Fitch Affirms Xerox's IDR at 'BBB'; Outlook Stable

Fitch Ratings has affirmed the following ratings for Xerox Corp. (Xerox) and its wholly-owned subsidiary, Affiliated Computer Services, Inc. (ACS):

Xerox

--Long-term Issuer Default Rating (IDR) at 'BBB';

--Short-term IDR at 'F2';

--Revolving credit facility (RCF) at 'BBB';

--Senior unsecured debt at 'BBB';

--Commercial paper (CP) at 'F2'.

ACS

--IDR at 'BBB';

--Senior notes at 'BBB'.

The Rating Outlook is Stable.

Approximately $11.2 billion of debt is affected by Fitch's action, including Xerox's undrawn $2 billion credit facility.

Xerox's ratings and Stable Outlook continue to reflect:

--Services growth led by business process outsourcing, as well as color growth, should more than offset revenue declines related to black-and-white (B&W) print, particularly in high-end production printing.

--Substantial recurring revenue from long-term services contracts, rentals and financing, and supplies (83% of total revenue).

--Solid liquidity supported by $785 million of cash, a fully undrawn $2 billion RCF, staggered debt maturities and consistent free cash flow (FCF). Fitch believes FCF (post-dividends) will continue to exceed $1 billion annually through 2013, despite increased cash pension contributions.

--A highly diverse revenue mix and reduced exposure to the slow-growth print industry following the acquisition of Affiliated Computer Services, Inc. (ACS).

--The company's continued investments in research and development support a broad and strong product portfolio, particularly in color and high-end production printing.

--Management's conservative financial policies and strong commitment to maintaining an investment grade rating.

Fitch's credit concerns continue to center on:

--B&W revenue pressures primarily due to declining installs, machines in field (MIF) and associated post-sale revenue from high-end production digital presses used in transaction printing.

--The aggregate $1.8 billion underfunding of worldwide defined benefit (DB) pension plans on a projected benefit obligation basis as of year-end 2010, which could increase at year-end 2011 given a decline in interest rates. Expected contributions in 2011 consist of $435 million of cash and $130 million of Xerox stock compared with $237 million of cash in 2010. In the first nine months of 2011, actual cash contributions were $348 million compared with $205 million in the year-ago period.

--New managed print services with existing Xerox clients could cannibalize equipment and post-sale revenue by reducing printing costs by up to 30%, potentially offset by cross-selling opportunities for other Xerox products and services.

--The print industry is intensely competitive, resulting in consistent equipment pricing pressure, particularly office products.

As of Sept. 30, 2011, Xerox's solid liquidity was supported by $785 million of cash, an undrawn $2 billion RCF ($1.3 billion available net of CP) maturing April 2013 and consistent FCF. Financial covenants in the RCF agreement consist of minimum total interest coverage of 3 times (x) and maximum total leverage of 3.75x.

In the latest 12 months (LTM) ended Sept. 30, 2011, FCF was $1.2 billion compared with $1.8 billion in the year-ago period due to pension contributions and start-up costs on services contracts. In the past seven years, annual FCF consistently exceeded $1 billion, except for 2008 when the company paid a $615 million securities litigation settlement, resulting in $450 million of FCF.

Total debt with equity credit was $9.4 billion on Sept. 30, 2011, primarily consisting of approximately $9.2 billion of senior unsecured debt and $349 million of convertible preferred stock, which Fitch assigns 50% equity credit.

At Sept. 30, 2011, $6 billion, or 64%, of total debt supported Xerox's financing business based on a debt to equity ratio of 7:1 for the financing assets. Xerox's net financing assets, consisting of receivables and equipment on operating leases, totaled $6.9 billion compared with $7.1 billion in the prior year.

Debt maturities in 4Q'11 and full-year 2012 are $665 million, including $651 million of CP, and $1.1 billion, respectively. Fitch anticipates at least $595 million of debt maturing in the fourth quarter will be repaid with FCF to meet the company's year-end debt target of $8.6 billion. Nearly all of the 2012 maturities will likely be refinanced.

Fitch estimates total leverage (total debt/ operating EBITDA) and core (non-financing) leverage were 2.9x and 1.2x at Sept. 30, 2011, respectively, compared with 3.7x and 1.6x in the year ago period. Total interest coverage (total operating EBITDA/ interest expense) and core (non-financing) interest coverage was 6.3x and 10.4x at Sept. 30, 2011, respectively, compared with 4.5x and 6.6 in the year ago period.

Fitch projects core leverage will remain near 1x and core interest coverage will be low double digits through 2013. Sizable acquisitions could result in a temporary spike in leverage, but Fitch anticipates the company would subsequently reallocate FCF toward debt reduction to restore its credit profile, similar to the ACS acquisition. However, Fitch expects the vast majority of acquisitions should be $25 million - $50 million and funded with FCF.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 12, 2011).

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229

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