- GAAP EPS from continuing operations of
26 cents
- Adjusted EPS of 31 cents
- Revenue of $5 billion, 54 percent from
Services
- Operating margin of 10.4 percent, up
one percentage point year-over-year
- Cash flow from operations of $2.06
billion for full-year 2014
- Share repurchases of $1.07 billion for
full-year 2014
- Quarterly cash dividend increase to 7
cents per share
Xerox (NYSE:XRX) announced today fourth-quarter 2014 adjusted
earnings per share of 31 cents. Adjusted EPS excludes 5 cents
related to the amortization of intangibles, resulting in GAAP EPS
from continuing operations of 26 cents.
As previously reported, these results reflect the pending sale
of the company’s ITO business to Atos, and the related presentation
of the ITO business as a discontinued operation.
In the fourth quarter, total revenue of $5.0 billion was down 3
percent or 1 percent in constant currency. Revenue from the
company’s Services business, which represented 54 percent of total
revenue, was $2.7 billion, up 1 percent or 3 percent in constant
currency. Services margin was 9.8 percent.
Revenue from the company’s Document Technology business, which
represented 43 percent of total revenue, was $2.2 billion, down 8
percent or 6 percent in constant currency. Document Technology
margin was 14.4 percent.
“We delivered strong profit and cash in the fourth quarter,”
said Ursula Burns, chairman and chief executive officer. “Services
revenue growth improved and margin expanded both sequentially and
year-over-year. This is an indication that our plan is delivering
positive results. Total contract signings increased 20 percent,
driven by renewals. We continue to lead in Document Technology,
where we are executing well and where we expanded profit
year-over-year.”
“We’re encouraged by these results, which demonstrate our
ability to win in segments where Xerox is uniquely differentiated
like healthcare, graphic communications and transportation,” Burns
added.
Fourth-quarter operating margin of 10.4 percent was up one
percentage point over the same quarter a year ago. Gross margin was
32.1 percent, and selling, administrative and general expenses were
18.7 percent of revenue.
Xerox generated $857 million in cash flow from operations during
the fourth quarter and $2.06 billion for the year. Xerox ended 2014
with a cash balance of $1.4 billion. The company repurchased $341
million in stock in the quarter and $1.07 billion for the
full-year.
The Xerox Board of Directors increased the company’s quarterly
cash dividend by 12 percent to 7 cents per share, beginning with
the dividend payable on April 30, 2015.
For first-quarter 2015, Xerox expects GAAP earnings per share of
16 to 18 cents and adjusted EPS of 20 to 22 cents.
Xerox 2015 adjusted earnings per share guidance is $1.00 to
$1.06, reflecting a 5 cent per share impact of recent shifts in
currency rates, specifically the weakening of the Euro. Xerox
expects full-year GAAP earnings per share from continuing
operations of $0.83 to $0.89.
As a result of the ITO divestiture and recent shifts in currency
rates, Xerox 2015 guidance for cash flow from operations is $1.7 to
$1.9 billion and free cash flow is $1.3 to $1.5 billion, reflecting
a negative $200 million impact to cash flow from operations and a
negative $100 million impact to free cash flow. Xerox expects to
offset the impact from the ITO sale on free cash flow by 2016.
Full-year 2014 results include:
- GAAP EPS from continuing operations of
90 cents, adjusted EPS of $1.07
- Total revenue of $19.5 billion; $10.6
billion from Services, $8.4 billion from Document Technology
- Operating margin of 9.6 percent
- Operating cash flow of $2.06
billion
- Net income from continuing operations
of $1.1 billion, adjusted net income of $1.3 billion
- Share repurchases of $1.07 billion
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 fourth quarter and full-year 2014 as well as for the first
quarter and full-year 2015 guidance which excludes the amortization
of intangible assets.
- Adjusted net income for the full-year
2014 which excludes the amortization of intangible assets.
- Operating margin for the fourth quarter
and full-year 2014 which excludes certain expenses.
- Constant Currency revenue growth for
the fourth quarter 2014 which excludes the effects of currency
translation.
- Free cash flow for the full-year 2015
which includes the impact of capital expenditures.
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 Xerox, 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. These 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; actions of
competitors; 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
multi-year contracts with governmental entities could be terminated
prior to the end of the contract term; the risk in the hiring and
retention of qualified personnel; the risk that unexpected costs
will be incurred; the risk that subcontractors, software vendors
and utility and network providers will not perform in a timely,
quality manner; 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;
development of new products and services; our ability to protect
our intellectual property rights; our ability to expand equipment
placements; 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; service
interruptions; interest rates, cost of borrowing and access to
credit markets; reliance on third parties, including
subcontractors, for manufacturing of products and provision of
services; our ability to drive the expanded use of color in
printing and copying; 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 Quarterly Reports on Form 10-Q for the quarters ended March 31,
2014, June 30, 2014 and September 30, 2014 and our 2013 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 Corporation 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 first half of 2015. As a result of the
pending sale of the ITO business, and having met applicable
accounting requirements, Xerox will report 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.
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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 Ended Year Ended
December 31, December 31, (in millions, except
per-share data)
2014 2013 % Change 2014
2013 % Change Revenues Sales $ 1,414 $
1,519 (7 %) $ 5,288 $ 5,582 (5 %) Outsourcing, maintenance and
rentals 3,526 3,569 (1 %) 13,865 13,941 (1 %) Financing 93
119 (22 %) 387 483 (20 %)
Total Revenues 5,033
5,207 (3 %) 19,540
20,006 (2 %) Costs and Expenses
Cost of sales 885 980 (10 %) 3,269 3,550 (8 %) Cost of outsourcing,
maintenance and rentals 2,499 2,523 (1 %) 9,885 9,808 1 % Cost of
financing 33 38 (13 %) 140 163 (14 %) Research, development and
engineering expenses 150 153 (2 %) 577 603 (4 %) Selling,
administrative and general expenses 942 1,023 (8 %) 3,788 4,073 (7
%) Restructuring and asset impairment charges 36 55 (35 %) 128 115
11 % Amortization of intangible assets 83 76 9 % 315 305 3 % Other
expenses, net 57 33 73 % 232
146 59 %
Total Costs and Expenses 4,685
4,881 (4 %) 18,334
18,763 (2 %) Income
before Income Taxes & Equity Income(1) 348
326 7 % 1,206 1,243 (3
%) Income tax expense 78 67 16 % 259 253 2 % Equity in net
income of unconsolidated affiliates 41 43 (5
%) 160 169 (5 %)
Income from
Continuing Operations 311 302 3 %
1,107 1,159 (4 %) (Loss) income from Discontinued
Operations, net of tax (149 ) 9
* (115
) 20 *
Net Income 162 311
(48 %) 992 1,179 (16 %)
Less: Net income attributable to noncontrolling interests
6 5 20 % 23 20 15 %
Net Income Attributable to Xerox $ 156
$ 306 (49 %) $ 969
$ 1,159 (16 %) Amounts
attributable to Xerox: Net Income from continuing operations $
305 $ 297
3 % $ 1,084 $ 1,139 (5 %) Net (loss) Income
from discontinued operations (149 ) 9 * (115 )
20 *
Net Income attributable to Xerox $
156 $ 306 (49 %) $
969 $ 1,159 (16 %)
Basic Earnings per Share: Continuing Operations
$ 0.26 $ 0.24 8 %
$ 0.92 $ 0.91 1 %
Discontinued Operations (0.13 ) 0.01
*
(0.10 ) 0.02 *
Total Basic Earnings per Share
$ 0.13 $ 0.25 (48
%) $ 0.82 $ 0.93
(12 %) Diluted Earnings per Share:
Continuing Operations
$ 0.26 $ 0.23
13 % $ 0.90 $ 0.89
1 % Discontinued Operations (0.13 )
0.01 * (0.09 ) 0.02 *
Total Diluted Earnings per
Share $ 0.13 $ 0.24
(46 %) $ 0.81 $
0.91 (11 %)
* 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 Ended Year Ended December
31, December 31, (in millions)
2014
2013 2014 2013 Net Income $ 162
$ 311 $ 992 $ 1,179 Less: Net income attributable to noncontrolling
interests 6 5 23
20
Net Income Attributable to Xerox 156
306 969 1,159
Other Comprehensive (Loss) Income, Net: Translation
adjustments, net (333 ) (7 ) (734 ) (185 ) Unrealized (losses)
gains, net (17 ) (7 ) 15 - Changes in defined benefit plans, net
(581 ) 511 (662 ) 632
Other Comprehensive (Loss) Income, Net (931 ) 497 (1,381 )
447 Less: Other comprehensive loss, net attributable to
noncontrolling interests - (1 ) (1 )
(1 )
Other Comprehensive (Loss) Income, Net Attributable
to Xerox (931 ) 498 (1,380 )
448 Comprehensive (Loss) Income, Net (769 ) 808 (389
) 1,626 Less: Comprehensive income, net attributable to
noncontrolling interests 6 4 22
19
Comprehensive (Loss) Income, Net
Attributable to Xerox $ (775 ) $ 804 $ (411 ) $ 1,607
Xerox Corporation
Condensed Consolidated Balance Sheets
(Unaudited)
December 31, December 31, (in
millions, except share data in thousands) 2014
2013 Assets Cash and cash equivalents $ 1,411 $ 1,764
Accounts receivable, net 2,652 2,929 Billed portion of finance
receivables, net 110 113 Finance receivables, net 1,425 1,500
Inventories 934 998 Assets of discontinued operations 1,260 - Other
current assets 1,082 1,207 Total
current assets 8,874 8,511 Finance receivables due after one year,
net 2,719 2,917 Equipment on operating leases, net 525 559 Land,
buildings and equipment, net 1,123 1,466 Investments in affiliates,
at equity 1,338 1,285 Intangible assets, net 2,031 2,503 Goodwill
8,805 9,205 Other long-term assets 2,243 2,590
Total Assets $ 27,658 $
29,036 Liabilities and Equity
Short-term debt and current portion of long-term debt $ 1,427 $
1,117 Accounts payable 1,584 1,626 Accrued compensation and
benefits costs 754 734 Unearned income 431 496 Liabilities of
discontinued operations 371 - Other current liabilities
1,509 1,713 Total current liabilities 6,076
5,686 Long-term debt 6,314 6,904 Pension and other benefit
liabilities 2,847 2,136 Post-retirement medical benefits 865 785
Other long-term liabilities 498 757
Total Liabilities 16,600
16,268 Series A Convertible Preferred
Stock 349 349
Common stock 1,124 1,210 Additional paid-in capital 4,283 5,282
Treasury stock, at cost (105 ) (252 ) Retained earnings 9,491 8,839
Accumulated other comprehensive loss (4,159 ) (2,779
) Xerox shareholders' equity 10,634 12,300 Noncontrolling interests
75 119
Total Equity
10,709 12,419 Total
Liabilities and Equity $ 27,658 $
29,036 Shares of common stock issued 1,124,354
1,210,321 Treasury stock (7,609 ) (22,001 )
Shares
of common stock outstanding 1,116,745
1,188,320
Xerox Corporation
Condensed Consolidated Statements of
Cash Flows (Unaudited)
Three Months Ended Year Ended December
31, December 31, (in millions)
2014
2013 2014 2013 Cash Flows
from Operating Activities: Net income $ 162 $ 311 $ 992 $ 1,179
Adjustments required to reconcile net income to cash flows from
operating activities: Depreciation and amortization 356 346 1,426
1,358 Provision for receivables (3 ) 37 53 123 Provision for
inventory 6 13 26 35 Net loss (gain) on sales of businesses and
assets 172 (31 ) 134 (45 ) Undistributed equity in net income of
unconsolidated affiliates (14 ) (7 ) (91 ) (92 ) Stock-based
compensation 15 12 91 90 Restructuring and asset impairment charges
37 56 130 116 Payments for restructurings (30 ) (29 ) (133 ) (136 )
Contributions to defined benefit pension plans (78 ) (68 ) (284 )
(230 ) Decrease (increase) in accounts receivable and billed
portion of finance receivables 49 (19 ) (436 ) (576 ) Collections
of deferred proceeds from sales of receivables 102 111 434 482
Decrease (increase) in inventories 115 144 (22 ) (38 ) Increase in
equipment on operating leases (79 ) (96 ) (283 ) (303 ) (Increase)
decrease in finance receivables (92 ) 90 (10 ) 609 Collections on
beneficial interest from sales of finance receivables 17 15 79 58
Decrease (increase) in other current and long-term assets 20 13
(159 ) (145 ) Increase (decrease) in accounts payable and accrued
compensation 90 94 128 (29 ) Increase (decrease) in other current
and long-term liabilities 16 (16 ) (64 ) (50 ) Net change in income
tax assets and liabilities 14 30 142 125 Net change in derivative
assets and liabilities 11 17 (14 ) (11 ) Other operating, net
(29 ) (55 ) (76 ) (145 ) Net cash
provided by operating activities 857 968
2,063 2,375
Cash Flows
from Investing Activities: Cost of additions to land, buildings
and equipment (91 ) (93 ) (368 ) (346 ) Proceeds from sales of
land, buildings and equipment 11 34 54 86 Cost of additions to
internal use software (23 ) (18 ) (84 ) (81 ) Proceeds from sale of
businesses 10 15 26 26 Acquisitions, net of cash acquired (34 ) -
(340 ) (155 ) Other investing, net (2 ) 9
9 18 Net cash used in investing
activities (129 ) (53 ) (703 ) (452 )
Cash Flows from Financing Activities: Net proceeds
(payments) on debt 160 497 (175 ) (434 ) Common stock dividends (71
) (71 ) (289 ) (272 ) Preferred stock dividends (6 ) (6 ) (24 ) (24
) Proceeds from issuances of common stock 6 28 55 124 Excess tax
benefits from stock-based compensation 3 3 18 16 Payments to
acquire treasury stock, including fees (341 ) (524 ) (1,071 ) (696
) Repurchases related to stock-based compensation (1 ) (3 ) (41 )
(57 ) Distributions to noncontrolling interests (47 ) (24 ) (87 )
(56 ) Other financing - - (10 )
(3 ) Net cash used in financing activities (297 )
(100 ) (1,624 ) (1,402 ) Effect of exchange
rate changes on cash and cash equivalents (35 ) 1
(89 ) (3 ) Increase (decrease) in cash
and cash equivalents 396 816 (353 ) 518 Cash and cash equivalents
at beginning of period 1,015 948
1,764 1,246
Cash and Cash Equivalents at
End of Period $ 1,411 $
1,764 $ 1,411 $
1,764
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 the first half 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 beginning with fourth quarter 2014. Prior
period results have been revised to reflect this change. Refer to
the “Discontinued Operations” section for further details.
Revenues
Three Months Ended December
31, % of Total Revenue % (in millions)
2014 2013 Change 2014 2013
Equipment sales $ 860 $ 969 (11 %) 17 % 19 % Annuity revenue
4,173 4,238 (2 %) 83 % 81 %
Total
Revenue $ 5,033 $ 5,207
(3 %)
100 % 100 %
Reconciliation to Condensed Consolidated Statements of
Income: Sales $ 1,414 $ 1,519 (7 %) Less: Supplies, paper and
other sales (554 ) (550 ) 1 %
Equipment Sales
$ 860 $ 969 (11 %)
Outsourcing, maintenance and rentals $ 3,526 $ 3,569 (1 %) Add:
Supplies, paper and other sales 554 550 1 % Add: Financing
93 119 (22 %)
Annuity Revenue $
4,173 $ 4,238 (2 %)
Fourth quarter 2014 total revenues decreased 3% as compared to
fourth quarter 2013, with a 2-percentage point negative impact from
currency, and reflected the following:
- Annuity revenue decreased 2% as
compared to fourth quarter 2013, with a 2-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 1% was due to 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 increase of 1% was due to modestly
higher supplies demand as well as prior year channel inventory
reductions.
- Financing revenue is generated
from financed sale transactions primarily within the Document
Technology segment. The decrease of 22% was driven by the fourth
quarter 2013 $15 million pre-tax gain on finance receivable sales
and a lower finance receivable balance due to lower originations
from decreased equipment sales and prior period sales of finance
receivables. See Sales of Finance Receivables section for further
discussion.
Equipment sales revenue is reported primarily within our
Document Technology segment and the Document Outsourcing business
within our Services segment. Equipment sales revenue decreased 11%
as compared to fourth quarter 2013, with a 2-percentage point
negative impact from currency. The decline was driven by lower
Eurasia sales due to economic instability, timing of large account
sales and overall price declines that were within our historical
range of 5% to 10%, as well as lower entry product sales primarily
due to product launch timing.
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 December 31,
2014 2013
B/(W)
Total Gross Margin 32.1 % 32.0 % 0.1 pts. RD&E as a % of
Revenue 3.0 % 2.9 % (0.1 ) pts. SAG as a % of Revenue 18.7 % 19.6 %
0.9 pts.
Operating Margin (1) 10.4 %
9.4 % 1.0 pts.
Pre-tax
income margin 6.9 % 6.3 % 0.6 pts.
Operating Margin
Fourth quarter 2014 operating margin1 of 10.4% increased
1.0-percentage point as compared to fourth quarter 2013, driven by
a 0.8-percentage point improvement in operating expenses as a
percent of revenue and a modest improvement in gross margin of
0.1-percentage point. The operating margin improvement reflects
restructuring and productivity improvements, continued benefits
from currency on yen based purchases and lower bad debt expense,
partially offset by a higher mix of Services. As anticipated,
operating margin also benefitted from lower year-over-year pension
expense and settlement losses (collectively referred to as “pension
expense”). As previously communicated, we are anticipating that
pension expense will increase in 2015 as a result of changes in the
discount rate and the estimated impact on settlement losses.
Gross Margin
Gross margin of 32.1% increased 0.1-percentage point as compared
to fourth quarter 2013. Document Technology gross margin increased
2.0-percentage points and Services gross margin was flat
year-over-year. These impacts combined with the higher proportion
of our revenue from Services (which historically has a lower gross
margin) resulted in only a modest overall gross margin
improvement.
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)
Fourth quarter 2014 RD&E as a percentage of revenue of 3.0%
increased 0.1-percentage point from fourth quarter 2013. Benefits
from the higher mix of Services revenue (which historically has
lower RD&E as a percentage of revenue) and restructuring and
productivity improvements were offset by increased investments in
Services RD&E and the total company revenue decline.
RD&E of $150 million was $3 million lower than fourth
quarter 2013, reflecting the impact of restructuring and
productivity improvements which were partially offset by increased
investments in Services RD&E. 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 18.7% decreased 0.9-percentage
point from fourth quarter 2013. The decrease was driven by the
higher mix of Services revenue (which historically has lower SAG as
a percentage of revenue), lower pension and bad debt expenses and
restructuring and productivity improvements. The net reduction in
SAG spending exceeded the overall revenue decline on a percentage
basis.
SAG of $942 million was $81 million lower than fourth quarter
2013. This includes a $17 million favorable impact from currency
for the quarter. SAG expenses reflect the following:
- $31 million decrease in selling
expenses.
- $12 million decrease in general and
administrative expenses.
- $38 million decrease in bad debt
expense reflecting the favorable trend in write-offs experienced
throughout the year. Full year 2014 bad debt expense remained less
than one percent of receivables.
Restructuring and Asset Impairment
Charges
During fourth quarter 2014, we recorded net restructuring and
asset impairment charges of $36 million, which includes $45 million
of severance costs related to headcount reductions of approximately
700 employees worldwide and $1 million of lease cancellation costs.
These costs were partially offset by $10 million of net reversals
for changes in estimated reserves from prior period
initiatives.
During fourth quarter 2013, we recorded net restructuring and
asset impairment charges of $55 million, which included $63 million
of severance costs related to headcount reductions of approximately
1,600 employees worldwide and $2 million of lease cancellations.
These costs were partially offset by $10 million of net reversals
for changes in estimated reserves from prior period
initiatives.
The restructuring reserve balance as of December 31, 2014 for
all programs was $95 million, of which $92 million is expected to
be spent over the next twelve months.
In first 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 147,500 as of December 31,
2014 increased by approximately 4,400 from December 31, 2013, due
primarily to the impact of acquisitions and seasonal fluctuations
in Services, partially offset by 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 Ended December 31, (in millions)
2014 2013 Non-financing interest
expense $ 58 $ 59 Interest income (3 ) (2 ) Gains on sales of
businesses and assets (10 ) (30 ) Currency losses / (gains), net 5
(1 ) Litigation matters (3 ) 3 Loss on sales of accounts
receivables 3 4 Deferred compensation investment gains (1 ) (4 )
All other expenses, net 8 4
Total
Other Expenses, Net $ 57 $
33
Non-financing interest expense
Fourth quarter 2014 non-financing interest expense of $58
million was $1 million lower than fourth quarter 2013. When
combined with financing interest expense (cost of financing), total
company interest expense declined by $6 million from fourth quarter
2013, driven by a lower average debt balance and lower average cost
of debt.
Currency losses / (gains), net
Fourth quarter 2014 currency losses are primarily related to
significant volatility in exchange rates in the Eurasian
market.
Gains on sales of businesses and
assets
Fourth quarter 2014 gains on sales of businesses and assets is
primarily comprised of a gain on the sale of a surplus property in
Latin America.
Fourth quarter 2013 gains on sales of businesses and assets was
primarily comprised of a gain on the sale of a portion of our
Wilsonville, Oregon product design, engineering and chemistry group
and related assets.
Litigation matters
Fourth quarter 2014 litigation matters reflects the favorable
resolution of our securities litigation matter mostly offset by
additional reserves for other litigation matters.
Income Taxes
Fourth quarter 2014 effective tax rate was 22.4%. On an adjusted
basis1, fourth quarter 2014 tax rate was 25.3%, which was lower
than the U.S. statutory tax rate primarily due to relatively equal
benefits from the reversal of a valuation allowance on deferred tax
assets associated with capital losses, the retroactive impact from
the U.S. Tax Increase Prevention Act of 2014 and the geographical
mix of profits.
Fourth quarter 2013 effective tax rate was 20.6%. On an adjusted
basis1, fourth quarter 2013 tax rate was 23.9%, which was lower
than the U.S. statutory tax rate primarily due to foreign tax
credits resulting from actual and anticipated dividends from our
foreign subsidiaries.
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 10-percentage points from these non-U.S. operations,
which is comparable to 2013.
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 first 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. Fourth quarter
2014 equity income was $41 million, a decrease of $2 million
compared to fourth quarter 2013. Fourth quarter 2013 equity income
includes $1 million of charges related to our share of Fuji Xerox
after-tax restructuring. There were no restructuring charges for
fourth quarter 2014.
Net Income
Fourth quarter 2014 net income from continuing operations
attributable to Xerox was $305 million, or $0.26 per diluted share.
On an adjusted basis1, net income from continuing operations
attributable to Xerox was $357 million, or $0.31 per diluted share.
Fourth quarter 2014 adjustments to net income reflect the
amortization of intangible assets.
Fourth quarter 2013 net income from continuing operations
attributable to Xerox was $297 million, or $0.23 per diluted share.
On an adjusted basis1, net income from continuing operations
attributable to Xerox was $344 million, or $0.27 per diluted share.
Fourth quarter 2013 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 Fourth 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 adjustments with additional consideration of
$50 million contingent on the condition of certain assets at
closing. We expect net after-tax proceeds from the transaction of
approximately $850 million. The transaction is subject to customary
closing conditions and regulatory approval and is expected to close
in the first half of 2015. Our ITO business includes approximately
9,800 employees in 45 countries. As part of the transaction, Atos
will provide IT services for certain of our existing BPO customers
as well as a portion of our internal IT requirements.
As a result of this pending transaction and having met
applicable accounting requirements, in fourth quarter 2014 we
reported the ITO business (“disposal group”) as held for sale and a
Discontinued Operation and reclassified its results from the
Services segment to Discontinued Operations. All prior periods have
accordingly been reclassified to conform to this presentation. This
represents the reclassification of $327 million in third-party
Services segment revenue and $25 million in Services segment profit
for fourth quarter 2014, and $1.3 billion in third-party Services
segment revenue and $107 million in Services segment profit for
full year 2014.
In fourth quarter 2014, we also 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.
Discontinued Operations will likely include additional charges
prior to the closing of the transaction. 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 December 31, 2014
and are included in Assets and Liabilities of Discontinued
Operations, respectively, in the Consolidated Balance Sheet at
December 31, 2014.
Other Discontinued Operations:
During third quarter 2014, we completed the closure of Xerox
Audio Visual Solutions, Inc. (XAV), a small audio visual business
within our Global Imaging Systems subsidiary, and recorded a net
pre-tax loss on disposal of $1 million. XAV provided audio visual
equipment and services to enterprise and government customers. As a
result of this closure, we reported XAV as a Discontinued Operation
and reclassified its results from the Other segment to Discontinued
Operations in third quarter 2014.
In May 2014, we sold our Truckload Management Services, Inc.
(TMS) business for $15 million and recorded a net pre-tax loss on
disposal of $1 million. TMS provided document capture and
submission solutions as well as campaign management, media buying
and digital marketing services to the long haul trucking and
transportation industry. As a result of this transaction, we
reported TMS as a Discontinued Operation and reclassified its
results from the Services segment to Discontinued Operations in
second quarter 2014.
In 2013, in connection with our decision to exit from the Paper
distribution business, we completed the sale of our North American
and European Paper businesses. As a result of these transactions,
we reported these paper-related operations as Discontinued
Operations and reclassified the results from the Other segment to
Discontinued Operations in 2013. We recorded a net pre-tax loss on
disposal of $25 million in 2013 and a $1 million net income
adjustment in 2014 to Discontinued Operations for the disposition
of these businesses.
Summarized financial information for our Discontinued Operations
is as follows:
Three Months Ended December 31,
2014 2013 (in millions)
ITO
Other Total ITO Other Total
Revenues $ 327 $ - $ 327 $ 341
$ 55 $ 396 Income (loss) from
operations (1) $ 16 $ - $ 16 $ 21 $ (2 ) $ 19 Loss on disposal
(181 ) - (181 ) -
(2 ) (2 )
Net (loss) income before income
taxes (165 ) - (165 ) 21 (4 ) 17 Income tax benefit (expense)
16 - 16 (7 )
(1 ) (8 )
(Loss) income from discontinued
operations, net of tax $ (149 ) $ - $ (149 ) $ 14
$ (5 ) $ 9
Diluted (loss) earnings per share from
discontinued operations $ (0.13 ) $ 0.01
Total
diluted earnings per share, inclusive of discontinued
operations $ 0.13 $ 0.24
Year Ended
December 31, 2014 2013 (in millions)
ITO
Other Total ITO Other Total
Revenues $ 1,320 $ 45 $ 1,365 $
1,335 $ 496 $ 1,831 Income (loss) from
operations (2) $ 74 $ (1 ) $ 73 $ 70 $ 3 $ 73 Loss on disposal
(181 ) (1 ) (182 ) - (25
) (25 )
Net (loss) income before income taxes
(107 ) (2 ) (109 ) 70 (22 ) 48 Income tax benefit (expense)
(5 ) (1 ) (6 ) (24 ) (4 ) (28 )
(Loss) income from discontinued operations, net of
tax $ (112 ) $ (3 ) $ (115 ) $ 46 $ (26 ) $ 20
Diluted (loss) earnings per share from discontinued
operations $ (0.09 ) $ 0.02
Total diluted
earnings per share, inclusive of discontinued operations $ 0.81
$ 0.91
(1) ITO Income from operations for both the 2014 and 2013 fourth
quarters includes intangible amortization and other expenses of
approximately $9 million.
(2) ITO Income from operations for the full-year 2014 and 2013
includes intangible amortization and other expenses of
approximately $33 million and $31 million, respectively.
Segment Review
Three Months Ended December 31,
Equipment Sales
Annuity Total % of Total Segment
Segment (in millions)
Revenue Revenue
Revenues Revenue Profit (Loss) Margin
2014 Services $ 135 $ 2,590 $ 2,725 54 % $ 268 9.8 %
Document Technology 693 1,466 2,159 43 % 310 14.4 % Other 32
117 149 3 % (65 ) (43.6 %)
Total
$ 860 $ 4,173 $ 5,033
100 % $ 513 10.2 %
2013 Services $ 146 $ 2,540 $ 2,686 52 % $ 261 9.7 %
Document Technology 790 1,561 2,351 45 % 273 11.6 % Other 33
137 170 3 % (34 ) (20.0 %)
Total
$ 969 $ 4,238 $ 5,207
100 % $ 500 9.6 %
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 Ended December 31, (in
millions)
2014 2013 Change
Business Processing Outsourcing $ 1,877 $ 1,824 3% Document
Outsourcing 874 889 (2%) Less: Intra-Segment Eliminations
(26 ) (27 ) (4%)
Total Revenue - Services $
2,725 $ 2,686 1%
Note: The above table has been revised to reflect the
reclassification of the ITO business to Discontinued Operations.
Additionally, 2013 BPO revenues have been revised to conform to the
2014 presentation of revenues.
Revenue
Fourth quarter 2014 Services revenue of $2,725 million was 54%
of total revenue and increased 1% from fourth quarter 2013, with a
2-percentage point negative impact from currency.
- BPO revenue increased 3%, with a
1-percentage point negative impact from currency, and represented
68% of total Services revenue. Increased growth from acquisitions
along with organic growth in several lines of business were
partially offset by the anticipated declines in the student loan
business and the Texas Medicaid contract termination, which
combined had a 3.7-percentage point negative impact on BPO revenue
growth in the quarter and a 2.5-percentage point negative impact on
total Services revenue. These negative year-over-year impacts will
end in the second half of 2015.
- In fourth quarter 2014, BPO revenue mix
across the major business areas was as follows: Commercial – 45%;
Government and Transportation – 25%; Commercial Healthcare – 18%;
and Government Healthcare – 12%.
- DO revenue decreased 2%, with a
3-percentage point negative impact from currency, and represented
32% of total Services revenue. Growth in the partner print services
offerings was partially offset by declines in Europe and other
markets due to contract run-off and new contract ramp timing.
Segment Margin
Fourth quarter 2014 Services segment margin of 9.8% increased by
0.1-percentage point from fourth quarter 2013, driven by flat gross
margin and lower SAG partially offset by increased RD&E.
Operating Margins improved across several BPO lines of business.
Productivity improvements and restructuring benefits were partially
offset by continued higher but improving expenses associated with
our government healthcare Medicaid platform, higher compensation
and benefit expenses and price declines that were consistent with
prior periods.
Metrics
Pipeline
Our total Services sales pipeline declined 5% over fourth
quarter 2013. The pipeline has been adjusted to remove the ITO
business and to reflect the realignment of our Services
go-to-market resources into industry focused business groups.
Additionally, the pipeline qualification criteria has been revised.
The sales pipeline includes the Total Contract Value (“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.
Signings
Signings are defined as estimated future revenues from contracts
signed during the period, including renewals of existing contracts.
Fourth quarter 2014 Services signings were $3.2 billion in TCV.
- BPO signings of $2.2 billion TCV
- DO signings of $1.0 billion TCV
Signings increased 20% versus fourth quarter 2013. The increase
was driven by higher new business signings in DO and higher renewal
signings in both DO and BPO. Signings on a trailing twelve month
(“TTM”) basis decreased 13% in relation to the comparable prior
year period. New business annual recurring revenue (“ARR”) and
non-recurring revenue (“NRR”) decreased 27% from fourth quarter
2013 and decreased 13% on a TTM basis. The above DO signings amount
does not include signings from our partner print services
offerings.
Note: TCV is the estimated total contractual revenue related to
future contracts in the pipeline or signed contracts, as
applicable.
Renewal rate (for BPO)
Renewal rate is defined as the ARR on contracts that are renewed
during the period as a percentage of ARR on all contracts on which
a renewal decision was made during the period. Fourth quarter 2014
contract renewal rate for BPO contracts was 93%, which was
moderately above our target range of 85%-90%. Total renewal
decision value increased significantly versus fourth quarter
2013.
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 Ended December 31, (in
millions)
2014 2013 Change
Equipment sales $ 693 $ 790 (12%) Annuity revenue 1,466
1,561 (6%)
Total Revenue $ 2,159
$ 2,351 (8%)
Fourth quarter 2014 Document Technology revenue of $2,159
million decreased 8% from fourth quarter 2013, with a 2-percentage
point negative impact from currency. Document Technology revenues
exclude Document Outsourcing. Inclusive of Document Outsourcing,
fourth quarter 2014 aggregate document-related revenue decreased 6%
from fourth quarter 2013, with a 2-percentage point negative impact
from currency. Document Technology segment revenue results included
the following:
- Equipment sales revenue
decreased 12% from fourth quarter 2013, with a 2-percentage point
negative impact from currency. The decrease in equipment sales
reflects lower sales in Eurasia due to economic instability, timing
of large account sales, the continued migration of customers to the
growing partner print services offering (included in the Services
segment), which impacts both the entry and mid-range products,
overall price declines that were within our historical range of 5%
to 10% as well as weakness in entry products primarily due to
product launch timing.
- Annuity revenue decreased 6%
from fourth quarter 2013, with a 2-percentage point negative impact
from currency. The overall decrease in Financing revenue from
fourth quarter 2013 contributed 2-percentage points to the Annuity
revenue decline and over 1-percentage point to the overall Document
Technology revenue decline. The Financing revenue decrease reflects
a $15 million gain from the sale of finance receivables in fourth
quarter 2013 and a lower finance receivables balance due to lower
originations and prior finance receivables sales. The remainder of
the decrease in Annuity revenue reflects, a modest decline in total
pages and continued migration of customers to our partner print
services offering (included in our Services segment) partially
offset by benefits from improved supplies demand and prior year
channel inventory reductions.
Document Technology revenue mix was 56% mid-range, 25% high-end
and 19% entry, consistent with recent quarters.
Segment Margin
Fourth quarter 2014 Document Technology segment margin of 14.4%
increased 2.8-percentage points from fourth quarter 2013, including
a 2.0-percentage point increase in gross margin. The gross margin
improvement reflects lower pension expense, currency benefit on yen
based purchases, restructuring and cost initiative savings, and
favorable revenue mix that more than offset price declines and the
impact of the prior year finance receivable sale gain. SAG
decreased as a percent of revenue, as lower pension and bad debt
expense and benefits from restructuring and productivity
improvements more than offset the impact of overall lower
revenues.
Total Installs (Document Technology and
Document Outsourcing2)
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
We launched a total of twelve new Entry products in 2014, with a
majority of them not available until late in the third and early in
the fourth quarter. The benefits of these launches and other Entry
go-to-market investments are still ramping, and trends in color
printers and multifunction devices are improving. Higher declines
in Eurasia due to economic instability are partially offsetting
these improvements.
- 9% increase in color printers.
- 9% decrease in color multifunction
devices.
- 25% decrease in black-and-white
multifunction devices.
Mid-Range
- 1% decrease in mid-range color is
consistent with recent quarters and reflects impacts from large
account sales timing and timing of benefits from newly launched
entry production devices.
- 8% decrease in mid-range
black-and-white is consistent with recent quarters and reflects
overall market declines.
High-End
- 12% increase in high-end color systems.
Excluding Fuji Xerox digital front-end sales, high-end color
installs increased 7%, with growth driven primarily by the new
Versant product and iGen.
- 19% decrease in high-end
black-and-white systems reflects the overall market dynamics in
this segment.
Other
Revenue
Fourth quarter 2014 Other revenue of $149 million decreased 12%
from fourth quarter 2013, with a negative 1-percentage point impact
from currency. The decrease is due primarily to lower licensing and
patent sale revenues. Total paper revenue (all within developing
markets) comprised approximately one-third of Other segment revenue
in the quarter.
Segment Loss
Fourth quarter 2014 Other segment loss of $65 million increased
$31 million from fourth quarter 2013, primarily driven by the lower
licensing and patent sale revenues and lower gains on sales of
businesses and assets. 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 December 31, 2014 and 2013:
Three Months Ended December 31,
(in millions)
2014 2013 Change Net cash
provided by operating activities $ 857 $ 968 $ (111 ) Net cash used
in investing activities (129 ) (53 ) (76 ) Net cash used in
financing activities (297 ) (100 ) (197 ) Effect of exchange rate
changes on cash and cash equivalents (35 ) 1
(36 ) Increase in cash and cash equivalents 396 816 (420 )
Cash and cash equivalents at beginning of period 1,015
948 67
Cash and Cash
Equivalents at End of Period $ 1,411 $ 1,764 $
(353 )
Cash Flows from Operating
Activities
Net cash provided by operating activities was $857 million in
fourth quarter 2014. The $111 million decrease in operating cash
from fourth quarter 2013 was primarily due to the following:
- $180 million decrease from finance
receivables primarily related to the impact from prior period sales
of receivables partially offset by higher net run-off. See Sales of
Finance Receivables for further discussion.
- $29 million decrease from inventories
primarily due to the timing of inventory purchases.
- $59 million increase from accounts
receivable primarily due to the timing of collections partially
offset by the impact from the sales of receivables.
- $17 million increase from lower
installs of equipment on operating leases.
Cash Flows from Investing
Activities
Net cash used in investing activities was $129 million in fourth
quarter 2014. The $76 million increase in the use of cash from
fourth quarter 2013 was primarily due to the following:
- $34 million increase in acquisitions.
Fourth quarter 2014 acquisitions included two businesses acquired
by our Document Technology segment.
- $23 million increase primarily due to
lower proceeds from the sale of assets. Fourth quarter 2013
included proceeds from the sale of portions of our Wilsonville,
Oregon operation and related assets.
Cash Flows from Financing
Activities
Net cash used in financing activities was $297 million in fourth
quarter 2014. The $197 million increase in the use of cash from
fourth quarter 2013 was primarily due to the following:
- $337 million increase from net debt
activity. Fourth quarter 2014 reflects an increase of $150 million
in Commercial Paper as compared to proceeds of $500 million from
the issuance of Senior Notes in the fourth quarter 2013.
- $23 million increase due to higher
distributions to noncontrolling interests.
- $22 million increase due to lower
proceeds from the issuance of common stock under our stock option
plans.
- $183 million decrease in share
repurchases due to 2014 repurchases being executed more
consistently throughout the year.
Customer Financing Activities
The following represents our Total finance assets, net
associated with our lease and finance operations:
December 31, December 31, (in millions)
2014 2013 Total Finance receivables, net (1) $
4,254 $ 4,530 Equipment on operating leases, net 525
559
Total Finance Assets, net (2) $
4,779 $ 5,089
_____________
(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, 2013 includes a decrease of $282
million due to currency across all Finance Assets.
The following summarizes our debt:
December 31, December 31, (in millions)
2014 2013 Principal debt balance(1) $ 7,722 $
7,979 Net unamortized discount (54 ) (58 ) Fair value
adjustments(2) - terminated swaps 68 100 - current swaps 5
-
Total Debt $ 7,741
$ 8,021
_____________
(1) Includes Notes Payable of $1 million and Commercial Paper of
$150 million as of December 31, 2014, and Notes Payable of $5
million and Commercial Paper of $0 as of December 31, 2013.
(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:
December 31, December 31, (in millions)
2014 2013 Financing Debt(1) $ 4,182 $ 4,453
Core Debt 3,559 3,568
Total Debt $
7,741 $ 8,021
_____________
(1) Financing Debt includes $3,722 million and $3,964 million as
of December 31, 2014 and December 31, 2013, 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 Ended Year Ended
December 31, December 31, (in millions)
2014
2013 2014 2013 Accounts
receivable sales $ 662 $ 814 $ 2,906 $ 3,401 Deferred proceeds 73
102 387 486 Loss on sales of accounts receivable 3 4 15 17
Estimated decrease to operating cash flows (1) (23 ) (13 ) (68 )
(55 )
___________________________
(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 the fourth and third quarters of 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, and associated pre-tax gains of $40 million
and $44 million, respectively. In 2013, the pre-tax gains were $15
million in the fourth quarter and $25 million in the third quarter.
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 Ended Year Ended
December 31, December 31, (in millions)
2014
2013 2014 2013 Net cash
received for sales of finance receivables (1) $ - $ 247 $ - $ 631
Impact from prior sales of finance receivables (2) (116 ) (134 )
(527 ) (392 ) Collections on beneficial interest 20
15 94 58 Estimated
(decrease) increase to operating cash flows $ (96 ) $ 128 $
(433 ) $ 297
_____________
(1) Net of beneficial interest, fees and expenses.
(2) 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. These 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; actions of
competitors; 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
multi-year contracts with governmental entities could be terminated
prior to the end of the contract term; the risk in the hiring and
retention of qualified personnel; the risk that unexpected costs
will be incurred; the risk that subcontractors, software vendors
and utility and network providers will not perform in a timely,
quality manner; 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;
development of new products and services; our ability to protect
our intellectual property rights; our ability to expand equipment
placements; 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; service
interruptions; interest rates, cost of borrowing and access to
credit markets; reliance on third parties, including
subcontractors, for manufacturing of products and provision of
services; our ability to drive the expanded use of color in
printing and copying; 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 Quarterly Reports on Form 10-Q for the quarters ended March 31,
2014, June 30, 2014, and September 30, 2014 and our 2013 Annual
Report on Form 10-K filed with the Securities and Exchange
Commission. The Company 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 Corporation 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 the first half of 2015. As a result of the
pending sale of the ITO business and having met applicable
accounting requirements, Xerox will report 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 2014
fourth 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 2014 and 2013 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.
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.
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 Ended Three Months Ended
December 31, 2014 December 31, 2013 (in millions;
except per share amounts)
Net Income EPS
Net Income EPS Reported(1)
$ 305 $ 0.26 $ 297
$ 0.23
Adjustments:
Amortization of intangible assets 52 0.05 47
0.04
Adjusted $ 357 $
0.31 $ 344 $ 0.27
Weighted average shares for adjusted EPS(2)
1,171 1,261 Fully diluted shares
at end of period(3)
1,159 Year
Ended Year Ended December 31, 2014 December
31, 2013 (in millions; except per share amounts)
Net
Income EPS Net Income EPS
Reported(1) $ 1,084 $
0.90 $ 1,139 $ 0.89
Adjustments:
Amortization of intangible assets 196 0.17 189
0.15
Adjusted $ 1,280 $
1.07 $ 1,328 $ 1.04
Weighted average shares for adjusted EPS(2)
1,199 1,274 Fully diluted shares
at end of period(3)
1,159 __________
(1) Net Income and EPS from continuing operations attributable
to Xerox.
(2) Average shares for the calculation of adjusted EPS include
27 million of shares associated with the Series A convertible
preferred stock and therefore the related quarterly dividend was
excluded.
(3) Represents common shares outstanding at December 31, 2014 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 fourth quarter
2014.
Guidance:
Earnings Per Share Q1 2015 FY
2015 GAAP EPS from Continuing Operations $0.16
- $0.18 $0.83 - $0.89
Adjustments: Amortization of intangible assets
0.04 0.17
Adjusted EPS $0.20 - $0.22 $1.00
- $1.06 Note: GAAP and Adjusted EPS guidance includes
anticipated restructuring
Free Cash Flow (in
billions)
FY 2015 Cash Flow from Operations $1.7 -
$1.9 CAPEX 0.4
Free Cash Flow $1.3 -
$1.5
Effective Tax reconciliation:
Three Months Ended Three Months Ended
December 31, 2014 December 31, 2013
Income Income Pre-Tax
Tax Effective Pre-Tax Tax
Effective (in millions)
Income Expense Tax
Rate Income Expense Tax Rate
Reported(1) $ 348 $ 78
22.4 % $ 326 $ 67
20.6 %
Adjustments:
Amortization of intangible assets 83 31
76 29
Adjusted $ 431 $
109 25.3 % $ 402 $
96 23.9 % Year
Ended Year Ended December 31, 2014 December
31, 2013 Income Income Pre-Tax Tax
Effective Pre-Tax Tax Effective (in
millions)
Income Expense Tax Rate
Income Expense Tax Rate
Reported(1) $ 1,206 $ 259
21.5 % $ 1,243 $ 253
20.4 %
Adjustments:
Amortization of intangible assets 315 119
305 116
Adjusted $ 1,521
$ 378 24.9 % $ 1,548
$ 369 23.8 %
(1) Pre-Tax Income
and Income Tax Expense from continuing operations attributable to
Xerox.
Operating Income / Margin
reconciliation:
Three Months Ended Three
Months Ended December 31, 2014 December 31, 2013
(in millions)
Profit Revenue Margin
Profit Revenue Margin Reported
pre-tax income(1) $ 348 $
5,033 6.9 % $ 326 $
5,207 6.3 %
Adjustments:
Amortization of intangible assets 83 76 Xerox restructuring charge
36 55 Other expenses, net 57 33
Adjusted Operating $ 524
$ 5,033 10.4 % $ 490
$ 5,207 9.4 % Equity in net income of
unconsolidated affiliates 41 43 Business transformation costs 5 -
Fuji Xerox restructuring charge - 1 Other expenses, net* (57
) (34 )
Segment
Profit/Revenue $ 513 $ 5,033
10.2 % $ 500 $
5,207 9.6 % _______________
Year Ended Year Ended December 31, 2014
December 31, 2013 (in millions)
Profit Revenue
Margin Profit Revenue Margin
Reported pre-tax income(1) $ 1,206
$ 19,540 6.2 % $ 1,243
$ 20,006 6.2 %
Adjustments:
Amortization of intangible assets 315 305 Xerox restructuring
charge 128 115 Other expenses, net 232
146
Adjusted Operating $
1,881 $ 19,540 9.6 % $
1,809 $ 20,006 9.0 % Equity in
net income of unconsolidated affiliates 160 169 Business
transformation costs 21 - Fuji Xerox restructuring charge 3 9
Litigation matters - (37 ) Other expenses, net* (232 )
(148 )
Segment
Profit/Revenue $ 1,833 $
19,540 9.4 % $ 1,802
$ 20,006 9.0 % _______________
* 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 Ended Year Ended December
31, December 31, 2014 2013
2014 2013 Basic Earnings (Loss) per
Share: Net income from continuing operations
attributable to Xerox $ 305 $ 297 $ 1,084 $ 1,139 Accrued Dividends
on preferred stock (6 ) (6 ) (24 ) (24
)
Adjusted net income from continuing
operations available to common shareholders
$ 299 $ 291 $ 1,060 $ 1,115 Net (loss) income from discontinued
operations attributable to Xerox (149 ) 9
(115 ) 20 Adjusted net income available to
common shareholders $ 150 $ 300 $ 945 $ 1,135
Weighted average common shares outstanding
1,128,502 1,213,670 1,154,365
1,225,486
Basic Earnings (Loss) per
Share: Continuing Operations $ 0.26 $ 0.24 $ 0.92 $ 0.91
Discontinued Operations (0.13 ) 0.01
(0.10 ) 0.02 Total $ 0.13 $ 0.25 $ 0.82
$ 0.93
Diluted Earnings (Loss) per
Share: Net income from continuing operations
attributable to Xerox $ 305 $ 297 $ 1,084 $ 1,139 Accrued Dividends
on preferred stock - - - - Interest on Convertible Securities, net
- - - 1
Adjusted net income from continuing
operations available to common shareholders
$ 305 $ 297 $ 1,084 $ 1,140 Net (loss) income from discontinued
operations attributable to Xerox (149 ) 9
(115 ) 20 Adjusted net income available to
common shareholders $ 156 $ 306 $ 969 $ 1,160
Weighted average common shares outstanding 1,128,502
1,213,670 1,154,365 1,225,486 Common shares issuable with respect
to: Stock options 2,378 4,458 2,976 5,401 Restricted stock and
performance shares 12,985 13,965 14,256 13,931 Convertible
preferred stock 26,966 26,966 26,966 26,966 Convertible securities
- 1,494 - 1,743
Adjusted weighted average common shares outstanding
1,170,831 1,260,553 1,198,563
1,273,527
Diluted Earnings (Loss) per
Share: Continuing Operations $ 0.26 $ 0.23 $ 0.90 $ 0.89
Discontinued Operations (0.13 ) 0.01
(0.09 ) 0.02
Total $ 0.13 $ 0.24
$ 0.81 $ 0.91
The following securities were not included
in the computation of diluted earnings per share because to do so
would have been anti-dilutive (shares in thousands):
Stock options 3,737 9,741 3,139 8,798 Restricted stock and
performance shares 19,258 12,377 17,987 12,411 Convertible
preferred stock - - - - Convertible Securities -
- - - 22,995
22,118 21,126 21,209
Dividends per Common Share $ 0.0625
$ 0.0575 $ 0.2500 $ 0.2300
APPENDIX II Xerox Corporation
Reconciliation of Segment Operating Profit to Pre-Tax Income
Three Months Ended December 31, (in millions)
2014 2013 Segment Profit $ 513 $ 500
Reconciling items:
Restructuring and related costs1
(41 ) (55 ) Restructuring charges of Fuji Xerox - (1 ) Amortization
of intangible assets (83 ) (76 ) Equity in net income of
unconsolidated affiliates (41 ) (43 ) Other - 1
Pre-Tax Income $ 348 $
326
1 Q4 2014 Restructuring and asset impairment charges of $36 and
business transformation costs of $5.
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.
APPENDIX III
Xerox CorporationDiscontinued
Operations Restatement Summary
Detailed below are the revised results for the Services,
Document Technology, Other and Total Segment by quarter for 2014
and 2013 as a result of the pending sale of the ITO business and
presentation of this business as a Discontinued Operation. Segment
profit for Document Technology and Other were impacted by the ITO
reclassification from the minor reallocation of expenses as well as
rounding adjustments. The entire revised income statement for these
periods can be found in the financial model included on our website
at http://news.xerox.com/investors/materials.
(in
millions)
2013 2014 Q1 Q2
Q3 Q4
FY Q1 Q2 Q3
Q3
YTD Revenues Services $ 2,584 $ 2,613 $ 2,596 $ 2,686 $
10,479 $ 2,585 $ 2,651 $ 2,623 $ 7,859 Document Technology 2,135
2,263 2,159 2,351 8,908 2,044 2,126 2,029 6,199 Other
138 166 145
170 619 142
164 143 449
Total Revenues $ 4,857
$ 5,042 $ 4,900
$ 5,207 $ 20,006
$ 4,771 $ 4,941
$ 4,795 $
14,507 Segment Profit (Loss)
Services $ 250 $ 276 $ 268 $ 261 $ 1,055 $ 222 $ 226 $ 240 $ 688
Document Technology 186 245 260 273 964 249 306 284 839 Other
(68 ) (61 ) (54 )
(34 ) (217 ) (50 ) (75 )
(82 ) (207 )
Segment Profit
(Loss) $ 368 $
460 $ 474 $
500 $ 1,802 $
421 $ 457 $
442 $ 1,320
Segment Margin Services 9.7 % 10.6 % 10.3 % 9.7 % 10.1 % 8.6
% 8.5 % 9.1 % 8.8 % Document Technology 8.7 % 10.8 % 12.0 % 11.6 %
10.8 % 12.2 % 14.4 % 14.0 % 13.5 % Other (49.3 %)
(36.7 %) (37.2 %) (20.0
%) (35.1 %) (35.2 %) (45.7 %)
(57.3 %) (46.1 %)
Segment Margin
7.6 % 9.1 %
9.7 % 9.6 %
9.0 % 8.8 %
9.2 % 9.2 %
9.1 %
XeroxMedia:Karen Arena,
+1-732-407-8510karen.arena@xerox.comorBen Rand,
+1-585-831-2088,benjamin.rand@xerox.comorInvestors:Jennifer
Horsley, +1-203-849-2656jennifer.horsley@xerox.comorTroy Anderson,
+1-203-849-5217troy.anderson@xerox.com
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