(The following statement was released by the rating agency)
NEW YORK, November 12 (Fitch) Fitch Ratings has affirmed the
for Xerox Corp. (Xerox) and its wholly-owned subsidiary,
Services, Inc. (ACS):
--Long-term Issuer Default Rating (IDR) at 'BBB';
--Short-term IDR at 'F2';
--Revolving credit facility (RCF) at 'BBB';
--Senior unsecured debt at 'BBB';
--Commercial paper (CP) at 'F2'.
--IDR at 'BBB';
--Senior notes at 'BBB'.
The Rating Outlook is Stable.
Approximately $9.5 billion of debt is affected by Fitch's
Xerox's undrawn $2 billion credit facility.
KEY RATING DRIVERS
Xerox's ratings and Stable Outlook reflect:
--Revenue growth in Services, which will continue to offset
revenue declines in
Document Technology (DT), primarily black-and-white (B&W)
--Substantial recurring revenue from long-term services
contracts, rentals and
financing, and supplies (85% of total revenue).
--Solid liquidity supported by $948 million of cash at Sept. 30.
undrawn $2 billion RCF due 2016, staggered debt maturities and
free cash flow (FCF). Fitch believes FCF (post-dividends) will
exceed $1.5 billion annually through 2016.
--A highly diverse revenue mix and declining exposure to the
industry due to stronger growth in the Services business.
Services accounts for
56% of Xerox's total revenue.
--Conservative financial policies. Management remains committed
to remaining at
investment grade and has established a track record of reducing
debt to offset
declining financing assets, thereby maintaining flat core
excludes debt associated with the financing business.
Fitch estimates Xerox's core leverage, including
off-balance-sheet debt, will
increase moderately to 1.8x at year-end 2013 from 1.7x in 2012
on-balance-sheet debt is offset by greater securitizations of
finance receivables. Annual core leverage is projected to
remain in the range
of 1.5x-1.7x thereafter through year-end 2016.
Fitch's credit concerns center on:
--Revenue pressures in DT, inclusive of equipment and supplies
Document Outsourcing (DO) contracts, partially offset by tight
DT revenue, including DO contracts, declined 3% YTD due to
declines in both B&W
and color revenue. Operating profit for DT on a stand-alone
basis declined 9.3%
YTD to $667 million on a 5.9% decline in revenue, excluding
one-time gains on
sales of finance receivables.
--The aggregate $1.9 billion underfunding of worldwide defined
pension plans on a projected benefit obligation basis as of
year-end 2012, up
from $1.5 billion in the prior year. The lower funded status
higher benefit obligations due to a 30- and 60-basis point
decline in the U.S.
and non-U.S. discount rate, respectively. Total contributions
are expected to be
$195 million in 2013 compared with $494 million in 2012. Fitch
million of cash pension contributions in 2014.
--Operating margin (OM) pressures in the Services business. The
for Xerox's Services segment increased 30 basis points in the
(LTM) ended Sept. 30, 2013 to 10.2% but remains at the lower end
company's range of 10%-12% and 140 basis points below the
The lower margin reflects: i) start-up expenses on new
greater implementation expenses for a healthcare insurance
platform deployed in Nevada and Medicaid Management Information
platform deployed in Alaska; ii) negative revenue mix as the
Information Technology Outsourcing (ITO) outperformed; iii)
declining volume on
certain higher margin business process outsourcing contracts,
student loan processing and customer care (CC) volume with a
telecom client post
acquisition; and iv) typical price erosion following contract
Fitch anticipates Services profitability will strengthen in 2014
due to strong
BPO signings in the YTD period (+53%) and decline in ITO
signings (-36%), albeit
the mix of new business versus renewals is undisclosed. ITO was
Computer Systems' lowest margin business historically. Margins
will also benefit
from the completion of the HIX and MMIS platforms, which can be
other states, restructuring actions, and increasing mix of
The key risk is the underestimation of costs, which could be an
indicator of broader systemic issues with respect to Xerox's
process. The desire to demonstrate revenue growth can lead to a
process, whereby the provider uses aggressive assumptions in
order to secure new
contracts. Clearly, Xerox's one challenging contract does not
signify a trend,
but the disclosure of additional problem contracts, if any,
could indicate a
--The print industry is intensely competitive, resulting in
pricing pressure, particularly office products.
--Revenue growth and margin expansion in services strengthens
Xerox's FCF and
credit protection metrics;
--Significant reduction in the funding shortfall for Xerox's
benefit pension plan.
--An accelerated decline in DT more than offsets growth in
in a material decline in financial performance and credit
--A material increase in core debt to finance acquisitions
Xerox's liquidity is solid, supported by $948 million of cash at
Sept. 30, 2013
and an undrawn $2 billion RCF that matures in December 2016 and
compliance with two financial covenants, consisting of a minimum
coverage of 3x and maximum total leverage of 3.75x. In the LTM
ended Sept. 30,
2013, Xerox generated $2.5 billion of reported FCF
adjusting for accounts and finance receivables securitizations.
Total debt with equity credit was $7.7 billion on Sept. 30,
consisting of approximately $7.5 billion of senior unsecured
debt and $349
million of convertible preferred stock, which Fitch assigns 50%
As of Sept. 30, 2012, $4.6 billion, or 59%, of total debt,
financing business based on a debt-to-equity ratio of 7:1 for
assets. Xerox's net financing assets, consisting of receivables
and equipment on
operating leases, totaled $5.2 billion compared with $6.2
billion in the prior
Xerox's annual FCF is expected to exceed annual debt maturities
through at least
2017 due to a highly staggered debt maturity schedule. Debt
2014-2018 are $1.1 billion, $1.3 billion, $971 million, $1
billion and $1
Fitch estimates total leverage (total debt/operating EBITDA) and
(non-financing) leverage were 2.5x and 1.1x at Sept. 30, 2013,
compared with 3.1x and 1.5x in the year ago period. Total
(total operating EBITDA/interest expense) and core
coverage was 7.6x and 11.6x at Sept. 30, 2013, respectively,
compared with 7.1x
and 12.1x in the year ago period. Fitch estimates gross debt,
off-balance-sheet debt, decreased to 3x as of Sept. 30, 2013
compared with 3.4x
in the year-ago period.
John M. Witt, CFA
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549,
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and
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