Fourth-Quarter 2009 Earnings Presentation

Transcription

1 Fourth-Quarter 2009 Earnings Presentation Ursula Burns Chief Executive Officer Larry Zimmerman Vice Chairman & CFO January 21, 2010

2 Forward-Looking Statements This presentation contains "forward-looking statements" as defined in the Private Securities Litigation Reform Act of The words anticipate, believe, estimate, expect, intend, will, should and similar expressions, as they relate to us, are intended to identify forwardlooking 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. These factors include but are not limited to: the unprecedented volatility in the global economy; the risk that unexpected costs will be incurred; the outcome of litigation and regulatory proceedings to which we may be a party; actions of competitors; changes and developments affecting our industry; quarterly or cyclical variations in financial results; development of new products and services; interest rates and cost of borrowing; our ability to protect our intellectual property rights; our ability to maintain and improve cost efficiency of operations, including savings from restructuring actions; changes in foreign currency exchange rates; changes in economic conditions, political conditions, trade protection measures, licensing requirements and tax matters in the foreign countries in which we do business; reliance on third parties for manufacturing of products and provision of services; the risk that we will not realize all of the anticipated benefits from the acquisition of Affiliated Computer Services, Inc. ( ACS ); 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 2008 Annual Report on Form 10-K and Quarterly Reports on Form 10-Q for the quarters ended March 31, 2009, June 30, 2009 and September 30, 2009 and ACS s 2009 Annual Report on Form 10-K and Quarterly Report on Form 10-Q for the quarter ended September 30, 2009 filed with the Securities and Exchange Commission. The Company assumes no obligation to update any forward-looking statements as a result of new information. Xerox and ACS urge investors and security holders to read the joint proxy statement/prospectus regarding the proposed transaction before making any voting or investment decision because it contains important information. You may obtain a free copy of the joint proxy statement/prospectus, as well as other filings containing information about Xerox and ACS, without charge, at the Securities and Exchange Commission's (SEC) Internet site ( Copies of the joint proxy statement/prospectus and the filings with the SEC that are incorporated by reference in the joint proxy statement/prospectus can also be obtained, without charge, from Xerox s website, under the heading Investor Relations and then under the heading SEC Filings. You may also obtain these documents, without charge, from ACS s website, under the tab Investor Relations and then under the heading SEC Filings. Information regarding participants or persons who may be deemed to be participants in the solicitation of proxies in respect of the proposed transaction is contained in Xerox's proxy statement for its most recent annual meeting and ACS's most recent annual report on Form 10-K, both as filed with the SEC. 2

3 Fourth-Quarter Overview Adjusted EPS 1 of $0.25 per share, GAAP EPS of $0.20 per share Q4 EPS above guidance of $0.20 to $0.22 FY adjusted EPS of $0.60 per share (GAAP $0.55) exceeded guidance of $0.55 to $0.57 Cash performance exceeds expectations Cash from operations $967M, $2.2B full year Cash balance 2 of $3.8B FY debt reduction 2 of $1.1B Total revenue grew sequentially; YOY down 3%, 7% CC Post sale flat, down 4%CC Equipment down 11%, 15%CC Revenue remains weak but trends are improving Solid operational cost and expense execution Gross margin improved 2.0 points YOY to 39.9% SAG percent of revenue 26.7% Captured savings from restructuring and cost actions 3 Constant currency (CC): see slide 21 for explanation of non-gaap measures 1 Excludes Q4 ACS acquisition-related costs: see slide 21 for explanation of non-gaap measures 2 Cash includes and debt excludes $2B in debt issued in December 2009 to fund ACS acquisition

4 Revenue (4%) CC $1,305M Production 1% CC $1,740M Color (2%) CC $2,369M Office (7%) $505M Developing Markets Revenue trend improving Q4 revenue 15% higher than Q3 Equipment revenue drives sequential growth above historic levels Install base remains stable Developing markets improving Office 14% sequential growth in revenue Supplies revenue returns to growth Operating margin of 11.3%is improving Strong Q4 for ColorQube TM Production Overview 20% sequential growth in revenue Operating margin of 5.1%is stable Solid quarter for high-end color igen4 TM and 7002/8002 digital presses 4 Constant currency (CC): see slide 21 for explanation of non-gaap measures Color revenue excludes GIS

5 Earnings (in millions, except per share data) Q FY 2009 Q4 Comments Revenue $ 4,219 $15,179 Stabilized with some areas of improvement Gross Margin 39.9% 39.7% Cost focus drives $25M gross profit improvement; transaction currency pressure continues RD&E $ 225 $ 840 SAG SAG % of Revenue $ 1, % $ 4, % Strong underlying performance; impacted by YOY comparisons and currency Operating Income $ 332 $ 1,036 Operating Income % of Revenue 7.9% 6.8% Other, net 1 Equity Income $ 89 $ 27 $ 376 $ 41 Excludes $63M of Q4 acquisition-related costs Capturing benefits of Fuji Xerox cost actions, includes $6M Fuji Xerox Q4 restructuring Adjusted Tax Rate 2 20% 25% Adjusted Net Income Xerox 2 $ 221 $ 526 Adjusted EPS 2 $ 0.25 $ 0.60 Compared to Q4 guidance of $ $0.22 Acquisition-related Costs $ (0.05) $ (0.05) GAAP EPS $ 0.20 $ Includes net income attributable to noncontrolling interest of $11M in Q4 and $31M FY Adjusted Net Income Xerox, Adjusted Tax Rate, Adjusted EPS: see slide 21 for explanation of non-gaap measures

6 Cash Flow (in millions, except per share data) Net Income Depreciation and amortization Q $ FY 2009 $ FY Cash from Operations of $2.2B exceeds guidance of $1.7B Restructuring payments Inventories Accounts Receivable and Billed Portion of Finance Receivables Accounts Payable and Accrued Compensation (39) (270) Working Capital 1 generated $489M of cash in Q4 Delivered $1B+ debt reduction 2 for FY 2009 Finance Receivables Equipment on Operating Leases (99) (82) 248 (267) CAPEX of $193M Other Cash from Operations 202 $ $ 2,208 Free Cash Flow 3 per share of $2.29 full year CAPEX (incl. internal use software) Acquisitions Other (49) (18) (2) (193) (163) 13 ACS funding in place: $2B raised and strong Xerox cash flow Cash from Investing $ (69) $ (343) Net Debt Payments / Proceeds 1, Other (41) (174) Cash from Financing $ 1,746 $ 692 Change in Cash and Cash Equivalents 2,640 2,570 Ending Cash and Cash Equivalents $ 3,799 $ 3, Working capital includes only accounts receivable, accounts payable and inventory 2 Excludes $2B in debt issued in December 2009 to fund ACS acquisition 3 Free Cash Flow: see slide 21 for explanation of non-gaap measures

7 Monthly Average Rate Oct 08 7 Financing Dynamics Xerox s value proposition includes leasing of Xerox equipment Maintain 7:1 leverage ratio of debt to equity on these finance assets $ billions Total Xerox Translation US$ to Euro US$ to Euro Dec Mar Jun Currency 12% Qtrly Mvt Sep Dec 09 Fin. Assets $ 7.6 Debt Financing $ 7.6 $ 6.6 Core 2 - $ 2.7 Yen Transaction US$ and Euro to Yen Euro US$ Oct 08 Dec Mar Jun Sep $ 9.3 5% Qtrly Mvt (7)% Qtrly Mvt 2.0% 1.0% 0.0% assumes $257M put under private placements (final maturity 2023) 2 Core debt includes $2B in debt issued in December 2009 to fund ACS acquisition Dec 09 $ millions $69M $58M 1,600 1, Balanced Debt Maturities Debt Ladder 15 yr putable notes 1 Receivables Quarterly Provisions and write-offs as a % of Receivables remains less than 1% Write-offs % Receivables Bad Debt Provision% Receivables $90M $81M $59M $49M Q Q Q $68M $82M Q

8 Post-Sale Revenue (in millions) CC* Growth Q Post Sale $ 3,069 Growth 1 Flat (4%) Post Sale at CC* Unbundled supplies growth drives sequential improvement Developing markets trend improving, post sale down 1% Core annuity stable - down 3%@ CC Page volume declined 8% Q $3,074 Install base stable, color transition continues Supplies and other (0.0)% Outsourcing Finance Income (12) (17) (0.4)% (0.6)% Q Post Sale Key Indicators Paper 249 (43) (1.4)% Color Total Digital Service and rental 1,087 (47) (1.5)% Revenue 5% 1% Q $ 2,955 (3.9)% CC 1% (3)% Developing Markets 363 (3) (0.1)% MIF (Install Base) 17% 1% Pages 4% (8)% 8 *Constant currency (CC): see slide 21 for explanation of non-gaap measures. 1 Actual growth weighted impact: Finance income (0.3)%; Outsourcing 0.5%; Service and rental 0.2%; Paper (1.0)%; and Supplies and other 0.4% MIF (Machines in Field) exclude printers, developing markets & GIS. Color and digital revenue excludes GIS. Pages includes estimates for developing markets, GIS and printers

9 2010 Full Year Guidance (including ACS) Earnings Cash Flow GAAP EPS $ $0.46 Cash from Operations Adj. EPS* $ $0.85 ~$2.6B *Adopting standard methodology for adjusting GAAP EPS Adjusted EPS Adjusted EPS to exclude: Amortization of intangibles Restructuring and asset impairment costs Restructuring 1 Estimated Q1 Charge ~$250M Estimated FY Charge ~$280M Targeted Focus Areas Acquisition-related costs including direct transaction costs and specifically defined integration costs Discrete unusual or infrequent items RD&E SAG Gross Margin 9 Guidance assumes that the ACS acquisition will close in early February *Guidance - Adjusted EPS: see slide 21 for explanation of non-gaap measures 1 Excludes anticipated Q1Fuji Xerox restructuring of approximately $25M.

10 ACS Update Shareholder meetings scheduled for Feb 5, will close shortly thereafter Year 1 profit synergies = $100M base case Acquisition Operations Office and teams in place to drive synergy capture: Corporate Governance over 30 work streams / clear ownership and accountability for deliverables Delivery & Infrastructure 20 projects worldwide Sales significant revenue/profit opportunities identified Innovation technology benefits validated 10

11 Summary 2009 Performance Delivered strong cash flow and cost/expense reductions in a challenging year Operational performance continues to improve sequentially Competitive position strengthened through innovative technology and industry leading Managed Print Services offering ACS acquisition opens new market opportunities and strengthens financial position 2010 Priorities Effective ACS transition; capture synergies Grow revenue and maintain leadership in innovation Continue focus on cost and expense management Drive cash flow and achieve debt reduction goals Q guidance* Q1 Adjusted EPS $ $0.13, GAAP EPS $(0.11) - $(0.13) 11 Includes ACS and assumes an early February close *Guidance - Adjusted EPS: see slide 21 for explanation of non-gaap measures

12 GAAP EPS to Adjusted EPS Guidance Track Earnings Per Share (in millions; except per share amounts) Q FY 2010 GAAP EPS $(0.11) - $(0.13) $ $ 0.46 Adjustments: Acquisition Related Costs $ 0.02 $ 0.03 Intangibles Amortization Xerox Restructuring Charge Fuji Xerox Restructuring Charge Venezuela Devaluation $ 0.24 $ 0.39 Adjusted EPS $ $ 0.13 $ $ 0.85 Estimated Weighted Avg Shares 1,230 1,360 The full year EPS may differ from the sum of the quarterly EPS calculations due to rounding and the effects of the changes in average shares in the individual quarters versus the full year 12 Guidance - Adjusted EPS: see slide 21 for explanation of non-gaap measures

13 Supplemental Slides

14 Revenue 2009 (in millions) Q1 Q2 Q3 Q4 FY Total Revenue $ 3,554 $ 3,731 $ 3,675 $4,219 $ 15,179 Growth (18%) (18)% (16)% (3)% (14%) CC* Growth (12%) (13)% (14)% (7)% (11%) Post Sale Growth $ 2,784 (14%) $ 2,903 (14)% $ 2,873 (11)% $3,069 flat $ 11,629 (10%) CC* Growth (8%) (8)% (9)% (4)% (7%) Equipment $ 770 $ 828 $ 802 $1,150 $ 3,550 Growth (30%) (29)% (29)% (11)% (24%) CC* Growth (26%) (25)% (28)% (15)% (23%) 14 *Constant currency: see slide 21 for explanation of non-gaap measures

15 Color Performance Total Color Revenue Quarterly Color Trends $1,731M $1,740M Total Revenue 1% CC) Color Revenue 1 : % of Post Sale Q % Q % Q % $1,119 $1,180 Post Sale 5% CC) % of Equipment % of Total Revenue 50% 40% 53% 43% 55% 45% Color Pages 2 : Growth 34% 23% 4% $612 $560 Equipment (8%) CC) % of Total Pages 14% 18% 22% Q Q Constant currency: see slide 21 for explanation of non-gaap measures 1 Color revenue excludes GIS results 2 Color pages exclude GIS, developing markets and printers in 2007 and 2008

16 Production Segment Production Revenue Production Overview Q4 $1,357M $1,305M Total Revenue (4%) CC) Improving revenue and install performance Mono page volume declines continue to impact post sale revenue and margins $930 $927 Post Sale (flat) CC) Operating margin stable at 5.1% Good high-end color performance from igen4, Xerox 700 and new 7002/8002 digital presses $427 $378 Q Q Equipment (11%) CC) Install Growth 1 Q FY 2009 Production Monochrome (15%) (22%) Production Color (7%) (11%) 16 Constant currency: see slide 21 for explanation of non-gaap measures Beginning in 2008, developing markets results are included in the results of the Production, Office and Other segments 1 Install growth includes Xerox-branded product shipments to GIS

17 Office Segment $2,409M Office Revenue $2,369M Total Revenue (2%) CC) Office Overview Q4 Improvement from trend driven by Supplies and developing markets Channel inventories stabilized $1,601 $1,640 Post Sale 2% CC) Operating margin of 11.3%, highest level since Q ColorQube Higher than average proportion of new business $808 $729 Q Q Equipment (10%) (-13%@ CC) Install Growth 1 Q FY 2009 Office B&W Copiers/MFDs (13%) (37%) Segments 1 (11-20) ppm (61%) (83%) Segments 2-5 (21-90) ppm 2 3% 4% Office Color MFDs (10%) (20%) Color Printers (31%) (34%) 17 Constant currency: see slide 21 for explanation of non-gaap measures Beginning in 2008, developing markets results are included in the results of the Production, Office and Other segments 1 Install growth includes Xerox-branded product shipments to GIS 2 Segments 2-5 (21-90) ppm includes 95 ppm, segment 6 device with an embedded controller

18 Developing Markets Developing Markets Revenue $545M $505M Total Revenue (7%) Developing Markets Overview Q4 Improving trend, especially in equipment and supplies $365 $363 Revenue up 23% sequentially Post Sale (1%) Lapped prior year currency movements $180 $142 Equipment (21%) Q Q Beginning in 2008, developing markets results are not reported as a separate segment, but are included within the results of the Production, Office and Other segments

19 Restructuring and Cost Action Details 2010 Restructuring 2009 Incremental Cost Actions Approximate 2010 Charge Approximate 2010 Savings ~$280M ~$140M 2009 Savings Objective $300M Q Savings ~ $100M Secures 2009 cost / margin progress: Recognizes lower revenue base out of 2009 Leverages digital product reliability and system improvements Enables investments in growth areas Focus areas: Supply chain and manufacturing infrastructure Back office functions Technical service and managed service costs Development and engineering costs FY 2009 Savings ~ $350M 2008 Restructuring 2009 Savings Objective $250M Q Savings ~ $ 70M FY 2009 Savings ~ $280M 19

20 Appendix

21 Non-GAAP Financial Measures 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. Currencies for developing market countries (Latin America, Brazil, Middle East, India, Eurasia and Central-Eastern Europe) that we operate in are reported at actual exchange rates for both actual and constant revenue growth rates because (1) these countries historically have had volatile currency and inflationary environments and (2) our subsidiaries in these countries have historically taken pricing actions to mitigate the impact of inflation and devaluation. 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. Adjusted Net Income and EPS : To better understand the trends in our business, we believe that it is helpful to adjust diluted earnings per share and net income for the fourth quarter and full year 2009 (including guidance) to exclude the effect of the fourth quarter 2009 costs related to the acquisition of ACS. Management believes that excluding the effects of these items enables investors to better understand and analyze the current periods results and provides a better measure of comparability given the discrete nature of these charges. 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 slide 23. Adjusted Effective Tax Rate : To better understand the trends in our business, we believe that it is helpful to adjust the effective tax rate for the fourth quarter 2009 to exclude the fourth quarter 2009 costs related to the acquisition of ACS. Management believes that excluding the tax effects of this item will enable investors to better understand and analyze the current periods effective tax rate given the discrete nature of these items in the respective period. A reconciliation of this non- GAAP financial measure to the most directly comparable financial measure calculated and presented in accordance with GAAP is set forth on slide

22 Non-GAAP Financial Measures Free Cash Flow : To better understand the trends in our business, we believe that it is helpful to adjust cash flows from operations to exclude amounts for certain capital expenditures including internal use software. Management believes this measure gives investors an additional perspective on cash flow from operating activities in excess of amounts required for reinvestments. It provides a measure of our ability to fund acquisitions, dividends and share repurchase. It also is used to measure our yield on market capitalization. Free Cash Flow per share : This non-gaap measure is calculated by dividing Free Cash Flow by our diluted shares outstanding. Management believes this measures allows us to benchmark and make relative comparisons of our Free Cash Flow generation against other companies in our industry and market, since it allows us to measure Free Cash Flow relative to our market capitalization and stock price. Free cash flow per share is solely used by management as a means to assess the Company s Free Cash Flow and should not be construed as an amount that accrues directly to the shareholders benefit. 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 slide Guidance - Adjusted EPS : To better understand the trends in our business and the impact of the ACS acquisition postclosing, we believe it is necessary to adjust first quarter and full year 2010 diluted earnings per share to exclude the effects of the following items: (1) the amortization of purchased intangible assets; (2) restructuring and asset impairment charges including those incurred by Fuji Xerox; and (3) acquisition related costs. In addition, we have also excluded the loss associated with the Venezuela devaluation given the discrete nature of this loss. Management believes that excluding the effects of these items enables investors to better understand and analyze the impact of the ACS acquisition as well as results for a particular period as compared to prior periods. Management also expects to use this non-gaap financial measure in its own evaluation of the Company s performance in 2010, particularly when comparing performance to prior periods. 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 slide 12. Management believes that these non-gaap financial measures provide an additional means of analyzing the current periods results against the corresponding prior periods 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. 22

23 2009 Q4 / Full Year Adjusted Net Income and EPS Q FY 2009 Adjusted Net Income/EPS (in millions, except per share data) Net Income - Xerox EPS Net Income - Xerox EPS As Reported $ 180 $ 0.20 $ 485 $ 0.55 Q Acquisition related costs As Adjusted $ 221 $ 0.25 $ 526 $

24 2009 Q4 / Full Year Adjusted Effective Tax Rate Q Adjusted Effective Tax Rate (in millions) Pre-Tax Income Income Taxes Effective Tax Rate As Reported $ 194 $ % Q Acquisition related costs As Adjusted $ 257 $ % FY 2009 Adjusted Effective Tax Rate (in millions) Pre-Tax Income Income Taxes Effective Tax Rate As Reported $ 627 $ % Q Acquisition related costs As Adjusted $ 690 $ % 24

25 2009 Free Cash Flow / Free Cash Flow Per Share Reconciliation Free Cash Flow per share FY 2009 (in millions except for per share data. Shares in thousand.) Cash from Operations $ 2,208 CAPEX (including internal use software) 193 Free Cash Flow (FCF) $ 2,015 Adjusted Weighted Average Shares Outstanding 879,520 Free Cash Flow per share $