UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-Q
_______________
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: September 30, 2017
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-04471
XEROX CORPORATION
(Exact Name of Registrant as specified in its charter)
New York | 16-0468020 | |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | |
P.O. Box 4505, 201 Merritt 7 Norwalk, Connecticut | 06851-1056 | |
(Address of principal executive offices) | (Zip Code) | |
(203) 968-3000
(Registrant’s telephone number, including area code)
_________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | x | Accelerated filer | o | Non-accelerated filer (Do not check if smaller reporting company) | o | Smaller reporting company | o | Emerging growth company | o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Class | Outstanding at September 30, 2017 | |
Common Stock, $1 par value | 254,586,109 shares | |
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q and any exhibits to this Report contains "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 conditions, 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 markets 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 (BPO) business; 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 this Quarterly Report on Form 10-Q, our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2017 and June 30, 2017 and our 2016 Annual Report on Form 10-K, as well as our Current Reports on Form 8-K filed with the Securities and Exchange Commission (SEC). 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 Holdings Corporation (“Fujifilm”) in which Xerox holds a noncontrolling 25% equity interest and Fujifilm holds the remaining equity interest. Given our status as a minority investor, we have limited contractual and other rights to information with respect to Fuji Xerox matters. In April 2017, Fujifilm publicly announced it had 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. Fujifilm publicly announced that 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 based on the Yen/U.S. Dollar spot exchange rate at March 31, 2017 of 111.89). The adjustments primarily related to misstatements at Fuji Xerox’s New Zealand and Australian subsidiaries, as well as certain other adjustments. We determined that our cumulative share of the revised amount of total adjustments identified as part of the investigation was approximately $90 million and impacted our fiscal years 2009 through 2017. Based on our procedures, as well as those performed by Fuji Xerox and Fujifilm, we concluded that the cumulative correction of the misstatements in our historical financial statements would have had a material effect on our current year consolidated financial statements. Accordingly, 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. The Fujifilm audited financial statements were issued in Japan on July 31, 2017, and 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. In addition, 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.
Xerox 2017 Form 10-Q
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XEROX CORPORATION
FORM 10-Q
September 30, 2017
TABLE OF CONTENTS
Page | ||
For additional information about Xerox Corporation and access to our Annual Reports to Shareholders and SEC filings, free of charge, please visit our website at www.xerox.com/investor. Any information on or linked from the website is not incorporated by reference into this Form 10-Q.
Xerox 2017 Form 10-Q
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ITEM 1 — FINANCIAL STATEMENTS
XEROX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(in millions, except per-share data) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Revenues | ||||||||||||||||
Sales | $ | 981 | $ | 1,057 | $ | 2,927 | $ | 3,186 | ||||||||
Services, maintenance and rentals | 1,443 | 1,489 | 4,368 | 4,603 | ||||||||||||
Financing | 73 | 83 | 223 | 248 | ||||||||||||
Total Revenues | 2,497 | 2,629 | 7,518 | 8,037 | ||||||||||||
Costs and Expenses | ||||||||||||||||
Cost of sales | 594 | 647 | 1,780 | 1,957 | ||||||||||||
Cost of services, maintenance and rentals | 882 | 913 | 2,666 | 2,816 | ||||||||||||
Cost of financing | 33 | 32 | 99 | 97 | ||||||||||||
Research, development and engineering expenses | 108 | 118 | 332 | 363 | ||||||||||||
Selling, administrative and general expenses | 648 | 664 | 1,955 | 2,056 | ||||||||||||
Restructuring and related costs | 36 | 25 | 196 | 172 | ||||||||||||
Amortization of intangible assets | 12 | 14 | 41 | 44 | ||||||||||||
Other expenses, net | 17 | 50 | 105 | 143 | ||||||||||||
Total Costs and Expenses | 2,330 | 2,463 | 7,174 | 7,648 | ||||||||||||
Income before Income Taxes and Equity Income | 167 | 166 | 344 | 389 | ||||||||||||
Income tax expense | 18 | 28 | 37 | 44 | ||||||||||||
Equity in net income of unconsolidated affiliates | 30 | 40 | 90 | 100 | ||||||||||||
Income from Continuing Operations | 179 | 178 | 397 | 445 | ||||||||||||
Income (loss) from discontinued operations, net of tax | 3 | 8 | (3 | ) | (65 | ) | ||||||||||
Net Income | 182 | 186 | 394 | 380 | ||||||||||||
Less: Net income attributable to noncontrolling interests | 3 | 3 | 9 | 8 | ||||||||||||
Net Income Attributable to Xerox | $ | 179 | $ | 183 | $ | 385 | $ | 372 | ||||||||
Amounts Attributable to Xerox: | ||||||||||||||||
Net income from continuing operations | $ | 176 | $ | 175 | $ | 388 | $ | 437 | ||||||||
Net income (loss) from discontinued operations | 3 | 8 | (3 | ) | (65 | ) | ||||||||||
Net Income Attributable to Xerox | $ | 179 | $ | 183 | $ | 385 | $ | 372 | ||||||||
Basic Earnings (Loss) per Share(1): | ||||||||||||||||
Continuing operations | $ | 0.68 | $ | 0.66 | $ | 1.49 | $ | 1.65 | ||||||||
Discontinued operations | 0.01 | 0.03 | (0.01 | ) | (0.25 | ) | ||||||||||
Total Basic Earnings per Share | $ | 0.69 | $ | 0.69 | $ | 1.48 | $ | 1.40 | ||||||||
Diluted Earnings (Loss) per Share(1): | ||||||||||||||||
Continuing operations | $ | 0.67 | $ | 0.66 | $ | 1.47 | $ | 1.64 | ||||||||
Discontinued operations | 0.01 | 0.03 | (0.01 | ) | (0.26 | ) | ||||||||||
Total Diluted Earnings per Share | $ | 0.68 | $ | 0.69 | $ | 1.46 | $ | 1.38 | ||||||||
__________________________
(1) Reflects our one-for-four reverse stock split that became effective on June 14, 2017. Refer to Note 1 - Basis of Presentation for further information.
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
Xerox 2017 Form 10-Q
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XEROX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(in millions) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Net income | $ | 182 | $ | 186 | $ | 394 | $ | 380 | ||||||||
Less: Net income attributable to noncontrolling interests | 3 | 3 | 9 | 8 | ||||||||||||
Net Income Attributable to Xerox | 179 | 183 | 385 | 372 | ||||||||||||
Other Comprehensive Income (Loss), Net(1): | ||||||||||||||||
Translation adjustments, net | 154 | (21 | ) | 491 | 86 | |||||||||||
Unrealized gains (losses), net | 2 | (9 | ) | (4 | ) | 24 | ||||||||||
Changes in defined benefit plans, net | (41 | ) | (15 | ) | (44 | ) | (107 | ) | ||||||||
Other Comprehensive Income (Loss), Net | 115 | (45 | ) | 443 | 3 | |||||||||||
Less: Other comprehensive income (loss), net attributable to noncontrolling interests | — | — | 1 | (1 | ) | |||||||||||
Other Comprehensive Income (Loss), Net Attributable to Xerox | 115 | (45 | ) | 442 | 4 | |||||||||||
Comprehensive Income, Net | 297 | 141 | 837 | 383 | ||||||||||||
Less: Comprehensive income, net attributable to noncontrolling interests | 3 | 3 | 10 | 7 | ||||||||||||
Comprehensive Income, Net Attributable to Xerox | $ | 294 | $ | 138 | $ | 827 | $ | 376 | ||||||||
__________________________
(1) Refer to Note 16 - Other Comprehensive Income (Loss) for gross components of Other Comprehensive Income (Loss), reclassification adjustments out of Accumulated Other Comprehensive Loss and related tax effects.
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
Xerox 2017 Form 10-Q
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XEROX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in millions, except share data in thousands) | September 30, 2017 | December 31, 2016 | ||||||
Assets | ||||||||
Cash and cash equivalents | $ | 1,781 | $ | 2,223 | ||||
Accounts receivable, net | 1,031 | 961 | ||||||
Billed portion of finance receivables, net | 86 | 90 | ||||||
Finance receivables, net | 1,290 | 1,256 | ||||||
Inventories | 1,039 | 841 | ||||||
Assets of discontinued operations | — | 1,002 | ||||||
Other current assets | 402 | 619 | ||||||
Total current assets | 5,629 | 6,992 | ||||||
Finance receivables due after one year, net | 2,296 | 2,398 | ||||||
Equipment on operating leases, net | 456 | 475 | ||||||
Land, buildings and equipment, net | 636 | 660 | ||||||
Investments in affiliates, at equity | 1,441 | 1,294 | ||||||
Intangible assets, net | 276 | 290 | ||||||
Goodwill | 3,922 | 3,787 | ||||||
Deferred tax assets, long-term | 1,477 | 1,472 | ||||||
Other long-term assets | 684 | 683 | ||||||
Total Assets | $ | 16,817 | $ | 18,051 | ||||
Liabilities and Equity | ||||||||
Short-term debt and current portion of long-term debt | $ | 763 | $ | 1,011 | ||||
Accounts payable | 1,183 | 1,126 | ||||||
Accrued compensation and benefits costs | 405 | 420 | ||||||
Unearned income | 191 | 187 | ||||||
Liabilities of discontinued operations | — | 1,002 | ||||||
Other current liabilities | 910 | 908 | ||||||
Total current liabilities | 3,452 | 4,654 | ||||||
Long-term debt | 5,235 | 5,305 | ||||||
Pension and other benefit liabilities | 1,674 | 2,240 | ||||||
Post-retirement medical benefits | 674 | 698 | ||||||
Other long-term liabilities | 178 | 193 | ||||||
Total Liabilities | 11,213 | 13,090 | ||||||
Commitments and Contingencies (See Note 18) | ||||||||
Convertible Preferred Stock | 214 | 214 | ||||||
Common stock | 255 | 254 | ||||||
Additional paid-in capital | 3,880 | 3,858 | ||||||
Retained earnings | 5,116 | 4,934 | ||||||
Accumulated other comprehensive loss | (3,895 | ) | (4,337 | ) | ||||
Xerox shareholders’ equity | 5,356 | 4,709 | ||||||
Noncontrolling interests | 34 | 38 | ||||||
Total Equity | 5,390 | 4,747 | ||||||
Total Liabilities and Equity | $ | 16,817 | $ | 18,051 | ||||
Shares of common stock issued and outstanding | 254,586 | 253,594 | ||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
Xerox 2017 Form 10-Q
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XEROX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(in millions) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Cash Flows from Operating Activities: | ||||||||||||||||
Net income | $ | 182 | $ | 186 | $ | 394 | $ | 380 | ||||||||
(Income) loss from discontinued operations, net of tax | (3 | ) | (8 | ) | 3 | 65 | ||||||||||
Income from continuing operations | 179 | 178 | 397 | 445 | ||||||||||||
Adjustments required to reconcile net income to cash flows from operating activities: | ||||||||||||||||
Depreciation and amortization | 131 | 140 | 399 | 426 | ||||||||||||
Provision for receivables | 15 | 15 | 38 | 39 | ||||||||||||
Provision for inventory | 9 | 6 | 21 | 21 | ||||||||||||
Net gain on sales of businesses and assets | (13 | ) | (3 | ) | (14 | ) | (20 | ) | ||||||||
Undistributed equity in net income of unconsolidated affiliates | (26 | ) | (37 | ) | (56 | ) | (66 | ) | ||||||||
Stock-based compensation | 14 | 14 | 39 | 31 | ||||||||||||
Restructuring and asset impairment charges | 35 | 13 | 178 | 154 | ||||||||||||
Payments for restructurings | (42 | ) | (38 | ) | (169 | ) | (83 | ) | ||||||||
Defined benefit pension cost | 34 | 32 | 133 | 108 | ||||||||||||
Contributions to defined benefit pension plans | (671 | ) | (34 | ) | (717 | ) | (102 | ) | ||||||||
Increase in accounts receivable and billed portion of finance receivables | (34 | ) | (13 | ) | (174 | ) | (173 | ) | ||||||||
Collections of deferred proceeds from sales of receivables | 58 | 58 | 157 | 191 | ||||||||||||
Increase in inventories | (99 | ) | (12 | ) | (187 | ) | (104 | ) | ||||||||
Increase in equipment on operating leases | (53 | ) | (74 | ) | (155 | ) | (204 | ) | ||||||||
Decrease in finance receivables | 75 | 53 | 209 | 138 | ||||||||||||
Collections on beneficial interest from sales of finance receivables | 2 | 5 | 13 | 20 | ||||||||||||
(Increase) decrease in other current and long-term assets | (3 | ) | 20 | (46 | ) | 29 | ||||||||||
Decrease in accounts payable and accrued compensation | (4 | ) | (84 | ) | (4 | ) | (250 | ) | ||||||||
Increase (decrease) in other current and long-term liabilities | 44 | 32 | 47 | (82 | ) | |||||||||||
Net change in income tax assets and liabilities | — | (151 | ) | (36 | ) | (173 | ) | |||||||||
Net change in derivative assets and liabilities | (9 | ) | 49 | 90 | — | |||||||||||
Other operating, net | (25 | ) | 41 | (13 | ) | 211 | ||||||||||
Net cash (used in) provided by operating activities of continuing operations | (383 | ) | 210 | 150 | 556 | |||||||||||
Net cash (used in) provided by operating activities of discontinued operations | (2 | ) | 160 | (97 | ) | (34 | ) | |||||||||
Net cash (used in) provided by operating activities | (385 | ) | 370 | 53 | 522 | |||||||||||
Cash Flows from Investing Activities: | ||||||||||||||||
Cost of additions to land, buildings and equipment | (15 | ) | (19 | ) | (45 | ) | (65 | ) | ||||||||
Proceeds from sales of land, buildings and equipment | 1 | 3 | 2 | 23 | ||||||||||||
Cost of additions to internal use software | (8 | ) | (10 | ) | (25 | ) | (34 | ) | ||||||||
Proceeds from sale of businesses | 20 | — | 20 | — | ||||||||||||
Acquisitions, net of cash acquired | — | 1 | (76 | ) | (17 | ) | ||||||||||
Other investing, net | (2 | ) | 2 | 8 | 6 | |||||||||||
Net cash used in investing activities of continuing operations | (4 | ) | (23 | ) | (116 | ) | (87 | ) | ||||||||
Net cash used in investing activities of discontinued operations | — | (46 | ) | — | (174 | ) | ||||||||||
Net cash used in investing activities | (4 | ) | (69 | ) | (116 | ) | (261 | ) | ||||||||
Cash Flows from Financing Activities: | ||||||||||||||||
Net proceeds on short-term debt | — | 2 | 1 | 1,000 | ||||||||||||
Proceeds from issuance of long-term debt | 1,001 | 5 | 1,006 | 14 | ||||||||||||
Payments on long-term debt | (13 | ) | (8 | ) | (1,343 | ) | (973 | ) | ||||||||
Common stock dividends | (65 | ) | (79 | ) | (210 | ) | (228 | ) | ||||||||
Preferred stock dividends | (3 | ) | (6 | ) | (13 | ) | (18 | ) | ||||||||
Proceeds from issuances of common stock | — | 3 | — | 6 | ||||||||||||
Repurchases related to stock-based compensation | (7 | ) | — | (15 | ) | — | ||||||||||
Payments to noncontrolling interests | (5 | ) | (1 | ) | (17 | ) | (13 | ) | ||||||||
Proceeds from Conduent | — | — | 161 | — | ||||||||||||
Other financing | — | — | — | (1 | ) | |||||||||||
Net cash provided by (used in) financing activities | 908 | (84 | ) | (430 | ) | (213 | ) | |||||||||
Effect of exchange rate changes on cash and cash equivalents | 16 | 5 | 51 | 9 | ||||||||||||
Decrease (increase) in cash of discontinued operations | — | 10 | — | (10 | ) | |||||||||||
Increase (decrease) in cash and cash equivalents | 535 | 232 | (442 | ) | 47 | |||||||||||
Cash and cash equivalents at beginning of period | 1,246 | 1,043 | 2,223 | 1,228 | ||||||||||||
Cash and Cash Equivalents at End of Period | $ | 1,781 | $ | 1,275 | $ | 1,781 | $ | 1,275 | ||||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
Xerox 2017 Form 10-Q
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XEROX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in millions, except per-share data and where otherwise noted)
Note 1 – Basis of Presentation
References herein to “we,” “us,” “our,” the “company” and “Xerox” refer to Xerox Corporation and its consolidated subsidiaries unless the context suggests otherwise.
We have prepared the accompanying unaudited Condensed Consolidated Financial Statements in accordance with the accounting policies described in our 2016 Annual Report on Form 10-K (2016 Annual Report), and the interim reporting requirements of Form 10-Q. Accordingly, certain information and note disclosures normally included in our annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. You should read these Condensed Consolidated Financial Statements in conjunction with the Consolidated Financial Statements included in our 2016 Annual Report.
In our opinion, all adjustments which are necessary for a fair statement of financial position, operating results and cash flows for the interim periods presented have been made. These adjustments consist of normal recurring items. Interim results of operations are not necessarily indicative of the results of the full year.
For convenience and ease of reference, we refer to the financial statement caption “Income before Income Taxes and Equity Income” as “pre-tax income.”
Overview
On December 31, 2016, Xerox Corporation completed the Separation of its Business Process Outsourcing (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”). The Separation and Distribution were structured to be tax-free for Xerox Corporation stockholders for federal income tax purposes. Conduent is now an independent public company trading on the New York Stock Exchange (“NYSE”) under the symbol “CNDT”. After the Separation, Xerox retained the DT/DO businesses and Xerox does not beneficially own any shares of Conduent common stock.
As a result of the Separation and Distribution, the financial position and results of operations of the BPO business are presented as discontinued operations and, as such, have been excluded from continuing operations for all periods presented. The accompanying Notes to the Condensed Consolidated Financial Statements have all been revised to reflect the effect of the Separation and Distribution and all prior year balances have been revised accordingly to reflect continuing operations only. The historical statements of Comprehensive Income (Loss) and Shareholders' Equity have not been revised to reflect the Separation and instead reflect the Separation and Distribution as a final adjustment to the balances at December 31, 2016. Refer to Note 5 - Divestitures for additional information regarding discontinued operations.
In connection with the Separation, Xerox entered into several agreements with Conduent to (1) effect the legal and structural separation of Xerox and Conduent, (2) govern the relationship between Xerox and Conduent up to and after the completion of the Separation and (3) allocate between Xerox and Conduent various assets, liabilities and obligations, including, among other things, employee benefits and tax-related assets and liabilities. The agreements entered into included a separation and distribution agreement, a transition service agreement, a tax matters agreement, an employee matters agreement, an intellectual property agreement and a trademark license agreement.
Segment Discussion
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 other, including product development, supply chain and back-office support services. In addition,
Xerox 2017 Form 10-Q
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all significant operating decisions are largely based upon an analysis of Xerox at the consolidated level, including assessments related to the company’s incentive compensation plan, as well as operating decisions at the Board level.
Reverse Stock Split
On May 23, 2017, the Board of Directors authorized a reverse stock split of the issued and 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 Shareholder 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 from Common stock to Additional paid-in 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 in the accompanying Condensed Consolidated Financial Statements have been adjusted to reflect this reverse stock split for all prior periods presented.
Note 2 – 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. On April 20, 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, subsequently identified total aggregate adjustments to Fuji Xerox's financial statements of approximately JPY 40 billion (approximately $360 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 revised amount of total adjustments identified as part of the investigation was approximately $901 and impacted our fiscal years 2009 through 2017.
In the second quarter 2017, we determined that the misstatements to our Equity in net income of unconsolidated affiliates in prior years and the first quarter of 2017 identified through 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. The effect of the revision on our previously issued financial statements is provided in the tables below. Amounts throughout the consolidated financial statements and notes thereto have been adjusted to incorporate the revised amounts, where applicable.
_____________
(1) | The difference between the aggregate revision to retained earnings and the $90 impact at March 31, 2017 is primarily due to currency and the impact of adjustments recorded directly by Xerox in the first quarter 2017. |
Xerox 2017 Form 10-Q
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Revised Annual Consolidated Statements of Income
The following tables reconcile selected lines from the company’s first quarter of 2017 and fiscal years of 2016, 2015 and 2014 Consolidated Statements of Income (Loss) from the previously reported amounts to the revised amounts:
Three Months Ended March 31, 2017 | Year Ended December 31, 2016 | |||||||||||||||||||||||
As Reported | Adjustment(1) | As Revised | As Reported | Adjustment | As Revised | |||||||||||||||||||
Equity in net income of unconsolidated affiliates | $ | 16 | $ | 24 | $ | 40 | $ | 121 | $ | 6 | $ | 127 | ||||||||||||
Income from Continuing Operations | 24 | 24 | 48 | 627 | 6 | 633 | ||||||||||||||||||
Net Income (Loss) | 18 | 24 | 42 | (466 | ) | 6 | (460 | ) | ||||||||||||||||
Net Income (Loss) Attributable to Xerox | 16 | 24 | 40 | (477 | ) | 6 | (471 | ) | ||||||||||||||||
Net income from continuing operations attributable to Xerox | $ | 22 | $ | 24 | $ | 46 | $ | 616 | $ | 6 | $ | 622 | ||||||||||||
Basic Earnings (Loss) per Share: | ||||||||||||||||||||||||
Continuing operations | $ | 0.07 | $ | 0.10 | $ | 0.17 | $ | 2.33 | $ | 0.03 | $ | 2.36 | ||||||||||||
Total | $ | 0.05 | $ | 0.09 | $ | 0.14 | $ | (1.98 | ) | $ | 0.03 | $ | (1.95 | ) | ||||||||||
Diluted Earnings (Loss) per Share: | ||||||||||||||||||||||||
Continuing operations | $ | 0.07 | $ | 0.09 | $ | 0.16 | $ | 2.31 | $ | 0.02 | $ | 2.33 | ||||||||||||
Total | $ | 0.05 | $ | 0.09 | $ | 0.14 | $ | (1.96 | ) | $ | 0.03 | $ | (1.93 | ) | ||||||||||
Year Ended December 31, 2015 | Year Ended December 31, 2014 | |||||||||||||||||||||||
As Reported | Adjustment | As Revised | As Reported | Adjustment | As Revised | |||||||||||||||||||
Equity in net income of unconsolidated affiliates | $ | 135 | $ | (26 | ) | $ | 109 | $ | 160 | $ | (18 | ) | $ | 142 | ||||||||||
Income from Continuing Operations | 866 | (26 | ) | 840 | 1,052 | (18 | ) | 1,034 | ||||||||||||||||
Net Income | 492 | (26 | ) | 466 | 1,036 | (18 | ) | 1,018 | ||||||||||||||||
Net Income Attributable to Xerox | 474 | (26 | ) | 448 | 1,013 | (18 | ) | 995 | ||||||||||||||||
Net income from continuing operations attributable to Xerox | $ | 848 | $ | (26 | ) | $ | 822 | $ | 1,029 | $ | (18 | ) | $ | 1,011 | ||||||||||
Basic Earnings per Share: | ||||||||||||||||||||||||
Continuing operations | $ | 3.10 | $ | (0.10 | ) | $ | 3.00 | $ | 3.48 | $ | (0.06 | ) | $ | 3.42 | ||||||||||
Total | $ | 1.69 | $ | (0.10 | ) | $ | 1.59 | $ | 3.43 | $ | (0.06 | ) | $ | 3.37 | ||||||||||
Diluted Earnings per Share: | ||||||||||||||||||||||||
Continuing operations | $ | 3.06 | $ | (0.09 | ) | $ | 2.97 | $ | 3.43 | $ | (0.06 | ) | $ | 3.37 | ||||||||||
Total | $ | 1.67 | $ | (0.09 | ) | $ | 1.58 | $ | 3.38 | $ | (0.06 | ) | $ | 3.32 | ||||||||||
_____________
Note: The sum of quarterly earnings per share may differ from the full-year amounts due to rounding, or in the case of diluted earnings per share, because securities that are anti-dilutive in certain quarters may not be anti-dilutive on a full-year basis.
Xerox 2017 Form 10-Q
9
Revised Consolidated Statements of Comprehensive Income (Loss)
The following tables reconcile selected lines from the company’s first quarter of 2017 and fiscal years of 2016, 2015 and 2014 Consolidated Statements of Comprehensive Income (Loss) from the previously reported amounts to the revised amounts:
Three Months Ended March 31, 2017 | Year Ended December 31, 2016 | |||||||||||||||||||||||
As Reported | Adjustment | As Revised | As Reported | Adjustment | As Revised | |||||||||||||||||||
Net Income (Loss) | $ | 18 | $ | 24 | $ | 42 | $ | (466 | ) | $ | 6 | $ | (460 | ) | ||||||||||
Net Income (Loss) Attributable to Xerox | 16 | 24 | 40 | (477 | ) | 6 | (471 | ) | ||||||||||||||||
Translation adjustments, net | $ | 136 | $ | (3 | ) | $ | 133 | $ | (346 | ) | $ | (1 | ) | $ | (347 | ) | ||||||||
Other Comprehensive Income (Loss), Net | 170 | (3 | ) | 167 | (235 | ) | (1 | ) | (236 | ) | ||||||||||||||
Other Comprehensive Income (Loss), Net Attributable to Xerox | 169 | (3 | ) | 166 | (232 | ) | (1 | ) | (233 | ) | ||||||||||||||
Comprehensive Income (Loss), Net | $ | 188 | $ | 21 | $ | 209 | $ | (701 | ) | $ | 5 | $ | (696 | ) | ||||||||||
Comprehensive Income (Loss), Net Attributable to Xerox | 185 | 21 | 206 | (709 | ) | 5 | (704 | ) | ||||||||||||||||
Year Ended December 31, 2015 | Year Ended December 31, 2014 | |||||||||||||||||||||||
As Reported | Adjustment | As Revised | As Reported | Adjustment | As Revised | |||||||||||||||||||
Net Income | $ | 492 | $ | (26 | ) | $ | 466 | $ | 1,036 | $ | (18 | ) | $ | 1,018 | ||||||||||
Net Income Attributable to Xerox | 474 | (26 | ) | 448 | 1,013 | (18 | ) | 995 | ||||||||||||||||
Translation adjustments, net | $ | (660 | ) | $ | 9 | $ | (651 | ) | $ | (734 | ) | $ | 6 | $ | (728 | ) | ||||||||
Other Comprehensive Loss, Net | (484 | ) | 9 | (475 | ) | (1,381 | ) | 6 | (1,375 | ) | ||||||||||||||
Other Comprehensive Loss, Net Attributable to Xerox | (483 | ) | 9 | (474 | ) | (1,380 | ) | 6 | (1,374 | ) | ||||||||||||||
Comprehensive Income (Loss), Net | $ | 8 | $ | (17 | ) | $ | (9 | ) | $ | (345 | ) | $ | (12 | ) | $ | (357 | ) | |||||||
Comprehensive Loss, Net Attributable to Xerox | (9 | ) | (17 | ) | (26 | ) | (367 | ) | (12 | ) | (379 | ) | ||||||||||||
Revised Consolidated Balance Sheets
The following table reconciles selected lines from the company’s Consolidated Balance Sheet at March 31, 2017 and December 31, 2016 and 2015 from the previously reported amounts to the revised amounts:
As of March 31, 2017 | As of December 31, 2016 | As of December 31, 2015 | ||||||||||||||||||||||||||||||||||
As Reported | Adjustment | As Revised | As Reported | Adjustment | As Revised | As Reported | Adjustment | As Revised | ||||||||||||||||||||||||||||
Investments in affiliates, at equity | $ | 1,477 | $ | (73 | ) | $ | 1,404 | $ | 1,388 | $ | (94 | ) | $ | 1,294 | $ | 1,382 | $ | (99 | ) | $ | 1,283 | |||||||||||||||
Total Assets | 15,916 | (73 | ) | 15,843 | 18,145 | (94 | ) | 18,051 | 25,541 | (99 | ) | 25,442 | ||||||||||||||||||||||||
Retained earnings | $ | 4,987 | $ | (81 | ) | $ | 4,906 | $ | 5,039 | $ | (105 | ) | $ | 4,934 | $ | 9,686 | $ | (111 | ) | $ | 9,575 | |||||||||||||||
Accumulated other comprehensive loss | (4,179 | ) | 8 | (4,171 | ) | (4,348 | ) | 11 | (4,337 | ) | (4,642 | ) | 12 | (4,630 | ) | |||||||||||||||||||||
Xerox shareholders' equity | 4,926 | (73 | ) | 4,853 | 4,803 | (94 | ) | 4,709 | 9,074 | (99 | ) | 8,975 | ||||||||||||||||||||||||
Total Equity | 4,966 | (73 | ) | 4,893 | 4,841 | (94 | ) | 4,747 | 9,117 | (99 | ) | 9,018 | ||||||||||||||||||||||||
Total Liabilities and Equity | 15,916 | (73 | ) | 15,843 | 18,145 | (94 | ) | 18,051 | 25,541 | (99 | ) | 25,442 | ||||||||||||||||||||||||
Xerox 2017 Form 10-Q
10
Revised Consolidated Statements of Cash Flows from Operations
The revision did not have an impact on the company’s operating cash flows. The following table reconciles selected lines from the company’s first quarter of 2017 and fiscal years of 2016, 2015 and 2014 Consolidated Statements of Cash Flows from the previously reported amounts to the revised amounts:
Three Months Ended March 31, 2017 | Year Ended December 31, 2016 | |||||||||||||||||||||||
As Reported | Adjustment | As Revised | As Reported | Adjustment | As Revised | |||||||||||||||||||
Cash Flows from Operating Activities: | ||||||||||||||||||||||||
Net Income (Loss) | $ | 18 | $ | 24 | $ | 42 | $ | (466 | ) | $ | 6 | $ | (460 | ) | ||||||||||
Income from Continuing Operations | 24 | 24 | 48 | 627 | 6 | 633 | ||||||||||||||||||
Undistributed equity in net income of unconsolidated affiliates | $ | (16 | ) | $ | (24 | ) | $ | (40 | ) | $ | (69 | ) | $ | (6 | ) | $ | (75 | ) | ||||||
Year Ended December 31, 2015 | Year Ended December 31, 2014 | |||||||||||||||||||||||
As Reported | Adjustment | As Revised | As Reported | Adjustment | As Revised | |||||||||||||||||||
Cash Flows from Operating Activities: | ||||||||||||||||||||||||
Net Income | $ | 492 | $ | (26 | ) | $ | 466 | $ | 1,036 | $ | (18 | ) | $ | 1,018 | ||||||||||
Income from Continuing Operations | 866 | (26 | ) | 840 | 1,052 | (18 | ) | 1,034 | ||||||||||||||||
Undistributed equity in net income of unconsolidated affiliates | $ | (79 | ) | $ | 26 | $ | (53 | ) | $ | (91 | ) | $ | 18 | $ | (73 | ) | ||||||||
Revised Quarterly Results of Operations
The following tables reconcile selected lines from the company’s 2016 and 2015 quarterly Consolidated Statements of Income (Loss) from the previously reported amounts to the revised amounts:
Three Months Ended March 31, 2016 | Three Months Ended June 30, 2016 | |||||||||||||||||||||||
As Reported | Adjustment | As Revised | As Reported | Adjustment | As Revised | |||||||||||||||||||
Equity in net income of unconsolidated affiliates | $ | 37 | $ | (3 | ) | $ | 34 | $ | 22 | $ | 4 | $ | 26 | |||||||||||
Income from Continuing Operations | 71 | (3 | ) | 68 | 195 | 4 | 199 | |||||||||||||||||
Net Income | 36 | (3 | ) | 33 | 157 | 4 | 161 | |||||||||||||||||
Net Income Attributable to Xerox | 34 | (3 | ) | 31 | 154 | 4 | 158 | |||||||||||||||||
Basic Earnings per Share: | ||||||||||||||||||||||||
Continuing operations | $ | 0.25 | $ | (0.01 | ) | $ | 0.24 | $ | 0.74 | $ | 0.01 | $ | 0.75 | |||||||||||
Total | $ | 0.11 | $ | (0.01 | ) | $ | 0.10 | $ | 0.59 | $ | 0.01 | $ | 0.60 | |||||||||||
Diluted Earnings per Share: | ||||||||||||||||||||||||
Continuing operations | $ | 0.24 | $ | (0.01 | ) | $ | 0.23 | $ | 0.73 | $ | 0.02 | $ | 0.75 | |||||||||||
Total | $ | 0.11 | $ | (0.01 | ) | $ | 0.10 | $ | 0.58 | $ | 0.02 | $ | 0.60 | |||||||||||
Xerox 2017 Form 10-Q
11
Three Months Ended September 30, 2016 | Three Months Ended December 31, 2016 | |||||||||||||||||||||||
As Reported | Adjustment | As Revised | As Reported | Adjustment | As Revised | |||||||||||||||||||
Equity in net income of unconsolidated affiliates | $ | 39 | $ | 1 | $ | 40 | $ | 23 | $ | 4 | $ | 27 | ||||||||||||
Income from Continuing Operations | 177 | 1 | 178 | 184 | 4 | 188 | ||||||||||||||||||
Net Income (Loss) | 185 | 1 | 186 | (844 | ) | 4 | (840 | ) | ||||||||||||||||
Net Income (Loss) Attributable to Xerox | 182 | 1 | 183 | (847 | ) | 4 | (843 | ) | ||||||||||||||||
Basic Earnings (Loss) per Share: | ||||||||||||||||||||||||
Continuing operations | $ | 0.66 | $ | — | $ | 0.66 | $ | 0.69 | $ | 0.02 | $ | 0.71 | ||||||||||||
Total | $ | 0.69 | $ | — | $ | 0.69 | $ | (3.37 | ) | $ | 0.02 | $ | (3.35 | ) | ||||||||||
Diluted Earnings (Loss) per Share: | ||||||||||||||||||||||||
Continuing operations | $ | 0.65 | $ | 0.01 | $ | 0.66 | $ | 0.68 | $ | 0.02 | $ | 0.70 | ||||||||||||
Total | $ | 0.68 | $ | 0.01 | $ | 0.69 | $ | (3.32 | ) | $ | 0.02 | $ | (3.30 | ) | ||||||||||
Three Months Ended March 31, 2015 | Three Months Ended June 30, 2015 | |||||||||||||||||||||||
As Reported | Adjustment | As Revised | As Reported | Adjustment | As Revised | |||||||||||||||||||
Equity in net income of unconsolidated affiliates | $ | 34 | $ | (18 | ) | $ | 16 | $ | 29 | $ | (4 | ) | $ | 25 | ||||||||||
Income from Continuing Operations | 189 | (18 | ) | 171 | 210 | (4 | ) | 206 | ||||||||||||||||
Net Income | 230 | (18 | ) | 212 | 17 | (4 | ) | 13 | ||||||||||||||||
Net Income Attributable to Xerox | 225 | (18 | ) | 207 | 12 | (4 | ) | 8 | ||||||||||||||||
Basic Earnings per Share: | ||||||||||||||||||||||||
Continuing operations | $ | 0.64 | $ | (0.06 | ) | $ | 0.58 | $ | 0.73 | $ | (0.01 | ) | $ | 0.72 | ||||||||||
Total | $ | 0.79 | $ | (0.07 | ) | $ | 0.72 | $ | 0.02 | $ | (0.01 | ) | $ | 0.01 | ||||||||||
Diluted Earnings per Share: | ||||||||||||||||||||||||
Continuing operations | $ | 0.63 | $ | (0.06 | ) | $ | 0.57 | $ | 0.72 | $ | (0.01 | ) | $ | 0.71 | ||||||||||
Total | $ | 0.78 | $ | (0.07 | ) | $ | 0.71 | $ | 0.02 | $ | (0.01 | ) | $ | 0.01 | ||||||||||
Three Months Ended September 30, 2015 | Three Months Ended December 31, 2015 | |||||||||||||||||||||||
As Reported | Adjustment | As Revised | As Reported | Adjustment | As Revised | |||||||||||||||||||
Equity in net income of unconsolidated affiliates | $ | 40 | $ | — | $ | 40 | $ | 32 | $ | (4 | ) | $ | 28 | |||||||||||
Income from Continuing Operations | 206 | — | 206 | 261 | (4 | ) | 257 | |||||||||||||||||
Net (Loss) Income | (31 | ) | — | (31 | ) | 276 | (4 | ) | 272 | |||||||||||||||
Net (Loss) Income Attributable to Xerox | (34 | ) | — | (34 | ) | 271 | (4 | ) | 267 | |||||||||||||||
Basic (Loss) Earnings per Share: | ||||||||||||||||||||||||
Continuing operations | $ | 0.75 | $ | — | $ | 0.75 | $ | 0.99 | $ | (0.02 | ) | $ | 0.97 | |||||||||||
Total | $ | (0.16 | ) | $ | — | $ | (0.16 | ) | $ | 1.05 | $ | (0.02 | ) | $ | 1.03 | |||||||||
Diluted (Loss) Earnings per Share: | ||||||||||||||||||||||||
Continuing operations | $ | 0.75 | $ | — | $ | 0.75 | $ | 0.98 | ||||||||||||||||