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Xerox Reports Third-Quarter 2015 Earnings

The following excerpt is from the company's SEC filing.

Third Quarter 2015 Summary:

GAAP EPS from continuing operations of (4) cents

Adjusted EPS of 24 cents

GAAP revenue of $4.3 billion

Adjusted revenue of $4.4 billion, 57 percent from Services

Operating margin of 8.7 percent, down 0.9 percentage points year-over-year

Cash flow from operations of $271 million

Share repurchase of $691 million

NORWALK, Conn., Oct. 26, 2015 - Xerox (NYSE: XRX) announced today third-quarter 2015 adjusted earnings per share of 24 cents. Adjusted EPS excludes 5 cents related to the amortization of intangibles, and 23 cents for the p reviously announced Health Enterprise charge; resulting in a GAAP loss from continuing operations of 4 cents per share.

The company also today announced that its Board of Directors has authorized a review of the company’s business portfolio and capital allocation options, with the goal of enhancing shareholder value.

“Xerox’s Board of Directors and management team continually review the company’s strategy and consider a range of opportunities regarding our businesses and operations with the goal of maximizing value for shareholders,” said Ursula Burns, Xerox Chairman and Chief Executive Officer. “Although we already have taken steps to accelerate cost reductions and prioritize investments to drive improved productivity and higher margins, our Board determined that undertaking a comprehensive review of structural options for the company’s portfolio is the right decision at this time.”

Burns added, “During the third quarter, the company achieved adjusted earnings in line with our guidance. We continue to focus on strengthening our offering portfolio, improving productivity and targeting our highest-margin segments. We remain focused on serving our clients and leading in the most attractive market segments where we are best positioned to compete and differentiate.”

Third Quarter Financial Results

Following is a breakdown of the company’s results on both a reported and an adjusted basis:

Adjusted*

Total Revenue

$4,333M

$4,449M

% Change

% Change CC

Gross Margin

SAG % of Revenue

Earnings per Share

$(0.04)

*Adjusted excludes the Health Enterprise charge.

CC = constant currency

In the third quarter, total adjusted revenue of $4.4 billion was down 4 percent in constant currency. Annuity revenue was 85 percent of total revenue.

On a GAAP basis, revenue from the company’s Services business was $2.4 billion, down 8 percent or 4 percent in constant currency. Services margin was negative 7.6 percent.

Adjusted to exclude the Health Enterprise charge, Services revenue, which represented 57 percent of total revenue, was $2.5 billion, consistent in constant currency with the same period last year. Adjusted services margin, was 8.1 percent, down 1.0 percentage point year-over-year.

Revenue from the company’s Document Technology business was $1.8 billion, down 12 percent or 9 percent in constant currency. Document Technology margin was 12.8 percent, down 1.2 percentage points.

Third-quarter operating margin of 8.7 percent was down 0.9 percentage points from the same quarter a year ago. Adjusted gross margin was 30.9 percent, and adjusted selling, administrative and general expenses were 19.2 percent of revenue.

Xerox generated $271 million in cash flow from operations during the third quarter, ending the quarter with a cash balance of $804 million. The company repurchased $691 million in stock in the quarter bringing the total to $1.3 billion through the first nine months of 2015.

2015 Guidance

Xerox expects fourth-quarter 2015 GAAP earnings of 23 to 25 cents per share and adjusted EPS of 28 to 30 cents per share.

For full-year 2015, Xerox expects GAAP earnings at the low end of 46 to 52 cents per share and adjusted EPS at the low end of $0.95 to $1.01 per share.

Xerox expects full-year 2015 cash flow from operations of $1.6 to $1.7 billion and free cash flow from operations of $1.3 to $1.4 billion.

About Xerox

Xerox is helping change the way the world works. By applying our expertise in imaging, business process, analytics, automation and user-centric insights, we engineer the flow of work to provide greater productivity, efficiency and personalization. We conduct business in 180 countries

and our more than 130,000 employees create meaningful innovations and provide business process services, printing equipment, software and solutions that make a real difference for our clients - and their customers. Learn more at

www.xerox.com

Non-GAAP Measures:

This release refers to the following non-GAAP financial measures:

Adjusted Revenue, Gross Margin, SAG as % of revenue as well as Services segment Revenues and Margin for the third-quarter 2015 that excludes the Health Enterprise charge.

Adjusted EPS (earnings per share) for the third-quarter 2015 as well as for the fourth-quarter and full-year 2015 guidance that excludes certain items including the Health Enterprise charge.

Operating margin for third-quarter 2015 that excludes certain costs and expenses.

Constant Currency revenue growth for the third-quarter 2015, which excludes the effects of currency translation.

Free cash flow for the 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 Reports on Form 10-Q for the quarters ended March 31, 2015 and June 30, 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.

Xerox announced today that its Board of Directors has authorized a review of the company’s business portfolio and capital allocation options, with the goal of enhancing shareholder value. No assurance can be given as to the outcome or timing of completion of the review. Xerox does not intend to make any further public comment regarding the review prior to its completion. The forward looking statements in this release are subject to the risk that the company’s business portfolio and/or capital allocation could change as a result of the review.

Media Contacts:

Sean Collins, Xerox, +1-310-497-9205,

sean.collins2@xerox.com

Carl Langsenkamp, Xerox, +1-585-423-5782,

carl.langsenkamp@xerox.com

Investor Contacts:

Jennifer Horsley, Xerox, +1-203-849-2656,

jennifer.horsley@xerox.com

Sean Cornett, Xerox, +1 203-849-2672,

sean.cornett@xerox.com

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://simplifywork.blogs.xerox.com

http://www.facebook.com/XeroxCorp

http://www.youtube.com/XeroxCorp

and Xerox and Design

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

Xerox Corporation

Condensed Consolidated Statements of (Loss) Income (Unaudited)

Three Months Ended

September 30,

Nine Months Ended

(in millions, except per-share data)

% Change

Outsourcing, maintenance and rentals

10,339

Financing

Total Revenues

13,392

14,507

Costs and Expenses

Cost of sales

Cost of outsourcing, maintenance and rentals

Cost of financing

Research, development and engineering expenses

Selling, administrative and general expenses

Restructuring and asset impairment charges

Amortization of intangible assets

Other expenses, net

Total Costs and Expenses

13,290

13,649

(Loss) Income before Income Taxes & Equity Income

Income tax (benefit) expense

Equity in net income of unconsolidated affiliates

(Loss) Income from Continuing Operations

(Loss) Income from Discontinued Operations, net of tax

Net (Loss) Income

Less: Net income attributable to noncontrolling interests

Net (Loss) Income Attributable to Xerox

Amounts attributable to Xerox:

Net (loss) income from continuing operations

Net (loss) income from discontinued operations

Net (Loss) Income attributable to Xerox

Basic (Loss) Earnings per Share:

Total Basic (Loss) Earnings per Share

Diluted (Loss) Earnings per Share:

Total Diluted (Loss) Earnings per Share

* Percent change not meaningful.

Referred to as “Pre-Tax (Loss) Income” throughout the remainder of this document.

Condensed Consolidated Statements of Comprehensive (Loss) Income (Unaudited)

(in millions)

Other Comprehensive (Loss) Income, Net:

Translation adjustments, net

Unrealized gains (losses), net

Changes in defined benefit plans, net

Other Comprehensive Loss, Net

Less: Other comprehensive loss, net attributable to noncontrolling interests

Other Comprehensive Loss, Net Attributable to Xerox

Less: Comprehensive income, net attributable to noncontrolling interests

Comprehensive (Loss) Income, Net Attributable to Xerox

Condensed Consolidated Balance Sheets (Unaudited)

(in millions, except share data in thousands)

September 30,

Assets

Cash and cash equivalents

Accounts receivable, net

Billed portion of finance receivables, net

Finance receivables, net

Inventories

Assets of discontinued operations

Other current assets

Total current assets

Finance receivables due after one year, net

Equipment on operating leases, net

Land, buildings and equipment, net

Investments in affiliates, at equity

Intangible assets, net

Goodwill

Other long-term assets

Total Assets

24,946

27,658

Liabilities and Equity

Short-term debt and current portion of long-term debt

Accounts payable

Accrued compensation and benefits costs

Unearned income

Liabilities of discontinued operations

Other current liabilities

Total current liabilities

Long-term debt

Pension and other benefit liabilities

Post-retirement medical benefits

Other long-term liabilities

Total Liabilities

15,440

16,556

Series A Convertible Preferred Stock

Common stock

Additional paid-in capital

Treasury stock, at cost

Retained earnings

Accumulated other comprehensive loss

(4,399

(4,159

Xerox shareholders’ equity

10,678

Noncontrolling interests

Total Equity

10,753

Total Liabilities and Equity

Shares of common stock issued

1,077,523

1,124,354

(65,120

(7,609

Shares of Common Stock Outstanding

1,012,403

1,116,745

Condensed Consolidated Statements of Cash Flows (Unaudited

Cash Flows from Operating Activities:

Adjustments required to reconcile net (loss) income to cash flows from operating activities:

Depreciation and amortization

Provision for receivables

Provision for inventory

Net loss (gain) on sales of businesses and assets

Undistributed equity in net income of unconsolidated affiliates

Stock-based compensation

Payments for restructurings

Contributions to defined benefit pension plans

Decrease (increase) in accounts receivable and billed portion of finance receivables

Collections of deferred proceeds from sales of receivables

Increase in inventories

Increase in equipment on operating leases

(Increase) decrease in finance receivables

Collections on beneficial interest from sales of finance receivables

Increase in other current and long-term assets

(Decrease) increase in accounts payable and accrued compensation

Increase (decrease) in other current and long-term liabilities

Net change in income tax assets and liabilities

Net change in derivative assets and liabilities

Other operating, net

Net cash provided by operating activities

Cash Flows from Investing Activities:

Cost of additions to land, buildings and equipment

Proceeds from sales of land, buildings and equipment

Cost of additions to internal use software

Proceeds from sale of businesses

Acquisitions, net of cash acquired

Other investing, net

Net cash (used in) provided by investing activities

Cash Flows from Financing Activities:

Net payments on debt

Common stock dividends

Preferred stock dividends

Proceeds from issuances of common stock

Excess tax benefits from stock-based compensation

Payments to acquire treasury stock, including fees

(1,302

Repurchases related to stock-based compensation

Distributions to noncontrolling interests

Other financing

Net cash used in financing activities

(1,796

(1,327

Effect of exchange rate changes on cash and cash equivalents

(Decrease) increase in cash and cash equivalents

Cash and cash equivalents at beginning of period

Cash and Cash Equivalents at End of Period

Financial Review

On October 13, 2015, Xerox Corporation announced an update regarding the strategic direction of its Government Healthcare Solutions (GHS) business, specifically addressing the implementation of its Health Enterprise (HE) Medicaid platform in California and Montana. As a result of these changes, during third quarter 2015 we recorded a pre-tax charge (HE charge) of $389 million ($241 million after-tax or 23 cents per share), which included a $116 million reduction to revenues. These developments build on the GHS strategy change previously announced in July 2015. Refer to the

area of the "Segment Review" section for further details.

As a result of the significant impact of the HE charge on our reported revenues, earnings and key metrics for the period, we are also discussing our results excluding the impact of the HE charge. These adjusted results are noted as “adjusted” in the discussion below.

% of Total Revenue

CC % Change

Equipment sales

Reconciliation to Condensed Consolidated Statements of Income:

Less: Supplies, paper and other sales

Equipment Sales

Add: Supplies, paper and other sales

Add: Financing

Annuity Revenue

See the “Non-GAAP Financial Measures” section for an explanation of the non-GAAP financial measure.

CC - Constant Currency (See "Non-GAAP Financial Measures" section)

total revenues decreased 10% as compared to

. On an adjusted

basis, excluding the HE charge, total revenues decreased 7%, with a 3-percentage point negative impact from currency. The negative impact from currency reflects the significant weakening of our major foreign currencies against the U.S. Dollar as compared to prior year. On a revenue-weighted basis, our major European currencies and the Canadian dollar were approximately 17% weaker against the U.S. dollar as compared to 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.

total revenues reflect the following:

decreased 9% as compared to

basis, annuity revenue decreased by 7%, with a 4-percentage point negative impact from currency. Annuity revenue is comprised...


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