2010 Annual Report
“ We give our clients
more freedom to
focus on what counts:
their core business,
their real business.”
Ursula M. Burns
Chairman and Chief Executive Officer
Letter to Shareholders
02
08 Board of Directors
10 Our Business
26 Management’s Discussion and Analysis
54 Consolidated Financial Statements
58 Notes to Consolidated Financial Statements
103 Reports and Signatures
105 Quarterly Results of Operations
106 Five Years in Review
107 Performance Graph
107 Corporate Information
108 Officers
Financial Overview
Total revenue
Equipment sales
Annuity revenue
Net income – Xerox
Adjusted net income* – Xerox
Diluted earnings per share
Adjusted earnings per share*
Net cash provided by operating activities
2010
2009
$ 21,633
$ 15,179
3,857
17,776
606
1,296
0.43
0.94
2,726
3,550
11,629
485
613
0.55
0.70
2,208
Adjusted operating margin*
9.6%
8.6%
* See Page 7 for the reconciliation of the difference between this financial measure that is not in compliance with Generally Accepted
Accounting Principles (GAAP) and the most directly comparable financial measure calculated in accordance with GAAP.
With ACS, we now serve
a $500 Billion market.
$150+ billion
Business Process Outsourcing
$130 billion
Traditional Technology-driven
Market
$250 billion
Information Technology
Outsourcing
Letter to Shareholders
Dear Fellow Shareholders:
I am pleased to report that 2010 was a year of both steady
progress and historic transformation for Xerox. Our results speak
to the strength of our business model, the expanding value we
bring to our customers, our growing distribution capability and the
determination of our people to do what it takes to give you a good
return on the trust you place in us. Here is a summary of how we
performed in 2010:
• We delivered adjusted earnings per share of 94 cents1 for the
year – well ahead of our expectations as we entered 2010.
• Total revenue was $21.6 billion – up 3 percent1 on a
pro-forma basis.
• We generated a very substantial $2.7 billion in cash from operations.
• From the time we acquired Affiliated Computer Services (ACS) in
February, we reduced debt by $1.9 billion.
• Our operating margin for the year was 9.6 percent1 – an
improvement of one percentage point1 over the previous year on
a pro-forma basis.
These are the basic facts, but they don’t begin to tell the whole story.
When the history of Xerox for this decade is written, I have no doubt
that 2010 will be viewed as a pivotal time. Many businesses talk about
transformation. We’re actually doing it. Through last year’s acquisition
of Affiliated Computer Services, our significant expansion into services
and our expanding distribution capacity, Xerox is now the world’s
leading enterprise for business process and document management.
The New Xerox
Most of you know us best for our world leadership in document
technology and services – printers, multifunction devices, copiers,
production publishing systems, managed print services, and
related software and solutions. We’re proud of that heritage and
we continue to build on it today. And now we are also a leader in
business process and IT outsourcing. We offer our customers a
wide variety of global services that may surprise you – from claims
reimbursement and electronic toll transactions to the management
of HR benefits and customer care centers.
Think of the modern-day enterprise as a multi-story office building
with IT occupying one floor, customer care on another, HR on top
of that and then finance and accounting on another. You might
just find the new Xerox on any one or all of these floors using our
expertise in business process and IT outsourcing to work behind the
scenes to make it all operate more efficiently and more effectively.
2
FPO
Ursula M. Burns
Chairman and Chief Executive Officer
“ Xerox is now in places you may not
expect to see us and still in places that
are a natural fit with our technology.”
And if you think of a vertical column running the height of the
building, that would be our document management capability,
supporting every facet of the enterprise.
Many of these functions and operations require expertise most
companies don’t have and time most companies don’t want to
invest. It’s not their real business. By outsourcing it to Xerox, our
clients have more freedom to focus on what counts: their core
business, their real business. And we do it in such a way that
our customers save money and improve productivity by taking
advantage of the scale, speed and simplification that comes from
our advantaged technology and expertise in managing basic and
complex business functions. As a result, Xerox is now in places you
may not expect to see us and still in places that are a natural fit with
our technology – all indicative of our transforming business and our
exciting future. Here are a few examples of what I mean:
• 3 Italia, the Italian global media company, turned to Xerox to
provide superior customer care services for nine million customers.
3 Italia joins a long list of customers who use our services in
industries ranging from high-tech to aviation. With more than
34,000 customer care agents in 142 customer care centers around
the world, we handle more than one million customer transactions
every day – and we do it in 20 different languages.
• The State of Wisconsin signed an eight-year, $30 million
• And, of course, we’re using ACS ourselves to run some of our
contract to have Xerox continue handling the State’s child-
support payment processing operations – including processing
and disbursing payments, performing bank reconciliation and
managing a customer service call center. All 50 states have
contracts with us for a variety of business processing and other
services that include child support, food stamps, Medicaid,
disability, health and welfare.
own back-office operations such as HR benefits processing and
accounts payable.
Multiply those examples by thousands more and you begin to
see the scope and scale of our company – and the extraordinary
opportunities for growth.
• Fiat Group signed a five-year contract for Xerox to manage its
Growth Opportunities
print infrastructure company-wide. Expected results include a 30
percent reduction in print-related cost and a 50 percent reduction
in energy use. Fiat joins other Xerox customers for managed print
services like the Dow Chemical Company, Ingersoll Rand and
hundreds more.
• Transit riders in Denver will notice a faster, more efficient and
greener experience as the City implements an advanced fare
collection system managed by Xerox. As part of a four-year, $15
million contract, public transportation users will receive smart
cards, load them with a pre-paid amount and simply wave the
smart card in front of a scanner to gain access to the transit
system. We do this and similar applications – like E-ZPass™ – for
scores of municipalities.
• More than 20,000 Procter & Gamble employees will soon be able
to print e-mails, presentations and other business documents
directly from their smart phones. It’s all part of a much broader
Enterprise Print Services strategy managed by Xerox for P&G
around the world. It’s credited with driving cost down and
productivity up while helping the company meet its aggressive
sustainability goals.
• Aspen Marketing, the largest privately held marketing services
company in the United States, uses our digital technology –
including Xerox iGen4® presses, DocuTech® Highlight Color
Systems, Xerox FreeFlow® Web Services and XMPie® PersonalEffect
Cross-Media solution – to help auto dealerships increase floor
traffic and grow revenue from maintenance services. They’re
promoting client loyalty through personalized direct-marketing
materials such as postcards, letters and invitations.
• The Scotts Miracle-Gro Company, the industry-leading lawn and
garden care company, turned to Xerox for help on upgrading
its IT infrastructure across Europe. The 10-country overhaul was
accomplished in four months while reducing costs, improving
performance and embedding better innovation.
• To maximize ROI on its 401(k) plan, a global defense and
technology giant asked Xerox to design and implement a
communication campaign to educate employees about the
importance of saving for retirement. The results: increased
employee participation rates, increased contribution rates and
improved asset allocation.
With the building of our services business alongside our technology
business, the size of the market we address has grown exponentially.
Our traditional technology-driven market is valued at about
$130 billion and is relatively flat. But we now participate in two
additional markets:
• Business Process Outsourcing, which is currently valued at over
$150 billion and is growing at over 5 percent per year.
• Information Technology Outsourcing, which is currently valued at
$250 billion a year and is growing at over 3 percent per year.
In total, that’s a more than $500 billion market – more than three
times our traditional opportunity. We’re attacking it aggressively on
four fronts.
First, we’re accelerating the transition to color. Until recently,
the barrier to “color everywhere” has been cost. That barrier was
broken first in the home with the advent of affordable color ink-jet
printers. Now we’re breaking the cost barrier in office and production
environments with our advantaged solid ink technology. For some
applications, a color page is already priced the same as a black-and-
white one.
We have our eyes wide open to the trends in the marketplace
around a declining use of paper for transactional black-and-white
documents. A good example is all those bill statements that used to
be mailed hardcopy every month and are now distributed by e-mail.
If you looked around most offices these days, you’d be convinced
that paper is never really going away. That may be true, but the way
we use paper is changing and our dependency on it is declining.
The higher-value print communications are those produced in color –
photo books, marketing collaterals, direct mailers and packaging. And
those printed in color with messages customized for the individual
cut through clutter in ways that no electronic communication ever
can. That’s why our investments in printing are focused entirely on
breaking the cost barriers in color and advancing digital technology
for the creation of real-time, relevant, personalized communications.
Xerox 2010 Annual Report
3
Net Income – Xerox
(millions)
Total Revenue
(millions)
Annuity Revenue
(included in total revenue – millions)
’06
’07
1,210
1,135
’08
230*
1,047*
’09
’10
485*
613*
606*
1,296*
’06
’07
’08
’09
’10
15,895
17,228
17,608
15,179
21,633
’06
’07
’08
’09
’10
11,438
12,475
12,929
11,629
17,776
“ We’ve moved aggressively in
recent years to both strengthen the
distribution channels we have and
acquire the new channels we need.”
Third, we’re extending our lead in document outsourcing. We’re
the acknowledged leader and intend to keep it that way. Our value
proposition is simple: we can do your document management more
efficiently and at less cost than you can do it yourself. In today’s
world, that’s a powerful statement. And it removes one more
distraction from our clients’ desire to focus on their core business.
To that end, here’s another unexpected place you’ll find Xerox today:
Mediaware Digital is a leading provider of digitally printed packaging.
It depends on Xerox’s Automated Packaging Solution to produce the
packaging for Microsoft’s Windows 7. It’s a good example of how
our printing business has expanded way beyond putting marks on
a sheet of paper – and why our technology is needed and remains
relevant well into the future.
Although it may seem counter-intuitive coming from Xerox, we almost
always help our customers print less, thereby saving them money
and helping them minimize their impact on the environment. One
example: At Procter & Gamble, we consolidated all the devices it used
for printing, copying, scanning and faxing into a more manageable
and cost-efficient network of multifunction systems. The managed
print services we provide to P&G has enabled it to print eight million
fewer pages and reduce print-related energy by 30 percent.
Second, we’re expanding our distribution. We already have
the industry’s broadest distribution to large enterprises and we
continue to increase our distribution capacity to small and mid-size
businesses. We understand that in today’s world people buy and
engage in a variety of ways. We’ve moved aggressively in recent
years to both strengthen the distribution channels we have and
acquire the new channels we need.
One great move by Xerox was the acquisition of Global Imaging
Systems a few years ago. The GIS network of 29 core companies
gave us an additional 1,400 feet on the street. We’ve since
expanded our distribution even more with acquisitions in key U.S.
markets and in the Netherlands. You can expect to see us do more
of the same – growing our network of channels so more people
are on more streets selling more Xerox technology and services.
Fourth, we’re expanding our business process and IT
outsourcing businesses globally. Our acquisition of ACS was
largely based on our confidence in the significant services growth
opportunity. Over 90 percent of the ACS business is currently in
the United States. Our global strength and brand awareness give
ACS the capability and permission to expand into markets around
the world – often growing our business with existing Xerox clients.
Our innovation in areas like advanced imaging and data analysis
gives us an advantage in how we serve our clients – more ways of
automating typically manual processes and more ways to simplify
often complex document and data-intensive transactions, like
claims reimbursement and invoice processing. Our expertise in
creating cloud-based platforms for these services and our extensive
experience in labor management for delivering quality support
become key differentiators for Xerox and position us incredibly well
for long-term growth.
* See Page 7 for the reconciliation of the difference between this financial measure that is not
in compliance with Generally Accepted Accounting Principles (GAAP) and the most directly
comparable financial measure calculated in accordance with GAAP.
44
Color Revenue
(included in total revenue – millions)
Net Cash from
Operating Activities
(millions)
’06
’07
’08
’09
’10
5,578
6,356
6,669
5,972
6,397
’06
’07
’08
’09
’10
1,617
1,871
939*
1,554*
2,208
2,726
One very positive sign: last year, we developed a services pipeline
of more than $5 billion in business that neither Xerox nor ACS could
have signed without the value the other brought to the table.
So we do not want for opportunity. I have great confidence in
our value proposition and in the technology and talent we have to
deliver it. And that’s a very good place to be.
Renowned Innovation
Our Real Business: Sound Strategy and Effective Execution
We now have two distinct yet synergistic business segments –
technology and services. This gives us a steady mix of annuity revenue.
In technology, it comes from service and supplies. In services, it comes
from multi-year outsourcing contracts. Together, they account for
more than 80 percent of our total revenue – a very attractive feature
of our business model. By the way, annuity revenue in 2010 on a pro-
forma basis was up 2 percent without the impact of currency1.
This company was built on innovation, which remains central to our
strategy today. If you could look under the hood of our R&D labs
around the world, you would probably be surprised at what you would
find. You would see work that is stretching the boundaries of what
is possible in digital printing of course, but you would also find in at
least equal measure work on intuitive data analysis and a variety of
green technologies to make business processes more sustainable. In
other words, you would see innovation that reflects the new Xerox.
In technology, our annuity stream is fueled by the sales of Xerox
equipment. Last year, equipment sales were up a significant 10
percent without the impact of currency1. That growth reflected
both strong demand for new products and expanded distribution
coverage around the world. The combination positioned us
extraordinarily well to take advantage of an improving economy
and the willingness for customers to begin investing in technology.
“ …revenue from services was up
3 percent. Business signings were
up 13 percent.”
One measure of how well we are doing is the number of patents
our innovators are awarded. Last year, that number was 1,031 – up
46 percent from 2009. That would rank us in the top 20 companies.
Last year’s patents included innovations to improve inventory
management, e-mail overload and personalized packaging. Other
patents help manage documents and make sense out of large
collections of information.
Just as our annuity revenue is fueled by equipment sales, our
equipment sales are fueled by a steady stream of new products.
During 2010, we launched 21 products with an emphasis on
maintaining our leadership in both the production and office markets.
Big contributors to equipment sales growth in 2010 were the Xerox®
Color 800 and 1000 series as well as the ColorQube® family of
multifunction systems, which uses our proprietary solid ink technology.
Total color revenue for the year was up 8 percent without the impact
of currency1 and color pages were up 9 percent – strong signs that our
color strategy is on track.
While our services business received a major power surge with the
acquisition of ACS, this part of our business has been evolving for a
very long time. By the time we acquired ACS one year ago, we already
had over a $3.5 billion services business – some of it through organic
growth and some of it through smaller acquisitions. The ACS deal was
a logical – albeit bold – leap forward. Overnight, we became a $10
billion services business.
Xerox 2010 Annual Report
55
Year-over-year our revenue from services was up 3 percent1 on a pro-
forma basis and indicators for future revenues remain strong. Business
signings were up about 13 percent on a trailing 12-month basis.
So positive results in both technology and services, good
opportunities going forward and a team that is focused on
excellent execution.
Delivering Shareholder Value
In 2010, we grew adjusted earnings, increased revenue, improved
operating margin and generated $2.7 billion in cash. We delivered
on our commitments across the board. And by doing so, we created
greater value for our shareholders. That was then; this is now.
We enter 2011 with building momentum and heightened
confidence. I don’t know that anyone has the hubris to predict with
any certainty what the post-recession business climate will be like.
But I do know this – businesses and governments, large and small,
will continue to struggle to contain costs, operate more efficiently,
grow revenue and build better client relationships. In other words,
they will want to go about their real business and Xerox is ready to
help them.
We’re confident, but not complacent. We’re differentiated in the
marketplace through our world-class innovation and renowned
service. We operate in some 160 countries and that’s becoming
more and more important to our larger customers who are looking
for global solutions. Our world-class brand gives us a high degree of
trust that helps us open doors and build relationships. We’re relevant
to our customers who rely on us to make them better. Our business
model has been tested under the most trying conditions the past
few years and proven to be both resilient and flexible. We are
focused on the basics – containing cost, generating cash, growing
revenue and providing you with good returns.
“ We are focused on the basics –
containing cost, generating cash,
growing revenue and providing
you with good returns.”
Our 2011 priorities and plans keep us on track to grow revenue,
generate significant cash and expand earnings. We won’t
compromise our leadership position or give an inch in document
technology. By continuing to expand distribution, we’ll increase
install activity and equipment sales – with an emphasis on driving
color pages that help boost our annuity stream.
We’ll continue to grow our services business by leveraging our brand,
global scale, innovation and delivery platforms to win multimillion-
dollar deals in business process, IT and document outsourcing.
We’ll remain diligent on cost and expense management, capturing
key cost synergies from the ACS acquisition and driving efficiencies
and productivity across the enterprise.
We’ll continue to focus on generating free cash flow1 – about $2
billion of it – all the while reducing debt, delivering dividends, closing
on “tuck-in” acquisitions and allotting a significant portion of
available cash to repurchasing stock.
We are now 136,000 people strong doing business in 160 countries
and all with an overreaching mission of delivering value to our
customers and our shareholders.
I’m confident we have the right strategy, a sound business model, the
competitive strength, a seasoned leadership team, talented people,
and the discipline and focus to put it all together for you in 2011.
This is our real business, and we’re ready.
Note: estimates regarding market size and growth are based on a combination of third-party
and internal information.
(1) We have discussed our results using non-GAAP measures. Management believes that these
non-GAAP financial measures provide an additional means of analyzing the current periods’
results against the corresponding prior periods’ results. However, these non-GAAP financial
measures should be viewed in addition to, and not as a substitute for, the Company’s reported
results prepared in accordance with GAAP. Our non-GAAP financial measures are not meant
to be considered in isolation or as a substitute for comparable GAAP measures and should be
read only in conjunction with our consolidated financial statements prepared in accordance
with GAAP. Our management regularly uses our supplemental non-GAAP financial measures
internally to understand, manage and evaluate our business and make operating decisions.
These non-GAAP measures are among the primary factors management uses in planning for
and forecasting future periods.
A reconciliation of these non-GAAP financial measures to the most directly comparable financial
measures calculated and presented in accordance with GAAP are set forth on the following page.
6
Ursula M. Burns
Chairman and Chief Executive Officer
Adjusted Net Income and Earnings Per Share (EPS):
(in millions, except per-share amounts)
As Reported
2010
2009
2008
Net Income
$ 606
EPS
$ 0.43
Net Income
$ 485
EPS
$ 0.55
Net Income
$ 230
EPS
$ 0.26
Year Ended December 31, 2010
Adjustments:
Xerox and Fuji Xerox restructuring charges
Acquisition-related costs
Amortization of intangible assets
ACS shareholders' litigation settlement
Venezuela devaluation costs
Medicare subsidy tax law change
Loss on early extinguishment of debt
Provision for litigation matters
Equipment write-off
Settlement of unrecognized tax benefits
Adjusted
Weighted average shares for reported EPS
Weighted average shares for adjusted EPS
Revenue Growth – pro-forma/without currency:
(in millions)
Revenue Category
Equipment sales
Supplies, paper and other
Sales
Service, outsourcing and rentals
Finance income
Total Revenues
Segment
Technology
Services
Other
Total Revenues
Memo:
Annuity Revenue
Color
355
58
194
36
21
16
10
—
—
—
690
$ 1,296
0.26
0.04
0.14
0.03
0.02
0.01
0.01
—
—
—
0.51
$ 0.94
1,351
1,378
41
49
38
—
—
—
—
—
—
—
128
$ 613
308
—
35
—
—
—
—
491
24
(41)
817
$ 1,047
0.05
0.06
0.04
—
—
—
—
—
—
—
0.15
$ 0.70
880
880
0.34
—
0.04
—
—
—
—
0.54
0.03
(0.05)
0.90
$ 1.16
895
897
Year Ended December 31,
As Reported
2010
As Reported
Pro-forma
2009
2009(1)
% Change
% Change
(Ex. Curr.)
Pro-forma
Change
Pro-forma Change
(Ex. Curr.)
$ 3,857
3,377
7,234
13,739
660
$ 21,633
$ 10,349
9,637
1,647
$ 21,633
$ 17,776
$ 6,397
$ 3,550
3,096
6,646
7,820
713
$ 15,179
$ 10,067
3,476
1,636
$ 15,179
$ 11,629
$ 5,972
$ 3,550
3,234
6,784
13,585
713
$ 21,082
$ 10,067
9,379
1,636
$ 21,082
$ 17,532
$ 5,972
9%
9%
9%
76%
(7)%
43%
3%
*
1%
43%
53%
7%
10%
10%
10%
76%
(7)%
43%
3%
*
1%
43%
53%
8%
9%
4%
7%
1%
(7)%
3%
3%
3%
1%
3%
1%
7%
10%
5%
8%
1%
(7)%
3%
3%
3%
1%
3%
2%
8%
* Percent change not meaningful.
(1) Pro-forma includes ACS’s 2009 estimated results from February 6 through December 31 adjusted for deferred revenue, exited businesses and certain non-recurring product sales.
(Ex. Curr.) = change without the effects of currency
Operating Margin:
(in millions)
Pre-tax income (loss)
Adjustments
Xerox restructuring charge
Acquisition-related costs
Amortization of intangible assets
Other expenses, net
Adjusted Operating Income
Pre-tax Income Margin
Adjusted Operating Margin
Year Ended December 31,
As Reported
2010
815
$
As Reported
Pro-forma
2009
627
$
2009(1)
$ 1,267
Change
Pro-forma
Change
30%
(36)%
483
77
312
389
(8)
72
60
285
(8)
104
60
382
$ 2,076
$ 1,036
$ 1,805
100%
15%
3.8%
9.6%
4.1%
6.8%
6.0%
8.6%
(0.3) pts
2.8 pts
(2.2) pts
1.0 pts
(1) Pro-forma reflects ACS’s 2009 estimated results from February 6 through December 31 adjusted to reflect fair-value adjustments related to property, equipment and computer software as well as customer
contract costs. In addition, adjustments were made for deferred revenue, exited businesses, certain non-recurring product sales and other material non-recurring costs associated with the acquisition.
2010 Free Cash Flow
(in millions)
Cash from Operations – Reported
Adjustments:
Cost of additions to land, buildings and equipment
Cost of additions to internal use software
Free Cash Flow
Year Ended
December 31, 2010
$ 2,726
(355)
(164)
$ 2,207
Adjusted Net Cash from Operating Activities
(in millions)
Operating Cash – As Reported
Adjustments:
Payments for securities litigation
Operating Cash – As Adjusted
Year Ended
December 31, 2008
$ 939
615
$ 1,554
Xerox 2010 Annual Report
7
Board of Directors
6
7
8
1
2
5
4
3
A: Member of the Audit Committee
B: Member of the Compensation Committee
C: Member of the Corporate
Governance Committee
D: Member of the Finance Committee
5. William Curt HunterA, C
Dean, Tippie College of Business
University of Iowa
Iowa City, IA
6. N. J. Nicholas, Jr.B, D
Investor
New York, NY
7. Ann N. ReeseC, D
Executive Director
Center for Adoption Policy
Rye, NY
8. Charles PrinceC, D
Senior Counselor,
Albright Stonebridge Group and
Albright Capital Management LLC
Retired Chairman and
Chief Executive Officer
Citigroup Inc.
New York, NY
1. Ursula M. Burns
Chairman and
Chief Executive Officer
Xerox Corporation
Norwalk, CT
2. Richard J. HarringtonA
Retired President and
Chief Executive Officer
The Thomson Corporation
Stamford, CT
3. Mary Agnes WilderotterD
Chairman and Chief Executive Officer
Frontier Communications Corporation
Stamford, CT
4. Robert A. McDonaldA, B
Chairman, President and
Chief Executive Officer
The Procter & Gamble Company
Cincinnati, OH
8
Glenn A. BrittA, B
Chairman and Chief Executive Officer
Time Warner Cable Inc.
New York, NY
(Not pictured)
Robert J. KeeganB
Retired Chairman, President and CEO
The Goodyear Tire & Rubber Company
Akron, OH
(Not pictured)
Xerox 2010 Annual Report
9
Our Business
Business Overview
With sales of $22 billion and operations
in 160 countries, we are the world’s leading
enterprise for business process and document
management. We focus on managing the
documents and millions of transaction touchpoints
that simplify the ways real business gets done.
We provide the industry’s broadest portfolio of document technology,
services and software, and the most diverse array of business process
and IT outsourcing support. Our document technology offerings serve
businesses of all sizes and across industries to deliver solutions for both
the workplace and production print environments. We leverage our
technology and the document expertise of our employees to deliver
further value for our customers through our document outsourcing
solutions, which help customers improve their productivity and reduce
costs. We have transformed our business with the acquisition of
Affiliated Computer Services, Inc. (“ACS”) in February 2010, which allows
Xerox to capitalize on the rapidly growing services market. Through our
business process and IT outsourcing we offer global services from claims
reimbursement and electronic toll transactions to the management of
HR benefits and customer care centers to the operation of a company’s
technology infrastructure.
10
We are a leader in a large, diverse and
growing market estimated at over $500 billion
(in billions)
$130
$150+
$250
• $250B Information Technology Outsourcing
We specialize in designing, developing and delivering
effective IT solutions. By outsourcing their IT infrastructure,
companies are able to streamline and improve their
IT functions while reducing costs and improving their
competitive position. We apply thought leadership,
innovation and operational excellence to deliver the
highest level of service delivery to our customers.
• $150B+ Business Process Outsourcing
We are the largest worldwide diversified business process
outsourcing company in the large and growing BPO market.
The BPO market comprises the outsourcing of non-core,
mission-critical business processes and functions that
clients need to run their day-to-day operations. The market
is very broad, encompassing horizontal business processes
such as human resource management and finance and
accounting, as well as industry-specific business processes.
• $130B Document Management
We are well-positioned to lead in this market. The
innovation that we bring to document systems, software
and integrated solutions is unparalleled in the industry and
is built into our broad portfolio of technology and services.
These market estimates are calculated by leveraging third-party forecasts
from firms such as International Data Corporation and InfoSource in
conjunction with our assump tions about our markets.
Our Strategy
We are well-positioned to lead in the markets in which we participate.
Our strategy leverages our core strengths to drive growth within our
segments and lines of businesses.
Core Strengths
Businesses
Growth Drivers
Accelerate
color transition
Advance customized
digital printing
Expand distribution
Extend lead in
document outsourcing
Expand BPO and
ITO globally
Leverage
innovation
Services
• Document
Outsourcing
• Business Process
Outsourcing
• IT Outsourcing
Our core strengths include:
• Our Brand – We have a strong and well-recognized brand that is known
by businesses worldwide for delivering industry-leading document
technology, services and solutions.
• Global Presence – Our geographic footprint spans 160 countries
and allows us to serve customers of all sizes to deliver superior
technology and services, regardless of complexity or number of
customer locations.
• Renowned Innovation – We have a history of innovation and, with
more than 10,200 active U.S. patents and five global research centers,
we are committed to continuing to lead in the document technology
industry and to leverage our technology into new service areas.
• Services Operational Excellence – We have an operational
excellence model that leverages our global delivery capabilities,
production model, incentive-based compensation process, proprietary
systems and financial discipline to deliver productivity and lower
costs for our customers.
We organize our business around two segments: Technology
and Services.
• Our Technology segment comprises our business of providing
customers with document technology and related supplies, technical
service and equipment financing. Our product categories within this
segment include Entry, Mid-range and High-end products.
• Our Services segment is comprised of business process outsourcing,
information technology outsourcing and document outsourcing
services. Because we provide all three of these business services,
we are uniquely positioned in the industry, and we believe this allows
us to provide a differentiated solution and deliver greater value to
our customers.
Xerox is Uniquely Positioned*
Business Process
Outsourcing
Document
Outsourcing
Information
Technology
Outsourcing
* For a description of how we are uniquely positioned, see the Shareholder
letter on page 2, left column, last paragraph.
Xerox 2010 Annual Report
11
Document Technology• High-end • Mid-range • EntryOur BrandRenowned InnovationGlobal PresenceServices Operational Excellence Acquisitions
In February 2010, we acquired Affiliated Computer Services, Inc.
ACS is a premier provider of diversified business process outsourcing and
information technology services and solutions to commercial
and government clients worldwide.
Subsequent to the acquisition of ACS, we acquired three additional
service companies, further expanding our BPO capabilities:
• In July 2010, we acquired ExcellerateHRO, LLP (“EHRO”), a global
benefits administration and relocation services provider. This
acquisition establishes ACS as one of the world’s largest pension plan
administrators and a leading provider of outsourced health, welfare
and relocation services.
• In October 2010, we acquired TMS Health, LLC (“TMS”), a U.S.-based
teleservices company that provides customer care services to the
pharmaceutical, biotech and healthcare industries. Through TMS, we
will improve communication between pharmaceutical companies,
physicians, consumers and pharmacists. By providing customer
education, product sales and marketing, and clinical trial solutions,
we build on our ITO and BPO services we are already delivering to
the healthcare and pharmaceutical industries.
• In November 2010, we acquired Spur Information Solutions, Limited
(“Spur”), one of the United Kingdom’s leading providers of parking
enforcement computer software used. Spur’s core software helps
governments implement and enforce local parking codes across
municipalities. The acquisition strengthens our broad portfolio of
services that support the transportation industry.
Additionally in 2010, we acquired two companies to further expand our
distribution capacity:
• In January 2010, we acquired Irish Business Systems Limited (“IBS”)
to expand our reach into the small and mid-size business market
in Ireland. IBS, a managed print services provider, has eight offices
located throughout Ireland and is the largest independent supplier of
digital imaging and printing solutions in Ireland.
• In September 2010, we acquired Georgia Duplicating Products, Inc.,
an office equipment supplier. This acquisition furthers our strategy
of supporting business customers across the U.S. with an expanding
network of office technology providers.
Our Business
We will leverage our core strengths and market opportunities to grow our
businesses by executing on the following growth initiatives:
• Accelerating the Transition to Color – We have the broadest color
portfolio in the industry and leading technologies to help customers
realize the communication benefits of printing in color. Cost and
quality improvements are driving the transition from black-and-white
to color. With only 23% of Xerox pages printed on color devices, we
believe there remains tremendous opportunity to grow color pages
and revenues.
• Advancing Customized Digital Printing – We are the leader in
digital production printing, and we continue to create new market
opportunities for digital printing through technology that enables
personalized promotional and transactional documents, short-run book
publishing, cross-media customized campaigns and more. Color digital
production pages are estimated to grow over 20% CAGR from 2009 to
2014, according to internal market estimates.
• Expand Distribution – We strive to ensure Xerox is considered by every
customer and potential customer. We will continue to broaden our
distribution capacity through acquisitions and channel partnerships
targeted at expanding our presence in the small and mid-size business
(“SMB”) market, and we will capitalize on our coverage investments
and partnerships to drive growth in digital production printing.
• Extending Lead in Document Outsourcing – We lead the industry with
end-to-end Document Management Services. Through offerings such
as managed print services, we can help our customers save up to 30%
on printing costs by optimizing their use of document systems across
an entire enterprise. We will seek to grow our document outsourcing
revenue by expanding our print services offerings to smaller companies,
delivering solutions in new service categories such as multi-channel
marketing communications, and leveraging our BPO and ITO presence
to deliver even greater value to our customers.
• Expand BPO and ITO Globally – In 2010, approximately 90% of our
BPO and ITO revenues were from services provided to customers in the
United States. We believe there is tremendous opportunity to leverage
Xerox’s global presence and customer relationships to expand our BPO
and ITO services internationally.
• Leverage Innovation – We have a strong heritage in innovation and
we continue to invest heavily in research and development. In 2010,
together with Fuji Xerox, our research and development spending was
$1,602 million. We see great opportunity in applying our document
management technology to deliver industry-leading document
solutions to the market, to increase ACS’s existing BPO capabilities,
and to deliver new services to help customers better manage their
document-intensive business processes.
12
Business Model Fundamentals
Our annuity-based business model yields
strong and stable cash generation and
earnings growth.
Revenue Stream
18%
Through our annuity-based business model, we deliver significant cash
generation and have a strong foundation upon which we can expand
earnings.
Annuity Model
The fundamentals of our business rest upon an annuity model that
drives significant recurring revenue and cash generation. Over 80%
of our 2010 total revenue was annuity-based revenue that includes
contracted services, equipment maintenance and consumable supplies,
among other elements. Some of the key indicators of annuity revenue
growth include:
• The number of page-producing machines in the field (“MIF”), which is
impacted by the number of equipment installations
• Page volume and the mix of color pages, as color pages generate more
revenue per page than black-and-white
• Services signings growth, which reflects the year-over-year increase in
estimated future revenues from contracts signed during the period as
measured on a trailing 12-month basis
• Services pipeline growth, which measures the year-over-year increase
in new business opportunities
• Expanding the digital production printing market, as this is key to
increasing pages.
82%
• 82% Annuity
Approximately 82% of our revenue, annuity includes
revenues from services, maintenance, supplies, rentals
and financing.
• 18% Equipment Sales
The remaining 18% of our revenue comes from
equipment sales, from either lease arrangements that
qualify as sales for accounting purposes or outright
cash sales.
Cash Generation
The combination of consistently strong cash flow from operations
and modest capital investments enabled us in 2010 to pay down a
significant amount of the debt associated with the ACS acquisition.
Cash generation in the future will continue to provide a return to
shareholders through:
• Buying back shares under our share repurchase program once debt
leverage targets are met
• Expanding our distribution and business process outsourcing
capabilities through acquisitions
• Maintaining and, over time, increasing our quarterly dividend.
Expanded Earnings
We will expand our operating margin and future earnings through:
• Modest revenue growth
• Driving cost efficiencies to balance gross profit and expense
• Repurchasing shares
• Making accretive acquisitions.
Xerox 2010 Annual Report
13
Our Business
Segment Information
Technology
Our reportable segments are Technology, Services and Other. We
present operating segment financial information in Note 2 – Segment
Reporting in the Consolidated Financial Statements, which we
incorporate by reference here. We have a very broad and diverse base
of customers by both geography and industry, ranging from SMB to
graphic communications companies, governmental entities, educational
institutions and Fortune 1000 corporate accounts. None of our business
segments depends upon a single customer, or a few customers, the loss
of which would have a material adverse effect on our business.
The innovation that we bring to document
systems, software and integrated solutions
is unparalleled in the industry and is built
into our broad portfolio of technology, for
businesses of any size, in any industry,
around the world.
percent of digital
production color
pages produced on
Xerox technology
Technology includes the sale of products and supplies, as well as the
associated technical service and financing of those products. The
Technology segment is centered around strategic product groups that
share common technology, manufacturing and product platforms.
Revenues by Business Segment
(in millions)
$1,647
$9,637
$10,349
• $10,349 Technology
Technology includes the sale of products and supplies,
as well as the associated technical service and financing
of those products.
• $9,637 Services
Our Services segment comprises three service offerings:
Business Process Outsourcing (“BPO”), Information
Technology Outsourcing (“ITO”) and Document
Outsourcing (“DO”).
• $1,647 Other
The Other segment primarily includes revenue from paper
sales, wide-format systems, and GIS network integration
solutions and electronic presentation systems.
14
9percent year-over-year increase in equipment sale revenue>509percent color page growth21product launches in 20107percent color revenue growth100billion dollar + market opportunity Technology Revenue Mix
22%
22%
56%
• 56% Mid-range
The Mid-range business comprises a wide range of
multifunction printers, copiers, digital printing presses,
and light production printers and copiers sold to enterprises
of all sizes.
• 22% Entry
The Entry business comprises products sold principally
to small and mid-size businesses.
• 22% High-end
The High-end business provides high-end digital monochrome
and color systems designed for customers in the graphic
communications industry and for large enterprises.
Our strategic product groups are as follows:
Entry
Entry comprises products sold principally to small and mid-size
businesses through a worldwide network of independent resellers, and
includes desktop monochrome and color printers and multifunction
printers (“MFPs”) ranging from small personal devices to larger
workgroup printers designed to serve the needs of demanding office
users. In 2010, we continued to build on our position in the market by:
• Leveraging the market transition from larger centralized devices
to more-affordable desktop-centric devices with a full portfolio of
products
• Making high-quality desktop color more affordable and easier to use
for small businesses and large enterprises alike
• Expanding our channel reach, partner programs and capacity to
support the needs of the SMB market.
Our Entry business products include:
• ColorQube 8570/8870: Featuring advanced cartridge-free solid ink,
the ColorQube 8570 and ColorQube 8870 color printers are powerful,
no-fuss and waste-conscious printing solutions that are simple, highly
productive and affordable, with the advantage of superior color
output. At 40 pages-per-minute (“ppm”), these products are perfect
for small to mid-size workgroups.
• Phaser® 7500: This 35 ppm color laser printer allows small and mid-
size workgroups to attain professional-quality results. Key features
include improved print quality as a function of 1200 dpi, new “Color
by Words” Xerox technology – a natural language technology enabling
easy and intuitive color adjustments – enhanced media handling
capabilities and longer lives on customer-replaceable parts.
• WorkCentre® 6400: The WC6400 is Xerox’s first desktop multifunction
printer that utilizes Xerox’s Smart Controller platform and supports
EIP, Xerox’s open platform allowing customization of applications on
the MFP. The WorkCentre 6400 is also able to handle busy volumes,
with print speeds up to 32 ppm color/37 ppm mono, and offers basic
finishing, Print Around and ID Card Copy.
Mid-range
Mid-range comprises products sold to enterprises of all sizes, principally
through dedicated Xerox-branded partners and our direct sales force.
We offer a wide range of multifunction printers, copiers, digital printing
presses and light production devices that deliver flexibility and advanced
features.
In 2010, our Mid-range business continued to build on our position in
the market by:
• Enhancing our already strong product portfolio, making color more
affordable, easier to use, faster and more reliable, while maintaining
our leadership position in black-and-white
• Driving to a leadership position in the combined color page printer and
color MFP market segments
• Offering a complete range of services and solutions in partnership with
independent software partners that allow our customers to analyze,
streamline, automate, secure and track their document workflows.
Xerox 2010 Annual Report
15
Our Business
The breadth of our Mid-range product portfolio is unmatched. We
continued to build on this portfolio in 2010 with the launches of:
• Xerox WorkCentre 7120: Xerox’s new multifunction printer combines
affordable color with high-productivity workflow tools. Today’s MFPs
do far more than copy and print – they improve the way work gets
done; the WorkCentre 7120 helps SMBs maximize office productivity
and produce affordable, impactful color documents.
• WorkCentre 7545 and 7556: These new multifunction printers
are equipped with features to help mid-size businesses and large
workgroups boost productivity and meet their sustainability goals.
They offer speeds up to 45 and 50 ppm color and 45 and 55 ppm
black-and-white, respectively. The MFPs, which can copy, scan, fax and
e-mail, include advanced document management and workflow tools
to make office work easier.
• Xerox Color 550/560 Digital Color Printer: The new Xerox Color
550/560 printer, with an easy-to-use color touchscreen, benchmark
image quality and flexible finishing options, is an efficient choice
for quick-print shops, small commercial printers, in-plant operations,
advertising agencies, creative shops and office settings. It is the perfect
fit in any print setting for applications ranging from marketing pieces
to office documents.
Extensible Interface Platform
Xerox Extensible Interface Platform (“EIP”)
is a software platform upon which developers
can use standard Web-based tools to create
server-based applications that can be configured
for the multifunction printer’s (“MFP’s”)
touch-screen user interface. It brings a new
world of possibilities to the Xerox MFP – the
ability to adapt to, support and automate
the work processes of our customers.
16
Xerox Mobile Offerings
These offerings make it easier for office workers
to print from anywhere, at anytime. Mobile
office workers and IT professionals stay
productive with three tools that make it easier
than ever to print, regardless of location:
• Xerox Mobile Print Solution makes mobile printing
simpler and more convenient. It keeps your business
documents secure while printing from any smartphone
or electronic device, with no need to download
cumbersome drivers, tools or software.
• Xerox Mobile Express Driver enables printing from a
PC to virtually anywhere. It is a single, universal printer
driver that can be downloaded to a PC and used to print
to any PostScript device on a network, including printers
made by other manufacturers.
• Secure Access Unified ID System allows remote workers
and students to send documents to a centralized print
server and activate their job at the device with a swipe
of their magnetic or proximity ID card for authentication.
This gives users quick, easy and secure access to
documents wherever they need them.
High-end
We provide High-end digital monochrome and color systems designed
for customers in the graphic communications industry and for large
enterprises. These High-end devices enable digital on-demand printing,
digital full-color printing and enterprise printing. We are the leading
provider in the market offering a complete family of monochrome and
color production systems, business development tools and workflow
solutions. We are creating new market opportunities in targeted
application areas with digital printing as a complement to traditional
offset printing.
For more than two decades, we have delivered innovative technologies
that have revolutionized the production printing industry. We are the
industry leader in the number of pages produced on digital production
color presses. We continued to build on our award-winning lineup in
2010 with the launches of:
• Xerox Color Press 800 and 1000: These new products are additions
to the portfolio and are positioned below iGen4, and above the
DocuColor 8002. They offer customers a set of new innovative
features. The optional fifth housing for clear dry ink allows users to
create new applications and/or add value to existing work. The clear
dry ink allows for images and text to be highlighted for visual impact,
or digital watermarks applied for artistic effect. Flexible finishing
options include high-capacity stackers, booklet makers and a tape
bind option exclusive to Xerox.
• Xerox iGen4 EXP: We added more capabilities to the flagship of the
production color portfolio, iGen4. The industry’s most reliable and
productive press added a number of new options that expand the
reach of iGen, enabling new applications that were previously done
only on offset presses. The expanded sheet size of 26", or 660mm,
allows print providers to produce full-size trifold brochures and more
multi-up images such as postcards and business cards per page. A new
touchless workflow allows for jobs to be completed without manual
intervention or setup, saving time, reducing errors and producing
more-sellable prints. Integrating with the Adobe PDF print engine
drives quick and reliable printing of native Adobe PDF files.
We are enabling print providers in graphic communications, service
bureaus and large enterprises to profit and grow by meeting their
customers’ specific business needs with just-in-time, one-to-one and
e-based services – rather than simply manufacturing a printed piece.
FreeFlow Digital Workflow: Our FreeFlow digital workflow is a collection
of software technology solutions that our customers can use to improve
all aspects of their processes, from content creation and management
to production and fulfillment. Our digital technology, combined with
total document solutions and services that enable personalization
and printing on demand, delivers value that improves our customers’
business results.
Through our industry-leading FreeFlow Digital Workflow collection and
FreeFlow Print Server, we deliver three primary values to our customers –
the ability to Connect, Control and Enable. Our solutions:
• Connect our customers to their customers 24/7, enabling them to be
open for business around the clock.
• Control our customers’ costs, environmental impacts and security.
Automated workflows provide extensive productivity gains and greatly
increase document integrity by eliminating manual processes.
• Enable new applications and revenue streams such as photo books,
secure event tickets and packaging.
Services
We are behind the scenes managing the
essential processes that your business can
count on to be successful.
Our Services segment comprises three service offerings: Business Process
Outsourcing (“BPO”), Document Outsourcing (“DO”) and Information
Technology Outsourcing (“ITO”). We provide non-core, mission-critical
services that our clients need to run their day-to-day business. The services
we provide enable our clients to concentrate on their core operations,
respond rapidly to changing technologies and reduce expenses associated
with their business processes and information processing.
The majority of our Services business is the result of our acquisition of
ACS in February 2010.
Xerox 2010 Annual Report
17
37billion public transport fares processed annually4.4million employees and retirees served by HR services900million healthcare claims processed annually3year leader in Gartner MPS Magic Quadrant350thousand desktops supported1.5million phone calls handled daily in our call centers • Customer Care: One of our core values is delivering a positive customer
care experience. We have years of experience providing customer care
outsourcing services that can improve productivity, efficiency and
customer retention. Services include:
– Strategic Advisory Services
– Account Activations
– Collections
– Device/Technical Support.
• Finance and Accounting Outsourcing: Our finance and accounting
services allow our clients to benefit from our global delivery model
and our quality management systems, resulting in better accuracy
and timeliness, and reduced risk for our clients. Services include:
– Accounts Payable, Accounts Receivable
– Billing
– General Accounting
– Tax Management
– Treasury and Risk Management
– Time and Expense Reporting.
• Healthcare Payer and Insurance: We deliver administrative efficiencies
to our healthcare payer clients through our scalable and flexible
transactional business solutions, which encompass both our global
delivery model and domestic payer service centers. Services include:
– Healthcare Payer Claim Processing
– Healthcare Payer Customer Care
– Cost Recovery, Audit, Cost Avoidance.
• Healthcare Provider: Our healthcare provider business offers services
and solutions to meet the critical financial, operational and clinical
needs of the healthcare provider industry. We offer a full range of
services, including:
– Consulting Solutions
– Revenue Cycle Management
– Application Services.
Our Business
Services Revenue Mix
13%
34%
53%
• 53% Business Process Outsourcing
BPO, which provides a multitude of services for
our customers, is the largest component of the
Services segment.
• 34% Document Outsourcing
Our DO business provides services that help customers
optimize their printing infrastructure and streamline their
communication and business processes.
• 13% Information Technology Outsourcing
Our ITO business allows our customers worldwide to focus
on their competencies instead of their IT infrastructure.
Business Process Outsourcing
We are the largest worldwide diversified business process outsourcing
company, with focused offerings in education, transportation,
communication, healthcare, government, finance and accounting
services, manufacturing, consumer goods and retail. Our BPO service
offerings are focused, transaction-intensive, back-office functions. Our
BPO services include:
• Human Resources Services: We provide a comprehensive portfolio of
human resources solutions that allow our clients to benefit from best
practices, our subject matter expertise, consulting and technological
solutions. Our human resources services include:
– HR Consulting
– HR Outsourcing
– Total Benefits Outsourcing
– Learning.
18
• Government Services and Solutions: We help federal, state and
Our ITO services include:
local government agencies by providing services that improve their
operating efficiency, increase the level of service provided to their
constituents, increase their revenue streams and reduce overall
operating costs of service delivery. Our service offerings include:
– Child Support Payment Processing
– Electronic Benefits Transfer
– Student Loan Servicing
– Government Records Management
– Electronic Payment Cards.
• Government Healthcare: We provide our state government clients
with health program management solutions to help them administer
their programs and control the cost of healthcare. We support the
full healthcare continuum, including member enrollment, claims
processing and health management. Our service offerings include:
– Medicaid Program Administration
– Healthcare and Quality Management
– Eligibility and Enrollment Solutions
– Pharmacy Benefits Management.
• Transportation Solutions: We help transportation agencies worldwide
address the unique challenges associated with revenue collection and
regulation compliance services. From fare collection to toll and parking
solutions and from back-office processing to infrastructure installation,
we provide systems and services that help governments with their
transportation problems. New innovations include the Smart Card
Fare Payment Solution – a streamlined and seamless fare payment
system. By adopting a fare payment system based on the financial
industry’s open standards, transit agencies can now enable riders to
tap contactless bankcards for point-of-entry payments.
Information Technology Outsourcing
We specialize in designing, developing and delivering effective IT
solutions. Our secure data centers, help desks and managed storage
facilities around the world provide a reliable IT infrastructure that
minimizes the chance of disruption to our clients’ daily operations.
With our global Information Technology Outsourcing solutions,
commercial businesses and government organizations worldwide can
focus on their competencies instead of their IT infrastructure.
Throughout our global IT services outsourcing portfolio, we:
• Infuse thought leadership and innovation
• Manage to the highest level of quality for service delivery
• Enable our customers to transform their organization.
• Data Center Outsourcing: We provide a 24/7 support organization
that maintains a unified set of tools and processes to support our
clients’ IT environments, including systems administration, database
administration, systems monitoring, batch processing, data backup
and capacity planning.
• Mid-range Server Outsourcing: We support our clients’ needs for
adaptable computing environments and their potential growth. We
provide comprehensive systems support services.
• Network Outsourcing: We provide telecommunications management
services for voice and data networks. We are able to leverage our
enterprise agreements, proprietary tools, procedures and skilled
personnel to provide our clients with a scalable and automated
processing environment.
• Remote Infrastructure Management (“RIM”): We provide RIM services
that allow our clients to retain control of their IT assets but outsource
the day-to-day IT operations management.
• Help Desk/Service Desk Management: We deliver specialized
service desk support from self-service to remote management and
diagnostics.
• Desktop Outsourcing: Our desktop services provide our clients with a
comprehensive approach to managing their end-user platforms and
devices. We design and execute desktop management strategies that
address and resolve issues such as enterprise bandwidth constraints,
unstable computing environments, areas of insecurity and unavailable
network resources.
• Managed Storage: Data storage requirements have become larger
and more complex. We help our clients define, monitor and optimize
their data storage requirements while reducing the complexity of their
storage environments and associated costs.
• Utility Computing: We support large corporations with our utility
computing model. Utility computing provides “pay for use” pricing for
mid-range server clients, which provides variable pricing and relieves
our clients from the burden of asset ownership.
• Disaster Recovery: We approach disaster recovery as a
multidisciplinary function. We assess our clients’ specific enterprise
requirements and then deploy solutions based on these requirements.
• Security Services: Our solutions provide security from the desktop to
LAN/WAN and Internet levels. We leverage a combination of mature
methodologies and industry best practices that afford increased
ability to protect valuable data while also satisfying industry audit
requirements.
• IT Commercial Services: We possess category knowledge, tools and
processes that allow us to reduce IT and telecommunication costs for
our clients.
Xerox 2010 Annual Report
19
Through these services, we:
• Help our clients save up to 30% on printing costs through managed
print services that optimize the use of document systems across an
entire enterprise
• Simplify document-driven processes, such as forms processing and
records management
• Manage in-house print operations and special events by handling
technology procurement and print/copy centers
• Make information easier to manage and find through digital imaging,
archiving and indexing
• Generate a better return on investment through personalized,
multi-channel marketing communications
• Improve commercial print operations, sales and profits through
document outsourcing.
As the market leader in managed print services, our approach to
optimizing across all print environments allows our customers to
print from anywhere to anywhere in a seamless way, while ensuring
compliance with budget targets, security protocols and environmental
sustainability programs.
Other
The Other segment primarily includes revenue from paper sales,
wide-format systems, and GIS network integration solutions and
electronic presentation systems. Paper comprised approximately
58% of the revenues in the Other segment.
Geographic Information
Our global presence is one of our core strengths. Overall, approximately
36% of our revenue is generated by customers outside the U.S.
Currently, ACS generates approximately 10% of its revenue outside the
U.S. We have a significant opportunity to leverage our global presence
and customer relationships to expand the ACS business in Europe and
developing markets.
Our Business
Cloud Computing
Xerox is uniquely positioned to bring the best
of enterprise-level Cloud services to our clients.
We’ve been involved in virtualization and
on-demand services for more than 20 years –
driving the evolution from mainframe computers
to the ASP model to utility computing. Cloud
is the next step in this evolution; representing
the maturation of what our company has
been doing all along. Our strength is delivering
secure, enterprise-level Cloud solutions to
large organizations with multi-site applications
and large transaction volumes. We create
and execute the entire solution – from the
initial consultation and development of the
most appropriate Cloud strategy to the
phased transformation.
Document Outsourcing
We are an industry leader in document outsourcing services, with
more than 20 years’ experience and 15,000 business professionals
across 160 countries.
We help companies optimize their printing infrastructure and streamline
their communication and business processes to grow revenue, reduce
costs and operate more efficiently. We specialize in the planning and
delivery of the following services:
• Managed print services for workplace, production environments and
virtual worker printing sites
• Consolidating in-house production and commercial printing under a
single point of control
• Improving communication processes and back-office functions
associated with creating, capturing, managing and routing customer,
employee and supplier information
• Designing, authoring and translating technical and user
documentation
• Creating personalized, multi-channel marketing communications.
20
Revenues by Geography
(in millions)
$2,500
$5,332
$13,801
To ensure our success, we have aligned our R&D investment portfolio
with our growth initiatives, including accelerating our color transition,
enhancing customer value by building on our services leadership, and by
strengthening our leadership in digital color printing.
Xerox conducts work in color science, computing, digital imaging, work
practices, electromechanical systems, novel materials, linguistics, work
practice analysis and other disciplines. Through our Smart Document
Technologies, we are developing ways to apply innovation to automate
and differentiate our Services offerings.
Sustaining engineering expenses, which are the hardware engineering
and software development costs we incur after we launch a product, are
included in our RD&E expenses.
RD&E Expenses
(in millions)
’10
’09
’08
• R&D
• Sustaining Engineering
$653
$128
$781
$713
$127
$840
$750
$134
$884
Fuji Xerox invested $821 million in R&D in 2010,
$796 million in 2009 and $788 million in 2008.
• $13,801 U.S.
• $5,332 Europe
• $2,500 Other Areas
Note: ACS generates approximately 10% of its revenue
outside the U.S.
Revenues by geography are based on the location of the unit reporting
the revenue and include export sales.
Research and Development
Innovation drives growth and keeps us at
the forefront of our industry.
Investment in R&D is critical for competitiveness in our fast-paced
markets. Approximately 55% of our equipment sales are from products
launched during the last two years. Our R&D investment also enables
innovation within our Services segment.
Research activities are conducted in the United States in Webster, New
York, and Palo Alto, California; in Canada in Mississauga, Ontario; in
Europe in Grenoble, France; and in Asia both at the India Innovation Hub
in Chennai, India, and in collaboration with Fuji Xerox, Ltd. (“Fuji Xerox”).
Xerox 2010 Annual Report
21
Our Business
Patents, Trademarks and Licenses
Xerox and its subsidiaries were awarded 1,031 U.S. utility patents in
2010. On that basis, we would have ranked 20th on the list of companies
that were awarded the most U.S. patents during the year. Including
our research partner Fuji Xerox, we were awarded over 1,600 U.S.
utility patents in 2010. Our patent portfolio evolves as new patents are
awarded to us and as older patents expire. As of December 31, 2010, we
held almost 10,200 design and utility U.S. patents. These patents expire
at various dates up to 20 years or more from their original filing dates.
While we believe that our portfolio of patents and applications has value,
in general no single patent is essential to our business or any individual
segment. In addition, any of our proprietary rights could be challenged,
invalidated or circumvented, or may not provide significant competitive
advantages.
In the U.S., we are party to numerous patent-licensing agreements
and, in a majority of them we license or assign our patents to others in
return for revenue and/or access to their patents. Most patent licenses
expire concurrently with the expiration of the last patent identified in
the license. In 2010, we added 16 new agreements to our portfolio of
patent-licensing and sale agreements, and Xerox and its subsidiaries
were licensor or seller in 14 of the agreements. We are also a party
to a number of cross-licensing agreements with companies that hold
substantial patent portfolios, including Canon, Microsoft, IBM, Hewlett-
Packard, Oce, Sharp, Samsung and Seiko Epson. These agreements vary
in subject matter, scope, compensation, significance and time.
In the U.S., we own more than 650 trademarks, either registered or
applied for. These trademarks have a perpetual life, subject to renewal
every 10 years. We vigorously enforce and protect our trademarks.
Marketing and Distribution
Our brand is valued at an estimated $6.1
billion and was ranked as a “Best Global
Brand” by Business Week.
We manage our business based on the principal business segments
described earlier. We have organized the marketing, selling and
distribution of our products and services by geography, channel type
and line of business.
We sell our products and services directly to customers through our
worldwide sales force and through a network of independent agents,
dealers, value-added resellers, systems integrators and the Web.
In large enterprises, we follow a services-led approach that enables us
to address two basic challenges facing large enterprise customers:
• How to optimize infrastructure to be both cost-effective and globally
consistent
• How to improve their value proposition and communication with their
customers
Our go-to-market approach includes the largest direct sales force in the
industry, with customers served by Client Managing Directors, Account
General Managers and Sales Representatives.
For small and mid-size business, we continue to expand our distribution
partnerships in North America with additional information technology
resellers and by enhancing our network of independent agents. In 2010,
we acquired two companies to further expand this distribution capacity.
In Europe, Africa, the Middle East and parts of Asia, we distribute our
products through Xerox Limited, a company established under the
laws of England, and related non-U.S. companies. Xerox Limited enters
into distribution agreements with unaffiliated third parties to provide
distribution of our products in many of the countries located in these
regions, and previously entered into agreements with unaffiliated
third parties providing distribution of our products in Iran, Sudan and
Syria. Iran, Sudan and Syria, among others, have been designated
as state sponsors of terrorism by the U.S. Department of State and
are subject to U.S. economic sanctions. We maintain an export and
sanctions compliance program and believe that we have been and are
in compliance with U.S. laws and government regulations for these
countries. We have no assets, liabilities or operations in these countries
other than liabilities under the distribution agreements. After observing
required prior notice periods, Xerox Limited terminated its distribution
agreements with distributors servicing Sudan and Syria in August 2006
and terminated its distribution agreement with the distributor servicing
Iran in December 2006. Now, Xerox only has legacy obligations to third
parties, such as providing spare parts and supplies to these third parties.
In 2010, total Xerox revenues of $21.6 billion included less than $0.2
million attributable to Iran, Sudan and Syria.
22
We operate in over 160 countries worldwide.
We provide the industry’s broadest portfolio of
document technology, services and software,
and the most diverse array of business processes
and IT outsourcing support through a variety of
distribution channels around the world.
• Xerox North America
North American Operations includes the United States
and Canada.
• Xerox Europe
Xerox Europe covers 17 countries across Europe.
• Developing Markets
Developing Markets supports more than 130 countries.
• Fuji Xerox
Fuji Xerox, an unconsolidated entity of which we own
25%, develops, manufactures and distributes document
management systems, supplies and services.
ACS maintains a global presence in the Business
Process Outsourcing and Information Technology
Outsourcing businesses and leverages the Xerox
distribution organizations within these geographies.
Competition
Although we encounter competition in all areas of our business, we are
the leader or among the leaders in each of our principal business segments.
We compete on the basis of technology, performance, price, quality,
reliability, brand, distribution, and customer service and support.
Our competitors in the Technology business include Canon, Ricoh,
Hewlett-Packard, Kodak, Oce, Konica Minolta and Lexmark. In the
Services business, our larger competitors are Hewlett-Packard, Genpact,
Teletech, Accenture, Aon Hewitt, Computer Services, IBM and Dell.
In addition, in the Services segment, we compete with in-house
departments performing the functions that we are seeking to have
them outsource to us.
We believe that our brand recognition, reputation for our business
process and document management knowledge and expertise, innovative
technology, service, breadth of product offerings, global distribution
channels, customer relationships and large customer base are important
competitive advantages. We and our competitors continue to develop and
market new and innovative products and services at competitive prices
and, at any given time, we may set new market standards for quality, speed,
function and level of service.
Global Employment
Globally, we have approximately 136,500 direct employees. We have
approximately 8,000 sales professionals, approximately 12,000 technical
service employees and over 46,000 employees serving our customers
through on-site operations or off-site delivery centers.
Xerox 2010 Annual Report
23
Our Business
Customer Financing
Manufacturing and Supply
We finance a large portion of our direct channel customer purchases
of Xerox equipment through bundled lease agreements. We believe
that financing facilitates customer acquisition of Xerox technology and
enhances our value proposition, while providing Xerox an attractive gross
margin and a reasonable return on our investment in this business.
Because our lease contracts permit customers to pay for equipment
over time rather than at the date of installation, we maintain a certain
level of debt to support our investment in these lease contracts. We
fund our customer financing activity through a combination of cash
generated from operations, cash on hand and proceeds from capital
market offerings. At December 31, 2010, we had $6.6 billion of finance
receivables and $0.6 billion of equipment on operating leases, or Total
Finance assets of $7.2 billion. We maintain an assumed 7:1 leverage
ratio of debt to equity as compared to our Finance assets and, therefore,
a significant portion of our $8.6 billion of debt is associated with our
financing business.
Our manufacturing and distribution facilities are located around the
world. The company’s largest manufacturing site is in Webster, New
York, where we produce fusers, photoreceptors, Xerox iGen and Nuvera®
systems, components, consumables and other products, and we have
an EA Toner plant located in Webster. Our other primary manufacturing
operations are located in: Dundalk, Ireland, for our high-end production
products and consumables; and Wilsonville, Oregon, for solid ink
products, consumable supplies and components for our Mid-range and
Entry products. We also have a major facility in Venray, Netherlands,
which handles supplies manufacturing and supply chain management
for the Eastern Hemisphere.
Our master supply agreement with Flextronics, a global electronics
manufacturing services company, to outsource portions of manufacturing
for our Mid-range and Entry businesses, continues into 2011.
We also acquire products from various third parties in order to increase the
breadth of our product portfolio and meet channel requirements. We have
arrangements with Fuji Xerox under which we purchase and sell products,
some of which are the result of mutual research and development
agreements. Refer to Note 7 – Investments in Affiliates, at Equity in
the Consolidated Financial Statements in our 2010 Annual Report for
additional information regarding our relationship with Fuji Xerox.
Services Global Production Model
We believe our global services production model is one of our key
competitive advantages. This model encompasses employees in
production centers around the world including India, Mexico, the
Philippines, Jamaica, Ghana, Brazil, Guatemala, Chile, Argentina, Spain,
Poland and Ireland, among others. Our global production model is
enabled by the use of proprietary technology, which allows us to securely
distribute client transactions within data privacy limits across a global
workforce. This global production model allows us to leverage lower-cost
production locations, consistent methodology and processes, and time
zone advantages.
24
Fuji Xerox
Backlog
Fuji Xerox is an unconsolidated entity in which we currently own a 25%
interest and FUJIFILM Holdings Corporation (“FujiFilm”) owns 75%.
Fuji Xerox develops, manufactures and distributes document processing
products in Japan, China, Hong Kong, other areas of the Pacific Rim,
Australia and New Zealand. We retain significant rights as a minority
shareholder. Our technology licensing agreements with Fuji Xerox ensure
that the two companies retain uninterrupted access to each other’s
portfolio of patents, technology and products.
International Operations
We are incorporating by reference the financial measures by
geographical area for 2010, 2009 and 2008 that are included in Note
2 – Segment Reporting in the Consolidated Financial Statements in
our 2010 Annual Report. See also the risk factor entitled “Our business,
results of operations and financial condition may be negatively impacted
by economic conditions abroad, including local economies, political
environments, fluctuating foreign currencies and shifting regulatory
schemes” in Part I, Item 1A of Form 10-K.
We believe that backlog, or the value of unfilled orders, is not a
meaningful indicator of future business prospects because of the
significant proportion of our revenue that follows contract signing and/
or equipment installation, the large volume of products we deliver from
shelf inventories, and the shortening of product life cycles.
Seasonality
Our technology revenues are affected by such factors as the introduction
of new products, the length of sales cycles and the seasonality of
technology purchases. These factors have historically resulted in lower
revenue in the first quarter and the third quarter.
Other Information
Xerox is a New York corporation, organized in 1906, and our
principal executive offices are located at 45 Glover Avenue,
P.O. Box 4505, Norwalk, Connecticut 06856-4505. Our telephone
number is (203) 968-3000.
In the Investor Information section of our Internet website, you will find
our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K and any amendments to these reports. We make
these documents available as soon as we can after we have filed them
with, or furnished them to, the Securities and Exchange Commission.
Our Internet address is www.xerox.com.
Xerox 2010 Annual Report
25
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
The following Management’s Discussion and Analysis (“MD&A”)
is intended to help the reader understand the results of operations
and financial condition of Xerox Corporation. MD&A is provided
as a supplement to, and should be read in conjunction with, our
consolidated financial statements and the accompanying notes.
Throughout this document, references to “we,” “our,” the “Company”
and “Xerox” refer to Xerox Corporation and its subsidiaries. References
to “Xerox Corporation” refer to the stand-alone parent company and
do not include its subsidiaries.
Executive Overview
We are a $22 billion leading global enterprise for business process and
document management. We provide the industry’s broadest portfolio of
document systems and services for businesses of any size. This includes
printers, multifunction devices, production publishing systems, managed
print services (“MPS”) and related software. We also offer financing,
service and supplies, as part of our document technology offerings. In
2010, we acquired Affiliated Computer Services, Inc. (“ACS”). Through
ACS we offer extensive business process outsourcing and information
technology outsourcing services, including data processing, HR benefits
management, finance support and customer relationship management
services for commercial and government organizations worldwide.
We operate in a market that is estimated to be $500 billion. We have
136,500 employees and serve customers in more than 160 countries.
Approximately 36% of our revenue is generated from customers outside
the U.S.
We organize our business around two segments: Technology and
Services.
•
•
Technology segment comprises our business of providing
Our
customers with document technology and related supplies, technical
service and equipment financing. Our product categories within this
segment include Entry, Mid-range and High-End products.
Our
Services segment is comprised of our business process
outsourcing, information technology outsourcing and document
outsourcing services. Because we participate in all three of these
lines of business, we are uniquely positioned in the industry, and
we believe this allows us to provide a differentiated solution and
deliver greater value to our customers.
The fundamentals of our business rest upon an annuity model that
drives significant recurring revenue and cash generation. Over 80%
of our 2010 total revenue was annuity-based revenue that includes
contracted services, equipment maintenance and consumable supplies,
among other elements. Some of the key indicators of annuity revenue
growth include:
•
•
•
•
The number of page-producing machines-in-the-field (“MIF”), which
is impacted by equipment installations
Page volume and the mix of color pages, as color pages generate
more revenue per page than black-and-white
Services signings growth, which reflects the year-over-year increase
in estimated future revenues from contracts signed during the period
as measured on a trailing12-month basis
Services pipeline growth, which measures the year-over-year increase
in new business opportunities
Subsequent to the acquisition of ACS, we acquired three additional
service companies, further expanding our BPO capabilities:
•
•
•
In July 2010, we acquired ExcellerateHRO, LLP (“EHRO”), a global
benefits administration and relocation services provider
In October 2010, we acquired TMS Health (“TMS”), a U.S.-based
teleservices company that provides customer care services to the
pharmaceutical, biotech and healthcare industries
In November 2010, we acquired Spur Information Solutions (“Spur”),
one of the United Kingdom’s leading providers of computer software
used for parking enforcement
Additionally, in 2010 we acquired two companies to further expand
our distribution capacity:
•
•
In January 2010, we acquired Irish Business Systems Limited
(“IBS”) to expand our reach into the small and mid-size business
market in Ireland
In September 2010, we acquired Georgia Duplicating Products
(“Georgia”), an office equipment supplier
Financial Overview
During 2010, despite the continued economic weakness, we began
to see improvement in our markets. Results remained strong in our
developing markets countries as well as in the small to mid-size business
market. We began to see increased demand and usage activity in large
enterprise customers, particularly in the fourth quarter 2010. We closed
2010 with strong revenue growth, operating margin expansion and
excellent cash generation, reflecting the strength of our business model
and the benefits of our expanded technology and service offerings.
26
Xerox 2010 Annual Report
Management’s Discussion
The following is a summary of key 2010 highlights:
•
•
•
•
Exceeded on earnings and cash generation commitments
Strong services performance, realizing benefits from the ACS
acquisition
Technology revenue and activity growth; innovative products
launched in key segments
Disciplined cost and expense management yielding operating
margin improvement
We completed the acquisition of ACS on February 5, 2010, and its results
subsequent to that date are included in our results. Total revenue of
$21.6 billion in 2010 increased 43% from the prior year, primarily as a
result of the ACS acquisition. Currency had a negligible impact on 2010
total revenues. In order to provide a clearer comparison of our results
to the prior year, we are also providing a discussion and analysis on a
pro-forma basis, where we include ACS’s 2009 estimated results from
February 6 through December 31 in our historical 2009 results(1). On
a pro-forma(1) basis, total revenue increased 3% in 2010, including a
negligible impact from currency.
2010 Annuity Revenue(2) increased 53% from the prior year, or 1%
on a pro-forma(1) basis. Currency had a 1-percentage point unfavorable
impact on pro-forma annuity revenue. 2010 Equipment Revenue
increased 9% from the prior year, including a 1-percentage point
negative impact from currency.
Net income attributable to Xerox for 2010 was $606 million and
included $690 million of after-tax costs and expenses related to
restructuring, intangibles amortization, acquisition-related costs and
other discrete and unusual items. Net income attributable to Xerox for
2009 was $485 million and included $128 million of similar after-tax
costs and expenses.
Cash flow from operations was $2.7 billion for 2010, primarily as a
result of increased earnings and working capital cash generation. Cash
used in investing activities of $2.2 billion primarily reflects the net
cash consideration of $1.5 billion for the ACS acquisition. Cash used in
financing activities was $3.1 billion, primarily reflecting the repayment of
ACS’s debt of $1.7 billion as well as net payments on other debt during
2010, including the early redemption of $660 million of debt.
Our 2011 priorities include:
•
•
•
•
Strengthening our leadership in Technology through competitively
advantaged products and increased distribution
Accelerating our services business – capture significant BPO
opportunity and continue improvements in ITO and document
outsourcing
Continued cost and expense discipline to enable operating margin
expansion
Driving cash flow, reducing debt and returning cash to shareholders
Our 2011 balance sheet and cash flow strategy includes: sustaining our
working capital improvements; continued reductions in non-financing
debt; leveraging of our financing assets (finance receivables and
equipment on operating leases); achieving an optimal cost of capital;
and effectively deploying cash to maximize shareholder value through
share repurchase, acquisitions and dividends.
In addition, as a result of providing lease equipment financing to our
customers, we expect to continue to make investments in lease contracts
(finance receivables and equipment on operating leases). Since we
maintain a certain level of debt to support this investment, we expect to
continue to leverage this investment in 2011 (see “Customer Financing
Activities” for additional information).
(1) The pro-forma information included within this MD&A is different from the pro-forma
information provided in Note 3 – Acquisitions. The pro-forma information included
in Note 3 presents the combined results for 2010 and 2009 as if the acquisition
was completed January 1st of each respective year. See the “Non-GAAP Financial
Measures” section for a further explanation and discussion of this non-GAAP measure.
(2) Annuity revenue = Service, outsourcing and rentals + Supplies, paper and other sales +
Finance income.
Currency Impacts
To understand the trends in our business, we believe that it is helpful to
analyze the impact of changes in the translation of foreign currencies
into U.S. Dollars on revenues and expenses. We refer to this analysis
as “currency impact” or “the impact from currency." This impact is
calculated by translating current-period activity in local currency using
the comparable prior-year period’s currency translation rate. This
impact is calculated for all countries where the functional currency is
the local-country currency. Revenues and expenses from our developing
market countries (Latin America, Brazil, the Middle East, India, Eurasia
and Central-Eastern Europe) are analyzed at actual exchange rates for
all periods presented, since these countries generally have unpredictable
currency and inflationary environments, and our operations in these
countries have historically implemented pricing actions to recover the
impact of inflation and devaluation. We do not hedge the translation
effect of revenues or expenses denominated in currencies where the
local currency is the functional currency.
Approximately 36% of our consolidated revenues are derived from
operations outside of the United States where the U.S. Dollar is not the
functional currency. When compared with the average of the major
European currencies and Canadian Dollar on a revenue-weighted basis,
the U.S. Dollar was 2% stronger in 2010 and 7% stronger in 2009, each
compared to the prior year. As a result, the foreign currency translation
impact on revenue was negligible in 2010 and a 3% detriment in 2009.
Refer to the “Gross Margin” section for additional information regarding
the impact of currency on our product costs.
Xerox 2010 Annual Report
27
Management’s Discussion
Summary Results
Revenue
Revenues for the three years ended December 31, 2010 were as follows:
(in millions)
2010
2009
2008
2010
2009
2010
2010
2009
2008
Revenues
Percent Change
Pro-forma(3)
Change
Percent of Total Revenue
Revenue:
Equipment sales
Supplies, paper and other
Sales
Service, outsourcing and rentals
Finance income
Total Revenues
Segments:
Technology
Services
Other
Total Revenues
Memo:
Annuity Revenue (1)
Color (2)
$ 3,857
3,377
7,234
13,739
660
$ 3,550
3,096
6,646
7,820
713
$ 4,679
3,646
8,325
8,485
798
$ 21,633
$ 15,179
$ 17,608
$ 10,349
9,637
1,647
$ 10,067
3,476
1,636
$ 11,714
3,828
2,066
$ 21,633
$ 15,179
$ 17,608
9%
9%
9%
76%
(7)%
43%
3%
177%
1%
43%
(24)%
(15)%
(20)%
(8)%
(11)%
(14)%
(14)%
(9)%
(21)%
(14)%
$ 17,776
$ 6,397
$ 11,629
$ 5,972
$ 12,929
$ 6,669
53%
7%
(10)%
(10)%
9%
4%
7%
1%
(7)%
3%
3%
3%
1%
3%
1%
7%
18%
15%
33%
64%
3%
24%
20%
44%
51%
5%
26%
21%
47%
48%
5%
100%
100%
100%
48%
44%
8%
66%
23%
11%
66%
22%
12%
100%
100%
100%
82%
30%
77%
39%
73%
38%
Revenue 2010
Total revenues increased 43% compared to the prior year. Our
consolidated 2010 results include ACS results subsequent to February 5,
2010, the effective date of the acquisition. On a pro-forma(3) basis, total
revenue grew 3%. Currency had a negligible impact on total revenues
during 2010. Total revenues included the following:
•
(1), or 1% on a pro-forma(3) basis, with
53% increase in annuity revenue
a 1-percentage point negative impact from currency. The components
of annuity revenue were as follows:
– Service, outsourcing and rentals revenue of $13,739 million
increased 76%, or 1% on a pro-forma(3) basis, and included a
negligible impact from currency. The increase was driven by Business
Process Outsourcing (“BPO”) revenue that partially offset the declines
in technical service revenue which were driven by a continued but
stabilizing decline in pages. Total digital pages declined 4%, while
color pages increased 9%. During 2010 digital MIF increased by 1%
and color MIF increased by 15%.
– Supplies, paper and other sales of $3,377 million increased 9%,
or 4% on a pro-forma(3) basis, with a 1-percentage point negative
impact from currency. Growth in supplies revenues was partially
offset by a decline in paper sales.
•
•
9% increase in equipment sales revenue, including a 1-percentage
point negative impact from currency. Growth in install activity was
partially offset by price declines of approximately 5% and mix.
7% increase in color revenue
negative impact from currency reflecting:
(2), including a 1-percentage point
– 5% increase in color annuity revenue, including a 1-percentage
point negative impact from currency. The increase was driven by
higher printer supplies sales and higher page volumes.
– 12% increase in color equipment sales revenue, including a
2-percentage point negative impact from currency. The increase was
driven by higher installs of new products.
– 9% growth in color pages(4). Color pages(4) represented 23% of total
pages in 2010, while color MIF represented 31% of total MIF.
Revenue 2009
•
Revenue decreased 14% compared to the prior year, including
a 3-percentage point negative impact from currency. Although
moderating in the fourth quarter 2009, worldwide economic weakness
negatively impacted our major market segments during the year.
Total revenues included the following:
28
Xerox 2010 Annual Report
Management’s Discussion
•
10% decrease in annuity revenue
negative impact from currency. The components of the annuity
revenue decreased as follows:
(1) including a 3-percentage point
– 8% decrease in service, outsourcing and rentals revenue to
$7,820 million, reflecting a 3-percentage point negative impact
from currency and an overall decline in page volume. Total digital
pages declined 6% despite an increase in color pages of 10%.
Additionally, during 2009 digital MIF increased by 2% and color
MIF increased by 21%.
– Supplies, paper and other sales of $3,096 million decreased 15%
due primarily to currency, which had a 2-percentage point negative
impact, and declines in channel supplies purchases, including lower
purchases within developing markets, and lower paper sales.
•
24% decrease in equipment sales revenue, including a 1-percentage
point negative impact from currency. The overall decline in
install activity was the primary driver, along with price declines of
approximately 5%.
Net Income
Net income and diluted earnings per share, as well as the adjustments to
net income(5) for the three years ended December 31, 2010, were as follows:
•
10% decrease in color revenue
negative impact from currency reflecting:
(2) including a 2-percentage point
– 5% decrease in color annuity revenue including a 3-percentage
point negative impact from currency. The decline was partially driven
by lower channel color printer supplies purchases. Color represented
40% and 37% of annuity revenue in 2009 and 2008, respectively.
– 22% decrease in color equipment sales revenue including a
2-percentage point negative impact from currency and lower installs
driven by the impact of the economic environment. Color sales
represented 53% and 50% of total equipment sales in 2009 and
2008, respectively.
– 10% growth in color pages(4). Color pages(4) represented 21% and
18% of total pages in 2009 and 2008, respectively.
(in millions, except per-share amounts)
As Reported
Adjustments:
Xerox and Fuji Xerox restructuring charges
Acquisition-related costs
Amortization of intangible assets
ACS shareholders’ litigation settlement
Venezuela devaluation costs
Medicare subsidy tax law change
Provision for litigation matters
Equipment write-off
Loss on early extinguishment of debt
Settlement of unrecognized tax benefits
As Adjusted(5)
Weighted average shares for reported EPS
Weighted average shares for adjusted EPS
Net Income
$ 606
355
58
194
36
21
16
—
—
10
—
$ 1,296
2010
2009
2008
EPS
Net Income
EPS
Net Income
$ 0.43
0.26
0.04
0.14
0.03
0.02
0.01
—
—
0.01
—
$ 0.94
1,351
1,378
$ 485
41
49
38
—
—
—
—
—
—
—
$ 613
$ 0.55
$ 230
308
—
35
—
—
—
491
24
—
(41)
$ 1,047
0.05
0.06
0.04
—
—
—
—
—
—
—
$ 0.70
880
880
EPS
$ 0.26
0.34
—
0.04
—
—
—
0.54
0.03
—
(0.05)
$ 1.16
895
897
Average shares for the calculation of adjusted EPS for 2010 of 1,378
million include a pro-rata portion of 27 million shares associated with the
Series A convertible preferred stock and therefore the 2010 dividends of
$21 million are excluded. In addition, average shares for the calculation
of adjusted EPS for both 2010 and 2008 include 2 million shares
associated with other convertible securities. We evaluate the dilutive
effect of our convertible securities on an “if-converted” basis. Refer to
Note 20 – Earnings Per Share in the Consolidated Financial Statements
for additional information.
(1) Annuity revenue equals Service, outsourcing and rentals plus Supplies, paper and
other sales plus Finance income.
(2) Color revenues represent a subset of total revenue and exclude the impact of
GIS’s revenues.
(3) Growth on a pro-forma basis reflects the inclusion of ACS’s adjusted results from
February 6 through December 31, 2009. Refer to the “Non-GAAP Financial Measures”
section for an explanation of this non-GAAP financial measure.
(4) Pages include estimates for developing markets, GIS and printers.
(5) Refer to the “Non-GAAP Financial Measures” section for an explanation of this non-
GAAP financial measure.
Xerox 2010 Annual Report
29
Management’s Discussion
Application of Critical Accounting Policies
In preparing our Consolidated Financial Statements and accounting
for the underlying transactions and balances, we apply various
accounting policies. Senior management has discussed the development
and selection of the critical accounting policies, estimates and related
disclosures included herein with the Audit Committee of the Board
of Directors. We consider the policies discussed below as critical
to understanding our Consolidated Financial Statements, as their
application places the most significant demands on management’s
judgment, since financial reporting results rely on estimates of the
effects of matters that are inherently uncertain. In instances where
different estimates could have reasonably been used, we disclosed
the impact of these different estimates on our operations. In certain
instances, like revenue recognition for leases, the accounting rules are
prescriptive; therefore, it would not have been possible to reasonably
use different estimates. Changes in assumptions and estimates are
reflected in the period in which they occur. The impact of such changes
could be material to our results of operations and financial condition
in any quarterly or annual period.
Specific risks associated with these critical accounting policies are
discussed throughout the MD&A, where such policies affect our
reported and expected financial results. For a detailed discussion of
the application of these and other accounting policies, refer to Note
1 – Summary of Significant Accounting Policies in the Consolidated
Financial Statements.
Revenue Recognition for Leases
Our accounting for leases involves specific determinations under
applicable lease accounting standards. These determinations affect the
timing of revenue recognition for our equipment. If a lease qualifies as a
sales-type capital lease, equipment revenue is recognized as sale revenue
upon delivery or installation of the equipment as opposed to ratably
over the lease term. The critical elements that we consider with respect
to our lease accounting are the determination of the economic life and
the fair value of equipment, including the residual value. For purposes of
determining the economic life, we consider the most objective measure
to be the original contract term, since most equipment is returned by
lessees at or near the end of the contracted term. The economic life of
most of our products is five years, since this represents the most frequent
contractual lease term for our principal products and only a small
percentage of our leases are for original terms longer than five years.
There is no significant after-market for our used equipment. We believe
five years is representative of the period during which the equipment is
expected to be economically usable, with normal service, for the purpose
for which it is intended.
30
Xerox 2010 Annual Report
Revenue Recognition for Bundled Lease Arrangements
We sell our products and services under bundled lease arrangements,
which typically include equipment, service, supplies and financing
components for which the customer pays a single negotiated
monthly fixed price for all elements over the contractual lease term.
Approximately 40% of our equipment sales revenue is related to sales
made under bundled lease arrangements. Typically these arrangements
include an incremental, variable component for page volumes in excess
of contractual page volume minimums, which are often expressed
in terms of price per page. Revenues under these arrangements
are allocated, considering the relative fair values of the lease and
non-lease deliverables included in the bundled arrangement, based
upon the estimated fair values of each element. Lease deliverables
include maintenance and executory costs, equipment and financing,
while non-lease deliverables generally consist of supplies and non-
maintenance services. The allocation for lease deliverables begins by
allocating revenues to the maintenance and executory costs plus profit
thereon. These elements are generally recognized over the term of
the lease as services revenue. The remaining amounts are allocated
to the equipment and financing elements, which are subjected to the
accounting estimates noted above under “Revenue Recognition for
Leases.” We perform analyses of available verifiable objective evidence of
equipment fair value based on cash selling prices during the applicable
period. The cash selling prices are compared to the range of values
included in our lease accounting systems. The range of cash selling
prices must be reasonably consistent with the lease selling prices, taking
into account residual values, in order for us to determine that such lease
prices are indicative of fair value.
Our pricing interest rates, which are used in determining customer
payments, are developed based upon a variety of factors including local
prevailing rates in the marketplace and the customer’s credit history,
industry and credit class. We reassess our pricing interest rates quarterly
based on changes in the local prevailing rates in the marketplace. These
interest rates have generally been adjusted if the rates vary by twenty-
five basis points or more, cumulatively, from the last rate in effect. The
pricing interest rates generally equal the implicit rates within the leases,
as corroborated by our comparisons of cash to lease selling prices.
Revenue Recognition for Services – Percentage-of-Completion
A significant portion of our services revenue is recognized based
on objective criteria that do not require significant estimates or
uncertainties. For example, transaction volume, time and materials
and cost-reimbursable arrangements are based on specific, objective
criteria under the contracts. Accordingly, revenues recognized under
these contracts do not require the use of significant estimates that
are susceptible to change. However, revenue recognized using the
percentage-of-completion accounting method does require the use
of estimates and judgment as discussed below. During 2010, we
recognized approximately $270 million of revenue using the percentage-
of-completion accounting method.
Management’s Discussion
Revenues on certain fixed-price contracts where we provide information
technology system development and implementation services are
recognized using the percentage-of-completion approach. Revenue
is recognized over the contract term based on the percentage of
development and implementation services that are provided during
the period compared with the total estimated development and
implementation services to be provided over the entire contract. These
contracts require that we perform significant, extensive and complex
design, development, modification and implementation activities for our
clients’ systems. Performance will often extend over long periods, and
our right to receive future payment depends on our future performance
in accordance with the agreement.
The percentage-of-completion methodology involves recognizing
probable and reasonably estimable revenue using the percentage of
services completed, on a current cumulative cost to estimated total cost
basis, using a reasonably consistent profit margin over the period. Due
to the longer-term nature of these projects, developing the estimates
of costs often requires significant judgment. Factors that must be
considered in estimating the progress of work completed and ultimate
cost of the projects include, but are not limited to, the availability of
labor and labor productivity, the nature and complexity of the work to
be performed and the impact of delayed performance. If changes occur
in delivery, productivity or other factors used in developing the estimates
of costs or revenues, we revise our cost and revenue estimates, which
may result in increases or decreases in revenues and costs. Such revisions
are reflected in income in the period in which the facts that give rise to
that revision become known. If at any time these estimates indicate the
contract will be unprofitable, the entire estimated loss for the remainder
of the contract is recorded immediately in cost. We perform ongoing
profitability analyses of our services contracts in order to determine
whether the latest estimates require updating.
Allowance for Doubtful Accounts and Credit Losses
We perform ongoing credit evaluations of our customers and adjust
credit limits based upon customer payment history and current
creditworthiness. We continuously monitor collections and payments
from our customers and maintain a provision for estimated credit losses
based upon our historical experience adjusted for current conditions.
We cannot guarantee that we will continue to experience credit loss
rates similar to those we have experienced in the past.
Measurement of such losses requires consideration of historical loss
experience, including the need to adjust for current conditions, and
judgments about the probable effects of relevant observable data,
including present economic conditions such as delinquency rates and
financial health of specific customers. We recorded bad debt provisions
of $188 million, $291 million and $188 million in SAG expenses in our
Consolidated Statements of Income for the years ended December 31,
2010, 2009 and 2008, respectively.
Historically, the majority of the bad debt provision related to our
finance receivables portfolio. This provision is inherently more difficult
to estimate than the provision for trade accounts receivable because
the underlying lease portfolio has an average maturity, at any time,
of approximately two to three years and contains past due billed
amounts, as well as unbilled amounts. The estimated credit quality of
any given customer and class of customer or geographic location can
significantly change during the life of the portfolio. We consider all
available information in our quarterly assessments of the adequacy
of the provision for doubtful accounts.
Bad debt provisions decreased by $103 million in 2010 and reserves
as a percentage of trade and finance receivables decreased to 3.3%
at December 31, 2010 as compared to 4.1% at December 31, 2009
and 3.4% at December 31, 2008. The decline in 2010 reflects the
improving trend in write-offs over the past year as well as the acquisition
of ACS. We continue to assess our receivable portfolio in light of the
current economic environment and its impact on our estimation of
the adequacy of the allowance for doubtful accounts. Refer to Note
4 – Receivables in the Consolidated Financial Statements for additional
information.
As discussed above, in preparing our Consolidated Financial Statements
for the three years ended December 31, 2010, we estimated our
provision for doubtful accounts based on historical experience and
customer-specific collection issues. This methodology was consistently
applied for all periods presented. During the five-year period ended
December 31, 2010, our reserve for doubtful accounts ranged from
3.0% to 4.1% of gross receivables. Holding all assumptions constant,
a 1-percentage point increase or decrease in the reserve from the
December 31, 2010 rate of 3.3% would change the 2010 provision by
approximately $98 million.
Pension and Retiree Health Benefit Plan Assumptions
We sponsor defined benefit pension plans in various forms in several
countries covering employees who meet eligibility requirements. Retiree
health benefit plans cover U.S. and Canadian employees for retirement
medical costs. Several statistical and other factors that attempt to
anticipate future events are used in calculating the expense, liability
and asset values related to our pension and retiree health benefit plans.
These factors include assumptions we make about the discount rate,
expected return on plan assets, rate of increase in healthcare costs,
the rate of future compensation increases and mortality. Differences
between these assumptions and actual experiences are reported as net
actuarial gains and losses and are subject to amortization to net periodic
benefit cost generally over the average remaining service lives of the
employees participating in the plans.
Cumulative actuarial losses for our defined benefit pension plans of
$1.9 billion as of December 31, 2010 were essentially unchanged from
December 31, 2009. Positive returns on plan assets in 2010 as compared
to expected returns offset a decrease in discount rates. The total
actuarial loss will be amortized over future periods, subject to offsetting
gains or losses that will impact the future amortization amounts.
Xerox 2010 Annual Report
31
Management’s Discussion
We used a weighted average expected rate of return on plan assets of
7.3% for 2010, 7.4% for 2009 and 7.6% for 2008, on a worldwide basis.
During 2010, the actual return on plan assets was $846 million, reflecting
an improvement in the equity markets during the year. When estimating
the 2011 expected rate of return, in addition to assessing recent
performance, we considered the historical returns earned on plan assets,
the rates of return expected in the future and our investment strategy
and asset mix with respect to the plans’ funds. The weighted average
expected rate of return on plan assets we will use in 2011 is 7.2%.
For purposes of determining the expected return on plan assets, we use
a calculated value approach to determine the value of the pension plan
assets, rather than a fair market value approach. The primary difference
between these two methods relates to a systematic recognition of
changes in fair value over time (generally two years) versus immediate
recognition of changes in fair value. Our expected rate of return on plan
assets is applied to the calculated asset value to determine the amount
of the expected return on plan assets to be used in the determination
of the net periodic pension cost. The calculated value approach reduces
the volatility in net periodic pension cost that can result from using the
fair market value approach. The difference between the actual return
on plan assets and the expected return on plan assets is added to,
or subtracted from, any cumulative differences from prior years. This
amount is a component of the net actuarial gain or loss.
Another significant assumption affecting our pension and retiree health
benefit obligations and the net periodic benefit cost is the rate that we
use to discount our future anticipated benefit obligations. The discount
rate reflects the current rate at which the benefit liabilities could be
effectively settled considering the timing of expected payments for plan
participants. In estimating this rate, we consider rates of return on high-
quality fixed-income investments included in published bond indices,
adjusted to eliminate the effects of call provisions and differences in
the timing and amounts of cash outflows related to the bonds. In the
U.S. and the U.K., which comprise approximately 75% of our projected
benefit obligations, we consider the Moody’s Aa Corporate Bond Index
and the International Index Company’s iBoxx Sterling Corporate AA
Cash Bond Index, respectively, in the determination of the appropriate
discount rate assumptions. The weighted average discount rate we used
to measure our pension obligations as of December 31, 2010 and to
calculate our 2011 expense was 5.2%, which is lower than 5.7% that
was used to calculate our 2010 expense. The weighted average discount
rate we used to measure our retiree health obligation as of December
31, 2010 and to calculate our 2011 expense was 4.9%, which is lower
than 5.4% that was used to calculate our 2010 expense.
On a consolidated basis, we recognized net periodic pension cost
of $355 million, $270 million and $254 million for the years ended
December 31, 2010, 2009 and 2008, respectively. The costs associated
with our defined contribution plans, which are included in net periodic
pension cost, were $51 million, $38 million and $80 million for the years
ended December 31, 2010, 2009 and 2008, respectively. The increase in
2010 was primarily due to our partial resumption of the 401(k) match in
the U.S. On a consolidated basis, we recognized net retiree health benefit
cost of $32 million, $26 million and $77 million for the years ended
December 31, 2010, 2009 and 2008, respectively.
32
Xerox 2010 Annual Report
Assuming settlement losses in 2011 are consistent with 2010, our
2011 net periodic defined benefit pension cost is expected to be
approximately $30 million lower than 2010, primarily driven by the
U.S. as a result of a reduction in the amortization of actuarial losses
and an increase in expected asset returns from higher asset values and
expected contributions to the plan. Our 2011 retiree health benefit cost
is expected to be approximately $17 million lower than 2010, primarily
as a result of amendments to the U.S. plan in 2010.
Benefit plan costs are included in several income statement components
based on the related underlying employee costs. Pension and retiree
health benefit plan assumptions are included in Note 15 – Employee
Benefit Plans in the Consolidated Financial Statements. Holding all other
assumptions constant, a 0.25% increase or decrease in the discount
rate would change the 2011 projected net periodic pension cost by $17
million. Likewise, a 0.25% increase or decrease in the expected return on
plan assets would change the 2011 projected net periodic pension cost
by $17 million.
Income Taxes and Tax Valuation Allowances
We record the estimated future tax effects of temporary differences
between the tax bases of assets and liabilities and amounts reported in
our Consolidated Balance Sheets, as well as operating loss and tax credit
carryforwards. We follow very specific and detailed guidelines in each
tax jurisdiction regarding the recoverability of any tax assets recorded in
our Consolidated Balance Sheets and provide valuation allowances as
required. We regularly review our deferred tax assets for recoverability
considering historical profitability, projected future taxable income, the
expected timing of the reversals of existing temporary differences and
tax planning strategies. If we continue to operate at a loss in certain
jurisdictions or are unable to generate sufficient future taxable income,
or if there is a material change in the actual effective tax rates or time
period within which the underlying temporary differences become
taxable or deductible, we could be required to increase the valuation
allowance against all or a significant portion of our deferred tax assets
resulting in a substantial increase in our effective tax rate and a material
adverse impact on our operating results. Conversely, if and when our
operations in some jurisdictions become sufficiently profitable to
recover previously reserved deferred tax assets, we would reduce all or a
portion of the applicable valuation allowance in the period when such
determination is made. This would result in an increase to reported
earnings in such period. Adjustments to our valuation allowance,
through charges (credits) to income tax expense, were $22 million, $(11)
million and $17 million for the years ended December 31, 2010, 2009
and 2008, respectively. There were other (decreases) increases to our
valuation allowance, including the effects of currency, of $11 million,
$55 million and $(136) million for the years ended December 31, 2010,
2009 and 2008, respectively. These did not affect income tax expense
in total, as there was a corresponding adjustment to deferred tax assets
or other comprehensive income. Gross deferred tax assets of $3.8 billion
and $3.7 billion had valuation allowances of $735 million and $672
million at December 31, 2010 and 2009, respectively.
Management’s Discussion
We are subject to ongoing tax examinations and assessments in various
jurisdictions. Accordingly, we may incur additional tax expense based
upon our assessment of the more-likely-than-not outcomes of such
matters. In addition, when applicable, we adjust the previously recorded
tax expense to reflect examination results. Our ongoing assessments of
the more-likely-than-not outcomes of the examinations and related tax
positions require judgment and can materially increase or decrease our
effective tax rate, as well as impact our operating results.
We file income tax returns in the U.S. Federal jurisdiction and in various
foreign jurisdictions. In the U.S., with the exception of ACS, we are no
longer subject to U.S. Federal income tax examinations for years before
2007. ACS is no longer subject to such examination for years before
2004. With respect to our major foreign jurisdictions, we are no longer
subject to tax examinations by tax authorities for years before 2000.
Legal Contingencies
We are involved in a variety of claims, lawsuits, investigations and
proceedings concerning securities law, intellectual property law,
environmental law, employment law and ERISA, as discussed in Note 17
– Contingencies in the Consolidated Financial Statements. We determine
whether an estimated loss from a contingency should be accrued by
assessing whether a loss is deemed probable and can be reasonably
estimated. We assess our potential liability by analyzing our litigation
and regulatory matters using available information. We develop our
views on estimated losses in consultation with outside counsel handling
our defense in these matters, which involves an analysis of potential
results, assuming a combination of litigation and settlement strategies.
Should developments in any of these matters cause a change in our
determination as to an unfavorable outcome and result in the need to
recognize a material accrual, or should any of these matters result in a
final adverse judgment or be settled for significant amounts, they could
have a material adverse effect on our results of operations, cash flows
and financial position in the period or periods in which such change in
determination, judgment or settlement occurs.
Business Combinations and Goodwill
The application of the purchase method of accounting for business
combinations requires the use of significant estimates and assumptions
in the determination of the fair value of assets acquired and liabilities
assumed in order to properly allocate purchase price consideration
between assets that are depreciated and those that are amortized
from goodwill. Our estimates of the fair values of assets and liabilities
acquired are based upon assumptions believed to be reasonable, and
when appropriate, include assistance from independent third-party
appraisal firms.
As a result of our acquisition of ACS, as well as other acquisitions
including GIS, we have a significant amount of goodwill. Goodwill
is tested for impairment annually or more frequently if an event or
circumstance indicates that an impairment loss may have been
incurred. Application of the goodwill impairment test requires judgment,
including the identification of reporting units, assignment of assets
and liabilities to reporting units, assignment of goodwill to reporting
units and determination of the fair value of each reporting unit. We
estimate the fair value of each reporting unit using a discounted cash
flow methodology. This requires significant judgment including: estimation
of future cash flows, which is dependent on internal forecasts; estimation
of the long-term rate of growth for our business; the useful life over which
cash flows will occur; determination of our weighted average cost of
capital for purposes of establishing a discount rate; and consideration
of relevant market data.
Our annual impairment test of goodwill is performed in the fourth
quarter of each year. The estimated fair values of our reporting units
were based on discounted cash flow models derived from internal
earnings forecasts and assumptions. The assumptions and estimates
used in those valuations considered the current economic environment.
In performing our 2010 impairment test, the following were the overall
composite assumptions regarding revenue and expense growth, which
formed the basis for estimating future cash flows used in the discounted
cash flow model: (1) revenue growth 3–5%; (2) gross margin 33–35%;
(3) RD&E 3%; (4) SAG 19–20%; and (5) return on sales 10–12%. We
believe these assumptions are appropriate because they are consistent
with historical results (inclusive of ACS), generally consistent with our
forecasted long-term business model and give appropriate consideration
to the current economic environment.
Based on these valuations, we determined that the fair values of
our reporting units exceeded their carrying values and no goodwill
impairment charge was required during the fourth quarter 2010.
Refer to Note 1 – Summary of Significant Accounting Policies – “Goodwill
and Intangible Assets” for additional information regarding our goodwill
impairment testing, as well as Note 8 – Goodwill and Intangible Assets,
Net in the Consolidated Financial Statements for additional information
regarding goodwill by operating segment.
Operations Review of Segment Revenue
and Operating Profit
Our reportable segments are consistent with how we manage the
business and view the markets we serve. Our reportable segments are
Technology, Services and Other.
2010 Segment Reporting Change
In 2010, as a result of our acquisition of ACS, we realigned our
internal financial reporting structure and began reporting our financial
performance based on two primary segments – Technology and Services.
The Technology segment represents the combination of our former
Production and Office segments excluding the document outsourcing
business. The Services segment represents the combination of our
document outsourcing business, which includes Xerox’s historic business
process services, and ACS’s business process outsourcing and information
technology outsourcing businesses. We believe this realignment improves
our view of the expanded markets we now serve and will help us to better
manage our business which is primarily centered around equipment
systems and outsourcing services. Our Technology segment operations
involve the sale and support of a broad range of document systems from
entry level to the high-end. Our Services segment operations involve
delivery of a broad range of outsourcing services including document,
business processing and IT. Our 2009 and 2008 segment disclosures have
been restated to reflect our new 2010 internal reporting structure. Refer to
Note 2 – Segment Reporting in the Consolidated Financial Statements for
further description of these segments.
Xerox 2010 Annual Report
33
Management’s Discussion
Revenues by segment for the three years ended December 31, 2010 were as follows:
(in millions)
2010
Technology
Services
Other
Total
2009
Technology
Services
Other
Total
2009 Pro-forma(1)
Technology
Services
Other
Total
2008
Technology
Services
Other
Total
Total
Revenue
Segment
Profit (Loss)
Segment
Margin
$ 10,349
9,637
1,647
$ 21,633
$ 10,067
3,476
1,636
$ 15,179
$ 10,067
9,379
1,636
$ 21,082
$ 11,714
3,828
2,066
$ 17,608
$ 1,085
1,132
(342)
$ 1,875
$ 949
231
(342)
$ 838
$ 949
1,008
(447)
$ 1,510
$ 1,288
302
(245)
$ 1,345
10.5%
11.7%
(20.8)%
8.7%
9.4%
6.6%
(20.9)%
5.5%
9.4%
10.7%
(27.3)%
7.2%
11.0%
7.9%
(11.9)%
7.6%
(1) Results include ACS’s 2009 estimated results February 6 through December 31. Refer to the “Non-GAAP Financial Measures” section for an explanation of this
non-GAAP financial measure.
Technology
Our technology segment includes the sale of document systems and
supplies, provision of technical service and financing of products.
(in millions)
Equipment sales
Post sale revenue(1)
Total Revenue
Year Ended December 31,
Percent Change
2010
$ 3,404
6,945
$ 10,349
2009
$ 3,137
6,930
$ 10,067
2008
2010
2009
$ 4,079
7,635
$ 11,714
9%
—%
3%
(23)%
(9)%
(14)%
(1) Post sale revenue does not include outsourcing revenue, which is reported in our Services segment.
Revenue 2010
Technology revenue of $10,349 million increased 3%, including a
negligible impact from currency and reflected solid install and related
equipment revenue growth including the launch of 21 new products in
2010. Total revenues included the following:
•
9% increase in equipment sales revenue, with a 1-percentage point
negative impact from currency, driven primarily by install growth
across all color product categories.
•
Post sale revenue was flat compared to prior year, with a 1-percentage
point negative impact from currency, as increased supplies sales were
offset by lower service revenues reflecting decreased but stabilizing
page volumes.
•
Technology revenue mix was 22% Entry, 56% Mid-range and
22% High-end.
34
Xerox 2010 Annual Report
Management’s Discussion
Segment Profit 2010
Technology segment profit of $1,085 million increased $136 million
from 2009, reflecting an increase in gross profit due to higher revenues
and lower bad debt expense, as well as cost and expense savings from
restructuring actions.
Installs 2010
Entry
•
46% increase in installs of A4 black-and-white multifunction devices,
driven by growth in developing markets and indirect channels.
•
39% increase in installs of A4 color multifunction devices, driven
by demand for new products.
•
4% increase in installs of color printers.
Mid-range
•
4% increase in installs of mid-range black-and-white devices.
•
27% increase in installs of mid-range color devices, primarily driven
by demand for new products such as the Xerox Color 550/560,
WorkCentre® 7545/7556 and WorkCentre® 7120/7700, and the
continued strong demand for the ColorQubeTM.
High-end
•
8% decrease in installs of high-end black-and-white systems, reflecting
declines across most product areas.
•
•
26% increase in installs of high-end color systems, reflecting strong
demand for the recently launched Xerox Color 800 and 1000.
Install activity percentages include installations for document
outsourcing and the Xerox-branded product shipments to GIS.
Descriptions of “Entry,” “Mid-range” and “High-end” can be found in
Note 2 – Segment Reporting in the Consolidated Financial Statements.
Revenue 2009
Technology revenue of $10,067 million decreased 14%, including
a 3-percentage point negative impact from currency. Total revenue
included the following:
•
•
•
23% decrease in equipment sales revenue, with a 2-percentage point
negative impact from currency. The decline reflects lower installs
driven by the weak economic environment during the year and delays
in customer spending on technology.
9% decrease in post sale revenue, with a 3-percentage point negative
impact from currency, reflecting lower page volumes and supplies
primarily as a result of the weak economic environment.
Technology revenue mix was 21% Entry, 56% Mid-range and 23%
High-end.
Segment Profit 2009
Technology profit of $949 million decreased $339 million from 2008.
The decrease is primarily the result of lower gross profit reflecting
decreased revenue partially offset by lower costs and expenses reflecting
the benefits from restructuring and favorable currency.
Installs 2009
Entry
•
40% decrease in installs of A4 black-and-white multifunction devices,
primarily reflecting lower activity in developing markets.
•
•
22% decrease in installs of A4 color multifunction devices, driven by
lower overall demand.
34% decrease in installs of color printers due to lower demand and
lower sales to OEM partners.
Mid-range
•
31% decrease in installs of mid-range black-and-white devices.
•
19% decrease in installs of mid-range color devices, driven by lower
overall demand which more than offset the impact of new products
including the ColorQube and a mid-range version of the Xerox® 700.
High-end
•
29% decrease in installs of high-end black-and-white systems,
reflecting declines in all product areas.
•
37% decrease in installs of high-end color systems as entry production
color declines were partially offset by increased iGen4 installs.
Services
Our Services segment comprises three service offerings: Business Process
Outsourcing (“BPO”), Document Outsourcing (“DO”) and Information
Technology Outsourcing (“ITO”).
Services total revenue and segment profit for the year ended December
31, 2010 increased 177% and 390%, respectively, primarily due to the
inclusion of ACS. Since these comparisons are not meaningful, results
for the Services segment are primarily discussed on a pro-forma basis,
with ACS’s 2009 estimated results from February 6 through December
31 included in our historical 2009 results (see “Non-GAAP Financial
Measures” section for discussion of this non-GAAP measure).
Revenue 2010
Services revenue of $9,637 million increased 177%, or 3% on a pro-
forma(1) basis, including a negligible impact from currency.
•
•
•
(1) revenue growth of 8% and represented
BPO delivered pro-forma
53% of total Services revenue. BPO growth was driven by healthcare
services, customer care, transportation solutions, healthcare payer
services and 2010 acquisitions.
DO revenue decreased 3%, including a negligible impact from
currency, and represented 34% of total Services revenue. The decrease
primarily reflects the continued impact of the weak economy on usage
levels and renewal rates.
ITO revenue was flat on a pro-forma
of total Services revenue.
(1) basis and represented 13%
Xerox 2010 Annual Report
35
Revenue 2009
Services revenue of $3,476 million decreased 9% including a
2-percentage point negative impact from currency. Services revenue
for 2009 and 2008 primarily reflects revenue from DO services.
The decrease in revenue is primarily due to lower usage, primarily
in black-and-white devices.
Segment Profit 2009
Services operating profit of $231 million decreased $71 million from
2008. The decrease was primarily due to lower gross profit reflecting
a decrease in revenues partially offset by lower cost and expenses
reflecting benefits from restructuring and favorable currency.
Other
Revenue 2010
Other revenue of $1,647 million increased 1%, including a negligible
impact from currency. Increases in GIS’s network integration and
electronic presentation systems and Wide Format sales offset a decline
in paper sales. Paper comprised approximately 58% of the Other
segment revenue.
Segment Loss 2010
Other segment loss of $342 million was flat with 2009, as higher gross
profit reflecting an increase in gross margins from the mix of revenues
was partially offset by higher interest expense associated with funding
for the ACS acquisition.
Revenue 2009
Other revenue of $1,636 million decreased 21%, including a
2-percentage point negative impact from currency, primarily driven by
declines in revenue from paper, wide format systems, and licensing and
royalty arrangements. Paper comprised approximately, 60% of the
Other segment revenue.
Segment Loss 2009
Other operating loss of $342 million increased $97 million from
2008, primarily due to lower revenue, as well as lower interest and
equity income.
(1) Refer to the “Non-GAAP Financial Measures” section for an explanation of the
Pro-forma non-GAAP financial measure.
Management’s Discussion
Segment Profit 2010
Services operating profit of $1,132 million increased $901 million or
$124 million on a pro-forma(1) basis from 2009, driven primarily by BPO
growth and lower G&A expenses.
Metrics
Pipeline
Our BPO and ITO revenue pipeline including synergy opportunities
grew 25% over the fourth quarter 2009. The sales pipeline includes
the Total Contract Value (“TCV”) of new business opportunities that
could potentially be contracted within the next six months and excludes
business opportunities with estimated annual recurring revenue in excess
of $100 million. The DO sales pipeline grew approximately 17% over the
fourth quarter 2009. The DO sales pipeline includes all active deals with
$10 million or greater in TCV.
Signings
Signings (“Signings”) are defined as estimated future revenues from
contracts signed during the period, including renewals of existing
contracts. Services signings were an estimated $14.6 billion in TCV in
2010 and increased 13% as compared to the comparable prior-year
period. TCV represents estimated total revenue for future contracts for
pipeline or signed contracts for signings as applicable.
Signings were as follows:
(in billions)
BPO
DO
ITO
Total Signings
Year Ended December 31, 2010
$ 10.0
3.3
1.3
$ 14.6
Signings growth was driven by strong signings in both our BPO and
DO businesses. In 2010 we signed significant new business in the
following areas:
•
•
•
•
•
•
•
•
Child support payment processing
Commercial healthcare
Customer care
Electronic payment cards
Enterprise print services
Government healthcare
Telecom and hardware services
Transportation
36
Xerox 2010 Annual Report
Management’s Discussion
Costs, Expenses and Other Income
Gross Margin
Gross margins by revenue classification were as follows:
Sales
Service, outsourcing and rentals
Finance income
Total Gross Margin
Year Ended December 31,
Change
2010
34.5%
33.1%
62.7%
34.4%
2009
33.9%
42.6%
62.0%
39.7%
2008
33.7%
41.9%
61.8%
38.9%
2010
0.6 pts
(9.5) pts
0.7 pts
(5.3) pts
2009
0.2 pts
0.7 pts
0.2 pts
0.8 pts
Pro-forma(1)
Change
2010
1.1 pts
(0.7) pts
0.7 pts
(0.2) pts
Gross Margin 2010
The 2010 total gross margin decreased 5.3-percentage points, and
service, outsourcing and rentals gross margin decreased 9.5-percentage
points, on an actual basis primarily due to the ACS acquisition. ACS, as
a services-based company, had a lower gross margin as compared to a
technology-based company, which typified Xerox before the acquisition.
Since actual comparisons are not meaningful, gross margins for these
two categories are primarily discussed below on a pro-forma basis
with ACS’s 2009 estimated results from February 6 through December
31 included in our historical 2009 results (see “Non-GAAP Financial
Measures” section for a further discussion of this non-GAAP measure).
•
•
•
decreased 5.3-percentage points or 0.2-
Total gross margin
percentage points on a pro-forma(1) basis, as compared to 2009.
The decline was primarily due to the unfavorable impact of year-
over-year transaction currency.
increased 0.6-percentage points or 1.1-
Sales gross margin
percentage points on a pro-forma(1) basis, as compared to 2009. Cost
improvements and positive mix more than offset a 0.5-percentage
point adverse impact from transaction currency and price declines of
about 1-percentage point.
Service, outsourcing and rentals gross margin
percentage points or 0.7-percentage points on a pro-forma(1) basis,
as compared to 2009, as price declines and the higher rate of growth
in lower-margin BPO revenue were only partially offset by cost
improvements.
decreased 9.5-
•
Financing income gross margin
to 2009.
of 62.7% remained comparable
Since a large portion of our inventory is procured from Japan, the
strengthening of the Yen versus the U.S. Dollar and Euro in 2010 and
2009 has significantly impacted our product costs. In 2010, the Yen
strengthened approximately 6% against the U.S. Dollar and 10%
against the Euro as compared to 2009. In 2009, the Yen strengthened
approximately 10% against the U.S. Dollar and 15% against the Euro
as compared to 2008. We expect product costs and gross margins to
continue to be negatively impacted in 2011, particularly in the first half,
if Yen exchange rates remain at January 2011 levels.
(1) Refer to the “Non-GAAP Financial Measures” section for an explanation of the
Pro-forma non-GAAP financial measure.
Gross Margin 2009
•
increased 0.8-percentage points compared to
Total gross margin
2008, primarily driven by cost improvements, enabled by restructuring
and our cost actions, which were partially offset by the 0.5-percentage
point unfavorable impact of transaction currency, primarily the Yen,
and price declines of 1.0-percentage point.
•
•
Sales gross margin
increased 0.2-percentage points, primarily due
to the cost improvements and the positive mix of revenues partially
offset by the adverse impact of transaction currency on our inventory
purchases of 1.0-percentage point and price declines of 1.2-
percentage points.
Service, outsourcing and rentals margin
points primarily due to the positive impact from the reduction in costs
driven by our restructuring and cost actions of 1.5-percentage points.
These cost improvements more than offset the approximate 0.9-
percentage point impact of pricing.
increased 0.7-percentage
•
Financing income margin
of 62% remained comparable to 2008.
Xerox 2010 Annual Report
37
Management’s Discussion
Research, Development and Engineering Expenses (“RD&E”)
We invest in technological research and development, particularly in
color, software and services. We believe our R&D spending is sufficient to
remain technologically competitive. Our R&D is strategically coordinated
with that of Fuji Xerox.
(in millions)
R&D
Sustaining Engineering
Total RD&E Expenses
RD&E % Revenue
R&D Investment by Fuji Xerox(2)
Year Ended December 31,
Change
2010
$ 653
128
$ 781
3.6%
$ 821
2009
$ 713
127
$ 840
2008
$ 750
134
$ 884
2010
(60)
1
(59)
$
$
5.5%
$ 796
5.0%
$ 788
(1.9) pts
25
$
$
2009
(37)
(7)
$
(44)
0.5 pts
8
$
Pro-forma(1)
Change
$
2010
(60)
1
$
(59)
(0.4) pts
n/a
(1) Refer to the “Non-GAAP Financial Measures” section for an explanation of the Pro-forma non-GAAP financial measure.
(2) Increase in Fuji Xerox R&D was primarily due to changes in foreign exchange rates.
RD&E 2010
The decrease in RD&E spending for 2010 primarily reflects the savings
from restructuring and productivity improvements.
RD&E 2009
The decrease in RD&E spending for 2009 reflects our restructuring and
cost actions which consolidated the development and engineering
infrastructures within our Technology segment.
Selling, Administrative and General Expenses (“SAG”)
(in millions)
Total SAG
SAG as a % of revenue
Bad Debt Expense
Bad Debt as a % of revenue
Year Ended December 31,
Change
Pro-forma(1)
Change
2010
2009
2008
2010
2009
2010
$ 4,594
21.2%
$ 188
0.9%
$ 4,149
$ 4,534
27.3%
25.7%
$ 291
$ 188
1.9%
1.1%
$
445
(6.1) pts
$
(103)
(1.0) pts
$
(385)
1.6 pts
$ 103
0.8 pts
$
(57)
(0.9) pts
$
(108)
(0.5) pts
(1) Refer to the “Non-GAAP Financial Measures” section for an explanation of the Pro-forma non-GAAP financial measure.
SAG 2010
SAG as a percent of revenue decreased 6.1-percentage points on an
actual basis, primarily due to the ACS acquisition. ACS, as a typical
services-based company, had lower SAG as a percent of revenue as
compared to a technology-based company, which typified Xerox before
the acquisition. Since actual comparisons are not meaningful, SAG is
primarily discussed on a pro-forma basis, with ACS’s 2009 estimated
results from February 6 through December 31 included in our historical
2009 results (see “Non-GAAP Financial Measures” section for additional
discussion of this non-GAAP measure).
SAG of $4,594 million was $445 million higher than 2009, or $57
million lower on a pro-forma(1) basis, including a negligible impact from
currency. The pro-forma(1) SAG decrease reflects the following:
•
•
•
$137 million increase in selling expenses, reflecting increased demand
generation and brand advertising and higher commissions, partially
offset by restructuring savings and productivity improvements
$86 million decrease in general and administrative expenses, reflecting
benefits from restructuring and operational improvements
$108 million decrease in bad debt expense, reflecting an improving
write-off trend
38
Xerox 2010 Annual Report
Management’s Discussion
SAG 2009
SAG of $4,149 million was $385 million lower than 2008, including
a $126 million benefit from currency. The SAG decrease was the result
of the following:
•
$311 million decrease in selling expenses, reflecting favorable currency;
benefits from restructuring, an overall reduction in marketing spend
and lower commissions
•
•
$177 million decrease in general and administrative expenses,
reflecting favorable currency and benefits from restructuring and
cost actions, partially offset by higher compensation accruals
$103 million increase in bad debt expense, reflecting increased
write-offs in North America and Europe
Summary Costs and Expenses
The following is a summary of key metrics used to assess our performance:
(in millions)
Total Gross Margin
RD&E % of revenue
SAG % of revenue
Operating Margin(1)
Pre-tax income (loss) margin
(1) See the “Non-GAAP Measures” section for additional information.
Year Ended December 31,
Change
Pro-forma(1)
Change
2010
34.4%
3.6%
21.2%
9.6%
3.8%
2009
39.7%
5.5%
27.3%
6.8%
4.1%
2008
38.9%
5.0%
25.7%
8.4%
(0.4)%
2010
2009
2010
(5.3) pts
(1.9) pts
(6.1) pts
2.8 pts
(0.3) pts
0.8 pts
0.5 pts
1.6 pts
(1.6) pts
4.5 pts
(0.2) pts
(0.4) pts
(0.9) pts
1.0 pts
(2.2) pts
As previously noted, the acquisition of ACS increased the proportion
of revenues from Services. Consistent with services companies, this
portion of our operations has a lower gross margin than our Technology
segment, but also has both lower SAG and R&D as a percent of revenue.
Accordingly, in 2010 we began to assess our performance using
an operating margin metric, which neutralizes this mix differential.
Operating margin is an internal measurement metric and represents
gross margin minus RD&E percentage of revenue and SAG percentage
of revenue. (Refer to the “Non-GAAP Financial Measures” section for
further information and the reconciliation of operating margin to pre-tax
income (loss) margin.)
During 2010, operating margin increased 2.8-percentage points or
1.0-percentage-point on a pro-forma(1) basis, as compared to 2009.
The improvement reflects strong revenue growth and continued
disciplined cost and expense management. During 2009, operating
margin decreased 1.6-percentage points largely due to lower revenue
as a result of the worldwide recession, as well as the negative effects
of currency on our product costs, which were only partially offset by
savings from prior-year restructuring actions.
Restructuring and Asset Impairment Charges
2010 Activity
During 2010 we recorded $483 million of net restructuring and asset
impairment charges which included the following:
•
$470 million of severance costs related to headcount reductions of
approximately 9,000 employees. The costs associated with these
actions applied about equally to North America and Europe, with
approximately 20% related to our developing market countries.
Approximately 50% of the costs were focused on gross margin
improvements, 40% on SAG and 10% on the optimization of RD&E
investments, and impacted the following functional areas:
– Services
– Supply chain and manufacturing
– Back-office administration
– Development and engineering
•
$28 million for lease termination costs, primarily reflecting the
continued rationalization and optimization of our worldwide operating
locations, including consolidations with ACS.
Xerox 2010 Annual Report
39
Acquisition-Related Costs
Costs of $77 million were incurred during 2010 in connection with
our acquisition of ACS. These costs include $53 million of transaction
costs, which represent external costs directly related to completing the
acquisition of ACS and primarily include expenditures for investment
banking, legal, accounting and other similar services. Legal costs include
costs associated with the ACS shareholders litigation which was settled
in 2010. The remainder of the acquisition-related costs represents
external incremental costs directly related to the integration of ACS
and Xerox. These costs include expenditures for consulting, systems
integration, corporate communication services and the consolidation of
facilities, as well as the expense associated with the performance shares
that were granted to ACS management in connection with existing
change-in-control agreements.
Costs of $72 million were incurred during 2009, in connection with our
acquisition of ACS. $58 million of the costs relate to the write-off of
fees associated with the Bridge Loan Facility commitment which was
terminated as a result of securing permanent financing to fund the
acquisition. The remainder of the costs represents transaction costs such
as banking, legal and accounting fees, as well as some pre-integration
costs such as external consulting services.
Amortization of Intangible Assets
During 2010, we recorded $312 million for the amortization of
intangibles assets, which was $252 million higher than 2009. The
increase primarily reflects the amortization of intangibles associated
with our acquisition of ACS. Refer to Note 3 – Acquisitions in the
Consolidated Financial Statements for additional information regarding
the ACS acquisition.
Amortization of intangibles was $60 million in 2009 which was an
increase of $6 million over 2008, primarily as a result of the full-year
amortization of the assets acquired as part of our acquisitions in 2008.
Worldwide Employment
Worldwide employment of 136,500 as of December 31, 2010 increased
approximately 83,000 from December 31, 2009, primarily due to the
additional headcount related to the ACS acquisition partially offset by
restructuring reductions. Worldwide employment was approximately
53,600 and 57,100 at December 31, 2009 and 2008, respectively.
Management’s Discussion
•
$19 million loss associated with the sale of our Venezuelan subsidiary.
The loss primarily reflects the write-off our Venezuelan net assets
including working capital and long-lived assets. We will continue to
sell equipment, parts and supplies to the acquiring company through
a distribution arrangement but will no longer have any direct or local
operations in Venezuela. The sale of our operations and change in
business model follows a decision by management in the fourth
quarter 2010 to reduce the Company’s future exposure and risk
associated with operating in this unpredictable economy.
The above charges were partially offset by $41 million of net reversals
for changes in estimated reserves from prior-period initiatives.
We expect 2011 pre-tax savings of approximately $270 million from
our 2010 restructuring actions and approximately $475 million of
annualized savings once all actions are fully implemented.
2009 Activity
Restructuring activity was minimal in 2009, and the related charges
primarily reflected changes in estimates in severance costs from
previously recorded actions.
2008 Activity
During 2008, we recorded $357 million of net restructuring charges
predominantly consisting of severance and costs related to the
elimination of approximately 4,900 positions primarily in North America
and Europe. Focus areas for these actions include the following:
•
•
•
Improving efficiency and effectiveness of infrastructure including:
marketing, finance, human resources and training
Capturing efficiencies in technical services, managed services, and
supply chain and manufacturing infrastructure
Optimizing product development and engineering resources
In addition, related to these activities, we also recorded lease
cancellation and other costs of $19 million and asset impairment
charges of $53 million. The lease termination and asset impairment
charges primarily related to: (i) the relocation of certain manufacturing
operations including the closing of our toner plant in Oklahoma City and
the consolidation of our manufacturing operations in Ireland; and (ii) the
exit from certain leased and owned facilities as a result of the actions
noted above.
Restructuring Summary
The restructuring reserve balance as of December 31, 2010 for all
programs was $323 million, of which approximately $309 million
is expected to be spent over the next 12 months. Refer to Note 9 –
Restructuring and Asset Impairment Charges in the Consolidated
Financial Statements for additional information regarding our
restructuring programs.
40
Xerox 2010 Annual Report
Management’s Discussion
Other Expenses, Net
Other expenses, net for the three years ended December 31, 2010 were
as follows:
(in millions)
Non-financing interest expense
Interest income
Gain on sales of businesses
and assets
Currency losses, net
ACS shareholders litigation
settlement
Litigation matters
Loss on early extinguishment
of debt
All Other expenses, net
Total Other Expenses, Net
2010
$ 346
(19)
(18)
11
36
(4)
15
22
$ 389
2009
$ 256
(21)
(16)
26
—
9
—
31
$ 285
2008
$ 262
(35)
(21)
34
—
781
—
12
$ 1,033
Non-financing interest expense: 2010 non-financing interest expense
of $346 million increased $90 million from 2009 due to higher
average debt balances, primarily resulting from the funding of the ACS
acquisition, partially offset by the early extinguishment of certain debt
instruments as well as the scheduled repayments of other debt.
In 2009 non-financing interest expense decreased compared to 2008,
as interest expense associated with our $2.0 billion Senior Note offering
for the funding of the ACS acquisition was more than offset by lower
interest rates on the remaining debt.
Interest income: Interest income is derived primarily from our invested
cash and cash equivalent balances. The decline in interest income in
2010 and 2009 was primarily due to lower average cash balances and
rates of return.
Gain on sales of businesses and assets: Gains on sales of business
and assets primarily consisted of the sales of certain surplus facilities
in Latin America.
Currency losses, net: Currency losses primarily result from the
re-measurement of foreign currency-denominated assets and liabilities,
the cost of hedging foreign currency-denominated assets and liabilities,
the mark-to-market of foreign exchange contracts utilized to hedge
those foreign currency-denominated assets and liabilities and the
mark-to-market impact of hedges of anticipated transactions, primarily
future inventory purchases, for those that we do not apply cash flow
hedge accounting treatment.
The 2010 net currency losses were primarily due to the currency
devaluation in Venezuela. In January 2010, Venezuela announced a
devaluation of the Bolivar to an official rate of 4.30 Bolivars to the U.S.
Dollar for a majority of our products. As a result of this devaluation, we
recorded a currency loss of $21 million in the first quarter of 2010 for the
re-measurement of our net Bolivar-denominated monetary assets. This
loss was partially offset by a cumulative translation gain of $6 million
that was recognized upon the repatriation of cash and liquidation of a
foreign subsidiary.
The 2009 net currency losses were primarily due to the significant
movement in exchange rates among the U.S. Dollar, Euro and Yen in the
first quarter of 2009, as well as the increased cost of hedging, particularly
in developing markets.
The 2008 currency losses were primarily due to net re-measurement
losses associated with our Yen-denominated payables, foreign currency-
denominated assets and liabilities in our developing markets and the
cost of hedging. The currency losses on Yen-denominated payables were
largely limited to the first quarter 2008 as a result of the significant and
rapid weakening of the U.S. Dollar and Euro versus the Yen.
ACS Shareholders’ Litigation Settlement: Represents litigation expense
of $36 million for the settlement of claims by ACS shareholders arising
from our acquisition of ACS. The total settlement for all defendants was
approximately $69 million, with Xerox paying approximately $36 million
net of insurance proceeds.
Litigation matters: The 2010 and 2009 amounts for litigation
matters primarily relate to changes in estimated probable losses for
various legal matters.
In 2008 legal matters consisted of the following:
•
•
$721 million reflecting provisions for the $670 million court approved
settlement of Carlson v. Xerox Corporation and other pending
securities-related cases, net of insurance recoveries.
$36 million for probable losses on Brazilian labor-related contingencies.
Following an assessment of the most recent trend in the outcomes
of these matters, we reassessed the probable estimated loss and, as
a result, recorded an additional reserve of $36 million in the fourth
quarter of 2008.
•
$24 million associated with probable losses from various other
legal matters.
Refer to Note 17 – Contingencies in the Consolidated Financial
Statements for additional information regarding litigation against
the Company.
All other expenses, net: All Other expenses in 2010 decreased primarily
due to lower interest expense on the Brazil tax and labor contingencies.
All Other expenses, net in 2009 were $19 million higher than 2008,
primarily due to fees associated with the sale of receivables, as well as an
increase in interest expense related to Brazil tax and labor contingencies.
Xerox 2010 Annual Report
41
Management’s Discussion
Income Taxes
(in millions)
Reported
Adjustments:
Xerox restructuring charge(1)
Acquisition-related costs
Amortization of intangible assets
Venezuela devaluation costs
Medicare subsidy tax law change
Equipment write-off
Provision for securities litigation
ACS Shareholders’ litigation settlement
Loss on early extinguishment of debt
Adjusted(2)
Year Ended December 31,
2010
Income
Tax
Expense
Pre-Tax
Income
Effective
Tax Rate
Pre-Tax
Income
2009
Income
Tax
Expense
Effective
Tax Rate
Pre-Tax
Income
2008
Income
Tax
Expense
Effective
Tax Rate
$ 815
$ 256
31.4%
$ 627
$ 152
24.2%
$
(79)
$ (231)
292.4%
483
77
312
21
—
—
—
36
15
$ 1,759
166
19
118
—
(16)
—
—
—
5
$ 548
31.2%
(8)
72
60
—
—
—
—
—
—
$ 751
(3)
23
22
—
—
—
—
—
—
426
—
54
—
—
39
774
—
—
134
—
19
—
—
15
283
—
41
$ 194
25.8%
$ 1,214
$ 261
21.5%
The 2010 effective tax rate was 31.4%, or 31.2%(2) on an adjusted
basis, which was lower than the U.S. statutory rate primarily due to the
geographical mix of income before taxes and the related effective tax
rates in those jurisdictions as well as the U.S. tax impacts on certain
foreign income and tax law changes.
The 2009 effective tax rate was 24.2%, or 25.8%(2) on an adjusted basis,
which was lower than the U.S. statutory tax rate primarily reflecting the
benefit to taxes from the geographical mix of income before taxes and
the related effective tax rates in those jurisdictions and the settlement
of certain previously unrecognized tax benefits partially offset by a
reduction in the utilization of foreign tax credits.
The 2008 effective tax rate was 292.4%, or 21.5%(2) on an adjusted
basis, which was lower than the U.S. statutory tax rate primarily reflecting
the benefit to taxes from the geographical mix of income before taxes
and the related effective tax rates in those jurisdictions, the utilization
of foreign tax credits and tax law changes.
Our effective tax rate will change based on nonrecurring events as well
as recurring factors including the geographical mix of income before
taxes and the related effective tax rates in those jurisdictions and the
U.S. tax impacts on certain foreign income. In addition, our effective tax
rate will change based on discrete or other nonrecurring events (such as
audit settlements) that may not be predictable. We anticipate that our
effective tax rate for 2011 will be approximately 31%, excluding the
effects of any discrete events.
Refer to Note 16 – Income and Other Taxes in the Consolidated Financial
Statements for additional information.
(1) Income tax benefit from restructuring in 2010 includes a $19 million benefit from
the sale of our Venezuelan operations.
(2) See the “Non-GAAP Measures” section for additional information.
42
Xerox 2010 Annual Report
Equity in Net Income of Unconsolidated Affiliates
(in millions)
2010
2009
2008
Year Ended December 31,
Total equity in net income of
unconsolidated affiliates
Fuji Xerox after-tax
$ 78
$ 41
$ 113
restructuring costs(1)
38
46
16
(1) Represents our 25% share of Fuji Xerox after-tax restructuring costs. Amounts are
included in Total equity in net income of unconsolidated affiliates.
Equity in net income of unconsolidated affiliates primarily reflects our
25% share in Fuji Xerox.
The 2010 increase of $37 million from 2009 was primarily due to an
increase in Fuji Xerox’s net income, which was primarily driven by higher
revenue and cost improvements, as well as lower restructuring costs.
The 2009 decrease of $72 million from 2008 was primarily due to
Fuji Xerox’s lower net income, which was negatively impacted by the
weakness in the worldwide economy, as well as $46 million related to our
share of Fuji Xerox after-tax restructuring costs.
Recent Accounting Pronouncements
Refer to Note 1 – Summary of Significant Accounting Policies in the
Consolidated Financial Statements for a description of recent accounting
pronouncements including the respective dates of adoption and the
effects on results of operations and financial condition.
Management’s Discussion
Capital Resources and Liquidity
Cash Flow Analysis
The following summarizes our cash flows for the three years ended
December 31, 2010, as reported in our Consolidated Statements of Cash
Flows in the accompanying Consolidated Financial Statements:
(in millions)
Net cash provided by operating activities
Net cash used in investing activities
Net cash (used in) provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
(Decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and Cash Equivalents at End of Year
Year Ended December 31,
Change
2010
$ 2,726
(2,178)
(3,116)
(20)
(2,588)
3,799
$ 1,211
2009
$ 2,208
(343)
692
13
2,570
1,229
$ 3,799
2008
$ 939
(441)
(311)
(57)
130
1,099
$ 1,229
2010
$ 518
(1,835)
(3,808)
(33)
(5,158)
2,570
$ (2,588)
2009
$ 1,269
98
1,003
70
2,440
130
$ 2,570
Cash Flows from Operating Activities
Net cash provided by operating activities was $2,726 million for the year
ended December 31, 2010 and includes $113 million of cash outflows
for acquisition-related expenditures. The $518 million increase in cash
from 2009 was primarily due to the following:
•
•
•
•
•
•
•
•
•
$1,173 million increase in pre-tax income before depreciation and
amortization, stock-based compensation, litigation, restructuring and
the Venezuelan currency devaluation.
$458 million increase due to higher accounts payable and accrued
compensation primarily related to higher inventory purchases and
the timing of accounts payable payments as well as increased
compensation, benefit and other accruals.
$141 million increase primarily from the early termination of certain
interest rate swaps.
$57 million increase due to lower restructuring payments.
$470 million decrease as a result of higher inventory levels reflecting
increased activity.
$367 million decrease due to an increase in accounts receivable, net of
collections of deferred proceeds from the sale of receivables, primarily
as a result of higher revenues and a lower impact from receivable sales.
$216 million decrease as a result of up-front costs and other customer
related spending associated with our services contracts.
$140 million decrease due to higher finance receivables of $119
million and equipment on operating leases of $21 million, both
reflective of increased equipment placements.
$115 million decrease primarily due to higher contributions to our U.S.
pension plans. No contributions were made in 2009 to our U.S. pension
plans due to the availability of prior years’ credit balances.
Net cash provided by operating activities was $2,208 million for the year
ended December 31, 2009. The $1,269 million increase in cash from
2008 was primarily due to the following:
•
•
•
•
•
•
•
•
•
•
$587 million increase due to the absence of payments for securities-
related litigation settlements.
$433 million increase as a result of lower inventory levels reflecting
aggressive supply chain actions in light of lower sales volume.
$410 million increase from accounts receivables reflecting the
benefits from sales of accounts receivables, lower revenue and strong
collection effectiveness.
$177 million increase due to lower contributions to our defined
pension benefit plans. The lower contributions are primarily in the U.S.,
as no contributions were required due to the availability of prior years’
credit balances.
$116 million increase due to lower net tax payments.
$84 million increase due to higher net run-off of finance receivables.
$64 million increase due to lower placements of equipment on
operating leases, reflecting lower install activity.
$440 million decrease in pre-tax income before litigation, restructuring
and acquisition costs.
$139 million decrease due to higher restructuring payments related to
prior years’ actions.
$54 million decrease due to lower accounts payable and accrued
compensation, primarily related to lower purchases and the timing of
payments to suppliers.
Xerox 2010 Annual Report
43
Net cash provided by financing activities was $692 million for the year
ended December 31, 2009. The $1,003 million increase in cash from
2008 was primarily due to the following:
•
•
•
•
$812 million increase because no purchases were made under our
share repurchase program in 2009.
$170 million increase from lower net repayments on secured debt.
$21 million increase due to lower share repurchases related to
employee withholding taxes on stock-based compensation vesting.
$3 million decrease due to lower net debt proceeds. 2009 reflects
the repayment of $1,029 million for Senior Notes due in 2009, net
payments of $448 million for Zero Coupon Notes, net payments
of $246 million on the Credit Facility, net payments of $35 million
primarily for foreign short-term borrowings and $44 million of debt
issuance costs for the Bridge Loan Facility commitment which was
terminated. These payments were partially offset by net proceeds
of $2,725 million from the issuance of Senior Notes in May and
December 2009. 2008 reflects the issuance of $1.4 billion in Senior
Notes, $250 million in Zero Coupon Notes and net payments of $354
million on the Credit Facility and $370 million on other debt.
ACS Acquisition
On February 5, 2010 we acquired all of the outstanding equity of
ACS in a cash-and-stock transaction valued at approximately $6.2
billion, net of cash acquired. The consideration transferred to acquire
ACS was as follows:
(in millions)
February 5, 2010
Xerox common stock issued
Cash consideration, net of cash acquired
Value of exchanged stock options
Series A convertible preferred stock
Net Consideration – Cash and Non-cash
$ 4,149
1,495
168
349
$ 6,161
In addition, we also repaid $1.7 billion of ACS’s debt at acquisition and
assumed an additional $0.6 billion.
Refer to Note 3 – Acquisitions in the Consolidated Financial Statements
for additional information regarding the ACS acquisition.
Management’s Discussion
Cash Flows from Investing Activities
Net cash used in investing activities was $2,178 million for the year
ended December 31, 2010. The $1,835 million increase in the use of
cash from 2009 was primarily due to the following:
•
•
$1,571 million increase primarily due to the acquisitions of ACS for
$1,495 million, EHRO for $125 million, TMS Health for $48 million,
IBS for $29 million, Georgia for $21 million and Spur for $12 million.
$326 million increase due to higher capital expenditures (including
internal use software) primarily as a result of the inclusion of ACS
in 2010.
•
$35 million decrease due to higher cash proceeds from asset sales.
Net cash used in investing activities was $343 million for the year ended
December 31, 2009. The $98 million decrease in the use of cash from
2008 was primarily due to the following:
•
•
$142 million decrease due to lower capital expenditures (including
internal use software), reflecting very stringent spending controls.
$21 million increase due to lower cash proceeds from asset sales.
Cash Flows from Financing Activities
Net cash used in financing activities was $3,116 million for the year
ended December 31, 2010. The $3,808 million decrease in cash from
2009 was primarily due to the following:
•
•
•
$3,980 million decrease due to net debt activity. 2010 includes the
repayments of $1,733 million of ACS’s debt on the acquisition date,
$950 million of Senior Notes, $550 million early redemption of the
2013 Senior Notes, net payments of $110 million on other debt
and $14 million of debt issuance costs for the Bridge Loan Facility
commitment, which was terminated in 2009. These payments were
offset by net proceeds of $300 million from Commercial Paper issued
under a program we initiated during the fourth quarter 2010. 2009
reflects the repayment of $1,029 million for Senior Notes due in 2009,
net payments of $448 million for Zero Coupon Notes, net payments
of $246 million on the Credit Facility, net payments of $35 million
primarily for foreign short-term borrowings and $44 million of debt
issuance costs for the Bridge Loan Facility commitment which was
terminated. These payments were partially offset by net proceeds
of $2,725 million from the issuance of Senior Notes in May and
December 2009.
$66 million decrease, reflecting dividends on an increased number of
outstanding shares as a result of the acquisition of ACS.
$182 million increase due to proceeds from the issuance of common
stock primarily as a result of the exercise of stock options issued under
the former ACS plans as well as the exercise of stock options from
several expiring grants.
•
$58 million increase from lower net repayments on secured debt.
44
Xerox 2010 Annual Report
Management’s Discussion
Financing Activities, Credit Facility and Capital Markets
The following summarizes our debt as of December 31:
Customer Financing Activities
We provide lease equipment financing to the majority of our customers,
primarily in our Technology segment. Our lease contracts permit
customers to pay for equipment over time rather than at the date of
installation. Our investment in these contracts is reflected in Total finance
assets, net. We currently fund our customer financing activity through
cash generated from operations, cash on hand, borrowings under bank
credit facilities and proceeds from capital markets offerings.
We have arrangements in certain international countries and
domestically through GIS, where third-party financial institutions
independently provide lease financing, on a non-recourse basis to Xerox,
directly to our customers. In these arrangements, we sell and transfer
title of the equipment to these financial institutions. Generally, we have
no continuing ownership rights in the equipment subsequent to its sale;
therefore, the unrelated third-party finance receivable and debt are not
included in our Consolidated Financial Statements.
The following represents our investment in lease contracts as of
December 31:
(in millions)
Total Finance receivables, net (1)
Equipment on operating leases, net
Total Finance Assets, net
2010
$ 6,620
530
$ 7,150
2009
$ 7,027
551
$ 7,578
(in millions)
Principal debt balance(1)
Net unamortized discount
Fair value adjustments
Total Debt
Less: Current maturities and short-term debt(1)
2010
2009
$ 8,380
(1)
228
8,607
(1,370)
$ 9,122
(11)
153
9,264
(988)
Total Long-term Debt(1)
$ 7,237
$ 8,276
(1) December 31, 2010 includes Commercial Paper of $300 million.
Sales of Accounts Receivable
We have facilities in the U.S., Canada and several countries in Europe
that enable us to sell to third parties, on an ongoing basis, certain
accounts receivable without recourse. The accounts receivable sold are
generally short-term trade receivables with payment due dates of less
than 60 days. Accounts receivable sales were as follows:
(in millions)
Accounts receivable sales
Deferred proceeds
Fees associated with sales
Estimated increase on operating
cash flows(1)
Year Ended December 31,
2010
2009
$ 2,374
307
15
$ 1,566
—
13
2008
$ 717
—
4
106
309
51
(1) Includes (i) billed portion of finance receivables, net, (ii) finance receivables, net
and (iii) finance receivables due after one year, net as included in the Consolidated
Balance Sheets as of December 31, 2010 and 2009.
(1) Represents the difference between current and prior-year fourth-quarter accounts
receivable sales adjusted for the effects of: (i) the deferred proceeds, (ii) collections
prior to the end of the year and (iii) currency.
$134 million of the $428 million decrease in Total finance assets, net is
due to currency.
Refer to Note 4 – Receivables, Net in the Consolidated Financial
Statements for additional information.
We maintain a certain level of debt, referred to as financing debt, in
order to support our investment in our lease contracts. We maintain an
assumed 7:1 leverage ratio of debt to equity as compared to our finance
assets for this financing aspect of our business. Based on this leverage,
the following represents the breakdown of Total debt between financing
debt and core debt as of December 31:
(in millions)
Financing debt(1)
Core debt
Total Debt
2010
$ 6,256
2,351
$ 8,607
2009
$ 6,631
2,633
$ 9,264
(1) Financing debt includes $5,793 million and $6,149 million as of December 2010
and 2009, respectively, of debt associated with Total finance receivables, net and
is the basis for our calculation of “equipment financing interest” expense. The
remainder of the financing debt is associated with Equipment on operating leases.
Financial Instruments
Refer to Note 13 – Financial Instruments in the Consolidated Financial
Statements for additional information regarding our derivative financial
instruments.
Share Repurchase Programs
Refer to Note 19 – Shareholders’ Equity – “Treasury Stock” in the
Consolidated Financial Statements for additional information regarding
our share repurchase programs.
Xerox 2010 Annual Report
45
Management’s Discussion
Dividends
The Board of Directors declared aggregate dividends of $243 million
and $152 million on common stock in 2010 and 2009, respectively.
The increase in 2010 is primarily due to the common stock issued in
connection with the ACS acquisition.
The Board of Directors declared aggregate dividends of $21 million on
the Series A Convertible Preferred Stock in 2010. The preferred shares
were issued in connection with the acquisition of ACS.
Refer to Note 3 – Acquisitions in the Consolidated Financial Statements
for additional information regarding the ACS acquisition.
Capital Market Activity
In 2010, we redeemed our $550 million 7.625% Senior Notes due in
2013. We incurred a loss on extinguishment of approximately $15
million, representing the call premium of approximately $7 million, as
well as the write-off of unamortized debt costs of $8 million.
Refer to Note 11 – Debt in the Consolidated Financial Statements for
additional information regarding 2010 Debt activity.
Liquidity and Financial Flexibility
We manage our worldwide liquidity using internal cash management
practices, which are subject to (1) the statutes, regulations and
practices of each of the local jurisdictions in which we operate, (2) the
legal requirements of the agreements to which we are a party and (3)
the policies and cooperation of the financial institutions we utilize to
maintain and provide cash management services.
Our liquidity is a function of our ability to successfully generate cash
flows from a combination of efficient operations and access to capital
markets. Our ability to maintain positive liquidity going forward depends
on our ability to continue to generate cash from operations and access
to financial markets, both of which are subject to general economic,
financial, competitive, legislative, regulatory and other market factors
that are beyond our control.
The following is a discussion of our liquidity position as of
December 31, 2010:
•
Total cash and cash equivalents was $1.2 billion and there were
no outstanding borrowings or letters of credit under our $2 billion
Credit Facility. The Credit Facility provides backup for our Commercial
Paper (“CP”) borrowings which amounted to $300 million at
December 31, 2010.
•
In October 2010, Xerox’s Board of Directors authorized the company
to issue Commercial Paper, a liquidity vehicle that the Company has
not used for several years. Aggregate CP and Credit Facility borrowings
may not exceed $2 billion outstanding at any time. Under the
company’s private placement CP program as of December 31, 2010,
we could issue CP up to a maximum amount of $1 billion. In February
2011 this amount was increased to $2 billion to be consistent with the
Board authorization.
•
Over the past three years we have consistently delivered strong cash
flow from operations, driven by the strength of our annuity-based
revenue model. Cash flows from operations were $2,726 million,
$2,208 million and $939 million for the years ended December 31,
2010, 2009 and 2008, respectively. Cash flows from operations in
2008 included $615 million in net payments for securities litigation.
•
Our principal debt maturities are in line with historical and projected
cash flows and are spread over the next 10 years as follows and
includes $300 million of Commercial Paper in 2011 (in millions):
Year
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020 and thereafter
Total Debt
Amount
$ 1,370
1,126
412
771
1,251
950
501
1,001
650
348
$ 8,380
Loan Covenants and Compliance
At December 31, 2010, we were in full compliance with the covenants
and other provisions of our Credit Facility and Senior Notes. We have
the right to prepay outstanding loans or to terminate the Credit Facility
without penalty. Failure to comply with material provisions or covenants
of the Credit Facility and Senior Notes could have a material adverse
effect on our liquidity and operations and our ability to continue to fund
our customers’ purchase of Xerox equipment.
Refer to Note 11 – Debt in the Consolidated Financial Statements for
additional information regarding debt arrangements.
46
Xerox 2010 Annual Report
Management’s Discussion
Contractual Cash Obligations and Other Commercial Commitments
and Contingencies
At December 31, 2010, we had the following contractual cash obligations
and other commercial commitments and contingencies:
(in millions)
Total debt, including capital lease obligations (1)
Minimum operating lease commitments(2)
Liability to subsidiary trust issuing
preferred securities(3)
Defined benefit pension plans
Retiree health payments
Estimated Purchase Commitments:
Flextronics(4)
Fuji Xerox(5)
HPES Contracts(6)
Other IM service contracts(7)
Other(8)
Other Commitments(9):
Surety Bonds
Letters of Credit
2011
$ 1,370
669
—
500
87
670
2,100
69
150
7
636
96
2012
$ 1,126
486
—
—
86
—
—
23
140
7
20
15
Total
$ 6,354
$ 1,903
2013
$ 412
337
—
—
85
—
—
6
122
1
7
—
$ 970
2014
$ 771
171
—
—
85
—
—
—
89
—
1
4
$ 1,121
2015
$ 1,251
118
—
—
84
—
—
—
12
—
1
—
$ 1,466
Thereafter
$ 3,450
106
650
—
396
—
—
—
36
—
1
155
$ 4,794
(1) Refer to Note 11 – Debt in the Consolidated Financial Statements for additional information and interest payments related to total debt. Amounts above include principal portion
only and $300 million of Commercial Paper in 2011.
(2) Refer to Note 6 – Land, Buildings and Equipment, Net in the Consolidated Financial Statements for additional information related to minimum operating lease commitments.
(3) Refer to Note 12 – Liability to Subsidiary Trust Issuing Preferred Securities in the Consolidated Financial Statements for additional information and interest payments (amounts
above include principal portion only).
(4) Flextronics: We outsource certain manufacturing activities to Flextronics and are currently in the first of two one-year extensions of the Master Supply Agreement. The term of
this agreement is three years, with two additional one-year extension periods. The amount included in the table reflects our estimate of purchases over the next year and is not a
contractual commitment.
(5) Fuji Xerox: The amount included in the table reflects our estimate of purchases over the next year and is not a contractual commitment.
(6) HPES contract: We have an information management contract with HP Enterprise Services (“HPES”), legal successor to Electronic Data Systems Corp., through March 2014. Services
to be provided under this contract include support for European mainframe system processing, as well as workplace, service desk, voice and data network management. Although the
HPES contract runs through March 2014, we may choose to transfer some of the services to internal Xerox providers before the HPES contract ends. There are no minimum payments
required under this contract. The amounts disclosed in the table reflect our estimate of minimum payments for the periods shown. We can terminate the contract for convenience by
providing 60 day’s prior notice without paying a termination fee. Should we terminate the contract for convenience, we have an option to purchase the assets placed in service under
the HPES contract.
(7) IM (“Information Management”) services: During 2010 and 2009, we terminated certain information management services provided under the HPES contract. Terminated services
were either discontinued or we entered into new agreements for similar services with other providers. Services provided under these contracts include mainframe application
processing, development and support; and mid-range applications processing and support. The contracts have various terms through 2015. Some of the contracts require minimum
payments and require early termination penalties. The amounts disclosed in the table reflect our estimate of minimum payments.
(8) Other purchase commitments: We enter into other purchase commitments with vendors in the ordinary course of business. Our policy with respect to all purchase commitments is to
record losses, if any, when they are probable and reasonably estimable. We currently do not have, nor do we anticipate, material loss contracts.
(9) Certain contracts, primarily governmental, require surety bonds or letters of credit as guarantee of performance. Generally these commitments have one-year terms which are
typically renewed annually. Refer to Note 17 – Contingencies in the Consolidated Financial Statements for additional information.
Xerox 2010 Annual Report
47
As of December 31, 2010, the total amounts related to the unreserved
portion of the tax and labor contingencies, inclusive of any related
interest, amounted to approximately $1,274 million, with the increase
from the December 31, 2009 balance of $1,225 million primarily related
to currency and current-year interest indexation partially offset by
matters that have been closed. With respect to the unreserved balance
of $1,274 million, the majority has been assessed by management as
being remote as to the likelihood of ultimately resulting in a loss to the
Company. In connection with the above proceedings, customary local
regulations may require us to make escrow cash deposits or post other
security of up to half of the total amount in dispute. As of December 31,
2010 we had $276 million of escrow cash deposits for matters we are
disputing and there are liens on certain Brazilian assets with a net book
value of $19 million and additional letters of credit of approximately
$160 million. Generally, any escrowed amounts would be refundable and
any liens would be removed to the extent the matters are resolved in our
favor. We routinely assess these matters as to probability of ultimately
incurring a liability against our Brazilian operations and record our best
estimate of the ultimate loss in situations where we assess the likelihood
of an ultimate loss as probable.
Other Contingencies and Commitments
As more fully discussed in Note 17 – Contingencies in the
Consolidated Financial Statements, we are involved in a variety of
claims, lawsuits, investigations and proceedings concerning securities
law, intellectual property law, environmental law, employment law
and the Employee Retirement Income Security Act. In addition,
guarantees, indemnifications and claims may arise during the ordinary
course of business from relationships with suppliers, customers and
nonconsolidated affiliates. Nonperformance under a contract including
a guarantee, indemnification or claim could trigger an obligation
of the Company.
We determine whether an estimated loss from a contingency should
be accrued by assessing whether a loss is deemed probable and can
be reasonably estimated. Should developments in any of these areas
cause a change in our determination as to an unfavorable outcome and
result in the need to recognize a material accrual, or should any of these
matters result in a final adverse judgment or be settled for significant
amounts, they could have a material adverse effect on our results of
operations, cash flows and financial position in the period or periods in
which such change in determination, judgment or settlement occurs.
Management’s Discussion
Pension and Other Post-retirement Benefit Plans
We sponsor defined benefit pension plans and retiree health
plans that require periodic cash contributions. Our 2010
contributions for these plans were $237 million for our defined
benefit pension plans and $92 million for our retiree health plans.
In 2011 we expect, based on current actuarial calculations, to
make contributions of approximately $500 million to our worldwide
defined benefit pension plans and approximately $90 million to our
retiree health benefit plans. Contributions to our defined benefit
pension plans have increased from the prior year due to a decrease
in the discount rate, prior years’ investment performance as well as
the requirement in the U.S. to make quarterly contributions for the
current plan year. Contributions in subsequent years will depend on
a number of factors, including the investment performance of plan
assets and discount rates as well as potential legislative and plan
changes. We currently expect contributions to our defined benefit
pension plans to decline in years subsequent to 2011.
Our retiree health benefit plans are non-funded and are almost entirely
related to domestic operations. Cash contributions are made each year
to cover medical claims costs incurred during the year. The amounts
reported in the above table as retiree health payments represent our
estimate of future benefit payments.
Fuji Xerox
We purchased products, including parts and supplies, from Fuji Xerox
totaling $2.1 billion, $1.6 billion and $2.1 billion in 2010, 2009 and
2008, respectively. Our purchase commitments with Fuji Xerox are
entered into in the normal course of business and typically have a
lead time of three months. Related party transactions with Fuji Xerox
are discussed in Note 7 – Investments in Affiliates, at Equity in the
Consolidated Financial Statements.
Brazil Tax and Labor Contingencies
Our Brazilian operations are involved in various litigation matters
and have received or been the subject of numerous governmental
assessments related to indirect and other taxes, as well as disputes
associated with former employees and contract labor. The tax matters,
which comprise a significant portion of the total contingencies,
principally relate to claims for taxes on the internal transfer of inventory,
municipal service taxes on rentals and gross revenue taxes. We are
disputing these tax matters and intend to vigorously defend our
positions. Based on the opinion of legal counsel and current reserves
for those matters deemed probable of loss, we do not believe that the
ultimate resolution of these matters will materially impact our results of
operations, financial position or cash flows. The labor matters principally
relate to claims made by former employees and contract labor for the
equivalent payment of all social security and other related labor benefits,
as well as consequential tax claims, as if they were regular employees.
48
Xerox 2010 Annual Report
Management’s Discussion
Unrecognized Tax Benefits
As of December 31, 2010, we had $186 million of unrecognized tax
benefits. This represents the tax benefits associated with various tax
positions taken, or expected to be taken, on domestic and international
tax returns that have not been recognized in our financial statements
due to uncertainty regarding their resolution. The resolution or
settlement of these tax positions with the taxing authorities is at
various stages and therefore we are unable to make a reliable estimate
of the eventual cash flows by period that may be required to settle
these matters. In addition, certain of these matters may not require
cash settlement due to the existence of credit and net operating loss
carryforwards, as well as other offsets, including the indirect benefit
from other taxing jurisdictions that may be available.
Off-Balance Sheet Arrangements
Although we rarely utilize off-balance sheet arrangements in our
operations, we enter into operating leases in the normal course of
business. The nature of these lease arrangements is discussed in Note
6 – Land, Buildings and Equipment, Net in the Consolidated Financial
Statements. In addition, we have facilities in the U.S., Canada and
several countries in Europe that enable us to sell to third parties, on an
ongoing basis, certain accounts receivable without recourse. Refer to
Note 4 – Receivables, Net in the Consolidated Financial Statements for
further additional information.
See the table above for the Company’s contractual cash obligations and
other commercial commitments and Note 17 – Contingencies in the
Consolidated Financial Statements for additional information regarding
our guarantees, indemnifications and warranty liabilities.
Financial Risk Management
We are exposed to market risk from foreign currency exchange rates
and interest rates, which could affect operating results, financial position
and cash flows. We manage our exposure to these market risks through
our regular operating and financing activities and, when appropriate,
through the use of derivative financial instruments. We utilized derivative
financial instruments to hedge economic exposures, as well as reduce
earnings and cash flow volatility resulting from shifts in market rates.
Recent market events have not caused us to materially modify or change
our financial risk management strategies with respect to our exposures
to interest rate and foreign currency risk. Refer to Note 13 – Financial
Instruments in the Consolidated Financial Statements for additional
discussion on our financial risk management.
Foreign Exchange Risk Management
Assuming a 10% appreciation or depreciation in foreign currency
exchange rates from the quoted foreign currency exchange rates at
December 31, 2010, the potential change in the fair value of foreign
currency-denominated assets and liabilities in each entity would
not be significant because all material currency asset and liability
exposures were economically hedged as of December 31, 2010. A 10%
appreciation or depreciation of the U.S. Dollar against all currencies
from the quoted foreign currency exchange rates at December 31,
2010 would have a $528 million impact on our cumulative translation
adjustment portion of equity. The net amount invested in foreign
subsidiaries and affiliates, primarily Xerox Limited, Fuji Xerox, Xerox
Canada Inc. and Xerox do Brasil, and translated into U.S. Dollars using
the year-end exchange rates, was $5.3 billion at December 31, 2010.
Interest Rate Risk Management
The consolidated weighted-average interest rates related to our total
debt and liability to subsidiary trust issuing preferred securities for 2010,
2009 and 2008 approximated 5.8%, 6.1% and 6.6%, respectively.
Interest expense includes the impact of our interest rate derivatives.
Virtually all customer-financing assets earn fixed rates of interest.
The interest rates on a significant portion of the Company’s term debt
are fixed.
As of December 31, 2010, $952 million of our total debt carried variable
interest rates, including the effect of pay variable interest rate swaps we
use to reduce the effective interest rate on our fixed coupon debt.
The fair market values of our fixed-rate financial instruments are sensitive
to changes in interest rates. At December 31, 2010, a 10% change
in market interest rates would change the fair values of such financial
instruments by approximately $194 million.
Xerox 2010 Annual Report
49
•
•
We incurred significant expenses in
Acquisition-related costs:
connection with our acquisition of ACS which we generally would
not have otherwise incurred in the periods presented as a part of our
continuing operations. Acquisition-related costs include transaction
and integration costs, which represent external incremental costs
directly related to completing the acquisition and the integration of
ACS and Xerox. We believe it is useful for investors to understand the
effects of these costs on our total operating expenses.
The amortization of intangible
Amortization of intangible assets:
assets is driven by our acquisition activity which can vary in size, nature
and timing as compared to other companies within our industry and
from period to period. Accordingly, due to the incomparability of
acquisition activity among companies and from period to period, we
believe exclusion of the amortization associated with intangible assets
acquired through our acquisitions allows investors to better compare
and understand our results. The use of intangible assets contributed to
our revenues earned during the periods presented and will contribute
to our future period revenues as well. Amortization of intangible assets
will recur in future periods.
•
Other discrete, unusual or infrequent costs and expenses:
In
addition, we have also excluded the following items given the
discrete, unusual or infrequent nature of these items on our results
of operations:
– 2010 (1) loss on early extinguishment of debt; (2) ACS shareholders
litigation settlement; (3) Venezuela devaluation and (4) Medicare
subsidy tax law change (income tax effect only); and
– 2008 (1) provision for litigation matters; (2) equipment write-off
and (3) settlement of unrecognized tax benefits.
We believe the exclusion of these items allows investors to better
understand and analyze the results for the period as compared to prior
periods as well as expected trends in our business.
See “Net Income” and “Income Taxes” sections in the MD&A for
the reconciliation of these Non-GAAP measures for net Income/
Earnings per share and the Effective tax rate, respectively, to the
most directly comparable measures calculated and presented in
accordance with GAAP.
Management’s Discussion
Non-GAAP Financial Measures
We have reported our financial results in accordance with generally
accepted accounting principles (“GAAP”). Additionally, we have discussed
our results using non-GAAP measures.
Management believes that these non-GAAP financial measures provide
an additional means of analyzing the current periods’ results against the
corresponding prior periods’ results. However, these non-GAAP financial
measures should be viewed in addition to, and not as a substitute for,
the Company’s reported results prepared in accordance with GAAP.
Our non-GAAP financial measures are not meant to be considered in
isolation or as a substitute for comparable GAAP measures and should
be read only in conjunction with our consolidated financial statements
prepared in accordance with GAAP. Our management regularly uses our
supplemental non-GAAP financial measures internally to understand,
manage and evaluate our business and make operating decisions. These
non-GAAP measures are among the primary factors management uses
in planning for and forecasting future periods. Compensation of our
executives is based in part on the performance of our business based on
these non-GAAP measures.
A reconciliation of these non-GAAP financial measures to the most
directly comparable financial measures calculated and presented in
accordance with GAAP are set forth below.
Adjusted Earnings Measures
To better understand the trends in our business and the impact of
the ACS acquisition, we believe it is necessary to adjust the following
amounts determined in accordance with GAAP to exclude the effects
of the certain items as well as their related income tax effects:
•
•
•
Net income and Earnings per share (“EPS”),
Pre-tax income (loss) margin, and
Effective tax rate.
The above have been adjusted for the following items:
•
Restructuring and asset impairment charges (including those
incurred by Fuji Xerox): Restructuring and asset impairment charges
consist of costs primarily related to severance and benefits for
employees terminated pursuant to formal restructuring and workforce
reduction plans. We exclude these charges because we believe that
these historical costs do not reflect expected future operating expenses
and do not contribute to a meaningful evaluation of our current or
past operating performance. In addition, such charges are inconsistent
in amount and frequency. Such charges are expected to yield future
benefits and savings with respect to our operational performance.
50
Xerox 2010 Annual Report
Management’s Discussion
The following is a reconciliation of the Non-GAAP measure of Operating
margin to Pre-tax income margin, which is the most directly comparable
measure calculated and presented in accordance with GAAP.
(in millions)
Total Revenues
Pre-tax Income
Adjustments:
Xerox restructuring charge
Acquisition-related costs
Amortization of intangible assets
Equipment write-off
Other expenses, net(2)
As Reported
2010
As Reported
2009
$ 21,633
$ 15,179
815
483
77
312
—
389
627
(8)
72
60
—
285
Pro-forma
2009(1)
$ 21,082
1,267
As Reported
2008
$ 17,608
(79)
'10 vs. '09
Change
43%
30%
Pro-forma
Change
'09 vs. '08
Change
3%
(36)%
(14)%
*
(8)
104
60
—
382
429
—
54
39
1,033
Adjusted Operating Income
$ 2,076
$ 1,036
$ 1,805
$ 1,476
Pre-tax Income (Loss) Margin
Adjusted Operating Margin
3.8%
9.6%
4.1%
6.8%
6.0%
8.6%
(0.4)%
8.4%
100%
(0.3) pts
2.8 pts
15%
(30)%
(2.2) pts
1.0 pts
4.5 pts
(1.6) pts
* Percent change not meaningful.
(1) Pro-forma reflects ACS’s 2009 estimated results from February 6 through December 31 adjusted to reflect fair value adjustments related to property, equipment and computer
software as well as customer contract costs. In addition, adjustments were made for deferred revenue, exited businesses, certain non-recurring product sales and other material non-
recurring costs associated with the acquisition.
(2) 2008 includes provision for litigation matters of $774 million.
Pro-forma Basis
To better understand the trends in our business, we discuss our 2010
operating results by comparing them against adjusted 2009 results
which include ACS historical results for the comparable period.
Accordingly, we have included ACS’s 2009 estimated results for the
comparable period February 6, 2009 through December 31, 2009 in our
reported 2009 results. We refer to comparisons against these adjusted
2009 results as “pro-forma” basis comparisons. ACS 2009 historical
results have been adjusted to reflect fair value adjustments related
to property, equipment and computer software as well as customer
contract costs. In addition, adjustments were made for deferred revenue,
exited businesses and other material non-recurring costs associated with
the acquisition. We believe comparisons on a pro-forma basis are more
meaningful than the actual comparisons, given the size and nature of
the ACS acquisition. We believe the pro-forma basis comparisons allow
investors to have better understanding and additional perspective of
the expected trends in our business as well as the impact of the ACS
acquisition on the Company’s operations.
Xerox 2010 Annual Report
51
Year Ended December 31,
As Reported
2010
As Reported
2009
Pro-forma
2009(1)
Change
Pro-forma
Change
$ 3,857
3,377
7,234
13,739
660
$ 21,633
$ 13,739
660
3,377
$ 17,776
$ 2,493
4,544
414
$ 7,451
$ 3,550
3,096
6,646
7,820
713
$ 15,179
$ 7,820
713
3,096
$ 11,629
$ 2,251
3,332
442
$ 6,025
$ 3,550
3,234
6,784
13,585
713
$ 21,082
$ 13,585
713
3,234
$ 17,532
$ 2,269
4,585
442
$ 7,296
9%
9%
9%
76%
(7)%
43%
76%
9%
4%
7%
1%
(7)%
3%
1%
53%
1%
34.5%
33.1%
62.7%
34.4%
781
3.6%
$
33.9%
42.6%
62.0%
39.7%
$ 840
$
5.5%
33.4%
33.8%
62.0%
34.6%
840
4.0%
0.6 pts
(9.5) pts
0.7 pts
(5.3) pts
1.1 pts
(0.7) pts
0.7 pts
(0.2) pts
(1.9) pts
(0.4) pts
$ 4,594
$ 4,149
$ 4,651
21.2%
27.3%
22.1%
(6.1) pts
(0.9) pts
Management’s Discussion
A reconciliation of these non-GAAP financial measures to the most
directly comparable financial measures calculated and presented in
accordance with GAAP are set forth below.
Total Xerox
(in millions)
Revenue:
Equipment sales
Supplies, paper and other
Sales
Service, outsourcing and rentals
Finance income
Total Revenues
Service, outsourcing and rentals
Add: Finance income
Add: Supplies, paper and other sales
Annuity Revenue
Gross Profit:
Sales
Service, outsourcing and rentals
Finance income
Total
Gross Margin:
Sales
Service, outsourcing and rentals
Finance income
Total
RD&E
RD&E % Revenue
SAG
SAG % Revenue
52
Xerox 2010 Annual Report
Management’s Discussion
Services Segment
(in millions)
Document outsourcing
Business processing outsourcing
Information technology outsourcing
Less: Intra-segment eliminations
Total Revenue – Services
Segment Profit – Services
Segment Margin – Services
Year Ended December 31,
As Reported
2010
As Reported
2009
Pro-forma
2009(1)
Change
Pro-forma
Change
$ 3,297
5,112
1,249
(21)
$ 9,637
$ 1,132
$ 3,382
94
—
—
$ 3,476
$ 231
$ 3,382
4,751
1,246
—
$ 9,379
$ 1,008
(3)%
*
*
*
177%
390%
(3)%
8%
—%
*
3%
12%
11.7%
6.6%
10.7%
5.1 pts
1.0 pts
* Percent change not meaningful.
(1) Pro-forma reflects ACS’s 2009 estimated results from February 6 through December 31 adjusted to reflect fair value adjustments related to property, equipment and computer
software as well as customer contract costs. In addition, adjustments were made for deferred revenue, exited businesses, certain non-recurring product sales and other material non-
recurring costs associated with the acquisition.
Forward-Looking Statements
This Annual Report contains 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. Information
concerning these factors is included in our 2010 Annual Report on Form
10-K filed with the Securities and Exchange Commission (“SEC”). We
do not intend to update these forward-looking statements, except as
required by law.
Xerox 2010 Annual Report
53
Xerox Corporation
Consolidated Statements of Income
(in millions, except per-share data)
Revenues
Sales
Service, outsourcing and rentals
Finance income
Total Revenues
Costs and Expenses
Cost of sales
Cost of service, outsourcing and rentals
Equipment financing interest
Research, development and engineering expenses
Selling, administrative and general expenses
Restructuring and asset impairment charges
Acquisition-related costs
Amortization of intangible assets
Other expenses, net
Total Costs and Expenses
Income (Loss) before Income Taxes and Equity Income
Income tax expense (benefit)
Equity in net income of unconsolidated affiliates
Net Income
Less: Net income attributable to noncontrolling interests
Net Income Attributable to Xerox
Basic Earnings per Share
Diluted Earnings per Share
Year Ended December 31,
2010
2009
2008
$ 7,234
13,739
660
21,633
4,741
9,195
246
781
4,594
483
77
312
389
20,818
815
256
78
637
31
$ 606
$ 0.44
$ 0.43
$ 6,646
7,820
713
15,179
4,395
4,488
271
840
4,149
(8)
72
60
285
14,552
627
152
41
516
31
$
485
$ 0.56
$ 0.55
$ 8,325
8,485
798
17,608
5,519
4,929
305
884
4,534
429
—
54
1,033
17,687
(79)
(231)
113
265
35
230
$
$ 0.26
$ 0.26
The accompanying notes are an integral part of these Consolidated Financial Statements.
54
Xerox 2010 Annual Report
Xerox Corporation
Consolidated Balance Sheets
(in millions, except share data in thousands)
Assets
Cash and cash equivalents
Accounts receivable, net
Billed portion of finance receivables, net
Finance receivables, net
Inventories
Other current assets
Total current assets
Finance receivables due after one year, net
Equipment on operating leases, net
Land, buildings and equipment, net
Investments in affiliates, at equity
Intangible assets, net
Goodwill
Deferred tax assets, long-term
Other long-term assets
Total Assets
Liabilities and Equity
Short-term debt and current portion of long-term debt
Accounts payable
Accrued compensation and benefits costs
Unearned income
Other current liabilities
Total current liabilities
Long-term debt
Liability to subsidiary trust issuing preferred securities
Pension and other benefit liabilities
Post-retirement medical benefits
Other long-term liabilities
Total Liabilities
Series A Convertible Preferred Stock
Common stock
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Xerox shareholders’ equity
Noncontrolling interests
Total Equity
Total Liabilities and Equity
Shares of common stock issued and outstanding
December 31,
2010
2009
$ 1,211
2,826
198
2,287
991
1,126
8,639
4,135
530
1,671
1,291
3,371
8,649
540
1,774
$ 30,600
$ 1,370
1,968
901
371
1,807
6,417
7,237
650
2,071
920
797
18,092
349
1,398
6,580
6,016
(1,988)
12,006
153
12,159
$ 30,600
1,397,578
$ 3,799
1,702
226
2,396
900
708
9,731
4,405
551
1,309
1,056
598
3,422
1,640
1,320
$ 24,032
$
988
1,451
695
201
1,126
4,461
8,276
649
1,884
999
572
16,841
—
871
2,493
5,674
(1,988)
7,050
141
7,191
$ 24,032
869,381
The accompanying notes are an integral part of these Consolidated Financial Statements.
Xerox 2010 Annual Report
55
Xerox Corporation
Consolidated Statements of Cash Flows
(in millions)
Cash Flows from Operating Activities:
Net income
Adjustments required to reconcile net income to cash flows from operating activities:
Depreciation and amortization
Provision for receivables
Provision for inventory
Deferred tax (benefit) expense
Net gain on sales of businesses and assets
Undistributed equity in net income of unconsolidated affiliates
Stock-based compensation
Provision for litigation, net
Payments for litigation, net
Restructuring and asset impairment charges
Payments for restructurings
Contributions to pension benefit plans
(Increase) decrease in accounts receivable and billed portion of finance receivables
Collections of deferred proceeds from sales of receivables
(Increase) decrease in inventories
Increase in equipment on operating leases
Decrease in finance receivables
(Increase) decrease in other current and long-term assets
Increase in accounts payable and accrued compensation
Decrease in other current and long-term liabilities
Net change in income tax assets and liabilities
Net change in derivative assets and liabilities
Other operating, net
Net cash provided by operating activities
Cash Flows from Investing Activities:
Cost of additions to land, buildings and equipment
Proceeds from sales of land, buildings and equipment
Cost of additions to internal use software
Acquisitions, net of cash acquired
Net change in escrow and other restricted investments
Other investing, net
Net cash used in investing activities
Cash Flows from Financing Activities:
Net proceeds (payments) on secured financings
Net (payments) proceeds on other debt
Common stock dividends
Preferred stock dividends
Proceeds from issuances of common stock
Excess tax benefits from stock-based compensation
Payments to acquire treasury stock, including fees
Repurchases related to stock-based compensation
Other financing
Net cash (used in) provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
(Decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and Cash Equivalents at End of Year
The accompanying notes are an integral part of these Consolidated Financial Statements.
56
Xerox 2010 Annual Report
Year Ended December 31,
2010
2009
2008
$
637
$
516
$
265
1,097
180
31
(2)
(18)
(37)
123
36
(36)
483
(213)
(237)
(118)
218
(151)
(288)
129
(98)
615
(9)
229
85
70
2,726
(355)
52
(164)
(1,734)
20
3
(2,178)
1
(3,057)
(215)
(15)
183
24
—
(15)
(22)
(3,116)
(20)
(2,588)
3,799
$ 1,211
698
289
52
120
(16)
(25)
85
—
(28)
(8)
(270)
(122)
467
—
319
(267)
248
129
157
(100)
(18)
(56)
38
2,208
(95)
17
(98)
(163)
(6)
2
(343)
(57)
923
(149)
—
1
—
—
(12)
(14)
692
13
669
199
115
(324)
(21)
(53)
85
781
(615)
429
(131)
(299)
57
—
(114)
(331)
164
(8)
211
(174)
(92)
230
(104)
939
(206)
38
(129)
(155)
8
3
(441)
(227)
926
(154)
—
6
2
(812)
(33)
(19)
(311)
(57)
2,570
1,229
$ 3,799
130
1,099
$ 1,229
Xerox Corporation
Consolidated Statements of Shareholders’ Equity
(in millions)
Balance at December 31, 2007
Net income
Translation adjustments
Cumulative effect of change in
accounting principles
Changes in benefit plans(2)
Other unrealized losses, net
Comprehensive (Loss) Income
Cash dividends declared – common stock(3)
Stock option and incentive plans
Payments to acquire treasury stock
Cancellation of treasury stock
Distributions to noncontrolling interests
Balance at December 31, 2008
Net income
Translation adjustments
Changes in benefit plans(2)
Other unrealized gains
Comprehensive Income
Cash dividends declared – common stock (3)
Stock option and incentive plans
Tax loss on stock option and
incentive plans, net
Distributions to noncontrolling interests
Balance at December 31, 2009
Net income
Translation adjustments
Changes in benefit plans(2)
Other unrealized gains, net
Comprehensive Income
ACS acquisition(4)
Cash dividends declared – common stock(3)
Cash dividends declared – preferred stock(5)
Stock option and incentive plans
Tax benefit on stock option and
incentive plans, net
Distributions to noncontrolling interests
Balance at December 31, 2010
Common
Stock(6)
$ 920
—
—
—
—
—
—
5
—
(59)
—
$ 866
—
—
—
—
—
5
—
—
$ 871
—
—
—
—
490
—
—
37
—
—
$ 1,398
Additional
Paid-In
Capital
$ 3,176
—
—
—
—
—
—
55
—
(784)
—
$ 2,447
—
—
—
—
—
67
(21)
—
$ 2,493
—
—
—
—
3,825
—
—
256
6
—
$ 6,580
Treasury
Stock(6)
Retained
Earnings
Xerox
Shareholders’
Equity
Non-
controlling
Interests
AOCL(1)
Total
Equity
$ (31)
$ 5,288
$ (765)
$ 8,588
$ 103
$ 8,691
—
—
—
—
—
—
—
(812)
843
—
$ —
—
—
—
—
—
—
—
—
$ —
—
—
—
—
—
—
—
—
—
—
$ —
230
—
—
(1,364)
230
(1,364)
35
(3)
265
(1,367)
(25)
—
—
(152)
—
—
—
—
$ 5,341
485
—
—
—
(152)
—
—
—
$ 5,674
606
—
—
—
—
(243)
(21)
—
—
—
—
(286)
(1)
(25)
(286)
(1)
—
—
—
(25)
(286)
(1)
$ (1,446)
$ 32
$ (1,414)
—
—
—
—
—
(152)
60
(812)
—
—
—
—
—
—
(15)
(152)
60
(812)
—
(15)
$ (2,416)
$ 6,238
$ 120
$ 6,358
—
595
(169)
2
—
—
—
—
485
595
(169)
2
31
1
—
—
516
596
(169)
2
$
913
$ 32
$
945
(152)
72
(21)
—
—
—
—
(11)
(152)
72
(21)
(11)
$ (1,988)
$ 7,050
$ 141
$ 7,191
—
(35)
23
12
—
—
—
—
—
—
606
(35)
23
12
$
606
4,315
(243)
(21)
293
6
—
31
—
—
—
637
(35)
23
12
$ 31
$
637
—
—
—
—
—
(19)
4,315
(243)
(21)
293
6
(19)
$ 6,016
$ (1,988)
$ 12,006
$ 153
$ 12,159
(1) Refer to Note 1 “Accumulated Other Comprehensive Loss (AOCL)” section for additional information.
(2) Refer to Note 15 – Employee Benefit Plans for additional information.
(3) Cash dividends declared on common stock of $0.0425 in each of the four quarters in 2008, 2009 and 2010.
(4) Refer to Note 3 – Acquisitions for additional information.
(5) Cash dividends declared on preferred stock of $12.22 per share in the first quarter of 2010 and $20 per share in each of the second, third and fourth quarters of 2010.
(6) Refer to Note 19 – Shareholders’ Equity for rollforward of shares.
The accompanying notes are an integral part of these Consolidated Financial Statements.
Xerox 2010 Annual Report
57
Notes to the Consolidated
Financial Statements
Dollars in millions, except per-share data and unless otherwise indicated.
Note 1 – Summary of Significant Accounting Policies
References herein to “we,” “us,” “our,” the “Company” and Xerox refer to
Xerox Corporation and its consolidated subsidiaries unless the context
specifically requires otherwise.
Description of Business and Basis of Presentation
We are a $22 billion global enterprise for business process and document
management. We provide essential back-office support through our
broad portfolio of technology, services and outsourcing offerings. We
also offer extensive business process outsourcing and information
technology outsourcing services through Affiliated Computer Services,
Inc. (“ACS”), which we acquired in February 2010. We develop,
manufacture, market, service and finance a complete range of document
equipment, software, solutions and services.
Basis of Consolidation
The Consolidated Financial Statements include the accounts of Xerox
Corporation and all of our controlled subsidiary companies. All significant
intercompany accounts and transactions have been eliminated.
Investments in business entities in which we do not have control, but
we have the ability to exercise significant influence over operating and
financial policies (generally 20% to 50% ownership) are accounted for
using the equity method of accounting. Operating results of acquired
businesses are included in the Consolidated Statements of Income from
the date of acquisition.
We consolidate variable interest entities if we are deemed to be the
primary beneficiary of the entity. Operating results for variable interest
entities in which we are determined to be the primary beneficiary are
included in the Consolidated Statements of Income from the date such
determination is made.
For convenience and ease of reference, we refer to the financial
statement caption “Income (Loss) before Income Taxes and Equity
Income” as “pre-tax income” or “pre-tax loss” throughout the Notes to
the Consolidated Financial Statements.
Use of Estimates
The preparation of our Consolidated Financial Statements, in
accordance with accounting principles generally accepted in the United
States of America, requires that we make estimates and assumptions
that affect the reported amounts of assets and liabilities, as well as the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during
the reporting period. Significant estimates and assumptions are used
for, but not limited to: (i) allocation of revenues and fair values in leases
and other multiple element arrangements; (ii) accounting for residual
values; (iii) economic lives of leased assets; (iv) revenue recognition for
services under the percentage-of-completion method; (v) allowance
for doubtful accounts; (vi) inventory valuation; (vii) restructuring and
related charges; (viii) asset impairments; (ix) depreciable lives of assets;
58
Xerox 2010 Annual Report
(x) useful lives of intangible assets; (xi) amortization period for customer
contract costs; (xii) pension and post-retirement benefit plans; (xiii)
income tax reserves and valuation allowances; and (xiv) contingency and
litigation reserves. Future events and their effects cannot be predicted
with certainty; accordingly, our accounting estimates require the exercise
of judgment. The accounting estimates used in the preparation of our
Consolidated Financial Statements will change as new events occur, as
more experience is acquired, as additional information is obtained and
as our operating environment changes. Actual results could differ from
those estimates.
The following table summarizes certain significant charges that require
management estimates for the three years ended December 31, 2010:
Expense/(Income)
2010
2009
2008
Years Ended December 31,
Restructuring provisions and
asset impairments
Provisions for receivables(1)
Provisions for litigation and
regulatory matters
Provisions for obsolete and
excess inventory
Depreciation and obsolescence of
equipment on operating leases
Depreciation of buildings
and equipment
Amortization of internal
use software
Amortization of product software
Amortization of acquired
$ 483
180
$
(8)
289
$ 429
199
(4)
9
781
31
52
115
313
329
298
379
247
257
70
7
53
5
56
—
intangible assets(2)
316
64
58
Amortization of customer
contract costs
Defined pension benefits –
net periodic benefit cost
Other post-retirement benefits –
net periodic benefit cost
Deferred tax asset valuation
allowance provisions
12
—
—
304
232
174
32
26
77
22
(11)
17
(1) Includes net receivable adjustments of $(8), $(2) and $11 for 2010, 2009 and 2008,
respectively.
(2) Includes amortization of $4 for patents, which is included in cost of sales for each
period presented.
Changes in Estimates
In the ordinary course of accounting for items discussed above, we
make changes in estimates as appropriate and as we become aware
of circumstances surrounding those estimates. Such changes and
refinements in estimation methodologies are reflected in reported
results of operations in the period in which the changes are made and,
if material, their effects are disclosed in the Notes to the Consolidated
Financial Statements.
Notes to the Consolidated
Financial Statements
Dollars in millions, except per-share data and unless otherwise indicated.
New Accounting Standards and Accounting Changes
FASB Establishes Accounting Standards Codification™
In 2009, the FASB established the Accounting Standards Codification
(“the Codification” or “ASC”) as the official single source of authoritative
U.S. generally accepted accounting principles (“GAAP”). All existing
accounting standards are superseded. All other accounting guidance
not included in the Codification is considered non-authoritative.
The Codification also includes all relevant Securities and Exchange
Commission (“SEC”) guidance organized using the same topical structure
in separate sections within the Codification. The FASB updates the
Codification by issuing Accounting Standard Updates (“ASUs”).
The Codification did not change GAAP, but only the way GAAP is
organized and presented. In order to ease the transition to the
Codification, we are providing the Codification cross-reference
alongside the references to the standards issued and adopted prior
to the adoption of the Codification.
Fair Value Accounting
In 2010, the FASB issued ASU No. 2010-06 which amended Fair Value
Measurements and Disclosures – Overall (ASC Topic 820-10). This
update required a gross presentation of activities within the Level 3 roll-
forward and added a new requirement to disclose transfers in and out
of Level 1 and 2 measurements. The update also clarified the following
existing disclosure requirements in ASC 820-10 regarding: i) the level
of disaggregation of fair value measurements; and ii) the disclosures
regarding inputs and valuation techniques. This update was effective
for our fiscal year beginning January 1, 2010 except for the gross
presentation of the Level 3 roll-forward information, which is effective for
our fiscal year beginning January 1, 2011. The principle impact from this
update is to expand disclosures regarding our fair value measurements.
In 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”
(ASC Topic 820) which defined fair value, established a market-based
framework or hierarchy for measuring fair value and expanded
disclosures about fair value measurements. This guidance is applicable
whenever another accounting pronouncement requires or permits
assets and liabilities to be measured at fair value. It did not expand or
require any new fair value measures; however, the application of this
statement may change current practice. We adopted this guidance for
financial assets and liabilities effective January 1, 2008 and for non-
financial assets and liabilities effective January 1, 2009. The adoption of
this guidance, which primarily affected the valuation of our derivative
contracts, did not have a material effect on our financial condition or
results of operations.
Business Combinations
In 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (ASC Topic 805). This guidance requires the acquiring
entity in a business combination to recognize the full fair value of assets
acquired and liabilities assumed in the transaction (whether a full or
partial acquisition); establishes the acquisition date fair value as the
measurement objective for all assets acquired and liabilities assumed;
requires expensing of most transaction and restructuring costs; and
requires the acquirer to disclose the information needed to evaluate
and understand the nature and financial effect of the business
combination. We adopted this guidance effective January 1, 2009
and have applied it to all business combinations prospectively from
that date. The impact of ASC Topic 805 on our consolidated financial
statements depends upon the nature, terms and size of the acquisitions
we consummate in the future.
Revenue Recognition
In 2009, the FASB issued the following ASUs:
In 2009, the FASB issued the following updates that provide additional
application guidance and require enhanced disclosures regarding fair
value measurements:
•
•
•
•
•
FSP FAS 157-4,
“Determining Fair Value When the Volume and Level
of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly” (ASC Topic 820-10-65)
FSP FAS 115-2 and FAS 124-2,
Other-Than-Temporary Impairments” (ASC Topic 320-10-65)
“Recognition and Presentation of
FSP FAS 107-1 and APB 28-1,
of Financial Instruments” (ASC Topic 320-10-65)
“Interim Disclosures about Fair Value
ASU No. 2009-05,
820) – Measuring Liabilities at Fair Value”
“Fair Value Measurements and Disclosures (Topic
•
We adopted these updates in 2009 and the adoptions did not have
a material effect on our financial condition or results of operations.
Revenue Recognition (ASC Topic 605) – Multiple-
ASU No. 2009-13,
Deliverable Revenue Arrangements, a consensus of the FASB Emerging
Issues Task Force. This guidance modified previous requirements by
allowing the use of the “best estimate of selling price” in the absence
of vendor-specific objective evidence (“VSOE”) or verifiable objective
evidence (“VOE”) (now referred to as TPE standing for third-party
evidence) for determining the selling price of a deliverable. A vendor
is now required to use its best estimate of the selling price when
more objective evidence of the selling price cannot be determined. In
addition, the residual method of allocating arrangement consideration
is no longer permitted.
ASU No. 2009-14,
Software (ASC Topic 985) – Certain Revenue
Arrangements That Include Software Elements, a consensus of
the FASB Emerging Issues Task Force. This guidance modified
the scope of ASC subtopic 985-605 Software-Revenue Recognition
to exclude from its requirements (a) non-software components
of tangible products and (b) software components of tangible
products that are sold, licensed or leased with tangible products
when the software components and non-software components of
the tangible product function together to deliver the tangible
product’s essential functionality.
Xerox 2010 Annual Report
59
Notes to the Consolidated
Financial Statements
Dollars in millions, except per-share data and unless otherwise indicated.
We adopted these updates effective for our fiscal year beginning January
1, 2010 and are applying them prospectively from that date for new
or materially modified arrangements. The adoption of these updates
did not have a material effect on our financial condition or results of
operations. See “Summary of Accounting Policies – Revenue recognition
– Multiple Element Arrangements” for further information regarding our
adoption of ASU No. 2009-13.
With respect to the new software guidance in ASU No. 2009-14, the
modification in the scope of the industry-specific software revenue
recognition guidance did not result in a change in the recognition of
revenue for our equipment and services. Software included within our
equipment and services has generally been considered incidental and
therefore has been, and will continue to be, accounted for as part of
the sale of equipment or services. Most of our equipment have both
software and non-software components that function together to deliver
the equipment’s essential functionality. The software scope modification
is also not expected to change the recognition of revenue for software
accessories sold in connection with our equipment or free-standing
software sales as these transactions will continue to be accounted for
under the industry-specific software revenue recognition guidance as
separate software elements. See “Summary of Accounting Policies –
Revenue Recognition – Software” for further information.
Other Accounting Changes
In 2010, the FASB issued the following codification updates:
•
•
ASU 2010-19
which amended Foreign Currency (ASC Topic 830).
The purpose of this update was to codify the SEC staff’s view on
certain foreign currency issues related to investments in Venezuela.
See “Foreign Currency Translation and Re-measurement” section
below for further information regarding our operations in Venezuela.
ASU 2010-20
which amended Receivables (ASC Topic 310) and
requires significantly increased disclosures regarding the credit
quality of an entity’s financing receivables and its allowance for
credit losses. In addition, this update requires an entity to disclose
credit quality indicators past due information, and modifications
of its financing receivables. The disclosures are first effective for our
2010 Annual Report. The principal impact from this update was
increased disclosures concerning the details of finance receivables
and the related provisions and reserves for credit losses. See Note
4 – Receivables, Net for the disclosures required by this update.
In 2009, the FASB issued the following codification updates:
•
which amended Transfers and Servicing (ASC Topic 860):
ASU 2009-16
Accounting for Transfers of Financial Assets. This update removed
the concept of a qualifying special-purpose entity and removed the
exception from applying consolidation guidance to these entities. This
update also clarified the requirements for isolation and limitations on
portions of financial assets that are eligible for sale accounting. We
adopted this update effective for our fiscal year beginning January 1,
2010. Certain accounts receivable sale arrangements were modified in
order to qualify for sale accounting under this updated guidance. The
adoption of this update did not have a material effect on our financial
condition or results of operations.
60
Xerox 2010 Annual Report
•
which amended Consolidations (ASC Topic 810):
ASU 2009-17
Improvements to Financial Reporting by Enterprises Involved
with Variable Interest Entities. This update required an analysis to
determine whether a variable interest gives the entity a controlling
financial interest in a variable interest entity. It also required an
ongoing reassessment and eliminates the quantitative approach
previously required for determining whether an entity is the primary
beneficiary. We adopted this update effective for our fiscal year
beginning January 1, 2010 and the adoption did not have a material
effect on our financial condition or results of operations.
Since the implementation of the codification, the FASB has issued
several ASUs. Except for the ASUs discussed above, the remaining
ASUs issued by the FASB entail technical corrections to existing
guidance or affect guidance related to unique/infrequent transactions
or specialized industries/entities and therefore have minimal, if any,
impact on the Company.
Summary of Accounting Policies
Revenue Recognition
We generate revenue through services, the sale and rental of equipment,
supplies and income associated with the financing of our equipment
sales. Revenue is recognized when earned. More specifically, revenue
related to services and sales of our products is recognized as follows:
Equipment: Revenues from the sale of equipment, including those from
sales-type leases, are recognized at the time of sale or at the inception
of the lease, as appropriate. For equipment sales that require us to install
the product at the customer location, revenue is recognized when the
equipment has been delivered and installed at the customer location.
Sales of customer-installable products are recognized upon shipment
or receipt by the customer according to the customer’s shipping terms.
Revenues from equipment under other leases and similar arrangements
are accounted for by the operating lease method and are recognized as
earned over the lease term, which is generally on a straight-line basis.
Services: Technical service revenues are derived primarily from
maintenance contracts on our equipment sold to customers and are
recognized over the term of the contracts. A substantial portion of our
products are sold with full service maintenance agreements for which
the customer typically pays a base service fee plus a variable amount
based on usage. As a consequence, other than the product warranty
obligations associated with certain of our low-end products, we do
not have any significant product warranty obligations, including any
obligations under customer satisfaction programs.
Revenues associated with outsourcing services are generally recognized
as services are rendered, which is generally on the basis of the number
of accounts or transactions processed. Information technology
processing revenues are recognized as services are provided to the
customer, generally at the contractual selling prices of resources
consumed or capacity utilized by our customers. In those service
arrangements where final acceptance of a system or solution by the
Notes to the Consolidated
Financial Statements
Dollars in millions, except per-share data and unless otherwise indicated.
customer is required, revenue is deferred until all acceptance criteria
have been met. Revenues on cost-reimbursable contracts are recognized
by applying an estimated factor to costs as incurred, determined by
the contract provisions and prior experience. Revenues on unit-price
contracts are recognized at the contractual selling prices as work is
completed and accepted by the customer. Revenues on time-and-
material contracts are recognized at the contractual rates as the labor
hours and direct expenses are incurred.
In connection with our services arrangements, we incur costs to originate
these long-term contracts and to perform the migration, transition and
setup activities necessary to enable us to perform under the terms of
the arrangement. We capitalize certain incremental direct costs that are
related to the contract origination or transition, implementation and
setup activities and amortize them over the term of the arrangement.
From time to time, we also provide certain inducements to customers
in the form of various arrangements, including contractual credits,
which are capitalized and amortized as a reduction of revenue over the
term of the contract. Customer-related deferred set-up/transition and
inducement costs are being amortized over a weighted average period
of approximately eight years. Initial direct costs of an arrangement are
capitalized and amortized over the contractual service period.
Long-lived assets used in the fulfillment of the arrangements are
capitalized and depreciated over the shorter of their useful life or the
term of the contract if an asset is contract-specific.
Revenues on certain fixed price contracts where we provide information
technology system development and implementation services are
recognized over the contract term based on the percentage of
development and implementation services that are provided during
the period compared with the total estimated development and
implementation services to be provided over the entire contract. These
services require that we perform significant, extensive and complex
design, development, modification or implementation of our customers’
systems. Performance will often extend over long periods, and our
right to receive future payment depends on our future performance
in accordance with the agreement. During 2010, we recognized
approximately $270 of revenue using the percentage-of-completion
accounting method.
The percentage-of-completion methodology involves recognizing
probable and reasonably estimable revenue using the percentage of
services completed, on a current cumulative cost to estimated total cost
basis, using a reasonably consistent profit margin over the period. Due to
the long-term nature of these projects, developing the estimates of costs
often requires significant judgment. Factors that must be considered
in estimating the progress of work completed and ultimate cost of the
projects include, but are not limited to, the availability of labor and labor
productivity, the nature and complexity of the work to be performed
and the impact of delayed performance. If changes occur in delivery,
productivity or other factors used in developing the estimates of costs
or revenues, we revise our cost and revenue estimates, which may result
in increases or decreases in revenues and costs, and such revisions are
reflected in income in the period in which the facts that give rise to that
revision become known.
Revenues earned in excess of related billings are accrued, whereas
billings in excess of revenues earned are deferred until the related
services are provided. We recognize revenues for non-refundable, upfront
implementation fees on a straight-line basis over the period between the
initiations of the ongoing services through the end of the contract term.
Sales to distributors and resellers: We utilize distributors and resellers
to sell certain of our products to end-user customers. We refer to our
distributor and reseller network as our two-tier distribution model.
Sales to distributors and resellers are generally recognized as revenue
when products are sold to such distributors and resellers. Distributors
and resellers participate in various cooperative marketing and other
programs, and we record provisions for these programs as a reduction
to revenue when the sales occur. Similarly, we account for our estimates
of sales returns and other allowances when the sales occur based on our
historical experience.
In certain instances, we may provide lease financing to end-user
customers who purchased equipment we sold to distributors or resellers.
We compete with other third-party leasing companies with respect to
the lease financing provided to these end-user customers.
Supplies: Supplies revenue generally is recognized upon shipment or
utilization by customers in accordance with the sales terms.
Software: Most of our equipment has both software and
non-software components that function together to deliver the
equipment’s essential functionality and therefore they are accounted
for together as part of the equipment sales or services revenues.
Software accessories sold in connection with our equipment sales, as
well as free-standing software sales, are accounted for as separate
deliverables or elements. In most cases, these software products are
sold as part of multiple-element arrangements and include software
maintenance agreements for the delivery of technical service, as well
as unspecified upgrades or enhancements on a when-and-if-available
basis. In those software accessory and free-standing software
arrangements that include more than one element, we allocate the
revenue among the elements based on vendor-specific objective
evidence (“VSOE”) of fair value. VSOE of fair value is based on the price
charged when the deliverable is sold separately by us on a regular basis
and not as part of the multiple-element arrangement. Revenue allocated
to software is normally recognized upon delivery, while revenue allocated
to the software maintenance element is recognized ratably over the
term of the arrangement.
Leases: The two primary accounting provisions which we use to classify
transactions as sales-type or operating leases are: 1) a review of the
lease term to determine if it is equal to or greater than 75% of the
economic life of the equipment; and 2) a review of the present value
of the minimum lease payments to determine if they are equal to or
greater than 90% of the fair market value of the equipment at the
inception of the lease. Our leases in our Latin America operations have
historically been recorded as operating leases given the cancellable
nature of the contract or because the recoverability of the lease
investment is deemed not to be predictable at lease inception.
Xerox 2010 Annual Report
61
Notes to the Consolidated
Financial Statements
Dollars in millions, except per-share data and unless otherwise indicated.
For purposes of determining the economic life, we consider the
most objective measure to be the original contract term, since most
equipment is returned by lessees at or near the end of the contracted
term. The economic life of most of our products is five years, since this
represents the most frequent contractual lease term for our principal
products and only a small percentage of our leases have original terms
longer than five years. We continually evaluate the economic life of
both existing and newly introduced products for purposes of this
determination. Residual values, if any, are established at lease inception
using estimates of fair value at the end of the lease term.
The vast majority of our leases that qualify as sales-type are non-
cancelable and include cancellation penalties approximately equal
to the full value of the lease receivables. A portion of our business
involves sales to governmental units. Governmental units are those
entities that have statutorily defined funding or annual budgets that
are determined by their legislative bodies. Certain of our governmental
contracts may have cancellation provisions or renewal clauses that are
required by law, such as 1) those dependant on fiscal funding outside
of a governmental unit’s control; 2) those that can be cancelled if
deemed in the best interest of the governmental unit’s taxpayers; or
3) those that must be renewed each fiscal year, given limitations that
may exist on entering into multi-year contracts that are imposed by
statute. In these circumstances, we carefully evaluate these contracts
to assess whether cancellation is remote. The evaluation of a lease
agreement with a renewal option includes an assessment as to whether
the renewal is reasonably assured based on the apparent intent and
our experience of such governmental unit. We further ensure that the
contract provisions described above are offered only in instances where
required by law. Where such contract terms are not legally required, we
consider the arrangement to be cancelable and account for the lease
as an operating lease.
After the initial lease of equipment to our customers, we may enter
subsequent transactions with the same customer whereby we extend
the term. Revenue from such lease extensions is typically recognized over
the extension period.
Bundled Lease Arrangements: We sell our products and services under
bundled lease arrangements, which typically include equipment, service,
supplies and financing components for which the customer pays a single
negotiated fixed minimum monthly payment for all elements over the
contractual lease term. Approximately 40% of our equipment sales
revenue is related to sales made under bundled lease arrangements.
These arrangements also typically include an incremental, variable
component for page volumes in excess of contractual page volume
minimums, which are often expressed in terms of price-per-page.
The fixed minimum monthly payments are multiplied by the number
of months in the contract term to arrive at the total fixed minimum
payments that the customer is obligated to make (“fixed payments”)
over the lease term. The payments associated with page volumes
in excess of the minimums are contingent on whether or not such
minimums are exceeded (“contingent payments”). In applying our
lease accounting methodology, we only consider the fixed payments for
purposes of allocating to the relative fair value elements of the contract.
62
Xerox 2010 Annual Report
Contingent payments, if any, are recognized as revenue in the period
when the customer exceeds the minimum copy volumes specified in
the contract. Revenues under bundled arrangements are allocated
considering the relative selling prices of the lease and non-lease
deliverables included in the bundled arrangement. Lease deliverables
include maintenance and executory costs, equipment and financing,
while non-lease deliverables generally consist of the supplies and non-
maintenance services. The allocation for the lease deliverables begins
by allocating revenues to the maintenance and executory costs plus
profit thereon. These elements are generally recognized over the term
of the lease as service revenue. The remaining amounts are allocated
to the equipment and financing elements which are subjected to the
accounting estimates noted above under “Leases.”
Multiple Element Arrangements: We enter into the following revenue
arrangements that may consist of multiple deliverables:
•
•
•
Bundled lease arrangements, which typically include both lease
deliverables and non-lease deliverables as described above.
Sales of equipment with a related full-service maintenance agreement.
Contracts for multiple types of outsourcing services, as well as
professional and value-added services. For instance, we may contract
for an implementation or development project and also provide
services to operate the system over a period of time; or we may
contract to scan, manage and store customer documents.
If a deliverable in a multiple-element arrangement is subject to specific
guidance, such as leased equipment in our bundled lease arrangements
(which is subject to specific leasing guidance) or accessory software
(which is subject to software revenue recognition guidance), that
deliverable is separated from the arrangement based on its relative
selling price (the relative selling price method – see below) and
accounted for in accordance with such specific guidance. The remaining
deliverables in a multiple-element arrangement are accounted for based
on the following guidance.
A multiple-element arrangement is separated into more than one unit
of accounting if both of the following criteria are met:
•
•
The delivered item(s) has value to the customer on a stand-alone
basis; and
If the arrangement includes a general right of return relative to
the delivered item(s), delivery or performance of the undelivered
item(s) is considered probable and substantially in our control. If
these criteria are not met, the arrangement is accounted for as one
unit of accounting and the recognition of revenue is generally upon
delivery/completion or ratably as a single unit of accounting over the
contractual service period.
Notes to the Consolidated
Financial Statements
Dollars in millions, except per-share data and unless otherwise indicated.
Consideration in a multiple-element arrangement is allocated at the
inception of the arrangement to all deliverables on the basis of the
relative selling price. When applying the relative selling price method, the
selling price for each deliverable is determined using VSOE of the selling
price, or TPE of the selling price. If neither VSOE nor TPE of the selling
price exists for a deliverable, we will use our best estimate of the selling
price for that deliverable.
The new guidance with respect to multiple-element arrangements did
not change the allocation of arrangement consideration to the units of
accounting or the pattern and timing of revenue recognition for those
units. Normally our equipment and services will qualify as separate
units of accounting, which are the majority of our multiple-element
arrangements. In addition, under previous guidance, consideration for
multiple-element arrangements was allocated based on VSOE or TPE,
since products and services are generally sold separately or the selling
price is determinable based on competitor prices for similar deliverables.
As a result, for substantially all of our multiple-element arrangements,
we will continue using VSOE or TPE to allocate the arrangement
consideration to each respective deliverable.
Although infrequent, under previous guidance with respect to multiple-
element arrangements, if we were unable to establish the selling
price using VSOE or TPE, arrangement consideration was allocated
using the residual method or recognized ratably over the contractual
service period. However, since the new guidance allows for the use of
our best estimate of the selling price in our allocation of arrangement
consideration if VSOE or TPE is not determinable, we now use our best
estimate of selling price in those infrequent situations. The objective of
using estimated selling price-based methodology is to determine the
price at which we would transact a sale if the product or service were
sold on a stand-alone basis. Accordingly, we determine our best estimate
of selling price considering multiple factors including, but not limited to,
geographies, market conditions, competitive landscape, internal costs,
gross margin objectives and pricing practices. Estimated selling price
based methodology generally will apply to an insignificant proportion
of our arrangements with multiple deliverables.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand, including
money-market funds, and investments with original maturities of
three months or less.
Restricted Cash and Investments
As more fully discussed in Note 17 – Contingencies, various litigation
matters in Brazil require us to make cash deposits as a condition of
continuing the litigation. In addition, several of our secured financing
arrangements and other contracts require us to post cash collateral
or maintain minimum cash balances in escrow. These cash amounts
are classified in our Consolidated Balance Sheets based on when the
cash will be contractually or judicially released (refer to Note 10 –
Supplementary Financial Information for classification of amounts).
Restricted cash amounts at December 31, 2010 and 2009 were
as follows:
Tax and labor litigation deposits in Brazil
Escrow and cash collections related
to receivable sales
Other restricted cash
2010
$ 276
2009
$ 240
88
7
29
20
Total Restricted Cash and Investments
$ 371
$ 289
Inventories
Inventories are carried at the lower of average cost or market.
Inventories also include equipment that is returned at the end of the
lease term. Returned equipment is recorded at the lower of remaining
net book value or salvage value. Salvage value consists of the estimated
market value (generally determined based on replacement cost) of
the salvageable component parts, which are expected to be used in
the remanufacturing process. We regularly review inventory quantities
and record a provision for excess and/or obsolete inventory based
primarily on our estimated forecast of product demand, production
requirements and servicing commitments. Several factors may influence
the realizability of our inventories, including our decision to exit a
product line, technological changes and new product development.
The provision for excess and/or obsolete raw materials and equipment
inventories is based primarily on near-term forecasts of product demand
and include consideration of new product introductions, as well as
changes in remanufacturing strategies. The provision for excess and/or
obsolete service parts inventory is based primarily on projected servicing
requirements over the life of the related equipment populations.
Land, Buildings and Equipment and Equipment on Operating Leases
Land, buildings and equipment are recorded at cost. Buildings and
equipment are depreciated over their estimated useful lives. Leasehold
improvements are depreciated over the shorter of the lease term or
the estimated useful life. Equipment on operating leases is depreciated
to estimated salvage value over the lease term. Depreciation is
computed using the straight-line method. Significant improvements
are capitalized and maintenance and repairs are expensed. Refer to
Note 5 – Inventories and Equipment on Operating Leases, Net and
Note 6 – Land, Buildings and Equipment, Net for further discussion.
Software – Internal Use and Product
We capitalize direct costs associated with developing, purchasing or
otherwise acquiring software for internal use and amortize these costs
on a straight-line basis over the expected useful life of the software,
beginning when the software is implemented (“Internal Use Software”).
Costs incurred for upgrades and enhancements that will not result in
additional functionality are expensed as incurred. Useful lives of Internal
Use Software generally vary from three to 10 years.
Xerox 2010 Annual Report
63
Notes to the Consolidated
Financial Statements
Dollars in millions, except per-share data and unless otherwise indicated.
We also capitalize certain costs related to the development of software
solutions to be sold to our customers upon reaching technological
feasibility and amortize these costs based on estimated future revenues
(“Product Software”). In recognition of the uncertainties involved in
estimating revenue, that amortization is not less than straight-line
amortization over the software’s remaining estimated economic life.
Useful lives of Product Software generally vary from three to 10 years.
Amounts capitalized for Product Software are included in Cash Flows
from Operations.
Additions to:
Internal use software
Product software
Capitalized costs, net:
Internal use software
Product software
Years Ended December 31,
2010
$ 164
70
2009
$ 98
1
2008
$ 129
1
As of December 31,
2010
$ 468
145
2009
$ 354
10
Goodwill and Other Intangible Assets
Goodwill is tested for impairment annually or more frequently if an
event or circumstance indicates that an impairment loss may have been
incurred. Application of the goodwill impairment test requires judgment,
including the identification of reporting units, assignment of assets
and liabilities to reporting units, assignment of goodwill to reporting
units and determination of the fair value of each reporting unit. We
estimate the fair value of each reporting unit using a discounted cash
flow methodology. This requires us to use significant judgment including
estimation of future cash flows, which is dependent on internal forecasts,
estimation of the long-term rate of growth for our business, the useful
life over which cash flows will occur, determination of our weighted
average cost of capital and relevant market data.
Other intangible assets primarily consist of assets obtained in connection
with business acquisitions, including installed customer base and
distribution network relationships, patents on existing technology and
trademarks. We apply an impairment evaluation whenever events or
changes in business circumstances indicate that the carrying value of
our intangible assets may not be recoverable. Other intangible assets
are amortized on a straight-line basis over their estimated economic
lives. We believe that the straight-line method of amortization reflects
an appropriate allocation of the cost of the intangible assets to earnings
in proportion to the amount of economic benefits obtained annually by
the Company. Refer to Note 8 – Goodwill and Intangible Assets, Net for
further information.
Impairment of Long-Lived Assets
We review the recoverability of our long-lived assets, including buildings,
equipment, internal-use software and other intangible assets, when events
or changes in circumstances occur that indicate that the carrying value of
the asset may not be recoverable. The assessment of possible impairment
is based on our ability to recover the carrying value of the asset from the
expected future pre-tax cash flows (undiscounted and without interest
64
Xerox 2010 Annual Report
charges) of the related operations. If these cash flows are less than the
carrying value of such asset, an impairment loss is recognized for the
difference between estimated fair value and carrying value. Our primary
measure of fair value is based on discounted cash flows.
Treasury Stock
We account for repurchased common stock under the cost method
and include such Treasury stock as a component of our Common
shareholders’ equity. Retirement of Treasury stock is recorded as a
reduction of Common stock and Additional paid-in capital at the time
such retirement is approved by our Board of Directors.
Research, Development and Engineering (“RD&E”)
Research, development and engineering costs are expensed as incurred.
Sustaining engineering costs are incurred with respect to ongoing
product improvements or environmental compliance after initial product
launch. Our RD&E expense for the three years ended December 31, 2010
was as follows:
R&D
Sustaining engineering
Total RD&E Expense
2010
$ 653
128
$ 781
2009
$ 713
127
$ 840
2008
$ 750
134
$ 884
Restructuring Charges
Costs associated with exit or disposal activities, including lease
termination costs and certain employee severance costs associated
with restructuring, plant closing or other activity, are recognized when
they are incurred. In those geographies where we have either a formal
severance plan or a history of consistently providing severance benefits
representing a substantive plan, we recognize severance costs when
they are both probable and reasonably estimable. Refer to Note 9 –
Restructuring and Asset Impairment Charges for further information.
Pension and Post-retirement Benefit Obligations
We sponsor defined benefit pension plans in various forms in several
countries covering employees who meet eligibility requirements. Retiree
health benefit plans cover U.S. and Canadian employees for retiree
medical costs. We employ a delayed recognition feature in measuring
the costs of pension and post-retirement benefit plans. This requires
changes in the benefit obligations and changes in the value of assets set
aside to meet those obligations to be recognized not as they occur, but
systematically and gradually over subsequent periods. All changes are
ultimately recognized as components of net periodic benefit cost, except
to the extent they may be offset by subsequent changes. At any point,
changes that have been identified and quantified but not recognized as
components of net periodic benefit cost, are recognized in Accumulated
Other Comprehensive Loss, Net of tax.
Several statistical and other factors that attempt to anticipate future
events are used in calculating the expense, liability and asset values
related to our pension and retiree health benefit plans. These factors
include assumptions we make about the discount rate, expected return
on plan assets, rate of increase in healthcare costs, the rate of future
compensation increases, and mortality. Actual returns on plan assets
are not immediately recognized in our income statement, due to the
delayed recognition requirement. In calculating the expected return
Notes to the Consolidated
Financial Statements
Dollars in millions, except per-share data and unless otherwise indicated.
on the plan asset component of our net periodic pension cost, we
apply our estimate of the long-term rate of return to the plan assets
that support our pension obligations, after deducting assets that are
specifically allocated to Transitional Retirement Accounts (which are
accounted for based on specific plan terms).
For purposes of determining the expected return on plan assets, we
utilize a calculated value approach in determining the value of the
pension plan assets, rather than a fair market value approach. The
primary difference between the two methods relates to systematic
recognition of changes in fair value over time (generally two years)
versus immediate recognition of changes in fair value. Our expected
rate of return on plan assets is applied to the calculated asset value
to determine the amount of the expected return on plan assets to
be used in the determination of the net periodic pension cost. The
calculated value approach reduces the volatility in net periodic pension
cost that would result from using the fair market value approach.
The discount rate is used to present value our future anticipated benefit
obligations. In estimating our discount rate, we consider rates of return
on high-quality fixed-income investments included in various published
bond indexes, adjusted to eliminate the effects of call provisions and
differences in the timing and amounts of cash outflows related to the
bonds, as well as the expected timing of pension and other benefit
payments. In the U.S. and the U.K., which comprise approximately
75% of our projected benefit obligation, we consider the Moody’s
Aa Corporate Bond Index and the International Index Company’s
iBoxx Sterling Corporate AA Cash Bond Index, respectively, in the
determination of the appropriate discount rate assumptions. Refer to
Note 15 – Employee Benefit Plans for further information.
Each year, the difference between the actual return on plan assets and
the expected return on plan assets, as well as increases or decreases in
the benefit obligation as a result of changes in the discount rate, are
added to or subtracted from any cumulative actuarial gain or loss that
arose in prior years. This resultant amount is the net actuarial gain or
loss recognized in Accumulated other comprehensive loss and is subject
to subsequent amortization to net periodic pension cost in future periods
over the remaining service lives of the employees participating in the
pension plan.
Foreign Currency Translation and Re-measurement
The functional currency for most foreign operations is the local currency.
Net assets are translated at current rates of exchange and income,
expense and cash flow items are translated at average exchange rates
for the applicable period. The translation adjustments are recorded in
Accumulated other comprehensive loss.
The U.S. Dollar is used as the functional currency for certain foreign
subsidiaries that conduct their business in U.S. Dollars. A combination
of current and historical exchange rates is used in re-measuring the local
currency transactions of these subsidiaries and the resulting exchange
adjustments are included in income.
Foreign currency losses were $11, $26 and $34 in 2010, 2009 and
2008, respectively, and are included in Other expenses, net in the
accompanying Consolidated Statements of Income.
We sold our Venezuelan subsidiary during the fourth quarter of 2010 as
part of our restructuring actions – refer to Note 9 – Restructuring and
Asset Impairment Charges for further information. Prior to the sale, the
U.S. Dollar was the functional currency of our Venezuelan operations.
In January 2010, Venezuela announced a devaluation of the Bolivar to
an official rate of 4.30 Bolivars to the U.S. Dollar for the majority of our
products. As a result of this devaluation, we recorded a currency loss
of $21 in the first quarter of 2010 for the re-measurement of our net
Bolivar-denominated monetary assets. During 2010, the ability to obtain
U.S. Dollars remained severely restricted. As a result, during 2010 we
re-measured our net Bolivar-denominated monetary transactions based
on exchange rates available through alternative markets. The average
rate during 2010 was approximately 5.77 Bolivars to the U.S. Dollar.
The impact of this change in the exchange rate was not material to our
results for the year since we derived less than 0.5% of our total revenues
from Venezuela.
Accumulated Other Comprehensive Loss (“AOCL”)
AOCL is composed of the following for the three years ending
December 31, 2010:
Cumulative translation
adjustments
Benefit plans net actuarial losses
and prior service credits(1)
Other unrealized gains, net
Total Accumulated Other
Comprehensive Loss
(1) Includes our share of Fuji Xerox.
2010
2009
2008
$ (835)
$ (800)
$ (1,395)
(1,167)
14
(1,190)
2
(1,021)
—
$ (1,988)
$ (1,988)
$ (2,416)
Note 2 – Segment Reporting
Our reportable segments are aligned with how we manage the business
and view the markets we serve. In 2010, as a result of our acquisition of
ACS, we realigned our internal financial reporting structure (refer to Note
3 – Acquisitions for information regarding the ACS acquisition). We now
report our financial performance based on the following two primary
reportable segments – Technology and Services. The Technology
segment represents the combination of our former Production and Office
segments excluding the document outsourcing business, which was
previously included in these reportable segments. The Services segment
represents the combination of our document outsourcing business and
ACS’s business process outsourcing (“BPO”) and information technology
outsourcing (“ITO”) businesses. We believe this realignment will help us
to better manage our business and view the markets we serve, which are
primarily centered around equipment systems and outsourcing services.
Our Technology segment operations involve the sale and support of
a broad range of document systems from entry level to the high-end.
Our Services segment operations involve delivery of a broad range of
outsourcing services including document, business processing and IT
outsourcing services. Our 2009 and 2008 segment disclosures have been
restated to reflect our new 2010 internal reporting structure.
Xerox 2010 Annual Report
65
Notes to the Consolidated
Financial Statements
Dollars in millions, except per-share data and unless otherwise indicated.
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.
“Mid-range,” which includes A3 devices that generally serve
workgroup environments in mid to large enterprises. Mid-range
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.
•
“High-end,” which includes production printing and publishing
systems that generally serve the graphic communications marketplace
and large enterprises.
The Services segment comprises three outsourcing service offerings:
•
•
•
Document Outsourcing (which includes Managed Print Services)
Business Process Outsourcing
Information Technology Outsourcing.
Document outsourcing services include service arrangements that allow
customers to streamline, simplify and digitize their document-intensive
business processes through automation and deployment of software
applications and tools and the management of their printing needs.
Business process outsourcing services include service arrangements
where we manage a customer’s business activity or process. 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.
The segment classified as Other includes several units, none of which
meets the threshold for separate segment reporting. This group primarily
includes Xerox Supplies Business Group (predominantly paper sales),
Wide Format Systems, licensing revenues, GIS network integration
solutions and electronic presentation systems, non-allocated Corporate
items including non-financing interest, as well as other items included in
Other expenses, net.
Selected financial information for our Operating segments for the three
years ended December 31, 2010 was as follows:
2010(1)
Revenues
Finance income
Total Segment Revenues
Interest expense
Segment profit (loss)(2)
Equity in net income of unconsolidated affiliates
2009(1)
Revenues
Finance income
Total Segment Revenues
Interest expense
Segment profit (loss)(2)
Equity in net income of unconsolidated affiliates
2008(1)
Revenues
Finance income
Total Segment Revenues
Interest expense
Segment profit (loss)(2)
Equity in net income of unconsolidated affiliates
Technology
Services
Other
Total
$ 9,790
559
$ 10,349
212
$
1,085
62
$ 9,470
597
$ 10,067
$
229
949
33
$ 11,041
673
$ 11,714
$
293
1,288
90
$ 9,548
89
$ 9,637
28
$
1,132
16
$ 3,373
103
$ 3,476
$
36
231
8
$ 3,718
110
$ 3,828
$
5
302
23
$ 1,635
12
$ 1,647
$ 352
(342)
—
$ 1,623
13
$ 1,636
$ 262
(342)
—
$ 2,051
15
$ 2,066
$ 269
(245)
—
$ 20,973
660
$ 21,633
$
592
1,875
78
$ 14,466
713
$ 15,179
$
527
838
41
$ 16,810
798
$ 17,608
$
567
1,345
113
(1) Asset information on a segment basis is not disclosed as this information is not separately identified and internally reported to our chief executive officer.
(2) Depreciation and amortization expense, which is recorded in cost of sales, RD&E and SAG are included in segment profit above. This information is neither identified nor internally
reported to our chief executive officer. The separate identification of this information for purposes of segment disclosure is impracticable, as it is not readily available and the cost
to develop it would be excessive.
66
Xerox 2010 Annual Report
Notes to the Consolidated
Financial Statements
Dollars in millions, except per-share data and unless otherwise indicated.
The following is a reconciliation of segment profit to pre-tax income
(loss) for the three years ended December 31, 2010:
Total Segment Profit
Reconciling items:
Restructuring and asset impairment charges
Restructuring charges of Fuji Xerox
Acquisition-related costs
Amortization of intangible assets
Venezuelan devaluation costs
ACS shareholders’ litigation settlement
Litigation matters(1)
Loss on early extinguishment of debt
Equity in net income of unconsolidated affiliates
Equipment write-off and other
Pre-tax Income (Loss)
2010
$ 1,875
(483)
(38)
(77)
(312)
(21)
(36)
—
(15)
(78)
—
$ 815
2009
$ 838
8
(46)
(72)
(60)
—
—
—
—
(41)
—
$ 627
2008
$ 1,345
(429)
(16)
—
(54)
—
—
(774)
—
(113)
(38)
$
(79)
(1) The 2008 provision for litigation represents $670 for the Carlson v. Xerox Corporation court-approved settlement, as well as provisions for other litigation matters including
$36 for the probable loss related to the Brazil labor-related contingencies.
Geographic area data is based upon the location of the subsidiary
reporting the revenue or long-lived assets and is as follows for the three
years ended December 31, 2010:
United States
Europe
Other areas
Total Revenues and Long-Lived Assets
2010
$ 13,801
5,332
2,500
$ 21,633
Revenues
2009
$ 8,156
4,971
2,052
$ 15,179
2008
$ 9,122
6,011
2,475
$ 17,608
2010
$ 1,764
741
309
$ 2,814
Long-Lived Assets(1)
2009
$ 1,245
717
262
$ 2,224
2008
$ 1,386
680
248
$ 2,314
(1) Long-lived assets are comprised of (i) land, buildings and equipment, net, (ii) equipment on operating leases, net, (iii) internal use software, net and (iv) product software, net.
Note 3 – Acquisitions
Affiliated Computer Services, Inc.
On February 5, 2010 (“the acquisition date”), we acquired all of the
outstanding equity of ACS in a cash-and-stock transaction valued at
approximately $6.5 billion. ACS provides business process outsourcing
and information technology (“ITO”) services and solutions to commercial
and government clients worldwide. ACS delivers a full range of BPO and
IT services, as well as end-to-end solutions to the public and private
sectors and supports a variety of industries including education, energy,
financial, government, healthcare, retail and transportation. ACS’s
revenues for the calendar year ended December 31, 2009 were $6.6
billion and they employed 78,000 people and operated in over 100
countries on the acquisition date.
Equity transaction: Each outstanding share of ACS Class A and Class
B common stock was converted into a combination of 4.935 shares
of Xerox common stock and $18.60 in cash for a combined value of
$60.40 per share, or approximately $6.0 billion based on the closing
price of Xerox common stock of $8.47 on the acquisition date. 489,802
thousand shares of Xerox common stock were issued. We also issued
convertible preferred stock with a liquidation value of $300 and a fair
value of $349 as of the acquisition date to ACS’s Class B shareholder.
Xerox 2010 Annual Report
67
Notes to the Consolidated
Financial Statements
Dollars in millions, except per-share data and unless otherwise indicated.
All ACS stock options outstanding at closing were assumed by Xerox
and converted into Xerox stock options. ACS stock options issued prior
to August 2009, whether or not then vested and exercisable, became
fully vested and exercisable in accordance with preexisting change-in-
control provisions. ACS stock options issued in August 2009 will continue
to vest and become exercisable for Xerox common stock in accordance
with their original terms. For the August 2009 options, the portion of
the estimated fair value associated with service prior to the close was
recorded as part of the acquisition fair value with the remainder to be
recorded as future compensation cost over the remaining vesting period.
Each assumed ACS option became exercisable for 7.085289 Xerox
common shares for a total of 96,662 thousand shares at a weighted
average exercise price of $6.79 per option. The estimated fair value
associated with the Xerox options issued in exchange for the ACS options
was approximately $222 based on a Black-Scholes valuation model
(refer to Note 19 – Shareholders’ Equity for assumptions). Approximately
$168 of the estimated fair value is associated with options issued prior
to August 2009, which became fully vested and exercisable upon the
acquisition in accordance with pre-existing change-in-control provisions,
was recorded as part of the acquisition fair value. The remaining $54 is
associated with options issued in August 2009 which continue to vest
according to their original terms and therefore is being expensed as
compensation cost over the remaining vesting period which is estimated
to be approximately 3.9 years.
Fair value of consideration transferred: The table below details the
consideration transferred to acquire ACS (certain amounts reflect
rounding adjustments):
(shares in millions)
Conversion Calculation
Estimated Fair Value
Form of Consideration
ACS Class A shares outstanding as of the acquisition date
ACS Class B shares outstanding as of the acquisition date
Total ACS Shares Outstanding
Xerox stock price as of the acquisition date
Multiplied by the exchange ratio
Equity Consideration per Common Share Outstanding
Cash Consideration per Common Share Outstanding
ACS stock options exchanged for a Xerox equivalent stock option
Multiplied by the option exchange ratio
Total Xerox Equivalent Stock Options
Xerox Preferred Stock Issued to ACS Class B Shareholder
Total Fair Value of Consideration Transferred
92.7
6.6
99.3
$ 8.47
4.935
$ 41.80
$ 18.60
13.6
7.085289
96.7
$ 4,149
$ 1,846
Xerox common stock
Cash
$ 168
$ 349
$ 6,512
Xerox stock options
Xerox preferred stock
Recording of assets acquired and liabilities assumed: The transaction
has been accounted for using the acquisition method of accounting
which requires, among other things, that most assets acquired and
liabilities assumed be recognized at their fair values as of the acquisition
date. The following table summarizes the assets acquired and liabilities
assumed as of the acquisition date:
Assets
Cash and cash equivalents
Accounts receivable
Other current assets
Land, buildings and equipment
Intangible assets
Goodwill
Other long-term assets
Liabilities
Other current liabilities
Deferred revenue
Deferred tax liability
Debt
Pension liabilities
Other long-term liabilities
Net Assets Acquired
February 5, 2010
$ 351
1,344
389
416
3,035
5,127
258
645
161
990
2,310
39
263
$ 6,512
68
Xerox 2010 Annual Report
Notes to the Consolidated
Financial Statements
Dollars in millions, except per-share data and unless otherwise indicated.
Intangible assets: The following table is a summary of the fair value
estimates of the identifiable intangible assets and their weighted-
average useful lives:
The following is a summary of the funded position of the assumed ACS
plans as of the acquisition date, as well as associated weighted-average
assumptions used to determine benefit obligations:
Estimated Fair Value
Estimated Useful Life
Estimated Fair Value
Customer relationships/contracts
ACS tradename
Buck tradename
Title plant
Total Identifiable Intangible Assets
$ 2,920
100
10
5
$ 3,035
11.6 years
4 years
(1)
(2)
Projected benefit obligation
Fair value of plan assets
Net Unfunded Status
Amounts recognized in the Consolidated Balance Sheets:
(1) Determined to be an indefinite-lived asset.
(2) Title plant is not subject to depreciation or charged to earnings based on ASC Topic
950 – Financial Services – Title Plant, unless circumstances indicate that the carrying
amount of the title plant has been impaired.
Other long-term assets
Pension liabilities
Net Amount Recognized
$ 142
111
$ (31)
$ 8
(39)
$ (31)
Deferred revenue: As part of our purchase price allocation, we revalued
ACS’s existing deferred revenue to fair value based on the remaining
post-acquisition service obligation. The total revaluation adjustment
was $133 ($53 current; $80 non-current) and represented the value
for services already rendered for which no future obligation to provide
services remains. Post-acquisition, revenue will accordingly be reduced
for the value of this adjustment. Accordingly, the remaining balance
of deferred revenue included in the above of $161 ($145 current; $16
non-current) primarily represents our estimate of the fair value for the
remaining service obligation.
Deferred taxes: We provided deferred taxes and recorded other tax
adjustments as part of the accounting for the acquisition primarily
related to the estimated fair value adjustments for acquired intangible
assets, as well as the elimination of a previously recorded deferred tax
liability associated with ACS’s historical goodwill that was tax deductible.
In addition, we also provided deferred taxes of $48 for the outside basis
difference associated with certain foreign subsidiaries of ACS for which
no taxes have been previously provided. We expect to reverse the outside
basis difference primarily through repatriating earnings from those
subsidiaries in lieu of permanently reinvesting them as well as through
the reorganization of those subsidiaries.
Debt: We repaid $1.7 billion of ACS’s debt and assumed an additional
$0.6 billion. The following is a summary of the third-party debt assumed
and not repaid in connection with the close of the acquisition:
4.70% Senior Notes due June 2010
5.20% Senior Notes due June 2015
Capital lease obligations and other debt
Principal debt balance
Fair value adjustments
Total Debt Assumed But Not Repaid
$ 250
250
64
564
13
$ 577
Pension obligations: We assumed several defined benefit pension
plans covering the employees of ACS’s human resources consulting and
outsourcing business in the U.S., U.K., Germany and Canada. The plans in
the U.S. and Canada are both funded and unfunded; the plan in the U.K.
is funded; and the plan in Germany is unfunded.
Weighted average assumption used to determine benefit obligations at
the acquisition date and net periodic benefit cost from the acquisition
date through December 31, 2010:
Discount rate
Expected rate of return on plan assets
Rate of compensation increase
5.7%
6.9%
3.9%
Change-in-control liabilities: We assumed liabilities due under
contractual change-in-control provisions in employment agreements
of certain ACS employees and its Chairman of approximately $95 ($15
current; $80 non-current). The liabilities include accruals for related
excise and other taxes we are obligated to pay on these obligations.
Contingent consideration: Although there is no contingent
consideration associated with our acquisition of ACS, ACS is obligated to
make contingent payments in connection with prior acquisitions upon
satisfaction of certain contractual criteria. Contingent consideration
obligations must be recorded at their respective fair value. As of the
acquisition date, the maximum aggregate amount of ACS’s outstanding
contingent obligations to former shareholders of acquired entities
was approximately $46, of which $11 was recorded representing the
estimated fair value of this obligation. We made contingent payments
of $8 in 2010 which are reflected within investing activities in the
Consolidated Statements of Cash Flows. As of December 31, 2010, the
maximum aggregate amount of the outstanding contingent obligations
to former shareholders of acquired entities was approximately $5.
Goodwill: Goodwill in the amount of $5.1 billion was recognized for
this acquisition and is calculated as the excess of the consideration
transferred over the net assets recognized and represents the future
economic benefits arising from other assets acquired that could not
be individually identified and separately recognized. Specifically, the
goodwill recorded as part of the acquisition of ACS includes:
•
•
•
The expected synergies and other benefits that we believe will result
from combining the operations of ACS with the operations of Xerox;
Any intangible assets that do not qualify for separate recognition such
as the assembled workforce; and
The value of the going-concern element of ACS’s existing businesses
(the higher rate of return on the assembled collection of net assets
versus acquiring all of the net assets separately).
Xerox 2010 Annual Report
69
Notes to the Consolidated
Financial Statements
Dollars in millions, except per-share data and unless otherwise indicated.
Goodwill of $2.3 billion is deductible for tax purposes as a result of
previous taxable acquisitions made by ACS. While the allocation of
goodwill among reporting units is not complete, we expect the majority
of the goodwill will be related to our Services segment.
Pro-forma impact of the acquisition: The unaudited pro-forma
results presented below include the effects of the ACS acquisition as
if it had been consummated as of January 1, 2010 and 2009. The
pro-forma results include the amortization associated with an estimate
for the acquired intangible assets and interest expense associated
with debt used to fund the acquisition, as well as fair value adjustments
for unearned revenue, software and land, buildings and equipment.
To better reflect the combined operating results, material non-recurring
charges directly attributable to the transaction have been excluded.
In addition, the pro-forma results do not include any anticipated
synergies or other expected benefits of the acquisition. Accordingly,
the unaudited pro-forma financial information below is not necessarily
indicative of future results of operations or results that might
have been achieved had the acquisition been consummated as of
January 1, 2010 or 2009.
Revenue
Net income – Xerox
Basic earnings per share
Diluted earnings per share
2010
2009
$ 22,252
592
0.41
0.41
$ 21,781
795
0.57
0.56
Note: The pro-forma information presented above is on a different basis
than the pro-forma information provided in Management’s Discussion
and Analysis of Financial Condition and Results of Operations of this
Annual Report for the year ended December 31, 2010.
Other Acquisitions
Irish Business Systems Limited: In January 2010, we acquired Irish
Business Systems Limited (“IBS”) for approximately $29 net of cash
acquired. This acquisition expands our reach into the small and mid-size
business market in Ireland. IBS has eight offices located throughout
Ireland and is a managed print services provider and the largest
independent supplier of digital imaging and printing solutions in Ireland.
Veenman B.V.: In 2008, we acquired Veenman B.V. (“Veenman”),
expanding our reach into the small and mid-size business market
in Europe, for approximately $69 (€44 million) in cash, including
transaction costs. Veenman is the Netherlands’ leading independent
distributor of office printers, copiers and multifunction devices serving
small and mid-size businesses.
ACS Acquisitions
Spur Information Solutions: In November 2010, ACS acquired Spur
Information Solutions, one of the United Kingdom’s leading providers
of computer software used for parking enforcement, for $12 in cash. The
acquisition strengthens ACS’s broad portfolio of services that support
the transportation industry.
70
Xerox 2010 Annual Report
TMS Health: In October 2010, ACS acquired TMS Health (“TMS”), a
U.S.-based teleservices company that provides customer care services to
the pharmaceutical, biotech and healthcare industries, for approximately
$48 in cash. Through TMS, ACS improves communication between
pharmaceutical companies, physicians, consumers and pharmacists.
By providing customer education, product sales and marketing and
clinical trial solutions, ACS builds on the IT and BPO services it already
delivers to the healthcare and pharmaceutical industries.
ExcellerateHRO, LLP: In July 2010, ACS acquired ExcellerateHRO, LLP
(“EHRO”), a global benefits administration and relocation services provider,
for $125 net of cash acquired. This acquisition establishes ACS as one of
the world’s largest pension plan administrators and as a leading provider
of outsourced health and welfare and relocation services. The purchase
price was primarily allocated to intangible assets (consisting of customer
relationships of $32 and software of $8) and goodwill of $77 based on
third-party valuations and management’s estimates.
GIS Acquisitions
Georgia Duplicating Products: In September 2010, GIS acquired
Georgia Duplicating Products, an office equipment supplier, for
approximately $21 net of cash acquired.
ComDoc, Inc.: In February 2009, GIS acquired ComDoc, Inc. (“ComDoc”)
for approximately $145 in cash. ComDoc is one of the larger independent
office technology dealers in the U.S. and expands GIS’s coverage in Ohio,
Pennsylvania, New York and West Virginia. GIS also acquired another
business in 2009 for $18 in cash.
Saxon Business Systems: In 2008, GIS acquired Saxon Business
Systems, an office equipment supplier in Florida, for approximately $69
in cash, including transaction costs. GIS acquired three other similar
businesses in 2008 for a total of $17 in cash.
These acquisitions continue the development of GIS’s national network
of office technology suppliers to serve its expanding base of small and
mid-size businesses.
Summary – Other Acquisitions
The operating results of the acquisitions described above are not
material to our financial statements and are included within our results
from the respective acquisition dates. Excluding ACS, our remaining
2010 acquisitions contributed aggregate revenues of approximately
$140 to our 2010 total revenues from their respective acquisition dates.
The ACS acquisitions are included within our Services segment while the
other acquisitions, including the GIS acquisitions, are primarily included
within our Technology segment. The purchase prices were primarily
allocated to intangible assets and goodwill based on third-party
valuations and management’s estimates.
Notes to the Consolidated
Financial Statements
Dollars in millions, except per-share data and unless otherwise indicated.
Note 4 – Receivables, Net
Accounts Receivable
Accounts receivable, net at December 31, 2010 and 2009 were as
follows:
Provisions for Losses on Uncollectible Receivables
Accounts Receivable: 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.
Amounts billed or billable
Unbilled amounts
Allowance for doubtful accounts
Accounts Receivable, net
2010
2009
$ 2,491
447
(112)
$ 2,826
$ 1,850
—
(148)
$ 1,702
Finance Receivables: Finance receivables include sales-type leases,
direct financing leases and installment loans. Our finance receivable
portfolios are primarily in the US, Canada and Europe. We generally
establish customer credit limits and estimate the allowance for credit
losses on a country or geographic basis.
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 December 31, 2010 and 2009 were approximately
$1,066 and $603, respectively.
Finance Receivables
Finance receivables result from installment arrangements and
sales-type leases arising from the marketing of our equipment. These
receivables are typically collateralized by a security interest in the
underlying assets. Finance receivables, net at December 31, 2010 and
2009 were as follows:
Gross receivables
Unearned income
Subtotal
Residual values
Allowance for doubtful accounts
Finance receivables, net
Less: Billed portion of finance receivables, net
Less: Current portion of finance receivables
not billed, net
2010
2009
$ 7,914
(1,093)
6,821
11
(212)
6,620
(198)
$ 8,427
(1,197)
7,230
19
(222)
7,027
(226)
(2,287)
(2,396)
Finance Receivables Due After One Year, net
$ 4,135
$ 4,405
Contractual maturities of our gross finance receivables as of December
31, 2010 were as follows (including those already billed of $198):
2011
2012
2013
2014
2015 Thereafter
Total
$2,978
$2,178
$1,527
$862
$330
$39 $ 7,914
We establish credit limits based upon an initial evaluation of the
customer’s credit quality and adjust that limit accordingly based upon
ongoing credit evaluations of the customer including payment history
and changes in credit quality.
The allowance for doubtful accounts and credit losses represents an
estimate of the losses expected to be incurred from the Company’s
finance receivable portfolio. The level of the allowance is determined
on a collective basis by applying projected loss rates to our different
portfolios by country, which represent our portfolio segments. This
is the level at which we develop and document our methodology to
determine allowance for credit losses. This loss rate is primarily based
upon historical loss experience adjusted for judgments about the
probable effects of relevant observable data including current economic
conditions as well as delinquency trends, resolution rates, the aging
of receivables, credit quality indicators and the financial health of
specific customer classes or groups. The allowance for doubtful finance
receivables is inherently more difficult to estimate than the allowance
for trade accounts receivable because the underlying lease portfolio has
an average maturity, at any time, of approximately two to three years
and contains past due billed amounts, as well as unbilled amounts. We
consider all available information in our quarterly assessments of the
adequacy of the allowance for doubtful accounts. The identification of
account-specific exposure is not a significant factor in establishing the
allowance for doubtful finance receivables. Our policy and methodology
used to establish our allowance for doubtful accounts has been
consistently applied over all periods presented.
Since our allowance for doubtful Finance receivables is determined
by country, the risk characteristics in our finance receivable portfolio
segments will generally be consistent with the risk factors associated
with the economies of those countries/regions. The economies of
the U.S., Canada and Europe continue to recover from the financial
economic crises and recession which began in late 2008. Although loss
rates across all our portfolio segments have declined in 2010, loss rates
continue to be elevated as compared to prior years. Since Europe is
composed of varied countries and regional economies, the risk profile
within our European portfolio segment is somewhat more diversified
due to the varying economic conditions among the countries. Credit
losses have increased within southern Europe given the current economic
difficulties facing the countries in this region.
Xerox 2010 Annual Report
71
Notes to the Consolidated
Financial Statements
Dollars in millions, except per-share data and unless otherwise indicated.
The following table is a roll-forward of the allowance for doubtful finance
receivables for the years ended December 31, 2010 and 2009, as well as
the related investment in finance receivables:
Allowance for Credit Losses:
Balance December 31, 2008
Provision
Charge-offs
Recoveries and other(1)
Balance December 31, 2009
Provision
Charge-offs
Recoveries and other(1)
Balance December 31, 2010
Finance receivables collectively evaluated for impairment:
December 31, 2009
December 31, 2010
United States
Canada
Europe
Other(2)
Total
$ 93
77
(79)
8
$ 99
47
(58)
3
$ 91
$ 3,474
$ 3,177
$ 24
21
(19)
7
$ 33
22
(23)
5
$ 37
$ 873
$ 872
$
$
78
78
(73)
4
87
59
(59)
(6)
$ 81
$ 2,832
$ 2,706
$ 3
1
—
(1)
$ 3
—
—
—
$ 3
$ 51
$ 66
$ 198
177
(171)
18
$ 222
128
(140)
2
$ 212
$ 7,230
$ 6,821
(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) Includes developing market countries and smaller units.
In the U.S. and Canada, customers are further evaluated or segregated
by class based on industry sector. The primary customer classes are
Finance & Other Services, Government & Education; Graphic Arts;
Industrial; Healthcare and Other. In Europe, customers are further
grouped by class based on the country or region of the customer.
The primary customer classes include the U.K./Ireland, France and
the following European regions – Central, Nordic and Southern. These
groupings or classes are used to understand the nature and extent
of our exposure to credit risk arising from finance receivables.
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 S&P
rating below BBB-. 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 with 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
evaluation 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%.
72
Xerox 2010 Annual Report
Notes to the Consolidated
Financial Statements
Dollars in millions, except per-share data and unless otherwise indicated.
The credit quality indicators are updated at least annually. The credit
quality of any given customer can significantly change during the life of
the portfolio. Details about our finance receivables portfolio based by
industry and by credit quality indicators are as follows:
United States:
Finance and Other Services
Government and Education
Graphic Arts
Industrial
Healthcare
Other
Total United States
Canada:
Finance and Other Services
Government and Education
Graphic Arts
Industrial
Other
Total Canada
Europe:
France
U.K./Ireland
Central(1)
Southern(2)
Nordics(3)
Total Europe
Other
Total
(1) Switzerland, Germany, Austria, Belgium, Holland.
(2) Italy, Greece, Spain, Portugal.
(3) Sweden, Norway, Denmark, Finland.
As of December 31, 2010
Investment
Grade
Non-
investment
Grade
Substandard
Total
Finance
Receivables
$ 360
849
147
206
134
102
1,798
150
127
32
57
88
454
219
206
297
263
50
$ 401
21
217
91
48
109
887
127
12
35
47
47
268
374
164
551
237
63
1,035
1,389
33
33
$ 3,320
$ 2,577
$ 190
7
156
38
32
69
492
56
3
48
30
13
150
82
51
65
81
3
282
—
$ 924
$ 951
877
520
335
214
280
3,177
333
142
115
134
148
872
675
421
913
581
116
2,706
66
$ 6,821
The aging of our receivables portfolio is based upon the number of days
an invoice is past due. Receivables that were more than 90 days past
due are considered delinquent. Receivable losses are charged against
the allowance when management believes the uncollectibility of the
receivable is confirmed and is generally based on individual credit
evaluations, results of collection efforts and specific circumstances of the
customer. Subsequent recoveries, if any, are credited to the allowance.
We generally continue to maintain equipment on lease and provide
services to customers that have invoices for finance receivables that
are 90 days or more past due and, as a result of the bundled nature
of billings, we also continue to accrue interest on those receivables.
However, interest revenue for such billings is only recognized if
collectability is deemed reasonably assured.
Xerox 2010 Annual Report
73
Notes to the Consolidated
Financial Statements
Dollars in millions, except per-share data and unless otherwise indicated.
The aging of our billed finance receivables is as follows:
As of December 31, 2010
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
$ 5
6
3
2
2
2
20
3
1
1
2
10
—
14
—
$ 37
$ 2
3
1
1
1
—
8
1
—
1
4
15
—
20
—
$ 29
$ 30
35
25
14
9
10
123
7
2
6
15
57
1
81
2
$ 213
$ 921
842
495
321
205
270
3,054
865
673
415
898
524
115
$ 951
877
520
335
214
280
3,177
872
675
421
913
581
116
2,625
2,706
64
66
$ 6,608
$ 6,821
$ 23
40
16
10
9
8
106
28
5
7
39
99
2
152
—
$ 286
Current
$ 23
26
21
11
6
8
95
3
1
4
9
32
1
47
2
$ 147
United States:
Finance and Other Services
Government and Education
Graphic Arts
Industrial
Healthcare
Other
Total United States
Total Canada
Europe:
France
U.K./Ireland
Central
Southern
Nordics
Total Europe
Other
Total
Accounts Receivable Sales Arrangements
We have facilities in the U.S., Canada and several countries in Europe
that enable us to sell to third parties, on an ongoing basis, certain
accounts receivable without recourse. The accounts receivables sold
are generally short-term trade receivables with payment due dates of
less than 60 days. The agreements involve the sale of entire groups
of accounts receivable for cash. In certain instances, a portion of the
sales proceeds is held back and deferred until collection of the related
receivables by the purchaser. Such holdbacks are not considered legal
securities nor are they certificated. Deferred proceeds on accounts
receivable sales in 2010 amounted to $307. We report collections on
such receivables as operating cash flows in the 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. These receivables are included in the caption “Other
current assets” in the accompanying Consolidated Balance Sheets and
were $90 at December 31, 2010. Under most of the agreements, we
also 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.
Accounts receivable sales for the three years ended December 31, 2010
were as follows:
Accounts receivable sales
Deferred proceeds
Fees associated with sales
Estimated increase on operating
cash flows(1)
2010
2009
$ 2,374
307
15
$ 1,566
—
13
2008
$ 717
—
4
106
309
51
(1) Represents the difference between current and prior-year fourth-quarter accounts
receivable sales adjusted for the effects of: (i) the deferred proceeds, (ii) collections
prior to the end of the year and (iii) currency.
Note 5 – Inventories and Equipment on Operating
Leases, Net
Inventories at December 31, 2010 and 2009 were as follows:
Finished goods
Work-in-process
Raw materials
Total Inventories
2010
$ 858
46
87
$ 991
2009
$ 772
43
85
$ 900
74
Xerox 2010 Annual Report
Notes to the Consolidated
Financial Statements
Dollars in millions, except per-share data and unless otherwise indicated.
The transfer of equipment from our inventories to equipment subject
to an operating lease is presented in our Consolidated Statements of
Cash Flows in the operating activities section as a non-cash adjustment.
Equipment on operating leases and similar arrangements consists of our
equipment rented to customers and depreciated to estimated salvage
value at the end of the lease term. We recorded $31, $52 and $115 in
inventory write-down charges for the years ended December 31, 2010,
2009 and 2008, respectively.
Equipment on operating leases and the related accumulated
depreciation at December 31, 2010 and 2009 were as follows:
Equipment on operating leases
Accumulated depreciation
2010
2009
$ 1,561
(1,031)
$ 1,583
(1,032)
Equipment on Operating Leases, net
$ 530
$ 551
Depreciable lives generally vary from three to four years consistent
with our planned and historical usage of the equipment subject to
operating leases. Depreciation and obsolescence expense for equipment
on operating leases was $313, $329 and $298 for the years ended
December 31, 2010, 2009 and 2008, respectively. Our equipment
operating lease terms vary, generally from 12 to 36 months. Scheduled
minimum future rental revenues on operating leases with original terms
of one year or longer are:
2011
$389
2012
$279
2013
$180
2014
$87
2015
$41
Thereafter
$14
Total contingent rentals on operating leases, consisting principally of
usage charges in excess of minimum contracted amounts, for the years
ended December 31, 2010, 2009 and 2008 amounted to $133, $125
and $117, respectively.
Note 6 – Land, Buildings and Equipment, Net
Land, buildings and equipment, net at December 31, 2010 and 2009
were as follows:
Estimated
Useful Lives
(Years)
2010
2009
Land
—
Buildings and building equipment 25 to 50
Varies
Leasehold improvements
5 to 12
Plant machinery
3 to 15
Office furniture and equipment
4 to 20
Other
—
Construction in progress
$
63
1,133
455
1,607
1,306
115
67
$
45
1,192
328
1,686
994
100
33
Depreciation expense and operating lease rent expense for the years
ended December 31, 2010, 2009 and 2008 were as follows:
Depreciation expense
Operating lease rent expense(1)
2010
$379
632
2009
$247
267
2008
$257
252
(1) We lease certain land, buildings and equipment, substantially all of which are
accounted for as operating leases.
Future minimum operating lease commitments that have initial or
remaining non-cancelable lease terms in excess of one year at December
31, 2010 were as follows:
2011
$669
2012
$486
2013
$337
2014
$171
2015
$118
Thereafter
$106
We have an information management contract with HP Enterprise
Services (“HPES”), the legal successor to Electronic Data Systems Corp.,
through March 2014. Services to be provided under this contract
include support for European mainframe system processing, as well
as workplace, service desk and voice and data network management.
Although the HPES contract runs through March 2014, we may choose
to transfer some of the services to internal Xerox providers before the
HPES contract ends. There are no minimum payments required under
this contract. We can terminate the contract for convenience without
paying a termination fee by providing 60 days’ prior notice. Should we
terminate the contract for convenience, we have an option to purchase
the assets placed in service under the HPES contract. Payments to HPES,
which are primarily recorded in selling, administrative and general
expenses, were $98, $198 and $279 for the years ended December 31,
2010, 2009 and 2008, respectively.
During 2010 and 2009 we terminated several agreements with HPES
for information management services and either terminated the
services or entered into new agreements for similar services with several
alternative providers. Services provided under these new contracts
include mainframe application processing, development and support
and mid-range applications processing and support. These contracts
have various terms through 2015. Some of the contracts require
minimum payments and include termination penalties. Payments for
information management services which are primarily recorded in
selling, administrative and general expenses were $44 and $26 for the
years ended December 31, 2010 and 2009, respectively.
Note 7 – Investments in Affiliates, at Equity
Investments in corporate joint ventures and other companies in which
we generally have a 20% to 50% ownership interest at December 31,
2010 and 2009 were as follows:
Subtotal
Accumulated depreciation
Land, Buildings and
Equipment, net
4,746
(3,075)
4,378
(3,069)
$ 1,671
$ 1,309
Fuji Xerox
All other equity investments
Investments in Affiliates, at Equity
2010
$ 1,217
74
$ 1,291
2009
$ 998
58
$ 1,056
Xerox 2010 Annual Report
75
Notes to the Consolidated
Financial Statements
Dollars in millions, except per-share data and unless otherwise indicated.
Our equity in net income of our unconsolidated affiliates for the three
years ended December 31, 2010 was as follows:
Yen/U.S. Dollar exchange rates used to translate are as follows:
Exchange Basis
2010
2009
2008
2010
2009
$ 63
15
$ 30
11
2008
$ 101
12
Summary of
Operations
Balance Sheet
Weighted
Average Rate
Year-End Rate
87.64
81.66
93.51
92.46
103.31
90.28
Transactions with Fuji Xerox
We receive dividends from Fuji Xerox, which are reflected as a reduction
in our investment. Additionally, we have a Technology Agreement with
Fuji Xerox whereby we receive royalty payments for their use of our Xerox
brand trademark, as well as rights to access their patent portfolio in
exchange for access to our patent portfolio. These payments are included
in Service, outsourcing and rental revenues in the Consolidated Statements
of Income. We also have arrangements with Fuji Xerox whereby we
purchase inventory from and sell inventory to Fuji Xerox. Pricing of the
transactions under these arrangements is based upon terms the Company
believes to be conducted at arm’s length. Our purchase commitments with
Fuji Xerox are in the normal course of business and typically have a lead
time of three months. In addition, we pay Fuji Xerox and they pay us for
unique research and development costs.
Transactions with Fuji Xerox for the three years ended December 31,
2010 were as follows:
2010
2009
2008
Dividends received from
Fuji Xerox
Royalty revenue earned
Inventory purchases from
Fuji Xerox
Inventory sales to Fuji Xerox
R&D payments received from
Fuji Xerox
R&D payments paid to Fuji Xerox
$
36
116
2,098
147
1
30
$
10
106
1,590
133
3
33
$
56
112
2,150
162
5
34
As of December 31, 2010 and 2009, net amounts due to Fuji Xerox were
$109 and $114, respectively.
Fuji Xerox
Other investments
Total Equity in Net Income of
Unconsolidated Affiliates
Fuji Xerox
$ 78
$ 41
$ 113
Fuji Xerox is headquartered in Tokyo and operates in Japan, China,
Australia, New Zealand and other areas of the Pacific Rim. Our
investment in Fuji Xerox of $1,217 at December 31, 2010 differs from
our implied 25% interest in the underlying net assets, or $1,335, due
primarily to our deferral of gains resulting from sales of assets by
us to Fuji Xerox, partially offset by goodwill related to the Fuji Xerox
investment established at the time we acquired our remaining 20%
of Xerox Limited from The Rank Group plc.
Equity in net income of Fuji Xerox is affected by certain adjustments to
reflect the deferral of profit associated with intercompany sales. These
adjustments may result in recorded equity income that is different than
that implied by our 25% ownership interest. Equity income for 2010 and
2009 includes after-tax restructuring charges of $38 and $46, respectively,
primarily reflecting employee-related costs as part of Fuji Xerox’s
continued cost-reduction actions to improve its competitive position.
Condensed financial data of Fuji Xerox for the three calendar years
ended December 31, 2010 was as follows:
Summary of Operations
Revenues
Costs and expenses
Income before income taxes
Income tax expense
Net Income
Less: Net income –
noncontrolling interests
2010
2009
2008
$ 11,276
10,659
$ 9,998
9,781
$ 11,190
10,451
617
291
326
5
217
67
150
1
739
287
452
7
Net Income – Fuji Xerox
$
321
$ 149
$ 445
Balance Sheet
Assets:
Current assets
Long-term assets
Total Assets
Liabilities and Equity:
Current liabilities
Long-term debt
Other long-term liabilities
Noncontrolling interests
Fuji Xerox shareholders’ equity
Total Liabilities and Equity
$ 4,884
5,978
$ 10,862
$ 3,534
1,260
707
22
5,339
$ 10,862
$ 4,111
5,457
$ 4,734
5,470
$ 9,568
$ 10,204
$ 2,643
1,368
1,104
19
4,434
$ 3,534
996
1,095
23
4,556
$ 9,568
$ 10,204
76
Xerox 2010 Annual Report
Notes to the Consolidated
Financial Statements
Dollars in millions, except per-share data and unless otherwise indicated.
Note 8 – Goodwill and Intangible Assets, Net
Goodwill
In 2010, as a result of our acquisition of ACS, we realigned our internal
reporting structure (see Note 2 – Segments for additional information).
Our December 31, 2010 goodwill balance was reallocated to properly
reflect our new segments and to align goodwill to the reporting units
benefiting from the synergies of our acquisitions.
The following table presents the changes in the carrying amount
of goodwill, by reportable segment, for the three years ended
December 31, 2010:
Balance at December 31, 2007
Foreign currency translation
Acquisition of Veenman B.V.
GIS acquisitions
Purchase price allocation adjustment – GIS
Balance at December 31, 2008
Foreign currency translation
GIS acquisitions
Balance at December 31, 2009
Foreign currency translation
Acquisition of Affiliated Computer Services, Inc. (“ACS”)
ACS acquisitions
GIS acquisitions
Acquisition of Irish Business Systems, Ltd.
Other
Balance at December 31, 2010
Intangible Assets, Net
Intangible assets primarily relate to the Services operating segment.
Intangible assets were comprised of the following as of December 31, 2010
and 2009:
Technology
$ 2,317
(200)
44
73
12
$ 2,246
61
118
$ 2,425
(25)
—
—
11
14
—
$ 2,425
Services
$ 1,122
(193)
—
—
—
$ 929
60
—
$ 989
(22)
5,127
124
—
—
(2)
$ 6,216
Other
$ 9
(2)
—
—
—
$ 7
1
—
$ 8
—
—
—
—
—
—
$ 8
Total
$ 3,448
(395)
44
73
12
$ 3,182
122
118
$ 3,422
(47)
5,127
124
11
14
(2)
$ 8,649
Weighted Average
Amortization
Period
12 years
25 years
15 years
6 years
December 31, 2010
December 31, 2009
Gross
Carrying
Amount
$ 3,487
123
325
47
$ 3,982
Accumulated
Amortization
$ 464
54
59
34
$ 611
Net
Amount
$ 3,023
69
266
13
$ 3,371
Gross
Carrying
Amount
$ 525
123
210
40
$ 898
Accumulated
Amortization
$ 198
49
25
28
$ 300
Net
Amount
$ 327
74
185
12
$ 598
Customer base
Distribution network
Trademarks(1)
Technology, patents and
non-compete(1)
Total Intangible Assets
(1) Includes $10 and $5 of non-amortizable assets within trademarks and technology, respectively, related to the 2010 acquisition of ACS.
Amortization expense related to intangible assets was $316, $64 and
$58 for the years ended December 31, 2010, 2009 and 2008, respectively.
Excluding the impact of additional acquisitions, amortization expense is
expected to approximate $345 in 2011, $335 in 2012 and 2013, and
$312 in 2014 and 2015.
Xerox 2010 Annual Report
77
Notes to the Consolidated
Financial Statements
Dollars in millions, except per-share data and unless otherwise indicated.
Note 9 – Restructuring and Asset Impairment Charges
The net restructuring and asset impairment charges (credits) in
the Consolidated Statements of Income totaled $483, $(8) and
$429 in 2010, 2009 and 2008, respectively. Detailed information
related to restructuring program activity during the three years ended
December 31, 2010 is outlined below:
Restructuring Activity
Balance December 31, 2007
Restructuring provision
Reversals of prior accruals
Net current year charges(2)
Charges against reserve and currency
Balance December 31, 2008
Restructuring provision
Reversals of prior accruals
Net current year charges(2)
Charges against reserve and currency
Balance December 31, 2009
Restructuring provision
Reversals of prior accruals
Net current year charges(2)
Charges against reserve and currency
Balance December 31, 2010
Severance and
Related Costs
Lease
Cancellation and
Other Costs
Asset
Impairments(1)
$ 71
363
(6)
357
(108)
320
28
(39)
(11)
(255)
54
470
(32)
438
(194)
$ 298
$ 38
20
(1)
19
(25)
32
9
(6)
3
(15)
20
28
(9)
19
(14)
$ 25
$ —
53
—
53
(53)
—
—
—
—
—
—
26
—
26
(26)
$ —
Total
$ 109
436
(7)
429
(186)
352
37
(45)
(8)
(270)
74
524
(41)
483
(234)
$ 323
(1) 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.
(2) Represents amount recognized within the Consolidated Statements of Income for the years shown.
Over the past several years, we have engaged in a series of restructuring
programs related to downsizing our employee base, exiting certain
activities, outsourcing certain internal functions and engaging in other
actions designed to reduce our cost structure and improve productivity.
These initiatives primarily include severance actions and impact all
major geographies and segments. Management continues to evaluate
our business and, therefore, in future years, there may be additional
provisions for new plan initiatives, as well as changes in estimates to
amounts previously recorded, as payments are made or actions are
completed. However, we do not expect that there will be significant new
restructuring initiatives in 2011. Asset impairment charges were also
incurred in connection with these restructuring actions for those assets
made obsolete as a result of these programs.
The following table summarizes the reconciliation to the Consolidated
Statements of Cash Flows for the three years ended December 31, 2010:
Charges to reserve
Asset impairments
Effects of foreign currency and
other non-cash items
Cash Payments for
Restructurings
2010
2009
2008
$ (234)
26
$ (270)
—
$ (186)
53
(5)
—
2
$ (213)
$ (270)
$ (131)
The following table summarizes the total amount of costs incurred in
connection with these restructuring programs by segment for the three
years ended December 31, 2010:
Technology
Services
Other
2010
$ 325
104
54
Total Net Restructuring Charges
$ 483
2009
$ (5)
(2)
(1)
$ (8)
2008
$ 288
85
56
$ 429
78
Xerox 2010 Annual Report
Notes to the Consolidated
Financial Statements
Dollars in millions, except per-share data and unless otherwise indicated.
2010 Activity
During 2010, we recorded $483 of net restructuring and asset
impairment charges, which included the following:
•
$470 of severance costs related to headcount reductions of
approximately 9,000 employees. The costs associated with these
actions applied about equally to North America and Europe, with
approximately 20% related to our developing market countries.
Approximately 50% of the costs were focused on gross margin
improvements, 40% on SAG and 10% on the optimization of RD&E
investments and impacted the following functional areas:
– Services
– Supply chain and manufacturing
– Back-office administration
– Development and engineering costs.
•
•
$28 for lease termination costs primarily reflecting the continued
rationalization and optimization of our worldwide operating locations,
particularly in light of our recent acquisition of ACS.
$19 loss associated with the sale of our Venezuelan subsidiary. The
loss primarily reflects the write-off of our Venezuelan net assets
including working capital and long-lived assets. We will continue to
sell equipment, parts and supplies to the acquiring company through
a distribution arrangement but will no longer have any direct or local
operations in Venezuela. The sale of our operations and change in
business model follows a decision by management in the fourth
quarter of 2010 to reduce the Company’s future exposure and risk
associated with operating in this unpredictable economy.
The above charges were partially offset by $41 of net reversals for
changes in estimated reserves from prior period initiatives.
The restructuring reserve balance as of December 31, 2010 for all
programs was $323, of which approximately $309 is expected to be
spent over the next 12 months.
2009 Activity
Restructuring activity was minimal in 2009 and the related charges
primarily reflected changes in estimates in severance costs from
previously recorded actions.
2008 Activity
During 2008, we recorded $357 of net restructuring charges
predominantly consisting of severance and costs related to the
elimination of approximately 4,900 positions primarily in both North
America and Europe. Focus areas for the actions include the following:
•
•
•
Improving efficiency and effectiveness of infrastructure including:
marketing, finance, human resources and training
Capturing efficiencies in technical services, managed services, and
supply chain and manufacturing infrastructure
Optimizing product development and engineering resources.
In addition, related to these activities, we also recorded lease cancellation
and other costs of $19 and asset impairment charges of $53. The lease
termination and asset impairment charges primarily related to: (i) the
relocation of certain manufacturing operations including the closing of our
toner plant in Oklahoma City and the consolidation of our manufacturing
operations in Ireland; and (ii) the exit from certain leased and owned
facilities as a result of the actions noted above.
Note 10 – Supplementary Financial Information
The components of other current assets and other current liabilities at
December 31, 2010 and 2009 were as follows:
2010
2009
$ 345
$ 328
Other Current Assets
Deferred taxes and income taxes receivable
Royalties, license fees and software
maintenance
Restricted cash
Prepaid expenses
Derivative instruments
Deferred purchase price from sale
of receivables
Advances and deposits
Other
155
91
133
45
90
23
244
Total Other Current Assets
$ 1,126
Other Current Liabilities
Deferred taxes and income taxes payable
Other taxes payable
Interest payable
Restructuring reserves
Derivative instruments
Product warranties
Dividends payable
Distributor and reseller rebates/commissions
Other
$
59
177
122
309
19
17
74
105
925
23
31
86
16
—
19
205
$ 708
$
68
161
114
64
15
19
41
127
517
Total Other Current Liabilities
$ 1,807
$ 1,126
Xerox 2010 Annual Report
79
Notes to the Consolidated
Financial Statements
Dollars in millions, except per-share data and unless otherwise indicated.
The components of other long-term assets and other long-term liabilities
at December 31, 2010 and 2009 were as follows:
2010
2009
Other Long-term Assets
Prepaid pension costs
Net investment in discontinued operations(1)
Internal use software, net
Product software, net
Restricted cash
Debt issuance costs, net
Customer contract costs, net
Derivative instruments
Other
Total Other Long-term Assets
Other Long-term Liabilities
Deferred and other tax liabilities
Derivative instruments
Environmental reserves
Unearned income
Restructuring reserves
Other
Total Other Long-term Liabilities
$
92
224
468
145
280
42
134
11
378
$ 1,774
$ 200
—
20
36
14
527
$ 797
$ 155
240
354
10
258
62
—
10
231
$ 1,320
$ 167
9
23
—
10
363
$ 572
(1) At December 31, 2010, our net investment in discontinued operations primarily
consists of a $245 performance-based instrument relating to the 1997 sale of
The Resolution Group (“TRG”) net of remaining net liabilities associated with our
discontinued operations of $21. The recovery of the performance-based instrument is
dependent on the sufficiency of TRG’s available cash flows, as guaranteed by TRG’s
ultimate parent, which are expected to be recovered in annual cash distributions
through 2017.
Note 11 – Debt
Short-term borrowings at December 31, 2010 and 2009 were as follows:
Commercial paper
Current maturities of long-term debt
Total Short-term Debt
2010
$ 300
1,070
$ 1,370
2009
$ —
988
$ 988
The weighted-average interest rate for commercial paper at December
31, 2010, including issuance costs, was 1.02% and had maturities
ranging from 18 to 32 days.
We classify our debt based on the contractual maturity dates of the
underlying debt instruments or as of the earliest put date available to
the debt holders. We defer costs associated with debt issuance over the
applicable term, or to the first put date in the case of convertible debt or
debt with a put feature. These costs are amortized as interest expense in
our Consolidated Statements of Income.
80
Xerox 2010 Annual Report
Long-term debt at December 31, 2010 and 2009 was as follows:
Weighted Average
Interest Rates at
December 31, 2010(2)
2010
2009
Xerox Corporation
Senior Notes due 2010
Notes due 2011
Notes due 2011
Senior Notes due 2011
Senior Notes due 2012
Senior Notes due 2013
Senior Notes due 2013
Convertible Notes due 2014
Senior Notes due 2014
Senior Notes due 2015
Notes due 2016
Senior Notes due 2016
Senior Notes due 2017
Senior Notes due 2018
Senior Notes due 2019
Zero Coupon Notes due 2023
Senior Notes due 2039
Subtotal
Xerox Credit Corporation
Notes due 2013
Notes due 2014
Subtotal
—%
0.09%
—%
6.59%
5.59%
5.65%
—%
9.00%
8.25%
4.29%
7.20%
6.48%
6.83%
6.37%
5.66%
5.41%
6.78%
—%
—%
ACS
Notes due 2015
Borrowings secured by other assets
4.25%
6.62%
Subtotal
Other U.S. Operations
Borrowings secured by
finance receivables
Borrowings secured by
other assets
Subtotal
Total U.S. Operations
International Operations
Other debt due 2011–2013
Total International Operations
Principal Debt Balance
Unamortized discount
Fair value adjustments(1)
Less: current maturities
Total Long-term Debt
—%
12.39%
0.86%
$ —
1
—
750
1,100
400
—
19
750
1,000
250
700
500
1,000
650
283
350
$ 7,753
—
—
—
250
71
321
—
4
4
$ 700
1
50
750
1,100
400
550
19
750
1,000
250
700
500
1,000
650
267
350
$ 9,037
10
50
60
—
—
—
2
5
7
8,078
9,104
2
2
8,080
(1)
228
(1,070)
$ 7,237
18
18
9,122
(11)
153
(988)
$ 8,276
(1) Fair value adjustments represent changes in the fair value of hedged debt
obligations attributable to movements in benchmark interest rates. Hedge accounting
requires hedged debt instruments to be reported at an amount equal to the sum of
their carrying value (principal value plus/minus premiums/discounts) and any fair
value adjustment.
(2) Represents weighted average effective interest rate which includes the effect of
discounts and premiums on issued debt.
Notes to the Consolidated
Financial Statements
Dollars in millions, except per-share data and unless otherwise indicated.
Scheduled principal payments due on our long-term debt for the next
five years and thereafter are as follows:
2011
2012
2013
2014
2015 Thereafter
Total
$1,070(1) $1,126
$412
$771
$1,251
$3,450
$8,080
(1) Quarterly total debt maturities for 2011 are $11, $9, $1,041 and $9 for the first,
second, third and fourth quarters, respectively.
The Credit Facility also contains various events of default, the
occurrence of which could result in a termination by the lenders and the
acceleration of all our obligations under the Credit Facility. These events
of default include, without limitation: (i) payment defaults, (ii) breaches
of covenants under the Credit Facility (certain of which breaches do not
have any grace period), (iii) cross-defaults and acceleration to certain of
our other obligations and (iv) a change of control of Xerox.
Commercial Paper
In October 2010, Xerox’s Board of Directors authorized the company
to issue commercial paper (“CP”). Aggregate CP and Credit Facility
borrowings may not exceed $2 billion outstanding at any time. Under
the company’s current private placement CP program, we may issue
CP up to a maximum amount of $1.0 billion outstanding at any time.
The maturities of the CP Notes will vary, but may not exceed 390 days
from the date of issue. The CP Notes are sold at a discount from par or,
alternatively, sold at par and bear interest at market rates.
Credit Facility
The Credit Facility is a $2.0 billion unsecured revolving credit facility
including a $300 letter of credit subfacility. At December 31, 2010 we
had no outstanding borrowings or letters of credit. Approximately $1.8
billion, or 90% of the Credit Facility, has a maturity date of April 30,
2013. The remaining portion of the Credit Facility has a maturity date
of April 30, 2012.
The Credit Facility is available, without sublimit, to certain of our
qualifying subsidiaries and includes provisions that would allow us
to increase the overall size of the Credit Facility up to an aggregate
amount of $2.5 billion. Our obligations under the Credit Facility are
unsecured and are not currently guaranteed by any of our subsidiaries.
Any domestic subsidiary that guarantees more than $100 of Xerox
Corporation debt must also guaranty our obligations under the Credit
Facility. In the event that any of our subsidiaries borrows under the
Credit Facility, its borrowings thereunder would be guaranteed by us.
Borrowings under the Credit Facility bear interest at our choice, at either
(a) a Base Rate as defined in our Credit Facility agreement, plus an all-in
spread that varies between 1.5% and 3.5% depending on our credit
rating at the time of borrowing, or (b) LIBOR plus an all-in spread that
varies between 2.5% and 4.5% depending on our credit rating at the
time of borrowing. Based on our credit rating as of December 31, 2010,
the applicable all-in spreads for the Base Rate and LIBOR borrowing were
2.5% and 3.5%, respectively.
The Credit Facility contains various conditions to borrowing and
affirmative, negative and financial maintenance covenants. Certain of
the more significant covenants are summarized below:
(a) Maximum leverage ratio (a quarterly test that is calculated as
principal debt divided by consolidated EBITDA, as defined) of 3.75x
(b) Minimum interest coverage ratio (a quarterly test that is calculated
as consolidated EBITDA divided by consolidated interest expense)
may not be less than 3.00x
(c) Limitations on (i) liens of Xerox and certain of our subsidiaries
securing debt, (ii) certain fundamental changes to corporate
structure, (iii) changes in nature of business and (iv) limitations on
debt incurred by certain subsidiaries
Capital Market Activity
During 2010, we redeemed the following Notes prior to their
scheduled maturity:
•
•
•
•
•
•
7.625% Senior Notes due in 2013 for $550;
6.00% Medium-term Notes due 2011 for $25;
7.41% Medium-term Notes due 2011 for $25;
6.50% Medium-term Notes due 2013 for $10;
6.00% Medium-term Notes due 2014 for $25; and
6.125% Medium-term Notes due 2014 for $25.
We incurred a loss on extinguishment of approximately $16,
representing the call premium of approximately $7 on the Senior
Notes as well as the write-off of unamortized debt costs of $9.
Interest
Interest paid on our short-term debt, long-term debt and liability
to subsidiary trust issuing preferred securities amounted to $586,
$531 and $527 for the years ended December 31, 2010, 2009 and
2008, respectively.
Interest expense and interest income for the three years ended
December 31, 2010 was as follows:
Interest expense(1)
Interest income(2)
2010
$ 592
679
2009
$ 527
734
2008
$ 567
833
(1) Includes Equipment financing interest expense, as well as non-financing interest
expense included in Other expenses, net in the Consolidated Statements of Income.
(2) Includes Finance income, as well as other interest income that is included in Other
expenses, net in the Consolidated Statements of Income.
Equipment financing interest is determined based on an estimated
cost of funds, applied against the estimated level of debt required to
support our net finance receivables. The estimated cost of funds is
based on our overall corporate cost of borrowing adjusted to reflect a
rate that would be paid by a typical BBB rated leasing company. The
estimated level of debt is based on an assumed 7 to 1 leverage ratio
of debt/equity as compared to our average finance receivable balance
during the applicable period.
Xerox 2010 Annual Report
81
Note 13 – Financial Instruments
We are exposed to market risk from changes in foreign currency
exchange rates and interest rates, which could affect operating results,
financial position and cash flows. We manage our exposure to these
market risks through our regular operating and financing activities and,
when appropriate, through the use of derivative financial instruments.
These derivative financial instruments are utilized to hedge economic
exposures, as well as to reduce earnings and cash flow volatility resulting
from shifts in market rates. We enter into limited types of derivative
contracts, including interest rate swap agreements, foreign currency spot,
forward and swap contracts and net purchased foreign currency options
to manage interest rate and foreign currency exposures. Our primary
foreign currency market exposures include the Japanese Yen, Euro and
U.K. Pound Sterling. The fair market values of all our derivative contracts
change with fluctuations in interest rates and/or currency exchange
rates and are designed so that any changes in their values are offset by
changes in the values of the underlying exposures. Derivative financial
instruments are held solely as risk management tools and not for trading
or speculative purposes. The related cash flow impacts of all of our
derivative activities are reflected as cash flows from operating activities.
We do not believe there is significant risk of loss in the event of non-
performance by the counterparties associated with our derivative
instruments because these transactions are executed with a diversified
group of major financial institutions. Further, our policy is to deal with
counterparties having a minimum investment grade or better credit
rating. Credit risk is managed through the continuous monitoring of
exposures to such counterparties.
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 December 31, 2010 and 2009, pay variable/receive fixed interest
rate swaps with notional amounts of $950 and $2,350 and net asset fair
value of $11 and $1, respectively, were designated and accounted for as
fair value hedges. No ineffective portion was recorded to earnings during
2010, 2009 or 2008.
Notes to the Consolidated
Financial Statements
Dollars in millions, except per-share data and unless otherwise indicated.
Net (payments) proceeds on debt other than secured borrowings as
shown on the Consolidated Statements of Cash Flows for the three years
ended December 31, 2010 was as follows:
Net proceeds (payments) on
short-term debt
Net payments on Credit Facility
Net proceeds from issuance of
long-term debt
Net payments on long-term debt
Net (Payments) Proceeds on
Other Debt
2010
2009
2008
$
300
—
$
(61)
(246)
—
(3,357)
2,725
(1,495)
$
(38)
(354)
1,650
(332)
$ (3,057)
$ 923
$ 926
Note 12 – Liability to Subsidiary Trust Issuing
Preferred Securities
The Liability to Subsidiary Trust Issuing Preferred Securities included in
our Consolidated Balance Sheets of $650 and $649 as of December 31,
2010 and 2009, respectively, reflects our obligations to Xerox Capital
Trust I (“Trust I”) as a result of their loans to us from proceeds related to
their issuance of preferred securities. This subsidiary is not consolidated
in our financial statements because we are not the primary beneficiary
of the trust.
In 1997, Trust I issued 650 thousand of 8.0% preferred securities (the
“Preferred Securities”) to investors for $644 ($650 liquidation value) and
20,103 shares of common securities to us for $20. With the proceeds
from these securities, Trust I purchased $670 principal amount of
8.0% Junior Subordinated Debentures due 2027 of the Company
(“the Debentures”). The Debentures represent all of the assets of
Trust I. On a consolidated basis, we received net proceeds of $637
which was net of fees and discounts of $13. Interest expense, together
with the amortization of debt issuance costs and discounts, was $54 in
2010, 2009 and 2008. We have guaranteed, on a subordinated basis,
distributions and other payments due on the Preferred Securities. The
guarantee, our obligations under the Debentures, the indenture pursuant
to which the Debentures were issued and our obligations under the
Amended and Restated Declaration of Trust governing the trust, taken
together, provide a full and unconditional guarantee of amounts due
on the Preferred Securities. The Preferred Securities accrue and pay
cash distributions semiannually at a rate of 8% per year of the stated
liquidation amount of one thousand dollars per Preferred Security. The
Preferred Securities are mandatorily redeemable upon the maturity
of the Debentures on February 1, 2027, or earlier to the extent of any
redemption by us of any Debentures. The redemption price in either
such case will be one thousand dollars per share plus accrued and unpaid
distributions to the date fixed for redemption.
82
Xerox 2010 Annual Report
Notes to the Consolidated
Financial Statements
Dollars in millions, except per-share data and unless otherwise indicated.
The following is a summary of our fair value hedges at December 31, 2010:
Debt Instrument
Senior Notes due 2013
Senior Notes due 2014
Senior Notes due 2016
Total Fair Value Hedges
Year First
Designated
as Hedge
2010
2009
2010
Notional
Amount
$ 400
450
100
$ 950
Net Fair
Value
Weighted
Average Interest
Rate Paid
Interest
Rate Received
$ —
10
1
$ 11
4.71%
6.19%
3.96%
5.65%
8.25%
6.40%
Basis
LIBOR
LIBOR
LIBOR
Maturity
2013
2014
2016
The following is a summary of the primary hedging positions and
corresponding fair values held as of December 31, 2010:
Terminated Swaps
During the period from 2004 to 2010, we terminated early several
interest rate swaps that were designated as fair value hedges of certain
debt instruments. The associated net fair value adjustments to the debt
instruments are being amortized to interest expense over the remaining
term of the related notes. In 2010, 2009 and 2008, the amortization
of these fair value adjustments reduced interest expense by $28, $17
and $12, respectively, and we expect to record a net decrease in interest
expense of $199 in future years through 2027.
Foreign Exchange Risk Management
We are exposed to foreign currency exchange rate fluctuations in
the normal course of business. As a part of our foreign exchange risk
management strategy, we use derivative instruments, primarily forward
contracts and purchase option contracts, to hedge the following
foreign currency exposures, thereby reducing volatility of earnings and
protecting fair values of assets and liabilities:
Currency Hedged (Buy/Sell)
U.K. Pound Sterling/Euro
Euro/U.S. Dollar
U.S. Dollar/Euro
Swedish Kronor/Euro
Swiss Franc/Euro
Japanese Yen/U.S. Dollar
Japanese Yen/Euro
Euro/U.K. Pound Sterling
U.K. Pound Sterling/Swiss Franc
Danish Krone/Euro
Mexican Peso/U.S. Dollar
All Other
Foreign currency-denominated assets and liabilities
Total Foreign Exchange Hedging
•
•
Forecasted purchases and sales in foreign currency
Summary of Foreign Exchange Hedging Positions
At December 31, 2010, we had outstanding forward exchange and
purchased option contracts with gross notional values of $2,968 which
is reflective of the amounts that are normally outstanding at any point
during the year. These contracts generally mature in 12 months or less.
Gross
Notional
Value
$ 217
370
585
93
194
397
367
211
74
57
52
351
$ 2,968
Fair Value
Asset
(Liability)(1)
$ (1)
(3)
9
2
8
8
11
1
(7)
—
—
(2)
$ 26
(1) Represents the net receivable (payable) amount included in the Consolidated Balance
Sheet at December 31, 2010.
Foreign Currency Cash Flow Hedges
We designate a portion of our foreign currency derivative contracts
as cash flow hedges of our foreign currency-denominated inventory
purchases, sales and expenses. No amount of ineffectiveness was
recorded in the Consolidated Statements of Income for these
designated cash flow hedges and all components of each derivative’s
gain or loss was included in the assessment of hedge effectiveness. As of
December 31, 2010, the net asset fair value of these contracts was $18.
Xerox 2010 Annual Report
83
Notes to the Consolidated
Financial Statements
Dollars in millions, except per-share data and unless otherwise indicated.
Summary of Derivative Instruments Fair Values
The following table provides a summary of the fair value amounts of
derivative instruments at December 31, 2010 and 2009, respectively.
Designation of Derivatives
Balance Sheet Location
Derivatives Designated as Hedging Instruments
Foreign exchange contracts – forwards
Interest rate swaps
Derivatives NOT Designated as Hedging Instruments
Foreign exchange contracts – forwards
Summary of Derivatives
Other current assets
Other current liabilities
Other long-term assets
Other long-term liabilities
Net Designated Assets
Other current assets
Other current liabilities
Net Undesignated Assets
Total Derivative Assets
Total Derivative Liabilities
Net Derivative Asset
Fair Value
2010
2009
$ 19
(1)
11
—
$ 29
$ 26
(18)
$ 8
$ 56
(19)
$ 37
$ 4
(3)
10
(9)
$ 2
$ 12
(12)
$ —
$ 26
(24)
$ 2
Summary of Derivative Instruments Gains (Losses)
Derivative gains and 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 and losses.
Designated Derivative Instruments Gains (Losses)
The following table provides a summary of the gains and losses
on designated derivative instruments for the three years ended
December 31, 2010:
Derivatives in Fair Value
Hedging Relationships
Location of Gain
(Loss) Recognized
in Income
Interest rate contracts
Interest expense
Derivative Gain (Loss)
Recognized in Income
Hedged Item Gain (Loss)
Recognized in Income
2010
$99
2009
$(18)
2008
$206
2010
$(99)
2009
$18
2008
$(206)
Derivatives in Cash Flow
Hedging Relationships
Interest rate contracts
Foreign exchange contracts –
forwards
Total Cash Flow Hedges
Derivative Gain (Loss)
Recognized in OCI
(Effective Portion)
2010
$ —
46
$ 46
2009
$ —
(1)
$ (1)
Location of
Derivative Gain (Loss)
Reclassified from
AOCI into Income
(Effective Portion)
2008
$ (2)
Interest expense
4
Cost of sales
$ 2
Gain (Loss)
Reclassified from AOCI
to Income (Effective Portion)
2010
$ —
28
$ 28
2009
$ —
2
$ 2
2008
$ —
2
$ 2
No amount of ineffectiveness was recorded in the Consolidated
Statements of Income for these designated cash flow hedges and all
components of each derivative’s gain or loss was included in the
assessment of hedge effectiveness.
84
Xerox 2010 Annual Report
Notes to the Consolidated
Financial Statements
Dollars in millions, except per-share data and unless otherwise indicated.
Non-Designated Derivative Instruments Gains (Losses)
Non-designated derivative instruments are primarily instruments
used to hedge foreign currency-denominated assets and liabilities.
They are not designated as hedges because there is a natural offset for
the re-measurement of the underlying foreign currency-denominated
asset or liability.
The following table provides a summary of gains (losses) on
non-designated derivative instruments for the three years ended
December 31, 2010:
Derivatives NOT Designated as Hedging Instruments
Location of Derivative Gain (Loss)
Foreign exchange contracts
Other expense – Currency losses, net
2010
$113
2009
$49
2008
$(147)
During the three years ended December 31, 2010, we recorded
total Currency losses, net of $11, $26 and $34, respectively. Currency
losses, net includes the mark-to-market of the derivatives not designated
as hedging instruments and the related cost of those derivatives, as
well as the re-measurement of foreign currency-denominated assets
and liabilities.
Accumulated Other Comprehensive Loss (“AOCL”)
The following table provides a summary of the activity associated
with all of our designated cash flow hedges (interest rate and
foreign currency) reflected in AOCL for the three years ended
December 31, 2010:
Beginning cash flow hedges
balance, net of tax
Changes in fair value gain (loss)
Reclass to earnings
Ending Cash Flow Hedges
Balance, Net of Tax
2010
2009
2008
$ 1
31
(18)
$ —
(1)
2
$ —
1
(1)
$ 14
$ 1
$ —
Xerox 2010 Annual Report
85
Notes to the Consolidated
Financial Statements
Dollars in millions, except per-share data and unless otherwise indicated.
Note 14 – Fair Value of Financial Assets and Liabilities
The following table represents our assets and liabilities measured at fair
value on a recurring basis as of December 31, 2010 and 2009 and the
basis for that measurement:
Total
Quoted Prices in
Fair Value Active Markets for
Identical Asset
(Level 1)
Measurement
December 31, 2010
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Assets:
Foreign exchange contracts-forwards
Interest rate swaps
Deferred compensation investments in cash surrender life insurance
Deferred compensation investments in mutual funds
Total
Liabilities:
Foreign exchange contracts-forwards
Deferred compensation plan liabilities
Total
$ 45
11
70
22
$ 148
$ 19
98
$ 117
$ —
—
—
—
$ —
$ —
—
$ —
$ 45
11
70
22
$ 148
$ 19
98
$ 117
$ —
—
—
—
$ —
$ —
—
$ —
Total
Quoted Prices in
Fair Value Active Markets for
Identical Asset
(Level 1)
Measurement
December 31, 2009
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Assets:
Foreign exchange contracts – forwards
Interest rate swaps
Total
Liabilities:
Foreign exchange contracts – forwards
Interest rate swaps
Total
$ 16
10
$ 26
$ 15
9
$ 24
$ —
—
$ —
$ —
—
$ —
$ 16
10
$ 26
$ 15
9
$ 24
$ —
—
$ —
$ —
—
$ —
We utilized the income approach to measure fair value for our derivative
assets and liabilities. The income approach uses pricing models that rely
on market observable inputs such as yield curves, currency exchange
rates and forward prices, and therefore are classified as Level 2.
Fair value for our deferred compensation plan investments in Company-
owned life insurance is reflected at cash surrender value. Fair value for
our deferred compensation plan investments in mutual funds is based
on quoted market prices for actively traded investments similar to those
held by the plan. Fair value for deferred compensation plan liabilities
is based on the fair value of investments corresponding to employees’
investment selections, based on quoted prices for similar assets in
actively traded markets.
86
Xerox 2010 Annual Report
Summary of Other Financial Assets & Liabilities Not Measured
at Fair Value on a Recurring Basis
The estimated fair values of our other financial assets and liabilities not
measured at fair value on a recurring basis at December 31, 2010 and
2009 were as follows:
2010
2009
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
$ 1,211
$ 1,211
$ 3,799
$ 3,799
2,826
1,370
7,237
2,826
1,396
7,742
1,702
988
8,276
1,702
1,004
8,569
650
670
649
663
Cash and cash
equivalents
Accounts receivable,
net
Short-term debt
Long-term debt
Liability to subsidiary
trust issuing
preferred securities
Notes to the Consolidated
Financial Statements
Dollars in millions, except per-share data and unless otherwise indicated.
The fair value amounts for Cash and cash equivalents and Accounts
receivable, net approximate carrying amounts due to the short
maturities of these instruments. The fair value of Short- and Long-
term debt, as well as our Liability to subsidiary trust issuing preferred
securities, was estimated based on quoted market prices for publicly
traded securities or on the current rates offered to us for debt of similar
maturities. The difference between the fair value and the carrying value
represents the theoretical net premium or discount we would pay or
receive to retire all debt at such date.
Note 15 – Employee Benefit Plans
We sponsor numerous pension and other post-retirement benefit plans,
primarily retiree health, in our domestic and international operations.
December 31 is the measurement date for all of our other post-
retirement benefit plans.
Change in Benefit Obligation:
Benefit obligation, January 1
Service cost
Interest cost
Plan participants’ contributions
Plan amendments(3)
Actuarial loss (gain)
Acquisitions(2)
Currency exchange rate changes
Curtailments
Benefits paid/settlements
Benefit obligation, December 31
Change in Plan Assets:
Fair value of plan assets, January 1
Actual return on plan assets
Employer contribution
Plan participants’ contributions
Acquisitions(3)
Currency exchange rate changes
Benefits paid/settlements
Other
Fair value of plan assets, December 31
Net funded status at December 31(1)
Amounts recognized in the Consolidated Balance Sheets:
Other long-term assets
Accrued compensation and benefit costs
Pension and other benefit liabilities
Post-retirement medical benefits
Net Amounts Recognized
(1) Includes under-funded and non-funded plans.
(2) Primarily ACS’s acquired balances.
(3) Refer to the “Plan Amendment” section for additional information.
Pension Benefits
Retiree Health
2010
2009
2010
2009
$ 9,194
178
575
11
(19)
477
140
(154)
(1)
(670)
9,731
7,561
846
237
11
107
(144)
(669)
(9)
7,940
$ (1,791)
$
92
(44)
(1,839)
—
$ (1,791)
$ 8,495
173
508
9
4
209
1
373
—
(578)
9,194
6,923
720
122
9
—
349
(578)
16
7,561
$ (1,633)
$
155
(47)
(1,741)
—
$ (1,633)
$ 1,102
8
54
26
(86)
13
1
6
—
(118)
1,006
—
—
92
26
—
—
(118)
—
—
$ 1,002
7
60
36
1
124
—
15
—
(143)
1,102
—
—
107
36
—
—
(143)
—
—
$ (1,006)
$ (1,102)
$ —
(86)
—
(920)
$ (1,006)
$ —
(103)
—
(999)
$ (1,102)
Xerox 2010 Annual Report
87
Notes to the Consolidated
Financial Statements
Dollars in millions, except per-share data and unless otherwise indicated.
Benefit plans pre-tax amounts recognized in AOCL:
Pension Benefits
Retiree Health
2010
2009
2010
2009
Net actuarial loss
(gain)
Prior service (credit)
cost
Total Pre-tax Loss
(Gain)
$ 1,867
$ 1,834
$ 54
$
40
(167)
(169)
(200)
(144)
$ 1,700
$ 1,665
$ (146)
$ (104)
The Accumulated benefit obligation for all defined benefit pension plans
was $9,256 and $8,337 at December 31, 2010 and 2009, respectively.
Aggregate information for pension plans with an Accumulated benefit
obligation in excess of plan assets is presented below:
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
2010
$ 5,726
5,533
3,883
2009
$ 5,134
4,864
3,697
Our domestic retirement defined benefit plans provide employees
a benefit, depending on eligibility, at the greater of (i) the benefit
calculated under a highest average pay and years of service formula,
(ii) the benefit calculated under a formula that provides for the
accumulation of salary and interest credits during an employee’s work
life, or (iii) the individual account balance from the Company’s prior
defined contribution plan (Transitional Retirement Account or TRA).
Components of Net Periodic Benefit Cost:
Service cost
Interest cost(1)
Expected return on plan assets(2)
Recognized net actuarial loss
Amortization of prior service credit
Recognized settlement loss
Defined Benefit Plans
Defined contribution plans
Total Net Periodic Benefit Costs
Other Changes in Plan Assets and Benefit
Obligations Recognized in Other
Comprehensive Income:
Net actuarial loss (gain)(3)
Prior service cost (credit)(4)
Amortization of net actuarial (loss) gain
Amortization of prior service (cost) credit
Total Recognized in Other
Comprehensive Income
Total Recognized in Net Periodic Benefit Cost
and Other Comprehensive Income
Pension Benefits
Retiree Health
2010
2009
2008
2010
2009
2008
$ 178
575
(570)
71
(22)
72
304
51
355
$ 198
(19)
(143)
22
$ 173
508
(523)
25
(21)
70
232
38
270
$
8
—
(95)
21
$ 209
(5)
(80)
36
(20)
34
174
80
254
$ 1,062
1
(70)
20
$ 8
54
—
—
(30)
—
32
—
32
$ 13
(86)
—
30
$ 7
60
—
—
(41)
—
26
—
26
$ 126
1
—
41
$ 14
84
—
—
(21)
—
77
—
77
$ (244)
(219)
—
21
58
(66)
1,013
(43)
168
(442)
$ 413
$ 204
$ 1,267
$ (11)
$ 194
$ (365)
(1) Interest cost includes interest expense on non-TRA obligations of $381, $390 and $408 and interest expense (income) directly allocated to TRA participant accounts of $194,
$118 and $(413) for the years ended December 31, 2010, 2009 and 2008, respectively.
(2) Expected return on plan assets includes expected investment income on non-TRA assets of $376, $405 and $493 and actual investment income (expense) on TRA assets of
$194, $118 and $(413) for the years ended December 31, 2010, 2009 and 2008, respectively.
(3) Includes adjustments as a result of the plan amendments as well as the actual valuation results based on January 1, 2010 plan census data for the U.S. and Canadian defined
benefit plans and the U.S. retiree medical plan. Refer to the “Plan Amendment” section for additional information.
(4) Refer to “Plan Amendments” for additional information.
88
Xerox 2010 Annual Report
Notes to the Consolidated
Financial Statements
Dollars in millions, except per-share data and unless otherwise indicated.
The following table provides a summary of the components of the Net
change in benefit plans included within Other comprehensive income as
reported in the Consolidated Statement of Shareholders’ Equity.
(Expense)/Benefit
2010
2009
2008
Other changes in plan assets and
benefit obligations
Income tax
Fuji Xerox changes in defined
benefit plans(1)
Currency, net(2)
Other, net
Net Change in Benefit Plans
$ (15)
(12)
$ (102)
61
$ (571)
183
28
22
—
$ 23
(36)
(90)
(2)
(75)
175
2
$ (169)
$ (286)
(1) Represents our share of Fuji Xerox’s benefit plan changes.
(2) Represents currency impact on cumulative amount of benefit plan net actuarial losses
and prior service credits included in AOCL.
The net actuarial loss and prior service credit for the defined benefit
pension plans that will be amortized from Accumulated other
comprehensive loss into net periodic benefit cost over the next fiscal year
are $71 and $(24), respectively. The net actuarial loss and prior service
credit for the retiree health benefit plans that will be amortized from
Accumulated other comprehensive loss into net periodic benefit cost
over the next fiscal year are zero and $(41), respectively.
Pension plan assets consist of both defined benefit plan assets and
assets legally restricted to the TRA accounts. The combined investment
results for these plans, along with the results for our other defined benefit
plans, are shown above in the “actual return on plan assets” caption. To
the extent that investment results relate to TRA, such results are charged
directly to these accounts as a component of interest cost.
Plan Amendments
In 2010, we amended our domestic retiree health benefit plan to
eliminate the use of the Retiree Drug Subsidy that the Company receives
from Medicare as an offset to retiree contributions. This amendment
is effective January 1, 2011. The Company will instead use this subsidy
to reduce its retiree healthcare costs. The amendment resulted in a
net decrease of $55 to the retiree medical benefit obligation and a
corresponding $34 after-tax increase to equity. This amendment will
reduce 2011 expenses by approximately $13.
In 2010, as a result of a renegotiation of the contract with our
largest union, we amended our union pension plan for this population
to freeze the final average pay formula of the pension plan effective
January 1, 2013 and our union retiree health benefits plan to eliminate
a portion of the subsidy currently paid to current and future Medicare-
eligible retirees effective January 1, 2011. These amendments are
generally consistent with amendments previously made to our salaried
employee retirement plans.
In 2009, the U.K. Final Salary Pension Plan was amended to close the
plan to future accrual effective January 1, 2014. Benefits earned up to
January 1, 2014 will not be affected; therefore, the amendment does
not result in a material change to the projected benefit obligation
at the re-measurement date, December 31, 2009. The amendment
results in substantially all participants becoming inactive; therefore, the
amortization period for actuarial gains and losses changes from the
average remaining service period of active members (approximately
10 years) to the average remaining life expectancy of all members
(approximately 27 years). As of December 31, 2010, the accumulated
actuarial losses for our U.K. plan amounted to $707.
In 2008, we amended our domestic retiree health benefit plan to
eliminate the subsidy currently paid to current and future Medicare-
eligible retirees effective January 1, 2010. The amendment resulted in
a net decrease of approximately $225 in the benefit obligation and a
corresponding after-tax increase to equity.
Xerox 2010 Annual Report
89
Notes to the Consolidated
Financial Statements
Dollars in millions, except per-share data and unless otherwise indicated.
Plan Assets
Current Allocation
As of the 2010 and 2009 measurement dates, the global pension plan
assets were $7.9 billion and $7.6 billion, respectively. These assets were
invested among several asset classes. None of the investments includes
debt or equity securities of Xerox Corporation.
The following table presents the defined benefit plans assets measured
at fair value at December 31, 2010 and the basis for that measurement:
Asset Class
Cash and Cash Equivalents
Equity Securities:
U.S. Large Cap
U.S. Mid Cap
U.S. Small Cap
International Developed
Emerging Markets
Global Equity
Total Equity Securities
Debt Securities:
U.S. Treasury Securities
Debt Security Issued by Government Agency
Corporate Bonds
Asset-Backed Securities
Total Debt Securities
Common/Collective Trust
Derivatives:
Interest Rate Contracts
Foreign Exchange Contracts
Equity Contracts
Credit Contracts
Other Contracts
Total Derivatives
Hedge Funds
Real Estate
Private Equity/Venture Capital
Guaranteed Insurance Contracts
Other
Total Defined Benefit Plans Assets(1)
Valuation Based on:
Quoted Prices in
Active Markets for
Identical Asset
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Fair Value
December 31,
2010
% of Total
$ 640
$ —
$ —
$ 640
8%
507
84
60
1,513
324
8
2,496
4
75
167
2
248
4
—
5
—
—
66
71
—
103
—
—
7
$ 3,569
54
—
62
514
—
25
655
209
1,011
1,412
15
2,647
69
123
(12)
53
—
3
167
2
73
—
—
49
$ 3,662
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
4
275
308
96
(1)
$ 682
561
84
122
2,027
324
33
3,151
213
1,086
1,579
17
2,895
73
123
(7)
53
—
69
238
6
451
308
96
55
$ 7,913
7%
1%
2%
26%
4%
—%
40%
3%
14%
20%
—%
37%
1%
2%
—%
—%
—%
1%
3%
—%
6%
4%
1%
—%
100%
(1) Total fair value assets exclude $27 of other net non-financial assets (liabilities) such as due to/from broker, interest receivables and accrued expenses.
90
Xerox 2010 Annual Report
Notes to the Consolidated
Financial Statements
Dollars in millions, except per-share data and unless otherwise indicated.
The following table presents the defined benefit plans assets measured
at fair value at December 31, 2009 and the basis for that measurement:
Asset Class
Cash and Cash Equivalents
Equity Securities:
U.S. Large Cap
U.S. Mid Cap
U.S. Small Cap
International Developed
Emerging Markets
Global Equity
Total Equity Securities
Debt Securities:
U.S. Treasury Securities
Debt Security Issued by Government Agency
Corporate Bonds
Asset-Backed Securities
Total Debt Securities
Common/Collective Trust
Derivatives:
Interest Rate Contracts
Foreign Exchange Contracts
Equity Contracts
Credit Contracts
Other Contracts
Total Derivatives
Hedge Funds
Real Estate
Private Equity/Venture Capital
Guaranteed Insurance Contracts
Other
Total Defined Benefit Plans Assets(1)
Valuation Based on:
Quoted Prices in
Active Markets for
Identical Asset
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Fair Value
December 31,
2009
% of Total
$ 748
$ —
$ —
$ 748
10%
768
31
90
1,292
299
12
2,492
4
114
145
3
266
2
—
15
—
—
—
15
—
62
—
—
8
$ 3,593
46
—
70
493
—
—
609
185
798
1,570
23
2,576
26
52
(77)
(24)
(2)
(6)
(57)
—
119
—
—
9
$ 3,282
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
4
237
286
130
—
$ 657
814
31
160
1,785
299
12
3,101
189
912
1,715
26
2,842
11%
—%
2%
24%
4%
—%
41%
3%
12%
23%
—%
38%
28
—%
52
(62)
(24)
(2)
(6)
(42)
4
418
286
130
17
—%
(1)%
—%
—%
—%
(1)%
—%
6%
4%
2%
—%
$ 7,532
100%
(1) Total fair value assets exclude $29 of other net non-financial assets (liabilities) such as due to/from broker, interest receivables and accrued expenses.
Xerox 2010 Annual Report
91
Notes to the Consolidated
Financial Statements
Dollars in millions, except per-share data and unless otherwise indicated.
The following table represents a roll-forward of the defined benefit plans
assets measured using significant unobservable inputs (Level 3 assets):
December 31, 2008
Net payments, purchases and sales
Net transfers in (out)
Realized gains (losses)
Unrealized gains (losses)
Currency translation
December 31, 2009
Net payments, purchases and sales
Net transfers in (out)
Realized gains (losses)
Unrealized gains (losses)
Currency translation
Other
December 31, 2010
Fair Value Measurement Using Significant Unobservable Inputs (Level 3)
Hedge Funds
Real Estate
Private
Equity/Venture
Capital
Guaranteed
Insurance
Contracts
$ 3
1
—
—
—
—
4
—
—
—
—
—
—
$ 4
$ 279
5
—
—
(66)
19
237
7
—
5
22
(6)
10
$ 275
$ 331
16
—
8
(69)
—
286
(8)
—
28
—
—
1
$ 307
$ 104
1
16
3
2
4
130
(12)
1
(2)
(2)
(9)
(9)
$ 97
Other
$ —
—
—
(1)
1
—
—
—
—
—
—
—
(1)
$ (1)
Total
$ 717
23
16
10
(132)
23
657
(13)
1
31
20
(15)
1
$ 682
Our pension plan assets and benefit obligations at December 31, 2010
were as follows:
(in billions)
U.S.
U.K.
Canada
Other
Total
Fair Value of
Pension Plan
Assets
Pension
Benefit
Obligations
$ 3.2
2.9
0.6
1.2
$ 7.9
$ 4.4
2.9
0.8
1.6
$ 9.7
Funded
Status
Status
$ (1.2)
—
(0.2)
(0.4)
$ (1.8)
Investment Strategy
The target asset allocations for our worldwide plans for 2010 and 2009
were:
Equity investments
Fixed income investments
Real estate
Private equity
Other
2010
2009
42%
45%
7%
4%
2%
41%
45%
7%
4%
3%
Total Investment Strategy
100%
100%
We employ a total return investment approach whereby a mix of
equities and fixed income investments are used to maximize the long-
term return of plan assets for a prudent level of risk. The intent of this
strategy is to minimize plan expenses by exceeding the interest growth
in long-term plan liabilities. Risk tolerance is established through careful
consideration of plan liabilities, plan funded status and corporate
financial condition. This consideration involves the use of long-term
measures that address both return and risk. The investment portfolio
contains a diversified blend of equity and fixed income investments.
Furthermore, equity investments are diversified across U.S. and non-
U.S. stocks, as well as growth, value and small and large capitalizations.
Other assets such as real estate, private equity and hedge funds are
used to improve portfolio diversification. Derivatives may be used to
hedge market exposure in an efficient and timely manner; however,
derivatives may not be used to leverage the portfolio beyond the market
value of the underlying investments. Investment risks and returns are
measured and monitored on an ongoing basis through annual liability
measurements and quarterly investment portfolio reviews.
Expected Long-term Rate of Return
We employ a “building block” approach in determining the long-term
rate of return for plan assets. Historical markets are studied and long-
term relationships between equities and fixed income are assessed.
Current market factors such as inflation and interest rates are evaluated
before long-term capital market assumptions are determined. The long-
term portfolio return is established giving consideration to investment
diversification and rebalancing. Peer data and historical returns are
reviewed periodically to assess reasonableness and appropriateness.
92
Xerox 2010 Annual Report
Notes to the Consolidated
Financial Statements
Dollars in millions, except per-share data and unless otherwise indicated.
Contributions
2010 contributions for our defined benefit pension plans were $237 and
$92 for our retiree health plans. In 2011 we expect, based on current
actuarial calculations, to make contributions of approximately $500 to
our defined benefit pension plans and approximately $90 to our retiree
health benefit plans.
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid during the following years:
2011
2012
2013
2014
2015
Years 2016–2020
Pension
Benefits
$ 749
647
644
653
668
3,473
Retiree
Health
$
87
86
85
85
84
396
Assumptions
Weighted-average assumptions used to determine benefit obligations
at the plan measurement dates:
Discount rate
Rate of compensation increase
2010
5.2%
3.1%
Pension Benefits
2009
5.7%
3.6%
2008
6.3%
3.9%
Retiree Health
2010
2009
4.9%
—(1) —
5.4%
(1) —
2008
6.3%
(1)
(1) Rate of compensation increase is not applicable to the retiree health benefits, as compensation levels do not impact earned benefits.
Weighted-average assumptions used to determine net periodic benefit
cost for years ended December 31:
Pension Benefits
Retiree Health
Discount rate
Expected return
on plan assets
Rate of compensation
increase
2011
5.2%
7.2%
3.1%
2010
5.7%
7.3%
3.6%
2009
6.3%
7.4%
3.9%
2008
5.9%
7.6%
4.1%
2011
4.9%
2010
5.4%
2009
6.3%
2008
6.2%
—(1) —
—(2) —
(1) —
(2) —
(1) —
(2) —
(1)
(2)
(1) Expected return on plan assets is not applicable to retiree health benefits, as these plans are not funded.
(2) Rate of compensation increase is not applicable to retiree health benefits, as compensation levels do not impact earned benefits.
Assumed healthcare cost trend rates at December 31,
Healthcare cost trend rate assumed for next year
Rate to which the cost trend rate is assumed
to decline (the ultimate trend rate)
Year that the rate reaches the ultimate trend rate
2010
2009
9.0%
9.8%
4.9%
4.9%
2017
2017
Assumed healthcare cost trend rates have a significant effect on
the amounts reported for the healthcare plans. A 1-percentage-
point change in assumed health care cost trend rates would have the
following effects:
1% increase
1% decrease
Effect on total service and interest
cost components
Effect on post-retirement benefit obligation
$ 6
82
$ (5)
(68)
Xerox 2010 Annual Report
93
Notes to the Consolidated
Financial Statements
Dollars in millions, except per-share data and unless otherwise indicated.
Note 16 – Income and Other Taxes
Income (loss) before income taxes for the three years ended December
31, 2010 was as follows:
Domestic income (loss)
Foreign income
Income (Loss) Before
Income Taxes
2010
$ 433
382
2009
$ 45
582
2008
$ (622)
543
$ 815
$ 627
$
(79)
Provisions (benefits) for income taxes for the three years ended
December 31, 2010 was as follows:
Federal income taxes
Current
Deferred
Foreign income taxes
Current
Deferred
State income taxes
Current
Deferred
Total Provision (Benefits)
2010
2009
2008
$ 153
(17)
$ (50)
109
$
(26)
(285)
59
8
46
7
$ 256
84
11
(2)
—
$ 152
118
4
1
(43)
$ (231)
A reconciliation of the U.S. federal statutory income tax rate to the
consolidated effective income tax rate for the three years ended
December 31, 2010 was as follows:
U.S. federal statutory income
tax rate
Nondeductible expenses
Effect of tax law changes
Change in valuation allowance
for deferred tax assets
State taxes, net of federal benefit
Audit and other tax return
adjustments
Tax-exempt income
Other foreign, including earnings
taxed at different rates
Other
2010
2009
2008
35.0%
6.3
(0.2)
35.0%
3.2
—
35.0%
(19.5)
16.1
2.6
2.0
(4.2)
(0.4)
(8.1)
(1.6)
(1.7)
(0.2)
(8.7)
(0.5)
(3.7)
0.8
(21.0)
36.7
84.4
8.5
148.9
3.3
Effective Income Tax Rate
31.4%
24.2%
292.4%
94
Xerox 2010 Annual Report
On a consolidated basis, we paid a total of $49, $78 and $194 in income
taxes to federal, foreign and state jurisdictions during the three years
ended December 31, 2010, 2009 and 2008, respectively.
Total income tax expense (benefit) for the three years ended December
31, 2010 was allocated as follows:
Pre-tax income
Common shareholders’ equity:
Changes in defined benefit plans
Stock option and incentive
plans, net
Translation adjustments
and other
Total Income Tax Expense
(Benefit)
2010
$ 256
2009
$ 152
2008
$ (231)
12
(61)
(183)
(6)
11
21
(13)
(2)
10
$ 273
$ 99
$ (406)
Unrecognized Tax Benefits and Audit Resolutions
Due to the extensive geographical scope of our operations, we are
subject to ongoing tax examinations in numerous jurisdictions.
Accordingly, we may record incremental tax expense based upon
the more-likely-than-not outcomes of any uncertain tax positions.
In addition, when applicable, we adjust the previously recorded tax
expense to reflect examination results when the position is effectively
settled. Our ongoing assessments of the more-likely-than-not outcomes
of the examinations and related tax positions require judgment and
can increase or decrease our effective tax rate, as well as impact our
operating results. The specific timing of when the resolution of each
tax position will be reached is uncertain. As of December 31, 2010, we
do not believe that there are any positions for which it is reasonably
possible that the total amount of unrecognized tax benefits will
significantly increase or decrease within the next 12 months.
A reconciliation of the beginning and ending amount of unrecognized
tax benefits is as follows:
Balance at January 1
Additions from acquisitions
Additions related to current year
Additions related to prior
years positions
Reductions related to prior
years positions
Settlements with taxing
authorities(1)
Reductions related to lapse of
statute of limitations
Currency
Balance at December 31
2010
$ 148
46
38
24
(16)
(19)
(35)
—
$ 186
2009
$ 170
—
6
2008
$ 303
—
12
27
(33)
(7)
(29)
14
13
(65)
(28)
(45)
(20)
$ 148
$ 170
(1) Majority of settlements did not result in the utilization of cash.
Notes to the Consolidated
Financial Statements
Dollars in millions, except per-share data and unless otherwise indicated.
Included in the balances at December 31, 2010, 2009 and 2008 are
$39, $67 and $67, respectively, of tax positions that are highly certain of
realizability but for which there is uncertainty about the timing or may
be reduced through an indirect benefit from other taxing jurisdictions.
Because of the impact of deferred tax accounting, other than for the
possible incurrence of interest and penalties, the disallowance of these
positions would not affect the annual effective tax rate.
We have filed claims in certain jurisdictions to assert our position should
the law be clarified by judicial means. At this point in time, we believe
it is unlikely that we will receive any benefit from these types of claims
but we will continue to analyze as the issues develop. Accordingly, we
have not included any benefit for these types of claims in the amount of
unrecognized tax benefits.
We recognized interest and penalties accrued on unrecognized tax
benefits, as well as interest received from favorable settlements within
income tax expense. We had $31, $13 and $22 accrued for the payment
of interest and penalties associated with unrecognized tax benefits at
December 31, 2010, 2009 and 2008, respectively.
We file income tax returns in the U.S. federal jurisdiction and various
foreign jurisdictions. In the U.S., with the exception of ACS, we are no
longer subject to U.S. federal income tax examinations for years before
2007. ACS is no longer subject to such examinations for years before
2004. With respect to our major foreign jurisdictions, we are no longer
subject to tax examinations by tax authorities for years before 2000.
Deferred Income Taxes
In substantially all instances, deferred income taxes have not been
provided on the undistributed earnings of foreign subsidiaries and other
foreign investments carried at equity. The amount of such earnings at
December 31, 2010 was approximately $7 billion. These earnings have
been indefinitely reinvested and we currently do not plan to initiate any
action that would precipitate the payment of income taxes thereon. It is
not practicable to estimate the amount of additional tax that might be
payable on the foreign earnings. Our 2001 sale of half of our ownership
interest in Fuji Xerox resulted in our investment no longer qualifying as a
foreign corporate joint venture. Accordingly, deferred taxes are required
to be provided on the undistributed earnings of Fuji Xerox, arising
subsequent to such date, as we no longer have the ability to ensure
indefinite reinvestment.
The tax effects of temporary differences that give rise to significant
portions of the deferred taxes at December 31, 2010 and 2009 were
as follows:
Deferred Tax Assets:
Research and development
Post-retirement medical benefits
Depreciation
Net operating losses
Other operating reserves
Tax credit carryforwards
Deferred compensation
Allowance for doubtful accounts
Restructuring reserves
Pension
Other
Subtotal
Valuation allowance
Total
Deferred Tax Liabilities:
Unearned income and installment sales
Intangibles and goodwill
Other
Total
Total Deferred Taxes, Net
2010
2009
$ 855
373
200
634
172
409
340
97
78
437
156
$ 752
421
246
576
261
525
233
93
16
403
132
3,751
(735)
3,658
(672)
$ 3,016
$ 2,986
$ (1,025)
(1,207)
(54)
$ (996)
(154)
(38)
$ (2,286)
$ (1,188)
$ 730
$ 1,798
The above amounts are classified as current or long-term in the
Consolidated Balance Sheets in accordance with the asset or liability to
which they relate or, when applicable, based on the expected timing of
the reversal. Current deferred tax assets at December 31, 2010 and 2009
amounted to $298 and $290, respectively.
The deferred tax assets for the respective periods were assessed for
recoverability and, where applicable, a valuation allowance was recorded
to reduce the total deferred tax asset to an amount that will, more likely
than not, be realized in the future. The net change in the total valuation
allowance for the years ended December 31, 2010 and 2009 was an
increase of $63 and a increase of $44, respectively. The valuation
allowance relates primarily to certain net operating loss carryforwards,
tax credit carryforwards and deductible temporary differences for which
we have concluded it is more likely than not that these items will not be
realized in the ordinary course of operations.
Although realization is not assured, we have concluded that it is more
likely than not that the deferred tax assets, for which a valuation
allowance was determined to be unnecessary, will be realized in the
ordinary course of operations based on the available positive and
negative evidence, including scheduling of deferred tax liabilities and
projected income from operating activities. The amount of the net
deferred tax assets considered realizable, however, could be reduced in
the near term if actual future income or income tax rates are lower than
estimated, or if there are differences in the timing or amount of future
reversals of existing taxable or deductible temporary differences.
Xerox 2010 Annual Report
95
Notes to the Consolidated
Financial Statements
Dollars in millions, except per-share data and unless otherwise indicated.
At December 31, 2010, we had tax credit carryforwards of $409
available to offset future income taxes, of which $109 are available
to carry forward indefinitely, while the remaining $300 will expire
2011 through 2027 if not utilized. We also had net operating loss
carryforwards for income tax purposes of $1,236 that will expire 2011
through 2029, if not utilized, and $2,478 billion available to offset
future taxable income indefinitely.
Note 17 – Contingencies
Brazil Tax and Labor Contingencies
Our Brazilian operations are involved in various litigation matters
and have received or been the subject of numerous governmental
assessments related to indirect and other taxes, as well as disputes
associated with former employees and contract labor. The tax matters,
which comprise a significant portion of the total contingencies,
principally relate to claims for taxes on the internal transfer of inventory,
municipal service taxes on rentals and gross revenue taxes. We are
disputing these tax matters and intend to vigorously defend our
positions. Based on the opinion of legal counsel and current reserves
for those matters deemed probable of loss, we do not believe that the
ultimate resolution of these matters will materially impact our results
of operations, financial position or cash flows. The labor matters
principally relate to claims made by former employees and contract
labor for the equivalent payment of all social security and other related
labor benefits, as well as consequential tax claims, as if they were
regular employees. As of December 31, 2010, the total amounts related
to the unreserved portion of the tax and labor contingencies, inclusive
of any related interest, amounted to approximately $1,274, with the
increase from December 31, 2009 balance of approximately $1,225
primarily related to currency and current year interest indexation
partially offset by matters that have been closed. With respect to the
unreserved balance of $1,274, the majority has been assessed by
management as being remote as to the likelihood of ultimately resulting
in a loss to the Company. In connection with the above proceedings,
customary local regulations may require us to make escrow cash deposits
or post other security of up to half of the total amount in dispute. As of
December 31, 2010 we had $276 of escrow cash deposits for matters
we are disputing and there are liens on certain Brazilian assets with a
net book value of $19 and additional letters of credit of approximately
$160. Generally, any escrowed amounts would be refundable and any
liens would be removed to the extent the matters are resolved in our
favor. We routinely assess all these matters as to probability of ultimately
incurring a liability against our Brazilian operations and record our best
estimate of the ultimate loss in situations where we assess the likelihood
of an ultimate loss as probable.
96
Xerox 2010 Annual Report
Legal Matters
As more fully discussed below, we are involved in a variety of claims,
lawsuits, investigations and proceedings concerning securities law,
intellectual property law, environmental law, employment law and the
Employee Retirement Income Security Act (“ERISA”). We determine
whether an estimated loss from a contingency should be accrued by
assessing whether a loss is deemed probable and can be reasonably
estimated. We assess our potential liability by analyzing our litigation
and regulatory matters using available information. We develop our
views on estimated losses in consultation with outside counsel handling
our defense in these matters, which involves an analysis of potential
results, assuming a combination of litigation and settlement strategies.
Should developments in any of these matters cause a change in our
determination as to an unfavorable outcome and result in the need to
recognize a material accrual, or should any of these matters result in a
final adverse judgment or be settled for significant amounts, they could
have a material adverse effect on our results of operations, cash flows
and financial position in the period or periods in which such change in
determination, judgment or settlement occurs.
Litigation Against the Company
In re Xerox Corporation Securities Litigation: A consolidated securities
law action (consisting of 17 cases) is pending in the United States
District Court for the District of Connecticut. Defendants are the
Company, Barry Romeril, Paul Allaire and G. Richard Thoman. The
consolidated action is a class action on behalf of all persons and entities
who purchased Xerox Corporation common stock during the period
October 22, 1998 through October 7, 1999 inclusive (“Class Period”) and
who suffered a loss as a result of misrepresentations or omissions by
Defendants as alleged by Plaintiffs (the “Class”). The Class alleges that
in violation of Section 10(b) and/or 20(a) of the Securities Exchange Act
of 1934, as amended (“1934 Act”), and SEC Rule 10b-5 thereunder, each
of the defendants is liable as a participant in a fraudulent scheme and
course of business that operated as a fraud or deceit on purchasers of
the Company’s common stock during the Class Period by disseminating
materially false and misleading statements and/or concealing material
facts relating to the defendants’ alleged failure to disclose the material
negative impact that the April 1998 restructuring had on the Company’s
operations and revenues. The complaint further alleges that the alleged
scheme: (i) deceived the investing public regarding the economic
capabilities, sales proficiencies, growth, operations and the intrinsic
value of the Company’s common stock; (ii) allowed several corporate
insiders, such as the named individual defendants, to sell shares of
privately held common stock of the Company while in possession of
materially adverse, non-public information; and (iii) caused the individual
plaintiffs and the other members of the purported class to purchase
common stock of the Company at inflated prices. The complaint seeks
unspecified compensatory damages in favor of the plaintiffs and the
other members of the purported class against all defendants, jointly and
severally, for all damages sustained as a result of defendants’ alleged
wrongdoing, including interest thereon, together with reasonable costs
and expenses incurred in the action, including counsel fees and expert
fees. In 2001, the Court denied the defendants’ motion for dismissal of
Notes to the Consolidated
Financial Statements
Dollars in millions, except per-share data and unless otherwise indicated.
the complaint. The plaintiffs’ motion for class certification was denied
by the Court in 2006, without prejudice to refiling. In February 2007, the
Court granted the motion of the International Brotherhood of Electrical
Workers Welfare Fund of Local Union No. 164, Robert W. Roten, Robert
Agius (“Agius”) and Georgia Stanley to appoint them as additional lead
plaintiffs. In July 2007, the Court denied plaintiffs’ renewed motion for
class certification, without prejudice to renewal after the Court holds
a pre-filing conference to identify factual disputes the Court will be
required to resolve in ruling on the motion. After that conference and
Agius’s withdrawal as lead plaintiff and proposed class representative,
in February 2008 plaintiffs filed a second renewed motion for class
certification. In April 2008, defendants filed their response and motion
to disqualify Milberg LLP as a lead counsel. On September 30, 2008, the
Court entered an order certifying the class and denying the appointment
of Milberg LLP as class counsel. Subsequently, on April 9, 2009, the Court
denied defendants’ motion to disqualify Milberg LLP. On November 6,
2008, the defendants filed a motion for summary judgment. Briefing
with respect to the motion is complete. The Court has not yet rendered
a decision. The parties also filed motions to exclude the testimony of
certain expert witnesses. On April 22, 2009, the Court denied plaintiffs’
motions to exclude the testimony of two of defendants’ expert
witnesses. On September 30, 2010, the Court denied plaintiffs’ motion
to exclude the testimony of another of defendants’ expert witnesses.
The Court also granted defendants’ motion to exclude the testimony
of one of plaintiffs’ expert witnesses, and granted in part and denied
in part defendants’ motion to exclude the testimony of plaintiffs’ two
remaining expert witnesses. The individual defendants and we deny any
wrongdoing and are vigorously defending the action. In the course of
litigation, we periodically engage in discussions with plaintiffs’ counsel
for possible resolution of this matter. Should developments cause a
change in our determination as to an unfavorable outcome, or result
in a final adverse judgment or a settlement for a significant amount,
there could be a material adverse effect on our results of operations,
cash flows and financial position in the period in which such change in
determination, judgment or settlement occurs.
Merger Agreement Between Xerox and Affiliated Computer Services,
Inc.: In late September and early October 2009, nine purported class
action complaints were filed by ACS shareholders challenging ACS’s
proposed merger with Xerox. Two actions were filed in the Delaware
Court of Chancery which subsequently were consolidated into
one action. Seven actions were filed in state courts in Texas, which
subsequently were consolidated into one action in the Dallas County
Court at Law No. 3. The operative complaints in the Delaware and Texas
actions named as defendants ACS and/or the members of ACS’s board
of directors (the “Individual Defendants”) and Xerox Corporation and/or
Boulder Acquisition Corp., a wholly owned subsidiary of Xerox (“Boulder”)
(ACS, the Individual Defendants, Xerox Corporation and Boulder,
collectively, the “Xerox Defendants”). A class of ACS shareholders was
certified in the Delaware action. Pursuant to a stipulation entered into
by all parties in the Delaware and Texas actions prosecution of the Texas
action was stayed and further prosecution of the Delaware and Texas
actions would proceed in the Delaware action.
The plaintiffs in the Delaware action alleged, among other things,
that (i) the Individual Defendants breached their fiduciary duties to
ACS and its shareholders by authorizing the sale of ACS to Xerox for
what plaintiffs deemed was inadequate consideration and pursuant
to inadequate process, and the Xerox Defendants aided and abetted
those alleged breaches; (ii) the Individual Defendants breached their
fiduciary duties to ACS and its shareholders by agreeing to the provisions
of the merger agreement relating to the consideration to be paid to the
holders of Class B shares which the Delaware plaintiffs alleged violated
the ACS certificate of incorporation and was, therefore, void, and the
Xerox Defendants aided and abetted those alleged breaches; and (iii)
the Individual Defendants breached their fiduciary duties by failing to
disclose material facts in the October 23, 2009 Form S-4 filed with the
SEC in connection with the merger. The plaintiffs sought, among other
things, to enjoin the defendants from consummating the merger on the
agreed-upon terms, and unspecified compensatory damages, together
with the costs and disbursements of the action.
On May 19, 2010, the parties in the Delaware and Texas Actions entered
into a Stipulation and Agreement of Compromise and Settlement
(“Settlement”) resolving all claims by ACS shareholders arising out of
Xerox’s acquisition of ACS, including all claims in the Delaware and
Texas Actions. The defendants in the Delaware and Texas Actions did not
admit to any wrongdoing as part of the Settlement, which provided for
an aggregate payment of $69 on behalf of all defendants, including a
payment of approximately $36 by Xerox, net of insurance proceeds. The
Delaware court approved the Settlement at a hearing held on August
24, 2010. In light of the Delaware court’s approval of the Settlement, on
October 13, 2010, the Texas court signed an order dismissing the Texas
action.
Other Contingencies
Guarantees, Indemnifications and Warranty Liabilities
Guarantees and claims arise during the ordinary course of business
from relationships with suppliers, customers and nonconsolidated
affiliates when the Company undertakes an obligation to guarantee
the performance of others if specified triggering events occur.
Nonperformance under a contract could trigger an obligation of the
Company. These potential claims include actions based upon alleged
exposures to products, real estate, intellectual property such as patents,
environmental matters, and other indemnifications. The ultimate
effect on future financial results is not subject to reasonable estimation
because considerable uncertainty exists as to the final outcome of these
claims. However, while the ultimate liabilities resulting from such claims
may be significant to results of operations in the period recognized,
management does not anticipate they will have a material adverse
effect on the Company’s consolidated financial position or liquidity. As
of December 31, 2010, we have accrued our estimate of liability incurred
under our indemnification arrangements and guarantees.
Xerox 2010 Annual Report
97
Notes to the Consolidated
Financial Statements
Dollars in millions, except per-share data and unless otherwise indicated.
Indemnifications Provided as Part of Contracts and Agreements
We are a party to the following types of agreements pursuant to
which we may be obligated to indemnify the other party with respect
to certain matters:
•
•
•
•
Contracts that we entered into for the sale or purchase of businesses or
real estate assets, under which we customarily agree to hold the other
party harmless against losses arising from a breach of representations
and covenants, including obligations to pay rent. Typically, these relate
to such matters as adequate title to assets sold, intellectual property
rights, specified environmental matters and certain income taxes
arising prior to the date of acquisition.
Guarantees on behalf of our subsidiaries with respect to real estate
leases. These lease guarantees may remain in effect subsequent to
the sale of the subsidiary.
Agreements to indemnify various service providers, trustees and bank
agents from any third-party claims related to their performance on our
behalf, with the exception of claims that result from third party’s own
willful misconduct or gross negligence.
Guarantees of our performance in certain sales and services contracts
to our customers and indirectly the performance of third parties
with whom we have subcontracted for their services. This includes
indemnifications to customers for losses that may be sustained as a
result of the use of our equipment at a customer’s location.
In each of these circumstances, our payment is conditioned on the
other party making a claim pursuant to the procedures specified in the
particular contract, which procedures typically allow us to challenge
the other party’s claims. In the case of lease guarantees, we may contest
the liabilities asserted under the lease. Further, our obligations under
these agreements and guarantees may be limited in terms of time
and/or amount, and in some instances, we may have recourse against
third parties for certain payments we made.
Patent Indemnifications
In most sales transactions to resellers of our products, we indemnify
against possible claims of patent infringement caused by our products
or solutions. In addition, we indemnify certain software providers
against claims that may arise as a result of our use or our subsidiaries’,
customers’ or resellers’ use of their software in our products and
solutions. These indemnifications usually do not include limits on the
claims, provided the claim is made pursuant to the procedures required
in the sales contract.
98
Xerox 2010 Annual Report
Indemnification of Officers and Directors
Our corporate by-laws require that, except to the extent expressly
prohibited by law, we must indemnify Xerox Corporation’s officers
and directors against judgments, fines, penalties and amounts
paid in settlement, including legal fees and all appeals, incurred in
connection with civil or criminal action or proceedings, as it relates
to their services to Xerox Corporation and our subsidiaries. Although
the by-laws provide no limit on the amount of indemnification, we
may have recourse against our insurance carriers for certain payments
made by us. However, certain indemnification payments may not
be covered under our directors’ and officers’ insurance coverage. In
addition, we indemnify certain fiduciaries of our employee benefit plans
for liabilities incurred in their service as fiduciary whether or not they
are officers of the Company.
Product Warranty Liabilities
In connection with our normal sales of equipment, including those
under sales-type leases, we generally do not issue product warranties.
Our arrangements typically involve a separate full service maintenance
agreement with the customer. The agreements generally extend over a
period equivalent to the lease term or the expected useful life under a
cash sale. The service agreements involve the payment of fees in return
for our performance of repairs and maintenance. As a consequence,
we do not have any significant product warranty obligations including
any obligations under customer satisfaction programs. In a few
circumstances, particularly in certain cash sales, we may issue a limited
product warranty if negotiated by the customer. We also issue warranties
for certain of our entry level products, where full service maintenance
agreements are not available. In these instances, we record warranty
obligations at the time of the sale. Aggregate product warranty liability
expenses for the three years ended December 31, 2010 were $33, $34
and $39, respectively. Total product warranty liabilities as of December
31, 2010 and 2009 were $18 and $20, respectively.
Other Contingencies
We have issued or provided the following guarantees as of
December 31, 2010:
•
•
$270 for letters of credit issued i) to guarantee our performance under
certain services contracts; ii) to support certain insurance programs;
and iii) to support our obligations related to the Brazil tax and labor
contingencies.
$666 for outstanding surety bonds. Certain contracts, primarily those
involving public sector customers, require us to provide a surety bond
as a guarantee of our performance of contractual obligations.
In general, we would only be liable for the amount of these guarantees
in the event of default in our performance of our obligations under
each contract; the probability of which we believe is remote. We believe
that our capacity in the surety markets, as well as under various credit
arrangements (including our Credit Facility), is sufficient to allow us to
respond to future requests for proposals that require such credit support.
Notes to the Consolidated
Financial Statements
Dollars in millions, except per-share data and unless otherwise indicated.
We have service arrangements where we service third-party student
loans in the Federal Family Education Loan program (“FFEL”) on behalf
of various financial institutions. We service these loans for investors
under outsourcing arrangements and do not acquire any servicing
rights that are transferable by us to a third party. At December 31,
2010, we serviced a FFEL portfolio of approximately 3.6 million loans
with an outstanding principal balance of approximately $51.4 billion.
Some servicing agreements contain provisions that, under certain
circumstances, require us to purchase the loans from the investor if the
loan guaranty has been permanently terminated as a result of a loan
default caused by our servicing error. If defaults caused by us are cured
during an initial period, any obligation we may have to purchase these
loans expires. Loans that we purchase may be subsequently cured,
the guaranty reinstated and the loans repackaged for sale to third
parties. We evaluate our exposure under our purchase obligations on
defaulted loans and establish a reserve for potential losses, or default
liability reserve, through a charge to the provision for loss on defaulted
loans purchased. The reserve is evaluated periodically and adjusted
based upon management’s analysis of the historical performance of
the defaulted loans. As of December 31, 2010, other current liabilities
include reserves of less than $1 for losses on defaulted loans purchased.
In connection with the acquisition of ACS, the Company agreed
to provide certain tax and prior employment agreement-related
indemnities to former officers and directors of ACS. Management does
not anticipate any potential claims under these indemnities would have
a material adverse effect on the Company’s financial statements taken
as a whole and accordingly no value has been assigned for financial
reporting purposes.
Note 18 – Preferred Stock
Series A Convertible Preferred Stock
In connection with the acquisition of ACS in February 2010 (see Note
3 – Acquisitions for additional information), we issued 300,000 shares
of Series A convertible perpetual preferred stock with an aggregate
liquidation preference of $300 and a fair value of $349 as of the
acquisition date to the holder of ACS Class B common stock. The
convertible preferred stock pays quarterly cash dividends at a rate of
8% per year and has a liquidation preference of $1,000 per share.
Each share of convertible preferred stock is convertible at any time, at
the option of the holder, into 89.8876 shares of common stock for a
total of 26,966 thousand shares (reflecting an initial conversion price
of approximately $11.125 per share of common stock and is a 25%
premium over $8.90, the average closing price of Xerox common stock
over the 7-trading day period ended on September 14, 2009 and
the number used for calculating the conversion price in the ACS
merger agreement), subject to customary anti-dilution adjustments.
On or after the fifth anniversary of the issue date, we have the right
to cause, under certain circumstances, any or all of the convertible
preferred stock to be converted into shares of common stock at the
then applicable conversion rate. The convertible preferred stock is also
convertible, at the option of the holder, upon a change in control, at
the applicable conversion rate plus an additional number of shares
determined by reference to the price paid for our common stock upon
such change in control. In addition, upon the occurrence of certain
fundamental change events, including a change in control or the
delisting of Xerox’s common stock, the holder of convertible preferred
stock has the right to require us to redeem any or all of the convertible
preferred stock in cash at a redemption price per share equal to the
liquidation preference and any accrued and unpaid dividends to, but
not including the redemption date. The convertible preferred stock is
classified as temporary equity (i.e., apart from permanent equity) as
a result of the contingent redemption feature.
Note 19 – Shareholders’ Equity
Preferred Stock
As of December 31, 2010 we had one class of preferred stock
outstanding. See Note 18 – Preferred Stock for further information.
We are authorized to issue approximately 22 million shares of
cumulative preferred stock, $1.00 par value per share.
Common Stock
We have 1.75 billion authorized shares of common stock, $1 par value
per share. At December 31, 2010, 167 million shares were reserved for
issuance under our incentive compensation plans, 48 million shares were
reserved for debt to equity exchanges, 27 million shares were reserved
for conversion of the Series A convertible preferred stock and two million
shares were reserved for the conversion of convertible debt.
In connection with the acquisition of ACS in February 2010 (see Note 3 –
Acquisitions for further information), we issued 489,802 thousand shares
of common stock to holders of ACS Class A and Class B common stock.
Treasury Stock
Our Board of Directors has authorized programs for repurchase of the
Company’s common stock. During the year ended December 31, 2010,
we did not purchase any common stock.
The following provides cumulative information relating to our share
repurchase programs from their inception in October 2005 through
December 31, 2010 (shares in thousands):
Authorized share repurchase
Share repurchases
Share repurchase fees
Number of shares repurchased
$ 4,500
$ 2,941
$
4
194,093
Xerox 2010 Annual Report
99
Notes to the Consolidated
Financial Statements
Dollars in millions, except per-share data and unless otherwise indicated.
The following table reflects the changes in Common and
Treasury stock shares for the three years ended December 31, 2010
(shares in thousand):
Common Stock Shares
Treasury Stock Shares
Balance at December 31, 2007
Stock option and incentive plans, net
Acquisition of Treasury stock
Cancellation of Treasury stock
Balance at December 31, 2008
Stock option and incentive plans, net
Balance at December 31, 2009
ACS acquisition(1)
Stock option and incentive plans, net
919,013
4,442
—
(58,678)
864,777
4,604
869,381
489,802
38,395
Balance at December 31, 2010
1,397,578 —
(1) Refer to Note 3 – Acquisitions for additional information.
(1,836)
—
(56,842)
58,678
—
—
—
—
—
Stock-Based Compensation
We have a long-term incentive plan whereby eligible employees may be
granted restricted stock units (“RSUs”), performance shares (“PSs”) and
non-qualified stock options.
We grant PSs and RSUs in order to continue to attract and retain employees
and to better align employees’ interests with those of our shareholders.
Each of these awards is subject to settlement with newly issued shares of
our common stock. At December 31, 2010 and 2009, 30 million and 15
million shares, respectively, were available for grant of awards.
Stock-based compensation expense for the three years ended December
31, 2010 was as follows:
Stock-based compensation
expense, pre-tax
Income tax benefit recognized
2010
2009
2008
$ 123
$ 85
$
85
in earnings
47
33
33
Restricted stock units: Compensation expense is based upon the grant
date market price for most awards and a Monte Carlo simulation pricing
model for a grant in 2009 that included a market condition; the expense
is recorded over the vesting period, which ranges from three to five
years from the date of grant. A summary of the activity for RSUs as of
December 31, 2010, 2009 and 2008, and changes during the years then
ended, is presented below (shares in thousands):
Nonvested Restricted Stock Units
Outstanding at January 1
Granted
Vested
Cancelled
Outstanding at December 31
2010
Weighted
Average Grant
Date Fair Value
$ 10.18
8.56
18.22
10.36
8.68
Shares
25,127
11,845
(3,671)
(870)
32,431
2009
Weighted
Average Grant
Date Fair Value
$ 15.43
6.69
15.17
13.94
10.18
Shares
14,037
15,268
(3,764)
(414)
25,127
2008
Weighted
Average Grant
Date Fair Value
$ 16.78
13.63
16.92
15.98
15.43
Shares
11,696
5,923
(3,350)
(232)
14,037
At December 31, 2010, the aggregate intrinsic value of RSUs
outstanding was $374. The total intrinsic value and actual tax benefit
realized for the tax deductions for vested RSUs for the three years ended
December 31, 2010 were as follows:
Vested Restricted Stock Units
2010
2009
2008
Total intrinsic value of
vested RSUs
Tax benefit realized for
vested RSUs tax deductions
$ 31
$ 19
$
54
10
6
18
At December 31, 2010, there was $135 of total unrecognized
compensation cost related to nonvested RSUs, which is expected to be
recognized ratably over a remaining weighted-average contractual term
of 1.7 years.
100
Xerox 2010 Annual Report
Performance shares: We grant officers and selected executives PSs that
vest contingent upon meeting pre-determined Earnings per Share (“EPS”)
and Cash Flow from Operations targets. These shares entitle the holder
to one share of common stock, payable after a three-year period and
the attainment of the stated goals. If the cumulative three-year actual
results for EPS and Cash Flow from Operations exceed the stated targets,
then the plan participants have the potential to earn additional shares
of common stock. This overachievement can not exceed 50% for officers
and 25% for non-officers of the original grant.
In connection with the ACS acquisition, selected ACS executives received a
special one-time grant of PSs that vest over a three-year period contingent
upon ACS meeting pre-determined annual earnings targets. These shares
entitle the holder to one share of common stock, payable after the three-
year period and the attainment of the targets. The aggregate number of
shares that may be delivered based on achievement of the targets was
determined on the date of grant and ranges in value as follows: 50% of
base salary (threshold); 100% of base salary (target); and 200% of base
salary plus 50% of the value of the August 2009 options (maximum).
Notes to the Consolidated
Financial Statements
Dollars in millions, except per-share data and unless otherwise indicated.
A summary of the activity for PSs as of December 31, 2010, 2009 and
2008, and changes during the years then ended, is presented below
(shares in thousands):
Nonvested Restricted Stock Units
Outstanding at January 1
Granted
Vested
Cancelled
Outstanding at December 31
2010
Weighted
Average Grant
Date Fair Value
$ 15.49
8.10
18.48
15.51
9.78
Shares
4,874
5,364
(1,566)
(901)
7,771
2009
Weighted
Average Grant
Date Fair Value
$ 15.39
15.17
15.17
15.52
15.49
Shares
7,378
718
(3,075)
(147)
4,874
2008
Weighted
Average Grant
Date Fair Value
$ 16.16
13.67
14.87
16.05
15.39
Shares
6,585
3,696
(2,734)
(169)
7,378
At December 31, 2010, the aggregate intrinsic value of PSs outstanding
was $90. The total intrinsic value of PSs and the actual tax benefit
realized for the tax deductions for vested PSs for the three years ended
December 31, 2010 was as follows:
Vested Performance Shares
Total intrinsic value of vested PSs
Tax benefit realized for vested PSs
tax deductions
2010
$ 12
2009
$ 15
2008
$
41
5
6
13
We account for PSs using fair value determined as of the grant date.
If the stated targets are not met, any recognized compensation cost
would be reversed. As of December 31, 2010, there was $45 of total
unrecognized compensation cost related to nonvested PSs; this cost is
expected to be recognized ratably over a remaining weighted-average
contractual term of 1.8 years.
Stock options
Employee stock options: With the exception of the stock options issued
in connection with the ACS acquisition (see below), we have not issued
any new stock options associated with our employee long-term incentive
plan since 2004. All stock options previously issued under our employee
long-term incentive plan and currently outstanding are fully vested and
exercisable and generally expire between eight and 10 years from the
date of grant.
ACS Acquisition: In connection with the acquisition of ACS (see Note
3 – Acquisitions for further information), outstanding ACS options were
converted into 96,662 thousand Xerox options. The Xerox options have a
weighted average exercise price of $6.79 per option. The estimated fair
value associated with the options issued was approximately $222 based
on a Black-Scholes valuation model utilizing the assumptions stated
below. Approximately $168 of the estimated fair value is associated with
ACS options issued prior to August 2009, which became fully vested and
exercisable upon the acquisition in accordance with pre-existing change-
in-control provisions, was recorded as part of the acquisition fair value.
The remaining $54 is associated with ACS options issued in August 2009
which continue to vest according to their original terms and, therefore, is
being expensed as compensation cost over the remaining vesting period.
The options generally expire 10 years from date of grant.
Assumptions
Strike price
Expected volatility
Risk-free interest rate
Dividend yield
Expected term
Pre-August 2009
Options
$ 6.89
37.90%
0.23%
1.97%
0.75 years
August 2009
Options
$ 6.33
38.05%
1.96%
1.97%
4.2 years
The following table provides information relating to the status of, and
changes in, outstanding stock options for each of the three years ended
December 31, 2010 (stock options in thousands):
Employee Stock Options
Outstanding at January 1
Granted – ACS acquisition
Cancelled/Expired
Exercised
Outstanding at December 31
Exercisable at December 31
2010
2009
2008
Stock
Options
28,363
96,662
(2,735)
(51,252)
71,038
57,985
Weighted
Average
Option Price
$10.13
6.79
7.33
6.92
8.00
8.38
Stock
Options
45,185
—
(16,676)
(146)
28,363
28,363
Weighted
Average
Option Price
$15.49
—
24.68
5.88
10.13
10.13
Stock
Options
52,424
—
(6,559)
(680)
45,185
45,185
Weighted
Average
Option Price
$19.73
—
50.08
8.89
15.49
15.49
Xerox 2010 Annual Report
101
Notes to the Consolidated
Financial Statements
Dollars in millions, except per-share data and unless otherwise indicated.
As of December 31, 2010, there was $35 of total unrecognized
compensation cost related to nonvested stock options. This cost is
expected to be recognized ratably over a remaining weighted-average
vesting period of three years.
Information relating to options outstanding and exercisable at
December 31, 2010 was as follows:
Options Outstanding
Options Exercisable
Aggregate intrinsic value
Weighted-average remaining
contractual life in years
$267
4.42
$199
3.46
The following table provides information relating to stock option
exercises for the three years ended December 31, 2010:
Total intrinsic value of
stock options
Cash received
Tax benefit realized for stock
option tax deductions
2010
2009
2008
$ 155
183
$ —
1
$
56
—
4
6
2
Note 20 – Earnings per Share
The following table sets forth the computation of basic and diluted
earnings per share of common stock for the three years ended
December 31, 2010 (shares in thousands):
Basic Earnings per Share:
Net income attributable to Xerox
Accrued dividends on preferred stock
Adjusted Net Income Available to Common Shareholders
Weighted average common shares outstanding
Basic Earnings per Share
Diluted Earnings per Share:
Net income attributable to Xerox
Accrued dividends on Preferred stock
Interest on Convertible securities, net
Adjusted Net Income Available to Common Shareholders
Weighted-average common shares outstanding
Common shares issuable with respect to:
Stock options
Restricted stock and performance shares
Convertible securities
Adjusted Weighted Average Shares Outstanding
Diluted Earnings per Share
The following represents shares not included in the computation of diluted earnings per share,
because to do so would have been anti-dilutive (shares in thousands):
Stock options
Restricted stock and performance shares
Convertible preferred stock
Convertible securities
Dividends Declared per Common Share
102
Xerox 2010 Annual Report
2010
2009
$
$
606
(21)
585
1,323,431
0.44
$
$
$
606
(21)
—
585
$
$
485
—
485
869,979
0.56
$
$
$
485
—
1
486
2008
230
—
230
$
$
885,471
0.26
$
$
$
230
—
—
230
1,323,431
869,979
885,471
13,497
13,800
—
462
7,087
1,992
3,885
6,186
—
1,350,728
$
0.43
879,520
895,542
$
0.55
$
0.26
57,541
25,983
26,966
1,992
112,482
$0.17
27,901
22,574
—
—
50,475
$0.17
41,300
14,969
—
1,992
58,261
$0.17
Reports of Management
Management’s Responsibility for
Financial Statements
Our management is responsible for the integrity and objectivity
of all information presented in this annual report. The consolidated
financial statements were prepared in conformity with accounting
principles generally accepted in the United States of America
and include amounts based on management’s best estimates
and judgments. Management believes the consolidated financial
statements fairly reflect the form and substance of transactions
and that the financial statements fairly represent the Company’s
financial position and results of operations.
The Audit Committee of the Board of Directors, which is
composed solely of independent directors, meets regularly with
the independent auditors, PricewaterhouseCoopers LLP, the
internal auditors and representatives of management to review
accounting, financial reporting, internal control and audit matters,
as well as the nature and extent of the audit effort. The Audit
Committee is responsible for the engagement of the independent
auditors. The independent auditors and internal auditors have
free access to the Audit Committee.
Management’s Report on Internal Control
Over Financial Reporting
Our management is responsible for establishing and
maintaining adequate internal control over financial reporting,
as such term is defined in the rules promulgated under the
Securities Exchange Act of 1934. Under the supervision and with
the participation of our management, including our principal
executive, financial and accounting officers, we have conducted
an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in “Internal Control –
Integrated Framework” issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
Based on the above evaluation, management has concluded
that our internal control over financial reporting was effective as
of December 31, 2010.
Ursula M. Burns
Chief Executive Officer
Luca Maestri
Chief Financial Officer
Gary R. Kabureck
Chief Accounting Officer
Xerox 2010 Annual Report
103
A company’s internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of
the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements
in accordance with generally accepted accounting principles, and
that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors
of the company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
PricewaterhouseCoopers LLP
Stamford, Connecticut
February 23, 2011
Report of Independent Registered
Public Accounting Firm
To the Board of Directors and Shareholders of Xerox Corporation:
In our opinion, the accompanying consolidated balance sheets
and the related consolidated statements of income, cash flows
and shareholders’ equity present fairly, in all material respects,
the financial position of Xerox Corporation and its subsidiaries at
December 31, 2010 and 2009, and the results of their operations
and their cash flows for each of the three years in the period ended
December 31, 2010 in conformity with accounting principles
generally accepted in the United States of America. Also in our
opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2010,
based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). The Company’s management is
responsible for these financial statements, for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included
in the accompanying Management’s Report on Internal Control
over Financial Reporting. Our responsibility is to express opinions
on these financial statements and on the Company’s internal
control over financial reporting based on our integrated audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal control
over financial reporting was maintained in all material respects.
Our audits of the financial statements included examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating
the overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an understanding
of internal control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed
risk. Our audits also included performing such other procedures as
we considered necessary in the circumstances. We believe that our
audits provide a reasonable basis for our opinions.
104
Xerox 2010 Annual Report
Quarterly Results of Operations (Unaudited)
(in millions, except per-share data)
2010
Revenues
Costs and Expenses(1)
(Loss) Income before Income Taxes and Equity Income
Income tax expenses(2)
Equity in net (loss) income of unconsolidated affiliates(3)
Net (Loss) Income
Less: Net income – noncontrolling interests
Net (Loss) Income Attributable to Xerox
Basic Earnings per Share(4)
Diluted Earnings per Share(4)
2009
Revenues
Costs and Expenses(1)
Income before Income Taxes and Equity Income
Income tax expenses(2)
Equity in net (loss) income of unconsolidated affiliates(3)
Net Income
Less: Net income – noncontrolling interests
Net Income Attributable to Xerox
Basic Earnings per Share(4)
Diluted Earnings per Share(4)
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Full Year
$ 4,721
4,731
$ 5,508
5,188
$ 5,428
5,100
$ 5,976
5,799
$ 21,633
20,818
(10)
22
(2)
(34)
8
320
112
28
236
9
$
(42)
$ (0.04)
(0.04)
$ 227
$ 0.16
0.16
328
98
26
256
6
$ 250
$ 0.18
0.17
177
24
26
179
8
815
256
78
637
31
$ 171
$ 0.12
0.12
$ 606
$ 0.44
0.43
$ 3,554
3,476
$ 3,731
3,534
$ 3,675
3,517
$ 4,219
4,025
$ 15,179
14,552
78
19
(10)
49
7
42
$
$ 0.05
0.05
197
59
9
147
7
$ 140
$ 0.16
0.16
158
44
15
129
6
$ 123
$ 0.14
0.14
194
30
27
191
11
627
152
41
516
31
$ 180
$ 0.21
0.20
$ 485
$ 0.56
0.55
(1) Costs and expenses for 2010 include: restructuring charges of $195, $11, $4 and $273; acquisition-related costs of $48, $15, $5 and $9, and amortization of intangible assets of
$57, $85, $85 and $85, respectively, in the first, second, third and fourth quarters of 2010, currency losses associated with the Venezuelan devaluation of $21 in the first quarter
of 2010, costs associated with the ACS shareholders litigation of $36 in the second quarter and the loss on early extinguishment of debt of $15 in the fourth quarter. Costs and
expenses for 2009 include: restructuring credits of $2, $1, $2 and $3: amortization of intangible assets of $14, $15, $15 and $16, respectively, for the first, second, third and fourth
quarters, as well as acquisition-related costs of $9 and $63, respectively, for the third and fourth quarters.
(2) Income tax expense for 2010 includes tax benefits for restructuring charges of $60, $4, $2 and $100; acquisition-related costs of $12, $1, $2 and $4 and amortization of intangible
assets of $22, $32, $32 and $32, respectively, for the first, second, third and fourth quarters and for loss on early extinguishment of debt of $5 in the fourth quarter. Additional
tax expense of $16 was incurred in the first quarter of 2010 due to the Medicare subsidy tax law change. The 2009 income tax expense includes tax benefits for amortization of
intangible assets of $5, $6, $5 and $6, respectively, for the first, second, third and fourth quarters, as well as acquisition-related costs of $1 and $22, respectively, for the third and
fourth quarters. Additional tax expense on restructuring of $1 was incurred in each of the first, third and fourth quarters of 2009.
(3) The first, second, third and fourth quarters of 2010 include $22, $5, $6 and $5 of charges, respectively, for our share of Fuji Xerox restructuring charges. The first, second, third and
fourth quarters of 2009 include $22, $9, $9 and $6 of charges, respectively, for our share of Fuji Xerox restructuring charges.
(4) The sum of quarterly earnings per share may differ from the full-year amounts due to rounding, or in the case of diluted earnings per share, because securities that are anti-dilutive in
certain quarters may not be anti-dilutive on a full-year basis.
Xerox 2010 Annual Report
105
Five Years in Review
(in millions, except per-share data)
Per-Share Data
Income from continuing operations
Basic
Diluted
Earnings
Basic
Diluted
Common stock dividends declared
Operations
Revenues
Sales
Service, outsourcing and rentals
Finance income
Income from continuing operations
Income from continuing operations – Xerox
Net income
Net income – Xerox
Financial Position
Working capital
Total Assets
Consolidated Capitalization
Short-term debt and current portion of long-term debt
Long-term debt
Total Debt
Liability to subsidiary trust issuing preferred securities
Series A convertible preferred stock
Xerox shareholders’ equity
Noncontrolling interests
2010(1)
2009
2008
2007(2)
2006
$
0.44
0.43
0.44
0.43
0.17
$ 21,633
7,234
13,739
660
637
606
637
606
$ 0.56
0.55
$ 0.26
0.26
0.56
0.55
0.17
$ 15,179
6,646
7,820
713
516
485
516
485
0.26
0.26
0.17
$ 17,608
8,325
8,485
798
265
230
265
230
$ 1.21
1.19
1.21
1.19
0.0425
$ 17,228
8,192
8,214
822
1,165
1,135
1,165
1,135
$ 1.25
1.22
1.25
1.22
—
$ 15,895
7,464
7,591
840
1,232
1,210
1,232
1,210
$ 2,222
30,600
$ 5,270
24,032
$ 2,700
22,447
$ 4,463
23,543
$ 4,056
21,709
1,370
7,237
8,607
650
349
12,006
153
988
8,276
9,264
649
—
7,050
141
1,610
6,774
8,384
648
—
6,238
120
525
6,939
7,464
632
—
8,588
103
1,485
5,660
7,145
624
—
7,080
108
Total Consolidated Capitalization
$ 21,765
$ 17,104
$ 1 5,390
$ 16,787
$ 14,957
Selected Data and Ratios
Common shareholders of record at year-end
Book value per common share
Year-end common stock market price
Employees at year-end
Gross margin
Sales gross margin
Service, outsourcing and rentals gross margin
Finance gross margin
(1) 2010 results include the acquisition of ACS.
(2) 2007 results include the acquisition of GIS.
43,383
$
8.59
$ 11.52
136,500
34.4%
34.5%
33.1%
62.7%
44,792
$ 8.11
$ 8.46
53,600
39.7%
33.9%
42.6%
62.0%
46,541
$ 7.21
$ 7.97
57,100
38.9%
33.7%
41.9%
61.8%
48,261
$ 9.36
$ 16.19
57,400
40.3%
35.9%
42.7%
61.6%
40,372
$ 7.48
$ 16.95
53,700
40.6%
35.7%
43.0%
63.7%
106
Xerox 2010 Annual Report
Performance Graph
Comparison of Cumulative Five Year Total Return
$150
$100
$50
$0
2005
2006
2007
2008
2009
2010
• Xerox Corporation
• S&P 500 Index
• S&P 500 Information Technology Index
Total Return to Shareholders
(Includes reinvestment of dividends)
Xerox Corporation
S&P 500 Index
S&P 500 Information Technology Index
2005
$100.00
100.00
100.00
2006
$115.70
115.79
108.42
2007
$110.80
122.16
126.10
2008
$55.37
76.96
71.70
2009
$60.34
97.33
115.95
2010
$83.61
111.99
127.77
Year Ended December 31,
Source: Standard & Poor’s Investment Services
Notes: Graph assumes $100 invested on December 31, 2005 in Xerox Corp., the S&P 500 Index and the S&P 500
Information Technology Index, respectively, and assumes dividends are reinvested.
Corporate Information
Stock Exchange Information
Xerox common stock (XRX) is listed on the New York Stock Exchange and the Chicago Stock Exchange.
Xerox Common Stock Prices and Dividends
New York Stock Exchange composite prices*
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2010
High
Low
Dividends Paid per Share
2009
High
Low
Dividends Paid per Share
* Prices as of close of business
$ 10.11
8.38
0.0425
$ 9.10
4.17
0.0425
$ 11.35
8.04
0.0425
$ 7.25
4.70
0.0425
$ 10.55
7.91
0.0425
$ 9.57
6.05
0.0425
$ 12.01
10.44
0.0425
$ 8.66
7.25
0.0425
Xerox 2010 Annual Report
107
Officers
Ursula M. Burns
Chairman and Chief Executive Officer
Lynn R. Blodgett
Executive Vice President
President and Chief Executive Officer,
Affiliated Computer Services, Inc.
James A. Firestone
Executive Vice President
President, Corporate Operations
Luca Maestri
Executive Vice President
Chief Financial Officer
Armando Zagalo de Lima
Executive Vice President
President,
Global Customer Operations
Willem T. Appelo
Senior Vice President
President,
Global Business and Services Group
M. Stephen Cronin
Senior Vice President
President,
Global Document Outsourcing
Don H. Liu
Senior Vice President
General Counsel and Secretary
Russell M. Peacock
Senior Vice President
President,
Xerox North America
108
Xerox 2010 Annual Report
Thomas J. Maddison
Vice President
Human Resources
Joseph H. Mancini Jr.
Vice President
Vice President, Finance
Xerox North America
John E. McDermott
Vice President
Chief Information Officer
Ivy Thomas McKinney
Vice President
Deputy General Counsel and
Chief Ethics Officer
Shaun W. Pantling
Vice President
Director and General Manager,
Global Document Outsourcing,
Xerox Europe
Rhonda L. Seegal
Vice President and Treasurer
Hervé Tessler
Vice President
President,
Developing Markets Operations
Sophie V. Vandebroek
Vice President
Chief Technology Officer and President,
Xerox Innovation Group
Leslie F. Varon
Vice President
Finance and Corporate Controller
Kevin M. Warren
Vice President
President,
United States Customer Operations
Uta Werner
Vice President
Corporate Business Strategy
Douglas H. Marshall
Assistant Secretary
Carol A. McFate
Assistant Treasurer
Chief Investment Officer
Eric Armour
Vice President
President,
Graphic Communications Business Group
Christa B. Carone
Vice President
Chief Marketing Officer
Richard F. Cerrone
Vice President
Global Imaging Support Operations
Mark Costello
Vice President
General Patent Counsel
Chief Strategy Counsel
Richard M. Dastin
Vice President
President,
Enterprise Business Group
Kathleen S. Fanning
Vice President
Worldwide Taxes
Anthony M. Federico
Vice President
Chief Engineer and
Graphic Communications Executive Liaison
Michael R. Festa
Vice President
Business Transformation, Finance,
Mergers and Acquisitions
Jacques H. Guers
Vice President
President,
Xerox Europe
D. Cameron Hyde
Vice President
Senior Vice President,
Global Accounts Operations
Gary R. Kabureck
Vice President
Chief Accounting Officer
John M. Kelly
Vice President
Executive Vice President,
ACS Major Accounts
James H. Lesko
Vice President
Investor Relations
Jule E. Limoli
Vice President
President,
North American Agent Operations
How to Reach Us
Xerox Corporation
45 Glover Avenue
Norwalk, CT 06856-4505
United States
203.968.3000
www.xerox.com
Xerox Europe
Riverview
Oxford Road
Uxbridge
Middlesex
United Kingdom
UB8 1HS
+44.1895.251133
Fuji Xerox Co., Ltd.
Tokyo Midtown West
9-7-3, Akasaka
Minato-ku, Tokyo 107-0052
Japan
+81.3.6271.5111
ACS, A Xerox Company
2828 North Haskell
Dallas, TX 75204
United States
214.841.6111
www.acs-inc.com
Products and Services
www.xerox.com or by phone:
800.ASK.XEROX (800.275.9376)
Additional Information
The Xerox Foundation
203.849.2478
Contact: Evelyn Shockley, Manager
Diversity Programs and EEO-1 Reports
585.423.6157
www.xerox.com/diversity
Minority and Women-Owned
Business Suppliers
585.422.9531
www.xerox.com/supplierdiversity
Ethics Helpline
866.XRX.0001 North America;
International numbers and
Web submission tool on www.xerox.com/ethics
e-mail: ethics@xerox.com
Environment, Health and
Safety Progress Report
800.828.6571, prompts 1, 3
www.xerox.com/environment
Global Citizenship
www.xerox.com/citizenship
e-mail: citizenship@xerox.com
Governance
www.xerox.com/governance
Questions from Students and Educators
e-mail: nancy.dempsey@xerox.com
Xerox Innovation
www.xerox.com/innovation
Independent Auditors
PricewaterhouseCoopers LLP
300 Atlantic Street
Stamford, CT 06901
203.539.3000
FYI
Shareholder Information
For investor information, including
comprehensive earnings releases:
www.xerox.com/investor or call
888.979.8378.
For shareholder services: call
800.828.6396 (TDD: 800.368.0328)
or 781.575.3222; or write to
Computershare Trust Company, N.A.
P.O. Box 43078,
Providence, RI 02940-3078;
or use e-mail available
at www.computershare.com.
Annual Meeting
Thursday, May 26, 2011, 9:00 a.m. EDT
Dolce Norwalk
32 Weed Avenue
Norwalk, Connecticut 06850
Proxy material mailed on April 12, 2011
to shareholders of record March 28, 2011
Investor Contacts
Jennifer Horsley
Manager, Investor Relations
jennifer.horsley@xerox.com
Joseph Ketchum
Manager, Investor Relations
joseph.ketchum@xerox.com
This annual report is also available online
at www.xerox.com/investor.
Electronic Delivery Enrollment
Xerox offers shareholders the convenience
of electronic delivery including:
• Immediate receipt of the
Proxy Statement and Annual Report
• Online proxy voting
Registered Shareholders, visit
http://www.eTree.com/Xerox
You are a registered shareholder if you have
your stock certificate in your possession or
if the shares are being held by our transfer
agent, Computershare.
Beneficial Shareholders, visit
http://enroll.icsdelivery.com/xrx
You are a beneficial shareholder if you
maintain your position in Xerox within
a brokerage account.
Marketing Communications: Pappas MacDonnell, Inc., Southport, CT
Xerox Corporation
45 Glover Avenue
P.O. Box 4505
Norwalk, CT 06856-4505
United States
203-968-3000
www.xerox.com
© 2011 Xerox Corporation. All rights reserved. XEROX® and design®, ColorQube®, DocuColor®, FreeFlow®, Phaser®,
ProfitAccelerator®, WorkCentre®, iGen4®, Xerox Extensible Interface Platform®, and Xerox Nuvera® are trademarks of,
or licensed to Xerox Corporation in the U.S. and/or other countries. XMPie® is a trademark of XMPie Inc.
002CSI1364