[July 24, 2015] |
|
Xerox Reports Second-Quarter 2015 Earnings
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.
Note: To receive RSS news feeds, visit http://news.xerox.com.
For open commentary, industry perspectives and views visit http://www.linkedin.com/company/xerox,
http://twitter.com/xeroxcorp,
http://simplifywork.blogs.xerox.com,
http://www.facebook.com/XeroxCorp,
http://www.youtube.com/XeroxCorp.
Xerox® and Xerox and Design® are trademarks of
Xerox in the United States and/or other countries.
|
Xerox Corporation
|
Condensed Consolidated Statements of Income (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months 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 attributable to
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 to noncontrolling
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 Review On December 18, 2014, Xerox Corporation
announced that it had entered into an agreement to sell its Information
Technology Outsourcing (ITO) business to Atos S.E. (Atos). 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 Margin Second 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 Margin Gross 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 Charges During
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 Employment Worldwide
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 expense Second
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.
Revenue Second 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 Margin Second 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 Change During
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
Signings Signings 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.
Pipeline The 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 Margin Second 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)2 Install
activity includes Document Outsourcing and Xerox-branded products
shipped to Global Imaging Systems. Detail by product group (see Appendix
II) is shown below:
Entry
-
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
Revenue Second 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 Loss Non-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 Activities Net
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 Activities Net
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 Activities Net
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 Receivable Accounts
receivable sales arrangements are utilized in the normal course of
business as part of our cash and liquidity management. We have
facilities in the U.S., Canada and several countries in Europe that
enable us to sell certain accounts receivable without recourse to
third-parties. The accounts receivables sold are generally short-term
trade receivables with payment due dates of less than 60 days. Accounts
receivable sales for the periods presented were as follows:
|
|
Three Months Ended June 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 Receivables In
2013 and 2012, we transferred our entire interest in certain groups of
lease finance receivables to third-party entities. The transfers were
accounted for as sales and resulted in the de-recognition of lease
receivables with a net carrying value of $676 million in 2013 and $682
million in 2012, respectively. We continue to service the sold
receivables and record servicing fee income over the expected life of
the associated receivables.
The net impact on operating cash flows from these transactions for the
periods presented is summarized below:
|
|
Three Months 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 Currency To better
understand trends in our business, we believe that it is helpful to
adjust revenue to exclude the impact of changes in the translation of
foreign currencies into U.S. dollars. We refer to this adjusted revenue
as "constant currency." Currencies for developing market countries
(Latin America, Brazil, Middle East, India, Eurasia and Central-Eastern
Europe) that we operate in are reported at actual exchange rates for
both actual and constant revenue growth rates because (1) these
countries historically have had volatile currency and inflationary
environments and (2) our subsidiaries in these countries have
historically taken pricing actions to mitigate the impact of inflation
and devaluation. Management believes the constant currency measure
provides investors an additional perspective on revenue trends. Currency
impact can be determined as the difference between actual growth rates
and constant currency growth rates.
Free Cash Flow To better
understand trends in our business, we believe that it is helpful to
adjust cash flows from operations to exclude amounts for capital
expenditures including internal use software. Management believes this
measure gives investors an additional perspective on cash flow from
operating activities in excess of amounts required for reinvestment. It
provides a measure of our ability to fund acquisitions, dividends and
share repurchase. It is also used to measure our yield on market
capitalization.
Management believes that these non-GAAP financial measures provide an
additional means of analyzing the current period's results against the
corresponding prior period's results. However, these non-GAAP financial
measures should be viewed in addition to, and not as a substitute for,
the Company's reported results prepared in accordance with GAAP. Our
non-GAAP financial measures are not meant to be considered in isolation
or as a substitute for comparable GAAP measures and should be read only
in conjunction with our consolidated financial statements prepared in
accordance with GAAP. Our management regularly uses our supplemental
non-GAAP financial measures internally to understand, manage and
evaluate our business and make operating decisions. These non-GAAP
measures are among the primary factors management uses in planning for
and forecasting future periods. Compensation of our executives is based
in part on the performance of our business based on these non-GAAP
measures.
A reconciliation of these non-GAAP financial measures and the most
directly comparable measures calculated and presented in accordance with
GAAP are set forth on the following tables:
Net Income and EPS reconciliation:
|
|
Three Months Ended
|
|
Three Months Ended
|
|
|
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 Ended June 30,
|
|
Six Months Ended June 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
diluted earnings per share as they were either contingently
issuable shares or shares 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/
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