Xerox Releases Third-Quarter Results, Raises 2019 Guidance

• $356 million of operating cash flow, up $82 million year-over-year, and $339 million of free cash flow, up $88 million year-over-year
• GAAP earnings per share (EPS) of $0.96, up $0.62 year-over-year, and adjusted EPS of $1.08, up $0.23 year-over-year (YOY)
• Adjusted operating margin of 12.1 percent, up 120 basis points year-over-year
• $2.2 billion of revenue in the quarter, a decrease of 6.5 percent in actual currency, or 5.3 percent in constant currency, year-over-year
• Increasing 2019 guidance for GAAP EPS to $3.10 – $3.20, adjusted EPS to $4.00 – $4.10, operating cash flow to $1.2 – $1.3 billion and free cash flow to $1.1 – $1.2 billion
• Completed $368 million of share repurchases through the third quarter, expecting at least $600 million in total for the year

NORWALK, Conn.–(BUSINESS WIRE)–Today Xerox Holdings Corporation (NYSE: XRX) announced its third-quarter 2019 financial results and said it would raise 2019 guidance for EPS and cash flow.

“Our strategy and execution delivered a strong third quarter despite industry headwinds. We increased cash flow, earnings per share and adjusted operating margin while we improved the revenue trend. These results give us confidence to raise our earnings and cash flow guidance for the year as we position Xerox for long-term growth,” said Xerox Vice Chairman and CEO John Visentin.

Key Financial Results:

1. 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 measures.

Key Business Highlights:

• On track to drive 2019 gross savings of at least $640 million under Project Own It, Xerox’s enterprise-wide initiative to simplify operations, drive continuous improvement and free up capital to reinvest in the business
• Added and renewed several contracts with Fortune 500 and public sector clients such as AstraZeneca, Leonardo S.p.A., Cardiff Council, and Prince George’s County Public Schools
• Launched new products and enhancements such as the Xerox PrimeLink™ C9065/C9070and the iGen^®5 XLSto capture incremental production volume

Xerox also announced today that it has completed its evaluation of its customer financing business and will not pursue a sale of the business at this time. The company received and reviewed bids from multiple potential counterparties that were interested in purchasing the business at an attractive premium but ultimately determined that retaining and optimizing the business through Project Own It will generate the greatest return for shareholders.

About Xerox

In the era of intelligent work, we’re not just thinking about the future, we’re making it. Xerox Holdings Corporation is a technology leader focused on the intersection of digital and physical. We use automation and next-generation personalization to redefine productivity, drive growth and make the world more secure. Every day, our innovative technologies and intelligent work solutions-Powered by Xerox^®-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 third quarter 2019 and 2018 and full-year 2019 guidance:

• Adjusted EPS, which excludes restructuring and related costs (including our share of Fuji Xerox restructuring), the amortization of intangible assets, non-service retirement-related costs, transaction and related costs, net and other discrete adjustments.
• Adjusted operating margin and income, which exclude the EPS adjustments noted above as well as the remainder of other expenses, net.
• Constant currency (CC) revenue growth, which excludes the effects of currency translation.
• Free cash flow, 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 measures.

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”, “targeting”, “projecting”, “driving” and similar expressions, as they relate to us, our performance and/or our technology, 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; our ability to attract and retain key personnel; 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; the imposition of new or incremental trade protection measures such as tariffs and import or export restrictions; 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 confidential and/or individually identifiable information of ours, our customers, clients and employees could be inadvertently disclosed or disclosed as a result of a breach of our security systems due to cyber attacks or other intentional acts; reliance on third parties, including subcontractors, for manufacturing of products and provision of services; the exit of the United Kingdom from the European Union; 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; any potential termination or restructuring of our relationship with Fujifilm Holdings Corporation; the shared services arrangements entered into by us as part of Project Own It; 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 Xerox Corporation’s 2018 Annual Report on Form 10-K, as well as in Xerox Corporation’s and Xerox Holdings Corporation’s Quarterly Reports on Form 10-Q and Current Reports on Form 8-K filed with the SEC. These forward-looking statements speak only as of the date of this release or as of the date to which they refer, and Xerox assumes no obligation to update any forward-looking statements as a result of new information or future events or developments, except as required by law.

Note: To receive RSS news feeds, visit https://www.news.xerox.com. For open commentary, industry perspectives and views, visit http://twitter.com/xerox, http://www.facebook.com/XeroxCorp, https://www.instagram.com/xerox/, http://www.linkedin.com/company/xerox, http://www.youtube.com/XeroxCorp.

Xerox^®, iGen^®, PrimeLink™ and Powered by Xerox^® are trademarks of Xerox in the United States and/or other countries.

XEROX HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

____________________________

1. Certain prior year amounts have been conformed to the current year presentation. See Appendix III for this change in presentation.
2. Referred to as “Pre-Tax Income” throughout the remainder of this document.

XEROX HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

XEROX HOLDINGS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

XEROX HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Revenues

____________________________

CC – Constant Currency (see “Non-GAAP Financial Measures” section).

1. Certain prior year amounts have been conformed to the current year presentation. See Appendix III for this change in presentation.
2. Refer to Appendix II for our Geographic Sales Channels and Products and Offerings Definitions.
3. Excluding equipment revenue, Xerox Services was $719 million and $760 million in the third quarter 2019 and 2018, respectively, representing a decrease of 5.4% including a 1.6-percentage point unfavorable impact from currency.

Third quarter 2019 total revenue decreased 6.5% as compared to third quarter 2018, including a 1.2-percentage point unfavorable impact from currency, and an approximate 0.7-percentage point unfavorable impact from lower OEM sales. Third quarter 2019 total revenue reflected the following:

• Post sale revenueprimarily reflects contracted services, equipment maintenance, supplies and financing. These revenues are associated not only with the population of devices in the field, which is affected by installs and removals, but also by the page volumes generated from the usage of such devices, and the revenue per printed page. Post sale revenue also includes transactional IT hardware sales and implementation services from our XBS organization. Post sale revenue decreased 7.3% as compared to third quarter 2018, including a 1.1-percentage point unfavorable impact from currency, and reflected the following:
  • Services, maintenance and rentals revenueincludes rental and maintenance revenue (including bundled supplies) as well as the post sale component of the document services revenue from our Xerox Services offerings. These revenues decreased 6.6% as compared to third quarter 2018, including a 1.0-percentage point unfavorable impact from currency. The decline at constant currency¹ reflected the continuing trend 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 continued lower Enterprise signings and lower installs in prior periods.
  • Supplies, paper and other salesincludes unbundled supplies and other sales. These revenues decreased 10.1% as compared to third quarter 2018, including a 0.9-percentage point unfavorable impact from currency and a 3.9-percentage point unfavorable impact from lower OEM sales. Excluding OEM sales, the decline at constant currency¹ reflected lower paper sales from developing markets (primarily from the Latin America region), as well as the impact of lower supplies revenues primarily associated with lower page volume trends. These declines were partially offset by the implementation of a large transactional IT sales arrangement from our XBS organization.
  • Financing revenue is generated from financed equipment sale transactions. The 7.7% decline in these revenues reflected a continued decline in the finance receivables balance due to lower equipment sales in prior periods and included a 0.7-percentage point unfavorable impact from currency.

____________________________

CC – Constant Currency (see “Non-GAAP Financial Measures” section).

• Equipment sales revenuedecreased 3.3% as compared to third quarter 2018, including a 1.1-percentage point unfavorable impact from currency as well as the impact of price declines of approximately 5%. The decline at constant currency¹ was primarily driven by lower sales of our office-centric devices (entry and mid-range products) partially offset by higher sales of our production-centric systems (high-end). The decline at constant currency¹ reflected the following:
  • Entry – The decreasereflected lower sales of devices primarily from developing market regions in EMEA reflecting in part continued weakness and delayed decisions as a result of uncertainty in the economic environment. Revenues from entry products through our indirect channels in the U.S. also declined as they were further impacted by price investments, and lower sales of devices from the lower end of the portfolio.
  • Mid-range –The decrease reflected lower sales from EMEA, primarily from developing market regions reflecting in part continued weakness and delayed decisions as a result of uncertainty in the economic environment. Revenues from our Americas region were flat as compared to the prior year, reflecting the favorable impact of a large account order (part of a refresh cycle), some of which occurred earlier than anticipated, offsetting lower sales from our US indirect channels and from our XBS sales organization, which continued to gradually stabilize from the impact of organizational changes that were part of our Project Own It transformation actions (including the transitioning of accounts to implement coverage changes, consolidation of real estate locations and the reduction of management layers).
  • High-end– The increase reflected higher sales of color systems associated with continued demand for our Iridesse production press and installs of our Versant production systems, as well as higher sales of our iGen press in the U.S., partially offset by lower sales of black-and-white systems.

Total Installs

Installs reflect new placement of devices only. Revenue associated with equipment installations may be reflected up-front in Equipment sales or over time either through rental income or as part of our Xerox Services revenues (which are both reported within our post sale revenues), depending on the terms and conditions of our agreements with customers. Installs include activity from Xerox Services and Xerox-branded products shipped to our XBS sales unit. Detail by product group (see Appendix II) is shown below:

Entry²

• 10% increase in color multifunction devices reflecting higher installs of ConnectKey devices primarily from our indirect channels in the U.S. partially offset by lower installs from EMEA.
• 6% decrease in black-and-white multifunction devices driven by lower activity primarily from our indirect channels in the U.S. and from EMEA.

Mid-Range³

• 2% increase in mid-range color installs primarily reflecting installs associated with a large account’s refresh cycle order.
• 20% decrease in mid-range black-and-white reflecting lower installs of ConnectKey devices primarily from developing market regions and from our indirect channels in the U.S. The decline also reflected global market trends.

High-End³

• 12% increase in high-end color installs reflecting continued demand for our Iridesse production press and higher installs of our lower-end Versant production systems as well as higher activity from iGen in North America.
• 22% decrease in high-end black-and-white systems.

___________________________

1. See the “Non-GAAP Financial Measures” section for an explanation of the non-GAAP financial measure.
2. When combined with OEM sales, Entry color multifunction devices increased 10%, while Entry black-and-white multifunction devices decreased 7%.
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 2%, and High-end color systems increased 12%.

Costs, Expenses and Other Income

Summary of Key Financial Ratios

The following is a summary of key financial ratios used to assess our performance:

____________________________

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

Pre-tax Income Margin

Third quarter 2019 pre-tax income margin of 10.5% increased 2.3-percentage points as compared to third quarter 2018. The increase was primarily driven by lower operating expenses, mainly reflecting the net benefit from our Project Own It transformation actions, which more than offset the adverse impact of lower revenues. The increase also reflected lower Other Expenses, net, partially offset by higher Transaction and related costs, net, due to a prior year credit associated with recoveries from insurance and other vendors.

Adjusted¹ Operating Margin

Third quarter 2019 adjusted¹ operating margin of 12.1% increased by 1.2-percentage points as compared to third quarter 2018 primarily reflecting the impact of SAG reductions and cost productivity associated with our Project Own It transformation actions, which more than offset the pace of revenue decline and an approximate 0.2-percentage point unfavorable impact from transaction currency. The increase also reflected a $5 million favorable impact from higher costs in the prior year related to the termination of certain IT projects.

____________________________

1. Refer to the Operating Income and Margin reconciliation table in the “Non-GAAP Financial Measures” section.

Gross Margin

Third quarter 2019 gross margin of 40.0% decreased by 0.1-percentage points compared to third quarter 2018, and reflected an approximate 0.2-percentage point unfavorable impact from transaction currency, and the impact of lower equipment and supplies sales revenues as well as lower page volumes offset by cost productivity and restructuring savings associated with our Project Own It transformation actions.

Third quarter 2019 equipment gross margin of 34.4% decreased by 0.2-percentage points as compared to third quarter 2018, reflecting cost productivity and the favorable mix impact of higher sales of high-end production systems offset by an approximate 0.6-percentage point unfavorable impact from transaction currency and selective price investments.

Third quarter 2019 post sale gross margin of 41.6% was flat as compared to third quarter 2018 as a result of productivity and restructuring savings associated with our Project Own It transformation actions, which entirely offset the impact of lower revenues, including lower pricing on contract renewals.

Gross margins are expected to be negatively impacted in future periods as a result of an increase in the cost of our imported products from higher import tariffs. We are taking actions to mitigate the impact of these tariffs, such as raising prices on certain products, however, we currently estimate approximately $24 million cost impact from these higher tariffs in 2019, with a significant portion impacting the fourth quarter 2019.

Research, Development and Engineering Expenses (RD&E)

Third quarter 2019 RD&E as a percentage of revenue of 4.5% increased by 0.2-percentage points as compared to third quarter 2018, primarily due to lower revenues as expenses were essentially flat year-over-year.

RD&E of $100 million decreased $2 million as compared to third quarter 2018 and reflected cost productivity and restructuring savings from our Project Own It transformation actions partially offset by the timing of investments that started to ramp during the quarter.

Selling, Administrative and General Expenses (SAG)

SAG as a percentage of revenue of 23.3% decreased by 1.5-percentage points as compared to third quarter 2018, primarily reflecting the benefit from productivity and restructuring associated with our Project Own It transformation actions.

SAG of $513 million decreased by $70 million as compared to third quarter 2018, reflecting productivity and restructuring savings associated with our Project Own It transformation actions as well as lower compensation and incentives (consistent with lower revenues); the decrease also includes the favorable impacts of approximately $6 million from translation currency and $5 million from higher costs in the prior year associated with the termination of certain IT projects. Bad debt expense of $13 million was $3 million higher compared to third quarter 2018 and on a trailing twelve-month basis (TTM) remained at less than one percent of total receivables.

Restructuring and Related Costs

During the second half of 2018, we started our Project Own It transformation initiative. The primary goal of this initiative is to improve productivity by driving end-to-end transformation of our processes and systems to create greater focus, speed, accountability and effectiveness and to reduce costs. We incurred restructuring and related costs of $27 million for the third quarter 2019 primarily related to costs to implement initiatives under our business transformation projects including Project Own It.

The following is a breakdown of those costs:

___________________

1. Reflects headcount reductions of approximately 150 employees worldwide.
2. Primarily related to the exit and abandonment of leased and owned facilities. The charge includes the accelerated write-off of $2 million for leased right-of-use asset balances net of any potential sublease income and other recoveries.
3. Primarily include additional costs incurred upon the exit from our facilities including decommissioning costs and associated contractual termination costs.
4. Reflects net reversals for changes in estimated reserves from prior period initiatives as well as $4 million in favorable adjustments from the early termination of prior period impaired leases.
5. Includes retention related severance and bonuses for employees expected to continue working beyond their minimum notification period before termination.
6. Reflects severance and other related costs we are contractually required to pay on employees transferred (approximately 2,200 employees) as part of the shared service arrangement entered into with HCL Technologies.
7. Represents professional support services associated with our business transformation initiatives.

Third quarter 2019 actions impacted several functional areas, with approximately 50% focused on gross margin improvements, approximately 45% focused on SAG reductions, and the remainder focused on RD&E optimization.

The implementation of our Project Own It initiatives as well as other business transformation initiatives is expected to result in significant cost savings in 2019 and future years. However, expected savings associated with these initiatives may be offset to some extent by business disruption during the implementation phase and until the initiatives are fully implemented and stabilized.

Third quarter 2018 restructuring and related costs of $29 million included $40 million of severance costs related to headcount reductions of approximately 900 employees worldwide and $1 million of lease cancellation costs. These costs were partially offset by $12 million of net reversals for changes in estimated reserves from prior period initiatives. Third 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.

The restructuring reserve balance as of September 30, 2019 for all programs was $57 million, which is expected to be paid over the next twelve months.

Transaction and Related Costs, Net

There were $4 million of Transaction and related costs, net recognized during third quarter 2019 as compared to a $33 million credit in third quarter 2018 which was primarily associated with recoveries from insurance and other vendors. These expenses primarily relate to on-going costs for litigation associated with the terminated Fuji transaction, which are expected to continue. We also continue to pursue recoveries from insurance carriers and other parties for costs and expenses related to the terminated Fuji transaction and related shareholder litigation and therefore additional recoveries and adjustments may be recorded in future periods, when finalized.

Amortization of Intangible Assets

Third quarter 2019 Amortization of intangible assets of $9 million decreased by $3 million compared to third quarter 2018 as a result of the write-off of trade names in prior periods associated with our realignment and consolidation of certain XBS sales units as part of Project Own It transformation actions.

Worldwide Employment

Worldwide employment was approximately 27,600 as of September 30, 2019 and decreased by approximately 4,800 from December 31, 2018. The reduction resulted from net attrition (attrition net of gross hires), of which a large portion is not expected to be backfilled, as well as the impact of organizational changes including employees transferred as part of the shared services arrangement entered into with HCL Technologies earlier this year.

Other Expenses, Net

Non-financing interest expense

Third quarter 2019 non-financing interest expense of $27 million was $1 million lower than third quarter 2018. When combined with financing interest expense (Cost of financing), total interest expense decreased by $1 million from third quarter 2018 primarily due to a lower debt balance.

Non-service retirement-related costs

Third quarter 2019 non-service retirement-related costs were $35 million lower than third quarter 2018, primarily driven by the favorable impact of a 2018 amendment to our U.S. Retiree Health Plan and lower losses from pension settlements in the U.S.

Gains on sales of businesses and assets

Third quarter 2019 gains on sales of businesses and assets were $16 million higher than third quarter 2018, reflecting the sale of non-core business assets.

Litigation matters

Third quarter 2019 litigation matters were $9 million lower than third quarter 2018, reflecting the favorable resolution of certain litigation matters in third quarter 2019.

Contract termination costs – IT services

Contract termination costs – IT services was an $8 million credit in third quarter 2019 reflecting an adjustment to a $43 million penalty recorded in fourth quarter 2018, associated with the termination of an IT services arrangement.

Income Taxes

Third quarter 2019 effective tax rate was 28.7%. On an adjusted¹ basis, third quarter 2019 effective tax rate was 26.5%. These rates were higher than the U.S. federal statutory tax rate of 21% primarily due to state taxes and the geographical mix of profits. The adjusted¹ effective tax rate excludes the tax impacts associated with the following charges: Restructuring and related costs, Amortization of intangible assets, Transaction and related costs, net as well as non-service retirement-related costs and other discrete, unusual or infrequent items as described in our Non-GAAP Financial Measures section.

Third quarter 2018 effective tax rate was 74.0% and included an additional charge of $95 million related to a change in the provisional estimated impact from the 2017 Tax Cuts Jobs Act (the “Tax Act”). On an adjusted¹ basis, third quarter 2018 effective tax rate was 24.5%. This rate was higher than the U.S. federal statutory tax rate of 21% primarily due to state taxes and the geographical mix of profits. In addition to excluding the impact of the Tax Act, the adjusted¹ effective tax rate excludes the tax impacts associated with the following charges: Restructuring and related costs, Amortization of intangible assets, Transaction and related costs, net, 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.

______________

1. Refer to the Effective Tax Rate reconciliation table in the “Non-GAAP Financial Measures” section.

Equity in Net Income of Unconsolidated Affiliates

Equity in net income of unconsolidated affiliates primarily reflects our 25% share of Fuji Xerox net income. Third quarter 2019 equity income of $58 million increased $15 million compared to third quarter 2018, primarily reflecting savings from Fuji Xerox restructuring and the benefit of $7 million of lower year-over-year charges related to our share of Fuji Xerox after-tax restructuring and other charges in the prior year.

Net Income

Third quarter 2019 net income attributable to Xerox Holdings was $221 million, or $0.96 per diluted share. On an adjusted¹ basis, net income attributable to Xerox Holdings was $248 million, or $1.08 per diluted share. Third quarter 2019 adjustments to net income included Restructuring and related costs, Amortization of intangible assets, Transaction and related cost, net as well as non-service retirement-related costs and other discrete, unusual or infrequent items as described in our Non-GAAP Financial Measures section.

Third quarter 2018 net income attributable to Xerox Holdings was $89 million, or $0.34 per diluted share, which included an estimated non-cash charge of $95 million or $0.37 per diluted share associated with the Tax Act. On an adjusted¹ basis, net income attributable to Xerox Holdings was $222 million, or $0.85 per diluted share. Third quarter 2018 adjustments to net income included Restructuring and related costs, Amortization of intangible assets, Transaction and related costs, net as well as non-service retirement-related costs and other discrete, unusual or infrequent items as described in our Non-GAAP Financial Measures section.

Click here to read the rest!

SOURCE Xerox

Chester Carlson and Xerography