Xerox’s Restructuring Costs Cut Into Profits

Xerox shares tumbled on Monday after the company reported that first-quarter profit plunged due in part to costs from its breakup into two separate entities.

Xerox’s profit fell 85% to $34 million, or 3 cents per share, while revenues were $4.3 billion, down from $4.5 billion a year ago. Adjusted earnings came to 22 cents per share, missing analysts’ estimates of 23 cents.

The stock closed down more than 9%, at $9.68, as the company also lowered cash flow projections for the year, attributing the downshift to accelerated and higher-than-anticipated restructuring charges.

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Xerox is preparing to split into two independent, publicly-traded companies by the end of the year — one focused on selling and maintaining its traditional copiers and printers, the other focused on providing business services.

“I’m pleased with our progress on our strategic transformation and separation,” Xerox Ursula Burns said in a news release. “We put in place a robust program management structure, mapped our path to the separation, initiated leadership searches and began building the strategic, operational and financial foundation of each company.”

But The Wall Street Journal said both the new companies will face challenges.

“Xerox’s legacy shrinking hardware business still throws off cash that helps support its parent company’s investment-grade debt rating,” it said. “The services wing has reported slight revenue growth, but its profitability has suffered partly due to a series of multimillion-dollar contracts it couldn’t satisfy.”

First-quarter revenue in Xerox’s services business rose about 1% to $2.5 billion, while sales in the legacy hardware division dropped 10% to $1.6 billion.

“Anybody who works in that equipment business has got to be concerned,” George Conboy, an investor and chairman of Brighton Securities, told the Rochester (N.Y.) Democrat & Chronicle.

Xerox cut 4,800 jobs worldwide in the first quarter, resulting in $124 million of severance costs. It projects total restructuring costs of $300 million this year.

“We have separation costs which are unique in ’16,” Burns said. “We will have some in ’17, but a small amount — a very small amount.”