Fitch Affirms Xerox's IDR at 'BBB'; Outlook Stable
NEW YORK -- November 12, 2012
Fitch Ratings has affirmed the following ratings for Xerox Corp. (Xerox) and
its wholly-owned subsidiary, Affiliated Computer 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 $11.4 billion of debt is affected by Fitch's action, including
Xerox's $2 billion credit facility.
Xerox's ratings and Stable Outlook continue to reflect:
--Services growth led by business process outsourcing, as well as color
growth, which should continue to offset revenue declines related to
black-and-white (B&W) print, particularly in high-end production printing.
--Substantial recurring revenue from long-term services contracts, rentals and
financing, and supplies (85% of total revenue).
--Solid liquidity supported by $882 million of cash, $1.2 billion available
under the $2 billion RCF, staggered debt maturities and consistent free cash
flow (FCF). Fitch believes FCF (post-dividends) will continue to exceed $1
billion annually through 2014.
--A highly diverse revenue mix and gradual mix shift toward higher growth
--The company's continued investments in research and development support a
broad and strong product portfolio, particularly in color, multifunction
devices (MFDs) and high-end production printing.
--Management's conservative financial policies and strong commitment to
maintaining an investment-grade rating.
Fitch's credit concerns continue to center on:
--B&W revenue pressures primarily due to declining installs, machines in field
(MIF) and associated post-sale revenue from high-end production digital
presses used in transaction printing.
--Deteriorating macroeconomic environment, particularly in Europe, and U.S.
governmental budget constraints, particularly at the state and local level.
Both have adversely affected equipment demand, transaction volumes on existing
business process outsourcing contracts and attach rates for high-margin
Fitch notes Europe accounts for 25% of Xerox's total revenue and 42% of its
finance receivables (F/R) portfolio, 8% of which is from southern Europe,
including Italy, Greece, Spain and Portugal.
Xerox faces lower near-term demand for transactional and discretionary
components of its business, both hardware and IT services, partially offset by
the relative stability of the company's sizable annuity revenue base.
Competitive pricing pressures in certain service lines also negatively
affected recent financial results.
--The aggregate $2.2 billion underfunding of worldwide defined benefit (DB)
pension plans on a projected benefit obligation basis as of year-end 2011.
Expected contributions in 2012 consist of $350 million of cash and $130
million of Xerox stock compared with $426 million of cash and $130 million of
Xerox stock in 2011. In the first nine months of 2011, actual cash
contributions were $310 million compared with $348 million in the year-ago
--Modest increase in core debt and core leverage (core debt/ core EBITDA) due
to profitability pressures and decline in F/Rs from lower equipment revenue
and one-time sales of F/Rs, including $350 million in the third quarter of
2012. Core debt metrics could deteriorate further if subsequent declines in
the F/R portfolio are not offset by a reduction in total debt and/or
--New managed print services (MPS) with existing Xerox clients could
cannibalize equipment and post-sale revenue by reducing printing costs by up
to 30%. This risk is mitigated by cross-selling opportunities for other Xerox
products and services and the fact that MPS cost savings are derived from a
variety of areas beyond just high-margin ink.
MPS cost savings are also achieved in part by consolidating standalone
printers using MFDs and reducing paper usage through mandatory duplex
printing, neither of which affects ink demand. Digitization of existing paper
processes does reduce ink demand, but this is only one component of the up to
30% cost savings and it also yields cross-selling opportunities.
--Relatively steady decline in equipment gross margin as the print industry is
intensely competitive, resulting in consistent equipment pricing pressure,
particularly office products.
As of Sept. 30, 2012, Xerox's solid liquidity was supported by $882 million of
cash, an undrawn $2 billion RCF ($1.2 billion available net of CP) maturing
December 2016 and consistent FCF. Financial covenants in the RCF agreement
consist of minimum total interest coverage of 3) and maximum total leverage of
In the latest 12 months (LTM) ended Sept. 30, 2012, FCF was $1.4 billion
compared with $1.2 billion in the year-ago period. In the past eight years,
annual FCF consistently exceeded $1 billion, except for 2008 when the company
paid a $615 million securities litigation settlement, resulting in $450
million of FCF.
Total debt with equity credit was $9.5 billion on Sept. 30, 2012, primarily
consisting of approximately $8.5 billion of senior unsecured notes, $844
million of CP, and $349 million of convertible preferred stock.
As of Sept. 30, 2012, $5.4 billion, or 57%, of total debt supported Xerox's
financing business based on a debt-to-equity ratio of 7:1 for the financing
assets. In the year-ago period, 64% of the company's total debt supported the
financing business, with the difference representing an increase in core debt.
Xerox's net financing assets, consisting of receivables and equipment on
operating leases, totaled $6.2 billion compared with $6.9 billion in the prior
Debt maturities in 4Q'12 and full-year 2013 are $860 million, including $844
million of CP, and $1 billion, respectively. Fitch anticipates at least $750
million of debt maturing in the fourth quarter will be repaid with FCF to meet
the company's year-end debt target of $8.6 billion.
Fitch estimates total leverage (total debt/ operating EBITDA) and core
(non-financing) leverage of 3.1x and 1.5x at Sept. 31, 2012, respectively,
compared with 2.9x and 1.2x in the year ago period. Fitch estimates total
interest coverage (total operating EBITDA/ interest expense) and core
(non-financing) interest coverage was 7.1x and 6.3x at Sept. 31, 2012,
respectively, compared with 6.7x and 1x in the year ago period.
Fitch projects core leverage will increase by nearly half a turn to 1.5x at
year-end 2012 before declining to approximately 1x at both year-end 2013 and
2014. Achievement of the 1x core leverage metric in 2013 requires material
reduction, the amount of which is contingent on the rate of decline in the F/R
portfolio, including the possibility of additional F/R sales. Core interest
coverage will remain in the low double digits through 2014.
Sizable acquisitions could result in a temporary spike in leverage, but Fitch
anticipates the company would subsequently reallocate FCF toward debt
reduction to restore its credit profile, similar to what was done with the ACS
acquisition. However, Fitch expects the vast majority of acquisitions should
be in the $25 million - $50 million range and funded with FCF.
WHAT COULD TRIGGER A RATING ACTION
Negative: Future developments that may, individually or collectively, lead to
a negative rating action include:
--An accelerated decline in B&W printing more than offsets growth in color and
services, resulting in a material decline in financial performance and credit
--A material increase in core debt to finance acquisitions and/or shareholder
--Greater than expected revenue synergies accelerate Xerox's revenue and FCF
growth and strengthen credit protection metrics;
--Significant reduction in the funding shortfall for Xerox's worldwide defined
benefit pension plan.
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
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John M. Witt, CFA, +1 212-908-0673
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New York, NY 10004
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