 

 

 

 
(670
)
Common stock dividends
 
(63
)
 
(63
)
 
(177
)
 
(182
)
Preferred stock dividends
 
(6
)
 
(6
)
 
(18
)
 
(18
)
Proceeds from issuances of common stock
 
33

 
10

 
43

 
41

Excess tax benefits from stock-based compensation
 
10

 
1

 
10

 
5

Payments to acquire treasury stock, including fees
 
(361
)
 
(309
)
 
(718
)
 
(309
)
Repurchases related to stock-based compensation
 
(40
)
 
(21
)
 
(41
)
 
(27
)
Distributions to noncontrolling interests
 
(2
)
 
(3
)
 
(63
)
 
(15
)
Net cash used in financing activities
 
(230
)
 
(492
)
 
(222
)
 
(573
)
Effect of exchange rate changes on cash and cash equivalents
 
(7
)
 
(20
)
 
(4
)
 
(1
)
Increase (decrease) in cash and cash equivalents
 
68

 
(313
)
 
(20
)
 
(426
)
Cash and cash equivalents at beginning of period
 
814

 
1,098

 
902

 
1,211

Cash and Cash Equivalents at End of Period
 
$
882

 
$
785

 
$
882

 
$
785


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

Xerox 2012 Form 10-Q
7


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 2011 Annual Report to Shareholders, which is incorporated by reference in our 2011 Annual Report on Form 10-K (“2011 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 2011 Annual Report.
In our opinion, all adjustments which are necessary for a fair statement of financial position, operating results and cash flows for the interim periods presented have been made. These adjustments consist of normal recurring items. Interim results of operations are not necessarily indicative of the results of the full year.
For convenience and ease of reference, we refer to the financial statement caption “Income before Income Taxes and Equity Income” as “pre-tax income.”

Note 2 – Recent Accounting Pronouncements
Fair Value Accounting: In May 2011, the FASB issued ASU 2011-04, which amended Fair Value Measurements and Disclosures - Overall (ASC Topic 820-10) to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are consistent between U.S. GAAP and International Financial Reporting Standards. This update changed certain fair value measurement principles and enhanced the disclosure requirements, particularly for level 3 fair value measurements. We adopted this update prospectively effective for our fiscal year beginning January 1, 2012. This update did not have a material effect on our financial condition, results of operations or disclosures.
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. This update is effective for our fiscal year beginning January 1, 2013 and must be applied retrospectively. The principal impact from this update will be to expand disclosures regarding our financial instruments. We currently report our derivative assets and liabilities on a gross basis in the Balance Sheet even in those instances where offsetting may be allowed under a master netting agreement.

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 Technology. Our Services segment operations involve delivery of a broad range of services including business process, document and IT outsourcing. Our 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")

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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 Technology segment is centered on strategic product groups, which share common technology, manufacturing and product platforms. This segment includes the sale of document systems and supplies, technical services and product financing. Our products 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.
The segment classified as Other includes several units, none of which meet the thresholds for separate segment reporting. This group primarily includes Global Paper and Supplies Distribution Group (predominantly paper sales), 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.
Operating segment revenues and profitability were as follows:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
Segment Revenue
 
Segment Profit (Loss)
 
Segment Revenue
 
Segment Profit (Loss)
2012
 
 
 
 
 
 
 
Services
$
2,847

 
$
269

 
$
8,474

 
$
830

Technology
2,259

 
245

 
6,967

 
758

Other
317

 
(62
)
 
1,026

 
(182
)
Total
$
5,423

 
$
452

 
$
16,467

 
$
1,406

2011
 
 
 
 
 
 
 
Services
$
2,717

 
$
323

 
$
7,973

 
$
911

Technology
2,500

 
258

 
7,547

 
824

Other
366

 
(86
)
 
1,142

 
(225
)
Total
$
5,583

 
$
495

 
$
16,662

 
$
1,510

 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
Reconciliation to Pre-tax Income
 
2012
 
2011
 
2012
 
2011
Segment Profit
 
$
452

 
$
495

 
$
1,406

 
$
1,510

Reconciling items:
 
 
 
 
 
 
 
 
Restructuring and asset impairment charges
 
(14
)
 
4

 
(60
)
 
28

Restructuring charges of Fuji Xerox
 
(5
)
 
(1
)
 
(15
)
 
(16
)
Amortization of intangible assets
 
(82
)
 
(87
)
 
(246
)
 
(259
)
Equity in net income of unconsolidated affiliates
 
(34
)
 
(43
)
 
(105
)
 
(111
)
Loss on early extinguishment of liability
 

 

 

 
(33
)
Other
 

 
(1
)
 
1

 
(1
)
Pre-tax Income
 
$
317

 
$
367

 
$
981

 
$
1,118


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Note 4 – Acquisitions

In July 2012, we acquired the following companies:
Wireless Data Services, Ltd. ("WDS"), a provider of technical support, knowledge management and related consulting services to the world's largest wireless telecommunication brands, for approximately $95 (£60 million). Based in the U.K., WDS's expertise in the telecommunications industry strengthens our broad portfolio of customer care solutions.
Lateral Data, LP., a leading e-discovery technology provider, for approximately $30. Lateral Data's flagship software, Viewpoint™, brings simplicity and affordability to e-discovery and complements the offerings of Xerox Litigation Services.
Martin Whalen Office Solutions, Inc., a leading provider of office technology and software solutions, for approximately $31. This acquisition further expands our distribution in Illinois and supports our strategy to create a nationwide network of locally based companies focused on customer needs.
 
In February 2012, we acquired R.K. Dixon, a leading provider of IT services, copiers, printers and managed print services, for approximately $58. The acquisition furthers our coverage of central Illinois and eastern Iowa.

WDS and Lateral Data are included in our Services segment while the acquisitions of Martin Whalen Office Solutions and R.K. Dixon are included within our Technology segment. Our Services segment acquired two additional businesses during the nine months ended September 30, 2012 for a total of $29 in cash.

The operating results of the 2012 acquisitions are not material to our financial statements and are included within our results from the respective acquisition dates. The purchase prices were primarily allocated to intangible assets and goodwill based on third-party valuations and management’s estimates.

Note 5 – Receivables, Net
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 on a periodic basis. The accounts receivables sold are generally short-term trade receivables with payment due dates of less than 60 days.
During 2012, we entered into an additional facility in the U.S. that enabled us to sell a designated pool of receivables on a revolving basis to a wholly-owned consolidated bankruptcy-remote limited purpose subsidiary, which in turn sold such receivables to third-party commercial paper conduit purchasers (collectively, the "Purchasers") for cash and a deferred purchase price receivable. The Purchasers' maximum cash investment in the receivables at any time was $265 and new receivables were purchased from cash collections on previously sold receivables. In September 2012, we negotiated a termination agreement with the Purchasers to repurchase the then outstanding receivables for cash and the satisfaction of the deferred purchase price. During the third quarter 2012, we had total cash outflows to the Purchasers of approximately $215, which reflects interim settlements as well as the repurchase of the remaining outstanding receivables upon termination. There were no outstanding balances associated with this facility as of September 30, 2012.
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 $124 and $97 at September 30, 2012 and December 31, 2011, 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.

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10





Of the accounts receivable sold and derecognized from our balance sheet, $678 and $815 remained uncollected as of September 30, 2012 and December 31, 2011, respectively. Accounts receivables sales were as follows:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2012
 
2011
 
2012
 
2011
Accounts receivable sales
$
725

 
$
754

 
$
2,816

 
$
2,303

Deferred proceeds
122

 
93

 
525

 
290

Fees associated with sales
4

 
5

 
16

 
14

Estimated decrease to operating cash flows(1)
(266
)
 
(35
)
 
(168
)
 
(29
)
 ____________________________

(1)
Represents the difference between current and prior period receivable sales adjusted for the effects of: (i) the deferred proceeds, (ii) collections prior to the end of the quarter and (iii) currency. The three months ended September 30, 2012 includes cash outflows related to our U.S. revolving facility of $215.
Sale of Finance Receivables
In September 2012, we sold our entire interest in a group of U.S. lease finance receivables from our Technology segment with a net carrying value of $341 to a third-party financial institution for cash proceeds of $314 and a beneficial interest from the purchaser of $52. The lease contracts, including associated service and supply elements, were initially sold to a wholly-owned consolidated bankruptcy-remote limited purpose subsidiary, which in turn sold the principal and interest portions of such contracts to the third-party financial institution (the ultimate purchaser). As of September 30, 2012, the principal value of the receivables sold and derecognized from our balance sheet was $350.
A pre-tax gain of $23 was recognized on this sale and is net of fees and expenses of approximately $2. The gain on the sale is reported in Finance Income within our Technology segment. We will continue to service the sold receivables for which we will receive a 1% servicing fee. We have concluded that the 1% servicing fee (approximately $6 over the expected life of the associated receivables) is adequate compensation and, accordingly, no servicing asset or liability was recorded.
The beneficial interest represents our right to receive future cash flows from the sold receivables, which exceed the servicing fee as well as the ultimate purchaser's initial investment and associated return on that investment. The beneficial interest was initially recognized at an estimate of fair value based on the present value of the expected future cash flows. The present value of the expected future cash flows was calculated using management's best estimate of key assumptions including credit losses, prepayment rate and an appropriate risk adjusted discount rate (all unobservable Level 3 inputs) for which we utilized annualized rates of 2.1%, 9.3% and 10.0%, respectively. These assumptions are supported by both our historical experience and anticipated trends relative to the particular portfolio of receivables sold. However, to assess the sensitivity on the fair value of the beneficial interest, we adjusted the credit loss rate, prepayment rate and discount rate assumptions individually by 10% and 20% while holding the other assumptions constant. Although the effect of multiple assumption changes was not considered in this analysis, a 10% or 20% adverse variation in any one of these three individual assumptions would each decrease the recorded beneficial interest by approximately $2 or less.
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 which $19 and $33 is included in Other current assets and Other long-term assets, respectively, in the accompanying Condensed Consolidated Balance Sheets at September 30, 2012. The beneficial interest is held by the bankruptcy-remote subsidiary and therefore is not available to satisfy any of our creditor obligations. We will 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 two years.
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:
 
 
United States
 
Canada
 
Europe
 
Other(3)
 
Total
Allowance for Credit Losses:
 
 
 
 
 
 
 
 
 
Balance at December 31, 2011
$
75

 
$
33

 
$
91

 
$
2

 
$
201

Provision
2

 
1

 
12

 

 
15

Charge-offs
(4
)
 
(3
)
 
(12
)
 

 
(19
)
Recoveries and other(1)
1

 
2

 
2

 
1

 
6

Balance at March 31, 2012
74

 
33

 
93

 
3

 
203

Provision
3

 
2

 
11

 
1

 
17

Charge-offs
(5
)
 
(4
)
 
(15
)
 

 
(24
)
Recoveries and other(1)
1

 

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

 
$
31

 
$
83

 
$
3

 
$
190

Provision
3

 
3

 
9

 

 
15

Charge-offs
(8
)
 
(5
)
 
(11
)
 

 
(24
)
Recoveries and other(1)

 
2

 
3

 

 
5

Sale of finance receivables
(9
)
 

 

 

 
(9
)
Balance at September 30, 2012
$
59

 
$
31

 
$
84

 
$
3

 
$
177

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

 
$
811

 
$
2,466

 
$
168

 
$
5,829

 
 
 
 
 
 
 
 
 
 
Allowance for Credit Losses:
 
 
 
 
 
 
 
 
 
Balance at December 31, 2010
$
91

 
$
37

 
$
81

 
$
3

 
$
212

Provision
7

 
4

 
11

 

 
22

Charge-offs
(10
)
 
(5
)
 
(8
)
 

 
(23
)
Recoveries and other(1)
(1
)
 
2

 
3

 

 
4

Balance at March 31, 2011
87

 
38

 
87

 
3

 
215

Provision
1

 
3

 
14

 

 
18

Charge-offs
(6
)
 
(5
)
 
(11
)
 

 
(22
)
Recoveries and other(1)
(1
)
 

 
(1
)
 

 
(2
)
Balance at June 30, 2011
$
81

 
$
36

 
$
89

 
$
3

 
$
209

Provision
4

 
1

 
18

 

 
23

Charge-offs
(7
)
 
(3
)
 
(19
)
 

 
(29
)
Recoveries and other(1)
1

 
(1
)
 
(5
)
 

 
(5
)
Balance at September 30, 2011
$
79

 
$
33

 
$
83

 
$
3

 
$
198

Finance receivables as of September 30, 2011 collectively evaluated for impairment(2)
$
2,943

 
$
793

 
$
2,714

 
$
95

 
$
6,545

 _____________________________
(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 $3 and $8, and the allowance for credit losses of $177 and $198 at September 30, 2012 and 2011, respectively.
(3)
Includes developing market countries and smaller units.

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We evaluate our customers based on the following credit quality indicators:
 
Investment grade: This rating includes accounts with excellent to good business credit, asset quality and the capacity to meet financial obligations. These customers are less susceptible to adverse effects due to shifts in economic conditions or changes in circumstance. The rating generally equates to a Standard & Poors (S&P) rating of BBB- or better. Loss rates in this category are normally minimal at less than 1%.

Non-investment grade: This rating includes accounts with average credit risk that are more susceptible to loss in the event of adverse business or economic conditions. This rating generally equates to a BB S&P rating. Although we experience higher loss rates associated with this customer class, we believe the risk is somewhat mitigated by the fact that our leases are fairly well dispersed across a large and diverse customer base. In addition, the higher loss rates are largely offset by the higher rates of return we obtain on such leases. Loss rates in this category are generally in the range of 2% to 4%.

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

Credit quality indicators are updated at least annually and the credit quality of any given customer can change during the life of the portfolio. Details about our finance receivables portfolio based on industry and credit quality indicators are as follows:
 
 
September 30, 2012
 
Investment
Grade
 
Non-investment
Grade
 
Substandard
 
Total Finance
Receivables
Finance and Other Services
$
301

 
$
235

 
$
96

 
$
632

Government and Education
762

 
17

 
2

 
781

Graphic Arts
94

 
117

 
175

 
386

Industrial
134

 
65

 
20

 
219

Healthcare
108

 
38

 
23

 
169

Other
86

 
66

 
45

 
197

Total United States
1,485

 
538

 
361

 
2,384

Finance and Other Services
152

 
115

 
43

 
310

Government and Education
118

 
9

 
3

 
130

Graphic Arts
38

 
35

 
36

 
109

Industrial
64

 
40

 
29

 
133

Other
77

 
41

 
11

 
129

Total Canada
449

 
240

 
122

 
811

France
271

 
275

 
134

 
680

U.K./Ireland
218

 
155

 
53

 
426

Central(1)
274

 
453

 
75

 
802

Southern(2)
163

 
228

 
73

 
464

Nordics(3)
52

 
38

 
4

 
94

Total Europe
978

 
1,149

 
339

 
2,466

Other
125

 
38

 
5

 
168

Total
$
3,037

 
$
1,965

 
$
827

 
$
5,829

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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December 31, 2011
 
Investment
Grade
 
Non-investment
Grade
 
Substandard
 
Total Finance
Receivables
Finance and Other Services
$
349

 
$
380

 
$
160

 
$
889

Government and Education
821

 
20

 
4

 
845

Graphic Arts
126

 
200

 
172

 
498

Industrial
180

 
83

 
32

 
295

Healthcare
130

 
42

 
28

 
200

Other
97

 
93

 
76

 
266

Total United States
1,703

 
818

 
472

 
2,993

Finance and Other Services
153

 
118

 
51

 
322

Government and Education
121

 
9

 
4

 
134

Graphic Arts
36

 
39

 
35

 
110

Industrial
56

 
41

 
34

 
131

Other
74

 
42

 
12

 
128

Total Canada
440

 
249

 
136

 
825

France
246

 
354

 
92

 
692

U.K./Ireland
201

 
162

 
54

 
417

Central(1)
330

 
494

 
57

 
881

Southern(2)
219

 
256

 
63

 
538

Nordics(3)
60

 
39

 
3

 
102

Total Europe
1,056

 
1,305

 
269

 
2,630

Other
75

 
26

 
7

 
108

Total
$
3,274

 
$
2,398

 
$
884

 
$
6,556

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


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The aging of our billed finance receivables is based upon the number of days an invoice is past due and is as follows:
 
September 30, 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
$
20

 
$
4

 
$
2

 
$
26

 
$
606

 
$
632

 
$
18

Government and Education
24

 
4

 
3

 
31

 
750

 
781

 
35

Graphic Arts
21

 
2

 
1

 
24

 
362

 
386

 
11

Industrial
9

 
2

 
1

 
12

 
207

 
219

 
9

Healthcare
7

 
2

 

 
9

 
160

 
169

 
6

Other
8

 
1

 
1

 
10

 
187

 
197

 
7

Total United States
89

 
15

 
8

 
112

 
2,272

 
2,384

 
86

Canada
5

 
3

 
1

 
9

 
802

 
811

 
29

France
4

 

 

 
4

 
676

 
680

 
32

U.K./Ireland
4

 
1

 
3

 
8

 
418

 
426

 
5

Central(1)
6

 
2

 
3

 
11

 
791

 
802

 
40

Southern(2)
25

 
11

 
12

 
48

 
416

 
464

 
68

Nordics(3)
2

 

 

 
2

 
92

 
94

 

Total Europe
41

 
14

 
18

 
73

 
2,393

 
2,466

 
145

Other
3

 
1

 

 
4

 
164

 
168

 

Total
$
138

 
$
33

 
$
27

 
$
198

 
$
5,631

 
$
5,829

 
$
260

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2011
 
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
$
18

 
$
4

 
$
1

 
$
23

 
$
866

 
$
889

 
$
15

Government and Education
21

 
5

 
2

 
28

 
817

 
845

 
29

Graphic Arts
16

 
2

 
1

 
19

 
479

 
498

 
7

Industrial
7

 
2

 
1

 
10

 
285

 
295

 
6

Healthcare
5

 
2

 

 
7

 
193

 
200

 
5

Other
8

 
1

 

 
9

 
257

 
266

 
4

Total United States
75

 
16

 
5

 
96

 
2,897

 
2,993

 
66

Canada
3

 
2

 
1

 
6

 
819

 
825

 
27

France
1

 
1

 
1

 
3

 
689

 
692

 
16

U.K./Ireland
3

 
2

 
3

 
8

 
409

 
417

 
4

Central(1)
7

 
2

 
3

 
12

 
869

 
881

 
46

Southern(2)
31

 
4

 
13

 
48

 
490

 
538

 
82

Nordics(3)
1

 

 

 
1

 
101

 
102

 

Total Europe
43

 
9

 
20

 
72

 
2,558

 
2,630

 
148

Other
2

 
1

 

 
3

 
105

 
108

 

Total
$
123

 
$
28

 
$
26

 
$
177

 
$
6,379

 
$
6,556

 
$
241

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


Xerox 2012 Form 10-Q
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Note 6 – Inventories
The following is a summary of Inventories by major category:
 
 
September 30, 2012
 
December 31, 2011
Finished goods
$
944

 
$
866

Work-in-process
74

 
58

Raw materials
110

 
97

Total Inventories
$
1,128

 
$
1,021


Note 7 – Investment in Affiliates, at Equity
Our equity in net income of our unconsolidated affiliates was as follows:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2012
 
2011
 
2012
 
2011
Fuji Xerox
$
32

 
$
42

 
$
97

 
$
104

Other investments
2

 
1

 
8

 
7

Total Equity in Net Income of Unconsolidated Affiliates
$
34

 
$
43

 
$
105

 
$
111

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. Equity income for the nine months ended September 30, 2012 and 2011 includes after-tax restructuring charges of $15 and $16, respectively, primarily reflecting Fuji Xerox’s continued cost-reduction initiatives.
Condensed financial data of Fuji Xerox was as follows:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2012
 
2011
 
2012
 
2011
Summary of Operations:
 
 
 
 
 
 
 
Revenues
$
3,192

 
$
3,330

 
$
9,586

 
$
9,274

Costs and expenses
2,988

 
3,042

 
8,928

 
8,584

Income before income taxes
204

 
288

 
658

 
690

Income tax expense
68

 
107

 
246

 
231

Net Income
136

 
181

 
412

 
459

Less: Net income – noncontrolling interests
2

 
1

 
4

 
3

Net Income – Fuji Xerox
$
134

 
$
180

 
$
408

 
$
456

Weighted Average Rate(1)
78.61

 
77.69

 
79.47

 
80.37

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



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16





Note 8 – Restructuring Programs
During the nine months ended September 30, 2012, we recorded net restructuring and asset impairment charges of $60, which included approximately $64 of severance costs related to headcount reductions of approximately 2,000 employees primarily in North America and $7 of lease cancellation and asset impairment charges. These costs were partially offset by $11 of net reversals for changes in estimated reserves from prior period initiatives.
Information related to restructuring program activity during the nine months ended September 30, 2012 is outlined below:
 
 
Severance and
Related Costs
 
Lease Cancellation
and Other Costs
 
Asset Impairments(2)
 
Total
Balance December 31, 2011
$
116

 
$
7

 
$

 
$
123

Restructuring provision
64

 
5

 
2

 
71

Reversals of prior accruals
(11
)
 

 

 
(11
)
Net current period charges(1)
53

 
5

 
2

 
60

Charges against reserve and currency
(108
)
 
(4
)
 
(2
)
 
(114
)
Balance September 30, 2012
$
61

 
$
8

 
$

 
$
69

 _____________________________
(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
September 30,
 
Nine Months Ended
September 30,
 
2012
 
2011
 
2012
 
2011
Charges against reserve
$
(29
)
 
$
(49
)
 
$
(114
)
 
$
(169
)
Asset impairment

 

 
2

 

Effects of foreign currency and other non-cash items
(1
)
 
7

 
(1
)
 
7

Cash Payments for Restructurings
$
(30
)
 
$
(42
)
 
$
(113
)
 
$
(162
)

The following table summarizes the total amount of costs incurred in connection with these restructuring programs by segment:

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2012
 
2011
 
2012
 
2011
Services
$
6

 
$
(2
)
 
$
25

 
$
(2
)
Technology
8

 
(4
)
 
37

 
(23
)
Other

 
2

 
(2
)
 
(3
)
Total Net Restructuring Charges
$
14

 
$
(4
)
 
$
60

 
$
(28
)

We expect to incur additional restructuring charges of approximately $50 to $100 in the fourth quarter of 2012 for actions and initiatives which have not yet been finalized. The additional restructuring is expected to be more focused on the Services segment.

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17






Note 9 – Debt
Debt Exchange
In February 2012, we completed an exchange of our 5.71% Zero Coupon Notes due 2023 with an accreted book value at the date of the exchange of