Xerox Holdings Corporation — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The fourth-quarter figures below are unaudited. Amounts are in millions of dollars except per-share data. Xerox Holdings became the public parent on July 31, 2019; its operating subsidiary, Xerox Corporation, accounts for essentially all reported operations.
Business context and reporting period
Xerox is a global workplace technology and printing company operating in approximately 160 countries, with one reportable segment. Its offerings include equipment, supplies, maintenance, managed print and digital services, software, and customer financing. Approximately 77% of 2019 revenue was post-sale revenue; about 40% came from outside the U.S.
Financial and operating results
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Revenue | $9,066 | $9,662 |
| Continuing-operations income attributable to Xerox | $648 | $306 |
| Adjusted continuing-operations income attributable to Xerox | $828 | $745 |
| GAAP diluted EPS from continuing operations | $2.78 | $1.16 |
| Adjusted diluted EPS | $3.55 | $2.88 |
| Operating cash flow from continuing operations | $1,244 | $1,082 |
| Capital expenditures | $65 | $90 |
| Total debt at year-end | $4,282 | $5,230 |
| Cash and cash equivalents at year-end | $2,740 | $1,081 |
Revenue comprised equipment sales of $2,062, post-sale revenue of $7,004, and financing revenue of $244. GAAP gross margin was 40.3%, compared with 40.0%; reported pre-tax margin was 9.1%, compared with 5.7%. Adjusted operating margin was 13.1%, versus 11.3%; excluding the $77 OEM license fee, 2019 adjusted operating margin was 12.4%.
For Q4 2019, revenue was $2,444 versus $2,498 in Q4 2018. The quarter included the $77 OEM license fee; excluding it, reported revenue declined 5.2% year over year. Income from continuing operations was $266, while net income attributable to Xerox was $818, including the sale-related gain. Diluted continuing-operations EPS was $1.17.
Working capital was $2,705 and total assets were $15,047 at year-end. Debt included $3,251 of financing debt supporting customer finance assets and $1,031 of core debt. The $1.8 billion revolving credit facility was undrawn, and the company reported compliance with its debt covenants. The company reported $3.7 billion of net finance assets.
Material changes versus the prior comparable period
- Revenue fell 6.2% year over year, including a 1.5 percentage-point unfavorable currency impact and a 0.8-point benefit from the OEM license fee. Excluding that fee, revenue declined 7.0% reported, or 5.5% at constant currency.
- Post-sale revenue declined 6.4%, reflecting lower page volumes, competitive pricing, and a smaller device population. Equipment sales declined 5.3%; office-centric entry and mid-range sales were weak, while high-end production sales were broadly stable.
- Cost reductions from Project Own It and lower non-service retirement-related and other expenses helped lift continuing-operations income and margins despite lower revenue. Restructuring and related costs increased to $229 from $157.
- Operating cash flow from continuing operations rose $162 to $1,244. Cash increased substantially, primarily from $2,233 of proceeds from the Fuji Xerox and XIP sales; financing cash outflow included $960 of senior-note repayments, $600 of share repurchases, and $243 of dividends.
- The November 2019 sale of Xerox’s indirect 25% Fuji Xerox interest and 51% XIP interest generated a pre-tax gain of $629 ($539 after tax). These businesses were presented as discontinued operations; 2019 net income attributable to Xerox of $1,353 therefore should not be treated as continuing operating earnings.
Outlook, management commentary, risks, and unusual items
- 2020 outlook: Management expected revenue to decline approximately 5%, or approximately 4% excluding the 2019 OEM license fee. Both GAAP and adjusted earnings were expected to improve slightly after excluding that fee. Operating cash flow from continuing operations was projected at approximately $1.3 billion, with capital expenditures of approximately $100 million. Expected 2020 share repurchases were at least $300 million.
- Cost program: Project Own It had delivered approximately $1 billion of savings through 2019, including $640 million in 2019. Xerox expected approximately $450 million of savings in 2020 and $1.5 billion over the three-year program through 2021. It also expected approximately $175 million of additional 2020 restructuring and related charges.
- HP proposal: Xerox proposed a combination with HP in November 2019; HP rejected the initial proposal. Xerox later raised its offer in February 2020 and reported $24 billion in financing commitments obtained in January. The transaction, financing, approvals, integration, synergies, and potential added debt remained uncertain at the filing date.
- Fuji Xerox arrangements: Fuji Xerox notified Xerox in January 2020 that it did not intend to renew the Technology Agreement when it expires March 31, 2021. The agreement supports royalty income and patent access. Product-supply arrangements were expected to continue; the agreement provides for a possible two-year brand-license extension for a prepaid $100 fee.
- Other risks and contingencies: Ongoing print-volume and device-placement declines, pricing pressure, execution of restructuring and shared-services transitions, supplier and supply-chain reliance, foreign exchange, tariffs, pensions, and non-investment-grade credit ratings could affect performance. Management estimated a roughly $20 million 2020 cost impact from higher tariffs. At the filing date, coronavirus-related disruption had not affected operations, but supply-chain effects were being monitored.
- Unusual items and judgments: The $77 OEM license fee benefited 2019 revenue and margins; the Fuji Xerox/XIP disposal materially boosted discontinued-operations income. Pension obligations were underfunded by approximately $1.2 billion. The auditor identified deferred-tax-asset realizability as a critical audit matter; the audit opinion was unqualified, and internal controls were reported effective.
Most important facts for investors to verify
- Whether continuing revenue declines stabilize and whether post-sale revenue, page volumes, device installs, and pricing improve.
- How much of reported earnings and cash flow reflects recurring operations versus the OEM fee, divestiture gain, restructuring, and other adjustments.
- Whether Project Own It savings and the HCL shared-services transition meet targets without disrupting customer service or operations.
- The status, final terms, financing, approvals, and potential leverage implications of the proposed HP transaction.
- The financial effect of the Technology Agreement’s expiration, including any license extension, royalty changes, and ongoing Fuji Xerox supply relationship.
- Debt maturities and refinancing capacity, pension funding needs, covenant headroom, and exposure to tariffs, supply-chain disruption, and legal or tax contingencies.