Second Quarter 2015 Summary:
- GAAP EPS from continuing operations of
9 cents
- Adjusted EPS of 22 cents
- Revenue of $4.6 billion, 56 percent
from Services
- Operating margin of 8.2 percent, down
1.6 percentage points year-over-year
- Cash flow from operations of $349
million
- Share repurchase of $395 million
- Increasing full year share repurchase
to $1.3 billion
Xerox (NYSE:XRX) announced today second-quarter 2015 adjusted
earnings per share of 22 cents. Adjusted EPS excludes 5 cents
related to the amortization of intangibles and 8 cents for the
previously announced non-cash software impairment charges,
resulting in GAAP EPS from continuing operations of 9 cents.
In the second quarter, total revenue of $4.6 billion was down 7
percent or 3 percent in constant currency. Annuity revenue was 84
percent of total revenue.
Revenue from the company’s Services business, which represented
56 percent of total revenue, was $2.6 billion, down 3 percent or up
1 percent in constant currency. Services margin was 7.5 percent,
down 1 percentage point.
Revenue from the company’s Document Technology business was $1.9
billion, down 12 percent or 7 percent in constant currency.
Document Technology margin was 12.1 percent, down 2.3 percentage
points.
Second-quarter operating margin of 8.2 percent was down 1.6
percentage points from the same quarter a year ago. Gross margin
was 31.1 percent, and selling, administrative and general expenses
were 19.7 percent of revenue.
Xerox generated $349 million in cash flow from operations during
the second quarter, ending the quarter with a cash balance of $1.6
billion. The company repurchased $395 million in stock in the
quarter, bringing the total to $611 million in the first-half of
2015.
“We delivered adjusted earnings in line with our guidance, met
our Services and Document Technology margin expectations and
delivered solid operating cash flow of $349 million in the
quarter," said Ursula Burns, Xerox chairman and chief executive
officer. “We are intensely focused on improving our Services margin
and are implementing restructuring actions and prioritizing
investments to accelerate benefits from our new operating
model.”
Xerox expects third-quarter 2015 GAAP earnings of 17 to 19 cents
per share. Third-quarter adjusted EPS is expected to be 22 to 24
cents per share.
For full-year 2015, Xerox expects GAAP earnings of 69 to 75
cents per share and adjusted EPS at the lower end of the 95 cents
to $1.01 per share range.
Xerox continues to expect full-year 2015 cash flow from
operations of $1.7 to $1.9 billion and free cash flow from
operations of $1.3 to $1.5 billion.
The company is adjusting its 2015 capital allocation plans,
increasing share repurchases by $300 million to $1.3 billion and
reducing acquisition investments.
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 130,000 Xerox employees and do business in
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
second-quarter, third-quarter and full-year 2015 guidance that
excludes certain items.
- Operating margin for second-quarter
2015 that excludes certain expenses.
- Constant Currency revenue growth for
the second quarter 2015, which excludes the effects of currency
translation.
- Free cash flow for full-year 2015,
which is cash flow from operations less 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 us, are
intended to identify forward-looking statements. These statements
reflect management’s current beliefs, assumptions and expectations
and are subject to a number of factors that may cause actual
results to differ materially. Such factors include but are not
limited to: changes in economic conditions, political conditions,
trade protection measures, licensing requirements and tax matters
in the United States and in the foreign countries in which we do
business; changes in foreign currency exchange rates; our ability
to successfully develop new products, technologies and service
offerings and to protect our intellectual property rights; the risk
that multi-year contracts with governmental entities could be
terminated prior to the end of the contract term and that civil or
criminal penalties and administrative sanctions could be imposed on
us if we fail to comply with the terms of such contracts and
applicable law; the risk that our bids do not accurately estimate
the resources and costs required to implement and service very
complex, multi-year governmental and commercial contracts, often in
advance of the final determination of the full scope and design of
such contracts or as a result of the scope of such contracts being
changed during the life of such contracts; the risk that
subcontractors, software vendors and utility and network providers
will not perform in a timely, quality manner; service
interruptions; actions of competitors and our ability to promptly
and effectively react to changing technologies and customer
expectations; our ability to obtain adequate pricing for our
products and services and to maintain and improve cost efficiency
of operations, including savings from restructuring actions and the
relocation of our service delivery centers; the risk that
individually identifiable information of customers, clients and
employees could be inadvertently disclosed or disclosed as a result
of a breach of our security systems; the risk in the hiring and
retention of qualified personnel; the risk that unexpected costs
will be incurred; our ability to recover capital investments; the
risk that our Services business could be adversely affected if we
are unsuccessful in managing the start-up of new contracts; the
collectability of our receivables for unbilled services associated
with very large, multi-year contracts; reliance on third parties,
including subcontractors, for manufacturing of products and
provision of services; our ability to expand equipment placements;
interest rates, cost of borrowing and access to credit markets; the
risk that our products may not comply with applicable worldwide
regulatory requirements, particularly environmental regulations and
directives; the outcome of litigation and regulatory proceedings to
which we may be a party; and other factors that are set forth in
the “Risk Factors” section, the “Legal Proceedings” section, the
“Management’s Discussion and Analysis of Financial Condition and
Results of Operations” section and other sections of our Quarterly
Report on Form 10-Q for the quarter ended March 31, 2015 and our
2014 Annual Report on Form 10-K filed with the Securities and
Exchange Commission. Xerox assumes no obligation to update any
forward-looking statements as a result of new information or future
events or developments, except as required by law.
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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 Six Months Ended June
30, June 30, (in millions, except per-share data)
2015 2014 % Change 2015
2014 % Change Revenues Sales $
1,224 $ 1,342 (9 )% $ 2,350 $ 2,599 (10 )% Outsourcing, maintenance
and rentals 3,279 3,501 (6 )% 6,532 6,915 (6 )% Financing 87
98 (11 )% 177 198 (11 )%
Total Revenues
4,590 4,941 (7 )%
9,059 9,712 (7 )%
Costs and Expenses Cost of sales 776 832 (7 )% 1,450 1,610
(10 )% Cost of outsourcing, maintenance and rentals 2,356 2,488 (5
)% 4,724 4,942 (4 )% Cost of financing 32 36 (11 )% 65 72 (10 )%
Research, development and engineering expenses 142 143 (1 )% 283
288 (2 )% Selling, administrative and general expenses 906 959 (6
)% 1,821 1,904 (4 )% Restructuring and asset impairment charges 157
39 * 171 65 * Amortization of intangible assets 79 78 1 % 156 155 1
% Other expenses, net 68 65 5 % 114 104
10 %
Total Costs and Expenses 4,516
4,640 (3 )% 8,784
9,140 (4 )% Income before Income
Taxes & Equity Income(1) 74 301
(75 )% 275 572 (52 )%
Income tax (benefit) expense (9 ) 73 * 30 115 * Equity in net
income of unconsolidated affiliates 29 33 (12 )% 63
75 (16 )%
Income from Continuing Operations
112 261 (57 )% 308 532
(42 )% (Loss) Income from Discontinued Operations,
net of tax (95 ) 11 * (61 ) 26 *
Net Income
17 272 (94 )% 247 558
(56 )% Less: Net income attributable to
noncontrolling interests 5 6 (17 )% 10 11
(9 )%
Net Income Attributable to Xerox $
12 $ 266 (95 )%
$ 237 $ 547 (57
)% Amounts attributable to Xerox: Net Income
from continuing operations $ 107 $ 255 (58 )% $ 298 $ 521 (43 )%
Net (Loss) Income from discontinued operations (95 ) 11 *
(61 ) 26 *
Net Income attributable to Xerox $
12 $ 266 (95 )%
$ 237 $ 547 (57
)% Basic Earnings per Share: Continuing
Operations
$ 0.09 $ 0.21 (57
)% $ 0.26 $ 0.43 (40
)% Discontinued Operations (0.08 ) 0.01 * (0.06 )
0.03 *
Total Basic Earnings per Share $
0.01 $ 0.22 (95 )%
$ 0.20 $ 0.46 (54
)% Diluted Earnings per Share: Continuing Operations
$ 0.09 $ 0.21 (57 )%
$ 0.26 $ 0.43 (40 )%
Discontinued Operations (0.08 ) 0.01 * (0.06 ) 0.02 *
Total Diluted Earnings per Share $ 0.01
$ 0.22 (95 )% $
0.20 $ 0.45 (56 )%
* Percent change not meaningful.(1) Referred to as “Pre-Tax
Income” throughout the remainder of this document.
Xerox Corporation Condensed Consolidated
Statements of Comprehensive Income (Unaudited)
Three Months Ended Six Months Ended June 30,
June 30, (in millions)
2015 2014
2015 2014 Net Income $ 17 $ 272 $ 247 $ 558
Less: Net income attributable to noncontrolling interests 5
6 10 11
Net Income Attributable to
Xerox 12 266 237 547
Other Comprehensive Income (Loss), Net: Translation
adjustments, net 194 92 (315 ) 91 Unrealized (losses) gains, net
(19 ) 15 10 41 Changes in defined benefit plans, net 67 (70
) 165 (154 )
Other Comprehensive Income (Loss), Net
242 37 (140 ) (22 )
Less: Other comprehensive income, net
attributableto noncontrolling interests
1 1 — 1
Other Comprehensive Income (Loss), Net
Attributable to Xerox
241 36 (140 ) (23 ) Comprehensive Income, Net
259 309 107 536
Less: Comprehensive income, net
attributable tononcontrolling interests
6 7 10 12
Comprehensive Income, Net
Attributable to Xerox $ 253 $ 302 $ 97 $
524
Xerox
Corporation Condensed Consolidated Balance Sheets
(Unaudited) June 30, December 31, (in
millions, except share data in thousands) 2015 2014
((1)) Assets Cash and cash equivalents $ 1,641 $ 1,411
Accounts receivable, net 2,722 2,652 Billed portion of finance
receivables, net 113 110 Finance receivables, net 1,328 1,425
Inventories 1,072 934 Assets of discontinued operations — 1,260
Other current assets 956 1,082 Total current assets
7,832 8,874 Finance receivables due after one year, net 2,581 2,719
Equipment on operating leases, net 500 525 Land, buildings and
equipment, net 1,078 1,123 Investments in affiliates, at equity
1,377 1,338 Intangible assets, net 1,890 2,031 Goodwill 8,810 8,805
Other long-term assets 1,948 2,243
Total
Assets $ 26,016 $ 27,658
Liabilities and Equity Short-term debt and current
portion of long-term debt $ 1,648 $ 1,427 Accounts payable 1,568
1,584 Accrued compensation and benefits costs 664 754 Unearned
income 428 431 Liabilities of discontinued operations — 371 Other
current liabilities 1,422 1,509 Total current
liabilities 5,730 6,076 Long-term debt 5,998 6,314 Pension and
other benefit liabilities 2,634 2,847 Post-retirement medical
benefits 790 865 Other long-term liabilities 418 454
Total Liabilities 15,570 16,556
Series A Convertible Preferred Stock 349
349 Common stock 1,097 1,124 Additional
paid-in capital 3,967 4,283 Treasury stock, at cost (316 ) (105 )
Retained earnings 9,605 9,535 Accumulated other comprehensive loss
(4,299 ) (4,159 ) Xerox shareholders’ equity 10,054 10,678
Noncontrolling interests 43 75
Total Equity
10,097 10,753 Total Liabilities and
Equity $ 26,016 $ 27,658
Shares of common stock issued 1,096,623 1,124,354
Treasury stock (27,828 ) (7,609 )
Shares of Common Stock
Outstanding 1,068,795 1,116,745 (1)
Certain prior year amounts have been revised. Refer to
Appendix III - 2014 Financial Statement Revision for additional
information.
Xerox Corporation Condensed
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended Six Months Ended June 30,
June 30, (in millions)
2015 2014
2015 2014 Cash Flows from Operating
Activities: Net income $ 17 $ 272 $ 247 $ 558 Adjustments
required to reconcile net income to cash flows from operating
activities: Depreciation and amortization 297 376 593 721 Provision
for receivables 14 22 32 38 Provision for inventory 10 4 16 14 Net
loss (gain) on sales of businesses and assets 74 1 62 (29 )
Undistributed equity in net income of unconsolidated affiliates (3
) 2 (34 ) (40 ) Stock-based compensation 23 24 45 50 Restructuring
and asset impairment charges 157 38 171 65 Payments for
restructurings (30 ) (36 ) (61 ) (72 ) Contributions to defined
benefit pension plans (57 ) (68 ) (98 ) (105 ) Increase in accounts
receivable and billed portion of finance receivables (6 ) (150 )
(245 ) (389 ) Collections of deferred proceeds from sales of
receivables 62 106 134 226 Increase in inventories (67 ) (43 ) (193
) (103 ) Increase in equipment on operating leases (69 ) (66 ) (139
) (123 ) Decrease in finance receivables 6 18 78 54 Collections on
beneficial interest from sales of finance receivables 12 21 27 42
Decrease (increase) in other current and long-term assets 11 (24 )
(60 ) (118 ) Decrease in accounts payable and accrued compensation
(21 ) (96 ) (38 ) (88 ) Decrease in other current and long-term
liabilities (57 ) (82 ) (83 ) (108 ) Net change in income tax
assets and liabilities 17 43 49 72 Net change in derivative assets
and liabilities 14 (20 ) 2 (21 ) Other operating, net (55 ) (17 )
(43 ) (33 ) Net cash provided by operating activities 349
325 462 611
Cash Flows from Investing
Activities: Cost of additions to land, buildings and equipment
(77 ) (102 ) (152 ) (186 ) Proceeds from sales of land, buildings
and equipment — 2 16 35 Cost of additions to internal use software
(25 ) (21 ) (45 ) (40 ) Proceeds from sale of businesses 930 15 933
15 Acquisitions, net of cash acquired (20 ) (227 ) (48 ) (281 )
Other investing, net 23 7 29 11 Net
cash provided by (used in) investing activities 831 (326 )
733 (446 )
Cash Flows from Financing Activities: Net
proceeds (payments) on debt 53 (299 ) (97 ) (295 ) Common stock
dividends (77 ) (73 ) (147 ) (141 ) Preferred stock dividends (6 )
(6 ) (12 ) (12 ) Proceeds from issuances of common stock 4 19 14 39
Excess tax benefits from stock-based compensation 1 3 3 6 Payments
to acquire treasury stock, including fees (395 ) (204 ) (611 ) (479
) Repurchases related to stock-based compensation — — (1 ) (1 )
Distributions to noncontrolling interests (2 ) (1 ) (56 ) (17 )
Other financing (1 ) — (1 ) (10 ) Net cash used in financing
activities (423 ) (561 ) (908 ) (910 ) Effect of exchange rate
changes on cash and cash equivalents 12 2 (57 ) (12 )
Increase (decrease) in cash and cash equivalents 769 (560 ) 230
(757 ) Cash and cash equivalents at beginning of period 872
1,567 1,411 1,764
Cash and Cash Equivalents
at End of Period $ 1,641 $
1,007 $ 1,641 $
1,007
Financial ReviewOn 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). As a result of this agreement, Xerox began reporting the
ITO business as a Discontinued Operation. Prior period results have
been revised to reflect this change. The sale was completed on June
30, 2015. Refer to the “Discontinued Operations” section for
further details.
Revenues
Three Months Ended June
30, % of Total Revenue %
CC %
(in millions)
2015 2014 Change
Change
2015 2014 Equipment sales $ 719 $ 781 (8)% (3)% 16%
16% Annuity revenue 3,871 4,160 (7)% (3)% 84% 84%
Total Revenue $ 4,590 $
4,941 (7)% (3)%
100% 100%
Reconciliation to Condensed Consolidated Statements of
Income: Sales $ 1,224 $ 1,342 (9)% (5)% Less: Supplies, paper
and other sales (505 ) (561 ) (10)% (8)%
Equipment Sales
$ 719 $ 781 (8)% (3)%
Outsourcing, maintenance and rentals $ 3,279 $ 3,501 (6)%
(2)% Add: Supplies, paper and other sales 505 561 (10)% (8)% Add:
Financing 87 98 (11)% (5)%
Annuity Revenue
$ 3,871 $ 4,160 (7)% (3)%
CC - Constant Currency (See "Non-GAAP Financial Measures"
section)
Second quarter 2015 total revenues decreased 7% as compared to
second quarter 2014, with a 4-percentage point negative impact from
currency. The 4-percentage point negative impact from currency
reflects the significant weakening of our major foreign currencies
against the U.S. Dollar as compared to the prior year. On a revenue
weighted basis, our major European currencies and the Canadian
dollar were approximately 18% weaker against the U.S. dollar as
compared to the prior year. Revenues from these major foreign
currencies comprise approximately 25% of our total consolidated
revenues, while overall non-U.S. revenues represent approximately
one third of the total. Second quarter 2015 total revenues reflect
the following:
- Annuity revenue decreased 7% as
compared to second quarter 2014, with a 4-percentage point negative
impact from currency. Annuity revenue is comprised of the
following:
- Outsourcing, maintenance and rentals
revenue includes outsourcing revenue within the Services
segment, and maintenance revenue (including bundled supplies) and
rental revenue, primarily within the Document Technology segment.
The decrease of 6% was primarily due to a 4-percentage point
negative impact from currency and a decline in the Document
Technology segment.
- Supplies, paper and other sales
includes unbundled supplies and other sales, primarily within the
Document Technology segment. The decrease of 10% was primarily due
to a 2-percentage point negative impact from currency and reduced
supplies demand mainly due to lower equipment sales in prior
periods, continued weakness in developing markets and lower OEM
sales.
- Financing revenue is generated
from financed equipment sale transactions primarily within the
Document Technology segment. The decrease of 11% reflects a
6-percentage point negative impact from currency and a declining
finance receivables balance due to lower prior period equipment
sales.
- 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 8% as compared to second quarter
2014, with a 5-percentage point negative impact from currency. The
decline reflects lower entry product sales, particularly in Eurasia
and other developing market countries, and overall price declines
that continue to be within our historical range of 5% to 10%,
partially offset by increased DO and high-end product sales.
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 June
30, 2015 2014 B/(W) Total Gross
Margin 31.1% 32.1%
(1.0) pts.
RD&E as a % of Revenue 3.1% 2.9% (0.2) pts. SAG as a % of
Revenue 19.7% 19.4% (0.3) pts.
Operating Margin (1)
8.2% 9.8% (1.6)
pts.
Pre-tax Income Margin 1.6% 6.1%
(4.5) pts.
Operating MarginSecond quarter 2015
operating margin1 of 8.2% decreased 1.6-percentage points as
compared to second quarter 2014, driven by a 1.0-percentage point
decrease in gross margin and a 0.5-percentage point increase in
operating expenses as a percent of revenue. The operating margin
reduction includes lower Services margin driven by resource and
other investments and higher costs associated with our Government
Healthcare Health Enterprise platform
implementations. Unfavorable revenue mix within Document
Technology and higher year-over-year pension expense and settlement
losses (collectively referred to as “pension expense”) also
adversely impacted operating margin. These negative impacts were
partially offset in both segments by restructuring savings and
productivity improvements and a $22 million curtailment gain we
recorded during the quarter following our decision to eliminate
retiree-health benefits for U.S. active salaried employees
effective as of December 31, 2015. While we continue to expect
higher year-over-year pension expense throughout 2015 reflecting
changes in the discount rate and the estimated impact on settlement
losses, our current pension expense estimates are lower than
originally anticipated.
Gross MarginGross margin of 31.1%
decreased 1.0-percentage point as compared to second quarter 2014.
Document Technology gross margin decreased 1.1-percentage points
while 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 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)Second quarter 2015 RD&E as a
percentage of revenue of 3.1% increased 0.2-percentage points from
second quarter 2014. This increase was due primarily to the total
company revenue decline and was only partially offset by benefits
from the higher mix of Services revenue (which historically has
lower RD&E as a percentage of revenue).
RD&E of $142 million decreased by $1 million compared to
second quarter 2014. 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 19.7%
increased 0.3-percentage points from second quarter 2014. The
increase was driven by the total company revenue decline and
increased investments in Services, partially offset by the higher
mix of Services revenue (which historically has lower SAG as a
percentage of revenue) and restructuring and productivity
improvements.
SAG of $906 million was $53 million lower than second quarter
2014. SAG expenses include a $39 million favorable impact from
currency and reflect the following:
- $27 million decrease in selling
expenses.
- $19 million decrease in general and
administrative expenses.
- $7 million decrease in bad debt
expense. Second quarter 2015 bad debt expense remained at less than
one percent of receivables.
Restructuring and Asset Impairment
ChargesDuring second quarter 2015, we recorded net
restructuring and asset impairment charges of $157 million. Net
restructuring charges of $11 million included $17 million of
severance costs related to headcount reductions of approximately
420 employees worldwide and $2 million of lease cancellation costs
partially offset by $8 million of net reversals for changes in
estimated reserves from prior period initiatives. Asset impairment
charges of $146 million were associated with software asset
impairments resulting from a change in our Government Healthcare
Solutions strategy in the Services segment (see additional
discussion in the Services section of the "Segment Review").
During second quarter 2014, we recorded net restructuring and
asset impairment charges of $39 million, which included
approximately $42 million of severance costs related to headcount
reductions of approximately 900 employees worldwide, $1 million of
lease cancellation costs and $3 million of asset impairments which
were primarily related to a surplus facility in Canada. These costs
were partially offset by $7 million of net reversals for changes in
estimated reserves from prior period initiatives.
The restructuring reserve balance as of June 30, 2015 for
all programs was $56 million, of which $53 million is expected to
be spent over the next twelve months.
In third quarter 2015, we expect to incur additional
restructuring charges of approximately $0.01 per diluted share for
actions and initiatives that have not yet been finalized.
Worldwide EmploymentWorldwide
employment, which excludes our divested ITO business, was
approximately 135,800 as of June 30, 2015 and decreased by
2,000 from December 31, 2014, due primarily to the impact of
restructuring actions and productivity improvements. Approximately
9,600 employees transferred to Atos on June 30, 2015 upon
completion of the sale of our ITO business.
Other Expenses, Net
Three Months Ended June 30, (in millions)
2015 2014 Non-financing interest expense $ 56
$ 60 Interest income (2 ) (3 ) Losses on sales of businesses and
assets (1) 6 — Currency gains (5 ) (1 ) Litigation matters 3 (1 )
Loss on sales of accounts receivables 3 4 Deferred compensation
investment gains — (3 ) All other expenses, net 7 9
Total Other Expenses, Net $ 68 $
65 (1) Excludes the loss on sale of the ITO
business, which is reported in Discontinued Operations.
Non-financing interest
expenseSecond quarter 2015 non-financing interest expense of
$56 million was $4 million lower than second quarter 2014. When
combined with financing interest expense (cost of financing), total
company interest expense declined by $8 million from second quarter
2014, driven by a lower average cost of debt and a lower average
debt balance.
Income Taxes
Second quarter 2015 effective tax rate was (12.2%) and was
negative primarily due to the discrete tax impact of the software
impairment charge. On an adjusted basis1, second quarter 2015 tax
rate was 25.8%, which was lower than the U.S. statutory tax rate
primarily due to foreign tax credits resulting from anticipated
dividends from our foreign subsidiaries, the geographical mix of
profits and the reversal of a deferred tax valuation allowance.
Second quarter 2014 effective tax rate was 24.3%. On an adjusted
basis1, second quarter 2014 tax rate was 27.2%, which was lower
than the U.S. statutory tax rate primarily due to benefits for
foreign tax credits as well as the geographical mix of profits.
Xerox operations are widely dispersed. The statutory tax rate in
most non-U.S. jurisdictions is lower than the combined U.S. and
state tax rate. The amount of income subject to these lower foreign
rates relative to the amount of U.S. income will impact our
effective tax rate. However, no one country outside of the U.S. is
a significant factor to our overall effective tax rate. Certain
foreign income is subject to U.S. tax net of any available foreign
tax credits. Our full year effective tax rate includes a benefit of
approximately 12-percentage points from these non-U.S. operations,
which is slightly higher than 2014 due to the geographical mix of
profits.
Our effective tax rate is based on nonrecurring events as well
as recurring factors, including the taxation of foreign income. In
addition, our effective tax rate will change based on discrete or
other nonrecurring events that may not be predictable. Excluding
the effects of intangibles amortization and software impairment
charges, we anticipate that our effective tax rate for the full
year and remaining quarters of 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. Second quarter
2015 equity income was $29 million, a decrease of $4 million
compared to second quarter 2014. The decrease is due to translation
currency impacts. Equity income in second quarter 2015 included a
$1 million charge related to our share of Fuji Xerox after-tax
restructuring while second quarter 2014 included $1 million of
income driven by reversals of prior period charges.
Net Income
Second quarter 2015 net income from continuing operations
attributable to Xerox was $107 million, or $0.09 per diluted share.
On an adjusted basis1, net income from continuing operations
attributable to Xerox was $246 million, or $0.22 per diluted share.
Second quarter 2015 adjustments to net income reflect the
amortization of intangible assets and non-cash software impairment
charges.
Second quarter 2014 net income from continuing operations
attributable to Xerox was $255 million, or $0.21 per diluted share.
On an adjusted basis1, net income from continuing operations
attributable to Xerox was $303 million, or $0.25 per diluted share.
Second quarter 2014 adjustments to net income reflect the
amortization of intangible assets.
The Net Income and EPS reconciliation table in the "Non-GAAP
Financial Measures" section contains the second 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 December 2014, we announced an agreement to sell the ITO
business to Atos. As a result of this agreement and having met
applicable accounting requirements, in fourth quarter 2014 we began
reporting the ITO business (disposal group) as a Discontinued
Operation. All prior periods were accordingly revised to conform to
this presentation. The sale was completed on June 30, 2015. The
final sale price of approximately $940 million ($930 million net of
cash sold) reflects closing adjustments, including an adjustment
for changes in net asset values and additional proceeds for the
condition of certain assets at the closing. Atos also assumed
approximately $85 million of capital lease obligations and pension
liabilities. Net after-tax proceeds are estimated to be
approximately $850 million, which reflects expected cash taxes as
well as our transaction and transition costs associated with the
disposal. The ITO business included approximately 9,600 employees
in 42 countries, who were transferred to Atos upon closing.
In fourth quarter 2014, we recorded a net pre-tax loss of $181
million related to the pending sale, reflecting the write-down of
the carrying value of the ITO disposal group, inclusive of
goodwill, to its estimated fair value less costs to sell. In 2015,
we recorded an additional net pre-tax loss of $72 million ($68
million in second quarter 2015) primarily related to adjustment of
the sales price and related expenses associated with the disposal,
as well as reserves for certain obligations and indemnifications we
retained as part of the final closing negotiations. In addition, in
second quarter 2015 we recorded tax expense of $54 million
primarily related to the difference between the book basis and tax
basis of allocated goodwill, which could only be recorded upon
final disposal of the business.
The transaction continues to be subject to post-closing
adjustments primarily related to a final true-up of net assets and
other indemnification obligations. In the event there are
additional charges associated with this disposal, we will record
such amounts through discontinued operations in future periods.
Other Discontinued Operations:
Other discontinued operations include the 2014 closure of Xerox
Audio Visual Solutions, Inc. (XAV) and the 2014 sale of our
Truckload Management Services, Inc. (TMS) business.
Summarized financial information for our Discontinued Operations
is as follows:
Three Months Ended June 30, 2015
2014 (in millions)
ITO Other
Total ITO Other Total
Revenues $ 308 $ — $ 308 $ 341 $
17 $ 358 Income from operations (1) (2) $ 43 $ — $ 43
$ 23 $ — $ 23 Loss on disposal (68 ) — (68 ) — (2 )
(2 )
Net (loss) income before income taxes (25 ) — (25 ) 23
(2 ) 21 Income tax expense (70 ) — (70 ) (9 ) (1 ) (10 )
(Loss) income from discontinued
operations, net of tax
$ (95 ) $ — $ (95 ) $ 14 $ (3 ) $ 11
Six Months Ended June 30, 2015 2014 (in
millions)
ITO Other Total ITO
Other Total Revenues $ 619 $ — $
619 $ 669 $ 38 $ 707 Income (loss) from
operations (1) (2) $ 104 $ — $ 104 $ 44 $ (1 ) $ 43 Loss on
disposal (72 ) — (72 ) — — —
Net
income (loss) before income taxes 32 — 32 44 (1 ) 43 Income tax
expense (93 ) — (93 ) (16 ) (1 ) (17 )
(Loss) income from
discontinued
operations, net of tax
$ (61 ) $ — $ (61 ) $ 28 $ (2 ) $ 26 (1)
ITO Income from operations for second quarter 2015 and six
months ended June 30, 2015 excludes approximately $41 million and
$80 million, respectively, of depreciation and amortization
expenses (including $7 million and $14 million, respectively, for
intangible amortization) since the business was held for sale. (2)
ITO Income from operations for the second quarter 2014 and six
months ended June 30, 2014 includes intangible amortization and
other expenses of approximately $8 million and $16 million,
respectively.
Segment Review
Three Months Ended June 30, Equipment
Sales Annuity Total % of Total
Segment
Segment (in millions)
Revenue Revenue
Revenues Revenue
Profit (Loss)
Margin 2015 Services $ 134 $ 2,435 $ 2,569 56 % $ 192
7.5 % Document Technology 550 1,330 1,880 41 % 228 12.1 % Other 35
106 141 3 % (76 ) (53.9
)%
Total $ 719 $ 3,871
$ 4,590 100 % $
344 7.5 % 2014 Services $ 128 $
2,523 $ 2,651 54 % $ 226 8.5 % Document Technology 613 1,513 2,126
43 % 306 14.4 % Other 40 124 164 3 % (75 )
(45.7 )%
Total $ 781 $
4,160 $ 4,941 100
% $ 457 9.2 %
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 June 30, (in
millions)
2015 2014 % Change CC %
Change Business Processing Outsourcing $ 1,736 $ 1,796 (3)%
(1)% Document Outsourcing 833 855 (3)% 4%
Total
Revenue - Services $ 2,569 $
2,651 (3)% 1%
Note: The above table has been revised to reflect the
reclassification of the ITO business to Discontinued Operations and
excludes intercompany revenue.
RevenueSecond quarter 2015 Services
revenue of $2,569 million was 56% of total revenue and decreased 3%
from second quarter 2014, with a 4-percentage point negative impact
from currency.
- BPO revenue decreased 3%, with a
2-percentage point negative impact from currency, and represented
68% of total Services revenue. The decline was primarily driven by
the anticipated run-off of the student loan business and the Texas
Medicaid contract, which combined had a 3.5-percentage point
negative impact on BPO revenue growth and a 2.4-percentage point
negative impact on total Services revenue growth. This negative
year-over-year impact will dissipate in the second half of 2015.
Partially offsetting this decline during the quarter was moderating
acquisition growth and organic growth in several lines of business
net of the impacts from lost business and pricing that were
consistent with prior trends.
- In second quarter 2015, BPO revenue mix
across the major business areas was as follows: Commercial Business
Groups (excluding healthcare) - 45%; Public Sector - 28%;
Commercial Healthcare - 14%; and Government Healthcare - 13%.
- DO revenue decreased 3%, with a
7-percentage point negative impact from currency, and represented
32% of total Services revenue. Growth from our partner print
services offerings and from equipment sales due to higher signings
was partially offset by declines in developing markets.
Segment MarginSecond quarter 2015
Services segment margin of 7.5% decreased by 1.0-percentage point
from second quarter 2014, as anticipated, and was driven by a flat
gross margin and increased SAG. Targeted resource and other
investments, increased expenses associated with our Government
Healthcare Solutions (GHS) Health Enterprise (HE) platform
implementations and price declines more than offset ramping
productivity improvements and restructuring benefits. Second
quarter 2014 Services segment margin included a 0.6-percentage
point negative impact from a net non-cash impairment charge as a
result of the cancellation of a state health insurance exchange
contract in our GHS business.
Government Healthcare Solutions Strategy
ChangeDuring second quarter 2015, we made changes in our GHS
strategy resulting from a comprehensive review of the in-process HE
Medicaid platform implementations and future market opportunities.
Going forward, we will focus on managing and completing the current
HE implementations and will be highly selective in responding to
new Medicaid Management Information System (MMIS) opportunities,
with an emphasis on our current Medicaid customers. In addition, we
will discontinue investment in and sales of the Xerox Integrated
Eligibility System in order to concentrate more of our future
software development efforts on the existing HE implementations. As
a result of these actions, in second quarter 2015 we recorded a
pre-tax, non-cash software platform impairment charge of $146
million.
Operationally, our HE platform is performing well in the states
where it has been implemented. Additionally, in June 2015, we
achieved a significant milestone for the New Hampshire
implementation and our HE platform overall with the Center for
Medicare and Medicaid Services having certified the New Hampshire
system, retroactive to the April 2013 implementation date. We
continue to strengthen and improve our platform development and
systems integration capabilities with additional resources and
enhanced program management and quality control practices. Changes
in the healthcare market, including evolving regulations, have
continued to impact our development work and project scope as well
as the development work required by our clients and their
providers. This has contributed to delays in meeting client
delivery dates as well as increased delivery costs for these
contracts. We consider these increased costs as well as risks and
uncertainties in our estimates of revenues and costs under the
percentage-of-completion (POC) accounting methodology. The POC
estimation process is complex and challenging for these contracts
due to their significant scope and duration and the highly
technical nature of the implementations. As a result, throughout
the respective development and implementation periods, there is the
potential for additional changes in contract costs, productivity,
performance penalties and other factors, all of which may result in
material increases or decreases in future revenues and
costs. We are seeking to mitigate these risks through the
strategic and operational changes we are implementing.
GHS remains a significant and important business for us, and we
remain optimistic about it over the longer-term. Many areas of GHS
are performing well in today’s ever-changing healthcare
environment. These areas include services such as medical and
pharmacy benefits management, fraud and abuse detection,
eligibility support solutions and audit and compliance solutions.
We will continue to assess and modify our GHS strategy as the
marketplace and business conditions evolve.
Metrics
SigningsSignings are defined as
estimated future revenues from contracts signed during the period,
including renewals of existing contracts. Second quarter 2015
Services signings were $3.2 billion in Total Contract Value
(TCV).
- BPO signings of $2.4 billion TCV
- DO signings of $810 million TCV
Signings increased 20% from second quarter 2014. Signings in the
quarter included the previously announced New York MMIS contract
and reflect a measurably lower level of renewal decision
opportunities. Signings on a trailing twelve month (TTM) basis
increased 1% from the comparable prior year period. New business
annual recurring revenue (ARR) and non-recurring revenue (NRR)
increased 9% from second quarter 2014 but decreased 15% on a TTM
basis. DO signings do not include signings from our growing partner
print services offerings. As of June 30, 2015, the previously
awarded Florida Tolling contract was still pending.
Note: TCV is the estimated total contractual revenue related to
future contracts in the pipeline or signed contracts, as
applicable.
Renewal rate (Total
Services)Renewal rate is defined as the ARR on contracts
that are renewed during the period as a percentage of ARR on all
contracts for which a renewal decision was made during the period.
The combined second quarter 2015 contract renewal rate for BPO and
DO contracts was 82%, which was modestly below our target range of
85%-90%. Total renewal decision opportunities in the quarter were
measurably below second quarter 2014.
PipelineThe sales pipeline includes
the TCV of new business opportunities that potentially could be
contracted within the next six months and excludes new business
opportunities with estimated annual recurring revenue in excess of
$100 million. Our total Services sales pipeline was flat with
fourth quarter 2014 but has improved sequentially from first
quarter 2015. Throughout 2015 we are comparing against the December
31, 2014 pipeline due to adjustments we made in fourth quarter 2014
to remove the ITO business, reflect the realignment of our Services
go-to-market resources into industry focused business groups and
revise the pipeline qualification criteria.
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 June 30,
CC %
(in millions)
2015 2014 % Change
Change
Equipment sales $ 550 $ 613 (10)% (6)% Annuity revenue 1,330
1,513 (12)% (7)%
Total Revenue
$ 1,880 $ 2,126 (12)%
(7)%
Second quarter 2015 Document Technology revenue of $1,880
million decreased 12% from second quarter 2014, with a 5-percentage
point negative impact from currency. Document Technology revenues
exclude Document Outsourcing. Inclusive of Document Outsourcing,
second quarter 2015 aggregate document-related revenue decreased 9%
from second quarter 2014, with a 5-percentage point negative impact
from currency, which is in line with recent trends. Document
Technology segment revenue results included the following:
- Equipment sales revenue
decreased 10% from second quarter 2014, with a 4-percentage point
negative impact from currency. The equipment sales decrease
reflects lower sales of entry products, particularly in Eurasia and
other developing market countries, and overall price declines that
were within our historical range of 5% to 10%. Increased high-end
product sales partially offset these declines.
- Annuity revenue decreased 12%
from second quarter 2014, with a 5-percentage point negative impact
from currency. The annuity revenue decrease reflects a modest
decline in total pages, continued migration of customers to our
partner print services offering (included in our Services segment),
lower supplies demand and reduced financing revenue reflecting a
lower finance receivables balance due to lower prior period
equipment sales.
Document Technology revenue mix was 57% mid-range, 24% high-end
and 19% entry, consistent with recent quarters.
Segment MarginSecond quarter 2015
Document Technology segment margin of 12.1% decreased
2.3-percentage points from second quarter 2014, including a
1.1-percentage point decrease in gross margin. The gross margin
decrease reflects unfavorable revenue mix, price declines and the
anticipated increase in pension expense, partially offset by the
retiree health curtailment gain and restructuring and productivity
benefits. SAG increased as a percent of revenue due to the impact
of overall lower revenues and the net impact of higher pension
expense that more than offset benefits from restructuring and
productivity improvements and the curtailment gain.
Total Installs (Document Technology and
Document Outsourcing)2Install activity includes Document
Outsourcing and Xerox-branded products shipped to Global Imaging
Systems. Detail by product group (see Appendix II) is shown
below:
Entry
- 24% decrease in color printers
reflecting lower OEM sales.
- 9% increase in color multifunction
devices including higher demand for new products.
- 12% decrease in black-and-white
multifunction devices reflecting continued higher declines in
developing markets including Eurasia.
Mid-Range
- 4% increase in mid-range color
including higher demand for new products.
- 2% decrease in mid-range
black-and-white consistent with recent quarters.
High-End
- 16% increase in high-end color systems
driven primarily by the new Versant and Color Press products.
Excluding Fuji Xerox digital front-end sales, high-end color
installs increased 12%.
- 4% increase in high-end black-and-white
systems.
Other
RevenueSecond quarter 2015 Other
revenue of $141 million decreased 14% from second quarter 2014,
with no impact from currency. The decrease is due primarily to
lower IT and networking hardware and services sales and lower paper
and wide-format sales. Total paper revenue (all within developing
markets) comprises nearly 40% of Other segment revenue.
Segment LossNon-financing interest
expense as well as all Other expenses, net (excluding Deferred
compensation investment gains) are reported within the Other
segment. Second quarter 2015 Other segment loss of $76 million
increased $1 million from second quarter 2014.
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 June 30, 2015 and 2014:
Three Months Ended June 30,
(in millions)
2015 2014 Change
Net cash provided by operating activities $ 349 $ 325 $ 24 Net cash
provided by (used in) investing activities 831 (326 ) 1,157 Net
cash used in financing activities (423 ) (561 ) 138 Effect of
exchange rate changes on cash and cash equivalents 12 2
10 Increase (decrease) in cash and cash equivalents
769 (560 ) 1,329 Cash and cash equivalents at beginning of period
872 1,567 (695 )
Cash and Cash Equivalents at End
of Period $ 1,641 $ 1,007
$ 634
Cash Flows from Operating
ActivitiesNet cash provided by operating activities was $349
million in second quarter 2015. The $24 million increase in
operating cash from second quarter 2014 was primarily due to the
following:
- $100 million increase from accounts
receivable primarily due to lower revenues and the timing of
collections.
- $75 million increase from accounts
payable and accrued compensation primarily related to the timing of
supplier payments.
- $24 million increase due to lower
pension contributions, restructuring payments, spending for product
software and up-front costs for outsourcing service contracts, all
primarily due to timing.
- $160 million decrease in pre-tax income
before depreciation and amortization, gain on sales of businesses
and assets and restructuring.
- $24 million decrease primarily due to
higher levels of inventory from lower supplies demand.
Cash flow from operations in second quarter 2015 and 2014
included a source of cash of $52 million and $45 million,
respectively, related to the ITO business.
Cash Flows from Investing
ActivitiesNet cash provided by investing activities was $831
million in second quarter 2015 as compared to a $326 million use of
cash in second quarter 2014. The change was primarily due to the
following:
- $930 million of net pre-tax proceeds
from the sale of our ITO business. See the "Discontinued
Operations" section for further discussion.
- $207 million change from acquisitions.
Second quarter 2015 reflects $20 million for acquisitions compared
to second quarter 2014 which reflects the acquisition of ISG
Holdings, Inc. for $225 million.
- $21 million due to lower capital
expenditures (including internal use software).
Capital expenditures (including internal use software) in second
quarter 2015 and 2014 included $23 million and $29 million,
respectively, related to the ITO business.
Cash Flows from Financing
ActivitiesNet cash used in financing activities was $423
million in second quarter 2015. The $138 million decrease in the
use of cash from second quarter 2014 was primarily due to the
following:
- $352 million decrease from net debt
activity. Second quarter 2015 reflects an increase in Commercial
Paper of $306 million offset by payments of $250 million on Senior
Notes. Second quarter 2014 reflects payments of $1,050 million on
Senior Notes offset by net proceeds of $700 million from the
issuance of Senior Notes and an increase of $50 million in
Commercial Paper.
- $191 million increase in share
repurchases.
- $15 million increase due to lower
proceeds from the issuance of common stock under our stock option
plans.
Customer Financing Activities
The following represents our total finance assets, net
associated with our lease and finance operations:
(in millions)
June 30, 2015
December 31, 2014
Total finance receivables, net (1) $ 4,022 $ 4,254 Equipment on
operating leases, net 500 525
Total Finance Assets,
net (2) $ 4,522 $
4,779
____________________________
(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, 2014 includes a
decrease of $137 million due to currency across all Finance Assets.
The following summarizes our debt:
(in millions)
June 30, 2015
December 31, 2014
Principal debt balance(1) $ 7,636 $ 7,722 Net unamortized discount
(52) (54) Fair value adjustments(2) - terminated swaps 57 68 -
current swaps 5 5
Total Debt $ 7,646 $
7,741
____________________________
(1) Includes Notes Payable of $3 million and $1 million as
of June 30, 2015 and December 31, 2014, respectively, and
Commercial Paper of $661 million and $150 million as of June 30,
2015 and December 31, 2014, 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.
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)
June 30, 2015 December 31,
2014 Financing debt(1) $ 3,957 $ 4,182 Core debt 3,689 3,559
Total Debt $ 7,646 $ 7,741
____________________________
(1) Financing debt includes $3,519 million and $3,722
million as of June 30, 2015 and December 31, 2014, respectively, of
debt associated with total finance receivables, net and is the
basis for our calculation of “Equipment financing interest”
expense. The remainder of the financing debt is associated with
equipment on operating leases.
Sales of Accounts
ReceivableAccounts 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 EndedJune 30, (in millions)
2015 2014 Accounts receivable sales $ 586 $
726 Deferred proceeds 57 96 Loss on sales of accounts receivable 3
4 Estimated decrease to operating cash flows (1) (27) (31)
____________________________
(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 ReceivablesIn 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 Ended June 30, (in millions)
2015 2014 Impact from prior sales of finance
receivables (1) $ (89) $ (137) Collections on beneficial interest
15 25 Estimated decrease to operating cash flows $ (74) $ (112)
____________________________
(1) Represents cash that would have been collected if we had
not sold finance receivables.
Forward-Looking Statements
This release contains “forward-looking statements” as defined in
the Private Securities Litigation Reform Act of 1995. The words
“anticipate,” “believe,” “estimate,” “expect,” “intend,” “will,”
“should” and similar expressions, as they relate to us, are
intended to identify forward-looking statements. These statements
reflect management’s current beliefs, assumptions and expectations
and are subject to a number of factors that may cause actual
results to differ materially. Such factors include but are not
limited to: changes in economic conditions, political conditions,
trade protection measures, licensing requirements and tax matters
in the United States and in the foreign countries in which we do
business; changes in foreign currency exchange rates; our ability
to successfully develop new products, technologies and service
offerings and to protect our intellectual property rights; the risk
that multi-year contracts with governmental entities could be
terminated prior to the end of the contract term and that civil or
criminal penalties and administrative sanctions could be imposed on
us if we fail to comply with the terms of such contracts and
applicable law; the risk that our bids do not accurately estimate
the resources and costs required to implement and service very
complex, multi-year governmental and commercial contracts, often in
advance of the final determination of the full scope and design of
such contracts or as a result of the scope of such contracts being
changed during the life of such contracts; the risk that
subcontractors, software vendors and utility and network providers
will not perform in a timely, quality manner; service
interruptions; actions of competitors and our ability to promptly
and effectively react to changing technologies and customer
expectations; our ability to obtain adequate pricing for our
products and services and to maintain and improve cost efficiency
of operations, including savings from restructuring actions and the
relocation of our service delivery centers; the risk that
individually identifiable information of customers, clients and
employees could be inadvertently disclosed or disclosed as a result
of a breach of our security systems; the risk in the hiring and
retention of qualified personnel; the risk that unexpected costs
will be incurred; our ability to recover capital investments; the
risk that our Services business could be adversely affected if we
are unsuccessful in managing the start-up of new contracts; the
collectability of our receivables for unbilled services associated
with very large, multi-year contracts; reliance on third parties,
including subcontractors, for manufacturing of products and
provision of services; our ability to expand equipment placements;
interest rates, cost of borrowing and access to credit markets; the
risk that our products may not comply with applicable worldwide
regulatory requirements, particularly environmental regulations and
directives; the outcome of litigation and regulatory proceedings to
which we may be a party; and other factors that are set forth in
the “Risk Factors” section, the “Legal Proceedings” section, the
“Management’s Discussion and Analysis of Financial Condition and
Results of Operations” section and other sections of our Quarterly
Report on Form 10-Q for the quarter ended March 31, 2015 and our
2014 Annual Report on Form 10-K filed with the Securities and
Exchange Commission. Xerox assumes no obligation to update any
forward-looking statements as a result of new information or future
events or developments, except as required by law.
Non-GAAP Financial Measures
We have reported our financial results in accordance with
generally accepted accounting principles (GAAP). In addition, we
have discussed the non-GAAP measures described below. A
reconciliation of these non-GAAP financial measures to the most
directly comparable financial measures calculated and presented in
accordance with GAAP are set forth below as well as in the 2015
second 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 and to allow
investors to better understand and compare our results, 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
The following items represent the current adjustments to our
reported earnings measures:
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.
Software impairment charge (See Services
within the "Segment Review" section for additional details)
- The software impairment charge is excluded due to its non-cash
impact and the unique nature of the item both in terms of the
amount and the fact that it was the result of a specific management
action involving a change in strategy in our Government Healthcare
Solutions business.
Deferred tax liability adjustment (see
Appendix III for additional details) - The deferred tax
liability adjustment was excluded due to its non-cash impact and
the unusual nature of the item both in terms of amount and the fact
that it was the result of an infrequent change in a tax treaty
impacting future distributions from Fuji Xerox.
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 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 charges consist of
costs primarily related to severance and benefits paid to employees
pursuant to formal restructuring and workforce reduction plans.
Asset impairment charges include 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. 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 CurrencyTo 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 FlowTo 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
June 30, 2015 June 30, 2014 (in millions; except per
share amounts)
Net Income EPS Net
Income EPS Reported(1) $
107 $ 0.09 $ 255 $
0.21 Adjustments: Amortization of
intangible assets 49 0.05 48 0.04 Software impairment 90 0.08 — —
Adjusted $ 246 $ 0.22 $
303 $ 0.25 Weighted average shares for
adjusted EPS(2) 1,105 1,208 Fully diluted shares at end of
period(3) 1,113
____________________________
(1) Net Income and EPS from continuing operations
attributable to Xerox. (2) Average shares for the calculation of
adjusted EPS for second quarter 2015 exclude 27 million of shares
associated with the Series A convertible preferred stock as to
include these shares would be anti-dilutive and therefore the
related quarterly dividend was included. For second quarter 2014,
these shares were included in the adjusted EPS calculation and
therefore the related quarterly dividend was excluded. (3)
Represents common shares outstanding at June 30, 2015 as well as
shares associated with our Series A convertible preferred stock
plus dilutive potential common shares as used for the calculation
of diluted earnings per share in second quarter 2015.
Guidance:
Earnings Per Share Q3 2015 FY
2015 GAAP EPS from Continuing Operations $0.17 -
$0.19 $0.69 - $0.75
Adjustments:
Amortization of intangible assets 0.05 0.18 Software impairment -
0.08
Adjusted EPS $0.22 - $0.24 $0.95 - $1.01
____________________________
Note: GAAP and Adjusted EPS guidance includes anticipated
restructuring.
(in billions)
Free Cash Flow
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
June 30, 2015 June 30, 2014 Income
Effective Income Pre-Tax
Tax Tax Pre-Tax Tax Effective
(in millions)
Income Expense Rate
Income Expense Tax Rate
Reported(1) $ 74 $ (9)
(12.2)% $ 301 $ 73 24.3%
Adjustments:
Amortization of intangible assets 79 30 78 30 Software impairment
146 56 — —
Adjusted $ 299
$ 77 25.8% $ 379 $
103 27.2%
____________________________
(1) Pre-Tax Income and Income Tax Expense from continuing
operations attributable to Xerox.
Operating Income / Margin
reconciliation:
Three Months Ended Three Months Ended
June 30, 2015 June 30, 2014 (in millions)
Profit Revenue Margin
Profit Revenue Margin
Reported pre-tax income(1) $ 74
$ 4,590 1.6% $ 301 $
4,941 6.1%
Adjustments:
Amortization of intangible assets 79 78 Restructuring and asset
impairment charges 157 39 Other expenses, net 68
65
Adjusted Operating $
378 $ 4,590 8.2% $ 483
$ 4,941 9.8% Equity in net income of
unconsolidated affiliates 29 33 Business transformation costs 3 7
Fuji Xerox restructuring charge 1 (1) Other expenses, net* (67)
(65)
Segment Profit/Revenue
$ 344 $ 4,590 7.5% $
457 $ 4,941 9.2%
____________________________
* 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 EndedJune 30, Six Months
EndedJune 30, 2015 2014 2015
2014 Basic Earnings per Share: Net income from
continuing operations attributable to Xerox $ 107 $ 255 $ 298 $ 521
Accrued dividends on preferred stock (6 ) (6 ) (12 ) (12 ) Adjusted
net income from continuing operations available to common
shareholders $ 101 $ 249 $ 286 $ 509 Net (loss) income from
discontinued operations attributable to Xerox (95 ) 11 (61 )
26 Adjusted net income available to common shareholders $ 6
$ 260 $ 225 $ 535 Weighted average
common shares outstanding 1,087,720 1,160,842
1,098,370 1,170,177
Basic Earnings per Share:
Continuing operations $ 0.09 $ 0.21 $ 0.26 $ 0.43 Discontinued
operations (0.08 ) 0.01 (0.06 ) 0.03 Total $ 0.01
$ 0.22 $ 0.20 $ 0.46
Diluted
Earnings per Share: Net income from continuing operations
attributable to Xerox $ 107 $ 255 $ 298 $ 521 Accrued dividends on
preferred stock (6 ) (6 ) (12 ) (12 ) Adjusted net income from
continuing operations available to common shareholders $ 101 $ 249
$ 286 $ 509 Net (loss) income from discontinued operations
attributable to Xerox (95 ) 11 (61 ) 26 Adjusted net
income available to common shareholders $ 6 $ 260 $
225 $ 535 Weighted average common shares outstanding
1,087,720 1,160,842 1,098,370 1,170,177 Common shares issuable with
respect to: Stock options 1,409 3,116 1,615 3,369 Restricted stock
and performance shares 16,140 16,801 15,300 15,792 Convertible
preferred stock — — — — Adjusted
weighted average common shares outstanding 1,105,269
1,180,759 1,115,285 1,189,338
Diluted
Earnings per Share: Continuing operations $ 0.09 $ 0.21 $ 0.26
$ 0.43 Discontinued operations (0.08 ) 0.01 (0.06 ) 0.02
Total $ 0.01 $ 0.22 $ 0.20 $ 0.45
The following securities were not included
in the computation of dilutedearnings per share as they were either
contingently issuable shares orshares that if included would have
been anti-dilutive:
Stock options 2,590 5,566 2,384 5,313 Restricted stock and
performance shares 13,981 15,896 14,820 16,905 Convertible
preferred stock 26,966 26,966 26,966 26,966
Total Anti-Dilutive Securities 43,537 48,428
44,170 49,184
Dividends per Common
Share $ 0.0700 $ 0.0625 $ 0.1400 $ 0.1250
APPENDIX II Xerox Corporation
Reconciliation of Segment Operating Profit to Pre-Tax Income
Three Months Ended June 30, (in
millions)
2015 2014 Segment Profit $ 344 $ 457
Reconciling items: Restructuring and asset impairment charges, and
related costs (1) (160) (46) Restructuring charges of Fuji Xerox
(1) 1 Amortization of intangible assets (79) (78) Litigation
matters 3 (1) Equity in net income of unconsolidated affiliates
(29) (33) Other (4) 1
Pre-Tax Income $ 74
$ 301 (1) Second quarter 2015 and 2014
Restructuring and asset impairment charges of $157 and $39,
respectively, and business transformation costs of $3 and $7,
respectively.
Our reportable segments are aligned to how we manage the
business and view the markets we serve. Our reportable segments are
Services, Document Technology and Other.
Services:The Services segment comprises two service
offerings:
- Business Process Outsourcing.
- Document Outsourcing, which includes
Managed Print Services, Central Print Services and revenues from
our partner print services offerings.
Document Technology:The Document Technology segment is
centered around strategic product groups, which share common
technology, manufacturing and product platforms. This segment
includes the sale of document systems and supplies, provision of
technical service and financing of products. Our products range
from:
- “Entry”, which includes A4 devices and
desktop printers.
- “Mid-Range”, which includes A3 devices
that generally serve workgroup environments in mid to large
enterprises. This includes products that fall into the market
categories, Color 41+ppm <$100K and Light Production 91+ppm
<$100K.
- “High-End”, which includes production
printing and publishing systems that generally serve the graphic
communications marketplace and large enterprises.
Other:The Other segment includes paper sales in our
developing market countries, Wide Format Systems, licensing
revenue, Global Imaging network integration solutions and
electronic presentation systems and non-allocated corporate items
including non-financing interest and other items included in Other
expenses, net.
APPENDIX III
Xerox Corporation
2014 Financial Statement Revision
During second quarter 2015, in connection with Fuji Xerox’s (FX)
payment of its semi-annual dividend, we determined that the
dividends were no longer subject to an additional tax as a result
of a change in the U.K. - Japan Tax Treaty in December 2014. As of
December 31, 2014, we had a deferred tax liability of $44 million
associated with this additional tax on the undistributed earnings
of FX through that date. This deferred tax liability was no longer
required as a result of the change in the Tax Treaty and therefore
should have been reversed in December 2014. There was no impact on
operating cash flows from this adjustment. We assessed the
materiality of this error on our 2014 financial statements and
concluded that it was not material to the fourth quarter or annual
period. However, due to the impact of this adjustment on the
current year consolidated financial statements, the accompanying
unaudited Condensed Consolidated Balance Sheet has been revised as
of December 31, 2014 to increase retained earnings by $44 million
and decrease our deferred tax liabilities by the same amount.
The following table presents the effect of this correction on
our Consolidated Statements of Income for all periods affected:
Quarter Ended December 31, 2014 Year Ended
December 31, 2014 (in millions)
As Reported As
Revised As Reported As Revised
Income tax expense $ 78 $ 34 $ 259 $ 215 Income from
Continuing Operations 311 355 1,107 1,151 Net Income 162 206 992
1,036 Net Income Attributable to Xerox 156 200 969 1,013 Net Income
Attributable to Xerox - Continuing Operations 305 349 1,084 1,128
Basic Earnings per Share: Continuing Operations $
0.26 $ 0.30 $ 0.92 $ 0.96 Total Basic Earnings per Share 0.13 0.17
0.82 0.86
Diluted Earnings per Share: Continuing
Operations $ 0.26 $ 0.30 $ 0.90 $ 0.94 Total Diluted Earnings per
Share 0.13 0.17 0.81 0.85
Adjusted Earnings per Share
(1): $ 0.31 $ 0.31 $ 1.07 $ 1.07 (1) See the
"Non-GAAP Financial Measures" section for an explanation of this
non-GAAP financial measure.
The following table presents the effect of this correction on
our Consolidated Balance Sheet at December 31, 2014:
As of December 31, 2014 (in millions)
As
Reported As Revised Other long-term liabilities $
498 $ 454 Total Liabilities 16,600 16,556 Retained earnings
9,491 9,535 Xerox shareholders' equity 10,634 10,678 Total Equity
10,709 10,753
The correction did not have an effect on the Company's operating
cash flows. The following table presents the effect on the
individual line items within operating cash flows of our
Consolidated Statement of Cash Flows for year ended December 31,
2014:
Year Ended December 31, 2014 (in millions)
As
Reported As Revised Net income $ 992 $
1,036
Net change in income tax assets and
liabilities
29 (15)
View source
version on businesswire.com: http://www.businesswire.com/news/home/20150724005172/en/
XeroxMedia:Sean Collins,
310-497-9205sean.collins2@xerox.comorKaren Arena,
732-407-8510karen.arena@xerox.comorInvestor:Leslie Varon,
203-849-2512leslie.varon@xerox.comorJennifer Horsley,
203-849-2656jennifer.horsley@xerox.comorTroy Anderson,
203-849-2672troy.anderson@xerox.com
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