- Delivers GAAP EPS of 3 cents and
adjusted EPS of 22 cents, within guidance
- Services delivers revenue of $2.5
billion, up 1 percent or 2 percent at constant currency
- Document Technology revenue of $1.6
billion, declines 10 percent or 9 percent at constant currency
- Operating margin of 7.2 percent,
seasonally lower
- Affirms full year 2016 revenue and
adjusted earnings guidance
- Separation on track to complete by the
end of 2016
Xerox (NYSE:XRX) announced today its first-quarter financial
results and reaffirmed its full-year adjusted earnings guidance.
The company reported it remains on track to complete its planned
separation into two independent, publicly-traded companies by the
end of the year and said it has made important progress on its
three-year, $2.4 billion strategic transformation program.
Xerox delivered adjusted earnings per share of 22 cents in the
first quarter of 2016. Adjusted EPS excludes after-tax costs of
$197 million or 19 cents per share, related to the amortization of
intangibles, restructuring and related costs, certain retirement
related costs and separation costs, resulting in GAAP EPS from
continuing operations of 3 cents.
“We delivered adjusted EPS in line with our guidance, revenue
growth in both the Document Outsourcing and BPO businesses of our
Services segment, and a strong renewal rate in Services. Document
Technology revenue declines remained in line with last quarter and
continue to be pressured by weak developing markets economies. We
have accelerated our cost reduction efforts across the company and
expect to begin realizing the benefits in the second quarter,” said
Ursula Burns, Xerox chairman and chief executive officer.
“I’m pleased with our progress on our strategic transformation
and separation,” Burns added. “We put in place a robust program
management structure, mapped our path to the separation, initiated
leadership searches and began building the strategic, operational
and financial foundation of each company.”
First Quarter Results
First-quarter total revenue of $4.3 billion was down 4 percent
or 3 percent in constant currency. The Services business, which
represented 58 percent of total revenue, delivered $2.5 billion in
revenue, representing an increase of 1 percent or 2 percent in
constant currency. Services margin was 7.7 percent, up 0.1
percentage point.
Revenue from the company’s Document Technology business was $1.6
billion, down 10 percent or 9 percent in constant currency.
Document Technology margin was 10.2 percent, down 2.5 percentage
points.
First-quarter operating margin of 7.2 percent was down 1.3
percentage points from the same quarter a year ago. Gross margin
and selling, administrative and general expenses were 29.9 percent
and 20.6 percent, respectively. Adjusted gross margin and selling,
administrative and general expenses (excluding certain retirement
related costs) were 30.3 percent and 20.1 percent,
respectively.
Xerox used $25 million in cash flow from operations during the
first quarter, in line with normal seasonality, and ended the
quarter with a cash balance of $1.2 billion.
Separation and Strategic Transformation Update
On January 29, 2016, Xerox announced a plan to separate into two
independent, publicly-traded companies, each of which will be a
leader in its respective industry. Xerox intends to make its
initial Form 10 registration statement filing with the Securities
and Exchange Commission in July 2016, on track to complete the
separation by year-end. The company has determined that the optimal
transaction structure for the separation is a tax-free spinoff of
its BPO business. Xerox expects to incur one-time separation costs
of approximately $200 to $250 million in 2016, inclusive of $8
million incurred in the first quarter. This amount does not include
potential tax cost related to the separation, some of which may be
offset by foreign tax credits.
In conjunction with the separation, Xerox is implementing a
three-year strategic transformation program to deliver significant
productivity gains and cost reductions across its businesses. It
expects to realize approximately $700 million in annualized savings
in 2016 from ongoing and incremental initiatives. The company
recorded $126 million of restructuring and related costs in the
first quarter related to the program and anticipates total
restructuring and related costs of $300 million for the full
year.
2016 Guidance
For second-quarter 2016, Xerox expects GAAP EPS of 6 to 8 cents
and adjusted EPS of 24 to 26 cents.
The company affirmed its full-year guidance for adjusted EPS of
$1.10 to $1.20 per share.
Xerox is aligning its full-year GAAP EPS and cash flow guidance
to reflect separation costs and higher restructuring and related
costs. The company now expects full-year GAAP EPS of 45 to 55
cents, previously 66 to 76 cents. Xerox expects full-year 2016 cash
flow from operations of $950 million to $1.2 billion, previously
$1.3 to $1.5 billion, and free cash flow of $600 to $850 million,
previously $1.0 to $1.2 billion.
About Xerox
Xerox is helping change the way the world works. By applying our
expertise in imaging, business process, analytics, automation and
user-centric insights, we engineer the flow of work to provide
greater productivity, efficiency and personalization. Our employees
create meaningful innovations and provide business process
services, printing equipment, software and solutions that make
a real difference for our clients and their customers in a 180
countries. On January 29, 2016, Xerox announced that it plans to
separate into two independent, publicly-traded companies: a
business process outsourcing company and a document technology
company. Xerox expects to complete the separation by year-end
2016. Learn more at www.xerox.com.
Non-GAAP Measures
This release refers to the following non-GAAP financial
measures:
- Adjusted gross margin and selling,
administrative and general expenses for the first quarter 2016 that
exclude certain retirement related costs.
- Adjusted EPS, for the first quarter
2016 as well as for the second quarter and full year 2016 guidance,
which excludes the amortization of intangibles, restructuring and
related costs, certain retirement related costs as well as
separation costs.
- Operating margin, for the first quarter
2016, that excludes Other expenses, net in addition to the EPS
adjustments noted above.
- Constant Currency revenue growth, for
the first quarter 2016, 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,
including with respect to the proposed separation of the Business
Process Outsourcing ("BPO") business from the Document Technology
and Document Outsourcing business, the expected timetable for
completing the separation, the future financial and operating
performance of each business, the strategic and competitive
advantages of each business, future opportunities for each business
and the expected amount of cost reductions that may be realized in
the cost transformation program, 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; the possibility that the proposed
separation of the BPO business from the Document Technology and
Document Outsourcing business will not be consummated within the
anticipated time period or at all, including as the result of
regulatory, market or other factors; the potential for disruption
to our business in connection with the proposed separation; the
potential that BPO and Document Technology and Document Outsourcing
do not realize all of the expected benefits of the separation; 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 2015 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.
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United States and/or other countries.
Xerox Corporation
Condensed Consolidated Statements of
Income (Unaudited)
Three Months EndedMarch 31, (in millions,
except per-share data)
2016 2015 %
Change Revenues Sales $ 1,021 $ 1,126 (9 )% Outsourcing,
maintenance and rentals 3,177 3,253 (2 )% Financing 83 90
(8 )%
Total Revenues 4,281 4,469
(4 )% Costs and Expenses Cost of sales
624 674 (7 )% Cost of outsourcing, maintenance and rentals 2,344
2,368 (1 )% Cost of financing 33 33 — % Research, development and
engineering expenses 134 141 (5 )% Selling, administrative and
general expenses 882 915 (4 )% Restructuring and related costs 126
14 * Amortization of intangible assets 89 77 16 % Separation costs
8 — * Other expenses, net 57 46 24 %
Total Costs
and Expenses 4,297 4,268 1
% (Loss) Income before Income Taxes & Equity
Income(1) (16 ) 201 * Income
tax (benefit) expense (15 ) 39 * Equity in net income of
unconsolidated affiliates 37 34 9 %
Income from
Continuing Operations 36 196 (82 )%
Income from discontinued operations, net of tax — 34
*
Net Income 36 230 (84 )% Less:
Net income attributable to noncontrolling interests 2 5
(60 )%
Net Income Attributable to Xerox $
34 $ 225 (85 )%
Amounts Attributable to Xerox: Net income from
continuing operations $ 34 $ 191 (82 )% Income from discontinued
operations, net of tax — 34 *
Net Income
Attributable to Xerox $ 34 $
225 (85 )% Basic Earnings per
Share: Continuing operations
$ 0.03 $
0.17 (82 )% Discontinued operations —
0.03 *
Total Basic Earnings per Share $
0.03 $ 0.20 (85 )%
Diluted Earnings per Share: Continuing operations
$
0.03 $ 0.16 (81 )% Discontinued
operations — 0.03 *
Total Diluted Earnings per
Share $ 0.03 $ 0.19
(84 )% * Percent change not meaningful. (1)
Referred to as “Pre-Tax (Loss) Income” throughout the
remainder of this document.
Xerox Corporation
Condensed Consolidated Statements of
Comprehensive Income (Loss) (Unaudited)
Three Months EndedMarch 31, (in millions)
2016 2015 Net income $ 36 $ 230 Less:
Net income attributable to noncontrolling interests 2 5
Net Income Attributable to Xerox 34 225
Other Comprehensive Income (Loss), Net: Translation
adjustments, net 191 (509 ) Unrealized gains, net 9 29 Changes in
defined benefit plans, net (112 ) 98
Other Comprehensive
Income (Loss), Net 88 (382 ) Less: Other comprehensive loss,
net attributable to noncontrolling interests — (1 )
Other
Comprehensive Income (Loss), Net Attributable to Xerox 88
(381 )
Comprehensive Income (Loss), Net 124
(152 ) Less: Comprehensive income, net attributable to
noncontrolling interests 2 4
Comprehensive Income
(Loss), Net Attributable to Xerox $ 122 $ (156 )
Xerox Corporation
Condensed Consolidated Balance Sheets
(Unaudited)
(in millions, except share data in thousands)
March
31,2016 December 31,2015 Assets
Cash and cash equivalents $ 1,189 $ 1,368 Accounts receivable, net
2,456 2,319 Billed portion of finance receivables, net 100 97
Finance receivables, net 1,307 1,315 Inventories 1,034 942 Other
current assets 722 644 Total current assets 6,808
6,685 Finance receivables due after one year, net 2,565 2,576
Equipment on operating leases, net 489 495 Land, buildings and
equipment, net 1,000 996 Investments in affiliates, at equity 1,432
1,389 Intangible assets, net 1,684 1,765 Goodwill 8,814 8,823 Other
long-term assets 2,065 2,060
Total Assets
$ 24,857 $ 24,789
Liabilities and Equity Short-term debt and current portion
of long-term debt $ 2,029 $ 985 Accounts payable 1,445 1,614
Accrued compensation and benefits costs 710 651 Unearned income 421
428 Other current liabilities 1,541 1,576 Total
current liabilities 6,146 5,254 Long-term debt 5,359 6,354 Pension
and other benefit liabilities 2,617 2,513 Post-retirement medical
benefits 792 785 Other long-term liabilities 431 417
Total Liabilities 15,345 15,323
Series A Convertible Preferred Stock 349
349 Common stock 1,013 1,013 Additional
paid-in capital 3,032 3,017 Retained earnings 9,635 9,686
Accumulated other comprehensive loss (4,554 ) (4,642 ) Xerox
shareholders’ equity 9,126 9,074 Noncontrolling interests 37
43
Total Equity 9,163 9,117
Total Liabilities and Equity $ 24,857
$ 24,789 Shares of common stock
issued and outstanding 1,013,002 1,012,836
Xerox Corporation
Condensed Consolidated Statements of
Cash Flows (Unaudited)
Three Months EndedMarch 31, (in millions)
2016 2015 Cash Flows from Operating
Activities: Net income $ 36 $ 230 Adjustments required to
reconcile net income to cash flows from operating activities:
Depreciation and amortization 290 296 Provision for receivables 15
18 Provision for inventory 9 6 Net gain on sales of businesses and
assets (20 ) (12 ) Undistributed equity in net income of
unconsolidated affiliates (37 ) (31 ) Stock-based compensation 14
22 Restructuring and asset impairment charges 123 14 Payments for
restructurings (28 ) (31 ) Contributions to defined benefit pension
plans (36 ) (41 ) Increase in accounts receivable and billed
portion of finance receivables (185 ) (239 ) Collections of
deferred proceeds from sales of receivables 59 72 Increase in
inventories (99 ) (126 ) Increase in equipment on operating leases
(62 ) (70 ) Decrease in finance receivables 64 72 Collections on
beneficial interest from sales of finance receivables 8 15 Increase
in other current and long-term assets (59 ) (71 ) Decrease in
accounts payable and accrued compensation (104 ) (17 ) Decrease in
other current and long-term liabilities (67 ) (26 ) Net change in
income tax assets and liabilities (47 ) 32 Net change in derivative
assets and liabilities 17 (12 ) Other operating, net 84 12
Net cash (used in) provided by operating activities (25 )
113
Cash Flows from Investing Activities: Cost of
additions to land, buildings and equipment (50 ) (75 ) Proceeds
from sales of land, buildings and equipment 19 16 Cost of additions
to internal use software (22 ) (20 ) Proceeds from sale of
businesses (56 ) 3 Acquisitions, net of cash acquired (18 ) (28 )
Other investing, net 2 6 Net cash used in investing
activities (125 ) (98 )
Cash Flows from Financing
Activities: Net proceeds (payments) on debt 45 (150 ) Common
stock dividends (71 ) (70 ) Preferred stock dividends (6 ) (6 )
Proceeds from issuances of common stock 1 10 Excess tax benefits
from stock-based compensation — 2 Payments to acquire treasury
stock, including fees — (216 ) Repurchases related to stock-based
compensation — (1 ) Distributions to noncontrolling interests (11 )
(54 ) Net cash used in financing activities (42 ) (485 ) Effect of
exchange rate changes on cash and cash equivalents 13 (69 )
Decrease in cash and cash equivalents (179 ) (539 ) Cash and cash
equivalents at beginning of period 1,368 1,411
Cash and Cash Equivalents at End of Period $
1,189 $ 872
Financial Review
On January 29, 2016, Xerox announced that its Board of Directors
approved management’s plan to separate the Company's Business
Process Outsourcing (BPO) business from its Document Technology and
Document Outsourcing business. Each of the businesses will operate
as an independent, publicly-traded company. Leadership and names of
the two companies will be determined as the separation process
progresses. The transaction is intended to be tax-free for Xerox
shareholders for federal income tax purposes.
Xerox has begun the process to separate and is finalizing the
transaction structure, which is predicated on a spin-off of the BPO
business. Our objective is to complete the separation by year-end
2016, subject to customary regulatory approvals, the effectiveness
of a Form 10 registration statement with the U.S. Securities and
Exchange Commission, tax considerations, securing any necessary
financing and final approval of the Xerox Board of Directors. Until
the separation is complete, we will continue to operate and report
as a single company, and it will continue to be business as usual
for our customers and employees.
In conjunction with the separation, Xerox also began a
three-year strategic transformation program targeting a cumulative
$2.4 billion savings across all segments. The program is inclusive
of ongoing activities and $600 million of incremental
transformation initiatives.
Revenues
Three Months EndedMarch
31, % of Total Revenue (in millions)
2016
2015 %
Change
CC % Change 2016 2015 Equipment sales $
560 $ 624 (10)% (9)% 13% 14% Annuity revenue 3,721
3,845 (3)% (2)% 87% 86%
Total Revenue $
4,281 $ 4,469 (4)% (3)%
100% 100% Reconciliation to Condensed
Consolidated Statements of Income: Sales $ 1,021 $ 1,126 (9)%
(8)% Less: Supplies, paper and other sales (461 ) (502 ) (8)% (6)%
Equipment Sales $ 560 $
624 (10)% (9)% Outsourcing, maintenance and
rentals $ 3,177 $ 3,253 (2)% (1)% Add: Supplies, paper and other
sales 461 502 (8)% (6)% Add: Financing 83 90 (8)%
(6)%
Annuity Revenue $ 3,721 $
3,845 (3)% (2)%
CC - Constant Currency (See "Non-GAAP Financial Measures"
section)
First quarter 2016 total revenues decreased 4% as compared to
first quarter 2015, with a 1-percentage point negative impact from
currency. The negative impact from currency reflects the continued
weakening of foreign currencies against the U.S. Dollar as compared
to prior year. On a revenue-weighted basis, our major European
currencies and the Canadian Dollar were approximately 4% weaker
against the U.S. Dollar as compared to prior year. Revenues from
these major foreign currencies comprise approximately 24% of our
total consolidated revenues, while overall non-U.S. revenues
represent almost one third of the total. First quarter 2016 total
revenues reflect the following:
- Annuity revenue decreased 3% as
compared to first quarter 2015, with a 1-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.
These revenues declined 2%, with a 1-percentage point negative
impact from currency, primarily due to a continued decline in the
Document Technology segment.
- Supplies, paper and other sales
includes unbundled supplies and other sales, primarily within the
Document Technology segment. The 8% revenue decline includes a
2-percentage point negative impact from currency, reduced supplies
demand as a result of lower equipment sales in prior periods,
continued weakness in developing markets and lower OEM supplies
sales. The rate of supplies revenue decline did, however, moderate
sequentially to a more normalized level.
- Financing revenue is generated
from financed equipment sale transactions primarily within the
Document Technology segment. The 8% revenue decline reflects a
2-percentage point negative impact from currency and a declining
finance receivables balance due to lower equipment sales in prior
periods.
- Equipment sales revenue is
reported primarily within our Document Technology segment and the
Document Outsourcing (DO) business within our Services segment.
Equipment sales revenue decreased 10% as compared to first quarter
2015, with a 1-percentage point negative impact from currency. The
decline was driven by developing markets and product launch timing
as well as overall price declines that continue to be within our
historical range of 5% to 10%. These areas of decline were
partially offset by strong Document Outsourcing equipment sales
growth.
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 Ended March 31, Reported
Adjusted(1) 2016
2015 B/(W) 2016
2015 B/(W) Total Gross
Margin 29.9 % 31.2 % (1.3) pts. 30.3 %
31.6 % (1.3) pts. RD&E as a % of
Revenue 3.1 % 3.2 % 0.1 pts. 2.9 % 3.0 % 0.1 pts. SAG as a % of
Revenue 20.6 % 20.5 % (0.1) pts. 20.1 % 20.0 % (0.1) pts.
Operating Margin (1) N/A
N/A N/A 7.2
% 8.5 % (1.3)
pts.
Pre-tax Income Margin (0.4 )%
4.5 % (4.9) pts. N/A
N/A N/A
(1)
See the “Non-GAAP Financial Measures” section for an
explanation of the non-GAAP financial measure.
Operating Margin
First quarter 2016 operating margin1 of 7.2% decreased
1.3-percentage points as compared to first quarter 2015 driven by
the operating margin decline in Document Technology, where
productivity improvements only partially offset revenue declines
and currency impacts.
Gross Margin
First quarter 2016 gross margin of 29.9% decreased
1.3-percentage points as compared to first quarter 2015. On an
adjusted1 basis, gross margin of 30.3% decreased by 1.3 percentage
points. Document Technology gross margin decreased 0.9-percentage
points while Services gross margin improved by 0.1-percentage point
year-over-year. These results combined with the higher proportion
of our revenue from Services (which historically has a lower gross
margin) resulted in a 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 2016 RD&E as a percentage of revenue of 3.1%
decreased 0.1-percentage point from first quarter 2015. On an
adjusted1 basis, RD&E was 2.9% of revenue and decreased
0.1-percentage point due to the benefits from restructuring and
productivity improvements and the higher mix of Services revenue
(which historically has lower RD&E as a percentage of
revenue).
RD&E of $134 million decreased by $7 million compared to
first quarter 2015. On an adjusted1 basis, RD&E of $126 million
decreased by $8 million. Innovation at Xerox is a core strength,
and we strategically coordinate R&D with Fuji Xerox.
Selling, Administrative and General
Expenses (SAG)
SAG as a percentage of revenue of 20.6% increased 0.1-percentage
point from first quarter 2015. On an adjusted1 basis, SAG was 20.1%
of revenue and increased 0.1-percentage point. The total company
revenue decline was only partially matched by restructuring and
productivity improvements, due in part to lower restructuring in
2015, and a higher mix of Services revenue (which historically has
lower SAG as a percentage of revenue).
SAG of $882 million was $33 million lower than first quarter
2015. On an adjusted1 basis, SAG of $861 million decreased $35
million and included a $17 million favorable impact from currency
and reflects the following:
- $21 million decrease in selling
expenses.
- $8 million decrease in general and
administrative expenses.
- $6 million decrease in bad debt
expense. First quarter 2016 bad debt expense remained at less than
one percent of receivables.
Restructuring and Related Costs
Restructuring and related costs of $126 million include
restructuring and asset impairment charges of $123 million as well
as $3 million of additional costs.
During first quarter 2016, we recorded net restructuring and
asset impairment charges of $123 million, which includes $124
million of severance costs related to headcount reductions of
approximately 4,800 employees worldwide and $2 million of lease
cancellation costs. Approximately 70% of the charges were related
to our Document Technology segment and 30% to our Services segment.
The first quarter 2016 actions impacted several functional areas,
with approximately 65% of the costs focused on gross margin
improvements and approximately 30% on SAG reductions with the
remainder focused on RD&E optimization. These costs were
partially offset by $3 million of net reversals for changes in
estimated reserves from prior period initiatives. In first quarter
2016, we also recorded $3 million of costs primarily related to
professional support services associated with the implementation of
the strategic transformation program.
During first quarter 2015, we recorded net restructuring and
asset impairment charges of $14 million, which included $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.
The restructuring reserve balance as of March 31, 2016 for
all programs was $120 million, of which $116 million is expected to
be spent over the next twelve months.
We expect to incur additional restructuring and related costs of
approximately $100 million in second quarter 2016 for actions and
initiatives that have not yet been finalized. For full-year 2016,
we expect to incur restructuring and related costs of approximately
$300 million.
Separation costs
Separation costs are primarily for third-party investment
banking, accounting, legal, consulting and other similar types of
services related to the separation transaction as well as costs
associated with the operational separation of the two companies,
such as those related to human resources, brand management, real
estate and information management to the extent not capitalized.
Separation costs also include the costs associated with bonuses and
restricted stock grants awarded to employees for retention through
the separation.
During first quarter 2016, we recorded separation costs of $8
million. For full-year 2016, we expect to incur separation costs of
approximately $200 to $250 million. This amount does not include
any estimated tax costs associated with aligning entities and
business activities to effect the separation, a portion of which
may be mitigated by foreign tax credits.
Amortization of Intangible
Assets
First quarter 2016 amortization of intangible assets of $89
million increased $12 million compared to first quarter 2015
primarily due to the impairment of a customer relationship asset as
a result of a lost contract.
Worldwide Employment
Worldwide employment was approximately 135,300 as of
March 31, 2016 and decreased by 8,300 from December 31,
2015, due primarily to the impact of seasonal reductions as well as
restructuring and productivity improvements partially offset by
ramping new business and acquisitions.
Other Expenses, Net
Three Months EndedMarch 31, (in millions)
2016 2015 Non-financing interest
expense $ 55 $ 56 Interest income (2 ) (2 ) Gains on sales of
businesses and assets (1) (20 ) (16 ) Currency losses, net 4 6
Litigation matters 7 (1 ) Loss on sales of accounts receivables 4 3
Deferred compensation investment gains — (4 ) All other expenses,
net 9 4
Total Other Expenses, Net $
57 $ 46 (1)
Excludes the loss on sale of the ITO business reported in
Discontinued Operations.
Non-financing interest expense
First quarter 2016 non-financing interest expense of $55 million
was $1 million lower than first quarter 2015. When combined with
financing interest expense (cost of financing), total company
interest expense declined by $1 million from first quarter 2015,
driven by a lower average debt balance.
Gains on sales of businesses and
assets
First quarter 2016 and first quarter 2015 include gains on the
sale of surplus technology assets of $17 million and $14 million,
respectively.
Litigation Matters
First quarter 2016 litigation matters reflect probable losses
and reserves for various legal matters.
Income Taxes
First quarter 2016 effective tax rate was 93.8%. On an adjusted
basis1, first quarter 2016 tax rate was 22.5%, 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 2015 effective tax rate was 19.4%. On an adjusted
basis1, first quarter 2015 tax rate was 25.7%, 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.
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, restructuring and related
costs, non-service retirement related costs, separation costs and
other discrete items, we anticipate that our adjusted effective tax
rate will be approximately 26% to 28% for second quarter and
full-year 2016.
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 2016
equity income of $37 million was $3 million higher than first
quarter 2015 primarily due to translation currency impacts.
Net Income
First quarter 2016 net income from continuing operations
attributable to Xerox was $34 million, or $0.03 per diluted share.
On an adjusted basis1, net income from continuing operations
attributable to Xerox was $231 million, or $0.22 per diluted share.
First quarter 2016 adjustments to net income include the
amortization of intangible assets, restructuring and related costs,
non-service retirement related costs and separation costs.
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 $278 million, or $0.24 per diluted share.
First quarter 2015 adjustments to net income include the
amortization of intangible assets, restructuring charges and
non-service retirement related costs.
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 the "Non-GAAP Financial Measures"
section for calculation of adjusted EPS.
Discontinued Operations
Information Technology Outsourcing (ITO):
In fourth quarter 2014, we announced an agreement to sell the
ITO business to Atos and began reporting it as a Discontinued
Operation. All prior periods were accordingly revised to conform to
this presentation. The sale was completed on June 30, 2015.
There were no Discontinued Operations as of March 31, 2016.
Summarized financial information for our Discontinued Operations is
as follows:
Three Months Ended March 31, 2015 (in
millions)
ITO Other
Total Revenues $ 311 $ — $ 311
Income from operations (1) $ 61 $ — $ 61 Loss on disposal (4
) — (4 )
Net income before income taxes $ 57 $ — $ 57
Income tax expense (23 ) — (23 )
Income from
discontinued
operations, net of tax
$ 34 $ — $ 34
(1)
ITO Income from operations for first quarter 2015 excludes
approximately $39 million of depreciation and amortization expense
(including $7 million of intangible amortization) since the
business was held for sale.
Segment Review
In first quarter 2016, we revised our segment reporting to
reflect the following changes:
- The transfer of the Education/Student
Loan business from the Services segment to Other as a result of the
expected continued run-off of this business. The business does not
meet the threshold for separate segment reporting.
- The exclusion of the non-service
elements of our defined-benefit pension and retiree-health plan
costs from Segment profit.
Prior year amounts were revised accordingly to reflect these
changes.
Three Months Ended March 31, (in millions)
Equipment
Sales
Revenue
Annuity
Revenue
Total
Revenues
% of Total
Revenue
Segment
Profit (Loss)
Segment
Margin
2016 Services $ 109 $ 2,373 $ 2,482 58 % $ 190 7.7 %
Document Technology 432 1,207 1,639 38 % 167 10.2 % Other 19
141 160 4 % (66 ) (41.3 )%
Total $
560 $ 3,721 $
4,281 100 % $ 291
6.8 % 2015 Services $ 97 $ 2,370 $
2,467 55 % $ 187 7.6 % Document Technology 509 1,321 1,830 41 % 232
12.7 % Other 18 154 172 4 % (47 ) (27.3 )%
Total $ 624 $ 3,845
$ 4,469 100 % $
372 8.3 %
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)
2016 2015 % Change
CC % Change Business Process Outsourcing $ 1,690 $ 1,687 —%
1% Document Outsourcing 792 780 2% 5%
Total
Revenue - Services $ 2,482 $
2,467 1% 2%
CC - Constant Currency (See "Non-GAAP Financial Measures"
section)
Note: The above table excludes intercompany revenue.
Revenue
First quarter 2016 Services revenue of $2,482 million was 58% of
total revenue and increased 1% from first quarter 2015, with a
1-percentage point negative impact from currency.
- BPO revenue was essentially flat from
first quarter 2015, with a 1-percentage point negative impact from
currency, and represented 68% of total Services revenue. Growth was
driven by acquisitions and ramping new contracts, particularly in
Healthcare. This increase more than offset the impacts of lost
business and lower volumes, primarily in Commercial Industries, and
overall price declines that were consistent with prior period
trends.
- In first quarter 2016, BPO revenue mix
across the major business areas was as follows: Commercial
Industries (excluding healthcare) - 44%; Healthcare - 27%; Public
Sector - 25%; and all other (including our Health Enterprise (HE)
Medicaid platform implementations) - 4%.
- DO revenue increased 2%, with a
3-percentage point negative impact from currency, and represented
32% of Services revenue. Growth was driven primarily from our
partner print services offerings, reflected in both equipment and
annuity revenue, and from strong equipment sales related to higher
prior-period signings.
Segment Margin
First quarter 2016 Services segment margin of 7.7% increased by
0.1-percentage point from first quarter 2015. Anticipated
year-over-year benefits from lower expenses associated with our HE
platform implementations, a result of decisions we made in 2015 to
curtail this business, were partially offset by margin pressures in
our customer care offering, modest declines in DO margin and
impacts from unfavorable line-of-business mix and price
declines.
Metrics
Signings
Signings are defined as estimated future revenues from contracts
signed during the period, including renewals of existing contracts.
First quarter 2016 Services signings were $2.1 billion in Total
Contract Value (TCV).
- BPO signings of $1.5 billion TCV
- DO signings of $0.6 billion TCV
Signings declined 13% from first quarter 2015, with a
2-percentage point negative impact from currency, primarily
reflecting lower renewal opportunities. On a trailing twelve month
(TTM) basis, signings increased 9% from the comparable prior year
period. New business TCV increased 6% at constant currency from
first quarter 2015 and increased 35% on a TTM basis. DO signings do
not include signings from our growing partner print services
offerings.
Note: TCV is the estimated total contractual revenue related to
signed contracts.
Renewal rate (Total Services)
Renewal rate is defined as the annual recurring revenue (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 2016 contract renewal rate for
BPO and DO contracts was 89%, which is at the high end of our
target range of 85%-90%.
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)
2016 2015 % Change CC %
Change Equipment sales $ 432 $ 509 (15)% (14)% Annuity revenue
1,207 1,321 (9)% (7)%
Total Revenue $
1,639 $ 1,830 (10)% (9)%
CC - Constant Currency (See "Non-GAAP Financial Measures"
section)
First quarter 2016 Document Technology revenue of $1,639 million
decreased 10% from first quarter 2015, with a 1-percentage point
negative impact from currency. Document Technology revenues exclude
Document Outsourcing. Inclusive of Document Outsourcing, first
quarter 2016 aggregate document-related revenue decreased 7% from
first quarter 2015, with a 2-percentage point negative impact from
currency. Document Technology segment revenue results included the
following:
- Equipment sales revenue declined
15% from first quarter 2015, with a 1-percentage point negative
impact from currency. The decline was driven by continued weakness
in developing markets, product launch timing, continued migration
of customers to our partner print services offering (included in
our Services segment) as well as overall price declines that
continue to be within our historical range of 5 to 10%.
- Annuity revenue decreased 9%
from first quarter 2015, with a 2-percentage point negative impact
from currency. The annuity revenue reduction reflects lower
equipment sales in prior periods, resulting in ongoing page
declines and lower supplies demand, although the supplies revenue
decline moderated sequentially to a more normalized level. The
reduction also reflects the continued migration of customers to our
partner print services offering (included in our Services segment).
These declines were partially offset by good annuity growth in our
high-end color product group.
Document Technology revenue mix was 57% mid-range, 24% high-end
and 19% entry, consistent with recent quarters.
Segment Margin
First quarter 2016 Document Technology segment margin of 10.2%
declined 2.5-percentage points from first quarter 2015, including a
0.9-percentage point reduction in gross margin. The gross margin
decrease reflects unfavorable currency impacts and price declines.
SAG increased as a percent of revenue as overall lower revenue was
only partially matched by productivity improvements due in part to
lower 2015 restructuring.
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:
Entry3
- 1% increase in color multifunction
devices driven by demand for new products primarily in Document
Outsourcing.
- 16% decrease in black-and-white
multifunction devices reflecting continued declines in developing
markets.
Mid-Range
- 1% increase in mid-range color
installs.
- 14% decrease in mid-range
black-and-white reflecting higher declines in developing markets
and a transition to color devices.
High-End
- 56% increase in high-end color systems,
excluding Fuji Xerox digital front-end sales, as growth in Color
Press 800 and 1000 products was partially offset by declines in
other production color products, reflecting product launch
timing.
- 8% decrease in high-end black-and-white
systems consistent with overall market declines.
Other
Revenue
First quarter 2016 Other revenue of $160 million decreased 7%
from first quarter 2015, with a 3-percentage point negative impact
from currency. The reduction is driven by the anticipated run-off
of the student loan business, now reported in Other, and lower
paper and wide-format revenues. Total paper revenue (all within
developing markets) and the student loan business each comprise
approximately one third of Other revenue.
Other Loss
Non-financing interest expense as well as all Other expenses,
net (excluding Deferred compensation investment gains) are reported
within Other and were $57 million in first quarter 2016 as compared
to $50 million in first quarter 2015. The $7 million increase was
primarily due to an increase in litigation-related costs. Remaining
Other loss of $9 million in first quarter 2016 increased $12
million from first quarter 2015 primarily related to lower
profitability in the student loan business.
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.
(3)
Entry installations exclude OEM sales; including OEM sales, Entry
color multifunction devices increased 117%, while Entry
black-and-white multifunction devices increased 11%.
Capital Resources and Liquidity
The following table summarizes our cash and cash equivalents for
the three months ended March 31, 2016 and 2015:
Three Months EndedMarch 31, (in
millions)
2016 2015 Change Net
cash (used in) provided by operating activities $ (25 ) $ 113 $
(138 ) Net cash used in investing activities (125 ) (98 ) (27 ) Net
cash used in financing activities (42 ) (485 ) 443 Effect of
exchange rate changes on cash and cash equivalents 13 (69 )
82 Decrease in cash and cash equivalents (179 ) (539 ) 360
Cash and cash equivalents at beginning of period 1,368 1,411
(43 )
Cash and Cash Equivalents at End of Period
$ 1,189 $ 872 $
317
Cash Flows from Operating
Activities
Net cash used in operating activities was $25 million in first
quarter 2016. The $138 million decrease in operating cash from
first quarter 2015 was primarily due to the following:
- $122 million decrease in pre-tax income
before depreciation and amortization, restructuring charges and
gains on sales of businesses and assets.
- $87 million decrease in accounts
payable and accrued compensation primarily related to a reduction
in days payable outstanding.
- $15 million decrease from finance
receivables reflecting a moderating rate of portfolio run-off.
- $14 million decrease reflecting
settlement payments associated with our third quarter 2015 decision
to not fully complete the HE implementations in California and
Montana.
- $41 million increase from accounts
receivable primarily due to improved collections and lower
revenues.
- $29 million increase from the
settlements of foreign currency derivative contracts. These
derivatives primarily relate to hedges of Yen inventory
purchases.
- $27 million increase primarily due to
lower inventory requirements reflecting reduced equipment and
supplies demand as well as lower levels of in-transit
inventory.
- $13 million increase due to the prior
year use of cash in the discontinued ITO business.
Cash Flows from Investing
Activities
Net cash used in investing activities was $125 million in first
quarter 2016. The $27 million decrease in cash from first quarter
2015 was primarily due to the following:
- $59 million decrease primarily due to a
$52 million payment to Atos reflecting final working capital
adjustments associated with the 2015 ITO divestiture.
- $23 million increase due to lower
capital expenditures (including internal use software) primarily
due to the sale of the ITO business.
- $10 million increase from lower
acquisitions.
Cash Flows from Financing
Activities
Net cash used in financing activities was $42 million in first
quarter 2016. The $443 million increase in cash from first quarter
2015 was primarily due to the following:
- $216 million increase as there were no
share repurchases in first quarter 2016.
- $195 million increase from net debt
activity. First quarter 2016 reflects net proceeds of $749 million
from a Senior Unsecured Term Facility offset by a $700 million
Senior Notes payment. 2015 reflects a $1 billion Senior Notes
payment offset by net proceeds of $648 million from the issuance of
Senior Notes and an increase of $204 million in Commercial
Paper.
- $43 million increase due to lower
distributions to noncontrolling interests.
Customer Financing Activities
The following represents our total finance assets, net
associated with our lease and finance operations:
(in millions)
March 31, 2016 December 31,
2015 Total finance receivables, net (1) $ 3,972 $ 3,988
Equipment on operating leases, net 489 495
Total Finance
Assets, net (2) $ 4,461 $
4,483
____________________________
(1)
Includes (i) billed portion of finance receivables, net,
(ii) finance receivables, net and (iii) finance receivables due
after one year, net as included in our Condensed Consolidated
Balance Sheets.
(2)
Change from December 31, 2015 includes an increase of $64 million
due to currency across all Finance Assets.
The following summarizes our debt:
(in millions)
March 31, 2016 December 31,
2015 Principal debt balance(1) $ 7,409 $ 7,365 Net unamortized
discount (50 ) (52 ) Debt issuance costs(3) (27 ) (28 ) Fair value
adjustments(2) - terminated swaps 41 47 - current swaps 15 7
Total Debt $ 7,388 $
7,339
____________________________
(1)
Includes Notes Payable of $2 million and $3 million as of
March 31, 2016 and December 31, 2015, respectively.
(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.
(3)
Reflects the adoption of ASU 2015-03, Interest - Imputation of
Interest: Simplifying the Presentation of Debt Issuance Costs
effective January 1, 2016; which requires debt issuance costs to be
presented as a direct deduction from the carrying amount of the
corresponding debt liability. Prior year amounts were revised to
reflect the new presentation.
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:
(in millions)
March 31, 2016 December 31,
2015 Financing debt(1) $ 3,903 $ 3,923 Core debt 3,485
3,416
Total Debt $ 7,388 $
7,339
____________________________
(1)
Financing debt includes $3,476 million and $3,490 million as
of March 31, 2016 and December 31, 2015, 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.
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)
2016 2015 Accounts receivable sales $ 680 $
602 Deferred proceeds 71 62 Loss on sales of accounts receivable 4
3 Estimated (decrease) increase to operating cash flows (1) (23 )
17
____________________________
(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)
2016 2015 Impact from prior sales of finance
receivables (1) $ (59 ) $ (105 ) Collections on beneficial interest
10 18 Estimated decrease to operating cash flows $
(49 ) $ (87 )
____________________________
(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,
including with respect to the proposed separation of the Business
Process Outsourcing ("BPO") business from the Document Technology
and Document Outsourcing business, the expected timetable for
completing the separation, the future financial and operating
performance of each business, the strategic and competitive
advantages of each business, future opportunities for each business
and the expected amount of cost reductions that may be realized in
the cost transformation program, 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; the possibility that the proposed
separation of the BPO business from the Document Technology and
Document Outsourcing business will not be consummated within the
anticipated time period or at all, including as the result of
regulatory, market or other factors; the potential for disruption
to our business in connection with the proposed separation; the
potential that BPO and Document Technology and Document Outsourcing
do not realize all of the expected benefits of the separation; 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 2015 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.
Non-GAAP Financial Measures
We have reported our financial results in accordance with
generally accepted accounting principles (GAAP). In addition, we
have discussed our financial results using the non-GAAP measures
described below. We believe these non-GAAP measures allow investors
to better understand the trends in our business and to better
understand and compare our results. Accordingly, we believe it is
necessary to adjust several reported amounts, determined in
accordance with GAAP, to exclude the effects of certain items as
well as their related income tax effects.
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 first quarter 2016 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.
NOTE: In 2016 we revised our
calculation of Adjusted Earnings Measures to exclude the following
items in addition to the amortization of intangibles:
- Restructuring and related costs
including those related to Fuji Xerox.
- The non-service related elements of our
defined benefit pension and retiree health plan costs (retirement
related).
- Separation costs
When these measures are presented in 2016, the prior year
measures will be revised accordingly to conform to the changes.
Adjusted Earnings Measures
- Net income and Earnings per share
(EPS)
- Effective tax rate
- Gross margin, RD&E and SAG
(adjusted for non-service retirement related costs only)
The above measures were adjusted for the following items:
- 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. 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.
- Restructuring and
related costs: Restructuring and related costs include
restructuring and asset impairment charges as well as costs
associated with our strategic transformation program beyond those
normally included in restructuring and asset impairment charges.
Restructuring consists of costs primarily related to severance and
benefits paid to employees pursuant to formal restructuring and
workforce reduction plans. Asset impairment includes costs incurred
for those assets sold, abandoned or made obsolete as a result of
our restructuring actions, exiting from a business or other
strategic business changes. Additional costs for our strategic
transformation program are primarily related to the implementation
of strategic actions and initiatives and include third-party
professional service costs as well as one-time incremental costs.
All of these costs can vary significantly in terms of amount and
frequency based on the nature of the actions as well as the
changing needs of the business. Accordingly, due to that
significant variability, we will exclude these charges since we do
not believe they provide meaningful insight into our current or
past operating performance nor do we believe they are reflective of
our expected future operating expenses as such charges are expected
to yield future benefits and savings with respect to our
operational performance.
- Non-service
retirement related costs: Our defined benefit pension and
retiree health costs include several elements impacted by changes
in plan assets and obligations that are primarily driven by changes
in the debt and equity markets as well as those that are
predominantly legacy in nature and related to employees who are no
longer providing current service to the Company (e.g. retirees and
ex-employees). These elements include (i) interest cost, (ii)
expected return on plan assets, (iii) amortized actuarial
gains/losses and (iv) the impacts of any plan
settlements/curtailments. Accordingly, we consider these elements
of our periodic retirement plan costs to be outside the operational
performance of the business or legacy costs and not necessarily
indicative of current or future cash flow requirements. Adjusted
earnings will continue to include the elements of our retirement
costs related to current employee service (service cost and
amortization of prior service cost) as well as the cost of our
defined contribution plans.
- Separation
costs: Separation costs are expenses incurred in connection
with Xerox's planned separation into two independent, publicly
traded companies. Separation costs are primarily for
third-party investment banking, accounting, legal, consulting and
other similar types of services related to the separation
transaction as well as costs associated with the operational
separation of the two companies, such as those related to human
resources, brand management, real estate and information management
to the extent not capitalized. Separation costs include the costs
associated with bonuses and restricted stock grants awarded to
employees for retention through the separation. These costs are
incremental to normal operating charges and are being incurred
solely as a result of the separation transaction. Accordingly, we
are excluding these expenses from our Adjusted Earnings Measures in
order to evaluate our performance on a comparable basis.
Operating Income
We also calculate and utilize operating income and margin
earnings measures by adjusting our pre-tax income and margin
amounts to exclude certain items. In addition to the costs noted
for our Adjusted Earnings measures, operating income and margin
also exclude Other expenses, net. Other expenses, net is primarily
comprised of non-financing interest expense and also includes
certain other non-operating costs and expenses. 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.” In 2016 we revised
our calculation of the currency impact on revenue growth, or
constant currency revenue growth, to include the currency impacts
from the developing market countries (Latin America, Brazil, Middle
East, India, Eurasia and Central-Eastern Europe), which had been
previously excluded from the calculation. As a result of economic
changes in these markets over the past few years, we currently
manage our exchange risk in our developing market countries in a
similar manner to the exchange risk in our developed market
countries, and therefore, the exclusion of the developing market
countries from the calculation of the currency effect is no longer
warranted. 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.
Free Cash Flow
To better understand trends in our business, we believe that it
is helpful to adjust cash flows from operations to exclude amounts
for capital expenditures including internal use software.
Management believes this measure gives investors an additional
perspective on cash flow from operating activities in excess of
amounts required for reinvestment. It provides a measure of our
ability to fund acquisitions, dividends and share repurchase. It is
also used to measure our yield on market capitalization.
Summary:
Management believes that all of 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, 2016
Three Months EndedMarch 31, 2015 (in millions, except
per share amounts)
Net Income EPS Net
Income EPS Reported(1) $
34 $ 0.03 $ 191 $
0.16
Adjustments:
Amortization of intangible assets 89 77 Restructuring and related
costs - Xerox 126 14 Non-service retirement related costs 46 42
Separation costs 8 — Income tax adjustments(2) (72 ) (47 )
Restructuring charges - Fuji Xerox — 1
Adjusted $ 231 $ 0.22
$ 278 $ 0.24 Weighted
average shares for adjusted EPS(3) 1,021 1,154 Fully diluted shares
at end of period(4) 1,048
____________________________
(1)
Net Income and EPS from continuing operations.
(2)
Refer to Effective Tax Rate reconciliation.
(3)
Average shares for the 2016 calculation of adjusted EPS exclude 27
million of shares associated with our Series A convertible
preferred stock and therefore the related quarterly dividend of $6
million is included. Average shares for the 2015 calculation of
adjusted EPS include 27 million of shares associated with our
Series A convertible preferred stock and therefore the related
quarterly dividend was excluded.
(4)
Represents common shares outstanding at March 31, 2016 as well as
shares associated with our Series A convertible preferred stock
plus potential dilutive common shares used for the calculation of
diluted earnings per share in first quarter 2016.
Effective Tax Rate
reconciliation:
Three Months EndedMarch 31, 2016
Three Months EndedMarch 31, 2015 (in millions)
Pre-Tax
(Loss) Income
Income
Tax (Benefit)
Expense
Effective
Tax
Rate
Pre-Tax
Income
Income
Tax
Expense
Effective
Tax Rate
Reported(1) $ (16 ) $
(15 ) 93.8 % $ 201
$ 39 19.4 % Non-GAAP
Adjustments(2) 269 72 133 47
Adjusted - revised (3) $ 253
$ 57 22.5 % $
334 $ 86 25.7 %
____________________________
(1)
Pre-Tax (Loss) Income and Income Tax (Benefit) Expense from
continuing operations.
(2)
Refer to Net Income/EPS reconciliation for details. Amounts exclude
Fuji Xerox restructuring as these amounts are net of tax.
(3)
The tax impact on Adjusted Pre-Tax Income from continuing
operations is calculated under the same accounting principles
applied to the As Reported Pre-Tax Income under ASC 740, which
employs an annual effective tax rate method to the results.
Operating Income / Margin
reconciliation:
Three Months EndedMarch 31, 2016
Three Months EndedMarch 31, 2015 (in millions)
(Loss) Profit Revenue Margin
Profit Revenue Margin
Reported Pre-Tax (Loss) Income(1) $ (16
) $ 4,281 (0.4 )% $
201 $ 4,469 4.5 %
Adjustments:
Amortization of intangible assets 89 77 Restructuring and related
costs - Xerox 126 14 Non-service retirement related costs 46 42
Separation costs 8 — Other expenses, net 57 46
Adjusted Operating $ 310
$ 4,281 7.2 % $ 380
$ 4,469 8.5 % Equity in net income of
unconsolidated affiliates 37 34 Business transformation costs 1 4
Restructuring charges - Fuji Xerox — 1 Other expenses, net* (57 )
(47 )
Segment Profit/Revenue
$ 291 $ 4,281 6.8
% $ 372 $ 4,469
8.3 %
____________________________
* Includes rounding adjustments.
(1) (Loss) Profit and Revenue from continuing operations.
Key Financial Ratios
reconciliation:
Three Months Ended March 31, 2016
2015 (in millions)
AsReported
Non-serviceretirementrelatedcosts
Adjusted
AsReported
Non-serviceretirementrelatedcosts
Adjusted Gross Profit $ 1,280 $ 17 $ 1,297 $ 1,394 $
16 $ 1,410 RD&E 134 (8 ) 126 141 (7 ) 134 SAG 882 (21 ) 861 915
(19 ) 896 Gross Margin 29.9 % 0.4 % 30.3 % 31.2 % 0.4 % 31.6
% RD&E as a % of Revenue 3.1 % (0.2 )% 2.9 % 3.2 % (0.2 )% 3.0
% SAG as a % of Revenue 20.6 % (0.5 )% 20.1 % 20.5 % (0.4 )% 20.0 %
Guidance:
Earnings Per Share Q2 2016 FY
2016 GAAP EPS from Continuing Operations $0.06 -
$0.08 $0.45 - $0.55 Non-GAAP Adjustments 0.18 0.65
Adjusted EPS $0.24 - $0.26 $1.10 - $1.20
____________________________
Note: Adjusted EPS guidance excludes amortization of intangible
assets, restructuring and related costs, non-service retirement
related costs and separation costs.
(in billions)
Free Cash Flow
FY 2016
Cash Flow from Operations $0.95 - $1.2 CAPEX 0.35
Free Cash Flow $0.60 - $0.85
2015 Net Income and EPS reconciliation
based on 2016 revised methodology:
Q2 2015 FY 2015 (in millions, except per share
amounts)
Net Income EPS Net Income
EPS Reported (1) $ 107
$ 0.09 $ 552 $
0.49
Adjustments:
Amortization of intangible assets 79 310 Software impairment 146
146 HE charge — 389 Restructuring charges - Xerox 11 40 Non-service
retirement related costs 10 116 Income tax on adjustments (2) (90 )
(380 ) Restructuring charges - Fuji Xerox 1 4
Adjusted - revised $ 264
$ 0.23 $ 1,177 $
1.07 Adjusted - previous basis $
246 $ 0.22 $ 1,076 $
0.98 Weighted average shares - adjusted EPS (3) 1,132
1,103
____________________________
(1)
Net Income and EPS from continuing operations.
(2)
The tax impact on the Adjusted Pre-Tax Income from continuing
operations is calculated under the same accounting principles
applied to the As Reported Pre-Tax Income under ASC 740, which
employs an annual effective tax rate method to the results - See
Effective Tax Rate reconciliation.
(3)
Average shares for the calculations of adjusted EPS include 27
million of shares associated with our Series A convertible
preferred stock.
2015 Adjusted Effective Tax Rate
reconciliation based on 2016 revised methodology:
Q2 2015 FY 2015 (in millions)
Pre-TaxIncome
IncomeTax(Benefit)Expense
EffectiveTax Rate
Pre-TaxIncome
IncomeTax(Benefit)Expense
EffectiveTax Rate
Reported (1) $ 74 $
(9 ) (12.2 )% $ 412
$ (23 ) (5.6 )%
Non-GAAP Adjustments (2) 246 90 1,001
380
Adjusted - revised
(3) $ 320 $ 81
25.3 % $ 1,413
$ 357 25.2 % Adjusted
- previous basis 25.8 % 23.7 %
____________________________
(1)
Pre-Tax Income from continuing operations.
(2)
See Net Income/EPS reconciliation for details. Amounts exclude Fuji
Xerox restructuring as these amounts are net of tax.
(3)
The tax impact on the Adjusted Pre-Tax Income from continuing
operations is calculated under the same accounting principles
applied to the As Reported Pre-Tax Income under ASC 740, which
employs an annual effective tax rate method to the results.
APPENDIX I
Xerox Corporation
Earnings per Common Share
(in millions except per share data, shares
in thousands)
Three Months EndedMarch 31, 2016
2015 Basic Earnings per Share: Net income from
continuing operations attributable to Xerox $ 34 $ 191 Accrued
dividends on preferred stock (6 ) (6 ) Adjusted net income from
continuing operations available to common shareholders $ 28 $ 185
Net income from discontinued operations attributable to Xerox —
34 Adjusted net income available to common
shareholders $ 28 $ 219 Weighted average common
shares outstanding 1,013,033 1,109,999
Basic
Earnings per Share: Continuing operations $ 0.03 $ 0.17
Discontinued operations — 0.03 Total $ 0.03 $
0.20
Diluted Earnings per Share: Net income from
continuing operations attributable to Xerox $ 34 $ 191 Accrued
dividends on preferred stock (6 ) (6 ) Adjusted net income from
continuing operations available to common shareholders $ 28 $ 185
Net income from discontinued operations attributable to Xerox —
34 Adjusted net income available to common
shareholders $ 28 $ 219 Weighted average common
shares outstanding 1,013,033 1,109,999 Common shares issuable with
respect to: Stock options 850 1,879 Restricted stock and
performance shares 6,640 14,740 Convertible preferred stock —
— Adjusted weighted average common shares outstanding
1,020,523 1,126,618
Diluted Earnings per
Share: Continuing operations $ 0.03 $ 0.16 Discontinued
operations — 0.03 Total $ 0.03 $ 0.19
The following securities were not included
in the computation of diluted earnings per share as they were
eithercontingently issuable shares or shares that if included would
have been anti-dilutive:
Stock options 2,104 2,716 Restricted stock and performance shares
18,718 16,730 Convertible preferred stock 26,966 26,966
Total Anti-Dilutive Securities 47,788 46,412
Dividends per Common Share $ 0.0775 $ 0.0700
APPENDIX II
Xerox Corporation
Reconciliation of Segment Operating
Profit to Pre-Tax Income
Three Months Ended March 31, (in millions)
2016 2015 Segment Profit(2) $ 291 $ 372
Reconciling items: Restructuring and related costs (1) (127 ) (18 )
Restructuring charges of Fuji Xerox — (1 ) Amortization of
intangible assets (89 ) (77 ) Equity in net income of
unconsolidated affiliates (37 ) (34 ) Non-service retirement
related costs (46 ) (42 ) Separation costs (8 ) — Other — 1
Pre-Tax (Loss) Income $ (16 )
$ 201
(1)
First quarter 2016 and 2015 Restructuring and related costs
of $126 and $14, respectively, and business transformation costs of
$1 and $4, respectively.
(2)
Revised to exclude non-service retirement related costs.
Note: Certain reclassifications of prior year amounts have been
made to conform to current year presentation.
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:
Other includes paper sales in our developing market countries,
Wide Format Systems, licensing revenue, Global Imaging network
integration solutions and electronic presentation systems, student
loan processing and non-allocated corporate items including
non-financing interest and other items included in Other expenses,
net.
View source
version on businesswire.com: http://www.businesswire.com/news/home/20160425005402/en/
XeroxMedia:Sean Collins,
+1-310-497-9205sean.collins2@xerox.comorCarl Langsenkamp,
+1-585-423-5782carl.langsenkamp@xerox.comorInvestors:Jennifer
Horsley, +1-203-849-2656jennifer.horsley@xerox.comorSean Cornett,
+1-203-849-2672sean.cornett@xerox.com
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