Market Overview

Xerox CEO Sets Direction to Drive Improved Performance; Company to Repurchase Up To $500 Million of Shares in 2018

Share:

Reports on second-quarter 2018 results and establishes business
priorities:

  • Drive revenue
  • Optimize operations for simplicity to better serve clients and partners
  • Re-energize the innovation engine
  • Focus on cash flow and increase capital returns

Xerox
(NYSE:XRX) Vice Chairman and CEO John
Visentin
today outlined his business imperatives to transform the
company with an emphasis on commercializing innovation,
optimizing operations to better serve customers and partners, and a
heightened commitment to shareholder returns. Visentin summarized his
direction as part of the company's second-quarter results.

"It's clear after two months as CEO of this iconic brand that we can
return Xerox to the forefront as a leading tech company," said Visentin.
"We currently have software,
services
and printing
technologies, along with a pipeline of innovations, which can disrupt
the marketplace and bring increased value to those we serve."

"Our second-quarter results demonstrate the benefit of having a business
model underpinned by annuity cash flow. However, it also highlights the
challenge of improving revenue and flowing cost savings to the bottom
line," he noted. "Our success will depend on operating with a relentless
focus on optimization. Actions include improving the effectiveness and
efficiency of our supply chain and go-to-market channels. Equally
important is ensuring we provide a great experience for our customers
and address their evolving business needs."

Demonstrating its commitment to enhancing shareholder returns, the Xerox
board of directors authorized a $1 billion share repurchase program and
the company will opportunistically repurchase up to $500 million in
2018. "This positive step forward is a strong endorsement of the company
and represents an immediate action to deliver value to our investors,"
said Visentin.

The company confirmed that it is not conducting an auction process.
Visentin stated, "While there has been much speculation about Xerox, I
want to be clear. My mission is to do what is right for Xerox. Our focus
is on leveraging the assets and capabilities we have today to create a
sustainable company that provides a compelling value proposition for
customers and partners."

Second Quarter 2018 Financial Results

  • Earnings Per Share: GAAP earnings per share (EPS) from
    continuing operations of 42 cents, down 21 cents compared to the same
    period in 2017, primarily due to transaction costs of $58 million or
    17 cents. Adjusted EPS of 80 cents, a decrease of 6 cents year over
    year.
  • Total Revenue: $2,510 million, down 2.2 percent year-over-year
    or 4.0 percent in constant currency
    • Equipment Sale Revenue: $561 million, up 0.9 percent or down 0.6
      percent in constant currency
    • Post Sale Revenue: $1,949 million, down 3.1 percent or 5.0 percent
      in constant currency
  • Adjusted Operating Margin: Adjusted operating margin of 11.9
    percent, down 1.3 points year-over-year
  • Cash Balance: $1,263 million at the end of the second quarter
  • Cash Flow: Operating cash flow of $235 million in the second
    quarter and $451 million for the first half
  • Dividend: Returned $68 million to shareholders

Full Year Expectations and Outlook for Cash Flow

Xerox will focus on driving strong cash generation and continues to
expect full-year operating cash flow of $900 to $1,100 million and free
cash flow of $750 to $950 million. The company plans to return at least
50 percent of its free cash flow to shareholders through common
dividends and share repurchases on an annual basis. Xerox will use
excess cash on the balance sheet to opportunistically repurchase up to
$500 million of shares in 2018.

The company's management team plans to update investors on its strategy
and longer-term financial expectations at an analyst day later this year
or early 2019.

About Xerox

Xerox Corporation is a technology
leader that innovates the way the world communicates,
connects and works
. We understand what's at the heart of sharing
information - and all of the forms it can take. We embrace the
integration of paper and digital, the increasing requirement for
mobility, and the need for seamless integration between work and
personal worlds. Every day, our innovative print technologies and
intelligent work solutions help people communicate and work
better. Discover more at www.xerox.com
and follow us on Twitter at @Xerox.

Non-GAAP Measures:

This release refers to the following non-GAAP financial measures for the
second-quarter 2018:

  • Adjusted EPS, which excludes restructuring and related costs
    (including our share of Fuji Xerox restructuring), the amortization of
    intangibles, non-service retirement-related costs and transaction and
    related costs, net.
  • Adjusted operating margin, which excludes the EPS adjustments noted
    above as well as the remainder of Other expenses, net and includes
    equity income, as adjusted.
  • Constant currency revenue growth, which excludes the effects of
    currency translation.
  • Free cash flow, which is cash flow from continuing 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, and other written or oral statements made from time to
time by management contain "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 and 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 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 outcome of our process to evaluate all strategic alternatives
to maximize shareholder value, including terminating or restructuring
Xerox's relationship with FUJIFILM Holdings Corporation ("Fujifilm");
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 2017 Annual Report on Form 10-K, as well as our
Quarterly Reports on Form 10-Q and Current Reports on Form 8-K filed
with the 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 and
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. In April 2017, Fujifilm
formed an independent investigation committee (the "IIC") to primarily
conduct a review of the appropriateness of the accounting practices at
Fuji Xerox's New Zealand subsidiary and at other subsidiaries. The IIC
completed its review during the second quarter 2017 and identified
aggregate adjustments to Fuji Xerox's financial statements of
approximately JPY 40 billion (approximately $360 million) primarily
related to misstatements at Fuji Xerox's New Zealand and Australian
subsidiaries. We determined that our share of the total adjustments
identified as part of the investigation was approximately $90 million
and impacted our fiscal years 2009 through 2017. We revised our
previously issued annual and interim consolidated financial statements
for 2014, 2015 and 2016 and the first quarter of 2017. However, Fujifilm
and Fuji Xerox continue to review Fujifilm's oversight and governance of
Fuji Xerox as well as Fuji Xerox's oversight and governance over its
businesses in light of the findings of the IIC.

In 2018, in connection with the completion of audits of Fuji Xerox's
fiscal year-end financial statements as of and for the years ended March
31, 2016 and 2017, as well as the review of Fuji Xerox's unaudited
interim financial statements as of and for the nine months ended
December 31, 2017 and 2016, additional adjustments and misstatements
were identified. These additional adjustments and misstatements were to
the net income of Fuji Xerox for the period from 2010 through 2017
previously revised for the items identified by the IIC noted above. At
this time, we can provide no assurances relative to the outcome of any
potential governmental investigations or any consequences thereof that
may happen as a result of this matter.

Note: To receive RSS news feeds, visit https://www.news.xerox.com.
For open commentary, industry perspectives and views, visit http://twitter.com/xerox,
http://connect.blogs.xerox.com,
http://www.facebook.com/XeroxCorp,
https://www.instagram.com/xerox/,
http://www.linkedin.com/company/xerox,
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
June 30,
Six Months Ended
June 30,
(in millions, except per-share data) 2018     2017 2018     2017
Revenues
Sales $ 1,017 $ 1,010 $ 1,950 $ 1,946
Services, maintenance and rentals 1,425 1,483 2,856 2,925
Financing 68   74   139   150  
Total Revenues 2,510   2,567   4,945   5,021  
Costs and Expenses
Cost of sales 622 619 1,185 1,184
Cost of services, maintenance and rentals 854 872 1,722 1,753
Cost of financing 33 33 67 66
Research, development and engineering expenses 101 102 201 213
Selling, administrative and general expenses 624 626 1,252 1,260
Restructuring and related costs 34 39 62 157
Amortization of intangible assets 12 15 24 29
Transaction and related costs, net 58 96
Other expenses, net 39   68   69   182  
Total Costs and Expenses 2,377   2,374   4,678   4,844  
Income before Income Taxes & Equity Income(1) 133 193 267 177
Income tax expense 38 43 78 19
Equity in net income (loss) of unconsolidated affiliates 19   20   (49 ) 60  
Income from Continuing Operations 114 170 140 218
Loss from discontinued operations, net of tax       (6 )
Net Income 114 170 140 212
Less: Net income attributable to noncontrolling interests 2   4   5   6  
Net Income Attributable to Xerox $ 112   $ 166   $ 135   $ 206  
 
Amounts Attributable to Xerox:
Net income from continuing operations $ 112 $ 166 $ 135 $ 212
Loss from discontinued operations, net of tax       (6 )
Net Income Attributable to Xerox $ 112   $ 166   $ 135   $ 206  
 
Basic Earnings (Loss) per Share:
Continuing operations $ 0.42 $ 0.64 $ 0.50 $ 0.81
Discontinued operations       (0.03 )
Total Basic Earnings per Share $ 0.42   $ 0.64   $ 0.50   $ 0.78  
Diluted Earnings (Loss) per Share:
Continuing operations $ 0.42 $ 0.63 $ 0.50 $ 0.80
Discontinued operations       (0.02 )
Total Diluted Earnings per Share $ 0.42   $ 0.63   $ 0.50   $ 0.78  
 
____________________________

(1) Referred to as "Pre-Tax Income"
throughout the remainder of this document.

       

Xerox Corporation

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

 
Three Months Ended
June 30,
Six Months Ended
June 30,
(in millions) 2018     2017 2018     2017
Net income $ 114 $ 170 $ 140 $ 212
Less: Net income attributable to noncontrolling interests 2   4   5   6  
Net Income Attributable to Xerox 112   166   135   206  
 
Other Comprehensive (Loss) Income, Net:
Translation adjustments, net (322 ) 204 (146 ) 337
Unrealized (losses) gains, net (3 ) (14 ) 14 (6 )
Changes in defined benefit plans, net 90   (29 ) 108   (3 )
Other Comprehensive (Loss) Income, Net (235 ) 161 (24 ) 328
Less: Other comprehensive income, net attributable to noncontrolling
interests
      1  
Other Comprehensive (Loss) Income, Net Attributable to Xerox (235 ) 161   (24 ) 327  
 
Comprehensive (Loss) Income, Net (121 ) 331 116 540
Less: Comprehensive income, net attributable to noncontrolling
interests
2   4   5   7  
Comprehensive (Loss) Income, Net Attributable to Xerox $ (123 ) $ 327   $ 111   $ 533  
 
       

Xerox Corporation

Condensed Consolidated Balance Sheets (Unaudited)

 
(in millions, except share data in thousands) June 30, 2018 December 31, 2017
Assets
Cash and cash equivalents $ 1,263 $ 1,293
Accounts receivable, net 1,297 1,357
Billed portion of finance receivables, net 100 112
Finance receivables, net 1,240 1,317
Inventories 947 915
Other current assets 233   236  
Total current assets 5,080 5,230
Finance receivables due after one year, net 2,183 2,323
Equipment on operating leases, net 438 454
Land, buildings and equipment, net 564 629
Investments in affiliates, at equity 1,344 1,404
Intangible assets, net 244 268
Goodwill 3,897 3,930
Deferred tax assets 917 1,026
Other long-term assets 889   682  
Total Assets $ 15,556   $ 15,946  
Liabilities and Equity
Short-term debt and current portion of long-term debt $ 412 $ 282
Accounts payable 1,153 1,108
Accrued compensation and benefits costs 357 444
Accrued expenses and other current liabilities 832   907  
Total current liabilities 2,754 2,741
Long-term debt 4,813 5,235
Pension and other benefit liabilities 1,502 1,595
Post-retirement medical benefits 650 662
Other long-term liabilities 215   206  
Total Liabilities 9,934   10,439  
 
Convertible Preferred Stock 214   214  
 
Common stock 255 255
Additional paid-in capital 3,920 3,893
Retained earnings 4,974 4,856
Accumulated other comprehensive loss (3,772 ) (3,748 )
Xerox shareholders' equity 5,377 5,256
Noncontrolling interests 31   37  
Total Equity 5,408   5,293  
Total Liabilities and Equity $ 15,556   $ 15,946  
Shares of common stock issued and outstanding 255,102 254,613
 
       

Xerox Corporation

Condensed Consolidated Statements of Cash Flows (Unaudited)

 
Three Months Ended
June 30,
Six Months Ended
June 30,
(in millions) 2018     2017 2018     2017
Cash Flows from Operating Activities
Net income $ 114 $ 170 $ 140 $ 212
Loss from discontinued operations, net of tax       6  
Income from continuing operations 114 170 140 218
Adjustments required to reconcile net income to cash flows from
operating activities:
Depreciation and amortization 139 135 278 268
Provisions 23 17 40 35
Net gain on sales of businesses and assets (16 ) (1 ) (32 ) (1 )
Undistributed equity in net income of unconsolidated affiliates (16 ) 10 52 (30 )
Stock-based compensation 13 12 29 25
Restructuring and asset impairment charges 34 32 62 140
Payments for restructurings (37 ) (66 ) (91 ) (124 )
Defined benefit pension cost 26 37 53 99
Contributions to defined benefit pension plans (37 ) (23 ) (75 ) (46 )
(Increase) decrease in accounts receivable and billed portion of
finance receivables
(10 ) (63 ) 36 (140 )
Decrease (increase) in inventories 16 (30 ) (71 ) (88 )
Increase in equipment on operating leases (63 ) (50 ) (119 ) (102 )
Decrease in finance receivables 57 69 142 134
Decrease (increase) in other current and long-term assets 37 14 19 (43 )
Decrease in accounts payable and accrued compensation (70 ) (21 ) (58 )
Decrease in other current and long-term liabilities (5 ) (6 ) (4 ) (7 )
Net change in income tax assets and liabilities 28 5 41 (36 )
Net change in derivative assets and liabilities (17 ) 44 (23 ) 99
Other operating, net 19   (4 ) 32   12  
Net cash provided by operating activities of continuing operations 235 281 451 413
Net cash used in operating activities of discontinued operations   (15 )   (95 )
Net cash provided by operating activities 235   266   451   318  
Cash Flows from Investing Activities
Cost of additions to land, buildings, equipment and software (32 ) (21 ) (50 ) (47 )
Proceeds from sales of land, buildings and equipment 16 32 1
Acquisitions, net of cash acquired (65 ) (76 )
Collections of deferred proceeds from sales of receivables 51 99
Collections on beneficial interest from sales of finance receivables 5 11
Other investing, net 1     1   (29 )
Net cash used in investing activities (15 ) (30 ) (17 ) (41 )
Cash Flows from Financing Activities
Net payments on debt (269 ) (306 ) (1,324 )
Dividends (68 ) (68 ) (135 ) (155 )
Other financing, net (2 ) (12 ) (15 ) 141  
Net cash used in financing activities (339 ) (80 ) (456 ) (1,338 )
       
Effect of exchange rate changes on cash, cash equivalents and
restricted cash
(28 ) 27   (19 ) 36  
(Decrease) increase in cash, cash equivalents and restricted cash (147 ) 183 (41 ) (1,025 )
Cash, cash equivalents and restricted cash at beginning of period 1,474   1,194   1,368   2,402  
Cash, Cash Equivalents and Restricted Cash at End of Period $ 1,327   $ 1,377   $ 1,327   $ 1,377  
 

Financial Review

Fuji Xerox Transaction Termination

On January 31, 2018, Xerox entered into agreements ("Transaction
Agreements") with FUJIFILM Holding Corporation ("Fujifilm") and Fuji
Xerox Co., Ltd. ("Fuji Xerox") for the combination of Xerox and Fuji
Xerox. Under the terms of the Transaction Agreements, Fuji Xerox would
have become a wholly-owned subsidiary of Xerox, Xerox shareholders would
have received a $2.5 billion special cash dividend and Xerox would have
become owned 49.9% by Xerox's shareholders as of the closing date for
the transaction and 50.1% by Fujifilm.

On May 13, 2018, Xerox determined that it was in the best interest of
the Company and its shareholders to terminate the Transaction Agreements
in accordance with their terms due to, among other things, the failure
by Fujifilm to deliver the audited financial statements of Fuji Xerox by
April 15, 2018 and the material deviations reflected in the audited
financial statements of Fuji Xerox, when delivered. The Company's
termination of the Transaction Agreements is the subject of pending
litigation.

The Company continues to maintain existing commercial relationships with
Fuji Xerox and Fujifilm, including, as part of the following agreements:
(i) the Joint Enterprise Contract, between the Company and Fujifilm,
dated March 30, 2001, (ii) the Technology Agreement, dated April 1,
2006, by and between the Company and Fuji Xerox and (iii) the Master
Program Agreement made and entered into as of September 9, 2013 by and
between the Company and Fuji Xerox. On June 25, 2018, the Company
disclosed to Fujifilm that it does not currently plan to renew the
Technology Agreement when it expires in 2021. In addition, the Company
indicated that, upon expiration, it may sell products directly into the
Asia-Pacific market with sole and exclusive use of the Xerox brand name.
Xerox's goal includes sourcing products, parts and supplies from the
most competitive suppliers to support the needs of its customers.

Bridge Facility Termination

On January 31, 2018, Xerox entered into a Commitment Letter with
Citigroup Global Markets Inc. and Morgan Stanley Senior Funding, Inc.,
which provided a commitment for a $2.5 billion unsecured bridge loan
facility that would have been available for Xerox to pay the special
one-time cash dividend of $2.5 billion to existing shareholders of Xerox
in connection with the Transaction Agreements, as described above.

Concurrent with the termination of the Transaction Agreements, the
commitment to provide the unsecured bridge loan facility was terminated
in the second quarter 2018 and, as a result, the remaining unamortized
debt issuance costs of $16 million were written-off.

Revenues

    Three Months Ended
June 30,
            % of Total Revenue
(in millions) 2018     2017 %

Change

CC % Change 2018     2017
Equipment sales $ 561 $ 556 0.9% (0.6)% 22% 22%
Post sale revenue 1,949   2,011   (3.1)% (5.0)% 78% 78%
Total Revenue $ 2,510   $ 2,567   (2.2)% (4.0)% 100% 100%
 
Reconciliation to Condensed Consolidated Statements of Income:
Sales $ 1,017 $ 1,010 0.7% (0.3)%
Less: Supplies, paper and other sales (456 ) (463 ) (1.5)% (2.0)%
Add: Equipment-related training(1)   9   NM NM
Equipment Sales $ 561   $ 556   0.9% (0.6)%
 
Services, maintenance and rentals $ 1,425 $ 1,483 (3.9)% (6.1)%
Add: Supplies, paper and other sales 456 463 (1.5)% (2.0)%
Add: Financing 68 74 (8.1)% (10.9)%
Less: Equipment-related training(1)   (9 ) NM NM
Post Sale Revenue $ 1,949   $ 2,011   (3.1)% (5.0)%
 
North America $ 1,514 $ 1,534 (1.3)% (1.8)% 60% 60%
International 898 895 0.3% (3.9)% 36% 35%
Other 98   138   (29.0)% (29.0)% 4% 5%
Total Revenue(2) $ 2,510   $ 2,567   (2.2)% (4.0)% 100% 100%
 
Memo:
Managed Document Services(3) $ 871 $ 833 4.6% 2.3% 35% 32%
 
____________________________

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

(1)

 

In 2018, upon adoption of ASU 2014-09 Revenue Recognition,
revenue from training related to equipment installation is now
included in Equipment Sales. In prior periods, this revenue was
reported within Services, maintenance and rentals.

(2)

Refer to Appendix II for our Geographic Sales Channels and
Product/Offering Definitions.

(3)

Excluding equipment revenue, Managed Document Services (MDS)
was $752 million in second quarter 2018 and $736 million in second
quarter 2017, representing an increase of 2.2% including a
2.1-percentage point favorable impact from currency.

 

Second quarter 2018 total revenue decreased 2.2% as compared to second
quarter 2017, with a 1.8-percentage point favorable impact from
currency. Second quarter 2018 total revenue reflected the following:

  • Post sale revenue primarily reflects contracted services,
    equipment maintenance, supplies and financing. These revenues are
    associated with the population of devices in the field, which is
    affected by installs and removals, as well as the page volumes
    generated by the usage of such devices and the revenue per printed
    page. Post sale revenue decreased 3.1% as compared to second quarter
    2017, with a 1.9-percentage point favorable impact from currency.
    • Services, maintenance and rentals revenue includes rental
      and maintenance revenue (including bundled supplies) as well as
      the post sale component of the document services revenue from our
      Managed Document Services (MDS) offerings, and revenues from our
      Communication and Marketing Solutions (CMS). These revenues
      decreased 3.9% with a 2.2-percentage point favorable impact from
      currency. The decline at constant currency1 reflected
      the continuing trends of lower page volumes (including a higher
      mix of lower usage products), an ongoing competitive price
      environment, and a lower population of devices, which are
      partially associated with lower signings and installs in prior
      periods. These impacts are partially offset by higher revenues
      from MDS, driven by our SMB-focused channels, along with revenues
      from our Global Imaging business, inclusive of acquisitions.
    • Supplies, paper and other sales includes unbundled supplies
      and other sales. These revenues decreased 1.5% as compared to
      second quarter 2017, with a 0.5-percentage point favorable impact
      from currency. The decline at constant currency1 was
      driven by lower network integration and software licensing sales,
      while paper and supplies revenues increased (excluding original
      equipment manufacturer (OEM) supplies) primarily from higher sales
      in developing markets and our Global Imaging business.
    • Financing revenue is generated from financed equipment sale
      transactions. The 8.1% decline in these revenues reflected a
      declining finance receivables balance due to lower equipment sales
      in prior periods and included a 2.8-percentage point favorable
      impact from currency.
    Three Months Ended
June 30,
            % of Equipment Sales
(in millions) 2018     2017 %

Change

CC % Change 2018     2017
Entry(1) $ 62 $ 55 12.7% 10.6% 11% 10%
Mid-range 390 358 8.9% 7.4% 69% 64%
High-end 100 109 (8.3)% (9.9)% 18% 20%
Other(1) 9   34   (73.5)% (73.5)% 2% 6%
Equipment Sales(2) $ 561   $ 556   0.9% (0.6)% 100% 100%
 
____________________________

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

(1)

 

In 2018 revenues from our OEM business are included in Other,
which had historically been reported within Entry. This
reclassification was made to provide better transparency to our
business results. Prior year amounts have been adjusted to conform
to this change.

(2)

In 2018, upon adoption of ASU 2014-09 Revenue Recognition,
revenue from training related to equipment installation is now
included in Equipment Sales (previously included in Post Sale
Revenue). Prior year amounts have been adjusted to conform to this
change.

 
  • Equipment sales revenue increased 0.9% as compared to second
    quarter 2017, with a 1.5-percentage point favorable impact from
    currency and was impacted by price declines of approximately 5% (which
    were in-line with our historic declines). The modest decline at
    constant currency1 included an approximate 4.0-percentage
    point unfavorable impact from lower OEM equipment sales while it also
    benefited from a favorable comparison as second quarter 2017 was
    measurably impacted by the timing of our ConnectKey product
    introduction. The increase in entry reflected higher sales
    of our ConnectKey devices in developing markets and U.S. indirect
    channels. The increase in mid-range reflected higher installs of new
    products across North America including higher large account sales as
    well as higher revenues from developing markets. The decrease in
    high-end sales primarily reflected lower revenues from iGen, at the
    top-end of the portfolio, along with lower revenues from
    black-and-white systems consistent with market decline trends; these
    declines were partially mitigated by higher activity from the recently
    launched Iridesse production press.

Total Installs

Revenue associated with equipment installations (discussed below) may be
reflected up-front in Equipment sales or over time either through rental
income or as part of our Managed Document Services revenues (which are
both reported within our post sale revenues), depending on the terms and
conditions of our agreements with customers.

Install activity includes Managed Document Services and Xerox-branded
products shipped to our Global Imaging business. Detail by product group
(see Appendix II) is shown below:

Entry2

  • 21% increase in color multifunction devices, reflecting demand for
    recently launched products across nearly all channels.
  • 21% increase in black-and-white multifunction devices, driven largely
    by higher activity from low-end devices in developing markets as well
    as higher sales through U.S. indirect channels.

Mid-Range3

  • 29% increase in mid-range color installs reflecting demand across
    large enterprise and indirect channels as well as a favorable impact
    due to the timing of our ConnectKey launch in the prior year.
  • 13% increase in mid-range black-and-white, reflecting demand for
    recently launched products as well as a favorable impact due to the
    timing of our ConnectKey launch in the prior year which more than
    offset market trends.

High-End3

  • 9% decrease in high-end color installs, as growth from our new
    Iridesse production press was offset by lower installs of iGen and
    lower-end production systems.
  • 12% decrease in high-end black-and-white systems reflecting market
    trends.

Signings

Signings are defined as estimated future revenues from contracts signed
during the period, including renewals of existing contracts. Our
reported signings mostly represent those from our Enterprise deals, as
we do not currently include signings from our growing partner print
services offerings or those from our Global Imaging business. Total
Contract Value (TCV) is the estimated total contractual revenue related
to signed contracts; our signings expressed in TCV were as follows:

    Three Months Ended
June 30,
        Six Months Ended
June 30, 2018
   
(in millions) 2018     2017 % Change     CC % Change 2018     2017 %

Change

    CC % Change
Signings $ 517 $ 643 (19.6)% (20.7)% $ 1,026 $ 1,155 (11.2)% (12.4)%
 
____________________________

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

Second quarter 2018 signings decreased 19.6% from second quarter 2017,
including a 1.1-percentage point favorable impact from currency,
reflecting a lower renewal rate impacted by fewer large-deal renewal
opportunities combined with ongoing competitive pressure in the market.
On a trailing twelve month (TTM) basis, signings decreased 3.0% from the
comparable prior year period, with a 0.9-percentage point favorable
impact from currency.

New business TCV increased 2.9% from second quarter 2017, with a
0.9-percentage point favorable impact from currency led by contracts
signed in Europe. On a TTM basis, new business decreased 1.8% at
constant currency1.

Renewal Rate

Renewal rate is defined as the annual recurring revenue (ARR) on
contracts that are renewed during the period as a percentage of ARR on
all contracts for which a renewal decision was made during the period.
Contract renewal rate for the second quarter 2018 was 75%, compared to
our full year 2017 renewal rate of 84%.

____________________________

(1)

 

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

(2)

Entry installations exclude OEM sales; including OEM sales,
Entry color multifunction devices decreased 20%, while Entry
black-and-white multifunction devices increased 12%.

(3)

Mid-range and High-end color installations exclude Fuji Xerox
digital front-end sales; including Fuji Xerox digital front-end
sales, Mid-range color devices increased 29%, and High-end color
systems decreased 10%.

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,
(in millions) 2018     2017     B/(W)
Gross Profit $ 1,001 $ 1,043 $ (42 )
RD&E 101 102 1
SAG 624 626 2
 
Equipment Gross Margin 31.8 % 28.7 % 3.1 pts.
Post sale Gross Margin 42.1 % 43.9 % (1.8) pts.
Total Gross Margin 39.9 % 40.6 % (0.7) pts.
RD&E as a % of Revenue 4.0 % 4.0 % - pts.
SAG as a % of Revenue 24.9 % 24.4 % (0.5) pts.
 
Pre-tax Income $ 133 $ 193 $ (60 )
Pre-tax Income Margin 5.3 % 7.5 % (2.2) pts.
 
Adjusted(1) Operating Profit $ 299 $ 338 $ (39 )
Adjusted(1) Operating Margin 11.9 % 13.2 % (1.3) pts.
 
____________________________

(1) See the "Non-GAAP Financial Measures"
section for an explanation of the non-GAAP financial measure.

Pre-tax Income Margin

Second quarter 2018 pre-tax income margin of 5.3% decreased
2.2-percentage points as compared to second quarter 2017. The decrease
was primarily driven by transaction and related costs, net as well as
lower adjusted1 operating profit, partially offset by
lower Other expenses, net.

Adjusted1
Operating Margin

Second quarter 2018 adjusted1 operating margin of 11.9%
decreased 1.3-percentage points as compared to second quarter 2017,
including a 0.8-percentage point unfavorable impact from SAG expenses
specifically related to the exit of a real estate facility
(0.5-percentage points) and the termination of an IT project
(0.3-percentage points). The decline is also associated with lower post
sale revenues and gross margins which more than offset cost productivity
and savings, including savings from restructuring. Adjusted1 operating
margin includes favorable transaction currency of 0.6-percentage points.

Gross Margin

Second quarter 2018 gross margin of 39.9% decreased 0.7-percentage
points compared to second quarter 2017, including a 0.6-percentage point
favorable impact from transaction currency and also reflecting lower
post sale margin as well as a less profitable mix of our revenues.

Second quarter 2018 equipment gross margin of 31.8% increased
3.1-percentage points as compared to second quarter 2017, reflecting
benefits from transaction currency and cost productivity savings
partially offset by an unfavorable mix due to higher sales of lower end
devices.

Second quarter 2018 post sale gross margin of 42.1% decreased
1.8-percentage points as compared to second quarter 2017 reflecting a
one-time negative impact related to the timing of a manufacturing
facility consolidation, as well as lower revenues that were only
partially offset by productivity savings and modestly favorable
transaction currency.

Research, Development and Engineering Expenses
(RD&E)

Second quarter 2018 RD&E as a percentage of revenue of 4.0% was flat
compared to second quarter 2017.

RD&E of $101 million decreased $1 million compared to second quarter
2017 and reflected cost reductions, including restructuring savings, and
lower expenses from the sale of a business and associated transfers of
resources to third parties during the prior year.

Selling, Administrative and General Expenses
(SAG)

SAG as a percentage of revenue of 24.9% increased 0.5-percentage points
as compared to second quarter 2017, including a 0.8-percentage point
unfavorable impact from the termination of an IT project and the exit of
a real estate facility.

SAG of $624 million was $2 million lower than second quarter 2017,
including an approximate $10 million unfavorable impact from currency as
well as $20 million of charges related to the accelerated depreciation
from the early termination of a capital lease associated with a surplus
facility ($13 million) and the write-off of an IT project ($7 million).
These adverse impacts were more than offset by cost savings, including
restructuring savings, which were partially offset by higher
compensation and benefit expense as well as sales incentives. Bad debt
expense of $12 million was $3 million higher than second quarter 2017
and remained at less than one percent of receivables.

Restructuring and Related Costs

Second quarter 2018 Restructuring and related costs of $34 million
included $40 million of severance costs related to headcount reductions
of approximately 550 employees worldwide. These costs were partially
offset by $6 million of net reversals for changes in estimated reserves
from prior period initiatives. Second quarter 2018 actions impacted
several functional areas, with approximately 30% focused on gross margin
improvements, approximately 65% on SAG reductions, and the remainder
focused on RD&E optimization.

Second quarter 2017 Restructuring and related costs of $39 million
included net restructuring and asset impairment charges of $32 million
as well as $7 million of additional costs primarily related to
professional support services associated with the implementation of the
strategic transformation program. Second quarter 2017 net restructuring
and asset impairment charges of $32 million included $49 million of
severance costs related to headcount reductions of approximately 500
employees worldwide and $1 million of lease cancellation charges. These
costs were partially offset by $18 million of net reversals for changes
in estimated reserves from prior period initiatives as well as a $5
million favorable adjustment on the early termination of the lease for
the corporate airplane. The second quarter 2017 actions impacted several
functional areas, with approximately 35% focused on gross margin
improvements, approximately 60% on SAG reductions, and the remainder
focused on RD&E optimization.

The restructuring reserve balance as of June 30, 2018 for all programs
was $79 million, of which $76 million is expected to be spent over the
next twelve months.

Transaction and Related Costs, Net

During second quarter 2018, we recorded $58 million of Transaction and
related costs, net which included the following:

  • Costs related to the previously disclosed settlement agreement reached
    with certain shareholders as well as third-party legal and other
    related costs associated with on-going litigation resulting from the
    terminated combination transaction and other related shareholder
    actions.
  • $17 million of costs related to the commitment for a $2.5 billion
    unsecured bridge loan facility, which was terminated concurrent with
    the termination of the Fuji Xerox combination transaction.
  • Insurance recoveries of approximately $15 million for litigation and
    related settlement costs. We continue to pursue additional recoveries
    from insurance carriers and other parties for costs and expenses
    related to the terminated transaction and shareholder litigation and
    therefore additional recoveries and adjustments may be recorded in
    future periods, when finalized. As previously disclosed, in July 2018,
    we reached a settlement with a financial advisor for the refund of
    approximately $13.5 million, which will be recorded in the third
    quarter 2018.
  • Follow-on costs related to the proposed combination transaction with
    Fuji Xerox, which was terminated in May 2018, primarily for
    third-party accounting, legal, consulting and other similar types of
    services.

Amortization of Intangible Assets

Second quarter 2018 Amortization of intangible assets of $12 million was
$3 million lower than second quarter 2017.

Worldwide Employment

Worldwide employment was approximately 34,300 as of June 30, 2018 and
decreased by approximately 1,000 from December 31, 2017. The reduction
is primarily due to the impact of restructuring and productivity-related
reductions.

Other Expenses, Net

    Three Months Ended
June 30,
(in millions) 2018       2017  
Non-financing interest expense $ 27 $ 24
Non-service retirement-related costs 25 34
Interest income (4 ) (2 )
Gains on sales of businesses and assets (16 ) (1 )
Currency losses, net 1 1
Loss on sales of accounts receivable 3
All other expenses, net 6   9  
Other expenses, net $ 39   $ 68  
 

Non-financing interest expense

Second quarter 2018 non-financing interest expense of $27 million was $3
million higher than second quarter 2017. When combined with financing
interest expense (Cost of financing), total interest expense increased
by $3 million from second quarter 2017 due to a higher debt balance
reflecting $1.0 billion of new debt issued in the third quarter 2017 to
fund, among other things, a $500 million voluntary contribution to our
U.S. defined benefit pension plans, partially offset by lower average
interest rates.

Non-service retirement-related costs

Second quarter 2018 non-service retirement-related costs were $9 million
lower than second quarter 2017, primarily driven by lower losses from
pension settlements and the favorable impact of higher pension
contributions and asset returns in the prior year.

Gains of sales of businesses and assets

Second quarter 2018 gains on sales of businesses and assets of $16
million reflected the sale of non-core business assets.

Income Taxes

Second quarter 2018 effective tax rate was 28.6%. On an adjusted1
basis, second quarter 2018 effective tax rate was 26.7%. These rates
were higher than the U.S. statutory tax rate of 21% primarily due to
impacts associated with the 2017 Tax Act, as discussed below, as well as
the geographical mix of profits. The adjusted1 effective tax
rate excludes the tax benefits associated with the following charges:
Restructuring and related costs, Amortization of intangible assets,
Transaction and related costs, net and non-service retirement-related
costs.

Second quarter 2017 effective tax rate was 22.3%. On an adjusted1 basis,
second quarter 2017 effective tax rate was 27.0%. Both rates were lower
than the U.S. statutory tax rate of 35% primarily due to foreign tax
credits and the geographic mix of profits. The adjusted1
effective tax rate excludes the tax benefits associated with the
following charges: Restructuring and related costs, Amortization of
intangible assets and non-service retirement-related costs.

Our effective tax rate is based on nonrecurring events as well as
recurring factors, including the taxation of foreign income. In
addition, our effective tax rate will change based on discrete or other
nonrecurring events that may not be predictable.

Tax Cuts and Jobs Act (the "Tax Act")

On December 22, 2017, the Tax Cuts and Jobs Act (the "Tax Act") was
enacted. The Tax Act significantly revises the U.S. corporate income tax
system by, among other things, lowering the U.S. statutory corporate
income tax rate from 35% to 21% and implementing a territorial tax
system that includes a one-time transition tax on deemed repatriated
earnings of foreign subsidiaries.

During the fourth quarter 2017, we recorded an estimated non-cash charge
of $400 million reflecting the impact associated with the provisions of
the Tax Act based on currently available information. Our estimated
charge incorporates assumptions made based on our current interpretation
of the Tax Act as well as currently available information and may
change, possibly materially, as we complete our analysis and receive
additional clarification and implementation guidance. Changes in
interpretations and assumptions as well as actions we may take as a
result of the Tax Act, may also impact this estimated charge. The $400
million estimated provisional charge continues to be our best estimate
of the impacts from the Tax Act and no further adjustment of that charge
was made in the second quarter 2018. However, we continue to evaluate
the impacts from the Tax Act and likely will do so through the filing of
our 2017 U.S. Tax Return in the third quarter 2018. Any adjustments to
these provisional amounts will be reported as a component of Income tax
expense in the reporting period in which any such adjustments are
determined.

Effective January 1, 2018, we became subject to several provisions of
the Tax Act including computations related to Global Intangible Low
Taxed Income ("GILTI"), Foreign Derived Intangible Income ("FDII"), Base
Erosion and Anti-Abuse Tax ("BEAT"), and IRC Section 163(j) interest
limitation (Interest Limitation). Our current estimate for the GILTI,
FDII and Interest Limitation rules was determined to be immaterial,
however we currently estimate that we are subject to BEAT. Accordingly,
our second quarter 2018 effective tax rate includes the estimated impact
for BEAT, which has also been incorporated into our estimated annual
effective tax for 2018. Similar to the provisional charge recorded in
the fourth quarter 2017 associated with the enactment of the Tax Act,
the estimates for these additional provisions of the Tax Act were made
based on our current interpretation of the Tax Act as well as currently
available information and may change, as we complete our analysis and
receive additional clarification and implementation guidance. Changes in
interpretations and assumptions as well as actions we may take as a
result of the Tax Act may also impact these estimates.

Equity in Net Income (Loss) of Unconsolidated Affiliates

Equity in net income (loss) of unconsolidated affiliates primarily
reflects our 25% share of Fuji Xerox net income. Second quarter 2018
equity income of $19 million decreased $1 million compared to second
quarter 2017.

Net Income from Continuing Operations

Second quarter 2018 net income from continuing operations attributable
to Xerox was $112 million, or $0.42 per diluted share. On an adjusted1
basis, net income from continuing operations attributable to Xerox was
$213 million, or $0.80 per diluted share. Second quarter 2018
adjustments to net income include Restructuring and related costs,
Amortization of intangible assets, Transaction and related costs, net
and non-service retirement-related costs.

Second quarter 2017 net income from continuing operations attributable
to Xerox was $166 million, or $0.63 per diluted share. On an adjusted1
basis, net income from continuing operations attributable to Xerox was
$224 million, or $0.86 per diluted share. Second quarter 2017
adjustments to net income include Restructuring and related costs,
Amortization of intangible assets and non-service retirement-related
costs.

See the "Non-GAAP Financial Measures" section for the calculation of
adjusted EPS. The calculations of basic and diluted earnings per share
are included as Appendix I.

____________________________

(1)

 

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

Capital Resources and Liquidity

The following summarizes our cash, cash equivalents and restricted cash:

    Three Months Ended
June 30,
   
(in millions) 2018     2017 Change
Net cash provided by operating activities of continuing operations $ 235 $ 281 $ (46 )
Net cash used in operating activities of discontinued operations   (15 ) 15  
Net cash provided by operating activities 235   266   (31 )
 
Net cash used in investing activities (15 ) (30 ) 15
 
Net cash used in financing activities (339 ) (80 ) (259 )
 
Effect of exchange rate changes on cash, cash equivalents and
restricted cash
(28 ) 27 (55 )
(Decrease) increase in cash, cash equivalents and restricted cash (147 ) 183 (330 )
Cash, cash equivalents and restricted cash at beginning of period 1,474   1,194   280  
Cash, Cash equivalents and Restricted Cash at End of Period $ 1,327   $ 1,377   $ (50 )
 

Cash Flows from Operating Activities

Net cash provided by operating activities of continuing operations was
$235 million in second quarter 2018. The $46 million decrease in
operating cash from second quarter 2017 was primarily due to the
following:

  • $22 million decrease in pre-tax income before Transaction and related
    costs, net, depreciation and amortization, gain on sales of businesses
    and assets, restructuring charges and defined benefit pension costs.
  • $53 million increase from accounts receivable primarily due to the
    prior year reclassification of $51 million of collections of deferred
    proceeds from the sales of accounts receivables to investing.
  • $46 million increase from inventory due to timing of the product
    launch in the prior year.
  • $29 million increase from lower restructuring payments.
  • $28 million increase due to lower net tax payments.
  • $57 million decrease from the change in accounts payable and accrued
    compensation primarily related to the year-over-year timing of
    supplier and vendor payments.
  • $27 million decrease in dividends received from equity investments
    primarily due to lower year-to-date income from Fuji Xerox.
  • $25 million decrease due to lower net run-off of finance receivables
    of $12 million and higher equipment on operating leases of $13 million.
  • $24 million decrease primarily related to the prior year settlements
    of foreign currency derivative contracts.
  • $23 million decrease due to payments for Transaction and related
    costs, net.
  • $14 million decrease from higher pension contributions primarily in
    the U.K.

Cash Flows from Investing Activities

Net cash used in investing activities was $15 million in second quarter
2018. The $15 million change from second quarter 2017 was primarily due
to the following:

  • $65 million increase due to no acquisitions in 2018.
  • $16 million increase primarily from the sale of non-core business
    assets in 2018.
  • $51 million decrease is primarily a result of the termination of
    certain accounts receivables sales arrangements in fourth quarter 2017.
  • $11 million decrease due to higher capital expenditures.

Cash Flows from Financing Activities

Net cash used in financing activities was $339 million in second quarter
2018. The $259 million increase in the use of cash from second quarter
2017 was primarily due from net debt activity. 2018 reflects payments of
$265 million on Senior Notes and $6 million of bridge facility costs
compared to no debt activity in the prior year.

Cash, Cash Equivalents and Restricted Cash

Restricted cash primarily relates to escrow cash deposits made in Brazil
associated with tax and labor litigation. Various litigation matters in
Brazil require us to make cash deposits to escrow as a condition of
continuing the litigation. Restricted cash amounts are classified in our
Condensed Consolidated Balance Sheets based on when the cash is expected
to be contractually or judicially released.

(in millions)     June 30, 2018     December 31, 2017
Cash and cash equivalents $ 1,263 $ 1,293
Restricted cash
Tax and labor litigation deposits in Brazil 62 72
Other restricted cash 2 3
Total Restricted cash 64 75
Cash, cash equivalents and restricted cash $ 1,327 $ 1,368
 

Restricted cash was reported in the Condensed Consolidated Balance
Sheets as follows:

(in millions)     June 30, 2018     December 31, 2017
Other current assets $ 1 $ 1
Other long-term assets 63 74
Total Restricted cash $ 64 $ 75
 

Debt and Customer Financing Activities

The following summarizes our debt:

(in millions)     June 30, 2018     December 31, 2017
Principal debt balance(1) $ 5,286 $ 5,579
Net unamortized discount (30 ) (35 )
Debt issuance costs (28 ) (32 )
Fair value adjustments(2)
- terminated swaps (8 ) 4
- current swaps 5   1  
Total Debt $ 5,225   $ 5,517  
 
____________________________

(1)

 

Includes Notes Payable of $4 million and $6 million as of June
30, 2018 and December 31, 2017, 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.

 

Finance Assets and Related Debt

The following represents our total finance assets, net associated with
our lease and finance operations:

(in millions)     June 30, 2018     December 31, 2017
Total finance receivables, net(1) $ 3,523 $ 3,752
Equipment on operating leases, net 438 454
Total Finance Assets, net(2) $ 3,961 $ 4,206
 
____________________________

(1)

 

Includes (i) Billed portion of finance receivables, net, (ii)
Finance receivables, net and (iii) Finance receivables due after
one year, net as included in our Condensed Consolidated Balance
Sheets.

(2)

The change from December 31, 2017 includes a decrease of $64
million due to currency.

 

Our lease contracts permit customers to pay for equipment over time
rather than at the date of installation; therefore, we maintain a
certain level of debt (that we refer to as financing debt) to support
our investment in these lease contracts, which are reflected in total
finance assets, net. For this financing aspect of our business, we
maintain an assumed 7:1 leverage ratio of debt to equity as compared to
our finance assets.

Based on this leverage, the following represents the breakdown of total
debt between financing debt and core debt:

(in millions)     June 30, 2018     December 31, 2017
Finance receivables debt(1) $ 3,084 $ 3,283
Equipment on operating leases debt 383 397
Financing debt 3,467 3,680
Core debt 1,758 1,837
Total Debt $ 5,225 $ 5,517
 
____________________________

(1)

 

Finance receivables debt is the basis for our calculation of
"Cost of financing" expense in the Condensed Consolidated
Statements of Income.

 

Sales of Accounts Receivable

Accounts receivable sales arrangements may be utilized in the normal
course of business as part of our cash and liquidity management.
Accounts receivable sold are generally short-term trade receivables with
payment due dates of less than 60 days. During the fourth quarter 2017,
we terminated all accounts receivable sales arrangements in North
America and all but one arrangement in Europe. The remaining accounts
receivable sales facility in Europe enables us to sell receivables
associated with our distributor network on an ongoing basis without
recourse. Under this arrangement, we sell our entire interest in the
related accounts receivable for cash and no portion of the payment is
held back or deferred by the purchaser.

Accounts receivable sales activities were as follows:

    Three Months Ended
June 30,
(in millions) 2018     2017
Accounts receivable sales(1) $ 128 $ 567
Deferred proceeds 56
Loss on sales of accounts receivable 3
Estimated increase to operating cash flows(2) 26 54
 
____________________________

(1)

 

Customers may also enter into structured-payable arrangements
that require us to sell our receivables from that customer to a
third-party financial institution, which then makes payments to us
to settle the customer's receivable. In these instances, we ensure
the sale of the receivables are bankruptcy remote and the payment
made to us is without recourse. The activity associated with these
arrangements is not reflected in this disclosure as payments under
these arrangements have not been material and these are customer
directed arrangements.

(2)

Represents the difference between current and prior period
accounts receivable sales adjusted for the effects of the deferred
proceeds, collections prior to the end of the quarter and currency.

 

Forward-Looking Statements

This release, and other written or oral statements made from time to
time by management contain "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 and 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 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 outcome of our process to evaluate all strategic alternatives
to maximize shareholder value, including terminating or restructuring
Xerox's relationship with FUJIFILM Holdings Corporation ("Fujifilm");
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 2017 Annual Report on Form 10-K, as well as our
Quarterly Reports on Form 10-Q and Current Reports on Form 8-K filed
with the 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 and
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. In April 2017, Fujifilm
formed an independent investigation committee (the "IIC") to primarily
conduct a review of the appropriateness of the accounting practices at
Fuji Xerox's New Zealand subsidiary and at other subsidiaries. The IIC
completed its review during the second quarter 2017 and identified
aggregate adjustments to Fuji Xerox's financial statements of
approximately JPY 40 billion (approximately $360 million) primarily
related to misstatements at Fuji Xerox's New Zealand and Australian
subsidiaries. We determined that our share of the total adjustments
identified as part of the investigation was approximately $90 million
and impacted our fiscal years 2009 through 2017. We revised our
previously issued annual and interim consolidated financial statements
for 2014, 2015 and 2016 and the first quarter of 2017. However, Fujifilm
and Fuji Xerox continue to review Fujifilm's oversight and governance of
Fuji Xerox as well as Fuji Xerox's oversight and governance over its
businesses in light of the findings of the IIC.

In 2018, in connection with the completion of audits of Fuji Xerox's
fiscal year-end financial statements as of and for the years ended March
31, 2016 and 2017, as well as the review of Fuji Xerox's unaudited
interim financial statements as of and for the nine months ended
December 31, 2017 and 2016, additional adjustments and misstatements
were identified. These additional adjustments and misstatements were to
the net income of Fuji Xerox for the period from 2010 through 2017
previously revised for the items identified by the IIC noted above. At
this time, we can provide no assurances relative to the outcome of any
potential governmental investigations or any consequences thereof that
may happen as a result of this matter.

Non-GAAP Financial Measures

We have reported our financial results in accordance with generally
accepted accounting principles (GAAP). In addition, we have discussed
our financial results using the non-GAAP measures described below. We
believe these non-GAAP measures allow investors to better understand the
trends in our business and to better understand and compare our results.
Accordingly, we believe it is necessary to adjust several reported
amounts, determined in accordance with GAAP, to exclude the effects of
certain items as well as their related income tax effects.

A reconciliation of these non-GAAP financial measures to the most
directly comparable financial measures calculated and presented in
accordance with GAAP are set forth below as well as in the second
quarter 2018 presentation slides available at www.xerox.com/investor.

These non-GAAP financial measures should be viewed in addition to, and
not as a substitute for, the company's reported results prepared in
accordance with GAAP.

Adjusted Earnings Measures

  • Net income and Earnings per share (EPS)
  • Effective tax rate

The above measures were adjusted for the following items:

  • Amortization of intangible assets:
    The amortization of intangible assets is driven by our acquisition
    activity which can vary in size, nature and timing as compared to
    other companies within our industry and from period to period. The use
    of intangible assets contributed to our revenues earned during the
    periods presented and will contribute to our future period revenues as
    well. Amortization of intangible assets will recur in future periods.
  • Restructuring and related costs:
    Restructuring and related costs include restructuring and asset
    impairment charges as well as costs associated with our strategic
    transformation program beyond those normally included in restructuring
    and asset impairment charges. Restructuring consists of costs
    primarily related to severance and benefits paid to employees pursuant
    to formal restructuring and workforce reduction plans. Asset
    impairment includes costs incurred for those assets sold, abandoned or
    made obsolete as a result of our restructuring actions, exiting from a
    business or other strategic business changes. Additional costs for our
    strategic transformation program are primarily related to the
    implementation of strategic actions and initiatives and include
    third-party professional service costs as well as one-time incremental
    costs. All of these costs can vary significantly in terms of amount
    and frequency based on the nature of the actions as well as the
    changing needs of the business. Accordingly, due to that significant
    variability, we will exclude these charges since we do not believe
    they provide meaningful insight into our current or past operating
    performance nor do we believe they are reflective of our expected
    future operating expenses as such charges are expected to yield future
    benefits and savings with respect to our operational performance.
  • Non-service retirement-related costs:
    Our defined benefit pension and retiree health costs include several
    elements impacted by changes in plan assets and obligations that are
    primarily driven by changes in the debt and equity markets as well as
    those that are predominantly legacy in nature and related to employees
    who are no longer providing current service to the company (e.g.
    retirees and ex-employees). These elements include (i) interest cost,
    (ii) expected return on plan assets, (iii) amortization of prior plan
    amendments, (iv) amortized actuarial gains/losses and (v) the impacts
    of any plan settlements/curtailments. Accordingly, we consider these
    elements of our periodic retirement plan costs to be outside the
    operational performance of the business or legacy costs and not
    necessarily indicative of current or future cash flow requirements.
    This approach is consistent with the classification of these costs as
    non-operating in other expenses, net as a result of our adoption of
    ASU 2017-07 - Reporting of Retirement Related Benefit Costs in 2018.
    Adjusted earnings will continue to include the service cost elements
    of our retirement costs, which is related to current employee service
    as well as the cost of our defined contribution plans.
  • Transaction and related costs, net:
    Transaction and related costs, net are expenses incurred in connection
    with Xerox's planned combination transaction with Fuji Xerox, which
    was terminated in May 2018, as well as costs and expenses related to
    the previously disclosed settlement agreement reached with certain
    shareholders and litigation related to the terminated transaction and
    other shareholder actions. These costs are considered incremental to
    our normal operating charges and were incurred or are expected to be
    incurred solely as a result of the planned combination transaction and
    the related shareholder settlement agreement and litigation.
    Accordingly, we are excluding these expenses from our Adjusted
    Earnings Measures in order to evaluate our performance on a comparable
    basis.
  • Restructuring and other charges - Fuji Xerox:
    We also adjust our 25% share of Fuji Xerox's net income for similar
    items noted above such as Restructuring and related costs and
    Transaction and related costs, net based on the same rationale
    discussed above.

We believe the exclusion of these items allows investors to better
understand and analyze the results for the period as compared to prior
periods and expected future trends in our business.

Adjusted Operating Income/Margin

We also calculate and utilize adjusted operating income and margin
measures by adjusting our reported pre-tax income and margin amounts. In
addition to the costs and expenses noted as adjustments for our Adjusted
Earnings measures, adjusted operating income and margin also exclude the
remaining amounts included in Other expenses, net, which are primarily
non-financing interest expense and certain other non-operating costs and
expenses. We exclude these amounts in order to evaluate our current and
past operating performance and to better understand the expected future
trends in our business. Adjusted operating income and margin also
include Equity in net income (loss) of unconsolidated affiliates. Equity
in net income (loss) of unconsolidated affiliates primarily reflects our
25% share of Fuji Xerox's net income. We include this amount in our
measure of operating income and margin as Fuji Xerox is our primary
product supplier and intermediary to the Asia/Pacific market for
distribution of Xerox branded products and services.

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." This impact is calculated by
translating current period activity in local currency using the
comparable prior year period's currency translation rate. This impact is
calculated for all countries where the functional currency is the local
country currency. The constant currency impact for signings growth is
calculated on the basis of plan currency rates. 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 operating cash flows from continuing operations by
subtracting amounts related to capital expenditures. 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.

Summary:

Management believes that all of these non-GAAP financial measures
provide an additional means of analyzing the current period's results
against the corresponding prior period's results. However, these
non-GAAP financial measures should be viewed in addition to, and not as
a substitute for, the company's reported results prepared in accordance
with GAAP. Our non-GAAP financial measures are not meant to be
considered in isolation or as a substitute for comparable GAAP measures
and should be read only in conjunction with our consolidated financial
statements prepared in accordance with GAAP. Our management regularly
uses our supplemental non-GAAP financial measures internally to
understand, manage and evaluate our business and make operating
decisions. These non-GAAP measures are among the primary factors
management uses in planning for and forecasting future periods.
Compensation of our executives is based in part on the performance of
our business based on these non-GAAP measures.

A reconciliation of these non-GAAP financial measures and the most
directly comparable measures calculated and presented in accordance with
GAAP are set forth on the following tables:

Net Income and EPS reconciliation:

    Three Months Ended
June 30, 2018
    Three Months Ended
June 30, 2017
(in millions, except per share amounts) Net Income     EPS Net Income     EPS
Reported(1) $ 112 $ 0.42 $ 166 $ 0.63
Adjustments:
Restructuring and related costs 34 39
Amortization of intangible assets 12 15
Transaction and related costs, net 58
Non-service retirement-related costs 25 34
Income tax on adjustments(2) (32 ) (33 )
Restructuring and other charges - Fuji Xerox(3) 4   3  
Adjusted $ 213   $ 0.80 $ 224   $ 0.86
Dividends on preferred stock used in adjusted EPS calculation(4) $ $
Weighted average shares for adjusted EPS(4) 265 263
Fully diluted shares at end of period(5)

265

 
 
____________________________

(1)

 

Net income and EPS from continuing operations attributable to
Xerox.

(2)

Refer to Effective Tax Rate reconciliation.

(3)

Other charges in 2018 represent costs associated with the
terminated combination transaction.

(4)

For those periods that exclude the preferred stock dividend,
the average shares for the calculations of diluted EPS include 7
million shares associated with our Series B convertible preferred
stock, as applicable.

(5)

Represents common shares outstanding at June 30, 2018 as well
as shares associated with our Series B convertible preferred stock
plus potential dilutive common shares as used for the calculation
of diluted earnings per share for the second quarter 2018.

 

Effective Tax Rate reconciliation:

    Three Months Ended
June 30, 2018
    Three Months Ended
June 30, 2017
(in millions)

Pre-Tax
Income

 

   

Income Tax
Expense

   

Effective Tax
Rate

Pre-Tax
Income

   

Income Tax
Expense

   

Effective Tax
Rate

Reported(1) $ 133 $ 38 28.6 % $ 193 $ 43 22.3 %
Non-GAAP Adjustments(2) 129 32 88 33
Adjusted(3) $ 262 $ 70 26.7 % $ 281 $ 76 27.0 %
 
____________________________

(1)

 

Pre-Tax Income and Income Tax Expense from continuing
operations.

(2)

Refer to Net Income and EPS reconciliation for details.

(3)

The tax impact on Adjusted Pre-Tax Income from continuing
operations is calculated under the same accounting principles
applied to the As Reported Pre-Tax Income under ASC 740, which
employs an annual effective tax rate method to the results.

 

Operating Income / Margin reconciliation:

    Three Months Ended
June 30, 2018
    Three Months Ended
June 30, 2017
(in millions) Profit     Revenue     Margin Profit     Revenue     Margin
Reported(1) $ 133 $ 2,510 5.3 % $ 193 $ 2,567 7.5 %
Adjustments:
Restructuring and related costs 34 39
Amortization of intangible assets 12 15
Transaction and related costs, net 58
Non-service retirement-related costs 25 34
Equity in net income of unconsolidated affiliates 19 20
Restructuring and other charges - Fuji Xerox(2) 4 3
Other expenses, net 14     34    
Adjusted $ 299   $ 2,510   11.9 % $ 338   $ 2,567   13.2 %
 
____________________________

(1)

 

Pre-Tax Income and revenue from continuing operations.

(2)

Other charges in 2018 represent costs associated with the
terminated combination transaction.

 

Guidance:

    Free Cash Flow
(in millions) FY 2018
Operating Cash Flows from Continuing Operations $900 - $1,100
Less: Capital Expenditures (150)
Free Cash Flows from Continuing Operations $750 - $950
 
       

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,
2018     2017 2018     2017
Basic Earnings (Loss) per Share:
Net income from continuing operations attributable to Xerox $ 112 $ 166 $ 135 $ 212
Accrued dividends on preferred stock (3 ) (3 ) (7 ) (7 )
Adjusted net income from continuing operations available to common
shareholders
$ 109 $ 163 $ 128 $ 205
Net loss from discontinued operations attributable to Xerox       (6 )
Adjusted net income available to common shareholders $ 109   $ 163   $ 128   $ 199  
Weighted average common shares outstanding 254,895 254,193 254,791 254,107
Basic Earnings (Loss) per Share:
Continuing operations $ 0.42 $ 0.64 $ 0.50 $ 0.81
Discontinued operations       (0.03 )
Basic Earnings per Share $ 0.42   $ 0.64   $ 0.50   $ 0.78  
Diluted Earnings (Loss) per Share:
Net income from continuing operations attributable to Xerox $ 112 $ 166 $ 135 $ 212
Accrued dividends on preferred stock (3 )   (7 ) (7 )
Adjusted net income from continuing operations available to common
shareholders
$ 109 $ 166 $ 128 $ 205
Net loss from discontinued operations attributable to Xerox       (6 )
Adjusted net income available to common shareholders $ 109   $ 166   $ 128   $ 199  
Weighted average common shares outstanding 254,895 254,193 254,791 254,107
Common shares issuable with respect to:
Stock Options
Restricted stock and performance shares 3,052 2,275 2,931 2,190
Convertible preferred stock   6,742      
Adjusted weighted average common shares outstanding 257,947   263,210   257,722   256,297  
Diluted Earnings (Loss) per Share:
Continuing operations $ 0.42 $ 0.63 $ 0.50 $ 0.80
Discontinued operations       (0.02 )
Diluted Earnings per Share $ 0.42   $ 0.63   $ 0.50   $ 0.78  

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 1,097 1,097
Restricted stock and performance shares 4,329 2,375 4,450 2,460
Convertible preferred stock 6,742     6,742   6,742  
Total Anti-Dilutive Securities 12,168   2,375   12,289   9,202  
 
Dividends per Common Share $ 0.25   $ 0.25   $ 0.50   $ 0.50  
 

APPENDIX II

 

Xerox Corporation

Geographic Sales Channels and Product/Offering Definitions

 

Our business is aligned to a geographic focus and is primarily organized
on the basis of go-to-market sales channels, which are structured to
serve a range of customers for our products and services:

  • North America, which includes our sales channels in the U.S. and
    Canada.
  • International, which includes our sales channels in Europe, Eurasia,
    Latin America, Middle East, Africa and India.
  • Other, primarily includes our OEM business, as well as sales to and
    royalties from Fuji Xerox, and our licensing revenue.

Our products and offerings include:

  • "Entry", which includes A4 devices and desktop printers. Prices in
    this product group can range from approximately $150 to $3,000.
  • "Mid-Range", which includes A3 Office and Light Production devices
    that generally serve workgroup environments in mid to large
    enterprises. Prices in this product group can range from approximately
    $2,000 to $75,000+.
  • "High-End", which includes production printing and publishing systems
    that generally serve the graphic communications marketplace and large
    enterprises. Prices for these systems can range from approximately
    $30,000 to $1,000,000+.
  • Managed Document Services (MDS) revenue, which includes solutions and
    services that span from managing print to automating processes to
    managing content. Our primary offerings within MDS are Managed Print
    Services (including from Global Imaging Systems), as well as workflow
    automation services, and Centralized Print Services and Solutions
    (CPS). MDS excludes Communication and Marketing Solutions (CMS).

View Comments and Join the Discussion!