Xerox 2011 Annual Report Download - page 99

97Xerox 2011 Annual Report
life of the equipment 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, 2011 were $30, $33 and $34, respectively. Total product
warranty liabilities as of December 31, 2011 and 2010 were
$16 and $18, respectively.
Other Contingencies
We have issued or provided the following guarantees as of
December 31, 2011:
•$445 for letters of credit issued to i) guarantee our performance under
certain services contracts; ii) support certain insurance programs;
and iii) support our obligations related to the Brazil tax and labor
contingencies.
•$788 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.
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, 2011, we
serviced an FFEL portfolio of approximately 4.0 million loans with an
outstanding principal balance of approximately $56.6 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, 2011,
other current liabilities include reserves which we believe to be adequate.
At December 31, 2011, other current liabilities include reserves of
approximately $1.0 for losses on defaulted loans purchased.
•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 the 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Indemnications
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
indemnities usually do not include limits on the claims, provided the claim
is made pursuant to the procedures required in the sales contract.
IndemnicationofOfcers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 (such as those related to “clawback” provisions
in certain compensation arrangements) 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
Notes to the Consolidated
Financial Statements
(in millions, except per-share data and where otherwise noted)