News from Xerox For Immediate Release Xerox Corporation 201 Merritt 7 Norwalk, CT 06851-1056 Tel +1-203-968-3000 Xerox Reports Strong Fourth-Quarter 2017 Results; Delivers on Full-Year Commitments Total revenue of $2.7 billion, up 0.5 percent or down 2.0 percent in constant currency year-over-year Equipment sale revenue up 4.3 percent or 1.5 percent in constant currency year-overyear Adjusted operating margin of 14.4 percent, up 0.2 points year-over-year Operating cash flow, both GAAP and adjusted, at high-end of guidance ranges Second-year savings from Strategic Transformation program above target Estimated non-cash charge of $400 million associated with the enactment of U.S. tax reform resulted in GAAP loss of 78 cents per share Adjusted EPS of $1.04, up 4 cents year-over-year Provides full-year 2018 GAAP EPS guidance of $2.30 to $2.50 and adjusted EPS of $3.50 to $3.70 NORWALK, Conn., Jan. 31, 2018 - Xerox (NYSE: XRX) today announced its fourth-quarter 2017 financial results that reflect meaningful improvements in revenue, operating margin and earnings. One year ago, I told the market that to position Xerox for long-term success and deliver shareholder value, we would focus on the growth areas in our industry to improve our revenue trajectory while continuing with our Strategic Transformation initiatives to increase our profitability and margins, said Xerox CEO Jeff Jacobson. With positive results across all metrics, our fourth-quarter performance clearly demonstrates the progress we have made and enabled us to deliver on our commitments for the full-year. Jacobson added, Building on the positive momentum from 2017, today we announced an agreement to combine with Fuji Xerox to create a world leader in innovative print technologies and intelligent work solutions. The new company expands the long-standing relationship between Xerox and Fujifilm, and will be better positioned to meet customer expectations and deliver incremental value to our shareholders. Fourth Quarter 2017 Results In the fourth quarter, Xerox recorded an estimated non-cash charge of $400 million related to the enactment of the U.S. Tax Cuts and Jobs Act (U.S. tax reform). Including this charge, the company had a fourth-quarter 2017 GAAP loss from continuing operations of 78 cents per share. Adjusted earnings per share (EPS) was $1.04, up 4 cents year-over-year and excludes $1.82 per share of after-tax costs related to the amortization of intangibles, restructuring and related costs, certain retirement-related costs, and other discrete adjustments including a $1.55 per share charge associated with the enactment of U.S. tax reform. 1
Revenues were $2.7 billion in the quarter, up 0.5 percent or down 2.0 percent in constant currency. The successful launch of new products earlier in the year helped drive equipment sale revenue growth of 4.3 percent or 1.5 percent in constant currency. Post sale revenue was 75 percent of total revenue. Fourth-quarter adjusted operating margin was 14.4 percent, up 0.2 points year-over-year. EPS from continuing operations Gross Margin SAG as % of Revenue Effective Tax Rate GAAP $(0.78)* 39.6% 24.6% 196.5%* $(1.48)* (0.4) pts (1.2) pts (186.4) pts* Adjusted $1.04 40.4% 23.2% 26.2% Year- Better/(Worse) over-year Better/(Worse) Yearover-Year $0.04 0.1 pts *Includes an estimated charge of $400 million associated with the enactment of U.S. tax reform. (0.1) pts (5.1) pts Including the previously announced $350 million impact from the termination of certain accounts receivable sales programs, operating cash flow from continuing operations was a $28 million use of cash. On an adjusted basis, operating cash flow from continuing operations was $322 million. Cash balance at the end of 2017 was $1.3 billion. The company returned $68 million in dividends to shareholders in the quarter. Full Year 2017 Results Total revenue of $10.3 billion, down 4.7 percent and in line with the company s guidance of down mid-single digits Adjusted operating margin of 12.8 percent, up 0.3 points and within the expected range of 12.5 to 13.5 percent Strategic Transformation cost savings of $680 million, above the $600 million target Including the previously announced $500 million in incremental U.S. pension contributions and $350 million impact from the termination of certain accounts receivable sales programs, operating cash flow from continuing operations of $122 million. Adjusted operating cash flow from continuing operations of $972 million. Including estimated non-cash charge of $400 million associated with the enactment of U.S. tax reform, GAAP EPS from continuing operations of $0.70 Adjusted EPS of $3.48 cents, exceeded the company s guidance range of $3.28 to $3.44 Full Year 2018 Guidance The company expects continued progress in 2018, as projected in its financial guidance. Xerox expects 2018 GAAP earnings from continuing operations of $2.30 to $2.50 per share and adjusted EPS of $3.50 to $3.70. The company expects its revenue trajectory to improve, declining 2 to 4 percent at constant currency. 2018 adjusted operating margin is expected to expand and be in the range of 13 to 14 percent. Xerox expects to generate operating cash flow from continuing operations of $900 to $1,100 million and free cash flow from continuing operations of $750 to $950 million. Conference Call Details Xerox will be hosting a conference call today at 8:00 a.m. ET. The live event can be accessed online at https://edge.media-server.com/m6/p/7ffthvi5. 2
An archived audio webcast of this event will be available shortly following the conference call. About Xerox Xerox Corporation is a technology leader that innovates the way the world communicates, connects and works. We understand what s at the heart of sharing information - and all of the forms it can take. We embrace the integration of paper and digital, the increasing requirement for mobility, and the need for seamless integration between work and personal worlds. Every day, our innovative print technologies and intelligent work solutions 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 fourth-quarter 2017, full-year 2017 and full-year 2018 guidance: Adjusted EPS, which excludes the amortization of intangibles, restructuring and related costs, certain retirement-related costs and other discrete adjustments including the impacts from the U.S. Tax Cuts and Jobs Act. Adjusted operating margin, which excludes Other expenses, net in addition to the EPS adjustments noted above and includes equity income. Adjusted gross margin and SAG (selling, administrative and general) as a percent of revenue, which excludes certain retirement-related costs. Adjusted effective tax rate, which excludes the EPS adjustments noted above. Constant currency revenue growth, which excludes the effects of currency translation. Adjusted operating cash flow, which exclude the incremental U.S. pension contributions and the impact from eliminating certain accounts receivable sales programs. Free cash flow, which is cash flow from continuing operations less capital expenditures including internal use software. 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 measure. Additional Information and Where to Find It This release may be deemed to be solicitation material in respect of the transactions with FUJIFILM Holdings Corporation ( Fujifilm ) described herein (the Transactions ) and/or the matters to be considered at the Company s 2018 Annual Meeting of Shareholders. In connection with the Transactions and the 2018 Annual Meeting, Xerox plans to file with the Securities and Exchange Commission ( SEC ) and furnish to Xerox s shareholders one or more proxy statements and other relevant documents. BEFORE MAKING ANY VOTING DECISION, XEROX S SHAREHOLDERS ARE URGED TO READ THE PROXY STATEMENT(S) IN THEIR ENTIRETY WHEN THEY BECOME AVAILABLE AND ANY OTHER DOCUMENTS TO BE FILED WITH THE SEC IN CONNECTION WITH THE TRANSACTIONS AND/OR THE COMPANY S 2018 ANNUAL MEETING OR INCORPORATED BY REFERENCE IN THE PROXY STATEMENTS BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION ABOUT THE TRANSACTIONS AND/OR THE COMPANY S 2018 ANNUAL MEETING AND THE PARTIES RELATED THERETO. Xerox s shareholders will be able to obtain a free copy of documents filed with the SEC at the SEC s website at http://www.sec.gov. In addition, Xerox s shareholders may obtain a free copy of Xerox s filings with the SEC from Xerox s website at http://www.xerox.com under the heading Investor Relations and then under the heading SEC Filings. 3
Participants in the Solicitation The directors, executive officers and certain other members of management and employees of Xerox may be deemed participants in the solicitation of proxies from shareholders of Xerox in favor of the Transactions or in connection with the matters to be considered at the Company s 2018 Annual Meeting. Information regarding the persons who may, under the rules of the SEC, be considered participants in the solicitation of the shareholders of Xerox in connection with the Transactions or the Company s 2018 Annual Meeting will be set forth in the applicable proxy statement and other relevant documents to be filed with the SEC. You can find information about Xerox s executive officers and directors in Xerox s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, Xerox s and such persons other filings with the SEC and in Xerox s definitive proxy statement filed with the SEC on Schedule 14A. Cautionary Statement Regarding 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 and similar expressions, as they relate to us, 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; 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; 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 individually identifiable information of customers, clients and employees could be inadvertently disclosed or disclosed as a result of a breach of our security systems; reliance on third parties, including subcontractors, for manufacturing of products and provision of services; 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; the risk that we do not realize all of the expected strategic and financial benefits from the separation and spin-off of our Business Process Outsourcing business; the effects on our business resulting from actions of activist shareholders; 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 Quarterly Reports on Form 10-Q for the quarters ended March 31, 2017, June 30, 2017 and September 30, 2017 and our 2016 Annual Report on Form 10-K, as well as our Current Reports on Form 8-K filed with the SEC. Furthermore, the actual results of the Transactions could vary materially as a result of 4
a number of factors, including, but not limited to: (i) the risk that the transactions may not be completed in a timely manner or at all, which may adversely affect Xerox s business and the price of Xerox s common stock, (ii) the failure to satisfy the conditions to the consummation of the transactions, including the receipt of certain approvals from Xerox s shareholders and certain governmental and regulatory approvals, (iii) the parties may be unable to achieve expected synergies and operating efficiencies in the transactions within the expected time frames or at all, (iv) the transactions may not result in the accretion to Xerox s earnings or other benefits, (v) the occurrence of any event, change or other circumstance that could give rise to the termination of the transaction agreements, (vi) the effect of the announcement or pendency of the transactions on Xerox s and/or Fujifilm business relationships, operating results, and business generally, risks related to the proposed transactions disrupting Xerox s current plans and operations and potential difficulties in Xerox s employee retention as a result of the transactions, (vii) risks related to diverting management's attention from Xerox s ongoing business operations, (viii) the outcome of any legal proceedings that may be instituted against Xerox, its officers or directors related to the transaction agreements or the transactions and (ix) the possibility that competing offers or acquisition proposals for Xerox will be made. 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. Fuji Xerox Co., Ltd. ( Fuji Xerox ) is a joint venture between Xerox Corporation and Fujifilm in which Xerox holds a noncontrolling 25% equity interest and Fujifilm holds the remaining equity interest. In April 2017, Fujifilm formed an independent investigation committee ( IIC ) to primarily conduct a review of the appropriateness of the accounting practices at Fuji Xerox s New Zealand subsidiary and at other subsidiaries. The IIC completed its review during the second quarter 2017 and identified aggregate adjustments to Fuji Xerox s financial statements of approximately JPY 40 billion (approximately $360 million) primarily related to misstatements at Fuji Xerox s New Zealand and Australian subsidiaries. We determined that our share of the total adjustments identified as part of the investigation was approximately $90 million and impacted our fiscal years 2009 through 2017. We concluded that we should revise our previously issued annual and interim consolidated financial statements for 2014, 2015 and 2016 and the first quarter of 2017 the next time they are filed. Our review of this matter has been completed. However, Fujifilm and Fuji Xerox continue to review Fujifilm s oversight and governance of Fuji Xerox as well as Fuji Xerox s oversight and governance over its businesses in light of the findings of the IIC. At this time, we can provide no assurances relative to the outcome of any potential governmental investigations or any consequences thereof that may happen as a result of this matter. -XXX- Media Contact: Carl Langsenkamp, Xerox, +1-585-423-5782, carl.langsenkamp@xerox.com Investor Contact: Jennifer Horsley, Xerox, +1-203-849-2656, jennifer.horsley@xerox.com Note: To receive RSS news feeds, visit https://www.news.xerox.com. For open commentary, industry perspectives and views, visit http://twitter.com/xerox, http://connect.blogs.xerox.com, http://www.facebook.com/xeroxcorp, https://www.instagram.com/xerox/, http://www.linkedin.com/company/xerox, http://www.youtube.com/xeroxcorp. Xerox and Xerox and Design are trademarks of Xerox in the United States and/or other countries. 5
Xerox Corporation Condensed Consolidated Statements of (Loss) Income (Unaudited) December 31, Year Ended December 31, (in millions, except per-share data) 2017 2016 2017 2016 Revenues Sales $ 1,146 $ 1,133 $ 4,073 $ 4,319 Services, maintenance and rentals 1,530 1,524 5,898 6,127 Financing 71 77 294 325 Total Revenues 2,747 2,734 10,265 10,771 Costs and Expenses Cost of sales 711 700 2,491 2,657 Cost of services, maintenance and rentals 914 909 3,580 3,725 Cost of financing 34 31 133 128 Research, development and engineering expenses 114 113 446 476 Selling, administrative and general expenses 676 639 2,631 2,695 Restructuring and related costs 24 92 220 264 Amortization of intangible assets 12 14 53 58 Other expenses, net 36 57 141 200 Total Costs and Expenses 2,521 2,555 9,695 10,203 Income before Income Taxes & Equity Income (1) 226 179 570 568 Income tax expense 444 18 481 62 Equity in net income of unconsolidated affiliates 25 27 115 127 (Loss) Income from Continuing Operations (193) 188 204 633 Income (loss) from discontinued operations, net of tax 6 (1,028) 3 (1,093) Net (Loss) Income (187) (840) 207 (460) Less: Net income attributable to noncontrolling interests 3 3 12 11 Net (Loss) Income Attributable to Xerox $ (190) $ (843) $ 195 $ (471) Amounts Attributable to Xerox: Net (loss) income from continuing operations $ (196) $ 185 $ 192 $ 622 Income (loss) from discontinued operations, net of tax 6 (1,028) 3 (1,093) Net (Loss) Income Attributable to Xerox $ (190) $ (843) $ 195 $ (471) Basic (Loss) Earnings per Share (2) : Continuing operations $ (0.78 ) $ 0.71 $ 0.70 $ 2.36 Discontinued operations 0.02 (4.06 ) 0.01 (4.31 ) Total Basic (Loss) Earnings per Share $ (0.76 ) $ (3.35 ) $ 0.71 $ (1.95 ) Diluted (Loss) Earnings per Share (2) : Continuing operations $ (0.78 ) $ 0.70 $ 0.70 $ 2.33 Discontinued operations 0.02 (4.00 ) 0.01 (4.26 ) Total Diluted (Loss) Earnings per Share $ (0.76 ) $ (3.30 ) $ 0.71 $ (1.93 ) (1) Referred to as Pre-Tax (Loss) Income throughout the remainder of this document. (2) Reflects our one-for-four reverse stock split that became effective on June 14, 2017. See "Financial Review" section. 6
Xerox Corporation Condensed Consolidated Statements of Comprehensive (Loss) Income (Unaudited) December 31, Year Ended December 31, (in millions) 2017 2016 2017 2016 Net (loss) income $ (187) $ (840) $ 207 $ (460) Less: Net income attributable to noncontrolling interests 3 3 12 11 Net (Loss) Income Attributable to Xerox (190) (843) 195 (471) Other Comprehensive (Loss) Income, Net: Translation adjustments, net (8) (433) 483 (347) Unrealized gains (losses), net 5 (39) 1 (15) Changes in defined benefit plans, net 150 233 106 126 Other Comprehensive Income (Loss), Net 147 (239) 590 (236) Less: Other comprehensive (loss) income, net attributable to noncontrolling interests (2) 1 (3) Other Comprehensive Income (Loss), Net Attributable to Xerox 147 (237) 589 (233) Comprehensive (Loss) Income, Net (40) (1,079) 797 (696) Less: Comprehensive income, net attributable to noncontrolling interests 3 1 13 8 Comprehensive (Loss) Income, Net Attributable to Xerox $ (43) $ (1,080) $ 784 $ (704) 7
Xerox Corporation Condensed Consolidated Balance Sheets (Unaudited) (in millions, except share data in thousands) December 31, 2017 December 31, 2016 Assets Cash and cash equivalents $ 1,293 $ 2,223 Accounts receivable, net 1,357 961 Billed portion of finance receivables, net 112 90 Finance receivables, net 1,317 1,256 Inventories 915 841 Assets of discontinued operations 1,002 Other current assets 236 619 Total current assets Finance receivables due after one year, net 5,230 2,323 6,992 2,398 Equipment on operating leases, net 454 475 Land, buildings and equipment, net 629 660 Investments in affiliates, at equity 1,404 1,294 Intangible assets, net 268 290 Goodwill 3,930 3,787 Deferred tax assets, long-term 1,026 1,472 Other long-term assets 682 683 Total Assets $ 15,946 $ 18,051 Liabilities and Equity Short-term debt and current portion of long-term debt $ 282 $ 1,011 Accounts payable 1,108 1,126 Accrued compensation and benefits costs 444 420 Liabilities of discontinued operations 1,002 Other current liabilities 907 1,095 Total current liabilities Long-term debt 2,741 5,235 4,654 5,305 Pension and other benefit liabilities 1,595 2,240 Post-retirement medical benefits 662 698 Other long-term liabilities 206 193 Total Liabilities 10,439 13,090 Convertible Preferred Stock 214 214 Common stock 255 254 Additional paid-in capital 3,893 3,858 Retained earnings 4,856 4,934 Accumulated other comprehensive loss (3,748) (4,337) Xerox shareholders equity 5,256 4,709 Noncontrolling interests 37 38 Total Equity 5,293 4,747 Total Liabilities and Equity $ 15,946 $ 18,051 Shares of common stock issued and outstanding 254,613 253,594 8
Xerox Corporation Condensed Consolidated Statements of Cash Flows (Unaudited) December 31, Year Ended December 31, (in millions) 2017 2016 2017 2016 Cash Flows from Operating Activities: Net (loss) income $ (187) $ (840) $ 207 $ (460) (Income) loss from discontinued operations, net of tax (6) 1,028 (3) 1,093 (Loss) income from continuing operations (193) 188 204 633 Adjustments required to reconcile net (loss) income to cash flows from operating activities: Depreciation and amortization 128 137 527 563 Provision for receivables 8 4 46 43 Provision for inventory 6 7 27 28 Net gain on sales of businesses and assets (1) (2) (15) (22) Undistributed equity in net income of unconsolidated affiliates 38 (9) (18) (75) Stock-based compensation 13 19 52 50 Restructuring and asset impairment charges 23 76 201 230 Payments for restructurings (55) (35) (224) (118) Defined benefit pension cost 61 19 194 127 Contributions to defined benefit pension plans (119) (76) (836) (178) (Increase) decrease in accounts receivable and billed portion of finance receivables (355) 22 (529) (151) Collections of deferred proceeds from sales of receivables 56 55 213 246 Decrease (increase) in inventories 118 111 (69) 7 Increase in equipment on operating leases (62) (64) (217) (268) (Increase) decrease in finance receivables (47) (12) 162 126 Collections on beneficial interest from sales of finance receivables 8 4 21 24 Decrease (increase) in other current and long-term assets 29 53 (17) 82 (Decrease) increase in accounts payable and accrued compensation (38) 6 (42) (244) (Decrease) increase in other current and long-term liabilities (62) 31 (15) (51) Net change in income tax assets and liabilities 446 (18) 410 (191) Net change in derivative assets and liabilities (15) (30) 75 (30) Other operating, net (15) (24) (28) 187 Net cash (used in) provided by operating activities of continuing operations (28) 462 122 1,018 Net cash provided by (used in) operating activities of discontinued operations 9 111 (88) 77 Net cash (used in) provided by operating activities (19) 573 34 1,095 Cash Flows from Investing Activities: Cost of additions to land, buildings and equipment (24) (28) (69) (93) Proceeds from sales of land, buildings and equipment 1 2 3 25 Cost of additions to internal use software (11) (11) (36) (45) Proceeds from sale of businesses 20 Acquisitions, net of cash acquired (11) (13) (87) (30) Other investing, net 130 (9) 138 (3) Net cash provided by (used in) investing activities of continuing operations 85 (59) (31) (146) Net cash used in investing activities of discontinued operations (77 ) (251 ) Net cash provided by (used in) investing activities 85 (136) (31) (397) Cash Flows from Financing Activities: Net (payments) proceeds on debt (486) 884 (822) 925 Common stock dividends (64) (79) (274) (307) Preferred stock dividends (4) (6) (17) (24) Proceeds from issuances of common stock 3 9 Repurchases related to stock-based compensation (1) (15) (1) Payments to noncontrolling interests (1) (4) (18) (17) Other financing, net 161 (1) Net cash (used in) provided by financing activities (555 ) 797 (985 ) 584 Effect of exchange rate changes on cash and cash equivalents 1 (39) 52 (30) Increase in cash of discontinued operations (247) (257) (Decrease) increase in cash and cash equivalents (488) 948 (930) 995 Cash and cash equivalents at beginning of period 1,781 1,275 2,223 1,228 Cash and Cash Equivalents at End of Period $ 1,293 $ 2,223 $ 1,293 $ 2,223 9
Financial Review Transaction to Combine Xerox and Fuji Xerox Xerox Corporation and Fujifilm Holdings Corporation ( Fujifilm ) today announced that they have entered into a definitive agreement to combine Xerox and their longstanding Fuji Xerox joint venture. The combined company will be a global leader in innovative print technologies and intelligent work solutions. This proposed combination provides Xerox shareholders with significant cash at closing, as well as a substantial interest in the significantly stronger combined company. The transaction has been unanimously approved by the Board of Directors of both Fujifilm and Xerox. Additional information about this transaction can be found in the parties' joint release. Correction of Fuji Xerox Misstatement in Prior Period Financial Statements Fuji Xerox is a joint venture between Xerox Corporation and Fujifilm Holdings Corporation ( Fujifilm ) in which Xerox holds a noncontrolling 25% equity interest and Fujifilm holds the remaining equity interest. In April 2017, Fujifilm publicly announced it had formed an independent investigation committee (IIC) to conduct a review of the appropriateness of the accounting practices at Fuji Xerox s New Zealand subsidiary related to the recovery of receivables associated with certain bundled leasing transactions that occurred in, or prior to, Fuji Xerox s fiscal year ending March 31, 2016. The IIC s review, completed during the second quarter 2017, identified total aggregate adjustments to Fuji Xerox s prior period financial statements of approximately JPY 40 billion (approximately $360 million based on the Yen/U.S. Dollar spot exchange rate at March 31, 2017 of 111.89). The adjustments identified by the IIC primarily related to misstatements at Fuji Xerox s New Zealand subsidiary as well as their Australian subsidiary and certain other adjustments. We determined that our cumulative share of the total adjustments identified as part of the IIC's investigation was approximately $90 million 1 and impacted our fiscal years 2009 through 2017. In the second quarter 2017, we determined that the misstatements to our equity income in prior years and in first quarter 2017 resulting from the IIC s review were immaterial to our previously issued financial statements. However, we concluded that the cumulative correction of these misstatements would have had a material effect on our current year consolidated financial statements. Accordingly, we will revise our previously issued annual and interim consolidated financial statements for 2014, 2015 and 2016 and the first quarter of 2017 the next time they are filed. Certain of the corrections discussed above affected periods prior to fiscal year 2014, and this effect was reflected as a cumulative, net of tax adjustment to reduce retained earnings as of January 1, 2014 by $69 million. Amounts throughout this release have been adjusted to incorporate the revised amounts, where applicable. Reverse Stock Split As a result of the spin-off of the company's Business Process Outsourcing (BPO) business, now Conduent Incorporated, Xerox's market capitalization was divided. Consequently, the company proposed a reverse stock split, which was intended to increase the per share trading price of Xerox common stock and to improve its liquidity and facilitate its trading. On May 23, 2017, the Board of Directors authorized the reverse stock split of outstanding Xerox common stock at a ratio of one-for-four shares, together with the proportionate reduction in the authorized shares of its common stock from 1,750,000,000 shares to 437,500,000 shares. Shareholder approval for the reverse stock split was obtained at the company's Annual Shareholders Meeting on May 23, 2017 and the reverse stock split became effective on June 14, 2017. At the effective time, every four shares of the company s common stock that were issued and outstanding were automatically combined into one issued and outstanding share, without any change in par value of such shares. Accordingly, we reclassified $760 million from Common stock to Additional paidin capital. The reverse stock split also correspondingly affected all outstanding Xerox equity awards and outstanding convertible securities. All authorized, issued and outstanding stock and per share amounts contained within the accompanying Condensed Consolidated Financial Statements have been adjusted to reflect this reverse stock split for all prior periods presented. 10
Separation Update On December 31, 2016, Xerox Corporation completed the separation of its BPO business from its Document Technology and Document Outsourcing (DT/DO) business (the Separation ). The Separation was accomplished through the transfer of the BPO business into a new legal entity, Conduent Incorporated ("Conduent"), and then distributing one hundred percent (100%) of the outstanding common stock of Conduent to Xerox Corporation stockholders (the Distribution ). Conduent is now an independent public company trading on the New York Stock Exchange ( NYSE ) under the symbol CNDT. As a result of the Separation and Distribution, the BPO business is presented as a discontinued operation and, as such, has been excluded from continuing operations for all periods presented. Segment Changes Following the separation of the BPO business, we realigned our operations to better manage the business and serve our customers and the markets in which we operate. In 2017, we transitioned to a geographic focus and are primarily organized from a sales perspective on the basis of go-to-market sales channels. These sales channels are structured to serve a range of customers for our products and services. As a result of this transition and change in structure, we concluded that we have one operating and reportable segment - the design, development and sale of document management systems and solutions. Our chief executive officer was identified as the chief operating decision maker ( CODM ). All of the company s activities are interrelated, and each activity is dependent upon and supportive of the others, including product development, supply chain and back-office support services. In addition, all significant operating decisions, by management and the Board, are largely based upon an analysis of Xerox on a total Company basis, including assessments related to the company s incentive compensation plans. (1) The difference between the aggregate revision to retained earnings and the $90 million impact at March 31, 2017 is primarily due to currency and the impact of adjustments recorded directly by Xerox in the first quarter 2017. 11
Revenues December 31, (in millions) 2017 2016 % Change % of Total Revenue CC % Change 2017 2016 Equipment sales $ 682 $ 654 4.3% 1.5% 25% 24% Post sale revenue 2,065 2,080 (0.7)% (3.1)% 75% 76% Total Revenue $ 2,747 $ 2,734 0.5% (2.0)% 100% 100% Reconciliation to Condensed Consolidated Statements of (Loss) Income: Sales $ 1,146 $ 1,133 1.1% (1.1)% Less: Supplies, paper and other sales (464) (479) (3.1)% (4.8)% Equipment Sales (1) $ 682 $ 654 4.3% 1.5% Services, maintenance and rentals $ 1,530 $ 1,524 0.4% (2.2)% Add: Supplies, paper and other sales 464 479 (3.1)% (4.8)% Add: Financing 71 77 (7.8)% (10.6)% Post Sale Revenue (1) $ 2,065 $ 2,080 (0.7)% (3.1)% North America $ 1,601 $ 1,627 (1.6)% (2.1)% 58% 60% International 1,001 955 4.8% (1.2)% 36% 35% Other 145 152 (4.6)% (4.6)% 6% 5% Total Revenue (2) $ 2,747 $ 2,734 0.5% (2.0)% 100% 100% Memo: Managed Document Services (3) $ 913 $ 883 3.4% 0.8% 33% 32% CC - Constant Currency (see "Non-GAAP Financial Measures" section). (1) Equipment sales revenue in 2016 has been revised to reclassify certain Global Imaging Systems IT-related equipment sales to other sales, which are included in Post sale revenue. (2) Refer to Appendix II for our Geographic Sales Channels and Product/Offering Definitions. (3) Excluding equipment revenue, Managed Document Services (MDS) was $768 million in fourth quarter 2017 and $743 million in fourth quarter 2016, representing an increase of 3.4% including a 2.6-percentage point favorable impact from currency. Fourth quarter 2017 total revenue increased 0.5% as compared to fourth quarter 2016, with a 2.5-percentage point favorable impact from currency. Fourth quarter 2017 total revenue reflected the following: Post sale revenue decreased 0.7% as compared to fourth quarter 2016, with a 2.4-percentage point favorable impact from currency. Post sale revenue is comprised of 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 Managed Document Services (MDS) offerings, and revenues from our Communication and Marketing Solutions (CMS) offerings that transferred to Xerox from the BPO business upon Separation. These revenues increased 0.4%, with a 2.6-percentage point favorable impact from currency. The decline at constant currency 1 reflected lower signings and installs in prior periods and the continuing decline in page volumes. These declines were partially mitigated by $20 million of higher revenues associated with a licensing agreement along with higher revenue from MDS, developing markets and acquisitions within our Global Imaging business. Supplies, paper and other sales includes unbundled supplies and other sales. These revenues declined 3.1%, with a 1.7-percentage point favorable impact from currency. The decline at constant currency 1 was driven by lower network integration solutions sales from our Global Imaging business, while supplies revenues were flat compared to prior year despite continued declines in equipment manufacturer (OEM) supplies. Financing revenue is generated from financed equipment sale transactions. The 7.8% decline in these revenues reflected a declining finance receivables balance due to lower equipment sales in prior periods and included a 2.8-percentage point favorable impact from currency. 12
December 31, (in millions) 2017 2016 % Change % of Equipment Sales CC % Change 2017 2016 Entry $ 100 $ 95 5.3% 4.1% 15% 15% Mid-range 410 401 2.2% (0.2)% 60% 61% High-end 161 150 7.3% 3.9% 23% 23% Other 11 8 NM NM 2% 1% Equipment Sales (1) $ 682 $ 654 4.3% 1.5% 100% 100% CC - Constant Currency (see "Non-GAAP Financial Measures" section). (1) Equipment sales revenue in 2016 has been revised to reclassify certain Global Imaging Systems IT-related equipment sales to other sales, which are included in Post sale revenue. Equipment sales revenue increased 4.3% as compared to fourth quarter 2016, with a 2.8-percentage point favorable impact from currency as well as the net benefits from the planned expansion of our U.S. channels. Revenue increased despite price declines of approximately 5% (which were in-line with our historic declines). The increase at constant currency 1 in entry sales reflected higher install activity associated with the new ConnectKey products partially offset by continued lower OEM activity and a higher mix of lower-end monochrome devices in developing markets. Mid-range declined modestly as a result of ongoing black-andwhite revenue declines that reflected overall market trends, nearly offset by increased sales of our new ConnectKey products. The increase in high-end sales primarily reflected higher revenues from our continuous feed inkjet and igen systems as well as demand for our recently launched Versant entry production color systems, partially offset by lower revenues from our black-and-white systems consistent with market decline trends. Revenue Metrics Total Installs Install activity includes Managed Document Services and Xerox-branded products shipped to Global Imaging Systems. Detail by product group (see Appendix II) is shown below: Entry 2 32% increase in color multifunction devices, reflecting demand for recently launched products as well as the migration from printers to multifunction devices, consistent with market trends. 34% increase in black-and-white multifunction devices, driven largely by higher activity for low-end devices in developing markets. Mid-Range 3 14% increase in mid-range color installs, reflecting higher demand for recently launched products. 1% increase in mid-range black-and-white, as demand for recently launched products more than offset market trends. High-End 3 5% decrease in high-end color systems, as growth from continuous feed inkjet color and the higher-end configurations of the recently launched Versant products was more than offset by lower installs of products at the lower-end of the high-end portfolio. 10% decrease in high-end black-and-white systems reflecting market trends. Signings Signings are defined as estimated future revenues from contracts signed during the period, including renewals of existing contracts. Our reported signings mostly represent those from our Enterprise deals, as we do not currently include signings from our growing partner print services offerings or those from our Global Imaging Systems channel. Total Contract Value (TCV) is the estimated total contractual revenue related to signed contracts; our signings expressed in TCV were as follows: 13
December 31, (in millions) 2017 2016 % Change Year Ended December 31, CC % Change 2017 2016 % Change CC % Change Signings $ 953 $ 805 18.4% 20.0% $ 2,714 $ 2,734 (0.7)% 1.0% CC - Constant Currency (see "Non-GAAP Financial Measures" section). Fourth quarter 2017 signings increased 18.4% from fourth quarter 2016, with a 1.6-percentage point unfavorable impact from currency, reflecting higher contribution from both new business and renewals. On a trailing twelve month (TTM) basis, signings decreased 0.7% from the comparable prior year period, with a 1.7-percentage point unfavorable impact from currency. New business TCV increased 11.0% from fourth quarter 2016, with a 2.5-percentage point unfavorable impact from currency, consistent with the sales cycle progression of deals corresponding with the full roll-out of our new products, and favorably impacted by a depressed level of signings in the prior year period. On a TTM basis, new business TCV decreased 12.6% from the comparable prior year period, with a 2.0-percentage point unfavorable impact from currency. The full year performance reflects ongoing competitive pressure in the market as well as the timing of new products amplified by the longer sales cycles in this area of the business. Renewal rate Renewal rate is defined as the annual recurring revenue (ARR) on contracts that are renewed during the period as a percentage of ARR on all contracts for which a renewal decision was made during the period. Contract renewal rate for the fourth quarter and full year 2017 was 86% and 84%, respectively, and increased compared to our full year 2016 renewal rate of 82%. Costs, Expenses and Other Income Summary of Key Financial Ratios The following is a summary of key financial ratios used to assess our performance: December 31, Reported Adjusted (1) (in millions) 2017 2016 B/(W) 2017 2016 B/(W) Gross Profit $ 1,088 $ 1,094 $ (6) $ 1,111 $ 1,101 $ 10 RD&E 114 113 (1) 106 109 3 SAG 676 639 (37) 636 631 (5) Equipment Gross Margin 27.4% 31.4% (4.0) pts. N/A N/A N/A Post sale Gross Margin 43.6% 42.7% 0.9 pts. 44.7% 43.1% 1.6 pts. Total Gross Margin 39.6% 40.0% (0.4) pts. 40.4% 40.3% 0.1 pts. RD&E as a % of Revenue 4.1% 4.1% 3.9% 4.0% 0.1 pts. SAG as a % of Revenue 24.6% 23.4% (1.2) pts. 23.2% 23.1% (0.1) pts. Pre-tax Income $ 226 $ 179 $ 47 N/A N/A N/A Pre-tax Income Margin 8.2% 6.5% 1.7 pts. N/A N/A N/A Adjusted Operating Profit N/A N/A N/A 395 388 7 Adjusted Operating Margin N/A N/A N/A 14.4% 14.2% 0.2 pts. Memo: Non-service retirement-related costs $ 62 $ 19 $ (43) N/A N/A N/A (1) See the Non-GAAP Financial Measures section for an explanation of the non-gaap financial measure. In fourth quarter 2016, we began to include Equity in net income of unconsolidated affiliates in the calculation of adjusted operating income and margin. Prior periods have been restated accordingly to conform to current year presentation. 14
Pre-tax Income Margin Fourth quarter 2017 pre-tax income margin of 8.2% increased 1.7-percentage points as compared to fourth quarter 2016. The increase was primarily driven by lower restructuring and related costs that reflect the phasing of our strategic transformation initiatives, as well as lower Other expenses, net largely reflecting lower interest expense. Productivity and savings from strategic transformation, along with higher licensing revenue, mitigated the impact of lower post sale revenue, unfavorable transaction currency and non-service retirement-related costs. Adjusted 1 Operating Margin Fourth quarter 2017 adjusted 1 operating margin of 14.4% increased 0.2-percentage points as compared to fourth quarter 2016, reflecting productivity and savings from strategic transformation as well as higher licensing revenue, which more than offset the pace of post sale revenue decline and the impact of revenue generating and SAG investments along with adverse transaction currency of 0.3-percentage points. Adjusted 1 operating margin was also unfavorably impacted by higher compensation and benefit expense which was partially offset by the benefit from a change in estimate related to consumables usage by customers. Gross Margin Fourth quarter 2017 gross margin of 39.6% decreased by 0.4-percentage points compared to fourth quarter 2016. On an adjusted 1 basis, gross margin of 40.4% increased by 0.1-percentage points. This performance reflected cost productivity and savings from strategic transformation, along with higher licensing revenue, that were partially offset by adverse transaction currency of 0.3-percentage points and the mix of our revenues. Fourth quarter 2017 equipment gross margin of 27.4% decreased 4.0-percentage points as compared to fourth quarter 2016, reflecting an unfavorable mix of our revenues as well as the impact of investments to support large account and channel sales and the impact of transaction currency, only partially offset by product cost productivity. Fourth quarter 2017 post sale gross margin of 43.6% increased 0.9-percentage points as compared to fourth quarter 2016. On an adjusted 1 basis, post sale gross margin of 44.7% improved 1.6-percentage points, including an approximate 0.6-percentage point benefit from a change in estimate related to consumables usage by customers; the improvement also reflected savings from strategic transformation and higher licensing revenue, which more than offset the pace of revenue decline. Research, Development and Engineering Expenses (RD&E) Fourth quarter 2017 RD&E as a percentage of revenue of 4.1% was flat compared to fourth quarter 2016. On an adjusted 1 basis, RD&E was 3.9% of revenue and decreased 0.1-percentage points compared to fourth quarter 2016. RD&E of $114 million increased by $1 million compared to fourth quarter 2016. On an adjusted 1 basis, RD&E of $106 million decreased by $3 million; the reduction reflected savings from strategic transformation including restructuring savings and lower expenses as a result of the transfer of resources to Electronics for Imaging (EFI), a third party high-end print server supplier, and the sale of our Xerox Research Centre Europe in Grenoble, France, which was mainly dedicated to supporting the discontinued BPO business. We strategically coordinate our R&D investments with Fuji Xerox. Selling, Administrative and General Expenses (SAG) SAG as a percentage of revenue of 24.6% increased by 1.2-percentage points from fourth quarter 2016 primarily as a result of higher non-service retirement-related costs. On an adjusted 1 basis, SAG was 23.2% of revenue and increased 0.1-percentage points, reflecting the impact of lower revenues that were partially mitigated by productivity and cost savings from strategic transformation, including savings from restructuring. SAG of $676 million was $37 million higher than fourth quarter 2016. On an adjusted 1 basis, SAG of $636 million increased by $5 million, including an approximate $11 million unfavorable impact from currency. The reduction at constant currency 1 primarily reflected cost savings, including savings from restructuring, and lower incentives and marketing expenses; these savings were partially offset by higher compensation and benefit expenses as well as expenses from Global Imaging acquisitions. Bad debt expense of $3 million was $1 million higher than fourth quarter 2016 and remained at less than one percent of receivables. Non-Service Retirement-Related Costs Non-service retirement-related costs were $43 million higher than fourth quarter 2016, primarily due to higher losses from pension settlements. 15
Restructuring and Related Costs Restructuring and related costs of $24 million for the fourth quarter 2017 included net restructuring and asset impairment charges of $23 million and $1 million of additional costs primarily related to professional support services associated with the implementation of the Strategic Transformation program. Fourth quarter 2017 net restructuring and asset impairment charges of $23 million included $25 million of severance costs related to headcount reductions of approximately 500 employees worldwide, $1 million of lease cancellation charges and $7 million of asset impairment losses related to the closure of a manufacturing site in Latin America. Fourth quarter 2017 actions impacted several functional areas, with approximately 35% focused on gross margin improvements and approximately 60% on SAG reductions, with the remainder focused on RD&E optimization. These costs were partially offset by $10 million of net reversals for changes in estimated reserves from prior period initiatives. Restructuring and related costs of $92 million for the fourth quarter 2016 included net restructuring and asset impairment charges of $76 million and $16 million of additional costs primarily related to professional support services associated with the implementation of the Strategic Transformation program. Fourth quarter 2016 net restructuring and asset impairment charges of $76 million included $57 million of severance costs related to headcount reductions of approximately 800 employees worldwide and $26 million of lease cancellation charges primarily related to early termination of the lease for our corporate airplane as a result of the elimination of our corporate aviation department. Fourth quarter 2016 actions impacted several functional areas, with approximately 36% focused on gross margin improvements and approximately 57% on SAG reductions, with the remainder focused on RD&E optimization. These costs were partially offset by $7 million of net reversals for changes in estimated reserves from prior period initiatives. The restructuring reserve balance as of December 31, 2017 for all programs was $109 million, of which $106 million is expected to be spent over the next twelve months. During 2018, we expect to incur additional restructuring and related costs of approximately $200 million for actions and initiatives that have not yet been finalized. Approximately $40 million of the full year charge is expected to be recognized in the first quarter of the year. Amortization of Intangible Assets Fourth quarter 2017 amortization of intangible assets of $12 million was $2 million lower than fourth quarter 2016. Worldwide Employment Worldwide employment was approximately 35,300 as of December 31, 2017 and decreased by approximately 2,300 from December 31, 2016. The reduction is primarily due to the impact of restructuring and productivity-related reductions partially offset by an increase of approximately 370 from acquisitions. Other Expenses, Net December 31, (in millions) 2017 2016 Non-financing interest expense $ 30 $ 43 Interest income (2) Gains on sales of businesses and assets (1) (2) Currency losses, net 6 Loss on sales of accounts receivable 1 4 Loss on early extinguishment of debt 7 All other expenses, net 1 6 Other expenses, net $ 36 $ 57 Non-financing interest expense Fourth quarter 2017 non-financing interest expense of $30 million was $13 million lower than fourth quarter 2016. When combined with financing interest expense (Cost of financing), total interest expense declined by $10 million from fourth quarter 2016 primarily due to a lower debt balance reflecting debt repayments of approximately $1.3 16
billion in the first quarter 2017 partially offset by new debt issued in the third quarter 2017 to fund a $500 million voluntary contribution to our U.S. defined benefit pension plans; the decline also reflected lower average interest rates. See "Debt and Customer Financing Activities" for further details. Loss on early extinguishment of debt During the fourth quarter of 2017, we recorded a $7 million loss associated with the repayment of $475 million in Senior Notes. See "Debt and Customer Financing Activities" for further information. Income Taxes Fourth quarter 2017 effective tax rate was 196.5%. This rate includes our current estimated impact of the 2017 Tax Cuts and Jobs Act (the "Tax Act") which is discussed below. On an adjusted 1 basis, fourth quarter 2017 tax rate was 26.2%. This rate was lower than the U.S. statutory tax rate of 35% primarily due to foreign tax credits. The adjusted 1 effective tax rate excludes the tax impacts associated with the following charges: restructuring and related costs, amortization of intangible assets, non-service retirement-related costs and other discrete items including the impact of the Tax Act. Fourth quarter 2016 effective tax rate was 10.1%. On an adjusted 1 basis, fourth quarter 2016 tax rate was 21.1%. Both rates were lower than the U.S. statutory tax rate primarily due to foreign tax credits resulting from anticipated dividends from our foreign subsidiaries and the geographic mix of our profits. The adjusted 1 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. Our effective tax rate is based on nonrecurring events as well as recurring factors, including the taxation of foreign income. In addition, our effective tax rate will change based on discrete or other nonrecurring events that may not be predictable. Excluding the effects of intangibles amortization, restructuring and related costs, non-service retirement-related costs and other discrete items, we anticipate that our adjusted 1 effective tax rate will be approximately 24% to 27% for full year 2018. Tax Cuts and Jobs Act (the Tax Act ) On December 22, 2017, the Tax Cuts and Jobs Act (the Tax Act ) was enacted. The Tax Act significantly revises the U.S. corporate income tax system by, among other things, lowering the U.S. statutory corporate income tax rate from 35% to 21% and implementing a territorial tax system that includes a one-time transition tax on deemed repatriated earnings of foreign subsidiaries. During the fourth quarter 2017, we recorded an estimated non-cash charge of $400 million reflecting the impact associated with the provisions of the Tax Act based on currently available information. Approximately $165 million of the charge is related to the deemed repatriation tax, $135 million from the re-measurement of U.S. deferred tax assets and liabilities to the lower enacted statutory tax rate and the remainder associated with other tax liabilities resulting from anticipated distributions of our foreign earnings. As a consequence of the Tax Act, we now anticipate the distribution of our foreign earnings and no longer consider them indefinitely reinvested. Additionally, we expect to utilize our existing foreign tax credit carryforward to settle the estimated deemed repatriation tax. Our estimated charge incorporates assumptions made based on our current interpretation of the Tax Act as well as currently available information and may change, possibly materially, as we complete our analysis and receive additional clarification and implementation guidance. Changes in interpretations and assumptions as well as actions we may take as a result of the Tax Act may also impact this estimated charge. Equity in Net Income of Unconsolidated Affiliates Equity in net income of unconsolidated affiliates primarily reflects our 25% share of Fuji Xerox net income. Fourth quarter 2017 equity income of $25 million decreased by $2 million compared to fourth quarter 2016 including $1 million of higher year-over-year charges related to our share of Fuji Xerox after-tax restructuring and other charges. Other charges included audit and other fees associated with the independent investigation of Fuji Xerox's accounting practices. 17