Overview: Glenview Capital Management's 1Q14 positions

Part 6
Overview: Glenview Capital Management's 1Q14 positions (Part 6 of 6)

Must-know: Why Glenview Capital exits position in Xerox

Glenview Capital exits position in Xerox

Larry Robbins’ Glenview Capital added new positions in WellPoint Inc. (WLP), Hertz Global Holdings Inc. (HTZ), eBay Inc. (EBAY), and Applied Materials Inc. (AMAT). The largest position sold was Xerox (XRX).

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Glenview Capital started a new position in Xerox Inc. (XRX) that accounted for 0.81% of the fund’s portfolio last quarter.

Xerox, which had revenues of $21.4 billion in 2013, provides business process and document management solutions. With ongoing innovation and acquisitions, over half of the Xerox’s revenue was derived from business services in 2013. It said its target is to increase business services to approximately two-thirds of total revenue by 2017. Xerox said in its 10-K that the global business process outsourcing and information technology outsourcing markets are estimated to be in excess of $250 billion each while the document management market is estimated at roughly $100 billion.

Xerox’s reportable segments are Services, Document Technology, and Other. The Services segment comprises business process outsourcing ( or BPO), information technology outsourcing (or ITO), and document outsourcing (or DO) services. The Document Technology segment is comprised of document technology and related supplies, technical service, and equipment financing (excluding contracts related to document outsourcing).

Xerox’s transition to business services has seen challenges

Mainly known for its printers and copiers, Xerox shifted into business services with its $5.5 billion acquisition of Affiliated Computer Services Inc. (ACS) in 2009. However, the move has seen challenges with rising costs for expanding its services businesses, and revenue declines at its document technology business. Xerox initiated a restructuring program in November, 2012, that involved layoffs and offshoring of jobs, and was aimed at boosting the services business due to sluggish growth in the printer and copier business. Revenue from Services represented 55% of total revenues in 2013. During 1Q14, Xerox recorded net restructuring and asset impairment charges of $27 million, which included approximately $28 million of severance costs related to headcount reductions of approximately 1,250 employees worldwide, $1 million of lease cancellation costs, and $4 million of asset impairments. For 2013, the company saw $142 million of severance costs related to headcount reductions of approximately 4,900 employees globally.

Xerox’s 1Q14 results were in line with estimates although net income declined to $281 million from $296 million a year earlier. Revenue fell 2% to $5.12 billion. Services segment revenues were flat compared to the prior year as growth in DO and ITO was offset by lower BPO revenue. Services segment revenues represented 57% of total revenues in 1Q14, and services margin declined mainly due to costs associated with the implementation of new Medicaid and health insurance exchange platforms.

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Lowers earnings outlook for 2Q14

Xerox said at its investor conference last year that “Investments in services coupled with our expertise in vertical markets gives us the competitive edge needed to provide targeted solutions in a wide variety of industries from customer care and education to transportation and healthcare.” In 2013, Xerox introduced a new government healthcare Medicaid platform and supported the launch of health insurance exchanges in Nevada, Kentucky, and other states. According to news reports in May, Xerox beat Hewlett-Packard (HPQ) to win a $500 million contract to develop New York’s Medicaid management system. The system is currently operated by Computer Sciences Corp. (CSC).

Xerox said as a result of increased implementation costs in government healthcare, it’s lowering its guidance for both full-year Services segment margin and 2014 earnings. 2Q14 Generally Accepted Accounting Principles (or GAAP) earnings per share is expected to be $0.21–$0.23 per share. Second-quarter adjusted EPS is expected to be $0.25–$0.27. The company expects full-year 2014 GAAP earnings per share of $0.90–$0.96 and full-year adjusted EPS of $1.07–$1.13.

Xerox acquires ISG Holdings

In May, Xerox announced acquisition of ISG Holdings Inc. (or ISG) for $225 million to boost its payment services for clients in the property and casualty insurance industry. ISG has two subsidiaries, StrataCare and Bunch Care Solutions, and offers SaaS (Software as a Service) cloud delivery platform, care management services, and analytics solutions.

Xerox to expand share repurchase program

Xerox repurchased $275 million of its shares and spent $74 million on dividends during 1Q14. According to the management in its earnings release, “Our strong cash position enabled a fast start to our share repurchase program, and we are increasing our full-year share repurchase expectations from at least $500 million to at least $700 million.”

For 2013, cash used in financing activities was $1.4 billion, which primarily reflected $696 million for stock repurchases, $434 million of net payments on debt, and $296 million for dividends. The board declared a quarterly cash dividend of 0.0625 cents per share on Xerox common stock in May. The dividend yield stands at 2.05%. It also declared a quarterly cash dividend of $20 per share on Xerox Series A Convertible Perpetual Preferred Stock.

 

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