- GAAP EPS from continuing operations of
2 cents, adjusted EPS of 15 cents; includes 3 cent charge related
to Fuji Xerox matter
- Total revenue of $2.45 billion, down
6.2% or 4.3% in constant currency year-over-year
- Adjusted operating margin of 11.4
percent, up 0.9 points year-over-year
- Operating cash flow of $190 million
from continuing operations, up $103 million from the same period in
2016
- Announced largest product launch in
company’s history, delivering new technology to transform the
workplace
Xerox (NYSE:XRX) today announced its first-quarter 2017
financial results.
“I am pleased with our operational results in the first
quarter,” said Jeff Jacobson, Xerox chief executive officer.
“Revenue and cash flow were in-line with our expectations and,
despite currency headwinds, operating margin expanded driven by
productivity savings from our Strategic Transformation
initiatives.” Jacobson added, “While we still have a lot to do, we
laid the foundation to deliver on our full-year commitments.”
The company delivered first-quarter 2017 GAAP earnings per share
(EPS) from continuing operations of 2 cents. Adjusted EPS was 15
cents, which excludes 13 cents per share of after-tax costs related
to the amortization of intangibles, restructuring and related
costs, certain retirement related costs, loss on extinguishment of
debt and a tax benefit. During the quarter, the company’s earnings
were impacted by a charge related to its equity investment in Fuji
Xerox, resulting in a 3 cent reduction in both GAAP and adjusted
EPS.
Revenues were $2.45 billion in the quarter, down 6.2 percent or
4.3 percent in constant currency. Post sale revenue was 80 percent
of total revenue.
First-quarter adjusted operating margin, excluding the impact of
the Fuji Xerox charge, was 11.4 percent, up 0.9 percentage points
from the same quarter a year ago.
EPS fromcontinuingoperations
Gross
Margin
SAG as % ofRevenue
GAAP
Year-over-Year
$0.02
-$0.04
38.9%
flat
27.1%
+0.3 pts
Adjusted
Year-over-Year
$0.15
-$0.03
39.8%
+0.2 pts
25.8%
-0.2 pts
Xerox generated operating cash flow of $190 million from
continuing operations during the first quarter and ended the period
with a cash balance of $1.05 billion. The company returned $87
million in dividends to shareholders and repaid $1.30 billion of
debt.
Fuji Xerox is an unconsolidated entity in which Xerox owns a 25
percent interest and Fujifilm Holdings Corporation (Fujifilm) owns
a 75 percent interest. On April 20, 2017, Fujifilm announced it is
conducting a review of the accounting at Fuji Xerox’s New Zealand
subsidiary related to the recovery of receivables associated with
certain leasing transactions that occurred in, or prior to, Fuji
Xerox’s fiscal year ending March 31, 2016. The Fujifilm review is
ongoing and a charge of approximately $30 million in the first
quarter of 2017 represents Xerox’s share of the current Fujifilm
estimated adjustments from this review.
Full Year 2017 Guidance
The company reiterated its full-year 2017 guidance of GAAP
earnings from continuing operations of 44 to 52 cents per share and
adjusted EPS of 80 to 88 cents per share.
Xerox continues to expect to generate operating cash flow from
continuing operations of $700 to $900 million and free cash flow
from continuing operations of $525 to $725 million in 2017.
About Xerox
Xerox Corporation is an $11 billion technology leader that
innovates the way the world communicates, connects and works. Our
expertise is more important than ever as customers of all sizes
look to improve productivity, maximize profitability and increase
satisfaction. We do this for small and mid-size businesses,
large enterprises, governments, graphic communications providers,
and for our partners who serve them.
We understand what’s at the heart of work - and all of the forms
it can take. We embrace the increasingly complex world of paper and
digital. Office and mobile. Personal and social. Every day across
the globe - in more than 160 countries - our technology, software
and people successfully navigate those intersections. We automate,
personalize, package, analyze and secure information to keep our
customers moving at an accelerated pace. For more information
visit www.xerox.com.
Non-GAAP Measures:
This release refers to the following non-GAAP financial
measures:
- Adjusted EPS, for the first quarter
2017 as well as for the full-year 2017 guidance, which excludes the
amortization of intangibles, restructuring and related costs,
certain retirement related costs and other discrete
adjustments.
- Adjusted operating margin, for the
first quarter 2017, that excludes other expenses, net in addition
to the EPS adjustments noted above and includes equity income, as
adjusted for the Fuji Xerox charge.
- Adjusted Gross Margin and SAG (Selling,
Administrative and General) as a percent of Revenue for the first
quarter 2017, which excludes certain retirement related costs.
- Constant currency revenue growth for
the first quarter 2017, which excludes the effects of currency
translation.
- Free cash flow for the full-year 2017
guidance, which is operating cash flow from continuing operations
less capital expenditures including internal use software.
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: our ability to address our business challenges in order
to reverse revenue declines, reduce costs and increase productivity
so that we can invest in and grow our business; changes in economic
conditions, political conditions, trade protection measures,
licensing requirements and tax laws 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 partners, subcontractors and software vendors will not
perform in a timely, quality manner; 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; 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;
reliance on third parties, including subcontractors, for
manufacturing of products and provision of services; our ability to
manage changes in the printing environment and markets and expand
equipment placements; interest rates, cost of borrowing and access
to credit markets; funding requirements associated with our
employee pension and retiree health benefit plans; the risk that
our operations and products may not comply with applicable
worldwide regulatory requirements, particularly environmental
regulations and directives and anti-corruption laws; the outcome of
litigation and regulatory proceedings to which we may be a party;
the risk that we do not realize all of the expected strategic and
financial benefits from the separation and spin-off of our Business
Process Outsourcing business; 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 2016
Annual Report on Form 10-K, as well as in our Quarterly Reports on
Form 10-Q and Current Reports on Form 8-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.
Fuji Xerox Co., Ltd. (“Fuji Xerox”) is a joint venture between
Xerox Corporation and Fujifilm Holdings Corporation (“Fujifilm”) in
which Xerox holds a 25% equity interest and Fujifilm holds the
remaining equity interest. On April 20, 2017, Fujifilm publicly
announced it formed an independent investigation committee to
conduct a review of the appropriateness of the accounting practices
at Fuji Xerox’s New Zealand subsidiary related to the recovery of
receivables associated with certain sales leasing transactions that
occurred in, or prior to, Fuji Xerox’s fiscal year ending March 31,
2016. In first quarter 2017, we recognized a charge of
approximately $30 million, which represents our share of the
current Fujifilm estimated adjustments from this review, as
publicly disclosed by Fujifilm. Fujifilm has publicly stated that
it expects the investigation will be completed in May 2017, and
that it intends to disclose the results shortly thereafter. Given
our status as a minority investor, we have limited contractual and
other rights to information and rely on Fuji Xerox and Fujifilm to
provide information to us and are not involved in the
investigation, including its scope and timing of completion.
Although we have no reason not to rely on Fujifilm’s estimated
adjustment and we are not aware of any additional amounts related
to this matter that would have a material effect on our financial
statements, this investigation is ongoing and our future results
may include additional adjustments that are materially different
from the amount of the charge that we have already recognized in
connection with this matter and the period(s) to which the charge
relates, and we can provide no assurances relative to the outcome
of any governmental investigations or any consequences thereof.
Note: To receive RSS news feeds, visit
https://www.news.xerox.com. For open commentary, industry
perspectives and views visit http://twitter.com/xerox,
http://www.linkedin.com/company/xerox,
http://connect.blogs.xerox.com, http://www.facebook.com/XeroxCorp,
http://www.youtube.com/XeroxCorp.
Xerox® and Xerox and Design® are trademarks of Xerox in the
United States and/or other countries.
Xerox Corporation
Condensed Consolidated Statements of
Income (Unaudited)
Three Months EndedMarch 31, (in millions, except per-share
data) 2017 2016
Revenues Sales $ 936 $ 1,003
Services, maintenance and rentals 1,442 1,529 Financing 76
83
Total Revenues 2,454 2,615
Costs
and Expenses Cost of sales 567 614 Cost of services,
maintenance and rentals 900 950 Cost of financing 33 33 Research,
development and engineering expenses 118 126 Selling,
administrative and general expenses 664 701 Restructuring and
related costs 120 100 Amortization of intangible assets 14 14 Other
expenses, net 54 45
Total Costs and Expenses
2,470 2,583
(Loss) Income Before Income Taxes
& Equity Income(1) (16 ) 32 Income tax benefit (24 )
(2 ) Equity in net income of unconsolidated affiliates 16 37
Income from Continuing Operations 24 71 Loss from
discontinued operations, net of tax (6 ) (35 )
Net Income 18
36 Less: Net income attributable to noncontrolling interests 2
2
Net Income Attributable to Xerox $ 16
$ 34
Amounts Attributable to Xerox: Net income
from continuing operations $ 22 $ 69 Loss from discontinued
operations, net of tax (6 ) (35 )
Net Income Attributable to
Xerox $ 16 $ 34
Basic Earnings (Loss)
per Share: Continuing operations $ 0.02 $ 0.06 Discontinued
operations (0.01 ) (0.03 )
Total Basic Earnings per Share $
0.01 $ 0.03
Diluted Earnings (Loss) per Share:
Continuing operations $ 0.02 $ 0.06 Discontinued operations (0.01 )
(0.03 )
Total Diluted Earnings per Share $ 0.01 $
0.03
____________________________
(1) Referred to as “Pre-Tax (Loss) Income” throughout the
remainder of this document.
Xerox Corporation
Condensed Consolidated Statements of
Comprehensive Income (Unaudited)
Three Months EndedMarch 31, (in millions) 2017
2016 Net income $ 18 $ 36 Less: Net income attributable to
noncontrolling interests 2 2
Net Income
Attributable to Xerox 16 34
Other
Comprehensive Income (Loss), Net: Translation adjustments, net
136 191 Unrealized gains, net 8 9 Changes in defined benefit plans,
net 26 (112 )
Other Comprehensive Income, Net 170 88
Less: Other comprehensive income, net attributable to
noncontrolling interests 1 —
Other Comprehensive
Income, Net Attributable to Xerox 169 88
Comprehensive Income, Net 188 124 Less: Comprehensive
income, net attributable to noncontrolling interests 3 2
Comprehensive Income, Net Attributable to Xerox $ 185
$ 122
Xerox Corporation
Condensed Consolidated Balance Sheets
(Unaudited)
(in millions, except share data in thousands) March 31,2017
December 31,2016
Assets Cash and cash equivalents $ 1,045 $
2,223 Accounts receivable, net 985 961 Billed portion of finance
receivables, net 100 90 Finance receivables, net 1,261 1,256
Inventories 898 841 Assets of discontinued operations — 1,002 Other
current assets 426 619 Total current assets 4,715
6,992 Finance receivables due after one year, net 2,345 2,398
Equipment on operating leases, net 472 475 Land, buildings and
equipment, net 641 660 Investments in affiliates, at equity 1,477
1,388 Intangible assets, net 280 290 Goodwill 3,808 3,787 Deferred
tax assets, long-term 1,489 1,472 Other long-term assets 689
683
Total Assets $ 15,916 $ 18,145
Liabilities and Equity Short-term debt and current portion
of long-term debt $ 13 $ 1,011 Accounts payable 1,148 1,126 Accrued
compensation and benefits costs 409 420 Unearned income 176 187
Liabilities of discontinued operations — 1,002 Other current
liabilities 878 908 Total current liabilities 2,624
4,654 Long-term debt 4,988 5,305 Pension and other benefit
liabilities 2,239 2,240 Post-retirement medical benefits 694 698
Other long-term liabilities 191 193
Total
Liabilities 10,736 13,090
Convertible
Preferred Stock 214 214 Common stock 1,017
1,014 Additional paid-in capital 3,101 3,098 Retained earnings
4,987 5,039 Accumulated other comprehensive loss (4,179 ) (4,348 )
Xerox shareholders’ equity 4,926 4,803 Noncontrolling interests 40
38
Total Equity 4,966 4,841
Total Liabilities and Equity $ 15,916 $ 18,145
Shares of common stock issued and outstanding 1,016,584
1,014,375
Xerox Corporation
Condensed Consolidated Statements of
Cash Flows (Unaudited)
Three Months EndedMarch 31, (in millions) 2017
2016
Cash Flows from Operating Activities: Net income $ 18 $
36 Loss from discontinued operations, net of tax 6 35
Income from continuing operations 24 71 Adjustments required to
reconcile net income to cash flows from operating activities:
Depreciation and amortization 133 142 Provision for receivables 13
13 Provision for inventory 5 9 Net gain on sales of businesses and
assets — (20 ) Undistributed equity in net income of unconsolidated
affiliates (16 ) (37 ) Stock-based compensation 13 10 Restructuring
and asset impairment charges 110 98 Payments for restructurings (60
) (21 ) Defined benefit pension cost 62 43 Contributions to defined
benefit pension plans (23 ) (34 ) Increase in accounts receivable
and billed portion of finance receivables (77 ) (49 ) Collections
of deferred proceeds from sales of receivables 48 59 Increase in
inventories (58 ) (99 ) Increase in equipment on operating leases
(52 ) (62 ) Decrease in finance receivables 65 64 Collections on
beneficial interest from sales of finance receivables 6 8 Increase
in other current and long-term assets (57 ) (37 ) Increase
(decrease) in accounts payable and accrued compensation 21 (76 )
Increase (decrease) in other current and long-term liabilities 3
(64 ) Net change in income tax assets and liabilities (41 ) (32 )
Net change in derivative assets and liabilities 55 17 Other
operating, net 16 84 Net cash provided by operating
activities of continuing operations 190 87 Net cash used in
operating activities of discontinued operations (80 ) (112 ) Net
cash provided by (used in) operating activities 110 (25 )
Cash Flows from Investing Activities: Cost of additions to
land, buildings and equipment (17 ) (19 ) Proceeds from sales of
land, buildings and equipment 1 19 Cost of additions to internal
use software (9 ) (13 ) Acquisitions, net of cash acquired (11 )
(18 ) Other investing, net 1 1 Net cash used in
investing activities of continuing operations (35 ) (30 ) Net cash
used in investing activities of discontinued operations —
(95 ) Net cash used in investing activities (35 ) (125 )
Cash
Flows from Financing Activities: Net (payments) proceeds on
debt (1,324 ) 45 Common stock dividends (81 ) (71 ) Preferred stock
dividends (6 ) (6 ) Proceeds from issuances of common stock — 1
Repurchases related to stock-based compensation (7 ) —
Distributions to noncontrolling interests (1 ) (11 ) Proceeds from
Conduent 161 — Net cash used in financing activities
(1,258 ) (42 ) Effect of exchange rate changes on
cash and cash equivalents 5 12 Increase in cash of
discontinued operations — (2 ) Decrease in cash and cash
equivalents (1,178 ) (182 ) Cash and cash equivalents at beginning
of period 2,223 1,228
Cash and Cash Equivalents at
End of Period $ 1,045 $ 1,046
Financial Review
Separation Update
On December 31, 2016, Xerox Corporation completed the separation
of its Business Process Outsourcing (BPO) business from its
Document Technology and Document Outsourcing (DT/DO) business (the
“Separation”). The Separation was accomplished by moving the BPO
business into a new legal entity, Conduent Incorporated
("Conduent"), and then distributing one hundred percent (100%) of
the outstanding common stock of Conduent to Xerox Corporation
stockholders (the “Distribution”). Conduent is now an independent
public company trading on the New York Stock Exchange (“NYSE”)
under the symbol “CNDT”. As a result of the Separation and
Distribution, the BPO business is presented as a discontinued
operation and, as such, has been excluded from continuing
operations for all periods presented.
Segment Changes
Following the separation of the BPO business, we realigned our
operations to better manage the business and serve our customers.
In 2017 we transitioned to a geographic focus and are primarily
organized from a sales perspective on the basis of “go-to-market”
sales channels. These sales channels are structured to serve a
range of customers for our products and services. As a result of
this transition and change in structure, we concluded that we have
one operating and reportable segment - the design, development and
sale of document management systems and solutions. Our chief
executive officer was identified as the chief operating decision
maker (“CODM”). All of the Company’s activities are interrelated,
and each activity is dependent upon and supportive of the other,
including product development, supply chain and back-office support
services. In addition, all significant operating decisions are
largely based upon an analysis of Xerox at the consolidated level,
including assessments related to the Company’s incentive
compensation plan, as well as at the Board level.
Revenues
Three Months EndedMarch 31, % of Total Revenue (in millions)
2017 2016 %
Change
CC % Change 2017 2016 Equipment sales $ 502
$ 542 (7.4)% (5.7)% 20% 21% Post sale revenue 1,952
2,073 (5.8)% (3.9)% 80% 79%
Total Revenue $ 2,454
$ 2,615 (6.2)% (4.3)% 100% 100%
Reconciliation to Condensed Consolidated Statements of
Income: Sales $ 936 $ 1,003 (6.7)% (4.8)% Less: Supplies, paper
and other sales (434 ) (461 ) (5.9)% (3.8)%
Equipment
Sales(1) $ 502 $ 542 (7.4)% (5.7)%
Services, maintenance and rentals $ 1,442 $ 1,529 (5.7)% (3.8)%
Add: Supplies, paper and other sales 434 461 (5.9)% (3.8)% Add:
Financing 76 83 (8.4)% (6.8)%
Post Sale
Revenue(1) $ 1,952 $ 2,073 (5.8)% (3.9)%
North America $ 1,473 $ 1,542 (4.5)% (4.8)% 60% 59%
International 852 919 (7.3)% (1.5)% 35% 35% Other 129 154
(16.2)% (16.2)% 5% 6%
Total Revenue (2) $
2,454 $ 2,615 (6.2)% (4.3)% 100% 100%
Memo: Managed Document Services (3) $ 819 $ 836
(2.0)% 0.4% 33% 32%
____________________________
CC - Constant Currency (See "Non-GAAP Financial Measures"
section)
(1) Equipment sales revenue in 2016 has been revised to
reclassify certain Global Imaging Systems equipment sales to other
sales, which are included in Post Sale Revenue.
(2) Refer to Appendix II for our Geographic Sales Channels and
Product/Offering Definitions.
(3) Excluding equipment revenue, Managed Document Services (MDS)
was $714 million in first quarter 2017 and $726 million in first
quarter 2016, representing a decline of 1.7% including a
2.0-percentage point negative impact from currency.
First quarter 2017 total revenues decreased 6.2% as compared to
first quarter 2016, with a 1.9-percentage point negative impact
from currency. First quarter 2017 total revenues reflect the
following:
- Post sale revenue decreased 5.8%
as compared to first quarter 2016, with a 1.9-percentage point
negative impact from currency. Post Sale revenue is comprised of
the following:
- Services, maintenance and rentals
revenue includes rental and maintenance revenue (including
bundled supplies) as well as the post sale component of the
document services revenue from our Managed Document Services (MDS)
offerings, and revenues from our Communication and Marketing
Solutions (CMS) offerings that transferred to Xerox from the
Business Process Outsourcing (BPO) business upon Separation. These
revenues declined 5.7%, with a 1.9-percentage point negative impact
from currency; the decline at constant currency1 reflected lower
installs in prior periods and ongoing decline in page volumes.
- Supplies, paper and other sales
includes unbundled supplies and other sales. These revenues
declined 5.9%, with a 2.1-percentage point negative impact from
currency. The decline at constant currency1 was driven by lower
original equipment manufacturer (OEM) supplies as well as lower
supplies demand (both in U.S. and European channels) consistent
with lower equipment sales in prior periods, partly offset by
higher supplies sales in developing markets which benefited
partially from a weaker prior year.
- Financing revenue is generated
from financed equipment sale transactions. The 8.4% decline in
these revenues reflected a declining finance receivables balance
due to lower equipment sales in prior periods, along with a
1.6-percentage point negative impact from currency.
Three
Months EndedMarch 31, % of Equipment Sales (in millions) 2017
2016 %
Change
CC % Change 2017 2016 Entry $ 88 $ 94
(6.4)% (5.5)% 18% 18% Mid-range 317 347 (8.6)% (7.0)% 63% 64%
High-end 93 99 (6.1)% (3.7)% 19% 18% Other 4 2 NM NM
NM NM
Equipment Sales(1) $ 502 $ 542
(7.4)% (5.7)% 100% 100%
____________________________
CC - Constant Currency (See "Non-GAAP Financial Measures"
section)
(1) Equipment sales revenue in 2016 has been revised to
reclassify certain Global Imaging Systems equipment sales to other
sales, which are included in Post Sale Revenue.
- Equipment sales revenue
decreased 7.4% as compared to first quarter 2016, with a
1.7-percentage point negative impact from currency. Revenue
declined across all product areas, including the impact of price
declines of approximately 5% which are in-line with our historic
impact. The decline in mid-range sales reflects lower revenue from
black-and-white consistent with overall market decline trends, as
well as the anticipated impact of upcoming product launches. The
decline in entry sales reflects lower OEM activity, which more than
offsets the benefit of new products already launched and growth in
developing markets (partially as a result of a weaker prior year).
The decline in high-end sales reflects lower revenues from our
black-and-white systems, consistent with overall market decline
trends, partially offset by high-end color revenue growth driven by
iGen and continuous feed more than offsetting lower sales of entry
production systems related to timing of upcoming product launches.
High-end color sales also included lower digital front-end (DFE)
sales to Fuji Xerox.
Revenue Metrics
Total Installs
Install activity includes Managed Document Services and
Xerox-branded products shipped to Global Imaging Systems. Detail by
product group (see Appendix II) is shown below:
Entry2
- 15% increase in color multifunction
devices, reflecting demand for recently launched products in this
space.
- 1% increase in black-and-white
multifunction devices driven largely by a higher level of large
deals for low-end printers in developing markets, compared to a
weaker first quarter in the prior year.
Mid-Range3
- Mid-range color installs were flat
compared to prior year, as growth in developing markets offset the
anticipated timing impact of upcoming product launches.
- 24% decrease in mid-range
black-and-white, reflecting overall market decline as well as the
anticipated timing impact of upcoming product launches.
High-End3
- 15% decrease in high-end color systems
due to timing of installs and upcoming product launches.
- 25% decrease in high-end
black-and-white systems, consistent with overall market decline and
trends.
Signings
Signings are defined as estimated future revenues from contracts
signed during the period, including renewals of existing contracts.
First quarter 2017 signings were approximately $532 million in
Total Contract Value (TCV). Signings decreased 6.0% from first
quarter 2016, with a 0.4-percentage point favorable impact from
currency, reflecting lower contribution from renewals. On a
trailing twelve month (TTM) basis, signings decreased 5.5% at
constant currency1 from the comparable prior year period. New
business TCV at constant currency1 increased 1.3% from first
quarter 2016 and decreased 15.1% on a TTM basis; this performance
is the result of ongoing competitive pressure in the market
partially amplified by the timing of product launches, as well as
price discipline. Our reported signings mostly represent those from
our Large Enterprise deals, as we do not currently include signings
from our growing partner print services offerings or those from our
Global Imaging Systems channel.
Note: TCV is the estimated total contractual revenue related to
signed contracts.
Renewal rate
Renewal rate is defined as the annual recurring revenue (ARR) on
contracts that are renewed during the period as a percentage of ARR
on all contracts for which a renewal decision was made during the
period. First quarter 2017 contract renewal rate was 81%, a
decrease of 1-percentage point as compared to our full year 2016
renewal rate of 82%.
Costs, Expenses and Other Income
Summary of Key Financial Ratios
The following is a summary of key financial ratios used to
assess our performance:
Three Months Ended March 31, Reported
Adjusted(1) (in millions) 2017 2016
B/(W) 2017 2016 B/(W)
Gross Profit $ 954 $ 1,018 $ (64 ) $
977 $ 1,035 $ (58 ) RD&E 118 126 8
110 118 8 SAG 664 701 37 633 680 47 Equipment Gross Margin
30.4 % 30.7 % (0.3) pts. N/A N/A N/A Post sale Gross Margin 41.0 %
41.1 % (0.1) pts. 42.2 % 41.9 % 0.3 pts. Total Gross Margin 38.9 %
38.9 % — 39.8 % 39.6 % 0.2 pts. RD&E as a % of Revenue 4.8 %
4.8 % — 4.5 % 4.5 % — SAG as a % of Revenue 27.1 % 26.8 % (0.3)
pts. 25.8 % 26.0 % 0.2 pts. Pre-tax (Loss) Income $ (16 ) $
32 $ (48 ) N/A N/A N/A Pre-tax (Loss) Income Margin (0.7 )% 1.2 %
(1.9) pts. N/A N/A N/A Equity in net income of unconsolidated
affiliates 16 37 (21 ) 46 37 9 Operating Profit N/A
N/A N/A 280
274 6 Operating Margin
N/A N/A N/A 11.4 %
10.5 % 0.9 pts. Memo:
Non-service retirement-related costs $ 62 $ 46 $ (16 ) N/A N/A N/A
____________________________
(1) See the “Non-GAAP Financial Measures” section for an
explanation of the non-GAAP financial measure. In fourth quarter
2016, we began to include equity income in the calculation of
adjusted operating income and margin. Prior periods have been
restated accordingly to conform to current year presentation.
Pre-tax Loss Margin
First quarter 2017 pre-tax loss margin of 0.7% declined
1.9-percentage points as compared to first quarter 2016. The higher
loss was primarily driven by higher restructuring, higher
non-service retirement related costs and higher Other expenses,
Net.
Adjusted Operating Margin1
First quarter 2017 adjusted operating margin1 of 11.4% increased
0.9-percentage points as compared to first quarter 2016. The
improvement was driven primarily by cost productivity and savings
from strategic transformation, including restructuring savings,
that outpaced the rate of revenue decline. Those improvements were
partially offset by 1.1-percentage points from adverse currency.
Equity in net income of unconsolidated affiliates, during the first
quarter 2017, included a charge of approximately $30 million that
represents our share of the current Fujifilm estimated adjustments
associated with an accounting review at Fuji Xerox’s New Zealand
subsidiary related to lease receivables. We have excluded this
impact for adjusted operating income1 and adjusted operating
margin1 in order to provide a more normalized view of our
operations for the quarter. See "Equity in net income of
unconsolidated affiliates" section for further information.
Gross Margin
First quarter 2017 gross margin of 38.9% was flat compared to
first quarter 2016. On an adjusted1 basis, gross margin of 39.8%
increased by 0.2-percentage points. This performance reflects cost
savings from strategic transformation and cost productivity, partly
offset by adverse transaction currency of 1.1-percentage point.
First quarter 2017 equipment gross margin of 30.4% decreased
0.3-percentage points as compared to first quarter 2016, as a
result of adverse transaction currency and pricing that more than
offset product cost productivity.
First quarter 2017 post sale gross margin of 41.0% decreased
0.1-percentage points as compared to first quarter 2016. On an
adjusted1 basis, post sale gross margin of 42.2% improved
0.3-percentage points, as a result of cost savings from strategic
transformation, including restructuring, which more than offset the
pace of revenue decline and the impact of adverse transaction
currency.
Research, Development and Engineering
Expenses (RD&E)
First quarter 2017 RD&E as a percentage of revenue of 4.8%
was flat from first quarter 2016. On an adjusted1 basis, RD&E
was 4.5% of revenue and was flat compared to first quarter
2016.
RD&E of $118 million decreased by $8 million compared to
first quarter 2016. On an adjusted1 basis, RD&E of $110 million
decreased by $8 million. We strategically coordinate our R&D
investments with Fuji Xerox.
Selling, Administrative and General
Expenses (SAG)
SAG as a percentage of revenue of 27.1% increased by
0.3-percentage points from first quarter 2016. On an adjusted1
basis, SAG was 25.8% of revenue and decreased 0.2-percentage
points, reflecting productivity and cost savings from strategic
transformation, including restructuring savings, that more than
outpaced the decline in revenues.
SAG of $664 million was $37 million lower than first quarter
2016. On an adjusted1 basis, SAG of $633 million decreased $47
million, including an approximately $12 million favorable impact
from currency and reflected the following:
- $37 million decrease in selling
expenses, reflecting in part, lower compensation expenses
consistent with lower revenues.
- $11 million decrease in general and
administrative expenses.
- $1 million increase in bad debt
expense. First quarter 2017 bad debt expense remained at less than
one percent of receivables.
Non-Service Retirement-Related
Costs
Non-service retirement-related costs were $16 million higher
than first quarter 2016, primarily driven by higher losses from
pension settlements.
Restructuring and Related Costs
Restructuring and related costs of $120 million include
restructuring and asset impairment charges of $110 million as well
as $10 million of additional costs primarily related to
professional support services associated with the implementation of
the Strategic Transformation program.
First quarter 2017 net restructuring and asset impairment
charges of $110 million included $110 million of severance costs
related to headcount reductions of approximately 1,000 employees
worldwide and $2 million of lease cancellation. The first quarter
2017 actions impacted several functional areas, with approximately
30% of the actions focused on gross margin improvements,
approximately 60% on SAG reductions and approximately 10% on
RD&E optimization. These costs were partially offset by $2
million of net reversals for changes in estimated reserves from
prior period initiatives.
During first quarter 2016, restructuring and related costs were
$100 million which included restructuring and asset impairment
charges of $98 million as well as $2 million of additional costs
primarily related to professional support services associated with
the implementation of the Strategic Transformation program.
First quarter 2016 net restructuring and asset impairment
charges of $98 million included $98 million of severance costs
related to headcount reductions of approximately 1,400 employees
worldwide and $1 million of lease cancellation costs. The first
quarter 2016 actions impacted several functional areas, with
approximately half of the actions focused on gross margin
improvements and approximately half on SAG reductions. These costs
were partially offset by $1 million of net reversals for changes in
estimated reserves from prior period initiatives.
The restructuring reserve balance as of March 31, 2017 for all
programs was $178 million, of which $175 million is expected to be
spent over the next twelve months.
In second quarter 2017, we expect to incur additional
restructuring charges of approximately $50 million for actions and
initiatives that have not yet been finalized. We continue to expect
restructuring and related costs of approximately $225 million for
full year 2017.
Amortization of Intangible
Assets
First quarter 2017 amortization of intangible assets of $14
million was flat compared to first quarter 2016.
Worldwide Employment
Worldwide employment was approximately 37,200 as of
March 31, 2017 and decreased by approximately 400 from
December 31, 2016. The reduction is primarily due to the
impact of restructuring and productivity-related reductions.
Other Expenses, Net
Three Months EndedMarch 31, (in millions) 2017 2016
Non-financing interest expense $ 36 $ 54 Interest income (2 ) (1 )
Gains on sales of businesses and assets — (20 ) Currency losses,
net 3 4 Litigation matters — 1 Loss on sales of accounts
receivables 3 4 Loss on early extinguishment of debt 13 — All other
expenses, net 1 3
Total Other Expenses, Net $
54 $ 45
Non-financing interest expense
First quarter 2017 non-financing interest expense of $36 million
was $18 million lower than first quarter 2016. When combined with
financing interest expense (cost of financing), total interest
expense declined by $18 million from first quarter 2016 primarily
due to a lower debt balance reflecting the repayment of
approximately $1.3 billion of debt in the first quarter 2017 as
well as repayment of approximately $1.0 billion in 2016.
Gains on sales of businesses and
assets
First quarter 2016 gains on sales of businesses and assets of
$20 million were primarily related to the sale of surplus
technology assets.
Loss on early extinguishment of
debt
During the first quarter of 2017, we recorded a $13 million loss
associated with the repayment of $300 million in Senior Notes. See
"Debt Exchange" section for further information.
Income Taxes
First quarter 2017 tax benefit was at an effective tax rate of
150.0%, which was higher than the U.S. statutory tax rate primarily
due to the favorable re-measurement of certain unrecognized tax
positions. On an adjusted1 basis, first quarter 2017 tax expense
was at an effective tax rate of 27.5%, which was lower than the
U.S. statutory tax rate primarily due to foreign tax credits and
the geographical mix of profits. The adjusted1 effective tax rate
excludes the majority of the benefit from the re-measurement of
certain unrecognized tax positions as well as the tax benefits
associated with the following charges: restructuring and related
costs, amortization of intangible assets and non-service
retirement-related costs.
First quarter 2016 tax benefit was at an effective tax rate of
(6.3)% and on an adjusted1 basis, first quarter 2016 tax expense
was at an effective tax rate of 21.4%. These rates were lower than
the U.S. statutory tax rate primarily due to foreign tax credits
and the geographical mix of profits. The adjusted1 effective tax
rate excludes the tax benefits associated with the following
charges: restructuring and related costs, amortization of
intangible assets and non-service retirement-related costs.
Our effective tax rate is based on nonrecurring events as well
as recurring factors, including the taxation of foreign income. In
addition, our effective tax rate will change based on discrete or
other nonrecurring events that may not be predictable. Excluding
the effects of intangibles amortization, restructuring and related
costs, non-service retirement-related costs, separation costs and
other discrete items, we anticipate that our adjusted1 effective
tax rate will be approximately 25% to 28% for second quarter and
full year 2017.
Equity in Net Income of Unconsolidated Affiliates
Equity in net income of unconsolidated affiliates primarily
reflects our 25% share of Fuji Xerox net income. First quarter 2017
equity income of $16 million decreased by $21 million compared to
first quarter 2016. During first quarter 2017, our Fuji Xerox
equity earnings included an out-of-period adjustment of
receivables. The receivables adjustment was the result of a review
of accounting practices at Fuji Xerox’s New Zealand subsidiary
(FXNZ) related to the recovery of receivables associated with
certain bundled leasing transactions that occurred in, or prior to,
Fuji Xerox’s fiscal year ending March 31, 2016. Fuji Xerox’s
parent, Fujifilm Holdings Corporation, is in the process of
completing its review of the accounting practices at FXNZ related
to these lease receivables. Our equity earnings in the first
quarter includes a charge of approximately $30 million, that
represents our share of the current Fujifilm estimated adjustments
from this review. While the investigation is ongoing, we are not
currently aware of any additional adjustments related to this
matter that would have a material effect on our financial
statements.
Net Income from Continuing Operations
First quarter 2017 net income from continuing operations
attributable to Xerox was $22 million, or $0.02 per diluted share.
On an adjusted1 basis, net income from continuing operations
attributable to Xerox was $154 million, or $0.15 per diluted share.
First quarter 2017 adjustments to net income include the
amortization of intangible assets, restructuring and related costs,
and non-service retirement-related costs as well as other
discretely identified adjustments.
First quarter 2016 net income from continuing operations
attributable to Xerox was $69 million, or $0.06 per diluted share.
On an adjusted1 basis, net income from continuing operations
attributable to Xerox was $186 million, or $0.18 per diluted share.
First quarter 2016 adjustments to net income include the
amortization of intangible assets, restructuring and related costs
and non-service retirement-related costs.
The Net Income and EPS reconciliation table in the "Non-GAAP
Financial Measures" section contains the first quarter adjustments
to net income.
The calculations of basic and diluted earnings per share are
included as Appendix I. See the "Non-GAAP Financial Measures"
section for calculation of adjusted EPS.
Discontinued Operations
Business Process Outsourcing (BPO):
As previously noted, on December 31, 2016, Xerox completed the
Separation of its BPO business through the Distribution of all of
the issued and outstanding stock of Conduent to Xerox Corporation
stockholders. As a result of the Separation and Distribution, the
financial position and results of operations of the BPO Business
are presented as a discontinued operation and, as such, have been
excluded from continuing operations for all periods presented.
Separation costs were $8 million for the three months ended
March 31, 2017 and 2016, and are included in Loss from discontinued
operations, net of tax, in the accompanying Condensed Consolidated
Statements of Income. Separation costs are primarily for
third-party investment banking, accounting, legal, consulting and
other similar types of services related to the Separation
transaction as well as costs associated with the operational
separation of the two companies, such as those related to human
resources, brand management, real estate and information management
to the extent not capitalized. Separation costs also include the
costs associated with bonuses and restricted stock grants awarded
to employees for retention through the Separation.
Summarized financial information for our Discontinued Operations
is as follows:
Three Months EndedMarch 31, (in millions) 2017
2016
Revenue $ — $ 1,671 Cost of
services — 1,409 Other expenses(1) 8 311
Total of
Costs and Expenses 8 1,720
Net loss
before income taxes (8 ) (49 ) Income tax benefit 2 14
Loss from discontinued operations, net of tax $ (6 )
$ (35 )
____________________________
(1) In addition to the $8 million of Separation related costs,
2016 also includes $1 million of interest on the $1.0 billion
Senior Unsecured Term Facility, which was required to be repaid
upon completion of the Separation and therefore was reported in the
loss from discontinued operations.
____________________________
(1) See the “Non-GAAP Financial Measures” section for an
explanation of the non-GAAP financial measure.
(2) Entry installations exclude OEM sales; including OEM sales,
Entry color multifunction devices decreased 13%, while Entry
black-and-white multifunction devices decreased 3%.
(3) Mid-range and High-end color installations exclude Fuji
Xerox digital front-end sales; including Fuji Xerox digital
front-end sales, Mid-range color devices were flat, and High-end
color systems declined 26%.
Capital Resources and Liquidity
The following summarizes our cash and cash
equivalents:
Three Months EndedMarch 31, (in millions) 2017
2016 Change Net cash provided by operating activities of continuing
operations $ 190 $ 87 $ 103 Net cash used in operating activities
of discontinued operations (80 ) (112 ) 32 Net cash provided
by (used in) operating activities 110 (25 ) 135
Net cash used in investing activities of continuing
operations (35 ) (30 ) (5 ) Net cash used in investing activities
of discontinued operations — (95 ) 95 Net cash used
in investing activities (35 ) (125 ) 90 Net cash used
in financing activities (1,258 ) (42 ) (1,216 ) Effect of
exchange rate changes on cash and cash equivalents 5 12 (7 )
Increase in cash of discontinued operations — (2 ) 2
Decrease in cash and cash equivalents (1,178 ) (182 ) (996 ) Cash
and cash equivalents at beginning of period 2,223 1,228
995
Cash and Cash Equivalents at End of Period
$ 1,045 $ 1,046 $ (1 )
Cash Flows from Operating
Activities
Net cash provided by operating activities of continuing
operations was $190 million in first quarter 2017. The $103 million
increase in operating cash from first quarter 2016 was primarily
due to the following:
- $6 million increase in pre-tax income
before depreciation and amortization, gain on sales of businesses
and assets, stock-based compensation, restructuring and related
costs and defined benefit pension cost.
- $92 million increase in accounts
payable and accrued compensation primarily related to the
year-over-year timing of supplier and vendor payments.
- $41 million increase from a lower
seasonal first quarter build-up of inventory primarily reflecting
reduced inventory requirements, partially offset by the inventory
impact of new product launches.
- $11 million increase from lower pension
contributions.
- $10 million increase due to lower
placements of equipment on operating leases reflecting decreased
installs.
- $42 million decrease from higher
restructuring and related payments.
- $39 million decrease from accounts
receivable primarily due to the timing of collections and a
reduction in sales of receivables.
Cash Flows from Investing
Activities
Net cash used in investing activities of continuing operations
was $35 million in first quarter 2017 (including $11 million
related to a Global Imaging acquisition) as compared to $30 million
in the prior year period (including $18 million related to a Global
Imaging acquisition).
Cash Flows from Financing
Activities
Net cash used in financing activities was $1,258 million in
first quarter 2017. The $1,216 million increase in the use of cash
from first quarter 2016 was primarily due to the following:
- $1,369 million increase from net debt
activity. 2017 reflects payments of $1.0 billion on Senior Notes
and net payments of $326 million on the tender and exchange of
certain Senior Notes including transaction costs. First quarter
2016 reflects net proceeds of $749 million from a Senior Unsecured
Term Facility offset by a $700 million Senior Notes payment.
- $10 million increase from common stock
dividends.
- $7 million increase from repurchases
related to a stock-based compensation vesting.
- $161 million decrease reflecting the
final cash adjustment with Conduent.
- $10 million decrease due to lower
distributions to noncontrolling interests.
Debt and Customer Financing
Activities
The following summarizes our debt:
(in millions) March 31, 2017 December 31, 2016 Principal
debt balance(1) $ 5,049 $ 6,349 Net unamortized discount (41 ) (43
) Debt issuance costs (30 ) (21 ) Fair value adjustments(2) -
terminated swaps 20 27 - current swaps 3 4
Total
Debt $ 5,001 $ 6,316
____________________________
(1) Includes Notes Payable of $5 million and $4 million as of
March 31, 2017 and December 31, 2016, 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.
Debt Exchange
In March 2017, we completed a private offering to exchange
portions of certain series of outstanding Senior Notes due 2018
through 2020 having an aggregate principal balance of $600 million
for $300 million of new Senior Notes due 2022 and $322 million in
cash consideration, which included a $22 million exchange
premium.
The new Senior Notes bear a fixed coupon rate of 4.07% and are
due March 17, 2022. There were no other significant changes to the
terms between the old and new Senior Notes. We recorded a loss of
approximately $9 million for the exchange premium and other
carrying value adjustments related to the portion of the old notes
exchanged for cash. However, the old notes exchanged for the new
Senior Notes were accounted for as a debt modification and
therefore approximately $9 million related to the exchange premium
and other carrying value adjustments for that portion was carried
over as an adjustment to the carrying value of new Senior Notes and
is expected to be accreted over the term of the new Senior Notes.
Transaction costs incurred on the exchange and paid to third
parties of $4 million were expensed as part of the loss.
Separation Debt Activity
In connection with the Separation, Conduent made a cash
distribution of approximately $1.8 billion to Xerox in fourth
quarter 2016. Xerox used a portion of the cash distribution
proceeds to repay its $1.0 billion Senior Unsecured Term Facility
in January 2017, which was required to be repaid upon completion of
the Separation. This $1.0 billion of cash and debt was excluded
from the Cash and cash equivalents and Total Debt at December 31,
2016, respectively, and was reported in Current Assets and Current
Liabilities of discontinued operations at December 31, 2016,
respectively. Interest expense associated with this borrowing
incurred during 2016 was included in the Loss from discontinued
operations, net of tax. Xerox used the balance of the proceeds
received as well as cash on hand to repay its $500 million 6.75%
Senior Notes and $500 million 2.95% Senior Notes that came due in
first quarter 2017.
Finance Assets and Related Debt
The following represents our total finance
assets, net associated with our lease and finance operations:
(in millions) March 31, 2017 December 31, 2016 Total finance
receivables, net (1) $ 3,706 $ 3,744 Equipment on operating leases,
net 472 475
Total Finance Assets, net (2) $
4,178 $ 4,219
____________________________
(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) The change from December 31, 2016 includes an increase
of $30 million due to currency.
Our lease contracts permit customers to pay for equipment over
time rather than at the date of installation; therefore, we
maintain a certain level of debt (that we refer to as financing
debt) to support our investment in these lease contracts, which are
reflected in total finance assets, net. For this financing aspect
of our business, we maintain an assumed 7:1 leverage ratio of debt
to equity as compared to our finance assets.
Based on this leverage, the following represents the breakdown
of total debt between financing debt and core debt:
(in millions) March 31, 2017 December
31, 2016 Finance receivables debt(1) $ 3,243 $ 3,276 Equipment on
operating leases debt 413 416 Financing debt 3,656
3,692 Core debt 1,345 2,624
Total Debt $ 5,001
$ 6,316
____________________________
(1) Finance receivables debt is the basis for our calculation of
"Cost of financing" expense in the Condensed Consolidated
Statements of Income.
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. Of the accounts receivable
sold and derecognized from our balance sheet, $473 million and $531
million remain uncollected as of March 31, 2017 and December 31,
2016, respectively. Our risk of loss following the sales of
accounts receivable is limited to the outstanding deferred purchase
price receivable. These receivables are included in Other current
assets in the accompanying Condensed Consolidated Balance Sheets
and were $53 million and $48 million at March 31, 2017 and December
31, 2016, respectively. Accounts receivable sales for the periods
presented were as follows:
Three Months EndedMarch 31, (in millions) 2017
2016 Accounts receivable sales $ 511 $ 592 Deferred proceeds
52 71 Loss on sales of accounts receivable 3 4 Estimated (increase)
decrease to operating cash flows (1) (65 ) 26
____________________________
(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.
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: our ability to address our business challenges in order
to reverse revenue declines, reduce costs and increase productivity
so that we can invest in and grow our business; changes in economic
conditions, political conditions, trade protection measures,
licensing requirements and tax laws 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 partners, subcontractors and software vendors will not
perform in a timely, quality manner; 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; 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;
reliance on third parties, including subcontractors, for
manufacturing of products and provision of services; our ability to
manage changes in the printing environment and markets and expand
equipment placements; interest rates, cost of borrowing and access
to credit markets; funding requirements associated with our
employee pension and retiree health benefit plans; the risk that
our operations and products may not comply with applicable
worldwide regulatory requirements, particularly environmental
regulations and directives and anti-corruption laws; the outcome of
litigation and regulatory proceedings to which we may be a party;
the risk that we do not realize all of the expected strategic and
financial benefits from the separation and spin-off of our Business
Process Outsourcing business; 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 2016
Annual Report on Form 10-K, as well as in our Quarterly Reports on
Form 10-Q and Current Reports on Form 8-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.
Fuji Xerox Co., Ltd. (“Fuji Xerox”) is a joint venture between
Xerox Corporation and Fujifilm Holdings Corporation (“Fujifilm”) in
which Xerox holds a 25% equity interest and Fujifilm holds the
remaining equity interest. On April 20, 2017, Fujifilm publicly
announced it formed an independent investigation committee to
conduct a review of the appropriateness of the accounting practices
at Fuji Xerox’s New Zealand subsidiary related to the recovery of
receivables associated with certain sales leasing transactions that
occurred in, or prior to, Fuji Xerox’s fiscal year ending March 31,
2016. In first quarter 2017, we recognized a charge of
approximately $30 million, which represents our share of the
current Fujifilm estimated adjustments from this review, as
publicly disclosed by Fujifilm. Fujifilm has publicly stated that
it expects the investigation will be completed in May 2017, and
that it intends to disclose the results shortly thereafter. Given
our status as a minority investor, we have limited contractual and
other rights to information and rely on Fuji Xerox and Fujifilm to
provide information to us and are not involved in the
investigation, including its scope and timing of completion.
Although we have no reason not to rely on Fujifilm’s estimated
adjustment and we are not aware of any additional amounts related
to this matter that would have a material effect on our financial
statements, this investigation is ongoing and our future results
may include additional adjustments that are materially different
from the amount of the charge that we have already recognized in
connection with this matter and the period(s) to which the charge
relates, and we can provide no assurances relative to the outcome
of any governmental investigations or any consequences thereof.
Non-GAAP Financial Measures
We have reported our financial results in accordance with
generally accepted accounting principles (GAAP). In addition, we
have discussed our financial results using the non-GAAP measures
described below. We believe these non-GAAP measures allow investors
to better understand the trends in our business and to better
understand and compare our results. Accordingly, we believe it is
necessary to adjust several reported amounts, determined in
accordance with GAAP, to exclude the effects of certain items as
well as their related income tax effects.
A reconciliation of these non-GAAP financial measures to the
most directly comparable financial measures calculated and
presented in accordance with GAAP are set forth below as well as in
the first quarter 2017 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
- Net income and Earnings per share
(EPS)
- Effective tax rate
- Gross margin, RD&E and SAG
(adjusted for non-service retirement-related costs only)
The above measures were adjusted for the following items:
- Amortization of
intangible assets: The amortization of intangible assets is
driven by our acquisition activity which can vary in size, nature
and timing as compared to other companies within our industry and
from period to period. The use of intangible assets contributed to
our revenues earned during the periods presented and will
contribute to our future period revenues as well. Amortization of
intangible assets will recur in future periods.
- Restructuring and
related costs: Restructuring and related costs include
restructuring and asset impairment charges as well as costs
associated with our Strategic Transformation program beyond those
normally included in restructuring and asset impairment charges.
Restructuring consists of costs primarily related to severance and
benefits paid to employees pursuant to formal restructuring and
workforce reduction plans. Asset impairment includes costs incurred
for those assets sold, abandoned or made obsolete as a result of
our restructuring actions, exiting from a business or other
strategic business changes. Additional costs for our Strategic
Transformation program are primarily related to the implementation
of strategic actions and initiatives and include third-party
professional service costs as well as one-time incremental costs.
All of these costs can vary significantly in terms of amount and
frequency based on the nature of the actions as well as the
changing needs of the business. Accordingly, due to that
significant variability, we will exclude these charges since we do
not believe they provide meaningful insight into our current or
past operating performance nor do we believe they are reflective of
our expected future operating expenses as such charges are expected
to yield future benefits and savings with respect to our
operational performance.
- Non-service
retirement-related costs: Our defined benefit pension and
retiree health costs include several elements impacted by changes
in plan assets and obligations that are primarily driven by changes
in the debt and equity markets as well as those that are
predominantly legacy in nature and related to employees who are no
longer providing current service to the Company (e.g. retirees and
ex-employees). These elements include (i) interest cost, (ii)
expected return on plan assets, (iii) amortized actuarial
gains/losses and (iv) the impacts of any plan
settlements/curtailments. Accordingly, we consider these elements
of our periodic retirement plan costs to be outside the operational
performance of the business or legacy costs and not necessarily
indicative of current or future cash flow requirements. Adjusted
earnings will continue to include the elements of our retirement
costs related to current employee service (service cost and
amortization of prior service cost) as well as the cost of our
defined contribution plans.
- Other discrete,
unusual or infrequent items: In addition, we have also
excluded the following additional items given the discrete, unusual
or infrequent nature of the items and their impact on our results
for the period: 1) a loss on early extinguishment of debt; and 2) a
benefit from the remeasurement of a tax matter related to a
previously adjusted item. We believe the exclusion of these items
allows investors to better understand and analyze the results for
the period as compared to prior periods and expected future trends
in our business.
Adjusted Operating Income
We also calculate and utilize operating income and margin
earnings measures by adjusting our pre-tax income and margin
amounts. In addition to the costs noted for our Adjusted Earnings
measures, operating income and margin also exclude other expenses,
net. Other expenses, net is primarily comprised of non-financing
interest expense and also includes certain other non-operating
costs and expenses. We exclude these amounts in order to evaluate
our current and past operating performance and to better understand
the expected future trends in our business. Operating income and
margin also includes equity in net income of unconsolidated
affiliates. Equity in net income of unconsolidated affiliates
primarily reflects our 25% share of Fuji Xerox net income. We
include this amount in our measure of operating income and margin
as Fuji Xerox is our primary intermediary to the Asia/Pacific
market for distribution of Xerox branded products and services. As
previously disclosed, first quarter Equity in net income of
unconsolidated affiliates included a charge that represents our
share of the current Fujifilm estimated adjustments associated with
an accounting review at Fuji Xerox’s New Zealand subsidiary related
to lease receivables. We have excluded this impact for adjusted
operating income and margin in order to provide a more normalized
view of our operations for the quarter. See Equity in Net Income of
Unconsolidated Affiliates for additional information regarding this
charge.
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.” 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 subtract amounts for capital expenditures (inclusive
of internal use software) from cash flows from continuing
operations. Management believes this measure gives investors an
additional perspective on cash flow from operating activities in
excess of amounts required for reinvestment. It provides a measure
of our ability to fund acquisitions, dividends and share
repurchase. It is also used to measure our yield on market
capitalization.
Summary:
Management believes that all of these non-GAAP financial
measures provide an additional means of analyzing the current
period’s results against the corresponding prior period’s results.
However, these non-GAAP financial measures should be viewed in
addition to, and not as a substitute for, the Company’s reported
results prepared in accordance with GAAP. Our non-GAAP financial
measures are not meant to be considered in isolation or as a
substitute for comparable GAAP measures and should be read only in
conjunction with our consolidated financial statements prepared in
accordance with GAAP. Our management regularly uses our
supplemental non-GAAP financial measures internally to understand,
manage and evaluate our business and make operating decisions.
These non-GAAP measures are among the primary factors management
uses in planning for and forecasting future periods. Compensation
of our executives is based in part on the performance of our
business based on these non-GAAP measures.
A reconciliation of these non-GAAP financial measures and the
most directly comparable measures calculated and presented in
accordance with GAAP are set forth on the following tables:
Net Income and EPS
reconciliation:
Three Months EndedMarch 31, 2017 Three Months EndedMarch 31, 2016
(in millions, except per share amounts) Net Income EPS Net
Income EPS
Reported(1) $ 22 $ 0.02 $ 69 $ 0.06
Adjustments: Restructuring and related costs 120 100
Amortization of intangible assets 14 14 Non-service
retirement-related costs 62 46 Loss on extinguishment of debt 13 —
Income tax adjustments(2) (61 ) (43 ) Remeasurement of unrecognized
tax positions (16 ) —
Adjusted $ 154
$ 0.15 $ 186 $ 0.18 Weighted average shares
for adjusted EPS(3) 1,052 1,021 Fully diluted shares at end of
period(4) 1,052
____________________________
(1) Net income and EPS from continuing operations attributable
to Xerox.
(2) Refer to Effective Tax Rate reconciliation.
(3) Average shares for the 2017 quarterly calculation of
adjusted EPS includes 27 million shares associated with our Series
B convertible preferred stock and therefore the related quarterly
dividend of $4 million was excluded. Average shares for the 2016
quarterly calculation of adjusted EPS excludes 27 million shares
associated with our Series A convertible preferred stock and
therefore the related quarterly dividend of $6 million was
included.
(4) Represents common shares outstanding at March 31, 2017
as well as shares associated with our Series B convertible
preferred stock plus potential dilutive common shares as used for
the calculation of diluted earnings per share for the first quarter
2017.
Effective Tax Rate
reconciliation:
Three Months EndedMarch 31, 2017 Three Months EndedMarch 31, 2016
(in millions) Pre-Tax (Loss)
Income
Income Tax (Benefit) Expense Effective
Tax Rate Pre-Tax
Income
Income Tax (Benefit) Expense Effective
Tax Rate
Reported(1) $ (16 ) $ (24 ) 150.0 % $ 32 $
(2 ) (6.3 )% Non-GAAP Adjustments(2) 209 61 160 43 Remeasurement of
unrecognized tax positions — 16 — —
Adjusted - revised (3) $ 193 $ 53 27.5
% $ 192 $ 41 21.4 %
____________________________
(1) Pre-Tax (Loss) Income and Income Tax Benefit from continuing
operations.
(2) Refer to Net Income and EPS reconciliation for details.
(3) The tax impact on Adjusted Pre-Tax Income from continuing
operations is calculated under the same accounting principles
applied to the As Reported Pre-Tax Income under ASC 740, which
employs an annual effective tax rate method to the results.
Operating Income /
Margin reconciliation:
Three Months EndedMarch 31, 2017 Three Months EndedMarch 31, 2016
(in millions) (Loss) Profit Revenue
Margin Profit Revenue Margin
Reported Pre-Tax (Loss) Income(1) $ (16 ) $ 2,454
(0.7 )% $ 32 $ 2,615 1.2 %
Adjustments: Restructuring and
related costs 120 100 Amortization of intangible assets 14 14
Non-service retirement-related costs 62 46 Equity in net income of
unconsolidated affiliates 16 37 Receivables write-off - Fuji Xerox
30 — Other expenses, net 54 45
Adjusted Operating Profit/Margin $ 280 $ 2,454
11.4 % $ 274 $ 2,615 10.5 %
____________________________
(1) Profit and Revenue from continuing operations.
Equity in net income
of unconsolidated affiliates reconciliation:
(in millions) Three Months EndedMarch 31, 2017 Three Months
EndedMarch 31, 2016
Equity in net income of unconsolidated
affiliates - Reported $ 16 $ 37
Adjustment: Receivables
write-off - Fuji Xerox 30 —
Equity in net income of
unconsolidated affiliates - Adjusted $ 46 $ 37
Key Financial Ratios
reconciliation:
Three Months EndedMarch 31, 2017 Three Months EndedMarch 31, 2016
(in millions) As Reported(1) Non-service retirement-
related costs Adjusted As Reported(1)
Non-service retirement- related costs Adjusted Total
Revenue $ 2,454 $ — $ 2,454 $ 2,615 $ — $ 2,615 Total Gross Profit
954 23 977 1,018 17 1,035 Post sale revenue 1,952 — 1,952 2,073 —
2,073 Post sale gross profit 801 23 824 852 17 869 RD&E 118 (8
) 110 126 (8 ) 118 SAG 664 (31 ) 633 701 (21 ) 680 Total
Gross Margin 38.9 % 39.8 % 38.9 % 39.6 % Post sale Gross Margin
41.0 % 42.2 % 41.1 % 41.9 % RD&E as a % of Revenue 4.8 % 4.5 %
4.8 % 4.5 % SAG as a % of Revenue 27.1 % 25.8 % 26.8 % 26.0 %
____________________________
(1) Revenue and costs from continuing operations.
Guidance:
Earnings per Share FY 2017 GAAP EPS from
Continuing Operations $0.44 - $0.52 Non-GAAP Adjustments
0.36
Adjusted EPS from Continuing Operations $0.80 -
$0.88
____________________________
Note: Adjusted EPS guidance excludes amortization of intangible
assets, restructuring and related costs and non-service
retirement-related costs.
Free Cash Flow (in millions)
FY 2017 Estimated
Operating Cash Flows from Continuing Operations $ ~700 -
900 Less: Capital Expenditures (including Internal Use
Software)
(175)
Free Cash Flows from Continuing Operations $ ~525 -
725
APPENDIX I
Xerox Corporation
Earnings per Common Share
(in millions except per share data, shares
in thousands)
Three Months EndedMarch 31, 2017 2016
Basic
Earnings (Loss) per Share: Net income from continuing
operations attributable to Xerox $ 22 $ 69 Accrued dividends on
preferred stock (4 ) (6 ) Adjusted net income from continuing
operations available to common shareholders $ 18 $ 63 Net loss from
discontinued operations attributable to Xerox (6 ) (35 ) Adjusted
net income available to common shareholders $ 12 $ 28
Weighted average common shares outstanding 1,016,151 1,013,033
Basic Earnings (Loss) per Share: Continuing operations $
0.02 $ 0.06 Discontinued operations (0.01 ) (0.03 ) Total $ 0.01
$ 0.03
Diluted Earnings (Loss) per Share: Net
income from continuing operations attributable to Xerox $ 22 $ 69
Accrued dividends on preferred stock (4 ) (6 ) Adjusted net income
from continuing operations available to common shareholders $ 18 $
63 Net loss from discontinued operations attributable to Xerox (6 )
(35 ) Adjusted net income available to common shareholders $ 12
$ 28 Weighted average common shares outstanding
1,016,151 1,013,033 Common shares issuable with respect to: Stock
options — 850 Restricted stock and performance shares 8,417 6,640
Convertible preferred stock — — Adjusted weighted
average common shares outstanding 1,024,568 1,020,523
Diluted Earnings (Loss) per Share: Continuing operations $
0.02 $ 0.06 Discontinued operations (0.01 ) (0.03 ) Total $ 0.01
$ 0.03 The following securities were not included in
the computation of diluted earnings per share as they were either
contingently issuable shares or shares that if included would have
been anti-dilutive: Stock options — 2,104 Restricted stock and
performance shares 15,749 18,718 Convertible preferred stock 26,966
26,966 Total Anti-Dilutive Securities 42,715
47,788
Dividends per Common Share $ 0.0625
$ 0.0775
APPENDIX II
Xerox Corporation
Geographic Sales Channels and
Product/Offering Definitions
Our business is aligned to a geographic focus and is primarily
organized on the basis of two main go-to-market sales channels,
which are structured to serve a range of customers for our products
and services:
- North America, which includes our sales
channels in the U.S. and Canada.
- International, which includes our sales
channels in Europe, Eurasia, Latin America, Middle East, Africa and
India.
- Other primarily includes our OEM
business, as well as sales to and royalties from Fuji Xerox, and
our licensing revenue.
Our products and offerings include:
- “Entry”, which includes A4 devices and
desktop printers. Prices in this area range from approximately $150
to $1,000.
- “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. Prices in this area range from approximately $1,000 to
$20,000+.
- “High-End”, which includes production
printing and publishing systems that generally serve the graphic
communications marketplace and large enterprises. Prices for these
systems range from approximately $20,000 to $1,000,000+.
- Managed Document Services (MDS)
revenue, which includes solutions and services that span from
managing print to automating processes to managing content. Our
primary offerings within MDS are Managed Print Services (including
from Global Imaging Systems), as well as workflow automation
services, and Centralized Print Services and Solutions (CPS).
View source
version on businesswire.com: http://www.businesswire.com/news/home/20170425005652/en/
XeroxMedia:Carl Langsenkamp,
+1-585-423-5782carl.langsenkamp@xerox.comorInvestors:Jennifer
Horsley, +1-203-849-2656jennifer.horsley@xerox.com
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