Press release

Xerox Delivers EPS Growth and Margin Expansion, Raises 2019 EPS Guidance

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Today Xerox
(NYSE: XRX) announced its first-quarter 2019 financial results.

“Our transformation initiatives are yielding results, which give us
confidence to raise our full-year earnings guidance despite revenue
declines. We are investing in our core business as well as new
technologies that create value for our stakeholders and position us for
long-term growth,” said Xerox Vice Chairman and CEO John Visentin.

Key Financial Results:

       
(in millions, except per share data) Q1 2019 Q1 2018

B/(W)
YOY

% Change
YOY

Revenue $ 2,206 $ 2,435 $ (229 )

(9.4) % AC
(7.0) % CC1

Gross Margin 40.3 % 39.8 % 50 bps
RD&E % 4.2 % 4.1 % (10) bps
SAG % 24.8 % 25.8 % 100 bps
Pre-Tax Income $ 83 $ 134 $ (51 ) (38 )%
Pre-Tax Income Margin 3.8 % 5.5 % (170) bps
Operating Income – Adjusted1 $ 249 $ 242 $ 7 3 %
Operating Margin – Adjusted1 11.3 % 9.9 % 140 bps
GAAP EPS $ 0.55 $ 0.08 $ 0.47 nm
EPS – Adjusted1 $ 0.91 $ 0.68 $ 0.23 34 %
 

(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 gross savings in 2019 of at least $640 million under
    Project Own It, Xerox’s enterprise-wide transformation initiative to
    create a simpler, more effective organization
  • Introduced a new services portfolio to deepen the integration of
    Xerox’s software, services and technology to deliver differentiated,
    higher margin solutions
  • Enabled mobile, on-the-go print services with the launch of Xerox
    Instant Print Kiosk, positioning Xerox for growth in the self-service
    print and document management market
  • Announced the new Xerox Rialto® 900 MP Inkjet Press, a
    roll-to-cut sheet platform designed to deliver maximum productivity
    per square meter
  • Introduced software enhancements to the Xerox AltaLink®
    Multifunction Printers that enable clients to detect and neutralize
    cyber threats instantaneously

About Xerox

In the era of intelligent work, we’re not just thinking about the
future, we’re making it. Xerox
Corporation
(NYSE: XRX) 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
first quarter 2019 and full-year 2019 guidance:

  • Adjusted EPS, which excludes restructuring and related costs
    (including our share of Fuji Xerox restructuring), the amortization of
    intangibles, non-service retirement-related costs and other discrete
    adjustments.
  • Adjusted operating margin and income, which excludes 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 proposed holding company reorganization; the
occurrence and timing of any closing of the proposed holding company
reorganization; the shared services arrangements entered into by the
Company as part of Project Own It; any potential strategic transaction
involving our customer financing business and/or related assets; and
other factors that are set forth in the “Risk Factors” section, the
“Legal Proceedings” section, the “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” section and other
sections of our 2018 Annual Report on Form 10-K, as well as in our
Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K filed
with the SEC. Our forward-looking statements are also subject to the
factors and other information set forth in the “Summary of the Holding
Company Reorganization Proposal” section, the “Risk Factors” section and
the “Proposal 1 – Approval of the Holding Company Reorganization”
section of our definitive Joint Proxy Statement/Prospectus dated April
22, 2019 filed on Schedule 14A 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.

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Xerox®, AltaLink®, Rialto® and Powered
by Xerox® are trademarks of Xerox in the United States and/or
other countries.

 
XEROX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 
 

Three Months Ended
March 31,

(in millions, except per-share data) 2019   2018
Revenues
Sales(1) $ 750 $ 845
Services, maintenance and rentals(1) 1,393 1,519
Financing 63   71  
Total Revenues 2,206   2,435  
Costs and Expenses
Cost of sales(1) 464 532
Cost of services, maintenance and rentals(1) 821 899
Cost of financing 32 34
Research, development and engineering expenses 92 100
Selling, administrative and general expenses 548 628
Restructuring and related costs 112 28
Amortization of intangible assets 15 12
Transaction and related costs, net 38
Other expenses, net 39   30  
Total Costs and Expenses 2,123   2,301  
Income before Income Taxes & Equity Income(2) 83 134
Income tax (benefit) expense (8 ) 40
Equity in net income (loss) of unconsolidated affiliates 45   (68 )
Net Income 136 26
Less: Net income attributable to noncontrolling interests 3   3  
Net Income Attributable to Xerox $ 133   $ 23  
 
Basic Earnings per Share $ 0.57 $ 0.08
Diluted Earnings per Share $ 0.55 $ 0.08
 
____________________________
(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 CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
 
 

Three Months Ended
March 31,

(in millions) 2019   2018
Net income $ 136 $ 26
Less: Net income attributable to noncontrolling interests 3   3
Net Income Attributable to Xerox 133   23
 
Other Comprehensive Income, Net
Translation adjustments, net 37 176
Unrealized gains, net 2 17
Changes in defined benefit plans, net 1   18
Other Comprehensive Income, Net Attributable to Xerox 40   211
 
Comprehensive Income, Net 176 237
Less: Comprehensive income, net attributable to noncontrolling
interests
3   3
Comprehensive Income, Net Attributable to Xerox $ 173   $ 234
 
 
XEROX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
   
(in millions, except share data in thousands) March 31, 2019

December 31, 2018

Assets
Cash and cash equivalents $ 723 $ 1,084
Accounts receivable, net 1,234 1,276
Billed portion of finance receivables, net 102 105
Finance receivables, net 1,191 1,218
Inventories 859 818
Other current assets 204   194  
Total current assets 4,313 4,695
Finance receivables due after one year, net 2,080 2,149
Equipment on operating leases, net 414 442
Land, buildings and equipment, net 469 499
Investments in affiliates, at equity 1,452 1,403
Intangible assets, net 208 220
Goodwill 3,889 3,867
Deferred tax assets 753 740
Other long-term assets 1,221   859  
Total Assets $ 14,799   $ 14,874  
Liabilities and Equity
Short-term debt and current portion of long-term debt $ 555 $ 961
Accounts payable 1,054 1,091
Accrued compensation and benefits costs 298 349
Accrued expenses and other current liabilities 1,022   850  
Total current liabilities 2,929 3,251
Long-term debt 4,268 4,269
Pension and other benefit liabilities 1,481 1,482
Post-retirement medical benefits 348 350
Other long-term liabilities 496   269  
Total Liabilities 9,522   9,621  
 
Convertible Preferred Stock 214   214  
 
Common stock 230 232
Additional paid-in capital 3,282 3,321
Treasury stock, at cost (103 ) (55 )
Retained earnings 5,270 5,072
Accumulated other comprehensive loss (3,652 ) (3,565 )
Xerox shareholders’ equity 5,027 5,005
Noncontrolling interests 36   34  
Total Equity 5,063   5,039  
Total Liabilities and Equity $ 14,799   $ 14,874  
 
Shares of common stock issued 229,732 231,690
Treasury stock (3,321 ) (2,067 )
Shares of Common Stock Outstanding 226,411   229,623  
 
 
XEROX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
 

Three Months Ended
March 31,

(in millions) 2019   2018
Cash Flows from Operating Activities
Net Income $ 136 $ 26
Adjustments required to reconcile Net Income to Cash flows from
operating activities
Depreciation and amortization 118 138
Provisions 22 17
Net gain on sales of businesses and assets (1 ) (16 )
Undistributed equity in net income of unconsolidated affiliates (42 ) 68
Stock-based compensation 15 16
Restructuring and asset impairment charges 54 28
Payments for restructurings (33 ) (54 )
Defined benefit pension cost 36 27
Contributions to defined benefit pension plans (34 ) (38 )
Decrease in accounts receivable and billed portion of finance
receivables
39 46
Increase in inventories (50 ) (87 )
Increase in equipment on operating leases (30 ) (56 )
Decrease in finance receivables 81 85
Increase in other current and long-term assets (2 ) (17 )
(Decrease) increase in accounts payable (34 ) 44
Decrease in accrued compensation (73 ) (32 )
Increase in other current and long-term liabilities 46 1
Net change in income tax assets and liabilities (21 ) 13
Net change in derivative assets and liabilities 8 (6 )
Other operating, net (9 ) 13  
Net cash provided by operating activities 226 216
Cash Flows from Investing Activities
Cost of additions to land, buildings, equipment and software (15 ) (18 )
Proceeds from sales of businesses and assets 1 16
Acquisitions, net of cash acquired (4 )  
Net cash used in investing activities (18 ) (2 )
Cash Flows from Financing Activities
Net payments on debt (402 ) (37 )
Dividends (62 ) (67 )
Payments to acquire treasury stock, including fees (103 )
Other financing, net (2 ) (13 )
Net cash used in financing activities (569 ) (117 )
   
Effect of exchange rate changes on cash, cash equivalents and
restricted cash
(1 ) 9  
(Decrease) increase in cash, cash equivalents and restricted cash (362 ) 106
Cash, cash equivalents and restricted cash at beginning of period 1,148   1,368  
Cash, Cash Equivalents and Restricted Cash at End of Period $ 786   $ 1,474  
 
 

Revenues

       

Three Months Ended
March 31,

% of Total Revenue
(in millions) 2019   2018

%

Change

CC%
Change

2019 2018
Equipment sales $ 448 $ 499 (10.2 )% (7.6 )% 20 % 20 %
Post sale revenue 1,758   1,936   (9.2 )% (6.8 )% 80 % 80 %
Total Revenue $ 2,206   $ 2,435   (9.4 )% (7.0 )% 100 % 100 %
 

Reconciliation to Condensed Consolidated

Statements of Income:

Sales(1) $ 750 $ 845 (11.2 )% (8.9 )%
Less: Supplies, paper and other sales(1) (302 ) (346 ) (12.7 )% (10.7 )%
Equipment Sales $ 448   $ 499   (10.2 )% (7.6 )%
 
Services, maintenance and rentals(1) $ 1,393 $ 1,519 (8.3 )% (5.8 )%
Add: Supplies, paper and other sales(1) 302 346 (12.7 )% (10.7 )%
Add: Financing 63   71   (11.3 )% (9.0 )%
Post Sale Revenue $ 1,758   $ 1,936   (9.2 )% (6.8 )%
 
Americas $ 1,410 $ 1,535 (8.1 )% (7.5 )% 64 % 63 %
EMEA 712 795 (10.4 )% (4.3 )% 32 % 33 %
Other 84   105   (20.0 )% (20.0 )% 4 % 4 %
Total Revenue(2) $ 2,206   $ 2,435   (9.4 )% (7.0 )% 100 % 100 %
 
Memo:
Xerox Services(3) $ 853 $ 908 (6.1 )% (2.9 )% 39 % 37 %
 
____________________________
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 $750 million and
$799 million in the first quarter 2019 and 2018, respectively,
representing a decrease of 6.1% including a 3.1-percentage point
unfavorable impact from currency.
 

First quarter 2019 total revenue decreased 9.4% as compared to first
quarter 2018, including a 2.4-percentage point unfavorable impact from
currency, and an approximate 1.0-percentage point unfavorable impact
from lower OEM sales. First quarter 2019 total revenue reflected the
following:

  • Post sale revenue primarily 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 decreased 9.2% as compared to first quarter
    2018, including a 2.4-percentage point unfavorable impact from
    currency, and reflected the following:

    • Services, maintenance and rentals revenue includes rental
      and maintenance revenue (including bundled supplies) as well as
      the post sale component of the document services revenue from our
      Xerox Services offerings. These revenues decreased 8.3% as
      compared to the first quarter 2018, including a 2.5-percentage
      point unfavorable impact from currency. The decline at constant
      currency1 reflected the continuing trends of lower page
      volumes (including a higher mix of lower usage products), an
      ongoing competitive price environment, and a lower population of
      devices, which are partially associated with continued lower
      Enterprise signings and lower installs in prior periods. These
      declines were larger in the U.S. where we recently implemented
      organizational changes as part of our Project Own It
      transformation actions.
    • Supplies, paper and other sales includes unbundled supplies
      and other sales. These revenues decreased 12.7% as compared to
      first quarter 2018, including a 2.0-percentage point unfavorable
      impact from currency and a 2.9-percentage point unfavorable impact
      from lower OEM sales. The decline at constant currency1 also
      reflected the impact of lower supplies revenues primarily from our
      developing market regions, and lower transactional IT network
      integration solutions sales from our XBS sales unit, as well as
      lower paper sales from Latin America.
    • Financing revenue is generated from financed equipment sale
      transactions. The 11.3% decline in these revenues reflected a
      continued decline in the finance receivables balance due to lower
      equipment sales in prior periods and included a 2.3-percentage
      point unfavorable impact from currency.
       

Three Months Ended
March 31,

% of Equipment Sales

(in millions) 2019   2018

%

Change

CC%
Change

2019   2018
Entry $ 53 $ 53 % 3.2 % 12 % 11 %
Mid-range 302 334 (9.6 )% (7.2 )% 67 % 67 %
High-end 89 92 (3.3 )% (0.3 )% 20 % 18 %
Other 4   20   (80.0 )% (80.0 )% 1 % 4 %
Equipment Sales $ 448   $ 499   (10.2 )% (7.6 )% 100 % 100 %

____________________________

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

  • Equipment sales revenue decreased 10.2% as compared to first
    quarter 2018, including a 2.6-percentage point unfavorable impact from
    currency. These revenues were impacted by price declines of
    approximately 5% and included a 2.8-percentage point unfavorable
    impact from the absence of OEM equipment sales in the first quarter
    2019. The decline at constant currency1 was mainly impacted
    by lower revenues from our mid-range products, and reflected the
    following:

    • Entry – The increasereflected higher installs
      of our ConnectKey devices in our Americas sales organization, and
      it also partially benefited from lower U.S. indirect channel sales
      in the prior year.
    • Mid-range – The decrease reflected lower sales from our
      Americas sales organization, including our XBS sales unit, which
      were further affected by the transitional impact associated with
      recently implemented organizational changes as 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),
      partially offset by higher sales from our European sales
      operations.
    • High-end The nearly flat revenue was driven by
      lower sales from our Americas sales organization, mostly offset by
      growth from our European region. The decline in installs was
      partially offset by a favorable revenue mix driven by strong
      demand for the higher-configuration models of our Iridesse
      production press.

While the rate of our first quarter 2019 revenue decline was greater
than the rate we expect for the year as a whole (largely due to the
impact of organizational changes implemented in the first quarter 2019),
we expect such decline to improve each quarter sequentially on a
year-over-year basis, resulting in an overall revenue decline of about
5% for the year as a whole, excluding an approximate 1.0-percentage
point unfavorable impact from currency.

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 in the higher-value Workteam/Workgroup through
    our indirect channels in the U.S., partially offset by lower activity
    from our EMEA organization.
  • 2% decrease in black-and-white multifunction devices driven by lower
    activity from our EMEA organization, including low-end devices in
    developing market regions, partially offset by higher installs of
    ConnectKey devices through our indirect channels in the U.S.

Mid-Range3

  • 7% decrease in mid-range color installs reflecting lower installs of
    ConnectKey devices through our indirect channels in the U.S. and from
    our XBS sales unit. Higher installs from our EMEA organization
    provided a partial offset.
  • 19% decrease in mid-range black-and-white reflecting lower installs of
    ConnectKey devices through our indirect channels in the U.S. and from
    our XBS sales unit. The decline also reflected market trends,
    partially offset by higher installs from our EMEA organization.

High-End3

  • 14% decrease in high-end color installs reflecting lower installs of
    our iGen and lower-end production systems, including Versant systems,
    partially offset by strong demand for the higher-configuration models
    of our Iridesse production press and higher installs of our inkjet
    production systems.
  • 12% decrease in high-end black-and-white systems reflecting market
    trends.
 
____________________________
(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
decreased 32%, while Entry black-and-white multifunction devices
decreased 22%.
(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 decreased 7%, and High-end color
systems decreased 14%.
 

Costs, Expenses and Other Income

Summary of Key Financial Ratios

 

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

 
  Three Months Ended March 31,
(in millions) 2019   2018   B/(W)
Gross Profit $ 889 $ 970 $ (81 )
RD&E 92 100 8
SAG 548 628 80
 
Equipment Gross Margin 35.7 % 32.6 % 3.1 pts.
Post sale Gross Margin 41.5 % 41.7 % (0.2) pts.
Total Gross Margin 40.3 % 39.8 % 0.5 pts.
RD&E as a % of Revenue 4.2 % 4.1 % (0.1) pts.
SAG as a % of Revenue 24.8 % 25.8 % 1.0 pts.
 
Pre-tax Income $ 83 $ 134 $ (51 )
Pre-tax Income Margin 3.8 % 5.5 % (1.7) pts.
 
Adjusted(1) Operating Profit $ 249 $ 242 $ 7
Adjusted(1) Operating Margin 11.3 % 9.9 % 1.4 pts.
____________________________
(1)   See the “Non-GAAP Financial Measures” section for an explanation of
the non-GAAP financial measure.
 

Pre-tax Income Margin

First quarter 2019 pre-tax income margin of 3.8% decreased
1.7-percentage points as compared to first quarter 2018. The decrease
was driven by higher restructuring and related costs partially offset by
lower transaction related costs as well as lower operating expenses
(primarily reflecting the net benefit from our Project Own It
transformation actions) that offset the impact of lower revenues.

Adjusted1
Operating Margin

First quarter 2019 adjusted1 operating margin of 11.3%
increased 1.4-percentage points as compared to first 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
0.3-percentage point unfavorable impact from transaction currency.

Gross Margin

First quarter 2019 gross margin of 40.3% increased by 0.5-percentage
points compared to first quarter 2018, reflecting higher equipment
margin partially offset by lower post sale margin.

First quarter 2019 equipment gross margin of 35.7% increased by
3.1-percentage points as compared to first quarter 2018, reflecting the
mix benefit from lower OEM sales (which carry a negative upfront margin)
as well as savings from our Project Own It cost productivity initiatives.

First quarter 2019 post sale gross margin of 41.5% decreased by
0.2-percentage points as compared to first quarter 2018 driven by a
0.6-percentage point unfavorable impact related to a prior year benefit
from a change in estimate for consumables usage by customers. Excluding
this item, post sale margin would have increased, reflecting
productivity and restructuring savings associated with our Project Own
It transformation actions that offset the impact of lower revenues.

Research, Development and Engineering Expenses
(RD&E)

First quarter 2019 RD&E as a percentage of revenue of 4.2% was
0.1-percentage points higher as compared to first quarter 2018, as
revenue declined at a higher rate than RD&E.

RD&E of $92 million decreased $8 million as compared to first quarter
2018 and reflected cost productivity and restructuring savings from our
Project Own It transformation actions, including savings in sustaining
engineering, partially offset by modest investments in innovation in
complementary market areas.

Selling, Administrative and General Expenses
(SAG)

SAG as a percentage of revenue of 24.8% decreased 1.0-percentage point
as compared to first quarter 2018, primarily reflecting the benefit from
productivity and restructuring associated with our Project Own It
transformation actions.

SAG of $548 million was $80 million lower than first quarter 2018,
reflecting productivity and restructuring savings associated with our
Project Own It transformation actions as well as favorable impacts of
approximately $13 million from translation currency and $9 million from
a prior year accelerated depreciation charge. Bad debt expense of $13
million was flat compared to first 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 $112 million for the first 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:

 
(in millions)

Three Months Ended
March 31, 2019

Restructuring Severance (1) $ 12
Asset Impairments (2) 36
Other contractual termination costs (3) 14
Net reversals (4) (8 )
Restructuring and asset impairment costs 54
Retention related severance/bonuses (5) 9
Contractual severance costs (6) 38
Consulting and other costs (7) 11  
Total $ 112  
 
 
___________________
(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 $26
million for leased right-of-use asset balances and $10 million for
owned asset balances upon exit from the facility 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) Net reversals for changes in estimated reserves from prior period
initiatives.
(5) Includes retention related severance and bonuses for employees
expected to continue working beyond their minimum notification
period before termination.
(6) Reflect severance 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) Represent professional support services associated with our business
transformation initiatives.
 

First quarter 2019 actions impacted several functional areas, with
approximately 25% focused on gross margin improvements,
approximately 70% focused on SAG reductions, and the remainder focused
on RD&E optimization.

First quarter 2018 restructuring and related costs of $28 million
included $24 million of severance costs related to headcount reductions
of approximately 400 employees worldwide and $12 million of lease
cancellation charges reflecting continued optimization of our operating
locations. These costs were partially offset by $8 million of net
reversals for changes in estimated reserves from prior period
initiatives. First quarter 2018 actions impacted several functional
areas, with approximately 55% focused on gross margin improvements and
approximately 45% on SAG reductions.

The restructuring reserve balance as of March 31, 2019 for all programs
was $80 million, of which $74 million is expected to be spent over the
next twelve months.

Transaction and Related Costs, Net

There were no Transaction and related costs, net recognized during the
first quarter 2019 as compared to $38 million during first quarter 2018.
We continue to pursue additional 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

First quarter 2019 Amortization of intangible assets of $15 million
increased by $3 million compared to first quarter 2018. The increase
primarily reflected the accelerated write-off of trade names 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 30,900 as of March 31, 2019 and
decreased by approximately 1,500 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.

 

Other Expenses, Net

 
 

Three Months Ended
March 31,

(in millions) 2019   2018
Non-financing interest expense $ 27 $ 29
Non-service retirement-related costs 13 25
Interest income (4 ) (3 )
Gains on sales of businesses and assets (1 ) (16 )
Currency losses (gains), net 2 (2 )
Loss on sales of accounts receivable 1 1
All other expenses, net 1   (4 )
Other expenses, net $ 39   $ 30  
 

Non-financing interest expense

First quarter 2019 non-financing interest expense of $27 million was $2
million lower than first quarter 2018. When combined with financing
interest expense (Cost of financing), total interest expense decreased
by $4 million from first quarter 2018 due primarily to a lower debt
balance.

Non-service retirement-related costs

First quarter 2019 non-service retirement-related costs were $12 million
lower than first quarter 2018, primarily driven by the favorable impact
of a 2018 amendment to our U.S. Retiree Health Plan partially offset by
higher losses from pension settlements in the U.S.

Gains on sales of businesses and assets

First quarter 2019 gains on sales of businesses and assets were $15
million lower than first quarter 2018, reflecting the prior year sale of
non-core business assets.

Income Taxes

First quarter 2019 effective tax rate was (9.6)% and includes a benefit
of $35 million related to the January 2019 finalization of regulations
that govern the repatriation tax from the 2017 Tax Cuts and Jobs Act
(the “Tax Act”). On an adjusted1 basis, first
quarter 2019 effective tax rate was 26.0%. This rate was higher than the
U.S. statutory tax rate of 21% primarily due to 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 and non-service
retirement-related costs as well as other discrete, unusual or
infrequent items as described in our Non-GAAP Financial Measures
section, which includes the impact of the Tax Act.

First quarter 2018 effective tax rate was 29.9%. On an adjusted1 basis,
first quarter 2018 effective tax rate was 28.3%. These rates were higher
than the U.S. statutory tax rate of 21% primarily due to impacts
associated with the 2017 Tax Act as well as 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, 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.

Equity in Net Income (Loss) of Unconsolidated Affiliates

Equity in net income (loss) of unconsolidated affiliates primarily
reflects our 25% share of Fuji Xerox net income. First quarter 2019
equity income of $45 million increased $113 million compared to first
quarter 2018, primarily reflecting $67 million of lower year-over-year
charges related to our share of Fuji Xerox after-tax restructuring and
other charges as well as an approximate $28 million out-of-period
adjustment charge at Fuji Xerox in the prior year. The increase also
reflects savings from restructuring.

Net Income

First quarter 2019 net income attributable to Xerox was $133 million, or
$0.55 per diluted share. On an adjusted1 basis, net income
attributable to Xerox was $219 million, or $0.91 per diluted share.
First quarter 2019 adjustments to net income included Restructuring and
related costs, Amortization of intangible assets, and non-service
retirement-related costs as well as other discrete, unusual or
infrequent items as described in our Non-GAAP Financial Measures section.

First quarter 2018 net income attributable to Xerox was $23 million, or
$0.08 per diluted share. On an adjusted1 basis, net income
attributable to Xerox was $178 million, or $0.68 per diluted share.
First 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.

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

 
Capital Resources and Liquidity

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

   

Three Months Ended
March 31,

(in millions) 2019   2018 Change
Net cash provided by operating activities $ 226 $ 216 $ 10
 
Net cash used in investing activities (18 ) (2 ) (16 )
 
Net cash used in financing activities (569 ) (117 ) (452 )
 
Effect of exchange rate changes on cash, cash equivalents and
restricted cash
(1 ) 9   (10 )
(Decrease) increase in cash, cash equivalents and restricted cash (362 ) 106 (468 )
Cash, cash equivalents and restricted cash at beginning of period 1,148   1,368   (220 )
Cash, Cash Equivalents and Restricted Cash at End of Period $ 786   $ 1,474   $ (688 )
 

Cash Flows from Operating Activities

Net cash provided by operating activities was $226 million in first
quarter 2019. The $10 million increase in operating cash from first
quarter 2018 was primarily due to the following:

  • $37 million increase primarily due to lower levels of non-equipment
    inventories.
  • $29 million increase due to net insurance proceeds of $14 million in
    first quarter 2019 compared to payments of $15 million in prior year
    for transaction and related costs, net.
  • $26 million increase due to lower equipment on operating leases.
  • $23 million increase primarily related to the prior year settlements
    of foreign derivative contracts.
  • $21 million increase from lower restructuring payments.
  • $75 million decrease from the change in accounts payable primarily
    related to lower inventory and other spending as well as the
    year-over-year timing of supplier and vendor payments.
  • $41 million decrease from accrued compensation primarily related to
    the year-over-year timing of employee incentive compensation payments.

Cash Flows from Investing Activities

Net cash used in investing activities was $18 million in first quarter
2019. The $16 million change in cash was primarily due to the sale of
non-core business assets in 2018.

Cash Flows from Financing Activities

Net cash used in financing activities was $569 million in first quarter
2019. The $452 million increase in the use of cash from first quarter
2018 was primarily due to the following:

  • $365 million increase from net debt activity. 2019 reflects payments
    of $406 million on Senior Notes compared to prior year payments of $25
    million related to the termination of a capital lease obligation and
    $13 million of bridge facility costs.
  • $103 million increase due to share repurchases.

Adoption of New Leasing Standard

On January 1, 2019, we adopted ASU 2016-02, Leases (ASC Topic 842). This
update, as well as additional amendments and targeted improvements
issued in 2018 and early 2019, supersedes existing lease accounting
guidance found under ASC 840, Leases (ASC 840) and requires the
recognition of right-of-use (ROU) assets and lease obligations by
lessees for those leases originally classified as operating leases under
prior lease guidance.

Upon adoption, we applied the transition option, whereby prior
comparative periods are not retrospectively presented in the Condensed
Consolidated Financial Statements. Lessee accounting – the adoption of
this update resulted in an increase to assets and related liabilities of
approximately $385 million (approximately $440 million undiscounted)
primarily related to leases of facilities. Lessor accounting – the
adoption of this update resulted in an increase to equipment sales by
approximately $3 million in 2019 as compared to 2018. The adoption of
the new standard did not, nor is it expected to, have a material impact
on our results of operations or cash flows.

Operating leases ROU assets, net and operating lease liabilities were
reported in the Condensed Consolidated Balance Sheets as follows:

 
(in millions) March 31, 2019
Other long-term assets $ 341
 
Other current liabilities $ 97
Other long-term liabilities 265
Total Operating lease liabilities $ 362
 

Cash, Cash Equivalents and Restricted Cash

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

   
(in millions) March 31, 2019 December 31, 2018
Cash and cash equivalents $ 723 $ 1,084
Restricted cash
Litigation deposits in Brazil 62 61
Other restricted cash 1   3
Total Restricted cash 63   64
Cash, cash equivalents and restricted cash $ 786   $ 1,148
 

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

   
(in millions) March 31, 2019

December 31,
2018

Other current assets $ 1 $ 1
Other long-term assets 62   63
Total Restricted cash $ 63   $ 64
 
 
Debt and Customer Financing Activities
The following summarizes our debt:
   
(in millions) March 31, 2019 December 31, 2018
Principal debt balance(1) $ 4,868 $ 5,281
Net unamortized discount (23 ) (25 )
Debt issuance costs (23 ) (25 )
Fair value adjustments(2)
– terminated swaps 2 2
– current swaps (1 ) (3 )
Total Debt $ 4,823   $ 5,230  
 
 
____________________________
(1)   Includes Notes Payable of $2 million as of March 31, 2019. There
were no Notes Payable as of December 31, 2018.
(2) Fair value adjustments include the following: (i) fair value
adjustments to debt associated with terminated interest rate swaps,
which are being amortized to interest expense over the remaining
term of the related notes; and (ii) changes in fair value of hedged
debt obligations attributable to movements in benchmark interest
rates. Hedge accounting requires hedged debt instruments to be
reported inclusive of any fair value adjustment.
 

Finance Assets and Related Debt

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

 

(in millions)   March 31, 2019   December 31, 2018
Total finance receivables, net(1) $ 3,373 $ 3,472
Equipment on operating leases, net 414   442
Total Finance Assets, net(2) $ 3,787   $ 3,914
 
____________________________
(1)   Includes (i) Billed portion of finance receivables, net, (ii)
Finance receivables, net and (iii) Finance receivables due after one
year, net as included in our Condensed Consolidated Balance Sheets.
(2) The change from December 31, 2018 includes a decrease of $6 million
due to currency.
 

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

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

   
(in millions) March 31, 2019 December 31, 2018
Finance receivables debt(1) $ 2,952 $ 3,038
Equipment on operating leases debt 362   387
Financing debt 3,314 3,425
Core debt 1,509   1,805
Total Debt $ 4,823   $ 5,230
 
____________________________
(1)   Finance receivables debt is the basis for our calculation of “Cost
of financing” expense in the Condensed Consolidated Statements of
Income.
 

Sales of Accounts Receivable

Accounts receivable sales arrangements may be utilized in the normal
course of business as part of our cash and liquidity management.
Accounts receivable sold are generally short-term trade receivables with
payment due dates of less than 60 days.

Accounts receivable sales activities were as follows:

 

Three Months Ended
March 31,

(in millions) 2019   2018
Accounts receivable sales(1) $ 88 $ 103
Loss on sales of accounts receivable 1 1
Estimated decrease to investing cash flows(2) (5 ) (50 )
 
____________________________
(1)   Customers may also enter into structured-payable arrangements that
require us to sell our receivables from that customer to a
third-party financial institution, which then makes payments to us
to settle the customer’s receivable. In these instances, we ensure
the sale of the receivables are bankruptcy remote and the payment
made to us is without recourse. The activity associated with these
arrangements is not reflected in this disclosure as payments under
these arrangements have not been material and these are customer
directed arrangements.
(2) Represents the difference between current and prior period accounts
receivable sales adjusted for the effects of currency.
 

Corporate Reorganization

On March 6, 2019, the Xerox Board of Directors approved a reorganization
(the “Reorganization”) of the Company’s corporate structure into a
holding company structure, pursuant to which Xerox Corporation will
become a direct, wholly-owned subsidiary of a new holding company. The
purpose of the Reorganization is to provide the Company with strategic,
operational and financial flexibility. The business operations,
directors and executive officers of the Company will not change as a
result of the Reorganization.

The Reorganization is intended to be implemented via
a tax-free transaction for U.S. federal income tax purposes that will
result in each holder of Xerox Corporation’s common stock owning the
same number of shares of common stock in the new holding company and
each holder of Xerox Corporation’s preferred stock owning the same
number of shares of preferred stock in the new holding company. It is
expected that the directors and executive officers of Xerox Corporation
will also serve in the same capacities for the new holding company and
that shares of the new holding company’s common stock will trade on the
New York Stock Exchange under Xerox Corporation’s current ticker symbol
“XRX.”

The Reorganization is subject to the approval of shareholders, who will
be asked to vote on the Reorganization at the annual shareholders
meeting scheduled to be held on May 21, 2019, as well as regulatory
approval and other customary conditions and is expected to be
implemented in mid-2019, though there can be no assurance as to its
completion or timing. Upon the completion of the Reorganization, it is
anticipated that the new holding company will become a guarantor of
Xerox Corporation’s existing Credit Facility as well as certain future
senior note issuances by Xerox Corporation.

Shared Services Arrangement with HCL Technologies

In March 2019, as part of Project Own It, we entered into a shared
services arrangement with HCL Technologies (HCL) pursuant to which we
are outsourcing certain global administrative and support functions,
including, among others, selected information technology, order to
collection and finance functions (excluding accounting). The transition
of these functions to HCL is expected to take up to 18 months. HCL is
expected to make certain up-front and ongoing investments in software,
tools and other technology to consolidate, optimize and automate the
transferred functions with the goal of providing improved service levels
and significant cost savings. The shared services arrangement with HCL
includes a total aggregate spending commitment by us of approximately
$1.3 billion over the next 7 years. However, we can terminate the
arrangement at any time at our discretion, subject to payment of
termination fees that decline over the term or for cause. The spending
commitment excludes restructuring and related costs we are expected to
incur in connection with the transition of the contemplated functions.
See Restructuring and Related Costs within the Costs, Expenses and Other
Income section. The shared services arrangement with HCL is subject to
compliance with European works council and employment regulatory
requirements.

Potential Customer Financing Transaction

In connection with the Company’s initiative to simplify and optimize its
operations, the Company is currently exploring the possibility and
feasibility of a strategic transaction involving its customer financing
business and/or related assets. That process includes discussions of
various transaction structures with potential counterparties. No
decision or commitment has been made by management or the Company’s
Board of Directors regarding specific terms nor potential structures of
any such transaction, and there can be no assurance that the process
will result in a transaction. If such a transaction were to occur, the
use of any potential proceeds received as a result of the transaction
would not be finally determined until after an agreement is signed.

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 proposed holding company reorganization; the
occurrence and timing of any closing of the proposed holding company
reorganization; the shared services arrangements entered into by the
Company as part of Project Own It; any potential strategic transaction
involving our customer financing business and/or related assets; and
other factors that are set forth in the “Risk Factors” section, the
“Legal Proceedings” section, the “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” section and other
sections of our 2018 Annual Report on Form 10-K, as well as in our
Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K filed
with the SEC. Our forward-looking statements are also subject to the
factors and other information set forth in the “Summary of the Holding
Company Reorganization Proposal” section, the “Risk Factors” section and
the “Proposal 1 – Approval of the Holding Company Reorganization”
section of our definitive Joint Proxy Statement/Prospectus dated April
22, 2019 filed on Schedule 14A 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.

Non-GAAP Financial Measures

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

A reconciliation of these non-GAAP financial measures to the most
directly comparable financial measures calculated and presented in
accordance with GAAP are set forth below as well as in the first quarter
2019 presentation slides available at www.xerox.com/investor.

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

Adjusted Earnings Measures

  • Net Income and Earnings per share (EPS)
  • Effective Tax Rate

The above measures were adjusted for the following items:

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

    • Impacts associated with the Tax Cuts and Jobs Act (the “Tax Act”)
      enacted in December 2017.
  • Restructuring and other charges – Fuji Xerox:
    We adjust our 25% share of Fuji Xerox’s net income for similar items
    noted above such as Restructuring and related costs and Transaction
    and related costs, net based on the same rationale discussed above.

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

Adjusted Operating Income/Margin

We calculate and utilize adjusted operating income and margin measures
by adjusting our reported pre-tax income and margin amounts. In addition
to the costs and expenses noted as adjustments for our Adjusted Earnings
measures, adjusted operating income and margin also exclude the
remaining amounts included in Other expenses, net, which are primarily
non-financing interest expense and certain other non-operating costs and
expenses. We exclude these amounts in order to evaluate our current and
past operating performance and to better understand the expected future
trends in our business.

Constant Currency

To better understand trends in our business, we believe that it is
helpful to adjust revenue to exclude the impact of changes in the
translation of foreign currencies into U.S. dollars. We refer to this
adjusted revenue as “constant currency.” This impact is calculated by
translating current period activity in local currency using the
comparable prior year period’s currency translation rate. This impact is
calculated for all countries where the functional currency is not the
U.S. dollar. Management believes the constant currency measure provides
investors an additional perspective on revenue trends. Currency impact
can be determined as the difference between actual growth rates and
constant currency growth rates.

Free Cash Flow

To better understand trends in our business, we believe that it is
helpful to adjust operating cash flows by subtracting amounts related to
capital expenditures. Management believes this measure gives investors
an additional perspective on cash flow from operating activities in
excess of amounts required for reinvestment. It provides a measure of
our ability to fund acquisitions, dividends and share repurchase.

Summary:

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

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

 

Net Income and EPS reconciliation

 
 

Three Months Ended
March 31, 2019

 

Three Months Ended
March 31, 2018

(in millions, except per share amounts) Net Income   EPS   Net Income   EPS
Reported(1) $ 133 $ 0.55 $ 23 $ 0.08
Adjustments:
Restructuring and related costs 112 28
Amortization of intangible assets 15 12
Transaction and related costs, net 38
Non-service retirement-related costs 13 25
Income tax on adjustments(2) (31 ) (27 )
Restructuring and other charges – Fuji Xerox(3) 12 79
Tax Act (35 )      
Adjusted $ 219   $ 0.91   $ 178   $ 0.68
Dividends on preferred stock used in adjusted EPS calculation(4) $ $
Weighted average shares for adjusted EPS(4) 240 264
Fully diluted shares at end of period(5) 238
 
____________________________
(1)   Net income and EPS attributable to Xerox.
(2) Refer to Effective Tax Rate reconciliation.
(3) Other charges represent costs associated with the terminated
combination transaction.
(4) For those periods that exclude the preferred stock dividend, the
average shares for the calculations of diluted EPS include 7 million
shares associated with our Series B convertible preferred stock, as
applicable.
(5) Represents common shares outstanding at March 31, 2019 as well as
shares associated with our Series B convertible preferred stock plus
potential dilutive common shares as used for the calculation of
diluted earnings per share for the first quarter 2019.
 
 

Effective Tax Rate reconciliation

   

Three Months Ended
March 31, 2019

Three Months Ended
March 31, 2018

(in millions)

Pre-Tax

Income

 

Income Tax
(Benefit)
Expense

 

Effective Tax
Rate

Pre-Tax
Income

 

Income Tax
Expense

 

Effective Tax
Rate

Reported(1) $ 83 $ (8 ) (9.6 )% $ 134 $ 40 29.9 %
Non-GAAP Adjustments(2) 140 31 103 27
Tax Act   35      
Adjusted(3) $ 223   $ 58   26.0 % $ 237   $ 67   28.3 %
 
____________________________
(1)   Pre-Tax Income and Income Tax (Benefit) Expense.
(2) Refer to Net Income and EPS reconciliation for details.
(3) The tax impact on Adjusted Pre-Tax Income is calculated under the
same accounting principles applied to the Reported Pre-Tax Income
under ASC 740, which employs an annual effective tax rate method to
the results.
 

Operating Income / Margin reconciliation

   

Three Months Ended
March 31, 2019

Three Months Ended
March 31, 2018

(in millions) Profit   Revenue   Margin Profit   Revenue   Margin
Reported(1) $ 83 $ 2,206 3.8 % $ 134 $ 2,435 5.5 %
Adjustments:
Restructuring and related costs 112 28
Amortization of intangible assets 15 12
Transaction and related costs, net 38
Other expenses, net 39     30    
Adjusted $ 249   $ 2,206   11.3 % $ 242   $ 2,435   9.9 %
 
____________________________
(1)   Pre-Tax Income and revenue.
 
 

Free Cash Flow reconciliation

 

Three Months Ended
March 31,

(in millions) 2019   2018
Reported(1) $ 226 $ 216
Capital Expenditures (15 ) (18 )
Free Cash Flow $ 211   $ 198  
 
____________________________
(1)   Net cash provided by operating activities.
 

Guidance

Earnings per Share

 
FY 2019
(in millions, except per share amounts) Net Income   EPS
Estimated(1) $ 700 ~$2.90 – $3.05
Adjustments:
Restructuring and related costs(2) 237
Amortization of intangible assets 40
Non-service retirement-related costs 40
Income tax on adjustments (70 )
Tax Act (35 )  
Adjusted $ 912   ~$3.80 – $3.95
 
Weighted average shares for adjusted EPS ~ 235
 
____________________________
(1)   Net Income and EPS attributable to Xerox
(2) Includes $12 million of Fuji Xerox related costs in first quarter
2019.
 
 
APPENDIX I
 
Xerox Corporation
Earnings per Common Share
(in millions except per share data, shares in thousands)
 

Three Months Ended
March 31,

2019   2018
Basic Earnings per Share:
Net Income Attributable to Xerox $ 133 $ 23
Accrued dividends on preferred stock (4 ) (4 )
Adjusted net income available to common shareholders $ 129   $ 19  
Weighted average common shares outstanding 228,567 254,660
 
Basic Earnings per Share $ 0.57 $ 0.08
 
Diluted Earnings per Share:
Net Income Attributable to Xerox $ 133 $ 23
Accrued dividends on preferred stock   (4 )
Adjusted net income available to common shareholders $ 133   $ 19  
Weighted average common shares outstanding 228,567 254,660
Common shares issuable with respect to:
Stock Options 3
Restricted stock and performance shares 4,406 2,810
Convertible preferred stock 6,742    
Adjusted weighted average common shares outstanding 239,718   257,470  
   
Diluted Earnings per Share $ 0.55   $ 0.08  
 

The following securities were not included in the computation of
diluted earnings per share as they were
either contingently
issuable shares or shares that if included would have been
anti-dilutive:

Stock Options 947
Restricted stock and performance shares 3,847 2,977
Convertible preferred stock   6,742  
Total Anti-Dilutive Securities 4,794   9,719  
 
Dividends per Common Share $ 0.25   $ 0.25  
 

APPENDIX II

Xerox Corporation
Geographic Sales Channels and
Product/Offering Definitions

Our business is aligned to a geographic focus and is primarily organized
on the basis of go-to-market sales channels, which are structured to
serve a range of customers for our products and services. In 2019 we
changed our geographic structure to create a more streamlined, flatter
and more effective organization, as follows:

  • Americas, which includes our sales channels in the U.S. and Canada, as
    well as Mexico, and Central and South America.
  • EMEA, which includes our sales channels in Europe, the Middle East,
    Africa and India.
  • Other, primarily includes our OEM business, as well as sales to and
    royalties from Fuji Xerox, and our licensing revenue.

Our products and offerings include:

  • “Entry”, which includes A4 devices and desktop printers. Prices in
    this product group can range from approximately $150 to $3,000.
  • “Mid-Range”, which includes A3 Office and Light Production devices
    that generally serve workgroup environments in mid to large
    enterprises. Prices in this product group can range from approximately
    $2,000 to $75,000+.
  • “High-End”, which includes production printing and publishing systems
    that generally serve the graphic communications marketplace and large
    enterprises. Prices for these systems can range from approximately
    $30,000 to $1,000,000+.
  • Xerox Services, formerly known as Managed Document Services (MDS),
    which includes solutions and services that span from managing print to
    automating processes to managing content. Our primary offerings are
    Intelligent Workplace Services (IWS), which is our rebranded Managed
    Print Services, as well as Digital and Cloud Print Services (including
    centralized print services). Xerox Services also includes
    Communication and Marketing Solutions that were previously excluded
    from our former MDS definition.

APPENDIX III

Change in Presentation

During first quarter 2019, we realigned portions of our business to
support our new revenue strategy. This realignment included the
combination and consolidation of certain sales units to better service
customers consistently across the company. In connection with that
realignment, we changed the classification of revenues and those related
costs from certain service arrangements to consistently conform the
presentation of those amounts among our various business units. Prior
year amounts were also revised as follows to conform with the 2019
presentation. The revised presentation does not impact total revenues,
total expenses or net income.

 
March 31, 2018
As Reported   Change   As Revised
Sales $ 933 $ (88 ) $ 845
Services, maintenance and rentals 1,431 88 1,519
 
Cost of sales $ 563 $ (31 ) $ 532
Cost of services, maintenance and rentals 868 31 899