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Xerox Reports Second-Quarter 2017 Earnings

NORWALK, Conn.--(BUSINESS WIRE)--Xerox (NYSE: XRX) today announced its second-quarter 2017 financial results.

“We are pleased with the strong operating margins and cash flow we delivered, as well as the continued progress on our Strategic Transformation initiatives,” said Jeff Jacobson, Xerox chief executive officer. “This resulted in solid operating results despite revenue declines, which were driven by lower equipment sales as we transition to the recently launched ConnectKey portfolio.” Jacobson added, “The new product line-up has been met with enthusiasm by customers, partners and industry experts, fueling our confidence in improving revenue trends later this year and into next.”

The company delivered second-quarter 2017 GAAP earnings per share (EPS) from continuing operations of 63 cents, reflecting its one-for-four reverse stock split on June 14, 2017. Adjusted EPS was 87 cents, which excludes 24 cents per share of after-tax costs related to the amortization of intangibles, restructuring and related costs, and certain retirement related costs.

Revenues were $2.57 billion in the quarter, down 8.1 percent or 6.4 percent in constant currency. Post sale revenue was 79 percent of total revenue.

Second-quarter adjusted operating margin was 13.3 percent, up 0.4 percentage points from the same quarter a year ago.

EPS from
continuing
operations

Gross
Margin

SAG as % of
Revenue

Tax Rate

GAAP

Better/(Worse)

$0.63 40.2% 25.0% 22.3%

Year-over-Year

($0.12) 0.4 pts (0.3) pts (12.9) pts
Adjusted

Better/(Worse)

$0.87 40.7% 24.3% 27.0%

Year-over-Year

($0.11) 0.5 pts (0.1) pts (8.5) pts

Xerox generated operating cash flow of $343 million from continuing operations during the second quarter and ended the period with a cash balance of $1.25 billion. The company returned million in dividends to shareholders.

Full-Year 2017 Guidance
The company narrowed its full-year 2017 guidance of GAAP EPS from continuing operations to $1.84 to $2.08 and adjusted EPS to $3.20 to $3.44.

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.

Fuji Xerox Accounting Review
Fuji Xerox is a joint venture between Xerox Corporation and Fujifilm Holdings Corporation, in which Xerox holds a noncontrolling 25% equity interest. During the second quarter, a review by an independent investigation committee of the appropriateness of the accounting practices at Fuji Xerox related to the recovery of receivables associated with certain bundled leasing transactions in Fuji Xerox’s New Zealand and Australian subsidiaries was completed. The review identified that total adjustments of approximately JPY 40 billion (approximately $360 million based on the Yen/U.S. Dollar spot exchange rate of 111.89 at March 31, 2017) were required to Fuji Xerox’s results for the period 2009 through 2017. Xerox determined that its share of that amount was approximately $90 million. Although Xerox determined that the impact to its equity income was immaterial to its previously issued financial statements, the cumulative correction would have a material effect on the company’s current year consolidated financial statements. Accordingly, Xerox will revise its previously issued annual and interim consolidated financial statements for 2014, 2015 and 2016 and the first quarter of 2017 the next time they are filed. Prior period amounts throughout this release have been adjusted to incorporate the revised amounts, where applicable.

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 second 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 second quarter 2017, which excludes other expenses, net in addition to the EPS adjustments noted above and includes equity income.
  • Adjusted Gross Margin and SAG (Selling, Administrative and General) as a percent of Revenue for the second quarter 2017, which excludes certain retirement related costs.
  • Constant currency revenue growth for the second 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 (“SEC”). 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 noncontrolling 25% equity interest and Fujifilm holds the remaining equity interest. Given our status as a minority investor, we have limited contractual and other rights to information with respect to Fuji Xerox matters. On April 20, 2017, Fujifilm publicly announced it had formed an independent investigation committee (IIC) to conduct a review of the appropriateness of the accounting practices at Fuji Xerox’s New Zealand subsidiary. Fujifilm publicly announced that the IIC completed its review during the second quarter 2017 and identified additional adjustments from the amount initially disclosed by Fujifilm bringing the total aggregate adjustments to approximately JPY 40 billion (approximately $360 million based on the Yen/U.S. Dollar spot exchange rate at March 31, 2017 of 111.89). The increase in adjustments related to subsequent findings by the IIC in their investigation primarily related to misstatements at Fuji Xerox's Australian subsidiary, as well as certain other adjustments. We determined that our cumulative share of the revised amount of total adjustments identified as part of the investigation was approximately $90 million and impacted our fiscal years 2009 through 2017. Based on our procedures, as well as those performed by Fuji Xerox and Fujifilm, we concluded that the cumulative correction of the misstatements in our historical financial statements would have had a material effect on our current year consolidated financial statements. Accordingly, we concluded that we should revise our previously issued annual and interim consolidated financial statements for 2014, 2015 and 2016 and the first quarter of 2017 the next time they are filed. The Fujifilm audited financial statements were issued in Japan on July 31, 2017, and our review of this matter is substantially completed. Although we are not aware of any issues that will cause further adjustments to our financial statements, Xerox continues to finalize its review of this matter and additional issues may be identified that may require adjustments to the amount and timing of charges that we have already recognized as part of our revision. In addition, we can provide no assurances relative to the outcome of any potential governmental investigations or any consequences thereof.

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Xerox® and Xerox and Design® are trademarks of Xerox in the United States and/or other countries.

Xerox Corporation

Condensed Consolidated Statements of Income (Unaudited)

Three Months Ended
June 30,
Six Months Ended
June 30,
(in millions, except per-share data) 2017 2016 2017 2016
Revenues
Sales $ 1,010 $ 1,126 $ 1,946 $ 2,129
Services, maintenance and rentals 1,483 1,585 2,925 3,114
Financing 74 82 150 165
Total Revenues 2,567 2,793 5,021 5,408
Costs and Expenses
Cost of sales 619 696 1,186 1,310
Cost of services, maintenance and rentals 884 953 1,784 1,903
Cost of financing 33 32 66 65
Research, development and engineering expenses 106 119 224 245
Selling, administrative and general expenses 643 691 1,307 1,392
Restructuring and related costs 40 47 160 147
Amortization of intangible assets 15 16 29 30
Other expenses, net 34 48 88 93
Total Costs and Expenses 2,374 2,602 4,844 5,185
Income before Income Taxes & Equity Income(1) 193 191 177 223
Income tax expense 43 18 19 16
Equity in net income of unconsolidated affiliates 20 26 60 60
Income from Continuing Operations 170 199 218 267
Loss from discontinued operations, net of tax (38 ) (6 ) (73 )
Net Income 170 161 212 194
Less: Net income attributable to noncontrolling interests 4 3 6 5
Net Income Attributable to Xerox $ 166 $ 158 $ 206 $ 189
Amounts Attributable to Xerox:
Net income from continuing operations $ 166 $ 196 $ 212 $ 262
Loss from discontinued operations, net of tax (38 ) (6 ) (73 )
Net Income Attributable to Xerox $ 166 $ 158 $ 206 $ 189
Basic Earnings (Loss) per Share(2):
Continuing operations $ 0.64 $ 0.75 $ 0.81 $ 0.99
Discontinued operations (0.15 ) (0.03 ) (0.29 )
Total Basic Earnings per Share $ 0.64 $ 0.60 $ 0.78 $ 0.70
Diluted Earnings (Loss) per Share(2):
Continuing operations $ 0.63 $ 0.75 $ 0.80 $ 0.98
Discontinued operations (0.15 ) (0.02 ) (0.28 )
Total Diluted Earnings per Share $ 0.63 $ 0.60 $ 0.78 $ 0.70

____________________________
(1) Referred to as “Pre-Tax Income” throughout the remainder of this document.
(2) Reflects our one-for-four reverse stock split that became effective on June 14, 2017. See "Financial Review" section.

Xerox Corporation

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

Three Months Ended
June 30,
Six Months Ended
June 30,
(in millions) 2017 2016 2017 2016
Net income $ 170 $ 161 $ 212 $ 194
Less: Net income attributable to noncontrolling interests 4 3 6 5
Net Income Attributable to Xerox 166 158 206 189
Other Comprehensive Income (Loss), Net:
Translation adjustments, net 204 (82 ) 337 107
Unrealized (losses) gains, net (14 ) 24 (6 ) 33
Changes in defined benefit plans, net (29 ) 20 (3 ) (92 )
Other Comprehensive Income (Loss), Net 161 (38 ) 328 48
Less: Other comprehensive (loss) income, net attributable to noncontrolling interests (1 ) 1 (1 )
Other Comprehensive Income (Loss), Net Attributable to Xerox 161 (37 ) 327 49
Comprehensive Income, Net 331 123 540 242
Less: Comprehensive income, net attributable to noncontrolling interests 4 2 7 4
Comprehensive Income, Net Attributable to Xerox $ 327 $ 121 $ 533 $ 238

Xerox Corporation

Condensed Consolidated Balance Sheets (Unaudited)

(in millions, except share data in thousands) June 30, 2017 December 31, 2016
Assets
Cash and cash equivalents $ 1,246 $ 2,223
Accounts receivable, net 1,037 961
Billed portion of finance receivables, net 84 90
Finance receivables, net 1,278 1,256
Inventories 944 841
Assets of discontinued operations 1,002
Other current assets 389 619
Total current assets 4,978 6,992
Finance receivables due after one year, net 2,341 2,398
Equipment on operating leases, net 464 475
Land, buildings and equipment, net 636 660
Investments in affiliates, at equity 1,398 1,294
Intangible assets, net 286 290
Goodwill 3,893 3,787
Deferred tax assets, long-term 1,481 1,472
Other long-term assets 690 683
Total Assets $ 16,167 $ 18,051
Liabilities and Equity
Short-term debt and current portion of long-term debt $ 765 $ 1,011
Accounts payable 1,202 1,126
Accrued compensation and benefits costs 373 420
Unearned income 191 187
Liabilities of discontinued operations 1,002
Other current liabilities 883 908
Total current liabilities 3,414 4,654
Long-term debt 4,236 5,305
Pension and other benefit liabilities 2,281 2,240
Post-retirement medical benefits 676 698
Other long-term liabilities 188 193
Total Liabilities 10,795 13,090
Convertible Preferred Stock 214 214
Common stock 254 254
Additional paid-in capital 3,875 3,858
Retained earnings 5,004 4,934
Accumulated other comprehensive loss (4,010 ) (4,337 )
Xerox shareholders’ equity 5,123 4,709
Noncontrolling interests 35 38
Total Equity 5,158 4,747
Total Liabilities and Equity $ 16,167 $ 18,051
Shares of common stock issued and outstanding 254,170 253,594

Xerox Corporation

Condensed Consolidated Statements of Cash Flows (Unaudited)

Three Months Ended
June 30,
Six Months Ended
June 30,
(in millions) 2017 2016 2017 2016
Cash Flows from Operating Activities:
Net income $ 170 $ 161 $ 212 $ 194
Loss from discontinued operations, net of tax 38 6 73
Income from continuing operations 170 199 218 267
Adjustments required to reconcile net income to cash flows from operating activities:
Depreciation and amortization 135 144 268 286
Provision for receivables 10 11 23 24
Provision for inventory 7 6 12 15
Net (gain) loss on sales of businesses and assets (1 ) 3 (1 ) (17 )
Undistributed equity in net income of unconsolidated affiliates 10 5 (30 ) (29 )
Stock-based compensation 12 7 25 17
Restructuring and asset impairment charges 33 43 143 141
Payments for restructurings (67 ) (24 ) (127 ) (45 )
Defined benefit pension cost 37 33 99 76
Contributions to defined benefit pension plans (23 ) (34 ) (46 ) (68 )
Increase in accounts receivable and billed portion of finance receivables (63 ) (111 ) (140 ) (160 )
Collections of deferred proceeds from sales of receivables 51 74 99 133
(Increase) decrease in inventories (30 ) 7 (88 ) (92 )
Increase in equipment on operating leases (50 ) (68 ) (102 ) (130 )
Decrease in finance receivables 69 21 134 85
Collections on beneficial interest from sales of finance receivables 5 7 11 15
Decrease (increase) in other current and long-term assets 14 46 (43 ) 9
Decrease in accounts payable and accrued compensation (21 ) (90 ) (166 )
(Decrease) increase in other current and long-term liabilities (50 ) 3 (114 )
Net change in income tax assets and liabilities 5 10 (36 ) (22 )
Net change in derivative assets and liabilities 44 (66 ) 99 (49 )
Other operating, net (4 ) 86 12 170
Net cash provided by operating activities of continuing operations 343 259 533 346
Net cash used in operating activities of discontinued operations (15 ) (82 ) (95 ) (194 )
Net cash provided by operating activities 328 177 438 152
Cash Flows from Investing Activities:
Cost of additions to land, buildings and equipment (13 ) (27 ) (30 ) (46 )
Proceeds from sales of land, buildings and equipment 1 1 20
Cost of additions to internal use software (8 ) (11 ) (17 ) (24 )
Acquisitions, net of cash acquired (65 ) (76 ) (18 )
Other investing, net 9 3 10 4
Net cash used in investing activities of continuing operations (77 ) (34 ) (112 ) (64 )
Net cash used in investing activities of discontinued operations (33 ) (128 )
Net cash used in investing activities (77 ) (67 ) (112 ) (192 )
Cash Flows from Financing Activities:
Net (payments) proceeds on debt (3 ) (1,324 ) 42
Common stock dividends (64 ) (78 ) (145 ) (149 )
Preferred stock dividends (4 ) (6 ) (10 ) (12 )
Proceeds from issuances of common stock 2 3
Repurchases related to stock-based compensation (1 ) (8 )
Distributions to noncontrolling interests (11 ) (1 ) (12 ) (12 )
Proceeds from Conduent 161
Other financing (1 ) (1 )
Net cash used in financing activities (80 ) (87 ) (1,338 ) (129 )
Effect of exchange rate changes on cash and cash equivalents 30 (8 ) 35 4
Increase in cash of discontinued operations (18 ) (20 )
Increase (decrease) in cash and cash equivalents 201 (3 ) (977 ) (185 )
Cash and cash equivalents at beginning of period 1,045 1,046 2,223 1,228
Cash and Cash Equivalents at End of Period $ 1,246 $ 1,043 $ 1,246 $ 1,043

Financial Review

Reverse Stock Split

As a result of the spin-off of the company's business process outsourcing business, now Conduent Incorporated, Xerox's market capitalization was divided. Consequently, the company proposed a reverse stock split, which was intended to increase the per share trading price of Xerox common stock and to improve its liquidity and facilitate its trading. On May 23, 2017, the Board of Directors authorized the reverse stock split of outstanding Xerox common stock at a ratio of one-for-four shares, together with the proportionate reduction in the authorized shares of its common stock from 1,750,000,000 shares to 437,500,000 shares. Shareholder approval for the reverse stock split was obtained at the company's Annual Shareholders Meeting on May 23, 2017 and the reverse stock split became effective on June 14, 2017. At the effective time, every four shares of the company’s common stock that were issued and outstanding were automatically combined into one issued and outstanding share, without any change in par value of such shares. Accordingly, we reclassified $760 million from Common stock to Additional paid-in capital. The reverse stock split also correspondingly affected all outstanding Xerox equity awards and outstanding convertible securities.

All authorized, issued and outstanding stock and per share amounts contained within the accompanying Condensed Consolidated Financial Statements have been adjusted to reflect this reverse stock split for all prior periods presented.

Correction of Fuji Xerox Misstatement in Prior Period Financial Statements

Fuji Xerox is a joint venture between Xerox Corporation and Fujifilm Holdings Corporation (“Fujifilm”) in which Xerox holds a noncontrolling 25% equity interest and Fujifilm holds the remaining equity interest. On April 20, 2017, Fujifilm publicly announced it had formed an independent investigation committee (IIC) 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 bundled leasing transactions that occurred in, or prior to, Fuji Xerox’s fiscal year ending March 31, 2016. In first quarter 2017, Xerox's Equity in net income of unconsolidated affiliates included an out-of-period charge of approximately $30 million1, which represented our estimated share at that time of the cumulative Fujifilm adjustments from this initial review of JPY 22 billion (approximately $200 million based on the Yen/U.S. Dollar spot exchange rate at March 31, 2017 of 111.89), as publicly disclosed by Fujifilm. In the first quarter 2017, the impact of this adjustment was not considered to be material to any of our previously issued financial statements nor was it considered to be material to Xerox's anticipated full year 2017 results.

The IIC’s review, completed during the second quarter 2017, subsequently identified additional adjustments from the amount initially disclosed by Fujifilm and recorded by Xerox in the first quarter 2017, bringing the total aggregate adjustments to approximately JPY 40 billion (approximately $360 million based on the Yen/U.S. Dollar spot exchange rate at March 31, 2017 of 111.89). The additional adjustments identified by the IIC during the second quarter 2017 primarily related to misstatements at Fuji Xerox's Australian subsidiary as well as certain other adjustments. We determined that our cumulative share of the revised amount of total adjustments identified as part of the investigation was approximately $90 million2 and impacted our fiscal years 2009 through 2017.

Accordingly, in the second quarter 2017, we updated our previous materiality evaluation with the additional adjustments identified by the IIC during the second quarter 2017 and determined that the misstatements to our equity income in prior years and in first quarter 2017 continued to be immaterial to our previously issued financial statements. However, based on this updated evaluation, we concluded that the cumulative correction of these misstatements would have had a material effect on our current year consolidated financial statements. Accordingly, we will revise our previously issued annual and interim consolidated financial statements for 2014, 2015 and 2016 and the first quarter of 2017 the next time they are filed. Certain of the corrections discussed above affected periods prior to fiscal year 2014, and this effect has been reflected as a cumulative, net of tax adjustment to reduce retained earnings as of January 1, 2014 by $69 million. The effect of the revision on our previously issued financial statements is provided in Appendix III. Amounts throughout this release have been adjusted to incorporate the revised amounts, where applicable.

(1) The difference between the $30 million out-of-period adjustment recorded in the first quarter 2017 and the revision adjustment of $24 million in the revision table for the three months ended March 31, 2017 primarily relates to the additional adjustments subsequently identified as part of the IIC review as described above.
(2) The difference between the aggregate revision to retained earnings and the $90 million impact at March 31, 2017 is primarily due to currency and the impact of adjustments recorded directly by Xerox in the first quarter 2017.

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 through the transfer of 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...


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