- U.S. printing technologies and managed document services provider Xerox Corp.'s business fundamentals and revenue base have continued to deteriorate because of declining core printer hardware and services sales amid challenging market conditions, slower-than-expected new product traction, and market share declines.
- Additionally, we expect the company to face operational challenges arising from the secularly declining and competitive printer markets, its recent senior management turnover, and its current plans not to renew the technology agreement with Fuji Xerox Co. Ltd. that expires in 2021, which will increase the uncertainty around Xerox's long-term business strategy and turnaround. We expect these factors to challenge management's efforts to stabilize the business and ongoing shareholder return policy to cause the company's S&P adjusted leverage to rise and remain above 2x, which was our previous downside threshold for the current rating.
- We are lowering our long-term issuer credit rating on Xerox Corp. to 'BB+' from 'BBB-' and are removing all of our ratings on the company from CreditWatch, where we placed them with negative implications on Oct. 24, 2018.
- At the same time, we are lowering our short-term rating on Xerox to 'B' from 'A-3' and our debt issue-level ratings to 'BB+' from 'BBB-', and assigning our '3' recovery rating to the company's approximately $5.2 billion of unsecured senior debt outstanding. We are assigning our 'BB+' issue-level rating and '3' recovery rating to Xerox's $1.8 billion unsecured revolver expiring in August 2022.
- The stable outlook reflects our expectation that Xerox will continue to face operational and business challenges. However, we do not believe that its position in its core printer markets will deteriorate materially and anticipate that its meaningful recurring revenue base will provide it with stable cash flow generation over the next 12-24 months. This should allow Xerox to fund its current product and printer market expansions and shareholder returns while maintaining S&P adjusted leverage in the low 2x area and a free operating cash flow (FOCF)-to-debt ratio in the mid-30% area.
NEW YORK (S&P Global Ratings) Dec. 17, 2018—S&P Global Ratings today took the rating actions listed above. The downgrade reflects our belief that Xerox will face operational uncertainty and elevated execution risk amid difficult industry conditions over the next 12-24 months following revenue declines and market share losses prior to its new product launches in 2017. We previously expected the company's revenue declines to abate by the end of 2018 and anticipated that it would be on a growth trajectory in 2019. However, we now believe that the company's business challenges will persist beyond 2018 and expect that it will face increased operational risk arising from the limited growth prospects in its core A3 multi-function printer (MFP) markets, elevated competition as it expands its product categories, and uncertainty related to its recent senior management turnover. We believe Xerox's uncertain business strategies and S&P-adjusted leverage rising and sustaining above 2x no longer support business and financial risk profiles that are commensurate with an investment-grade rating. S&P Global has not reviewed Xerox management's new strategic and operational plans for 2019. The stable outlook on Xerox reflects our expectation that the company will continue to face operational and business challenges. However, we do not believe that its position in its core printer markets will deteriorate materially and anticipate that its meaningful recurring revenue base will provide it with stable cash flow generation over the next 12-24 months. This should allow Xerox to fund its current product and printer market expansions and shareholder returns while maintaining S&P adjusted leverage in the low 2x area and a FOCF-to-debt ratio in the mid-30% area. We could lower our rating on Xerox if the company engages in strategic alternatives--including a significant restructuring--if its pursues large-scale acquisitions, or if its adopts a more aggressive capital allocation policy, including shareholder returns, that causes its leverage to approach 3x or if FOCF-to-debt ratio to decline below 25%. We could also downgrade the company's if its competitive position weakens further such that it breaches the aforementioned thresholds. While unlikely over the next 12 months because of its operational challenges, we would consider upgrading Xerox over the long term if there is evidence of sustained operational improvements and business stabilization and the company establishes a track record of increasing its revenue over a multi-year period while maintaining leverage of 2x or lower.
