Xerox’s Profit Dips 52%

Xerox Corp. (XRX - Analyst Report) revealed a 52% drop in profits to $123 million or 14 cents per share for the third quarter of the year, from $258 million or 29 cents per share in the same quarter a year ago. However, the company did manage to outperform the Zacks Consensus Estimate profit of 12 cents per share.

Total revenue declined 16% to $3.7 billion, including a 2 percentage point negative impact from currency. Post-sale and financing revenue went down 11%, or 9% in constant currency. Equipment sale revenue shrank 29% or 28% in constant currency.

Operating cash flow was $610 million during the quarter. Xerox has generated $1.2 billion in operating cash flow throughout the third quarter. Consequently, the company has increased its operating cash flow expectation for the full year to $1.7 billion.

Gross margin increased of over half a percentage point to 39.8% from the prior year. Selling, administrative and general expenses (SGA) were down $131 million year-over-year. SGA, as a percentage of revenue, stood at 27.4%.

Financial Position

Xerox ended the third quarter with a cash balance of $1.2 billion. Total debt was down $938 million to $7.44 billion as of Sept. 30, 2009 compared to Dec. 31, 2008. Long-term debt-to-capitalization ratio stood at 47% as of Sept. 30, 2009. The company is on track to reduce total debt by more than $1 billion this year.

In the first nine months of 2009, Xerox generated cash flow from operations amounting to $1.24 billion. Capital expenditures stood at $69 million in the above period.

Outlook

Xerox expects earnings per share in the range of 20 cents to 22 cents, excluding costs related to the $6.4 billion acquisition of Dallas-based business process outsourcing provider Affiliated Computer Services (ACS) for the upcoming quarter, which is compatible with the Zacks Consensus Estimate of 20 cents per share.

The company has increased its full-year earnings expectations to 55 cents to 57 cents per share, which excludes fourth-quarter ACS acquisition related costs. This is slightly higher than the Zacks Consensus Estimate of 54 cents per share.

We recommend the shares of Xerox as Neutral.

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