First-Quarter 2015 Summary:
- GAAP EPS from continuing operations of
16 cents
- Adjusted EPS of 21 cents
- Revenue of $4.5 billion, 56 percent
from Services
- Operating margin of 7.6 percent, down
1.1 percentage points year-over-year
- Cash flow from operations of $113
million
- Share repurchase of $216 million
Xerox (NYSE:XRX) announced today first-quarter 2015 adjusted
earnings per share of 21 cents. Adjusted EPS excludes 5 cents
related to the amortization of intangibles, resulting in GAAP EPS
from continuing operations of 16 cents.
In the first quarter, total revenue of $4.5 billion was down 6
percent or 2 percent in constant currency. Revenue from the
company’s Services business, which represented 56 percent of total
revenue, was $2.5 billion, down 3 percent or up 1 percent in
constant currency. Services margin was 7.5 percent, down 1.1
percentage points, primarily due to higher costs in our legacy
Health Enterprise platform implementations.
Revenue from the company’s Document Technology business was $1.8
billion, down 10 percent or 6 percent in constant currency.
Document Technology margin was 11.1 percent, down 1.1 percentage
points due to increased pension expense, as expected.
“Our earnings are in-line with the guidance we provided,” said
Ursula Burns, Xerox chairman and chief executive officer. “Results
in Document Technology, which included the increased impact from
foreign currency, largely met our expectations. Several of our
Services businesses performed well, but overall Services segment
results fell short of our expectations driven by higher
implementation costs in certain Health Enterprise platform
accounts.”
First-quarter operating margin of 7.6 percent was down 1.1
percentage points from the same quarter a year ago. Gross margin
was 31.2 percent, and selling, administrative and general expenses
were 20.5 percent of revenue.
Xerox generated $113 million in cash flow from operations during
the first quarter, ending the quarter with a cash balance of $872
million. The company repurchased $216 million in stock in the
quarter.
2015 Guidance
We expect increased currency headwinds, softer signings and
acquisition timing to impact revenue; and Services margin to be
impacted by increased implementation costs in legacy Health
Enterprise accounts. As a result, we are adjusting our full
year expectations.
Current 2015Guidance
Previous 2015Guidance
Revenue at Constant Currency Down ~1% Flat Currency
Impact (4) pts (3) - (4) pts
Services margin 8.5% - 9.0% 9.0% -
10.0% GAAP EPS from continuing
operations $0.77 - $0.83 $0.83 - $0.89 Adjusted EPS
$0.95 - $1.01 $1.00 - $1.06
Xerox continues to expect full-year 2015 cash flow from
operations of $1.7 to $1.9 billion and free cash flow from
operations of $1.3 to $1.5 billion.
The company continues to expect to use its strong free cash flow
and anticipated proceeds from the pending ITO divestiture to
repurchase up to $1 billion in shares this year, return
approximately $300 million to shareholders in dividends, and to
spend up to $900 million on acquisitions.
For second-quarter 2015, Xerox expects GAAP earnings of 17 to 19
cents per share and adjusted EPS of 21 to 23 cents per share.
As we previously communicated, these results and guidance
reflect the pending sale of the company’s ITO business to Atos, and
the related reporting of the ITO business as a discontinued
operation.
About Xerox
Xerox is a global business services, technology and
document management company helping
organizations transform the way they manage their
business processes and information. Headquartered in Norwalk,
Conn., we have more than 140,000 Xerox employees and do business in
more than 180 countries. Together, we provide business process
services, printing equipment, hardware and software technology for
managing information -- from data to documents. Learn more at
www.xerox.com.
Non-GAAP Measures
This release refers to the following non-GAAP financial
measures:
- Adjusted EPS (earnings per share) for
the first-quarter 2015 as well as for the second-quarter and
full-year 2015 guidance that excludes certain items.
- Operating margin for the first-quarter
2015 that excludes certain expenses.
- Constant Currency revenue growth for
the first quarter 2015 as well as for the full-year 2015, which
excludes the effects of currency translation.
Refer to the “Non-GAAP Financial Measures” section of this
release for a discussion of these non-GAAP measures and their
reconciliation to the reported GAAP measure.
Forward-Looking Statements
This release 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. Such factors include, but are not
limited to: changes in economic conditions, political conditions,
trade protection measures, licensing requirements and tax matters
in the United States and in the foreign countries in which we do
business; changes in foreign currency exchange rates; our ability
to successfully develop new products, technologies and service
offerings and to protect our intellectual property rights; the risk
that multi-year contracts with governmental entities could be
terminated prior to the end of the contract term and that civil or
criminal penalties and administrative sanctions could be imposed on
us if we fail to comply with the terms of such contracts and
applicable law; the risk that our bids do not accurately estimate
the resources and costs required to implement and service very
complex, multi-year governmental and commercial contracts, often in
advance of the final determination of the full scope and design of
such contracts or as a result of the scope of such contracts being
changed during the life of such contracts; the risk that
subcontractors, software vendors and utility and network providers
will not perform in a timely, quality manner; service
interruptions; actions of competitors and our ability to promptly
and effectively react to changing technologies and customer
expectations; our ability to obtain adequate pricing for our
products and services and to maintain and improve cost efficiency
of operations, including savings from restructuring actions and the
relocation of our service delivery centers; the risk that
individually identifiable information of customers, clients and
employees could be inadvertently disclosed or disclosed as a result
of a breach of our security systems; the risk in the hiring and
retention of qualified personnel; the risk that unexpected costs
will be incurred; our ability to recover capital investments; the
risk that our Services business could be adversely affected if we
are unsuccessful in managing the start-up of new contracts; the
collectability of our receivables for unbilled services associated
with very large, multi-year contracts; reliance on third parties,
including subcontractors, for manufacturing of products and
provision of services; our ability to expand equipment placements;
interest rates, cost of borrowing and access to credit markets; the
risk that our products may not comply with applicable worldwide
regulatory requirements, particularly environmental regulations and
directives; the outcome of litigation and regulatory proceedings to
which we may be a party; and other factors that are set forth in
the “Risk Factors” section, the “Legal Proceedings” section, the
“Management's Discussion and Analysis of Financial Condition and
Results of Operations” section and other sections of our 2014
Annual Report on Form 10-K filed with the U.S. Securities and
Exchange Commission. Xerox assumes no obligation to update any
forward looking statements as a result of new information or future
events or developments, except as required by law.
On December 18, 2014, Xerox announced that it had entered into
an agreement to sell its Information Technology Outsourcing (“ITO”)
business to Atos S.E. The transaction is subject to customary
closing conditions and regulatory approval and is expected to close
in the second quarter of 2015. As a result of the pending sale
of the ITO business and having met applicable accounting
requirements, Xerox is reporting the ITO business as a discontinued
operation. The forward looking statements contained in this release
are subject to the risk that the sale of the ITO business may not
occur on the terms, within the time frame and/or in the manner
previously disclosed, if at all.
Note: To receive RSS news feeds, visit
http://news.xerox.com. For open commentary, industry perspectives
and views visit http://www.linkedin.com/company/xerox,
http://twitter.com/xeroxcorp, http://simplifywork.blogs.xerox.com,
http://www.facebook.com/XeroxCorp,
http://www.youtube.com/XeroxCorp.
Xerox® and Xerox and Design® are trademarks of Xerox in the
United States and/or other countries.
Xerox Corporation
Condensed Consolidated Statements of
Income (Unaudited)
Three Months EndedMarch 31, (in
millions, except per-share data)
2015 2014
% Change Revenues Sales $ 1,126 $ 1,257 (10 )%
Outsourcing, maintenance and rentals 3,253 3,414 (5 )% Financing 90
100 (10 )%
Total Revenues 4,469
4,771 (6 )% Costs and Expenses
Cost of sales 674 778 (13 )% Cost of outsourcing, maintenance and
rentals 2,368 2,454 (4 )% Cost of financing 33 36 (8 )% Research,
development and engineering expenses 141 145 (3 )% Selling,
administrative and general expenses 915 945 (3 )% Restructuring and
asset impairment charges 14 26 (46 )% Amortization of intangible
assets 77 77 — % Other expenses, net 46 39 18 %
Total Costs and Expenses 4,268 4,500
(5 )% Income before Income Taxes &
Equity Income(1) 201 271 (26
)% Income tax expense 39 42 (7 )% Equity in net income of
unconsolidated affiliates 34 42 (19 )%
Income from
Continuing Operations 196 271 (28
)% Income from Discontinued Operations, net of tax 34
15
*
Net Income 230 286 (20 )% Less:
Net income attributable to noncontrolling interests 5 5
— %
Net Income Attributable to Xerox $
225 $ 281 (20 )%
Amounts attributable to Xerox: Net Income from
continuing operations $ 191 $ 266 (28 )% Net Income from
discontinued operations 34 15
*
Net Income attributable to Xerox $ 225
$ 281 (20 )% Basic
Earnings per Share: Continuing Operations
$ 0.17
$ 0.22 (23 )% Discontinued Operations
0.03 0.01
*
Total Basic Earnings per Share $ 0.20
$ 0.23 (13 )% Diluted
Earnings per Share: Continuing Operations
$ 0.16
$ 0.22 (27 )% Discontinued Operations
0.03 0.01
*
Total Diluted Earnings per Share $ 0.19
$ 0.23 (17 )%
* Percent change not meaningful.
(1) Referred to as “Pre-Tax Income” throughout the remainder of
this document.
Xerox Corporation
Condensed Consolidated Statements of
Comprehensive (Loss) Income (Unaudited)
Three Months EndedMarch 31, (in
millions)
2015 2014 Net Income $ 230 $ 286
Less: Net income attributable to noncontrolling interests 5
5
Net Income Attributable to Xerox 225 281
Other Comprehensive (Loss) Income, Net:
Translation adjustments, net (509 ) (1 ) Unrealized gains, net 29
26 Changes in defined benefit plans, net 98 (84 )
Other
Comprehensive Loss, Net (382 ) (59 ) Less: Other comprehensive
loss, net attributable to noncontrolling interests (1 ) —
Other Comprehensive Loss, Net Attributable to Xerox (381 )
(59 ) Comprehensive (Loss) Income, Net (152 ) 227 Less:
Comprehensive income, net attributable to noncontrolling interests
4 5
Comprehensive (Loss) Income, Net Attributable
to Xerox $ (156 ) $ 222
Xerox Corporation
Condensed Consolidated Balance Sheets
(Unaudited)
(in millions, except share data in thousands)
March 31,2015 December 31,2014
Assets Cash and cash equivalents $ 872 $ 1,411 Accounts
receivable, net 2,721 2,652 Billed portion of finance receivables,
net 117 110 Finance receivables, net 1,313 1,425 Inventories 1,009
934 Assets of discontinued operations 1,324 1,260 Other current
assets 1,002 1,082 Total current assets 8,358 8,874
Finance receivables due after one year, net 2,558 2,719 Equipment
on operating leases, net 496 525 Land, buildings and equipment, net
1,087 1,123 Investments in affiliates, at equity 1,383 1,338
Intangible assets, net 1,947 2,031 Goodwill 8,723 8,805 Other
long-term assets 2,105 2,243
Total Assets
$ 26,657 $ 27,658
Liabilities and Equity Short-term debt and current portion
of long-term debt $ 1,333 $ 1,427 Accounts payable 1,471 1,584
Accrued compensation and benefits costs 770 754 Unearned income 424
431 Liabilities of discontinued operations 353 371 Other current
liabilities 1,380 1,509 Total current liabilities
5,731 6,076 Long-term debt 6,265 6,314 Pension and other benefit
liabilities 2,797 2,847 Post-retirement medical benefits 850 865
Other long-term liabilities 419 498
Total
Liabilities 16,062 16,600 Series
A Convertible Preferred Stock 349 349
Common stock 1,113 1,124 Additional paid-in capital 4,151
4,283 Treasury stock, at cost (147 ) (105 ) Retained earnings 9,631
9,491 Accumulated other comprehensive loss (4,540 ) (4,159 ) Xerox
shareholders’ equity 10,208 10,634 Noncontrolling interests 38
75
Total Equity 10,246
10,709 Total Liabilities and Equity $
26,657 $ 27,658 Shares of common
stock issued 1,113,217 1,124,354 Treasury stock (11,048 ) (7,609 )
Shares of common stock outstanding 1,102,169
1,116,745
Xerox Corporation
Condensed Consolidated Statements of
Cash Flows (Unaudited)
Three Months EndedMarch 31, (in
millions)
2015 2014 Cash Flows from
Operating Activities: Net income $ 230 $ 286 Adjustments
required to reconcile net income to cash flows from operating
activities: Depreciation and amortization 296 345 Provision for
receivables 18 16 Provision for inventory 6 10 Net gain on sales of
businesses and assets (12 ) (30 ) Undistributed equity in net
income of unconsolidated affiliates (31 ) (42 ) Stock-based
compensation 22 26 Restructuring and asset impairment charges 14 27
Payments for restructurings (31 ) (36 ) Contributions to defined
benefit pension plans (41 ) (37 ) Increase in accounts receivable
and billed portion of finance receivables (239 ) (239 ) Collections
of deferred proceeds from sales of receivables 72 120 Increase in
inventories (126 ) (60 ) Increase in equipment on operating leases
(70 ) (57 ) Decrease in finance receivables 72 36 Collections on
beneficial interest from sales of finance receivables 15 21
Increase in other current and long-term assets (71 ) (94 )
(Decrease) increase in accounts payable and accrued compensation
(17 ) 8 Decrease in other current and long-term liabilities (26 )
(26 ) Net change in income tax assets and liabilities 32 29 Net
change in derivative assets and liabilities (12 ) (1 ) Other
operating, net 12 (16 ) Net cash provided by operating
activities 113 286
Cash Flows from Investing
Activities: Cost of additions to land, buildings and equipment
(75 ) (84 ) Proceeds from sales of land, buildings and equipment 16
33 Cost of additions to internal use software (20 ) (19 ) Proceeds
from sale of businesses 3 — Acquisitions, net of cash acquired (28
) (54 ) Other investing, net 6 4 Net cash used in
investing activities (98 ) (120 )
Cash Flows from Financing
Activities: Net (payments) proceeds on debt (150 ) 4 Common
stock dividends (70 ) (68 ) Preferred stock dividends (6 ) (6 )
Proceeds from issuances of common stock 10 20 Excess tax benefits
from stock-based compensation 2 3 Payments to acquire treasury
stock, including fees (216 ) (275 ) Repurchases related to
stock-based compensation (1 ) (1 ) Distributions to noncontrolling
interests (54 ) (16 ) Other financing — (10 ) Net cash used
in financing activities (485 ) (349 ) Effect of exchange rate
changes on cash and cash equivalents (69 ) (14 ) Decrease in cash
and cash equivalents (539 ) (197 ) Cash and cash equivalents at
beginning of period 1,411 1,764
Cash and Cash
Equivalents at End of Period $ 872
$ 1,567
Financial Review
On December 18, 2014, Xerox Corporation announced that it
had entered into an agreement to sell its Information Technology
Outsourcing (ITO) business to Atos S.E. (Atos). The transaction is
subject to customary closing conditions and regulatory approval and
is expected to close in second quarter 2015. As a result of the
pending sale of the ITO business and having met applicable
accounting requirements, Xerox is reporting the ITO business as a
discontinued operation. Prior period results have been revised to
reflect this change. Refer to the “Discontinued Operations” section
for further details.
Revenues
Three Months EndedMarch 31,
% of Total Revenue (in millions)
2015
2014 %
Change
CC %Change
2015 2014 Equipment sales $ 624 $ 715
(13)% (8)% 14% 15% Annuity revenue 3,845 4,056 (5)%
(1)% 86% 85%
Total Revenue $ 4,469
$ 4,771 (6)% (2)%
100% 100%
Reconciliation to Condensed Consolidated Statements of
Income: Sales $ 1,126 $ 1,257 (10)% (7)% Less: Supplies, paper
and other sales (502 ) (542 ) (7)% (5)%
Equipment Sales
$ 624 $ 715 (13)% (8)%
Outsourcing, maintenance and rentals $ 3,253 $ 3,414 (5)% (1)% Add:
Supplies, paper and other sales 502 542 (7)% (5)% Add: Financing 90
100 (10)% (3)%
Annuity Revenue $
3,845 $ 4,056 (5)% (1)%
CC - Constant Currency (See "Non-GAAP Financial Measures"
section)
First quarter 2015 total revenues decreased 6% as compared to
first quarter 2014, with a 4-percentage point negative impact from
currency. The 4-percentage point negative impact from currency
reflects the significant weakening of our major foreign currencies
against the U.S. Dollar as compared to the prior year. On a revenue
weighted basis, our major European currencies and the Canadian
dollar were approximately 17% weaker against the U.S. dollar as
compared to the prior year. Revenues from these major foreign
currencies comprise approximately 25% of our Consolidated revenues.
First quarter 2015 total revenues reflect the following:
- Annuity revenue decreased 5% as
compared to first quarter 2014, with a 4-percentage point negative
impact from currency. Annuity revenue is comprised of the
following:
- Outsourcing, maintenance and rentals
revenue includes outsourcing revenue within the Services
segment, and maintenance revenue (including bundled supplies) and
rental revenue primarily within the Document Technology segment.
The decrease of 5% was due to a 4-percentage point negative impact
from currency, and a decline in the Document Technology segment
mostly offset by growth in the Services segment.
- Supplies, paper and other sales
includes unbundled supplies and other sales, primarily within the
Document Technology segment. The decrease of 7% was primarily due
to a 2-percentage point negative impact from currency and reduced
supplies demand primarily due to lower equipment sales in prior
periods and continued weakness in developing markets.
- Financing revenue is generated
from financed sale transactions primarily within the Document
Technology segment. The decrease of 10% reflects a 7-percentage
point negative impact from currency and a lower finance receivable
balance due to lower originations from reduced equipment
sales.
- Equipment sales revenue is
reported primarily within our Document Technology segment and the
Document Outsourcing business within our Services segment.
Equipment sales revenue decreased 13% as compared to first quarter
2014, with a 5-percentage point negative impact from currency. The
decline was driven by lower entry and production equipment sales as
well as overall price declines that continue to be within our
historical range of 5% to 10%.
Additional analysis of the change in revenue for each business
segment is included in the “Segment Review” section.
Costs, Expenses and Other Income
Summary of Key Financial Ratios
The following is a summary of key financial ratios used to
assess our performance:
Three Months EndedMarch 31, 2015
2014 B/(W) Total Gross Margin 31.2 % 31.5 %
(0.3) pts. RD&E as a % of Revenue 3.2 % 3.0 % (0.2) pts. SAG as
a % of Revenue 20.5 % 19.8 % (0.7) pts.
Operating Margin (1)
7.6 % 8.7 % (1.1)
pts. Pre-tax
Income Margin 4.5 % 5.7 % (1.2) pts.
Operating Margin
First quarter 2015 operating margin1 of 7.6% decreased
1.1-percentage points as compared to first quarter 2014, driven by
a 0.9-percentage point increase in operating expenses as a percent
of revenue and a 0.3-percentage point decrease in gross margin. The
operating margin reduction reflects lower revenue and higher costs
associated with our Government Healthcare Health Enterprise
platform implementations as well as higher year-over-year pension
expense and settlement losses (collectively referred to as “pension
expense”). These negative impacts were partially offset by benefits
from restructuring and productivity improvements and moderating net
currency benefits primarily from yen-based purchases. We continue
to expect higher year-over-year pension expense throughout 2015 as
a result of changes in the discount rate and the estimated impact
on settlement losses.
Gross Margin
Gross margin of 31.2% declined 0.3-percentage point as compared
to first quarter 2014. Document Technology gross margin increased
0.8-percentage points while Services gross margin decreased
0.3-percentage points year-over-year. These impacts combined with
the higher proportion of our revenue from Services (which
historically has a lower gross margin) resulted in a modest
reduction in overall gross margin.
Additional analysis of the change in gross margin for each
business segment is included in the “Segment Review” section.
Research, Development and Engineering
Expenses (RD&E)
First quarter 2015 RD&E as a percentage of revenue of 3.2%
increased 0.2-percentage points from first quarter 2014. This
increase was due primarily to the total company revenue decline and
was only partially offset by benefits from the higher mix of
Services revenue (which historically has lower RD&E as a
percentage of revenue) and modest restructuring and productivity
improvements.
RD&E of $141 million was $4 million lower than first quarter
2014, reflecting the impact of restructuring and productivity
improvements. Innovation at Xerox is a core strength, and we
continue to invest at levels that enhance our competitiveness,
particularly in Services, color and software. R&D is
strategically coordinated with Fuji Xerox.
Selling, Administrative and General
Expenses (SAG)
SAG as a percentage of revenue of 20.5% increased 0.7-percentage
points from first quarter 2014. The increase was driven by
increased investments in Services and higher pension and bad debt
expense while total company revenue declined, partially offset by
the higher mix of Services revenue (which historically has lower
SAG as a percentage of revenue) and restructuring and productivity
improvements.
SAG of $915 million was $30 million lower than first quarter
2014. SAG expenses include a $36 million favorable impact from
currency and reflect the following:
- $34 million decrease in selling
expenses.
- $2 million decrease in general and
administrative expenses.
- $6 million increase in bad debt expense
as the first quarter 2014 benefit from a prior period write-off
recovery did not repeat. First quarter 2015 bad debt expense
remained at less than one percent of receivables.
Restructuring and Asset Impairment
Charges
During first quarter 2015, we recorded net restructuring and
asset impairment charges of $14 million, which includes $21 million
of severance costs related to headcount reductions of approximately
580 employees worldwide and $1 million of lease cancellation costs.
These costs were partially offset by $8 million of net reversals
for changes in estimated reserves from prior period
initiatives.
During first quarter 2014, we recorded net restructuring and
asset impairment charges of $26 million, which included $27 million
of severance costs related to headcount reductions of approximately
1,200 employees worldwide, $1 million of lease cancellation costs
and $4 million of asset impairments. These costs were partially
offset by $6 million of net reversals for changes in estimated
reserves from prior period initiatives.
The restructuring reserve balance as of March 31, 2015 for
all programs was $74 million, of which $73 million is expected to
be spent over the next twelve months.
In second quarter 2015, we expect to incur additional
restructuring charges of approximately $0.02 per diluted share for
actions and initiatives that have not yet been finalized.
Worldwide Employment
Worldwide employment of approximately 145,600 as of
March 31, 2015 decreased by approximately 1,900 from
December 31, 2014, due primarily to the impact of
restructuring actions and productivity improvements. Total
headcount includes approximately 9,800 employees who are expected
to transfer to Atos upon closure of the sale of our ITO
business.
Other Expenses, Net
Three Months EndedMarch 31, (in millions)
2015 2014 Non-financing interest expense $ 56
$ 63 Interest income (2 ) (2 ) Gains on sales of businesses and
assets (16 ) (30 ) Currency losses, net 6 1 Litigation matters (1 )
(1 ) Loss on sales of accounts receivables 3 4 Deferred
compensation investment gains (4 ) (2 ) All other expenses, net 4
6
Total Other Expenses, Net $ 46
$ 39
Non-financing interest expense
First quarter 2015 non-financing interest expense of $56 million
was $7 million lower than first quarter 2014. When combined with
financing interest expense (cost of financing), total company
interest expense declined by $10 million from first quarter 2014,
driven by a lower average cost of debt and a lower average debt
balance.
Currency losses, net
First quarter 2015 currency losses are primarily related to
volatility in worldwide exchange rates.
Gains on sales of businesses and
assets
During first quarter 2015, we sold surplus technology assets and
recognized a $14 million gain on the sale. During first quarter
2014, we sold a surplus facility in Latin America and recognized a
$30 million gain on the sale.
Income Taxes
First quarter 2015 effective tax rate was 19.4%. On an adjusted
basis1, first quarter 2015 tax rate was 24.5%, which was lower than
the U.S. statutory tax rate primarily due to foreign tax credits
resulting from anticipated dividends from our foreign subsidiaries
and the geographical mix of profits.
First quarter 2014 effective tax rate was 15.5%. On an adjusted
basis1, first quarter 2014 tax rate was 20.4%, which was lower than
the U.S. statutory tax rate primarily due to a net benefit of $33
million resulting from the redetermination of certain unrecognized
tax positions upon conclusion of several audits as well as foreign
tax credits from anticipated dividends.
Xerox operations are widely dispersed. The statutory tax rate in
most non-U.S. jurisdictions is lower than the combined U.S. and
state tax rate. The amount of income subject to these lower foreign
rates relative to the amount of U.S. income will impact our
effective tax rate. However, no one country outside of the U.S. is
a significant factor to our overall effective tax rate. Certain
foreign income is subject to U.S. tax net of any available foreign
tax credits. Our full year effective tax rate includes a benefit of
approximately 12-percentage points from these non-U.S. operations,
which is slightly higher than 2014 due to the geographical mix of
profits.
Our effective tax rate is based on nonrecurring events as well
as recurring factors, including the taxation of foreign income. In
addition, our effective tax rate will change based on discrete or
other nonrecurring events that may not be predictable. Excluding
the effects of intangibles amortization, we anticipate that our
effective tax rate for second quarter and full year 2015 will be
approximately 25% to 27%.
Equity in Net Income of Unconsolidated Affiliates
Equity in net income of unconsolidated affiliates primarily
reflects our 25% share of Fuji Xerox net income. First quarter 2015
equity income was $34 million, a decrease of $8 million compared to
first quarter 2014. The decrease is driven primarily by translation
currency impacts. Equity income in first quarter 2015 and 2014
includes $1 million and $3 million, respectively, of charges
related to our share of Fuji Xerox after-tax restructuring.
Net Income
First quarter 2015 net income from continuing operations
attributable to Xerox was $191 million, or $0.16 per diluted share.
On an adjusted basis1, net income from continuing operations
attributable to Xerox was $239 million, or $0.21 per diluted share.
First quarter 2015 adjustments to net income reflect the
amortization of intangible assets.
First quarter 2014 net income from continuing operations
attributable to Xerox was $266 million, or $0.22 per diluted share.
On an adjusted basis1, net income from continuing operations
attributable to Xerox was $314 million, or $0.26 per diluted share.
First quarter 2014 adjustments to net income reflect the
amortization of intangible assets.
The Net Income and EPS reconciliation table in the Non-GAAP
Financial Measures section contains the first quarter adjustments
to net income.
The calculations of basic and diluted earnings per share are
included as Appendix I. See Non-GAAP financial measures for
calculation of adjusted EPS.
Discontinued Operations
Information Technology Outsourcing (ITO):
In December 2014, we announced a definitive agreement to sell
our ITO business to Atos for $1.05 billion. The final sales price
is subject to closing balance sheet related adjustments as well as
the potential for additional consideration of $50 million
contingent on the condition of certain assets at closing. The
transaction is subject to customary closing conditions and
regulatory approval and is expected to close in second quarter
2015.
As a result of this pending transaction and having met
applicable accounting requirements, we are reporting the ITO
business ("disposal group") as held for sale and a Discontinued
Operation.
In fourth quarter 2014, we recorded a net pre-tax loss of $181
million related to the pending sale, reflecting the write-down of
the carrying value of the ITO disposal group, inclusive of
goodwill, to its estimated fair value less costs to sell. In first
quarter 2015, we recorded an additional net pre-tax loss of $4
million related to the adjustment of estimates regarding asset
values and related expenses associated with the disposal. In
addition, upon final disposal of the business, we expect to record
additional tax expense of approximately $75 million within
Discontinued Operations primarily related to the difference between
the book basis and tax basis of allocated goodwill. All of the
assets and liabilities of the ITO business are reported as held for
sale at March 31, 2015 and are included in Assets and
Liabilities of Discontinued Operations, respectively, in the
Condensed Consolidated Balance Sheet at March 31, 2015.
Other Discontinued Operations:
Other discontinued operations includes the 2014 closure of Xerox
Audio Visual Solutions, Inc. (XAV) and the 2014 sale of our
Truckload Management Services, Inc. (TMS) business.
Summarized financial information for our Discontinued Operations
is as follows:
Three Months Ended March 31, 2015
2014 (in millions)
ITO Other
Total ITO Other Total
Revenues $ 311 $ — $ 311 $ 328 $
22 $ 350 Income (loss) from operations (1) (2) $ 61 $
— $ 61 $ 21 $ (1 ) $ 20 (Loss) gain on disposal (4 ) — (4 )
— 2 2
Net income before income taxes 57
— 57 21 1 22 Income tax expense (23 ) — (23 ) (7 ) —
(7 )
Income from discontinued
operations, net of tax
$ 34 $ — $ 34 $ 14 $ 1 $ 15
(1) ITO Income from operations for first quarter 2015 excludes
approximately $39 million of depreciation and amortization expenses
(including $7 million for intangibles amortization) since the
business is held for sale.
(2) ITO Income from operations for first quarter 2014 includes
intangible amortization and other expenses of approximately $8
million.
Segment Review
Three Months Ended March 31, (in millions)
Equipment
Sales
Revenue
Annuity
Revenue
Total
Revenues
% of Total
Revenue
Segment
Profit (Loss)
Segment
Margin
2015 Services $ 97 $ 2,417 $ 2,514 56 % $ 189 7.5 % Document
Technology 509 1,321 1,830 41 % 203 11.1 % Other 18 107
125 3 % (62 ) (49.6 )%
Total $
624 $ 3,845 $
4,469 100 % $ 330
7.4 % 2014 Services $ 116 $ 2,469 $ 2,585 54 %
$ 222 8.6 % Document Technology 576 1,468 2,044 43 % 249 12.2 %
Other 23 119 142 3 % (50 ) (35.2 )%
Total $ 715 $ 4,056
$ 4,771 100 % $
421 8.8 %
Refer to Appendix II for the reconciliation of Segment Profit to
Pre-tax Income.
Services
Our Services segment comprises two service offerings: Business
Process Outsourcing (BPO) and Document Outsourcing (DO).
Services Revenue Breakdown:
Three Months EndedMarch
31,
(in millions)
2015 2014 %
Change
CC %Change
Business Processing Outsourcing $ 1,734 $ 1,767 (2)% 1% Document
Outsourcing 780 818 (5)% 2%
Total Revenue -
Services $ 2,514 $ 2,585
(3)% 1%
Note: The above table has been revised to reflect the
reclassification of the ITO business to Discontinued Operations and
excludes intercompany revenue.
Revenue
First quarter 2015 Services revenue of $2,514 million was 56% of
total revenue and decreased 3% from first quarter 2014, with a
4-percentage point negative impact from currency.
- BPO revenue decreased 2%, with a
3-percentage point negative impact from currency, and represented
69% of total Services revenue. Growth from acquisitions and organic
growth in several lines of business was partially offset by a
combined 4.0-percentage point anticipated decline from the run-off
of the student loan business and the Texas Medicaid contract. This
negative year-over-year impact pressured total Services revenue
growth by 2.7-percentage points and will dissipate in the second
half of 2015.
- In first quarter 2015, BPO revenue mix
across the major business areas was as follows: Commercial Business
Groups (excluding healthcare) - 45%; Public Sector - 27%;
Commercial Healthcare - 15%; and Government Healthcare - 13%.
- DO revenue decreased 5%, with a
7-percentage point negative impact from currency, and represented
31% of total Services revenue. Growth in our partner print services
offerings was partially offset by declines in non-U.S. markets due
to contract run-off and new contract ramp timing.
Segment Margin
First quarter 2015 Services segment margin of 7.5% decreased by
1.1-percentage points from first quarter 2014, driven by a modest
decline in gross margin and increased SAG. Operating margins
improved across Document Outsourcing and several BPO lines of
business. Lower revenue and increased expenses associated with our
Government Healthcare Health Enterprise platform implementations,
targeted investments in go-to-market and leadership resources and
increased compensation and benefit expenses, combined with price
declines that were consistent with prior periods, more than offset
productivity improvements and restructuring benefits.
Metrics
Signings
Signings are defined as estimated future revenues from contracts
signed during the period, including renewals of existing contracts.
First quarter 2015 Services signings were $2.4 billion in Total
Contract Value (“TCV”).
- BPO signings of $1.8 billion TCV
- DO signings of $630 million TCV
Signings declined 13% from first quarter 2014. The reduction
reflects a decline in new business signings and a measurably lower
level of renewal decision opportunities. Signings on a trailing
twelve month (“TTM”) basis decreased 10% from the comparable prior
year period. New business annual recurring revenue (“ARR”) and
non-recurring revenue (“NRR”) decreased 26% from first quarter 2014
and decreased 17% on a TTM basis. DO signings do not include
signings from our growing partner print services offerings. As of
March 31, 2015, there were two significant new business
opportunities with combined TCV in excess of $1 billion that were
awarded in 2014 but were not signed and approved, the New York MMIS
and Florida Tolling contracts. The New York MMIS contract was
finalized in April 2015, and we expect the Florida Tolling contract
to be finalized in second quarter 2015.
Note: TCV is the estimated total contractual revenue related to
future contracts in the pipeline or signed contracts, as
applicable.
Renewal rate (Total Services)
Renewal rate is defined as the ARR on contracts that are renewed
during the period as a percentage of ARR on all contracts for which
a renewal decision was made during the period. The combined first
quarter 2015 contract renewal rate for BPO and DO contracts was
91%, which was modestly above our target range of 85%-90%. Total
renewal decision opportunities in the quarter were measurably below
first quarter 2014.
Pipeline
The sales pipeline includes the TCV of new business
opportunities that potentially could be contracted within the next
six months and excludes business opportunities with estimated
annual recurring revenue in excess of $100 million. Our total
Services sales pipeline declined 7% from fourth quarter 2014. Due
to the fourth quarter 2014 pipeline adjustments that removed the
ITO business, reflected the realignment of our Services
go-to-market resources into industry focused business groups and
revised the pipeline qualification criteria, we will be comparing
against the fourth quarter 2014 pipeline throughout 2015.
Document Technology
Our Document Technology segment includes the sale of products
and supplies, as well as the associated maintenance and financing
of those products.
Document Technology Revenue
Breakdown:
Three Months EndedMarch 31, (in
millions)
2015 2014 % Change
CC %Change
Equipment sales $ 509 $ 576 (12)% (8)% Annuity revenue 1,321
1,468 (10)% (5)%
Total Revenue $ 1,830
$ 2,044 (10)% (6)%
First quarter 2015 Document Technology revenue of $1,830 million
decreased 10% from first quarter 2014, with a 4-percentage point
negative impact from currency. Document Technology revenues exclude
Document Outsourcing. Inclusive of Document Outsourcing, first
quarter 2015 aggregate document-related revenue decreased 9% from
first quarter 2014, with a 5-percentage point negative impact from
currency. Document Technology segment revenue results included the
following:
- Equipment sales revenue
decreased 12% from first quarter 2014, with a 4-percentage point
negative impact from currency. The equipment sales decrease
reflects lower sales of entry and production products and overall
price declines that were within our historical range of 5% to
10%.
- Annuity revenue decreased 10%
from first quarter 2014, with a 5-percentage point negative impact
from currency. The Annuity revenue reflects a modest decline in
total pages, continued migration of customers to our partner print
services offering (included in our Services segment), lower
supplies demand and reduced financing revenue reflecting a lower
finance receivables balance due to lower originations.
Document Technology revenue mix was 57% mid-range, 23% high-end
and 20% entry, consistent with recent quarters.
Segment Margin
First quarter 2015 Document Technology segment margin of 11.1%
decreased 1.1-percentage points from first quarter 2014, including
a 0.8-percentage point increase in gross margin. The gross margin
improvement reflects a moderating net currency benefit primarily
from yen-based purchases, restructuring and cost initiative
benefits, and favorable revenue mix that more than offset
consistent price declines and the anticipated increase in pension
costs. SAG increased as a percent of revenue as higher pension and
bad debt expense and the impact of overall lower revenues more than
offset benefits from restructuring and productivity
improvements.
Total Installs (Document Technology and
Document Outsourcing)2
Install activity includes Document Outsourcing and Xerox-branded
products shipped to Global Imaging Systems. Detail by product group
(see Appendix II) is shown below:
Entry
Higher declines in developing markets, including Eurasia, are
more than offsetting the benefits of new product launches and other
Entry go-to-market investments over the last several quarters.
- 1% increase in color printers.
- 30% decrease in color multifunction
devices.
- 22% decrease in black-and-white
multifunction devices.
Mid-Range
- 1% decrease in mid-range color is
consistent with recent quarters.
- 1% decrease in mid-range
black-and-white is consistent with recent quarters.
High-End
- 8% increase in high-end color systems
driven primarily by the new Versant product. Excluding Fuji Xerox
digital front-end sales, high-end color installs decreased 26% due
to timing of customer orders and product launches.
- 5% decrease in high-end black-and-white
systems reflects the overall market dynamics in this segment.
Other
Revenue
First quarter 2015 Other revenue of $125 million decreased 12%
from first quarter 2014, with a negative 1-percentage point impact
from currency. The decrease is due primarily to lower IT and
networking hardware and services sales and modestly lower paper and
wide-format sales. Total paper revenue (all within developing
markets) comprised over 40% of Other segment revenue in the
quarter.
Segment Loss
First quarter 2015 Other segment loss of $62 million increased
$12 million from first quarter 2014, primarily driven by lower
gains on asset sales. Non-financing interest expense as well as all
Other expenses, net (excluding Deferred compensation investment
gains) are reported within the Other segment.
Notes:
(1) See the “Non-GAAP Financial Measures” section for an
explanation of the non-GAAP financial measure.
(2) Revenue from Document Outsourcing installations is reported
in the Services segment.
Capital Resources and Liquidity
The following table summarizes our cash and cash equivalents for
the three months ended March 31, 2015 and 2014:
Three Months EndedMarch 31, (in
millions)
2015 2014 Change Net
cash provided by operating activities $ 113 $ 286 $ (173 ) Net cash
used in investing activities (98 ) (120 ) 22 Net cash used in
financing activities (485 ) (349 ) (136 ) Effect of exchange rate
changes on cash and cash equivalents (69 ) (14 ) (55 ) Decrease in
cash and cash equivalents (539 ) (197 ) (342 ) Cash and cash
equivalents at beginning of period 1,411 1,764 (353 )
Cash and Cash Equivalents at End of Period $
872 $ 1,567 $ (695
)
Cash Flows from Operating
Activities
Net cash provided by operating activities was $113 million in
first quarter 2015. The $173 million decrease in operating cash
from first quarter 2014 was primarily due to the following:
- $79 million decrease in pre-tax income
before depreciation and amortization, gain on sales of businesses
and assets and restructuring.
- $66 million decrease primarily due to
the timing of purchases, the impact from lower than expected sales
volume in certain product lines and post sale consumables, as well
as higher levels of in transit inventory.
- $48 million decrease from accounts
receivable primarily due to the timing of collections.
- $25 million decrease from accounts
payable and accrued compensation primarily related to the timing of
accounts payable payments.
- $30 million increase from finance
receivables primarily related to a lower impact from prior period
sales of receivables. See Sales of Finance Receivables for further
discussion.
- $14 million increase from lower
spending from product software and up-front costs.
Cash flow from operations in first quarter 2015 and 2014 include
a use of cash of $13 million and $32 million, respectively, related
to our ITO business.
Cash Flows from Investing
Activities
Net cash used in investing activities was $98 million in first
quarter 2015. The $22 million decrease in the use of cash from
first quarter 2014 was primarily due to the following:
- $26 million decrease in acquisitions.
First quarter 2015 reflects the acquisition of Intrepid Learning
Solutions, Inc. for $28 million while first quarter 2014 reflects
the acquisition of Invoco Holding GmbH for $54 million.
- $14 million lower proceeds from the
sale of assets and businesses. First quarter 2014 included a sale
of a surplus facility in Latin America for $32 million while first
quarter 2015 reflects a few smaller transactions.
Capital expenditures (including internal use software) in first
quarter 2015 and 2014 include approximately $20 million in each
year related to our ITO business.
Cash Flows from Financing
Activities
Net cash used in financing activities was $485 million in first
quarter 2015. The $136 million increase in the use of cash from
first quarter 2014 was primarily due to the following:
- $154 million increase from net debt
activity primarily due to the first quarter 2015 payment of $1
billion on Senior Notes offset by net proceeds of $648 million from
the issuance of Senior Notes and an increase of $204 million in
Commercial Paper.
- $38 million increase due to higher
distributions to noncontrolling interests.
- $59 million decrease in share
repurchases.
Customer Financing Activities
The following represents our Total finance assets, net
associated with our lease and finance operations:
(in millions)
March 31, 2015 December 31,
2014 Total Finance receivables, net (1) $ 3,988 $ 4,254
Equipment on operating leases, net 496 525
Total Finance
Assets, net (2) $ 4,484 $
4,779
____________________________
(1) Include (i) billed portion of finance receivables, net,
(ii) finance receivables, net and (iii) finance
receivables due after one year, net as included in our Condensed
Consolidated Balance Sheets.
(2) Change from December 31, 2014 includes a decrease of
$216 million due to currency across all Finance Assets.
The following summarizes our debt:
(in millions)
March 31, 2015 December 31,
2014 Principal debt balance(1) $ 7,580 $ 7,722 Net unamortized
discount (54 ) (54 ) Fair value adjustments(2) - terminated swaps
63 68 - current swaps 9 5
Total Debt $
7,598 $ 7,741
____________________________
(1) Includes Commercial Paper of $354 million as of
March 31, 2015, and Notes Payable of $1 million and Commercial
Paper of $150 as of December 31, 2014.
(2) Fair value adjustments include the following: (i) fair
value adjustments to debt associated with terminated interest rate
swaps, which are being amortized to interest expense over the
remaining term of the related notes; and (ii) changes in fair
value of hedged debt obligations attributable to movements in
benchmark interest rates. Hedge accounting requires hedged debt
instruments to be reported inclusive of any fair value
adjustment.
Our lease contracts permit customers to pay for equipment over
time rather than at the date of installation; therefore, we
maintain a certain level of debt (that we refer to as financing
debt) to support our investment in these lease contracts, which are
reflected in Total finance assets, net. For this financing aspect
of our business, we maintain an assumed 7:1 leverage ratio of debt
to equity as compared to our finance assets.
Based on this leverage, the following represents the breakdown
of total debt between financing debt and core debt:
March 31, 2015 December 31, 2014 (in
millions) Financing Debt(1) $ 3,924 $ 4,182 Core Debt 3,674
3,559
Total Debt $ 7,598 $
7,741
____________________________
(1) Financing Debt includes $3,490 million and $3,722 million as
of March 31, 2015 and December 31, 2014, 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.
Capital Market Activity - Senior
Notes
In March 2015, we issued $400 million of 2.75% Senior Notes due
2020 and $250 million of 4.80% Senior Notes due 2035 resulting in
aggregate net proceeds of $648 million. Interest on the Senior
Notes is payable semi-annually. Debt issuance costs of $6 million
were paid and deferred with the issuance of these Senior Notes. The
proceeds were used for general corporate purposes, which included
repayment of a portion of our outstanding borrowings.
Sales of Accounts Receivable
Accounts receivable sales arrangements are utilized in the
normal course of business as part of our cash and liquidity
management. We have facilities in the U.S., Canada and several
countries in Europe that enable us to sell certain accounts
receivable without recourse to third-parties. The accounts
receivables sold are generally short-term trade receivables with
payment due dates of less than 60 days. Accounts receivable sales
for the periods presented were as follows:
Three Months EndedMarch 31, (in millions)
2015 2014 Accounts receivable sales $ 602 $
822 Deferred proceeds 62 124 Loss on sales of accounts receivable 3
4 Estimated increase to operating cash flows (1) 17 11
____________________________
(1) Represents the difference between current and prior period
receivable sales adjusted for the effects of the deferred proceeds,
collections prior to the end of the quarter and currency.
Sales of Finance Receivables
In 2013 and 2012, we transferred our entire interest in certain
groups of lease finance receivables to third-party entities. The
transfers were accounted for as sales and resulted in the
de-recognition of lease receivables with a net carrying value of
$676 million in 2013 and $682 million in 2012, respectively. We
continue to service the sold receivables and record servicing fee
income over the expected life of the associated receivables.
The net impact on operating cash flows from these transactions
for the periods presented is summarized below:
Three Months EndedMarch 31, (in millions)
2015 2014 Impact from prior sales of finance
receivables (1) $ (105 ) $ (149 ) Collections on beneficial
interest 18 26 Estimated decrease to operating cash
flows $ (87 ) $ (123 )
____________________________
(1) Represents cash that would have been collected if we had not
sold finance receivables.
Forward-Looking Statements
This release 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. Such factors include but are not
limited to: changes in economic conditions, political conditions,
trade protection measures, licensing requirements and tax matters
in the United States and in the foreign countries in which we do
business; changes in foreign currency exchange rates; our ability
to successfully develop new products, technologies and service
offerings and to protect our intellectual property rights; the risk
that multi-year contracts with governmental entities could be
terminated prior to the end of the contract term and that civil or
criminal penalties and administrative sanctions could be imposed on
us if we fail to comply with the terms of such contracts and
applicable law; the risk that our bids do not accurately estimate
the resources and costs required to implement and service very
complex, multi-year governmental and commercial contracts, often in
advance of the final determination of the full scope and design of
such contracts or as a result of the scope of such contracts being
changed during the life of such contracts; the risk that
subcontractors, software vendors and utility and network providers
will not perform in a timely, quality manner; service
interruptions; actions of competitors and our ability to promptly
and effectively react to changing technologies and customer
expectations; our ability to obtain adequate pricing for our
products and services and to maintain and improve cost efficiency
of operations, including savings from restructuring actions and the
relocation of our service delivery centers; the risk that
individually identifiable information of customers, clients and
employees could be inadvertently disclosed or disclosed as a result
of a breach of our security systems; the risk in the hiring and
retention of qualified personnel; the risk that unexpected costs
will be incurred; our ability to recover capital investments; the
risk that our Services business could be adversely affected if we
are unsuccessful in managing the start-up of new contracts; the
collectability of our receivables for unbilled services associated
with very large, multi-year contracts; reliance on third parties,
including subcontractors, for manufacturing of products and
provision of services; our ability to expand equipment placements;
interest rates, cost of borrowing and access to credit markets; the
risk that our products may not comply with applicable worldwide
regulatory requirements, particularly environmental regulations and
directives; the outcome of litigation and regulatory proceedings to
which we may be a party; and other factors that are set forth in
the “Risk Factors” section, the “Legal Proceedings” section, the
“Management’s Discussion and Analysis of Financial Condition and
Results of Operations” section and other sections of our 2014
Annual Report on Form 10-K filed with the Securities and Exchange
Commission. Xerox assumes no obligation to update any
forward-looking statements as a result of new information or future
events or developments, except as required by law.
On December 18, 2014, Xerox announced that it had entered
into an agreement to sell its Information Technology Outsourcing
(ITO) business to Atos. The transaction is subject to customary
closing conditions and regulatory approval and is expected to close
in second quarter 2015. As a result of the pending sale of the ITO
business and having met applicable accounting requirements, Xerox
is reporting the ITO business as a discontinued operation. The
forward looking statements contained in this release are subject to
the risk that the sale of the ITO business may not occur on the
terms, within the time and/or in the manner as previously
disclosed, if at all.
Non-GAAP Financial Measures
We have reported our financial results in accordance with
generally accepted accounting principles (GAAP). In addition, we
have discussed the non-GAAP measures described below. 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 as well as in the 2015
first quarter presentation slides available at www.xerox.com/investor.
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.
Adjusted Earnings Measures
To better understand the trends in our business, we believe it
is necessary to adjust the following amounts determined in
accordance with GAAP to exclude the effects of certain items as
well as their related income tax effects.
- Net income and Earnings per share
(EPS)
- Effective tax rate
In 2015 and 2014 we adjusted for the amortization of intangible
assets. The amortization of intangible 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.
We also calculate and utilize an Operating income and margin
earnings measure by adjusting our pre-tax income and margin amounts
to exclude certain items. In addition to the amortization of
intangible assets, operating income and margin also exclude Other
expenses, net as well as Restructuring and asset impairment
charges. Other expenses, net is primarily comprised of
non-financing interest expense and also includes certain other
non-operating costs and expenses. Restructuring and asset
impairment charges consist of costs primarily related to severance
and benefits for employees pursuant to formal restructuring and
workforce reduction plans. Such charges are expected to yield
future benefits and savings with respect to our operational
performance. We exclude these amounts in order to evaluate our
current and past operating performance and to better understand the
expected future trends in our business.
Constant Currency
To better understand trends in our business, we believe that it
is helpful to adjust revenue to exclude the impact of changes in
the translation of foreign currencies into U.S. dollars. We refer
to this adjusted revenue as “constant currency.” Currencies for
developing market countries (Latin America, Brazil, Middle East,
India, Eurasia and Central-Eastern Europe) that we operate in are
reported at actual exchange rates for both actual and constant
revenue growth rates because (1) these countries historically
have had volatile currency and inflationary environments and
(2) our subsidiaries in these countries have historically
taken pricing actions to mitigate the impact of inflation and
devaluation. Management believes the constant currency measure
provides investors an additional perspective on revenue trends.
Currency impact can be determined as the difference between actual
growth rates and constant currency growth rates.
Management believes that these non-GAAP financial measures
provide an additional means of analyzing the current period’s
results against the corresponding prior period’s 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 and the
most directly comparable measures calculated and presented in
accordance with GAAP are set forth on the following tables:
Net Income and EPS
reconciliation:
Three Months EndedMarch 31, 2015
Three Months EndedMarch 31, 2014 (in millions; except
per share amounts)
Net Income EPS Net
Income EPS Reported(1) $
191 $ 0.16 $ 266 $
0.22
Adjustments:
Amortization of intangible assets 48 0.05 48
0.04
Adjusted $ 239 $
0.21 $ 314 $ 0.26
Weighted average shares for adjusted EPS(2) 1,127 1,225 Fully
diluted shares at end of period(3) 1,146
____________________________
(1) Net Income and EPS from continuing operations attributable
to Xerox.
(2) Average shares for the calculation of adjusted EPS for first
quarter 2015 exclude 27 million of shares associated with the
Series A convertible preferred stock as to include these shares
would be anti-dilutive and therefore the related quarterly dividend
was included. For first quarter 2014, these shares were included in
the adjusted EPS calculation and therefore the related quarterly
dividend was excluded.
(3) Represents common shares outstanding at March 31, 2015
as well as shares associated with our Series A convertible
preferred stock plus dilutive potential common shares as used for
the calculation of diluted earnings per share in first quarter
2015.
Guidance:
Earnings Per Share Q2 2015 FY
2015 GAAP EPS from Continuing Operations $0.17 -
$0.19 $0.77 - $0.83
Adjustments:
Amortization of intangible assets 0.04 0.18
Adjusted
EPS $0.21 - $0.23 $0.95 - $1.01
____________________________
Note: GAAP and Adjusted EPS guidance includes anticipated
restructuring
Effective Tax reconciliation:
Three Months EndedMarch 31, 2015
Three Months EndedMarch 31, 2014 (in millions)
Pre-Tax
Income
Income
Tax
Expense
Effective
Tax
Rate
Pre-Tax
Income
Income
Tax
Expense
Effective
Tax Rate
Reported(1) $ 201 $ 39
19.4 % $ 271 $ 42
15.5 %
Adjustments:
Amortization of intangible assets 77 29 77
29
Adjusted $ 278
$ 68 24.5 % $ 348
$ 71 20.4 %
____________________________
(1) Pre-Tax Income and Income Tax Expense from continuing
operations attributable to Xerox.
Operating Income / Margin
reconciliation:
Three Months EndedMarch 31, 2015
Three Months EndedMarch 31, 2014 (in millions)
Profit Revenue Margin
Profit Revenue Margin
Reported pre-tax income(1) $ 201
$ 4,469 4.5 % $ 271
$ 4,771 5.7 %
Adjustments:
Amortization of intangible assets 77 77 Xerox restructuring charge
14 26 Other expenses, net 46 39
Adjusted Operating $ 338 $
4,469 7.6 % $ 413 $
4,771 8.7 % Equity in net income of
unconsolidated affiliates 34 42 Business transformation costs 4 3
Fuji Xerox restructuring charge 1 3 Other expenses, net* (47 )
(40 )
Segment Profit/Revenue
$ 330 $ 4,469 7.4
% $ 421 $ 4,771
8.8 %
____________________________
* Includes rounding adjustments.
(1) Profit and Revenue from continuing operations attributable
to Xerox.
APPENDIX I
Xerox Corporation
Earnings per Common Share
(in millions, except per share data.
Shares in thousands)
Three Months EndedMarch
31,
2015 2014 Basic Earnings per Share: Net
income from continuing operations attributable to Xerox $ 191 $ 266
Accrued dividends on preferred stock (6 ) (6 ) Adjusted net income
from continuing operations available to common shareholders $ 185 $
260 Net income from discontinued operations attributable to Xerox
34 15 Adjusted net income available to common
shareholders $ 219 $ 275 Weighted average common
shares outstanding 1,109,999 1,178,828
Basic
Earnings per Share: Continuing operations $ 0.17 $ 0.22
Discontinued operations 0.03 0.01 Total $ 0.20
$ 0.23
Diluted Earnings per Share: Net income from
continuing operations attributable to Xerox $ 191 $ 266 Accrued
dividends on preferred stock (6 ) (6 ) Adjusted net income from
continuing operations available to common shareholders $ 185 $ 260
Net income from discontinued operations attributable to Xerox 34
15 Adjusted net income available to common
shareholders $ 219 $ 275 Weighted average common
shares outstanding 1,109,999 1,178,828 Common shares issuable with
respect to: Stock options 1,879 3,580 Restricted stock and
performance shares 14,740 15,021 Convertible preferred stock — —
Convertible securities — 332 Adjusted weighted
average common shares outstanding 1,126,618 1,197,761
Diluted Earnings per Share: Continuing operations $ 0.16 $
0.22 Discontinued operations 0.03 0.01 Total $ 0.19
$ 0.23
The following securities were not included
in the computation of diluted earnings per share as they were
either contingently issuable shares or shares that if included
would have been anti-dilutive:
Stock options 2,716 7,742 Restricted stock and performance shares
16,730 19,183 Convertible preferred stock 26,966 26,966
Total Anti-Dilutive Securities 46,412 53,891
Dividends per Common Share $ 0.0700 $ 0.0625
APPENDIX II
Xerox Corporation
Reconciliation of Segment Operating
Profit to Pre-Tax Income
Three Months Ended March 31, (in millions)
2015 2014 Segment Profit $ 330 $ 421
Reconciling items: Restructuring and related costs 1 (18 ) (29 )
Restructuring charges of Fuji Xerox (1 ) (3 ) Amortization of
intangible assets (77 ) (77 ) Equity in net income of
unconsolidated affiliates (34 ) (42 ) Other 1 1
Pre-Tax Income $ 201 $
271
1 First quarter 2015 and 2014 Restructuring and asset
impairment charges of $14 and $26, respectively, and business
transformation costs of $4 and $3, respectively.
Our reportable segments are aligned to how we manage the
business and view the markets we serve. Our reportable segments are
Services, Document Technology and Other.
Services:
The Services segment comprises two service offerings:
- Business Process Outsourcing.
- Document Outsourcing, which includes
Managed Print Services, Central Print Services and revenues from
our partner print services offerings.
Document Technology:
The Document Technology segment is centered around strategic
product groups, which share common technology, manufacturing and
product platforms. This segment includes the sale of document
systems and supplies, provision of technical service and financing
of products. 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. This includes products that fall into the market
categories, Color 41+ppm <$100K and Light Production 91+ppm
<$100K.
- “High-End”, which includes production
printing and publishing systems that generally serve the graphic
communications marketplace and large enterprises.
Other:
The Other segment includes paper sales in our developing market
countries, Wide Format Systems, licensing revenue, Global Imaging
network integration solutions and electronic presentation systems
and non-allocated corporate items including non-financing interest
and other items included in Other expenses, net.
XeroxMedia Contacts:Sean Collins,
+1-310-497-9205sean.collins2@xerox.comorKaren Arena,
+1-732-407-8510karen.arena@xerox.comorInvestor
Contacts:Jennifer Horsley,
+1-203-849-2656jennifer.horsley@xerox.comorTroy Anderson,
+1-203-849-2672troy.anderson@xerox.com
Xerox (NYSE:XRX)
Historical Stock Chart
From Mar 2024 to Apr 2024
Xerox (NYSE:XRX)
Historical Stock Chart
From Apr 2023 to Apr 2024
