We provide the document 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 support and supplies, such as toner, paper and ink as part of our document technology offerings. Through our heritage of innovation we continue to deliver leading document technology.
We are the industry leader in managed print services helping businesses save up to 30 percent on printing costs by optimizing the use of document systems across an entire enterprise. With the acquisition of ACS we manage the essential processes that businesses count on to be successful and we are a leading business process and IT outsourcing company, offering services from claims reimbursement and electronic toll transactions to customer call centers and HR benefits management.
Xerox is a leader in a large, diverse, and growing market. The document and business process management industry continues to see significant trends toward color, enterprise print services, and electronic document management. Our broad portfolio of production, office, and service offerings provide value to our customers and enable Xerox to lead and grow in the $132 billion document market we serve. With ACS, we more than double our market opportunity to over $500 billion and we will now participate in the diverse and growing business process and IT outsourcing market.
We are well-positioned to lead in the large and growing business process and document management market through:
Executing on 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.
• Color is a large and growing market and is estimated at $44 billion.
• Cost and quality improvements are driving the transition from black-and-white to color.
• We are also a leader in the black-and-white segment and we continue to gain share and capture growth opportunities in this $62 billion market.
• Building on services leadership – We lead the industry with end-to-end Document Management Services and we participate in three areas of the outsourcing services market:
• Infrastructure Outsourcing, where we help our customers through differentiated technology, skills and automation to reduce their enterprise spend and optimize their IT and print infrastructure to support their business processes. With the acquisition of ACS, we have expanded our capabilities into IT outsourcing.
• Application Outsourcing, where we help our customers to streamline their document intensive business processes through automation and deployment of software applications and tools.
• Business Process Outsourcing (“BPO”), where we have the technology and global presence to deliver value to our customers of all sizes. In today’s competitive environment, our customers are striving to reduce cost, improve productivity, and add more value. With our broad array of solutions, workflow, knowledge, and leadership, we are uniquely positioned to deliver value to our customers. With the acquisition of ACS, we are the leader in this diverse industry.
• Strengthening our leadership in digital production printing – We continue to create new market opportunities with digital printing as a complement to traditional offset printing through technology that enables short-run book publishing, personalized transactional and promotional statements, cross-media customized campaigns and more.
• We continue to identify new applications which are suitable for digital production printing.
• Our leading technology, workflow, and business development tools lead the way to enable our customers to increase their communication effectiveness, improve their returns and add value in a competitive market.
Expanding our Distribution Channels
• We continue to broaden our distribution capacity through acquisitions and channel partnerships targeted at expanding our presence in the small and medium size business (“SMB”) market.
• We are focused on capturing the high growth opportunities in the Developing Markets. Through our marketing investments and expanded offerings, we are well positioned to meet the unique business requirements in these markets.
• We are capitalizing on our coverage investments and partnerships to capture the opportunities in digital production printing.
• We will leverage our account management infrastructure and global reach to create significant opportunities for ACS to expand its business worldwide.
Securing Future Technology Leadership
• Through advancing our heritage of innovation, we are yielding a broad technology portfolio.
• We continue to capitalize on breakthrough ink technologies. We launched the new ColorQubeTM product and, with this innovative offering, we are able to deliver affordable color to the market and further expand and leverage color growth.
• We continue to expand our Document Management Technology software and solutions to optimize the capabilities of our products and streamline customer’s processes.
• We will utilize our intellectual property and technology to enhance ACS’s BPO solutions.
Optimizing Productivity and Infrastructure
• We continue to improve the efficiency and effectiveness of our infrastructure through our cost reduction programs.
• We are focused on optimizing our resources to support innovation and growth.
• We will apply the capabilities of both Xerox and ACS to further improve our combined cost efficiency.
During 2009, Global Imaging Systems, Inc. (“GIS”) acquired ComDoc, Inc. This acquisition further strengthens our distribution capacity and expands GIS’s coverage into four states offering them access to more than 14,000 new customers.
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 in areas that include finance and accounting services, communications, transportation, human resources, healthcare, transaction processing, and customer care. ACS’s revenues for the calendar year ended December 31, 2009 were $6.6 billion. Headquartered in Dallas, TX, ACS’s 78,000 professionals support thousands of multinational corporations and government agencies in more than 100 countries and from about 425 locations.
This transformative acquisition allows Xerox to capitalize on rapidly emerging demands in the marketplace. Our customers are increasingly seeking service providers that offer a full range of solutions – from the management of print services to the management of work processes. As part of Xerox, ACS:
Provides us with immediate scale and leadership in business process outsourcing, a market that is sized at approximately $150 billion and growing at a rate of 5 percent per year.
• Increases our already strong operating cash flow.
• Strengthens our annuity-based business model. Through multi-year service contracts for business process outsourcing and document management, our recurring revenue will represent 80 percent of total revenue.
• Leverages the power of our brand, technology and our global reach, creating significant opportunities for us to expand ACS’s business in markets outside of the U.S.
• Significantly enhances our revenue growth and operating margin.
Through our annuity based business model, we drive significant cash generation and have a strong foundation upon which we can expand earnings.
The fundamentals of our business rest upon an annuity model that drives significant post sale revenue and cash generation. Over 75 percent of our 2009 total revenue was post sale revenue that includes equipment maintenance and consumable supplies, among other elements. With the acquisition of ACS, our annuity model is further enhanced, and recurring revenue will represent over 80 percent of total revenue. Some of the key indicators of Post Sale Revenue growth include:
• The number of page-producing machines in the field (“MIF”) which is impacted by the number of equipment installations and removals;
• Expanding the document management services we offer our customers;
• The mix of color pages as color pages use more consumables per page than black-and-white; and
• Expanding our market, particularly within the digital production printing, is key to increasing pages and we have developed tools and resources to be the leader in this large market opportunity.
Our consistent strong cash flow from operations is driven by recurring revenues; this, along with modest capital investments will enable us to pay down the debt associated with the ACS acquisition and continue to provide a return to shareholders through:
• Expanding through acquisitions our distribution and business process outsourcing capabilities;
• Buying back shares under our share repurchase program once debt leverage targets are met; and
• Maintaining our quarterly dividend.
We anticipate expanding our future earnings through:
• Modest revenue growth;
• Driving cost efficiencies to balance gross profit and expense;
• Leveraging share repurchase; and
• Making accretive acquisitions.
Our reportable segments are Production, Office 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 large 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.
We are still evaluating and assessing the impact of the ACS acquisition on our internal organizational and reporting structure, as well as its related impact on our reportable segment disclosures. Accordingly, in the first quarter 2010, we currently expect to report ACS as a separate reportable segment pending completion of that evaluation and assessment.
Xerox develops and manufactures a range of color and black-and-white multifunction, printer, copier fax products and document related software solutions. Our Office segment serves global, national and small to mid-size commercial customers, as well as government, education and other public sector customers. Office systems and services, which include monochrome devices at speeds up to 95 ppm and color devices up to 85 ppm, include our family of ColorQube, WorkCentre® multifunction printers (“MFP’s”) and Phaser® desktop printers and MFP’s.
We offer 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, which we then use to identify the most efficient, productive mix of office equipment, software and services for that business, helping to reduce the customer’s document-related costs.
In 2009, we continued to build on our position in the market by:
• Driving to a revenue leadership position in the combined color page printer and color MFP spaces. Revenue leadership is focused on both increasing unit share of color devices installed and growing the total number of color pages printed. Our goal is to accelerate the market trend towards color centric printers and MFP from mono centric devices.
• Helping customers through our industry leading MPS offering to reduce operational costs by up to 30 percent and get more out of the print infrastructure they’ve invested in.
• Enhancing our already strong color product portfolio, making color more affordable, easier to use, faster and more reliable while maintaining our leadership position in black-and-white. Key to our success was the extension of our unique solid ink value proposition into the growing A3 color workgroup MFP market space with the ColorQube 9200 series of MFPs.
• Expanding our channel reach and capacity to support the needs of the SMB market. This will increase our MIF and capture more pages, building the foundation for future post sale revenue growth.
The breadth of our product portfolio is unmatched. Our color-capable laser devices provide an attractive color entry point, our patented solid ink technology offers unmatched ease of use, vibrant color image quality and economic color run costs and our top of the line color laser products provide superior image quality coupled with industry-leading productivity and reliability. In 2009, we delivered a number of innovative products to the markets, following are a few examples:
• ColorQube 9201/9202/9203: A game-changer that brings Xerox’s Solid Ink technology upstream to the console (A3) workgroup color market. The ColorQube 9200 series makes color affordable by dramatically reducing the cost of color with its Hybrid Color Plans. Cartridge-free Solid Ink technology is extremely easy to use, and with only 1 customer replaceable unit, the ColorQube has 90 percent less waste and a 9 percent lower carbon footprint associated with it over life than a comparable laser MFP.
• Phaser 7500: This 35 ppm color laser printer allows small and mid-sized workgroups to attain professional-quality features. 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 MFP that utilizes Xerox’s Smart Controller platform and supports EIP, Xerox’s open platform allowing customization of applications on the MFP. Able to handle busy volumes with print speeds up to 32ppm color/37ppm mono, the WorkCentre 6400 also offers basic finishing, Print Around, and ID Card Copy.
• WorkCentre 7425/7428/7435: This A3 workgroup color MFP platform utilizes HiQ LED technology and targets the sweet spot of the color market with speeds up to 35 ppm color and black-and-white. This series uses Xerox's Emulsion Aggregation (“EA”) High Gloss Toner which allows for sharper 1200 x 2400 dpi image quality, and is extremely energy efficient—using less than 2 watts in sleep mode.
• Channel Managed Print Services: A suite of managed print service programs that help channel partners manage their customers' printing infrastructure and reduce costs. Xerox's program is the first to offer channel partners the ability to manage their customers' entire fleet of printers and multifunction printers no matter what the brand.
• Enterprise Print Services: A managed print services solution offering to help companies better manage documents across their global print infrastructure—from the office to the in-house print center to the virtual workplace.
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 only manufacturer in the market that offers a complete family of cut-sheet monochrome production systems from 65 to 288 ppm, color production systems from 40 to 110 ppm and a complete line of continuous feed printers from 250 to 1,300 ppm. In addition, we offer a variety of pre-press and post-press options and the industry’s broadest set of workflow software.
We continue to strengthen our leadership position in cut-sheet monochrome and color and expand our reach and share into continuous feed monochrome and color and to build on the power of digital printing. Our digital production printing strategy complements the traditional offset market and continues to transform our industry. 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. Having the right business model SM, the right workflowSM and the right technologySM are fundamental to this transformation.
In 2009, we continued to build on our unmatched product breadth, world class market and business development tools and integrated end-to-end applications.
Right Business Model
Our commitment to our customers starts before technology is discussed and extends long after a solution is installed. It includes sharing resources, strategies and tools that will help our customers grow their businesses with digital printing.
• ProfitAccelerator®: This robust set of tools and programs designed to maximize our customer’s investment in digital printing equipment expanded in 2009 and now includes more than 100 tools. It brings together Xerox’s unparalleled experience and expertise, world-class resources and industry-leading support.
• Business Development Services: In direct response to customer demand, this initiative continues to provide both training and professional services to help print providers increase page volume and revenue.
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.
In 2009 we launched FreeFlow Process Manager® 8.0 which continues to further enhance our software solutions to drive productivity and accelerate time from job submission to print.
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 round the clock.
• Control our customer’s costs, environmental impacts, and security. Automated workflows provide extensive productivity gains and greatly increase document integrity by eliminating manual processes.
• Enable new applications and new revenue streams such as photo books, secure event tickets, and packaging.
For more than two decades, we have delivered innovative technologies that have revolutionized the production printing industry. We continued to increase installations of our flagship Digital Color Production Presses. We are the industry leader in the number of pages produced on digital production color presses, with our flagship Xerox iGen4® Digital Production Press, iGen3® Digital Production Press and DocuColor® Digital Presses. Worldwide, approximately 400 customers have installed two or more iGen presses to meet their increased demand. In 2009 we delivered a number of innovative products to the markets, following are a few examples:
• Xerox DocuColor 7002/8002: In August we launched both a 70 and 80 ppm full-color production systems built off the very successful 7000AP/8000AP products. The new products utilize a new low gloss toner formulation which provides a more matte or ‘offset like’ finish. We also incorporated the In-Line Spectrophotometer and Automated Color Quality Suite, these automation tools enable increased productivity and color quality. New finishing options including tape and e-bind solutions were also enabled on the new products.
• Xerox Nuvera® 200 EA Perfecting Production System: In April we added to the Nuvera product portfolio with the Nuvera 200 Perfecting Production System. This product enables Xerox to enhance the portfolio by offering another tandem architecture product positioned below the flagship Nuvera 288. Throughout the year we expanded the finishing capabilities of the entire Nuvera portfolio. We added an in line binding solution, the GBC e-Bind 200. A new booklet maker from partner Plockmatic, the DBM5001 and an enhanced stacking solution the Xerox DS 3500 stacker. All of these finishing options are available on any Nuvera product.
• Xerox Nuvera 100/120/144/200/288 MX Production Systems: In October we refreshed the entire magnetic ink character recognition (“MICR”) portfolio. We added MICR capability to the 200 & 288 products for the first time. Reliability and productivity improvements were made to the existing Nuvera 100/120/144 MX that includes an upgrade to our FreeFlow Print Server hardware and software, and other system upgrades to the print engine.
The Other segment primarily includes revenue from paper sales, value-added services, wide-format systems and GIS network integration solutions and electronic presentation systems.
We sell cut-sheet paper to our customers for use in their document processing products. The market for cut-sheet paper is highly competitive and revenues are significantly affected by pricing. Our strategy is to charge a premium over mill wholesale prices, which is adequate to cover our costs and the value we add as a distributor, as well as to provide unique products that enhance digital production printing and color output.
An increasingly important part of our offering is value-added services, which utilizes our document industry knowledge and experience. Our value-added services deliver solutions that optimize our customers’ document output and infrastructure costs while streamlining, simplifying, and digitizing their document-intensive business processes. Through our imaging centers, a company can scan and digitize documents to create secure, accessible and searchable online information archives, such as a library of car-rental contracts or construction blueprints. Often our value-added services solutions lead to larger managed print services contracts which include our equipment, supplies, service, and labor. We report revenue from managed services contracts in the Production or Office segments. In 2009, the combined value-added services and managed print services revenue, including equipment, totaled $3.5 billion.
In our wide-format systems business, we offer document processing products and devices designed to reproduce large engineering and architectural drawings up to three feet by four feet in size. In 2009 we launched:
• The Xerox 6604 & 6605 Wide Format Printer: This printer continues our successful tradition in the computer-aided design environment with its unsurpassed ease of operation and benchmark image quality. This new product includes a full-color scanner and new user friendly interface for ease of operation.
We sell the majority of our products and services under bundled lease arrangements, in which our customers pay a monthly amount for the equipment, maintenance, services, supplies and financing over the course of the lease agreement. These arrangements are beneficial to our customers and to us since, in addition to customers receiving a bundled offering, these arrangements allow us to maintain the customer relationship for future sales of equipment and services.
We analyze these arrangements to determine whether the equipment component meets certain accounting requirements such that the equipment fair value should be recorded as a sale at lease inception, that is, a sales-type lease. We allocate the remaining portion of the monthly minimum payments to the various elements of the lease based on fair value – service, maintenance, supplies and financing – that we generally recognize over the term of the lease agreement, and that we report as “post sale revenue”. In those arrangements that do not qualify as sales-type leases, we recognize revenue over the term of the lease agreement, whether rental or operating lease, and report it in post sale revenue. Our accounting policies for revenue recognition for leases and bundled arrangements are included in Note 1 –Summary of Significant Accounting Policies in the Consolidated Financial Statements in our 2009 Annual Report.
Research and Development
Investment in R&D is critical for competitiveness in our fast-paced markets. More than two-thirds of our equipment sales are from products launched during the past two years. Research activities are conducted in the United States, Canada, Europe and Asia – often in collaboration with Fuji Xerox Co., Ltd. (“Fuji Xerox”).
Our R&D drives innovation and customer value by:
• Creating new differentiated products and services;
• Enabling cost competitiveness through continuous and disruptive innovation for products and services;
• Enabling new ways to serve customers;
• Creating new business opportunities that drive future growth and reach new customers; and
• Creating sustainable/green products, solutions and services.
To ensure our success, we have aligned our R&D investment portfolio with our growth initiatives of accelerating the transition to color, enhancing customer value by building on our services leadership and by strengthening our leadership in digital production printing. The decrease in RD&E spending for 2009 reflects our successful integration of the Production and Office development and engineering infrastructure which optimizes platform development and time to market. 2009 R&D spending focused primarily on the development of high-end communication solutions in digital production printing, extending our enterprise product portfolio for more affordable color and supporting a new generation of workplace solutions, expanding our services offerings and delivering lower-cost platforms and customer productivity enablers. With our R&D investments we have continued to expand the capability of the Xerox iGen family with both higher throughput and image quality and high value solutions to deliver customized and 1:1 marketing materials. We have also extended the market reach of our proprietary solid ink technology through the ColorQube family of products that offer breakthrough running cost for workgroup color applications. Coupled with our Extensible Interface Platform, Xerox Multifunction devices can now help our customers streamline document workflows integrating paper based documents into their enterprise applications. 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.
Patents, Trademarks and Licenses
Xerox and its subsidiaries were awarded 706 U.S. utility patents in 2009. On that basis, we would have ranked 24th 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 1,130 U.S. utility patents in 2009. Our patent portfolio evolves as new patents are awarded to us and as older patents expire. As of December 31, 2009, we held approximately 9,437 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 2009, we added 10 new agreements to our portfolio of patent licensing and sale agreements, and Xerox and its subsidiaries were licensor or seller in 7 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, Océ, Sharp, Samsung and Seiko Epson. These agreements vary in subject matter, scope, compensation, significance and time.
In the U.S., we own approximately 502 trademarks, either registered or applied for. These trademarks have a perpetual life, subject to renewal every ten years. We vigorously enforce and protect our trademarks.
Marketing and Distribution
We manage our business based on the principal business segments described earlier. However, we have organized the marketing, selling and distribution of our products and solutions according to geography and channel type. We sell our products and solutions 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 the U.S. GIS continues to expand its network of office technology suppliers to serve an ever-expanding base of small and medium size businesses. We utilize our direct sales force to address our customers’ more advanced technology, solutions and services requirements, and use cost-effective indirect distribution channels for our basic product offerings.
In large enterprises, we follow a services-led approach that enables us to address two basic challenges facing large enterprises:
• How to optimize infrastructure to be both cost effective and globally consistent.
• How to improve the value proposition and communication with their customers.
In response to these needs, we offer a go-to-market approach that leads with the largest direct sales and service delivery force in the industry available on a globally consistent manner. This can range from hardware, software or services in whatever combination is necessary to meet the needs of that customer.
We market our Phaser line of color and monochrome laser-class and solid ink printers primarily through office information technology resellers, who typically access our products through distributors. We continue to expand our distribution partnerships in North America through additional information technology resellers and by enhancing our network of independent agents. We also continued to increase product offerings available through a two-tiered distribution model in Europe and developing markets.
Our reselling relationship with key partners contributed to our market coverage expansion and new business penetration. Through our global reseller alliance with FujiFilm, we distribute our production products and solutions to graphic communications customers, as well as photo specialty markets spanning retail, professional labs and centralized processing center businesses. In 2009, we signed additional country-level contracts with FujiFilm Graphics Systems in Europe and developing markets to extend Xerox digital production systems reach to new commercial print customers and prospects. We continue to use alliances to integrate "best-in-class" information technologies and services to deliver improved workflow, color management and document output management enabling our customers to accelerate profitable revenue growth in their businesses. Through the world-class Xerox Business Partner Program we are able to deliver an extensive portfolio of products and end-to-end solutions which streamline our customer’s workflows enabling them to reduce costs, improve operational efficiencies and drive new business opportunities.
In Europe, Africa, the Middle East, India, 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 2009, total Xerox revenues of $15.2 billion included approximately $2.6 million attributable to Iran and less than $0.2 million attributable to Sudan and Syria.
Although we encounter aggressive competition in all areas of our business, we are the leader or among the leaders in each of our principal business segments. Our competitors range from large international companies to relatively small firms. We compete on the basis of technology, performance, price, quality, reliability, brand, distribution and customer service and support. To remain competitive we invest in and develop new products and services and continually improve our existing offerings. Our key competitors include Canon, Ricoh, Hewlett-Packard, and, in certain areas of the business, Pitney Bowes, Kodak, Océ, Konica Minolta and Lexmark. With the acquisition of ACS, we will now also compete with a variety of business process outsourcing companies, as well as in-house departments performing the functions that we are seeking to outsource. These competitors can include large multi-national corporations, accounting or consulting companies, smaller niche service providers and offshore service providers in low-cost locations. 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 at competitive prices, and, at any given time, we may set new market standards for quality, speed and function.
As of December 31, 2009, we had a worldwide service force of approximately 12,500 employees and an extensive variable contract service force. We continue to expand our use of cost-effective remote service technology for basic product offerings while utilizing our direct service force and a variable contract service force to address customers’ more advanced technology requirements. The increasing use of a variable contract service force is consistent with our strategy to reduce fixed service costs while maintaining high-quality levels of service. We believe that our service force represents a significant competitive advantage because it is continually trained on our products and its diagnostic equipment is state-of-the-art. We offer service 24 hours a day, 7 days a week, in major metropolitan areas around the world, providing a consistent and superior level of service worldwide.
We finance a large portion of customer purchases of Xerox equipment through our bundled lease arrangements. We believe that financing facilitates customer acquisition of Xerox technology and enhances our value proposition while providing Xerox a profitable revenue stream and an attractive gross margin that provides us a reasonable return on our investment in this business.
As a result of our customer financing program, we benefit by gaining in-depth knowledge of the products being leased and a deep understanding of the customer base and their use of our technology. This knowledge allows us to effectively manage the credit and residual value risk normally associated with financing. Our financing risk is further mitigated because a majority of our lease contracts are non-cancelable and include cancellation penalties approximately equal to the full value of the lease receivables.
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, proceeds from capital market offerings and borrowings under bank credit facilities. At December 31, 2009 we had $7.0 billion of finance receivables and $0.6 billion of equipment on operating leases, or Total Finance assets of $7.6 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 $9.3 billion of debt is associated with our financing business.
Manufacturing and Supply
Our manufacturing and distribution facilities are located around the world. The company's largest manufacturing site is in Webster, New York, where we make fusers, photoreceptors, Xerox iGen and Nuvera systems, components, consumables and other products. Additionally we have an EA Toner plant located in Webster, New York that was built in 2007. Our remaining 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 Office segment products. We also have a major facility in Venray, Netherlands that handles supplies manufacturing and supply chain management for the eastern hemisphere.
We are currently in the third year of a master supply agreement with Flextronics, a global electronics manufacturing services company, to outsource portions of manufacturing for our Office segment. The agreement has a three year term, with two additional one-year extension periods at our option. Our inventory purchases from Flextronics currently represent approximately 20 percent of our overall worldwide inventory procurement and production. Pricing for inventory sourced through Flextronics is generally market based. We have agreed to purchase from Flextronics some products and consumables within specified product families although we do have the ability to source product from other suppliers without penalty to the extent needed. Flextronics is required to acquire inventory based on our forecasted requirements and must maintain sufficient manufacturing capacity to satisfy these requirements. Under certain circumstances, we may become obligated to purchase inventory that remains unused for more than 180 days, becomes obsolete or remains unused on the termination of the supply agreement. If Flextronics were unable to continue to supply product, it would not result in a material disruption to our business because Flextronics primarily provides contract assembly labor and we continue to manage the inbound sourcing and supply chain management of raw materials and sub-assembly parts. In addition, we own the tooling and technology that Flextronics currently uses to produce our products; there are a number of alternative suppliers that could replace the contract assembly labor Flextronics provides and we have business resumption plans in place for Flextronics and other similar suppliers.
We acquire other office 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 arrangements. Refer to Note 7 – Investments in Affiliates, at Equity in the Consolidated Financial Statements in our 2009 Annual Report for additional information regarding our relationship with Fuji Xerox.
Fuji Xerox is an unconsolidated entity in which we currently own a 25 percent interest and FUJIFILM Holdings Corporation (“FujiFilm”) owns a 75 percent interest. 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.
We are incorporating by reference the financial measures by geographical area for 2009, 2008 and 2007 that are included in Note 2 – Segment Reporting in the Consolidated Financial Statements in our 2009 Annual Report. See also the risk factors entitled “Our business, results of operations and financial condition may be negatively impacted by economic conditions abroad, including fluctuating foreign currencies and shifting regulatory schemes.” in Part 1, Item 1A of this Form 10-K.