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XRX > SEC Filings for XRX > Form 10-Q on 1-May-2014All Recent SEC Filings

Show all filings for XEROX CORP

Form 10-Q for XEROX CORP


1-May-2014

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
First quarter 2014 results reflect the benefits of our diversified portfolio of businesses as well as improved performance across a number of areas including Document Technology, Document Outsourcing and Commercial Business Processing Outsourcing (BPO), including Commercial Healthcare. These improvements were partially offset by challenges in our Government Healthcare business. Total revenue of $5.1 billion for the three months ended March 31, 2014 declined 2% from the prior year with no impact from currency. Services segment revenues were flat as compared to the prior year as growth in Document Outsourcing (DO) and Information Technology Outsourcing (ITO) was offset by lower BPO revenue. Services segment revenues represent 57% of total revenues. Services segment margin of 8.6% decreased 0.7-percentage points as compared to the prior year primarily due to incremental costs associated with the implementation of our new Medicaid and health insurance exchange platforms. Document Technology segment revenues declined by 4% with a 1% positive impact from currency. The decline reflects the continued migration of customers to Xerox managed print services (included in our Services segment), weakness in developing markets and price declines as well as the impacts from the prior period sales of finance receivables. Document Technology segment margin of 12.2% increased by 3.4-percentage points as compared to the prior year, reflecting the benefits from productivity improvements and restructuring, lower pension expense and favorable currency impacts.
Net income from continuing operations attributable to Xerox for the three months ended March 31, 2014 was $279 million and included $52 million of after-tax amortization of intangibles. Net income from continuing operations attributable to Xerox for the three months ended March 31, 2013 was $293 million and included $51 million of after-tax amortization of intangibles.
Cash flow from operations was $286 million for the three months ended March 31, 2014, as compared to an $87 million use in the prior year period. The increase reflects improvements from accounts receivables and accounts payables, in part reflecting timing, as well as an improvement in inventory due to a higher level of inventory in 2013 related to our ConnectKey product launch. Cash used in investing activities of $120 million reflects capital expenditures of $103 million and acquisitions of $54 million partially offset by $33 million of proceeds from the sale of surplus real estate. Cash used in financing activities was $349 million, reflecting $74 million for dividends and $275 million for share repurchases.
As a result of the slower than anticipated start in Services revenue, we expect full year 2014 revenue in the range of flat to slightly down with contributions from acquisitions coming later in the year. Full year 2014 earnings are expected to be impacted by a lower than previously expected Services segment margin partially offset by a modest upside in Document Technology segment margin and a lower full-year tax rate. We will continue to improve our cost infrastructure and align our investments and capital consistent with expected market opportunities.

Xerox 2014 Form 10-Q


Financial Review

Revenues
                                      Three Months Ended                              Three Months Ended
                                           March 31,                                      March 31,
                                                                                 % of Total       % of Total
(in millions)                         2014           2013         % Change      Revenue 2014     Revenue 2013
Equipment sales                   $      715      $     724           (1 )%            14 %             14 %
Annuity revenue                        4,406          4,478           (2 )%            86 %             86 %
Total Revenue                     $    5,121      $   5,202           (2 )%           100 %            100 %
Reconciliation to Condensed
Consolidated Statements of
Income:
Sales                             $    1,272      $   1,293           (2 )%
Less: Supplies, paper and other
sales                                   (557 )         (569 )         (2 )%
Equipment Sales                   $      715      $     724           (1 )%
Outsourcing, maintenance and
rentals                           $    3,749      $   3,792           (1 )%
Add: Supplies, paper and other
sales                                    557            569           (2 )%
Add: Financing                           100            117          (15 )%
Annuity Revenue                   $    4,406      $   4,478           (2 )%

First quarter 2014 Total revenues decreased 2% as compared to the first quarter 2013, with no impact from currency, and reflected the following:
Annuity revenue decreased 2% as compared to the first quarter 2013, with no impact from currency. Annuity revenue is comprised of the following:

Outsourcing, maintenance and rentals revenue of $3,749 million includes outsourcing revenue within our Services segment and maintenance revenue (including bundled supplies) and rental revenue, both primarily within our Document Technology segment.The decrease of 1% was primarily driven by an decrease in the Document Technology segment.

Supplies, paper and other sales of $557 million includes unbundled supplies and other sales, primarily within our Document Technology segment. The decrease of 2% was driven by moderately lower supplies demand.

Financing revenue is generated from financed sale transactions primarily within our Document Technology segment. The decrease of 15% reflects a lower finance receivable balance primarily as a result of prior period sales of finance receivables and lower originations due to decreased equipment sales. See "Sales of Finance Receivables" section for further discussion.

Equipment sales revenue is reported primarily within our Document Technology segment and the document outsourcing business within our Services segment. Equipment sales revenue decreased 1% as compared to the first quarter 2013, including a 1-percentage point positive impact from currency. Benefits from product introductions and a positive mix impact were more than offset by lower sales in developing markets and overall price declines ranging from 5% to 10%, which is consistent with prior periods.

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

Xerox 2014 Form 10-Q


Costs, Expenses and Other Income
Summary of Key Financial Ratios
                           Three Months Ended
                                March 31,
                            2014         2013        Change
Total Gross Margin          30.2 %        30.5 %   (0.3) pts
RD&E as a % of Revenue       2.8 %         3.0 %   (0.2) pts
SAG as a % of Revenue       18.8 %        20.0 %   (1.2) pts
Operating Margin(1)          8.6 %         7.5 %     1.1 pts
Pre-tax Income Margin        5.7 %         5.8 %   (0.1) pts

Operating Margin

First quarter 2014 operating margin1 of 8.6% increased 1.1-percentage points as compared to the first quarter 2013, driven primarily by a 1.4-percentage point improvement in operating expenses as a percent of revenue partially offset by a decline in gross margin of 0.3-percentage points. This operating margin improvement reflects continued productivity and restructuring benefits partially offset by pressure on Services margins from higher government healthcare platform expenses and the run-off of the student loan business. As anticipated, gross margin, SAG and RD&E benefited from lower year-over-year pension expense and settlement losses and we expect these benefits to continue throughout 2014, but at a lower amount than in the first quarter.
(1)Refer to the Operating Margin reconciliation table in the Non-GAAP Financial Measures section. Gross Margins

Total gross margin for the first quarter 2014 of 30.2% decreased 0.3-percentage points as compared to the first quarter 2013. While the Document Technology segment gross margin increased 1.2-percentage points, a decrease of 0.7-percentage points in the Services segment gross margin, along with the impact of a higher mix of Services revenue, resulted in the overall decrease in gross margin.
Research, Development and Engineering Expenses (RD&E)

                            Three Months Ended
                                March 31,
(in millions)                 2014            2013     Change
R&D                    $     113             $ 126    $  (13 )
Sustaining engineering        31                28         3
Total RD&E Expenses    $     144             $ 154    $  (10 )

First quarter 2014 RD&E as a percentage of revenue of 2.8% was lower by 0.2-percentage points from the first quarter 2013. Benefits from the higher mix of Services revenue (which historically has lower RD&E as a percentage of revenue), lower spending and productivity improvements exceeded the overall revenue decline on a percentage basis.

RD&E of $144 million was $10 million lower than the first quarter 2013, 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 18.8% decreased 1.2-percentage points from the first quarter 2013. The decrease was driven primarily by the higher mix of Services revenue (which historically has lower SAG as a percentage of revenue), restructuring and productivity improvements, lower compensation and benefit related expenses and lower bad debt expense. The net reduction in SAG spending exceeded the overall revenue decline on a percentage basis.

Xerox 2014 Form 10-Q


SAG of $961 million was $79 million lower than the first quarter 2013. This included a $3 million unfavorable impact from currency for the quarter. SAG expenses reflect the following:
$32 million decrease in selling expenses.

$37 million decrease in general and administrative expenses.

$10 million decrease in bad debt expenses to $14 million, primarily due to a recovery against a prior period write-off. Bad debt expense for the quarter remained at less than one percent of receivables.

Restructuring and Asset Impairment Charges During the first quarter 2014, we recorded net restructuring and asset impairment charges of $27 million, which included approximately $28 million of severance costs related to headcount reductions of approximately 1,250 employees worldwide, $1 million of lease cancellation costs and $4 million of asset impairments. Included within these amounts are approximately $4 million of severance costs and asset impairments associated with the decision to shut down a Services business in Latin America. These costs were partially offset by $6 million of net reversals for changes in estimated reserves from prior period initiatives.

During the first quarter 2013, we recorded net restructuring and asset impairment credits of $8 million, primarily resulting from net reversals and adjustments in estimated reserves from prior period initiatives. The restructuring reserve balance as of March 31, 2014, for all programs was $102 million, of which approximately $96 million is expected to be spent over the next twelve months.
We expect to incur additional restructuring charges of approximately $0.02 per diluted share in the second quarter of 2014, for actions and initiatives which have not yet been finalized.

Refer to Note 10 - Restructuring Programs, in the Condensed Consolidated Financial Statements for additional information regarding our restructuring programs.
Worldwide Employment
Worldwide employment of approximately 141,400 at March 31, 2014 decreased by approximately 1,700 from December 31, 2013, primarily due to restructuring-related actions and normal attrition outpacing hiring and the impact of acquisitions.

Other Expenses, Net
                                           Three Months Ended
                                               March 31,
(in millions)                              2014          2013
Non-financing interest expense          $    64       $    61
Interest income                              (2 )          (2 )
Gains on sales of businesses and assets     (30 )           -
Currency losses (gains), net                  1            (4 )
Litigation matters                           (1 )         (37 )
Loss on sales of accounts receivable          4             4
Deferred compensation investment gains       (2 )          (6 )
All other expenses, net                       6             1
Total Other Expenses, Net               $    40       $    17

Note: Total Other Expenses, Net with the exception of Deferred compensation investment gains are included in the Other segment. Deferred compensation investment gains are included in the Services segment together with the related deferred compensation expense.
Non-Financing Interest Expense: Non-financing interest expense for the three months ended March 31, 2014 of $64 million was $3 million higher than the prior year comparable period. However, when non-financing interest expense is combined with financing interest expense (cost of financing), total company interest expense declined by $4 million from the prior year comparable period, primarily driven by a lower average debt balance partially offset by a moderately higher average cost of debt.

Xerox 2014 Form 10-Q


Gains on Sales of Businesses and Assets: Gains on sales of businesses and assets in the first quarter 2014 was primarily the result of a $30 million gain on the sale of a surplus facility in Latin America.
Litigation Matters: Litigation matters for the three months ended March 31, 2013 of $(37) million primarily reflects the benefit resulting from a reserve reduction related to litigation developments in the first quarter 2013. Income Taxes

First quarter 2014 effective tax rate was 16.8%. On an adjusted basis1, the first quarter 2014 tax rate was 21.6%, which was lower than the U.S. statutory tax rate primarily due to a net benefit of approximately $33 million resulting from the redetermination of certain unrecognized tax positions upon conclusion of several audits as will as foreign tax credits from anticipated dividends.

The effective tax rate for the three months ended March 31, 2013 was 16.7%. On an adjusted basis1 the tax rate for the three months ended March 31, 2013 was 21.4%. The adjusted tax rates for the three months were 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.

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 2013.

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. Excluding the effects of intangibles amortization, we anticipate that our effective tax rate for the remaining quarters of 2014 will be approximately 25% to 27% and for the full year we anticipate it will be approximately 24% to 26%.
(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)                                               2014                2013
Total equity in net income of unconsolidated
affiliates                                           $             42     $            47
Fuji Xerox after-tax restructuring costs included
in equity income                                                    3                   4

Equity in net income of unconsolidated affiliates primarily reflects our 25% share of Fuji Xerox net income. The decrease in equity income is due primarily to negative translation currency impact. Net Income from Continuing Operations
First quarter 2014 net income from continuing operations attributable to Xerox was $279 million, or $0.23 per diluted share. On an adjusted basis1, net income from continuing operations attributable to Xerox was $331 million, or $0.27 per diluted share and reflects the adjustment for amortization of intangible assets.

First quarter 2013 net income from continuing operations attributable to Xerox was $293 million, or $0.23 per diluted share. On an adjusted basis1, net income from continuing operations attributable to Xerox was $344 million, or $0.27 per diluted share and reflected adjustments for the amortization of intangible assets.
(1) Refer to the Net Income and EPS reconciliation table in the Non-GAAP Financial Measures section.

Xerox 2014 Form 10-Q


Discontinued Operations

In 2013, in connection with our decision to exit from the Paper distribution business, we completed the sale of our North American (N.A.) and Western European Paper businesses. As a result of these transactions, we reported these paper-related operations as Discontinued Operations and reclassified their results from the Other segment to Discontinued Operations in 2013. We recorded a net pre-tax loss on disposal of $25 million in 2013 for the disposition of these businesses. In the first quarter 2014, we recorded income of $2 million in discontinued operations primarily representing adjustments to the loss on disposal recorded in 2013 due to changes in estimates.
Refer to Note 5 - Divestitures, in the Condensed Consolidated Financial Statements for additional information regarding discontinued operations. Net Income
First quarter 2014 net income attributable to Xerox was $281 million, or $0.23 per diluted share. First quarter 2013 net income attributable to Xerox was $296 million, or $0.23 per diluted share.
Other Comprehensive Income
First quarter 2014 Other comprehensive loss attributable to Xerox was $59 million as compared to a $268 million loss in the first quarter 2013. The decreased loss of $209 million was primarily due to a significant decrease in the losses from the translation of our foreign currency denominated net assets in the first quarter 2014 as compared to the first quarter 2013, which was only partially offset by net changes in our defined benefit plans. The lower amount of translation losses are primarily the result of a relatively flat movement of our major foreign currencies against the U.S. Dollar in the first quarter of 2014 as compared to a significant weakening in the first quarter of 2013. Refer to Note 14 - Employee Benefit Plans, in the Condensed Consolidated Financial Statements for additional information regarding net changes in our defined benefit plans.

Segment Review
                                                             Three Months Ended March 31,
                             Equipment Sales      Annuity         Total       % of Total        Segment         Segment
(in millions)                    Revenue          Revenue        Revenue       Revenue       Profit (Loss)       Margin
2014
Services                     $          116     $    2,807     $   2,923           57 %     $        251           8.6  %
Document Technology                     576          1,469         2,045           40 %              250          12.2  %
Other                                    23            130           153            3 %              (51 )       (33.3 )%
Total                        $          715     $    4,406     $   5,121          100 %     $        450           8.8  %

2013
Services                     $          100     $    2,820     $   2,920           56 %     $        273           9.3  %
Document Technology                     597          1,538         2,135           41 %              187           8.8  %
Other                                    27            120           147            3 %              (70 )       (47.6 )%
Total                        $          724     $    4,478     $   5,202          100 %     $        390           7.5  %

Services
Our Services segment comprises three service offerings: Business Process Outsourcing (BPO), Document Outsourcing (DO) and Information Technology Outsourcing (ITO).

Xerox 2014 Form 10-Q


Revenue
                                        Three Months Ended
                                            March 31,
(in millions)                            2014         2013      Change
Business Processing Outsourcing      $   1,767      $ 1,802      (2 )%
Document Outsourcing                       823          788       4  %
Information Technology Outsourcing         378          375       1  %
Less: Intra-segment elimination            (45 )        (45 )     -  %
Total Services Revenue               $   2,923      $ 2,920       -  %


_______________

Note: The 2013 BPO and ITO revenues have been revised to conform to the 2014 presentation of revenues.

First quarter 2014 Services total revenue of $2,923 million was 57% of total revenue and was essentially flat with the first quarter 2013, with no impact from currency.
BPO revenue decreased 2% and represented 59% of total Services revenue. The anticipated run-off of the student loan business had a 2% negative impact on BPO revenue growth in the quarter. Growth in the commercial and government healthcare businesses and in the commercial European BPO businesses was offset by lower volumes in portions of our customer care and government and transportation businesses.

First quarter 2014 BPO revenue mix across the major business areas was as follows: commercial 45%, government and transportation 25%. commercial healthcare 17% and government healthcare 13%.

DO revenue increased 4% and represented 28% of total Services revenue. DO growth was driven primarily by our partner print services offerings and improvement in Europe.

ITO revenue increased 1% and represented 13% of total Services revenue. ITO growth was driven by the continued revenue ramp from prior period signings and strength in our healthcare offerings. As expected, ITO growth continues to decelerate as compared to prior quarters

Considering the slower than anticipated start in Services revenue in the first quarter 2014 and the delayed contribution from acquisitions, we expect Services revenues will grow approximately 3% for the full year 2014. However, we expect revenue growth to average in the mid-single digits in the second half of the year reflecting a ramp in signings, renewals, a strong pipeline and acquisitions as well as the lessening impact from the run-off of the student loan business.

Segment Margin

First quarter 2014 Services segment margin of 8.6% decreased 0.7-percentage points from the first quarter 2013, driven primarily by a gross margin decline of 0.7-percentage points, as margin improvements in DO, commercial BPO and commercial healthcare were more than offset by decreased margin in government healthcare. Productivity improvements and restructuring benefits were not enough to offset higher expenses in the government healthcare business associated with the implementation of our Medicaid and Health Insurance Exchange platforms, the anticipated run-off of the student loan business and price declines that were consistent with prior periods. SAG and RD&E combined improved moderately overall and as a percent of revenue. The higher than anticipated government healthcare platform costs had a 0.7-percentage point negative impact on segment margin. Full year 2014 Services segment margin is expected to be flat to 0.4-percentage points lower as compared to full year 2013 segment margin of 9.8%, reflecting our first quarter 2014 performance and expectations for continued higher costs in government healthcare. Longer term, we expect to continue to take actions to improve our mix to higher value offerings while continuing to drive productivity and cost structure improvements.

Xerox 2014 Form 10-Q


Metrics
Pipeline: Our total Services sales pipeline grew 9% over the first quarter 2013.
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 millions)       March 31, 2014
. . .
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