Xerox Holdings Corporation today announced 2021 fourth-quarter and full-year results and guidance for 2022.
“Our team’s focus and dedication drove improved results in 2021 despite ongoing challenges caused by the pandemic and global supply chain disruptions,” said Xerox Vice Chairman and CEO John Visentin. “Our ability to increase free cash flow, while investing for sustainable, long-term growth and improving our operations, highlights the quality of our team and strategy. We stood up Xerox Financial Services, CareAR and Innovation (PARC), while laying the foundation for growth in print, digital solutions, and IT services. We look forward to sharing more detail about our long-term plans and strategies for monetizing our investments in growth at our Investor Day in February.”
The company expects to grow revenue in 2022. Guidance assumes supply chain and pandemic-related disruptions persist through the first half of the year. The company also expects to generate at least $400 million of free cash flow, inclusive of incremental cash investments in new businesses.
- Revenue of at least $7.1 billion in actual currency
- Free cash flow of at least $400 million
- Return at least 50% of free cash flow to shareholders
This release refers to the following non-GAAP financial measures:
- Adjusted EPS, which excludes the Goodwill impairment charge as well as Restructuring and related costs, net, Amortization of intangible assets, Transaction and related costs, net, non-service retirement-related costs, and other discrete adjustments from GAAP-EPS, as applicable.
- Adjusted operating margin and income, which exclude the EPS adjustments noted above as well as the remainder of Other expenses, net from pre-tax (loss) income and margin.
- Constant currency (CC) revenue change, which excludes the effects of currency translation.
- Free cash flow, which is operating cash flow less capital expenditures.
Non-GAAP Financial Measures
We have reported our financial results in accordance with generally accepted accounting principles (GAAP). In addition, we have discussed our financial results using the non-GAAP measures described below. We believe these non-GAAP measures allow investors to better understand the trends in our business and to better understand and compare our results. Accordingly, we believe it is necessary to adjust several reported amounts, determined in accordance with GAAP, to exclude the effects of certain items as well as their related income tax effects. A reconciliation of these non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP are set forth below as well as in the fourth quarter 2021 presentation slides available at www.xerox.com/investor. These non-GAAP financial measures should be viewed in addition to, and not as a substitute for, the Company’s reported results prepared in accordance with GAAP.
Adjusted Earnings Measures
• Net (Loss) Income and Earnings per share (EPS)
• Effective Tax Rate
The above measures were adjusted for the following items:
Restructuring and related costs, net: Restructuring and related costs, net include restructuring and asset impairment charges as well as costs associated with our transformation programs beyond those normally included in restructuring and asset impairment charges. Restructuring consists of costs primarily related to severance and benefits paid to employees pursuant to formal restructuring and workforce reduction plans. Asset impairment includes costs incurred for those assets sold, abandoned or made obsolete as a result of our restructuring actions, exiting from a business or other strategic business changes. Additional costs for our transformation programs are primarily related to the implementation of strategic actions and initiatives and include third-party professional service costs as well as one-time incremental costs. All of these costs can vary significantly in terms of amount and frequency based on the nature of the actions as well as the changing needs of the business. Accordingly, due to that significant variability, we will exclude these charges since we do not believe they provide meaningful insight into our current or past operating performance nor do we believe they are reflective of our expected future operating expenses as such charges are expected to yield future benefits and savings with respect to our operational performance.
Amortization of intangible assets: The amortization of intangible assets is driven by our acquisition activity which can vary in size, nature and timing as compared to other companies within our industry and from period to period. The use of intangible assets contributed to our revenues earned during the periods presented and will contribute to our future period revenues as well. Amortization of intangible assets will recur in future periods.
Transaction and related costs, net: Transaction and related costs, net are costs and expenses primarily associated with certain strategic M&A projects. These costs are primarily for third-party legal, accounting, consulting and other similar type professional services as well as potential legal settlements that may arise in connection with those M&A transactions. These costs are considered incremental to our normal operating charges and were incurred or are expected to be incurred solely as a result of the planned transactions. Accordingly, we are excluding these expenses from our Adjusted Earnings Measures in order to evaluate our performance on a comparable basis.
Non-service retirement-related costs: Our defined benefit pension and retiree health costs include several elements impacted by changes in plan assets and obligations that are primarily driven by changes in the debt and equity markets as well as those that are predominantly legacy in nature and related to employees who are no longer providing current service to the Company (e.g. retirees and ex-employees). These elements include (i) interest cost, (ii) expected return on plan assets, (iii) amortization of prior plan amendments, (iv) amortized actuarial gains/losses and (v) the impacts of any plan settlements/curtailments. Accordingly, we consider these 14 elements of our periodic retirement plan costs to be outside the operational performance of the business or legacy costs and not necessarily indicative of current or future cash flow requirements. This approach is consistent with the classification of these costs as non-operating in Other expenses, net. Adjusted earnings will continue to include the service cost elements of our retirement costs, which is related to current employee service as well as the cost of our defined contribution plans.
Other discrete, unusual or infrequent items: We excluded the following items given their discrete, unusual or infrequent nature and their impact on our results for the period:
◦ Non-cash goodwill impairment charge ◦ Loss on early extinguishment of debt
◦ Contract termination costs – IT services.
We believe the exclusion of these items allows investors to better understand and analyze the results for the period as compared to prior periods and expected future trends in our business.
Adjusted Operating Income and Margin
We calculate and utilize adjusted operating income and margin measures by adjusting our reported pre-tax (loss) income and margin amounts. In addition to the costs and expenses noted as adjustments for our adjusted earnings measures, adjusted operating income and margin also exclude the remaining amounts included in Other expenses, net, which are primarily non-financing interest expense and certain other non-operating costs and expenses. We exclude these amounts in order to evaluate our current and past operating performance and to better understand the expected future trends in our business.
To better understand trends in our business, we believe that it is helpful to adjust revenue to exclude the impact of changes in the translation of foreign currencies into U.S. dollars. We refer to this adjusted revenue as “constant currency.” This impact is calculated by translating current period activity in local currency using the comparable prior year period’s currency translation rate. This impact is calculated for all countries where the functional currency is not the U.S. dollar. Management believes the constant currency measure provides investors an additional perspective on revenue trends. Currency impact can be determined as the difference between actual growth rates and constant currency growth rates.
Free Cash Flow To better understand trends in our business, we believe that it is helpful to adjust operating cash flows by subtracting amounts related to capital expenditures. Management believes this measure gives investors an additional perspective on cash flow from operating activities in excess of amounts required for reinvestment. It provides a measure of our ability to fund acquisitions, dividends and share repurchase.
Management believes that all of these non-GAAP financial measures provide an additional means of analyzing the current period’s results against the corresponding prior period’s results. However, these non-GAAP financial measures should be viewed in addition to, and not as a substitute for, the Company’s reported results prepared in accordance with GAAP. Our non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP measures and should be read only in conjunction with our Condensed Consolidated Financial Statements prepared in accordance with GAAP. Our management regularly uses our supplemental non-GAAP financial measures internally to understand, manage and evaluate our business and make operating decisions. These non-GAAP measures are among the primary factors management uses in planning for and forecasting future periods. Compensation of our executives is based in part on the performance of our business based on these non -GAAP measures.
• $1.78 billion of revenue in Q4, down 7.9 percent year-over-year, or down 7.4 percent in constant currency; $7.04 billion of FY revenue, up 0.2 percent year-over-year, or down 1.4 percent in constant currency.
• Q4 and FY GAAP (loss)/earnings per share (EPS) of $(3.97) and $(2.56), down $4.33 and $3.40 year-over-year, respectively. Both Q4 and FY GAAP EPS include an after-tax non-cash goodwill impairment charge of $750 million or $4.38 and $4.08 per share, respectively.
• Q4 and FY adjusted EPS of $0.34 and $1.51, down $0.24 and up $0.10 year-over-year, respectively.
• Q4 adjusted operating margin of 4.8 percent, down 470 basis points year-over-year; FY adjusted operating margin of 5.3 percent, down 130 basis points year-over-year.
• $198 million of operating cash flow in Q4, down $37 million year-over-year; $629 million of FY operating cash flow, up $81 million year-over-year.
• $182 million of free cash flow in Q4, down $39 million year-over-year; $561 million of FY free cash flow, up $87 million year-over-year.
• Delivered $375 million of targeted 2021 gross cost savings through Project Own It, or $1.8 billion since inception.
• Returned more than $1 billion to shareholders, close to double FY 2021 free cash flow.
Despite continued uncertainty associated with supply chain conditions and the pandemic, we are confident in our ability to deliver at least $7.1 billion of revenue and at least $400 million of free cash flow in 2022. Our confidence stems from strong demand for our products and services, and continued strength in correlations between in-office work and post sale revenue. We expect growth will be weighted to the back half of the year, with revenue improving as supply chain conditions normalize and workers return to the office. We maintain our policy of returning at least 50% of annual free cash flow to shareholders. In recent years, we have delivered well in excess of that goal, but our current policy gives us the flexibility to pursue value accretive M&A and additional investments in innovation.
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