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XRX > SEC Filings for XRX > Form 10-Q on 1-May-2013All Recent SEC Filings

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Form 10-Q for XEROX CORP


1-May-2013

Quarterly Report


ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis (MD&A) is intended to help the reader understand the results of operations and financial condition of Xerox Corporation. MD&A is provided as a supplement to, and should be read in conjunction with, our Condensed Consolidated Financial Statements and the accompanying notes.
Throughout this document, references to "we," "our," the "Company," and "Xerox" refer to Xerox Corporation and its subsidiaries. References to "Xerox Corporation" refer to the stand-alone parent company and do not include its subsidiaries.
To understand the trends in the business, we believe that it is helpful to analyze the impact of changes in the translation of foreign currencies into U.S. dollars on revenue and expenses. We refer to this analysis as "currency impact" or "the impact from currency." This includes translating the most recent financial results of operations using foreign currency of the earliest period presented. Currencies for our developing market countries (Latin America, Brazil, the Middle East, India, Eurasia and Central-Eastern Europe) are reflected at actual exchange rates for all periods presented, since these countries generally have volatile currency and inflationary environments, and our operations in these countries have historically implemented pricing actions to recover the impact of inflation and devaluation. We do not hedge the translation effect of revenues or expenses denominated in currencies where the local currency is the functional currency.

Overview
Total revenue of $5.4 billion for the three months ended March 31, 2013 decreased 3% from the prior year with no impact from currency. Services segment revenues increased 4% primarily reflecting growth in our BPO/ITO outsourcing service offerings. Segment margin of 9.3% was flat as compared to the prior year as cost savings offset mix and pricing. Signings growth increased 64% as compared to the prior year and the renewal rate for our BPO/ITO contracts was 89%, within the expected range of 85% - 90%. Document Technology segment revenues declined by 9% reflecting the continued weak macro-economic environment and the transition to new products as well as an increasing migration of customers to Xerox managed print services. Segment margin of 8.8% decreased by 1.7 percentage points as compared to the prior year reflecting lower revenues and increased costs associated with the launch of new products.
Net income attributable to Xerox for the three months ended March 31, 2013 was $296 million and included $51 million of after-tax amortization of intangibles as well as a $23 million after-tax credit from litigation matters and a $19 million income tax benefit from the Taxpayer Relief Act. Net income attributable to Xerox for the three months ended March 31, 2012 was $269 million and included $50 million of after-tax amortization of intangibles.
We used $87 million in operating cash during the first quarter 2013 as compared to a use of $15 million in the first quarter 2012. Cash used in investing activities of $153 million reflects capital expenditures of $107 million and acquisitions of $53 million. Cash used in financing activities was $1 million, as $58 million for dividends were partially offset by a $40 million increase in Commercial Paper and other debt of $25 million.
In summary, our Services segment results were steady as compared to the prior year. Services signings were strong and the renewal rate for contracts was on target. In our Document Technology segment results were impacted by the transition to new products and continued market weakness. We remain focused on improving our cost infrastructure in both segments and plan on restructuring activities in the second quarter of $35 million.

Xerox 2013 Form 10-Q


Financial Review
Revenues
                                                                         Three Months Ended March 31,
(in millions)                              2013           2012        % Change     % of Total Revenue 2013     % of Total Revenue 2012
Equipment sales                        $      724     $      811       (11 )%                     14 %                        15 %
Annuity revenue                             4,632          4,692        (1 )%                     86 %                        85 %
Total Revenue                          $    5,356     $    5,503        (3 )%                    100 %                       100 %

Reconciliation to Condensed
Consolidated Statements of Income:
Sales                                  $    1,446     $    1,588
Less: Supplies and other sales               (528 )         (565 )
Less: Paper sales                            (194 )         (212 )
Equipment Sales                        $      724     $      811
Outsourcing, maintenance and rentals   $    3,793     $    3,767
Add: Financing                                117            148
Add: Supplies and other sales                 528            565
Add: Paper sales                              194            212
Annuity Revenue                        $    4,632     $    4,692

First quarter 2013 Total revenues decreased by 3% compared to the first quarter 2012, with no impact from currency, and reflected the following:
• Annuity revenue decreased by 1% compared to the first quarter 2012, with no impact from currency. Annuity revenue is comprised of the following:

? Outsourcing, maintenance and rentals revenue, which includes outsourcing revenue within our Services segment and maintenance revenue (including bundled supplies) and rental revenue, both primarily within our Document Technology segment. An increase of 1% was driven by an increase in outsourcing revenue in our Services segment, partially offset by a decline in maintenance revenue, due to moderately lower page volumes and revenue per page.

? Supplies and other sales, which includes unbundled supplies and other sales, primarily within our Document Technology segment. A decrease of 7% was driven by moderately lower supplies demand, as well as a lowering of channel inventories in the U.S.

? Paper sales, primarily within our Other segment, decreased by 8% from the first quarter 2012, driven by market pricing and lower activity.

? Financing revenue declined by 21% from the first quarter 2012. The 2012 sales of finance receivables drove approximately half of the total decline in 2013, while the remainder was driven by a decline in the volume of new finance receivables as a result of lower financed equipment sales in prior periods.

• Equipment sales revenue is reported primarily within our Document Technology segment and the document outsourcing business within our Services segment. Equipment sales revenue declined 11% as compared to the first quarter 2012, with no impact from currency. Declines were driven by the weak macro-environment as well as the timing of our mid-range product refresh. Entering the second quarter 2013, order backlog is up year over year, resulting from our first quarter 2013 product announcements in the mid-range and entry production color spaces. Consistent with prior quarters, price declines were in the range of 5% to 10%.

Additional analysis of the change in revenue for each business segment is included in the "Segment Review" section.

Xerox 2013 Form 10-Q


Costs, Expenses and Other Income
Summary of Key Financial Ratios

                           Three Months Ended
                                March 31,
                            2013         2012      Change
Total Gross Margin          30.0 %        31.0 %    (1.0 ) pts
RD&E as a % of Revenue       2.9 %         3.1 %    (0.2 ) pts
SAG as a % of Revenue       19.7 %        19.4 %     0.3   pts
Operating Margin(1)          7.4 %         8.5 %    (1.1 ) pts
Pre-tax Income Margin        5.7 %         5.7 %       -   pts

Operating Margin
First quarter 2013 operating margin1 of 7.4% decreased 1.1-percentage points as compared to the first quarter 2012. This decrease was driven primarily by an increase of SAG expenses as a percent of revenue in our Document Technology segment as well as a decline in gross margin in our Services segment.
(1) Refer to the Operating Margin reconciliation table in the Non-GAAP Financial Measures section.

Gross Margins
Total Gross Margin
Gross margin of 30% decreased 1.0-percentage point as compared to the first quarter 2012. This decrease was driven by revenue mix within the Services segment, contract ramp within document outsourcing, as well as the continued increase of Services revenue as a percent of total revenue. Services Gross Margin
Services segment gross margin decreased by 0.7-percentage points as compared to the first quarter 2012. The decrease was driven by revenue mix within the segment and contract ramp within document outsourcing. Productivity improvement and restructuring savings more than offset the impact of price declines. Document Technology Gross Margin
Document Technology segment gross margin was flat as compared to the first quarter 2012 as cost improvements offset the impact of price declines. Research, Development and Engineering Expenses (RD&E)

                            Three Months Ended
                                March 31,
(in millions)                 2013            2012     Change
R&D                    $     126             $ 145    $  (19 )
Sustaining engineering        28                28         -
Total RD&E Expenses    $     154             $ 173    $  (19 )

Xerox 2013 Form 10-Q


First quarter 2013 RD&E as a percentage of revenue of 2.9% decreased 0.2-percentage points from the first quarter 2012. In addition to lower spending and improved productivity, this decrease was driven by the positive mix impact of the continued growth in Services revenue, which historically has a lower RD&E as a percentage of revenue.

RD&E of $154 million was $19 million lower than the first quarter 2012, reflecting the impact of restructuring and productivity improvements. Innovation continues to be a core strength and we continue to invest at levels that enhance our innovation, particularly in services, color and software. Xerox R&D is strategically coordinated with Fuji Xerox. Selling, Administrative and General Expenses (SAG) SAG as a percentage of revenue of 19.7% increased 0.3-percentage points from the first quarter 2012. The increase was driven by lower than expected revenue in our Document Technology segment reflecting product launch timing and overall market conditions. This was partially offset by restructuring benefits, productivity improvements and the positive mix impact from the continued growth in Services revenue, which historically has a lower SAG as a percentage of revenue.

SAG of $1,057 million was $11 million lower than the first quarter 2012 and included a $1 million favorable impact from currency for the quarter. SAG expenses reflect the following:
• $19 million decrease in selling expenses, driven primarily by benefits from restructuring and productivity improvements, partially offset by the impact of acquisitions and investments in our mid-range product launch.

• $7 million increase in general and administrative expenses, as restructuring savings and productivity improvements were more than offset by the impact of acquisitions.

• $1 million increase in bad debt expenses to $25 million. Small increases in the U.S. and developing markets were partially offset by a decrease in Europe. First quarter 2013 bad debt expense remained at less than one percent of receivables.

Restructuring and Asset Impairment Charges During the first quarter 2013, we recorded net restructuring and asset impairment credits of $7 million, primarily resulting from net reversals and adjustments in estimated reserves from prior period initiatives.
The restructuring reserve balance as of March 31, 2013, for all programs was $86 million, of which approximately $80 million is expected to be spent over the next twelve months.
We expect to incur additional restructuring charges of approximately $35 million in the second quarter of 2013 for actions and initiatives which have not yet been finalized.

During the first quarter 2012, we recorded net restructuring and asset impairment charges of $17 million, which included approximately $22 million of severance costs related to headcount reductions of approximately 500 employees primarily in North America and $2 million of asset impairment charges. These costs were partially offset by $7 million of net reversals for changes in estimated reserves from prior period initiatives.

Refer to Note 9 - Restructuring Programs, in the Condensed Consolidated Financial Statements for additional information regarding our restructuring programs.
Amortization of Intangible Assets
During the first quarter 2013 we recorded $83 million of expense related to the amortization of intangible assets.

Xerox 2013 Form 10-Q


Worldwide Employment
Worldwide employment of 143,200 at March 31, 2013 decreased by approximately
4,400 from December 31, 2012, primarily due to restructuring-related actions and
attrition outpacing hiring.
Other Expenses, Net

                                           Three Months Ended
                                               March 31,
(in millions)                              2013          2012
Non-financing interest expense          $    61       $    56
Interest income                              (2 )          (3 )
Gains on sales of businesses and assets       -            (1 )
Currency gains, net                          (4 )           -
Litigation matters                          (37 )          (1 )
Loss on sales of accounts receivables         4             6
Deferred compensation investment gains       (6 )          (7 )
All other expenses, net                      (1 )           5
Total Other Expenses, Net               $    15       $    55

Note: Total Other Expenses, Net are included in the Other segment. Non-Financing Interest Expense: First quarter 2013 non-financing interest expense of $61 million was $5 million higher than first quarter 2012, driven by an increase in the core debt balance. When combined with financing interest expense (cost of financing), total interest expense declined by $5 million from the first quarter 2012, driven by a lower total debt balance.
Litigation Matters: Litigation matters of $(37) million reflects the benefit resulting from a reserve reduction related to recent litigation developments. Income Taxes

First quarter 2013 effective tax rate was 17.0%. On an adjusted basis1, the first quarter 2013 tax rate was 21.6%, which was lower than the U.S. statutory tax rate primarily due to foreign tax credits resulting from anticipated dividends and other foreign transactions and the retroactive tax benefits from the American Taxpayer Relief Act of 2012 tax law change of approximately $19 million.

First quarter 2012 effective tax rate was 24.6%. On an adjusted basis1, first quarter 2012 tax rate was 27.6%, which was lower than the U.S. statutory tax rate primarily due to foreign tax credits resulting from anticipated dividends and other foreign transactions as well as net tax benefits from the geographical mix of profits.

Xerox operations are widely dispersed. The statutory tax rate in most non-U.S. jurisdictions is lower than the combined U.S. and state tax rate. The amount of income subject to these lower foreign rates relative to the amount of U.S. income will impact our effective tax rate. However, no one country outside of the U.S. is a significant factor to our overall effective tax rate. Certain foreign income is subject to U.S. tax net of any available foreign tax credits. Our full-year effective tax rate includes a benefit of approximately 10 percentage points from these non-U.S. operations, which is comparable to 2012.

Xerox 2013 Form 10-Q


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. We anticipate that our effective tax rate for the remaining quarters of 2013 will be approximately 28%, excluding the effects of intangibles amortization and discrete events.
(1) Refer to the Effective Tax Rate reconciliation table in the Non-GAAP Financial Measures section.

Equity in Net Income of Unconsolidated Affiliates

                                                                    Three Months Ended
                                                                        March 31,
(in millions)                                                    2013                2012
Total equity in net income of unconsolidated affiliates   $             47     $            40
Fuji Xerox after-tax restructuring costs                                 4                   4

Equity in net income of unconsolidated affiliates primarily reflects our 25% share of Fuji Xerox net income. The increase in equity income reflects higher Fuji Xerox net income.
Net Income
First quarter 2013 net income attributable to Xerox was $296 million, or $0.23 per diluted share. On an adjusted basis1, net income attributable to Xerox was $347 million, or $0.27 per diluted share, which includes a benefit of approximately $0.02 per share resulting from a reserve reduction related to recent litigation developments. First quarter 2013 adjustments to net income reflect the amortization of intangible assets.

First quarter 2012 net income attributable to Xerox was $269 million, or $0.19 per diluted share. On an adjusted basis1, net income attributable to Xerox was $319 million, or $0.23 per diluted share. First quarter 2012 adjustments to net income reflect the amortization of intangible assets.
(1) Refer to the Net Income and EPS reconciliation table in the Non-GAAP Financial Measures section.

Other Comprehensive Income
Other comprehensive loss attributable to Xerox was $268 million in the first quarter 2013 as compared to income of 62 million in the first quarter 2012. The decrease of $330 million was primarily due to losses from the translation of our foreign currency denominated net assets in 2013 as compared to translation gains in 2012 which more than offset changes in the defined benefit plans. The translation losses are the result of a weakening of our major foreign currencies against the U.S. Dollar in the first quarter of 2013 as compared to a strengthening of those same currencies in the first quarter of 2012. See Note 13
- Employee Benefit Plans for additional information regarding the changes in our defined benefit plans.

Xerox 2013 Form 10-Q


Segment Review
                                   Three Months Ended March 31,
                        Total        % of Total        Segment        Segment
(in millions)          Revenue        Revenue       Profit (Loss)      Margin
2013
Services            $   2,920             55 %     $        273         9.3  %
Document Technology     2,135             40 %              187         8.8  %
Other                     301              5 %              (65 )     (21.6 )%
Total               $   5,356            100 %     $        395         7.4  %

2012
Services            $   2,821             51 %     $        263         9.3  %
Document Technology     2,338             43 %              245        10.5  %
Other                     344              6 %              (52 )     (15.1 )%
Total               $   5,503            100 %     $        456         8.3  %

Services
Our Services segment comprises three service offerings: Business Process
Outsourcing (BPO), Document Outsourcing (DO) and Information Technology
Outsourcing (ITO).
Revenue
                                        Three Months Ended
                                            March 31,
(in millions)                            2013         2012      Change
Business Processing Outsourcing      $   1,805      $ 1,745        3 %
Document Outsourcing                       788          780        1 %
Information Technology Outsourcing         376          332       13 %
Less: Intra-segment Elimination            (49 )        (36 )     36 %
Total Services Revenue               $   2,920      $ 2,821        4 %


_______________

Note:
• First quarter 2012 Business Process Outsourcing (BPO) and Document Outsourcing (DO) revenues have been restated by $108 million to reflect the transfer of the Communication & Marketing Services (CMS) business from DO to BPO in 2013. The revenue transfer for the remaining periods of 2012 were $114 million for the second quarter, $109 million for the third quarter and $119 million for the fourth quarter.

• ITO growth includes 1 point of growth from intercompany services which is eliminated in total services.

Xerox 2013 Form 10-Q


First quarter 2013 Services total revenue of $2,920 million increased 4% from the first quarter 2012, with no impact from currency.
• BPO revenue increased 3% and represented 61% of total Services revenue. BPO growth was driven by our government healthcare, healthcare payer and customer care businesses.

• DO revenue increased 1% and represented 27% of total Services revenue. DO growth was driven primarily by our new partner print services offerings.

• ITO revenue increased 13% and represented 12% of total Services revenue. ITO growth was driven by the continued revenue ramp on recent signings.

Segment Margin
First quarter 2013 Services segment margin of 9.3% was flat as compared to the first quarter 2012, as the decline in gross margin was offset by SAG reductions which included benefits from restructuring. Metrics
Pipeline
Our total Services sales pipeline grew 5% over the first quarter 2012. This sales pipeline includes the Total Contract Value (TCV) of new business opportunities that potentially could be contracted within the next six months and excludes business opportunities with estimated annual recurring revenue in excess of $100 million.
Signings
Signings are defined as estimated future revenues from contracts signed during the period, including renewals of existing contracts. Signings were as follows:

                  Three Months Ended
(in billions)       March 31, 2013
BPO              $                2.8
DO                                0.8
ITO                               0.1
Total Signings   $                3.7

Signings increased 64% as compared to the first quarter 2012. Signings on a trailing twelve month basis declined 11% in relation to the comparable prior year period. The above DO signings figures represent Enterprise signings only and do not include signings from our partner print services offerings. Note: TCV is the estimated total revenue for future contracts for the pipeline or signed contracts for signings, as applicable. Renewal Rate (BPO and ITO)
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 on which a renewal decision was made during the period. The first quarter 2013 contract renewal rate for BPO and ITO contracts was 89%, at the high end or our target range of 85% - 90%.

Xerox 2013 Form 10-Q


Document Technology
Our Document Technology segment includes the sale of products and supplies, as
well as the associated maintenance and financing of those products. Document
Technology revenue excludes the impact of growth in the Xerox document
outsourcing business.
Revenue
                      Three Months Ended
                           March 31,
(in millions)           2013           2012     Change
Equipment sales   $      597         $   679     (12 )%
Annuity revenue        1,538           1,659      (7 )%
Total Revenue     $    2,135         $ 2,338      (9 )%

First quarter 2013 Document Technology revenue of $2,135 million decreased 9% from the first quarter 2012, with no impact from currency. Document Technology revenue excludes the impact of growth in Document Outsourcing. Inclusive of Document Outsourcing, first quarter 2013 aggregate document-related revenue decreased 6% from the first quarter 2012. Document Technology segment revenue results included the following:
• Equipment sales revenue decreased by 12%. This decline was driven by the weak macro-environment as well as the timing of our mid-range product refresh. Price declines were in the historical 5% to 10% range.

• Annuity revenue decreased by 7%, driven by a modest decline in total pages and revenue per page, the continued migration of customers to our partner print services offering (included in our Services segment) and a decline in financing revenue.

• Document Technology revenue mix was 22% entry, 58% mid-range and 20% high-end, consistent with recent quarters.

We expect equipment revenue to continue to be pressured in 2013 and therefore, total revenue declines are expected to be down mid-single digits for the Document Technology segment.
Segment Margin
First quarter 2013 Document Technology segment margin of 8.8% decreased by 1.7-percentage points from the first quarter 2012. Gross margin was flat as compared to first quarter 2012, as productivity and restructuring offset the impact of price declines. SAG as a percent of revenue was negatively impacted by lower than expected revenue driven by product launch timing and overall market conditions.

Total Installs (Technology and Document Outsourcing1) Install activity includes installations for document outsourcing and Xerox-branded products shipped to Global Imaging Systems (GIS). Details by product groups is shown below:
Entry
Installs for the first quarter 2013:
• 16% increase in color multifunction devices driven by demand for the recently introduced WorkCentre® 6015, WorkCentre® 6605 and ColorQube 8700/8900.

• 6% increase in color printers driven by demand for the recently launched Phaser 6600 family of products as well as an increase in sales to OEM partners..

• 22% decrease in black-and-white multifunction devices driven by declines in all geographies.

Xerox 2013 Form 10-Q


Mid-Range
Installs for the first quarter 2013 :
• 4% decrease in installs of mid-range color devices.

• 7% decrease in installs of mid-range black-and-white devices.

We expect to see the positive impact of our late first quarter 2013 product refresh beginning in the second quarter 2013.

High-End
Installs for the first quarter 2013:
• 44% increase in installs of high-end color systems driven by growth across several product areas, including Entry Production Color and iGen, as we . . .

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