Xerox's Q4 net income soars to US$375M from US$171M in year-ago period, net sales flat at US$6B; profit influenced by pre-tax gains of US$107M resulting from freeze on pension plans
January 25, 2012
– --Full-year 2011 GAAP EPS of 90 cents; adjusted EPS of $1.08, up 15 percent
--Q4 total revenue was flat; up 2 percent pro-forma for full-year 2011
--Q4 operating cash flow of $1.3 billion; $2 billion for full-year 2011
--Q4 stock repurchase of $392 million, $700 million for full-year 2011
Xerox Corporation announced today fourth-quarter 2011 results that include adjusted earnings per share of 33 cents, up 14 percent from fourth-quarter 2010, and $1.3 billion in operating cash flow. Adjusted EPS excludes 7 cents related to amortization of intangibles, resulting in GAAP EPS of 26 cents.
The company ended 2011 with full-year adjusted EPS up 15 percent, pro-forma revenue up 2 percent and operating cash flow of $2 billion. "Our performance reflects Xerox's operational discipline in delivering strong bottom-line results while scaling our services business and maintaining our leadership in document technology," said Ursula Burns, Xerox chairman and chief executive officer.
In the fourth quarter, total revenue of $6 billion was flat; revenue from the company's services business was up 6 percent, and revenue from its technology business was down 5 percent. Growth in services was driven by an 8 percent increase in both business process outsourcing and document outsourcing. Technology revenue, which represents the sale of document systems, supplies, technical service and financing of products, was significantly impacted by economic weakness in Europe.
"While operating in a challenging economic environment, we've grown our global market share for equipment revenue, further strengthening our industry leadership. Installs of Xerox equipment increased 8 percent in the fourth quarter. And, our managed print services are proving not only to be the industry standard but also an engine of growth for our business," said Burns.
"Signings for our diverse services offerings were up 15 percent in the fourth quarter," Burns added. "Our services portfolio remains a competitive advantage -- providing clients cost-efficient ways to run more productive enterprises and benefitting our business for the long term through a healthy base of recurring revenue."
The increase in services signings continues to put near-term pressure on gross margins as Xerox makes initial investments to implement new contracts. Fourth-quarter gross margin was 32.2 percent, and selling, administrative and general expenses improved to 19.3 percent of revenue. Fourth-quarter 2011 results include 2 cents from a curtailment gain net of restructuring expenses. Operating margin of 10 percent was down 0.4 points from fourth-quarter 2010.
Full-year 2011 results include:
-- Net income of $1.3 billion, adjusted net income of $1.6 billion, up 21 percent
-- Total revenue of $22.6 billion, up 5 percent, 2 percent pro-forma
-- Operating margin of 9.8 percent, up 0.3 points pro-forma
-- Operating cash flow of $2 billion
-- $700 million in share repurchase
The company expects first-quarter 2012 GAAP earnings of 17 to 20 cents per share. First-quarter adjusted EPS is expected to be 21 to 24 cents per share. Full-year 2012 GAAP earnings are expected to be 97 cents to $1.03 per share. Full-year adjusted earnings are expected to be $1.12 to $1.18 per share, including restructuring.
The company also expects $2 billion to $2.3 billion in cash flow from operations for 2012.
The Xerox board of directors recently increased the company's share repurchase authorization by $500 million to more than $1.3 billion. With this authorization, the company expects to repurchase between $900 million and $1.1 billion in Xerox shares during 2012.
Fourth quarter 2011 total revenues were flat compared to the fourth quarter 2010, with no impact from currency. Total revenues included the following:
-- Flat annuity revenue(1), including a 1-percentage point negative impact from currency. Annuity revenue(1) is comprised of the following: -- Service, outsourcing and rentals revenue of $3,816 million increased 2%, with no impact from currency. The increase was primarily driven by growth in business process outsourcing revenue in our Services segment.
-- Supplies, paper and other sales of $830 million decreased by 4%, with no impact from currency. This was driven by a decrease in paper revenue.
-- 3% decrease in equipment sales revenue, including a 1-percentage point negative impact from currency, driven primarily by a decline in Europe. An increase in total product installs in all three of our product groups was more than offset by price declines, which, consistent with prior quarters, were in the range of 5% to 10%, and lower product mix.
-- 2% increase in color revenue(2), with no impact from currency, reflects: -- 2% increase in color(2) annuity(1) revenue, with no impact from currency. The increase was driven by higher page volumes on color devices.
-- 2% increase in color(2) equipment sales revenue, with no impact from currency. Growth across all color product groups was offset by lower product mix and price declines.
An analysis of the change in revenue for each business segment is included in the "Segment Review" section.
Costs, Expenses and Other Income
Summary of Key Financial Ratios
The following is a summary of key financial ratios used to assess our performance:
Fourth quarter 2011 operating margin(3) of 10.0% decreased 0.4-percentage points as compared to the fourth quarter 2010. The decrease was primarily due to a decrease in gross margin, which was partially offset by expense reductions.
Gross margin of 32.2% decreased 1.4-percentage points, as compared to the fourth quarter 2010. The decrease was driven by the ramping of new services contracts, the impact of lower contract renewals from prior periods and the higher mix of Services revenue.
Services gross margin decreased by 2.2-percentage points as compared to the fourth quarter 2010, due primarily to the ramping of new services contracts within BPO and ITO and the impact of lower contract renewals from prior periods.
Technology gross margin decreased by 0.4-percentage points as compared to the fourth quarter 2010. The impact of price declines was partially offset by cost productivities and restructuring savings, reflecting continued focus on cost management.
Research, Development and Engineering Expenses ("RD&E")
Fourth quarter 2011 RD&E as a percent of revenue of 3.0% decreased 0.2-percentage points from the fourth quarter 2010. In addition to lower spending, the decrease was driven by the positive mix impact of the continued growth in Services revenue, which historically has a lower RD&E percent of revenue.
RD&E of $179 million was $14 million lower than the fourth quarter 2010, reflecting the impact of restructuring and productivity improvements. Innovation is one of our core strengths and we continue to invest at levels that enhance this core strength, particularly in color, software and services. Xerox R&D is strategically coordinated with Fuji Xerox.
Selling, Administrative and General Expenses ("SAG")
SAG as a percent of revenue of 19.3% decreased 0.7-percentage points from the fourth quarter 2010. The decrease was driven by spending reductions reflecting benefits from restructuring and productivity improvements in addition to the positive mix impact from the continued growth in Services revenue, which historically has a lower SAG percent of revenue.
SAG of $1,150 million was $46 million lower than the fourth quarter 2010. This included a $3 million favorable impact from currency for the quarter. SAG expenses reflect the following:
-- $66 million decrease in selling expenses, reflecting benefits from restructuring, productivity improvements and a decrease in brand advertising.
-- $8 million increase in general and administrative expenses, driven by the impact of acquisitions.
-- $12 million increase in bad debt expenses, as improvements in write-off trends in North America were more than offset by higher write-offs in southern Europe. Fourth quarter 2011 bad debt expense continued to remain at less than one percent of receivables.
Restructuring and Asset Impairment Charges
During the fourth quarter 2011, we recorded $61 million of net restructuring and asset impairment charges ($39 million after tax), which included the following:
-- $66 million for severance costs related to headcount reductions of approximately 1,000 employees primarily in North America across several functional areas.
-- $5 million of asset impairment losses from the disposition of two aircraft associated with the restructuring of our Corporate Aviation operations.
These costs were partially offset by $10 million of net reversals for changes in estimated reserves from prior period initiatives. The restructuring reserve balance as of December 31, 2011, for all programs was $123 million, of which approximately $116 million is expected to be spent over the next twelve months.
We anticipate additional restructuring initiatives of approximately $0.01-$0.02 per share for the first quarter of 2012.
In the fourth quarter 2010, we recorded $273 million of net restructuring and asset impairment charges, which included the following:
-- $264 million for severance costs related to headcount reductions of approximately 6,000 employees. The functional areas impacted by the actions include services, supply chain and manufacturing, back office administrative functions and research and development.
-- $11 million for lease termination costs.
-- $19 million loss associated with the sale of our Venezuelan operations. The loss primarily reflects the write off of our Venezuelan net assets including working capital and long-lived assets given the decision in the fourth quarter 2010 to transition to a distributor model for this market.
These costs were partially offset by $23 million of net reversals for changes in estimated reserves from prior period initiatives.
Amortization of Intangible Assets
During the fourth quarter 2011, we recorded $139 million of expense related to the amortization of intangible assets. This was $54 million higher than fourth quarter 2010 and was driven by the accelerated write-off of the ACS trade name as a result of the fourth quarter 2011 decision to discontinue its use in early 2012 and transition the services business to the "Xerox Services" trade name.
In December 2011, we amended all of our primary U.S. Defined Benefit Pension Plans for salaried employees. Our primary qualified plans had previously been amended to freeze the final average pay formulas within the plans as of December 31, 2012, but the cash balance service credit was expected to continue post December 31, 2012. The 2011 amendments now fully freeze benefit and service accruals after December 31, 2012 for these plans, including the related non-qualified plans. As a result of these plan amendments, we recognized a pre-tax curtailment gain of $107 million ($66 million after-tax), which represents the recognition of deferred gains from other prior year amendments ("prior service credits") as a result of the discontinuation ("freeze") of any future benefit or service accrual period. The amendments are not expected to materially impact 2012 pension expense.
Acquisition Related Costs
Acquisition related costs associated with our acquisition of ACS were $9 million in the fourth quarter 2010. These costs primarily represent incremental external costs directly related to the integration of ACS and Xerox.
Worldwide employment of 139,650 at December 31, 2011 increased approximately 3,100 from year-end 2010, primarily due to the impact of acquisitions.
Non-Financing Interest Expense
Fourth quarter 2011 non-financing interest expense of $56 million was $22 million lower than fourth quarter 2010 primarily due to the benefit of lower borrowing costs achieved as a result of refinancing existing debt and utilizing the commercial paper program.
Currency Losses (Gains), net
Fourth quarter 2011 currency losses (gains) were $10 million higher than fourth quarter 2010 due primarily to a prior year cumulative translation gain of $6 million that was recognized upon the repatriation of cash and liquidation of a foreign subsidiary.
Loss on Early Extinguishment of Liability
Fourth quarter 2010 loss on early extinguishment of liability of $15 million represents the loss associated with the redemption of senior and medium-term notes in the fourth quarter 2010 and reflects a call premium and the write-off of unamortized debt costs.
Fourth quarter 2011 effective tax rate was 22.8%. On an adjusted basis(3), fourth quarter 2011 tax rate was 26.3%, which was lower than the U.S. statutory tax rate primarily due to geographical mix of profits as well as a higher foreign tax credit benefit as a result of our decision to repatriate current year income from certain non U.S. subsidiaries.
Fourth quarter 2010 effective tax rate was 13.6%. On an adjusted basis(3), fourth quarter 2010 tax rate was 29.5%, which was lower than the U.S. statutory tax rate primarily due to geographical mix of profits and tax law changes.
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 2010.
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 2012 will be approximately 29%, excluding the effects of intangibles amortization and discrete events.
Equity in Net Income of Unconsolidated Affiliates
Equity in net income of unconsolidated affiliates, which primarily reflects our 25% share of Fuji Xerox net income, was $38 million, an increase of $12 million compared to fourth quarter 2010.
Fourth quarter 2011 equity income includes charges of $3 million related to our share of Fuji Xerox after-tax restructuring compared to $5 million of charges for the fourth quarter 2010.
Fourth quarter 2011 net income attributable to Xerox was $375 million, or $0.26 per diluted share. On an adjusted basis(3), net income attributable to Xerox was $462 million, or $0.33 per diluted share. Fourth quarter 2011 adjustments to net income include amortization of intangible assets.
Fourth quarter 2010 net income attributable to Xerox was $171 million, or $0.12 per diluted share. On an adjusted basis(3), net income attributable to Xerox was $417 million, or $0.29 per diluted share.
The Net Income and EPS reconciliation table in the Non-GAAP Financial Measures section contains the fourth quarter adjustments to net income.
The calculations of basic and diluted earnings per share are included as Appendix I. See Non-GAAP financial measures for calculation of adjusted EPS.
Refer to Appendix II for the reconciliation of Segment Profit to Pre-tax Income.
Our Services segment comprises three service offerings: Document Outsourcing ("DO"), Business Process Outsourcing ("BPO") and Information Technology Outsourcing ("ITO").
Fourth quarter 2011 Services total revenue of $2,864 million increased 6%from the fourth quarter 2010, with no impact from currency.
-- DO revenue increased 8%, with no impact from currency, and represented 33% of total Services revenue. Growth continued and was driven primarily by our new partner print services offerings as well as new signings.
-- BPO delivered growth of 8%and represented 55% of total Services revenue. BPO growth was driven by the healthcare payer, human resources services, business process solutions and transportation solutions businesses as well as the impacts from recent acquisitions.
-- ITO revenue decreased 6% and represented 12% of total Services revenue. The decline was driven by lower third-party equipment sales as well as the impact of lower contract renewals from prior periods.
Fourth quarter 2011 Services segment margin of 10.3% decreased 1.7-percentage points from fourth quarter 2010, due primarily to the decline in gross margin, which was driven by the ramping of new services contracts and the impact of lower contract renewals from prior periods.
Our total services sales pipeline, including synergy opportunities, grew 5% over the fourth quarter 2010. We have been able to maintain a significant pipeline, which has increased by approximately 50% from prior to the ACS acquisition, even with strong growth in signings. 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 are defined as estimated future revenues from contracts signed during the period, including renewals of existing contracts. Services signings were an estimated $4.2 billion in TCV for the quarter.
-- BPO signings of $1.5 billion TCV.
-- DO signings of $1.1 billion TCV.
-- ITO signings of $1.6 billion TCV.
Signings increased 15% from the fourth quarter 2010, driven by growth in the ITO and DO offerings. Signings on a trailing twelve month basis were flat in relation to the comparable prior year period, impacted by the cyclicality of large deals in prior quarters, particularly the California Medicaid signing in the first quarter 2010. Signings continued to trend positively, increasing sequentially for the third straight quarter.
Note: TCV is estimated total revenue for future contracts for pipeline or signed contracts for signings as applicable.
Our Technology segment includes the sale of products and supplies, as well as the associated technical service and financing of those products.
Fourth quarter 2011 Technology revenue of $2,712 million decreased 5% from the fourth quarter 2010, including a 1-percentage point negative impact from currency. Revenue results included the following:
-- 8% decrease in equipment sales revenue, with no impact from currency, driven primarily
by a decline in Europe reflecting the economic conditions in the Euro zone. An increase in total product installs in all three of our product groups was more than offset by price declines and product mix. Consistent with prior quarters, price declines were in the range of 5% to 10%. Technology revenue excludes increasing revenues in our document outsourcing offerings.
-- 3% decrease in annuity revenue(1) with a 1-percentage point negative impact from currency. An increase in supplies revenue was offset by a decline in pages, while revenue per page continued to increase.
-- Technology revenue mix was 21% entry, 57% mid-range and 22% high-end.
Fourth quarter 2011 Technology segment margin of 11.7% was flat compared to the fourth quarter 2010. Lower cost and expense from restructuring savings was offset by a decline in gross margin.
-- 6% increase in total black-and-white and color multifunction devices and color printers driven by demand for recent product introductions such as the WorkCentre(R) 3045 and the WorkCentre(R) 6015.
-- 27% increase in installs of mid-range color devices driven by strong demand for new products such as the WorkCentre(R) 7530/7535 and the Xerox Color 550/560 across all geographies. This growth has enabled market share gains in the fastest growing and most profitable segment of the office color market.
-- 6% increase in installs of mid-range black-and-white devices driven by strong demand for the recently launched WorkCentre(R) 5325/5330/5335 product.
-- 15% increase in installs of high-end color systems driven primarily by strong demand for the recently launched Xerox Color 770 and the DocuColor(TM) 8080. These products have improved our offerings in the Entry Production Color product category. In addition, installs of our market-leading Xerox Color 800 and 1000 continued to grow from the fourth quarter 2010.
-- 11% decrease in installs of high-end black-and-white systems.
Note: Install activity percentages include installations for Document Outsourcing and the Xerox-branded products shipped to GIS. "Entry", "Mid-Range" and "High-End" are defined in Appendix II.
Fourth quarter 2011 Other revenue of $388 million decreased 8%, with no impact from currency, due to a decline in paper sales, wide format systems and other supplies partially offset by an increase in revenue from patent sales and licensing (see below). Paper comprised approximately 54% of the fourth quarter 2011 Other segment revenue.
In the fourth quarter of 2011, we entered into an agreement with another company that included, among other items, the sale of certain patents and a cross-licensing of certain patents of each party, pursuant to which we received an up-front payment with the remaining amount payable in two equal annual installment payments. Consistent with our accounting policy for these transactions, revenue associated with this agreement will be recorded as earned and only to the extent of cash received. During the fourth quarter 2011, the Other segment included revenue and pre-tax income/segment profit of approximately $32 million and $26 million ($16 million after-tax), respectively, which is net of certain expenses paid in connection with this agreement. We expect to recognize additional revenue and pre-tax income/segment profit of approximately $12 million and $8 million ($5 million after-tax), respectively, in each of the next two years in the Other Segment related to this agreement.
Fourth quarter 2011 Other segment loss of $30 million decreased $36 million from the fourth quarter 2010, primarily driven by the increase from the patent sale and licensing as well as lower non-financing interest expense.
Cash Flows from Operating Activities
Net cash provided by operating activities was $1,278 million in the fourth quarter 2011. The $29 million decrease in cash from fourth quarter 2010 was primarily due to the following:
-- $50 million decrease from higher net income tax payments primarily due to refunds in the prior year.
-- $46 million decrease due to higher contributions to our defined pension benefit plans.
-- $42 million increase due to lower net accounts receivable reflecting improved collections in the quarter.
-- $19 million increase in pre-tax income before depreciation and amortization, restructuring and curtailment.
Cash Flows from Investing Activities
Net cash used in investing activities was $140 million in the fourth quarter 2011. The $76 million decrease in the use of cash from fourth quarter 2010 was primarily due to the following:
-- $37 million decrease due to lower capital expenditures (including internal use software).
-- $36 million decrease in acquisitions. 2011 acquisitions include MBM for $42 million and Breakaway Group for $18 million as well as a net cash receipt of $35 million for Symcor. 2010 acquisitions include TMS Health for $48 million and Spur Information Solutions for $12 million.
Cash Flows from Financing Activities
Net cash used in financing activities was $1,013 million in the fourth quarter 2011. The $150 million increase in the use of cash from fourth quarter 2010 was primarily due to the following:
-- $392 million increase resulting from the resumption of our share repurchase program.
-- $60 million increase due to lower proceeds from the issuances of common stock under our stock option plans.
-- $315 million decrease from net debt activity. Fourth quarter 2011 reflects net payments of $551 million on Commercial Paper and net payments of $2 million on other debt. Fourth quarter 2010 reflects net payments of $602 million on the Credit Facility, $550 million early redemption of the 2013 Senior Notes and $16 million on other debt partially offset by net proceeds of $300 million from Commercial Paper.
In fourth quarter 2011, we refinanced our $2 billion unsecured revolving credit facility that was executed in April 2007. This new facility is a five year commitment maturing in 2016 with a group of lenders, most of whom were lenders under the prior facility. Pricing, which is improved as a result of the refinancing, includes a borrowing rate of LIBOR + 1.175% and an annual commitment fee of 20 bps, based on our current ratings. The new facility contains a $300 million letter of credit sub facility, and also includes an accordion feature that allows us to increase the overall size of the facility up to an aggregate amount not to exceed $2.75 billion. The new facility provides a backstop to Xerox's $2 billion commercial paper program. Proceeds from any borrowing under the new facility can be used to provide working capital and for general corporate purposes.
Customer Financing Activities
The following represents our Total finance assets, net associated with our lease and finance operations:
The decrease of $255 million in Total finance assets, net includes currency of $63 million.
The following summarizes our debt:
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:
Sales of Accounts Receivables
We have facilities in the U.S., Canada and several countries in Europe that enable us to sell to third-parties, on an on-going basis, certain accounts receivable without recourse. The accounts receivables sold are generally short-term trade receivables with payment due dates of less than 60 days. Accounts receivable sales were as follows:
With sales approaching $23 billion, Xerox Corporation XRX -8.48% is the world's leading enterprise for business process and document management. Its technology, expertise and services enable workplaces -- from small businesses to large global enterprises -- to simplify the way work gets done so they operate more effectively and focus more on what matters most: their real business. Headquartered in Norwalk, Conn., Xerox offers business process outsourcing and IT outsourcing services, including data processing, healthcare solutions, HR benefits management, finance support, transportation solutions, and customer relationship management services for commercial and government organizations worldwide. The company also provides extensive leading-edge document technology, services, software and genuine Xerox supplies for graphic communication and office printing environments of any size. The 140,000 people of Xerox serve clients in more than 160 countries. For more information, visit http://www.xerox.com , http://news.xerox.com or http://www.realbusiness.com . For investor information, visit http://www.xerox.com/investor .
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