BW20021023002188 20021023T111846Z UTC
( BW)(XEROX-CORP)(BB63) 3rd Quarter Results
Business Editors
UK REGULATORY NEWS
LONDON--(BUSINESS WIRE)--Oct. 23, 2002--
Xerox Reports Third-quarter Earnings
of 5 Cents Per Share
"Through our strengthened operations and superior offerings, we
are winning customers' confidence ...building value for stakeholders."
Xerox Corporation (NYSE: XRX) announced today another quarter of
strong operating cash flow and earnings driven by improved margins and
increased product demand in key growth markets.
Xerox reported third-quarter earnings of 5 cents per share
including restructuring charges of 6 cents per share. The
third-quarter 2002 results are a 10-cent improvement from the third
quarter of last year, reflecting the company's effective execution of
its strategy to significantly strengthen its business.
"Margins are up, costs are down and Xerox's streamlined business
model is delivering sustainable profitability as well as strong
operational cash generation," said Anne M. Mulcahy, Xerox chairman and
chief executive officer. "Through our strengthened operations and
superior offerings, we are winning customers' confidence, attacking
competitors' share in our sweet spots of the market and building value
for Xerox stakeholders."
Operational improvements led to gross margins of 42 percent, a
year-over-year increase of 4.4 percentage points. Selling,
administrative and general costs decreased $152 million or 13 percent
from third quarter 2001.
The company continued to generate significant cash from
operations, reporting $611 million in operating cash flow for the
third quarter. As of the end of September, Xerox's worldwide cash
balance was $2.3 billion.
In related financial news, the company noted its announcement
earlier this week with General Electric Vendor Financial Services for
GE to finance Xerox's lease receivables in the U.S. through monthly
securitizations based on new lease originations. The agreement, which
is in effect, calls for GE to provide Xerox with funding in the U.S.
of up to $5 billion outstanding during the eight-year term of the
arrangement.
Xerox reported third-quarter revenue of $3.8 billion, a
year-over-year decline of 6 percent. Approximately 50 percent of the
third-quarter revenue decline was due to the company's exit last year
from the retail small office/home office equipment business as well as
declines in its developing markets operations.
Third-quarter results reflect quarter-by-quarter percentage
improvements this year in the company's core office and production
businesses, with new product launches delivering growth in target
markets including office color, office monochrome multifunction and
production color.
"There is no doubt that Xerox's technology is the best in the
industry. This advantage is further strengthened by our rich portfolio
of services and solutions that give our customers the added value that
all businesses need," said Mulcahy. "In the third quarter, we began to
see the results of our technology investments with strong customer
demand for products launched this year including the Document Centre
500 series, expanded line of Phaser color printers, and the DocuColor
1632, 2240 and 6060."
Mulcahy added that Xerox continues to take the necessary actions
to hit all key areas of the market with competitive technology
offerings, noting its launch yesterday of the Xerox 1010, the
company's latest entry into the "light production" segment of the
high-end digital production publishing market. As a stand-alone
digital copier that can be upgraded to a networked printer, the 101
page-per-minute system is the least expensive and most advanced
product in its class.
Evidence of the growing demand for Xerox technology, the company
highlighted several recent customer contracts that represent new
business, competitive knockouts and renewals:
- Microsoft has engaged Xerox for continued managed services and
document solutions valued at $38 million over 3 years. A premier
supplier under Microsoft's new vendor program, Xerox will supply
office equipment including Document Centres, Phaser printers and other
products. Over $2 million in product sales are expected through
year-end.
- Latham & Watkins, a large global law firm, replaced 110
competitive products with Xerox's Document Centre digital
multifunction systems.
- Xerox completed new and expanded contracts with major
print-for-pay and commercial printers, including agreements with
Office Depot and Kinko's that combined call for the placement of more
than 3,000 products over the next 18 months.
- Dow Chemical Company called upon Xerox to develop a digital
imaging solution that helps to eliminate multiple collections of
materials. Since Xerox created a database that includes Dow's research
materials dating back to 1937, access by Dow's scientists and
strategic partners has quadrupled.
Worldwide employment declined 1,600 in the third quarter to 69,900
as the company continued to make progress in capturing additional
cost-reduction opportunities.
Research and development spending was 6 percent of revenue,
reflecting Xerox's commitment to fostering innovation in its three key
markets: office, production and services.
Commenting on the fourth quarter, Mulcahy said, "While we expect
that economic uncertainty will continue to impact year-over-year
revenue results, total revenue in the fourth quarter will continue to
trend positively, largely driven by significant equipment sales
improvement due to new product launches. Enhanced business model
improvements will strengthen our bottom line, delivering strong
full-year profitability."
For additional information about The Document Company Xerox,
please visit our Worldwide Web site at www.xerox.com/investor.
This release contains forward-looking statements and information
relating to Xerox that are based on our beliefs as well as assumptions
made by and information currently available to us. The words
"anticipate," "believe," "estimate," "expect," "intend," "will" and
similar expressions, as they relate to us, are intended to identify
forward-looking statements. Actual results could differ materially
from those projected in such forward-looking statements. Information
concerning certain factors that could cause actual results to differ
materially is included in the company's Form 10-Q for the quarter
ended June 30, 2002, as filed with the SEC.
XEROX(R), The Document Company(R) and the digital X(R) are
trademarks of XEROX CORPORATION.
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Xerox Corporation
Condensed Consolidated Statements of Income (Unaudited)
----------------------------------------------------------------------
Three Months Ended Nine Months Ended
Sept 30, Sept 30,
2002 2001 %Change 2002 2001 %Change
(in millions, Restated Restated
except per share
data)
----------------------------------------------------------------------
Revenues
Sales $1,593 $1,708 (7%) $4,838 $5,431 (11%)
Service,
outsourcing
and rentals 1,953 2,071 (6%) 6,004 6,344 (5%)
Finance 247 273 (10%) 761 851 (11%)
----------------------------------------------------
Total Revenues 3,793 4,052 (6%) 11,603 12,626 (8%)
Costs and Expenses
Cost of Sales 1,013 1,239 (18%) 3,036 3,917 (22%)
Cost of service,
outsourcing
and rentals 1,079 1,183 (9%) 3,411 3,658 (7%)
Equipment
financing
interest 107 107 - 300 362 (17%)
Research and
development
expenses 229 257 (11%) 699 765 (9%)
Selling,
administrative
and general
expenses 1,023 1,175 (13%) 3,302 3,544 (7%)
Restructuring
and asset
impairment
charges 63 63 - 262 487 (46%)
Gain on sale
of half of
interest in
Fuji Xerox - - - - (769) (a)
Other expenses,
net 93 125 (26%) 290 327 (11%)
-----------------------------------------------------
Total Costs and
Expenses 3,607 4,149 (13%) 11,300 12,291 (8%)
Income (Loss)
before Income
Taxes (Benefits),
Equity Income,
Minorities'
Interests, and
Cumulative Effect
of Change
in Accounting
Principle 186 (97) (a) 303 335 (10%)
Income Taxes
(Benefits) 81 (74) (a) 128 247 (48%)
-----------------------------------------------------
Income (Loss)
before Equity
Income, Minorities'
Interests and
Cumulative Effect
of Change in
Accounting
Principle 105 (23) (a) 175 88 99%
Equity in net income
of unconsolidated
affiliates 17 - (a) 43 34 26%
Minorities' Interests
in earnings of
subsidiaries (17) (9) 89% (66) (26) (a)
-----------------------------------------------------
Income (Loss)
before Cumulative
Effect of Change
in Accounting
Principle 105 (32) (a) 152 96 58%
Cumulative effect
of change in
accounting
principle, net - - - - (2) (a)
Net Income (Loss) $105 $(32) (a) $152 $94 62%
======================================================================
Basic Earnings
(Loss) per Share:
Preferred dividends,
net of tax (63) - (a) (63) (12) (a)
Income (Loss)
available for common
shareholders 42 (32) (a) 89 82 9%
Weighted average
shares
outstanding 734 718 2% 729 699 4%
-----------------------------------------------------
Net Earnings (Loss)
Per Share $0.06 ($0.05) (a) $0.12 $0.12 -
======================================================================
Diluted Earnings
(Loss) per Share:
ESOP expense
adjustment,
net of tax (63) - (a) (63) (8) (a)
----------------------------------------------------
Income (Loss)
available for
common
shareholders 42 (32) (a) 89 86 3%
Weighted average
shares
outstanding 825 718 15% 803 783 3%
----------------------------------------------------
Net Earnings (Loss)
Per Share $0.05 ($0.05) (a) $0.11 $0.11 -
======================================================================
(a) Percent not meaningful
Xerox Corporation
Condensed Consolidated Balance Sheets (Unaudited)
September 30, December 31,
(In millions) 2002 2001
----------------------------------------------------------------------
Assets
Cash and cash equivalents $2,281 $3,990
Accounts receivable, net 1,822 1,896
Billed contractual finance
receivables 544 584
Contractual finance receivables, net 3,160 3,338
Inventories 1,207 1,364
Deferred taxes and other current
assets 1,436 1,428
----------------------------------------------------------------------
Total Current Assets 10,450 12,600
Contractual finance receivables
due after one year, net 5,176 5,756
Equipment on operating
leases, net 506 804
Land, buildings and
equipment, net 1,773 1,999
Goodwill, net 1,587 1,445
Other long-term assets 4,974 5,085
----------------------------------------------------------------------
Total Assets $24,466 $27,689
======================================================================
Liabilities and Equity
Short-term debt and current
portion of long-term debt $3,514 $6,637
Accounts payable 716 704
Other current liabilites 2,535 2,919
----------------------------------------------------------------------
Total Current Liabilities 6,765 10,260
Long-term debt 10,470 10,128
Other long-term liabilities 3,031 3,251
----------------------------------------------------------------------
Total Liabilities 20,266 23,639
Deferred ESOP benefits (135) (135)
Minorities' interests in equity of
subsidiaries 68 73
Company-obligated, mandatorily
redeemable preferred securities
of subsidiary trusts holding
solely subordinated
debentures of the Company 1,698 1,687
Preferred stock 559 605
Common shareholders' equity 2,010 1,820
----------------------------------------------------------------------
Total Liabilities and Equity $24,466 $27,689
======================================================================
Xerox Corporation
Condensed Consolidated Statement of Cash Flows (Unaudited)
----------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 2002 2001 2002 2001
Restated Restated
----------------------------------------------------------------------
Cash Flows from
Operating Activities
Net Income (Loss) $105 ($32) $152 $94
Adjustments required to
reconcile net income
to cash flows
from operating
activities:
Depreciation and
amortization 213 317 772 997
Provisions for
receivables and
inventory 118 186 375 574
Restructuring and
asset impairment
charges 63 63 262 487
Cash payments for
restructurings (93) (101) (276) (365)
(Gains) losses on
sales of businesses
and assets, net (14) - (20) (759)
(Increase) decrease
in inventories (17) (9) 64 118
Increase in on-lease
equipment (7) (50) (98) (231)
Decrease in unbilled
finance receivables 188 194 656 222
Decrease (increase)
in accounts receivable
and billed finance
receivables 91 (74) (11) (1)
Net change in current
and long-term
deferred income
taxes 60 (140) (259) 208
(Decrease) increase
in other current
and long-term
liabilities 13 32 (175) (26)
All other operating
changes, net (109) (152) (200) (351)
Net cash provided
by operating
activities 611 234 1,242 967
Cash Flows from
Investing Activities
Cost of additions to
land, buildings
and equipment (38) (38) (109) (159)
Proceeds from sales
of businesses
and assets 67 - 340 1,635
All other investing
activities, net 17 (40) (10) (296)
Net cash provided by
(used) in
investing
activities 46 (78) 221 1,180
Cash Flows from
Financing Activities
Net change in debt (289) 34 (3,238) (1,385)
All other financing
activities, net (2) - 2 (95)
Net cash (used in)
provided by
financing
activities (291) 34 (3,236) (1,480)
Effect of exchange
rate changes
on cash and
cash
equivalents 24 59 64 8
Increase (decrease)
in cash and
cash equivalents 390 249 (1,709) 675
Cash and cash
equivalents at
beginning of period 1,891 2,176 3,990 1,750
Cash and cash
equivalents at
end of period $2,281 $2,425 $2,281 $2,425
======================================================================
*T
Financial Review
Summary
On April 11, 2002, we reached a settlement with the Securities and
Exchange Commission (SEC) relating to matters that had been under
investigation by the SEC since June 2000. In connection with the
settlement, we agreed to restate our consolidated financial statements
as of and for the years ended December 31, 1997 through 2000 and
undertake a review of our material internal controls and accounting
policies. We also restated our condensed consolidated financial
statements for the first three-quarters of 2001 that were included in
our quarterly filings on Form 10-Q. The restatement is discussed in
more detail in the "Recent Events" section of this Financial Review.
The effects of the restatement adjustments on revenue and pre-tax
profit for the three months ended September 30, 2001 was to increase
revenue by $150 million and decrease pre-tax loss by $149 million. We
estimate that approximately $205 million of revenue that was
recognized in the three months ended September 30, 2002 had been
restated from prior periods. At the end of the third quarter 2002,
approximately $1.3 billion of revenue recognized in periods prior to
January 1, 2002, that was reversed, is estimated to be recognized as
follows: $185 million - fourth quarter 2002, $570 million - 2003 and
$530 million - thereafter. However, prospective marketplace activity
such as lease terminations and trades and currency movements will
impact the realization of these amounts. Total future revenue will
also be impacted by the application of our new bundled lease revenue
allocation methodology and other accounting changes discussed in our
2001 Annual Report on Form 10-K.
Throughout the following Financial Review, all referenced amounts
reflect the above described restatement adjustments.
Total third quarter 2002 revenues of $3.8 billion declined 6
percent from $4.1 billion in the 2001 third quarter, representing a
reduced rate of decline from prior periods, as equipment sale declines
moderated reflecting the success of our new product launches in
several of our target markets. Approximately half the total revenue
decline was due to our second half 2001 exit from the Small
Office/Home Office (SOHO) business and declines in our Developing
Markets Operations (DMO) as we continue to prioritize profitable
revenue. The rest of the decline reflects continued economic weakness
and marketplace competition as production monochrome and office light
lens declines were only partially offset by growth in the key areas of
office monochrome digital multifunction as well as production and
office color. Cost and expense actions, consistent with improving our
business model, enabled further progress in gross margins and reduced
selling, administrative and general (SAG) expenses.
Third quarter 2002 net income of $105 million or $0.05 cents per
diluted share included after-tax restructuring charges of $49 million
($63 million pre-tax). The third quarter 2001 net loss of $32 million,
or $0.05 cents per diluted share, included after-tax restructuring
charges of $47 million ($63 million pre-tax), net after-tax losses
from foreign unhedged currency exposures of $38 million ($59 million
pre-tax) and after-tax goodwill amortization of $15 million ($16
million pre-tax) that was amortized prior to our adoption of SFAS
No.142.
Beginning in the second quarter of 2001, the Board of Directors
suspended the dividend on the Company's Preferred Stock held by its
Employee Stock Ownership plan (ESOP). In order to meet ESOP debt
service requirements since dividends were suspended, we incurred
additional ESOP-related compensation expense for each period that the
dividends were not declared. On September 9, 2002, the Board of
Directors declared preferred dividends totaling $67 million
representing the cumulative unpaid dividends that were in arrears, as
well as the third quarter 2002 dividend. This resulted in a reversal
of the previously recorded compensation expense and a corresponding
increase to net income of $63 million. However, there is no
corresponding earnings per share (EPS) improvement since the EPS
calculation requires deduction of dividends declared from reported net
income in arriving at income available to common shareholders.
Operations Review
Pre-Currency Growth
To understand the trends in the business, we believe that it is
helpful to adjust revenue and expense growth (except for ratios) to
exclude the impact of changes in the translation of European and
Canadian currencies into U.S. dollars. We refer to this adjusted
growth as "pre-currency growth." Latin American results are shown at
actual exchange rates for both pre-currency and post-currency
reporting, since these countries generally have volatile currency and
inflationary environments.
A substantial portion of our consolidated revenues is derived from
operations outside of the United States where the U.S. dollar is not
the functional currency. When compared with the average of the major
European and Canadian currencies on a revenue-weighted basis, the U.S.
dollar was approximately 7 percent weaker in the 2002 third quarter
than in the 2001 third quarter. As a result, foreign currency
translation favorably impacted revenue growth by approximately 2
percentage points in the third quarter 2002.
Revenues by Type
Year-over-year post-currency percent changes by type of revenue
were as follows:
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*T
Post Currency
2001 2002
--------------------- -------------
Q1 Q2 Q3 Q4 FY Q1(a)Q2(a) Q3
--------------------- -------------
% % % % % % % %
Equipment Sales (10)(20)(19)(21)(18) (17)(12) (9)
Post Sale and Other Revenue (5) (7) (6) (8) (6) (8) (6) (5)
Financing Income 1 (1) (7) (5) (3) (10)(13)(10)
Total Revenue (6)(10) (9)(12) (9) (10) (8) (6)
(a) Equipment and Post Sale and Other amounts have been revised from
previously reported percentages to conform certain sale revenue
classifications to the current quarter presentation.
*T
Note: Sales revenue in the Condensed Consolidated Statement of
Income includes equipment sales noted above as well as supplies, paper
and other revenue that is included in "Post Sale and Other Revenue" in
the above table.
Equipment sales typically represent approximately 20-25 percent of
total revenue. Equipment sales in the third quarter 2002 declined 9
percent (11 percent pre-currency) from the third quarter 2001 with
approximately 40 percent of the decline due to our exit from the SOHO
business. In addition, continued competitive pressures and economic
weakness impacted equipment sales particularly in production
monochrome. In November, we will launch our new 101 per minute (ppm)
monochrome system, the Xerox 1010, our latest digital entry in the
"light production" market and the least expensive and most advanced
system in its class. In the third quarter, new products delivered
growth in production color, monochrome digital multi-function and
office color printing. The DocuColor 1632 (16 ppm color / 32 ppm black
& white) and 2240 (22 ppm pages color / 40 ppm black & white) midrange
color printer/copiers deliver affordability and speed with a benchmark
cost for color pages of less than 10 cents a page. The Document Centre
500 Series digital multifunction systems bring unparalleled
productivity and features to small and mid-sized workgroups at
significantly lower manufacturing costs. Demand for the new Document
Centre 500 Series exceeded our expectations and contributed to a
backlog, which we expect to install in the fourth quarter. In
addition, the Phaser 6200 laser and 8200 solid ink color printers
launched in May continued to deliver strong growth. The DocuColor 6060
complements the successful DocuColor 2000 family by offering a more
advanced set of features, productivity and capabilities.
Post sale and other revenues include service, document
outsourcing, rentals, supplies and paper, which represent the revenue
streams that follow equipment placement, as well as revenue not
associated with equipment placement, such as royalties. Third quarter
2002 post sale and other revenues declined 5 percent (7 percent
pre-currency) from the 2001 third quarter, as declines in North
America and the Developing Markets were only partially offset by
growth in Europe. The declines reflect lower equipment populations due
to reduced placements in earlier periods, lower page print volumes,
and lower rental income in Latin America. Growth in Europe reflected
the profile of the installed base, which has a higher proportion of
digital products than North America, as well as longer average lease
duration. 2002 third quarter document outsourcing revenue declined
from the 2001 third quarter as declines in North America outpaced
revenue growth in Europe. We expect document outsourcing revenue will
continue to decline as we continue to focus on more profitable
contracts.
Finance Income declined 10 percent (12 percent pre currency) in
the third quarter 2002 from the third quarter 2001 reflecting
continued equipment sale declines, primarily in North America, and the
effects of the sale of our financing businesses in the Nordic
countries and Italy.
Key Ratios and Expenses
The trend in key ratios was as follows:
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2001 2002
------------------------- ---------------
Q1 Q2 Q3 Q4 FY Q1 Q2 Q3
------------------------- ---------------
% % % % % % % %
Total Gross Margin 34.8 39.1 37.6 41.4 38.2 41.0 42.5 42.0
R&D % Revenue 5.8 6.0 6.3 5.3 5.9 6.0 6.1 6.0
SAG % Revenue 26.8 28.5 29.0 27.0 27.8 30.3 28.1 27.0
*T
Third quarter 2002 gross margin of 42.0 percent improved 4.4
percentage points from 37.6 percent in the third quarter 2001.
Approximately two percentage points of the improvement reflect the
prior liquidation of equipment inventory associated with our SOHO
exit. In addition, the improvement reflects improved manufacturing and
service productivity partially offset by the impact of competitive
price pressures. The applicable portion of the previously discussed
ESOP expense adjustment benefited the third quarter 2002 gross margin
by $28 million or 0.7 percentage points.
Research and development (R&D) expense of $229 million was $28
million lower in the 2002 third quarter than the third quarter 2001
reflecting benefits from cost restructuring actions, the $11 million
applicable portion of the ESOP expense adjustment and our SOHO exit.
R&D spending in the 2002 third quarter represented 6 percent of
revenue as we continue to invest in technological development,
particularly color, in order to maintain our position in the rapidly
changing document processing market. We expect 2002 R&D spending will
represent approximately 6 percent of revenue, a level that we believe
is adequate to remain technologically competitive. Xerox R&D remains
strategically coordinated with Fuji Xerox.
Selling, administrative and general (SAG) expenses declined by
$152 million in the 2002 third quarter to $1,023 million primarily
reflecting business model improvements from our cost reductions, the
$28 million applicable portion of the ESOP expense adjustment, a $34
million favorable property tax adjustment, lower bad debt provision
and a $26 million loss associated with leased facilities. The $34
million property tax adjustment resulted from a change in the
estimated amounts payable to the numerous domestic state and local
property tax jurisdictions where we place our equipment through sale
or lease. Such change was due to our reviews of property tax rates,
experience in property tax audits and amounts of leased equipment at
customer sites. The $26 million loss associated with leased facilities
represents a change in the estimated loss we expect to incur related
to our decision not to utilize existing lease facilities, as well as
changes in our estimates of certain sublease rentals at a lower rate
than our lease costs. The third quarter 2002 bad debt provision of $87
million was $64 million lower than 2001 primarily due to improved
aging and historical write-off trends for accounts and finance
receivables as well as lower provisions in North America due to
improved customer administration and tighter credit control policies.
The third quarter 2001 was negatively impacted by provisions required
for many high-risk small customers.
We have been initiating restructuring actions in order to cut
costs and prioritize resources in strategic areas of our business. We
recorded a restructuring charge in the third quarter 2002 of $63
million ($49 million after taxes) to reflect these actions. The charge
primarily consisted of severance and employee benefits related to the
termination of approximately 1,100 employees worldwide, as well as
certain costs related to the consolidation of excess facilities. These
actions are expected to reduce annualized costs by approximately $75
million. We expect additional provisions will be required in 2002 as
additional plans are finalized and are committed to. The fourth
quarter provision is expected to be higher than the average of the
first 3 quarters of 2002 but cannot be estimated until finalization of
the plans. The restructuring reserve balance at September 30, 2002 was
approximately $200 million.
Worldwide employment was 69,900 at the end of the 2002 third
quarter primarily reflecting reductions due to our restructuring
programs and the prior de-consolidation of our South African
subsidiary.
Other expenses, net for the quarters ended September 30, 2002 and
2001 were as follows:
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Q3 Q3
($ in millions) 2002 2001
----- -----
Non-financing interest expense $83 $48
Currency losses, net 12 59
Amortization of goodwill (2001 only) and intangibles 9 21
Interest income (21) (24)
Gain on sale of businesses and assets, net (14) -
All other, net 24 21
-----------
Total $93 $125
===========
*T
Other expenses, net were $93 million in the third quarter 2002 and
$125 million in the third quarter 2001. Higher non-financing interest
expense primarily reflects higher borrowing costs associated with the
terms of the New Credit Facility. Non-financing interest expense also
includes net gains from the mark-to-market of interest rate swaps,
including "received fixed/pay variable" type swaps. These gains are
the result of a declining interest rate environment and totaled $29
million and $46 million in the third quarter of 2002 and 2001,
respectively. The decline in gains is the result of a smaller swap
portfolio and a lower relative interest rate decline in 2002 as
compared to 2001.
Net currency losses of $12 million in the 2002 third quarter
primarily represent the cost of hedging our foreign currency
denominated exposures in markets where we have been able to restore
economic hedging capability. Gains and losses on unhedged exposures
were immaterial on a net basis in the quarter. The large loss in the
third quarter 2001 resulted from our unhedged exposures largely due to
our restricted access to the derivatives markets in 2001.
Effective January 1, 2002, we adopted the provisions of SFAS No.
142 "Goodwill and Other Intangible Assets." Accordingly, the
amortization of goodwill was discontinued in 2002.
Interest income is derived from our invested cash balances and
income tax receivables. In the future, we expect interest income will
decline, as cash balances are lower than prior years following debt
repayments, including $3.5 billion on our credit facilities.
In July 2002, we sold our 22 percent investment in Katun
Corporation, a supplier of aftermarket copier/printer parts and
supplies, for net proceeds of $67 million, which resulted in a pre-tax
gain of $12 million. After-tax, the sale was essentially break-even,
as the taxable basis of Katun was lower than our carrying value on the
sale date resulting in a high rate of income tax.
All other, net for the 2002 third quarter includes $20 million of
expenses related to certain litigation and associated claims. The 2001
third quarter included $10 million of property losses related to the
September 11 attacks as well as numerous other individually
insignificant items.
Income Taxes, Equity in Net Income of Unconsolidated Affiliates
and Minorities' Interests in Earnings of Subsidiaries
Pre-tax income was $186 million in the third quarter 2002 compared
to a pre-tax loss of $97 million in the third quarter 2001.
In the third quarter 2002, we recorded an income tax expense of
$81 million compared to an income tax benefit of $74 million in the
third quarter of 2001. The consolidated effective tax rate for the
third quarter 2002 was 43.5 percent and the year-to-date effective tax
rate was 42.2 percent. The third quarter 2002 and year-to-date tax
rates reflect additional tax expense recorded for the sale of our
interest in Katun Corporation, the on-going examination in India as
well as losses in certain jurisdictions where we are not providing tax
benefits. Such expense is offset, in part, by certain benefits arising
from tax law changes and the declaration of ESOP dividends.
Our annual effective tax rate will change based on nonrecurring
events (such as new restructuring initiatives) as well as recurring
factors including the geographical mix of income before taxes and the
related tax rates in those jurisdictions. We expect that our
consolidated 2002 effective tax rate will approximate 45 percent.
Before restructuring charges, we expect that our 2002 effective tax
rate will approximate 40 percent.
Equity in Net income of unconsolidated affiliates consists of our
25 percent share of Fuji Xerox income as well as income from other
smaller equity investments. Higher equity in net income for the third
quarter 2002 primarily reflects improved Fuji Xerox performance
including strong revenue growth and improved gross margins.
Minorities interest in earnings of subsidiaries increased by $8
million to $17 million in the third quarter 2002 primarily due to the
quarterly distribution on the November 2001 Convertible Trust
Preferred Securities.
Business Performance by Operating Segment
Our operating segments are as follows: Production, Office, DMO,
SOHO, and Other. The following table summarizes our business
performance by segment. Revenue and year-over-year revenue percentage
changes by segment are as follows:
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*T
2001 2002
-------------------------------------
Full %
Year Q3 Change
---------------------------
Revenue(a) Revenue(a) Q1 Q2 Q3
---------- --------- ---------------------------
Production $5.9 $1.3 (9) (8) (5)
Office 6.9 1.6 (6) (4) (2)
DMO 2.0 0.4 (11) (10) (15)
SOHO 0.4 0.1 (43) (42) (43)
Other 1.8 0.4 (19) (11) (10)
---------- ---------
Total $17.0 $3.8 (10) (8) (6)
========== =========
Memo: Color $2.8 $0.7 (8) 1 4
(a) Dollars are in billions
*T
Operating segment profit (loss) and margins are as follows:
-0-
*T
2001 2002
------------------------- --------------- --------------
Profit (Loss)(a) Margin
----------------------------------------- --------------
Q1 Q2 Q3 Q4 FY Q1 Q2 Q3 Q3 2002 Q3 2001
------------------------- --------------- --------------
Production $112 $101 $73 $180 $466 $105 $125 $142 10.7% 5.2%
Office 47 98 63 157 365 91 138 115 7.1% 3.8%
DMO (70) 5 (12) (48)(125) (5) 7 21 5.1% (2.5%)
SOHO (79) (84) (54) 22 (195) 27 15 23 36.5% (49.1%)
Other (1) (42)(101) 35 (109) (112) (47) (35) (9.3%) (24.0%)
----------------------------------------- --------------
Total $9 $78 ($31)$346 $402 $106 $238 $266 7.0% (0.8%)
========================================= ==============
(a) Dollars are in millions
*T
Note: For purposes of comparability, 2001 operating segment
information has been adjusted to reflect a change in measurement of
segment profit or loss that was implemented in 2002. The nature of the
changes related primarily to corporate expense and other allocations
associated with internal reorganizations made in 2002, as well as
decisions concerning direct applicability of certain overhead expenses
to the segments. The adjustments increased (decreased) full year 2001
revenues as follows: Production- ($16), Office - ($16), DMO - ($1),
SOHO -$3 and Other- $30. The full year 2001 segment profit was
increased (decreased) as follows: Production - $12, Office - $24, DMO
- $32, SOHO - $2 and Other - ($70).
Production revenues include production publishing, production
printing, color products for the production and graphic arts markets
and light lens copiers over 90 pages per minute sold predominantly
through direct sales channels in North America and Europe. Revenues in
the third quarter 2002 declined 5 percent (8 percent pre-currency)
from the 2001 third quarter. Production monochrome declines reflect
customer transition from light lens to digital offerings, continued
market weakness, particularly in the Graphic Arts market and the trend
towards distributed printing and electronic substitutes. We have just
announced the November launch of the Xerox 1010, our latest digital
entry for the growing "light production" market. Third quarter 2002
production color revenues grew from the 2001 third quarter reflecting
the recently launched DocuColor 1632 and DocuColor 2240
printer/copiers as well as continued success in the DocuColor 2000
family. Production revenues represented approximately 35 percent of
total revenue in the third quarter 2002 and 34 percent of revenue in
the third quarter 2001.
Third quarter 2002 production segment profit increased by $69
million to $142 million and the segment margin improved by 5.5
percentage points to 10.7 percent reflecting gross margin improvement
and expense benefits from our cost saving initiatives, partially
offset by increased R&D spending.
Office revenues include our family of Document Centre digital
multifunction products, color laser, solid ink and monochrome laser
printers, digital and light lens copiers under 90 pages per minute,
and facsimile products sold through direct and indirect sales channels
in North America and Europe. Third quarter 2002 revenues declined 2
percent (4 percent pre-currency) from the 2001 third quarter as light
lens declines were only partially offset by strong monochrome digital
and color revenue growth from recently launched products. In the third
quarter 2002, we launched the Document Centre 500 Series digital
multifunction systems at speeds of 35, 45 and 55 pages per minute. The
new Phaser office color printers, launched in May, are designed to
fuel the migration to color in the office by offering cost and print
quality advantages that make it practical to replace black-and-white
printers. Office revenues represented approximately 43 percent of
total revenue in the third quarter 2002 and 40 percent in the third
quarter 2001.
Third quarter 2002 office segment profit increased by $52 million
to $115 million and the segment margin improved by 3.3 percentage
points to 7.1 percent reflecting expense benefits from our cost saving
initiatives and improved gross margins driven primarily by improved
manufacturing and service productivity.
DMO includes operations in Latin America, the Middle East, India,
Eurasia, Russia and Africa. DMO revenue declined 15 percent in the
2002 third quarter predominantly due to lower equipment populations
and the currency devaluation in Brazil.
Third quarter 2002 DMO segment profit increased by $33 million to
$21 million and the segment margin improved by 7.6 percentage points
to 5.1 percent. The third quarter profit improvement includes
significantly lower SAG spending resulting from our cost saving
initiatives and the currency devaluation as our improved liquidity has
allowed us to better economically hedge currency exposures.
We announced our disengagement from our worldwide SOHO business in
June 2001. SOHO revenues now consist primarily of consumables for the
inkjet printers and personal copiers previously sold through indirect
channels in North America and Europe. Third quarter 2002 SOHO revenues
declined 43 percent from 2001, primarily due to the absence of
equipment revenue. Third quarter 2002 profitability reflects continued
sales of high margin consumables for the existing equipment
population. We expect sales of these supplies to continue over the
next few years, and will decline over time as the existing population
of equipment is replaced.
Other includes revenues and costs associated with paper sales,
Xerox Engineering Systems (XES), Xerox Connect, our investment in Fuji
Xerox, consulting and other services. Other also includes corporate
items such as non-financing interest and other non-allocated costs.
2002 third quarter revenue declined 10 percent (14 percent pre
currency) principally due to lower XES and Xerox Connect revenues
partially offset by higher paper revenue. The reduced third quarter
2002 loss principally reflects the beneficial impact of the ESOP
expense adjustment, partially offset by higher non-financing interest
expense.
Third quarter 2002 Adjusted Average Shares Outstanding of 825
million for the diluted EPS calculation increased by approximately 107
million shares from the 2001 third quarter reflecting the effect of
our dilutive securities, which are included in the calculation when we
are profitable. The increase primarily reflects share dilution
resulting from the application of the "if converted" methodology in
the calculation of our diluted EPS for the Preferred Shares held by
the ESOP.
When computing diluted EPS, the "if converted" methodology
requires us to assume conversion of the ESOP preferred shares into
common stock if we are profitable. The conversion guarantees that each
ESOP preferred share be converted into shares worth a minimum value of
$78.25. As long as our common stock price is above $13.04 per share,
the conversion ratio is 6 to 1. As our share price falls below this
amount, the conversion ratio increases. In the third quarter 2002,
approximately 87 million common shares were included in the adjusted
average shares outstanding, resulting from the assumed conversion of
the 7.2 million average outstanding ESOP Preferred Shares at the third
quarter 2002 average share price of approximately $6.46 per share.
Capital Resources and Liquidity
Cash Flow Analysis
The following summarizes our cash flows for the three and nine
months ended September 30, 2002 and 2001 as reported in our Condensed
Statement of Cash Flows in the accompanying Condensed Consolidated
Financial Statements:
-0-
*T
Three Months Nine Months
Ended Ended
September 30, September 30,
--------------- ---------------
2002 2001 2002 2001
Restated Restated
Operating Cash Flows $611 $234 $1,242 $967
Investing Cash Flows / Usage 46 (78) 221 1,180
Financing Cash Usage / Flows (291) 34 (3,236) (1,480)
Effect of exchange rate changes on
cash and cash equivalents 24 59 64 8
--------------- ---------------
Increase (Decrease) in cash and cash
equivalents 390 249 (1,709) 675
Cash and cash equivalents at beginning
of period 1,891 2,176 3,990 1,750
--------------- ---------------
Cash and cash equivalents at end of
period $2,281 $2,425 $2,281 $2,425
=============== ===============
*T
For the three months ended September 30, 2002, operating cash
flows of $611 million reflected positive net income as well as working
capital reductions partially offset by a $90 million cash contribution
to our pension plans. The increase in operating cash flows reflected
improvement in our operating income, net cash generation from our
finance-receivable portfolios reflecting continued equipment sale
declines and our transition to third party vendor financing, and a
modest improvement in accounts receivable. In addition, on-lease
equipment spending declined due to lower rental populations,
particularly in our older-generation light- lens products. Interest
payments were essentially unchanged, as lower debt levels were offset
by higher interest rates versus the prior year quarter. Third quarter
cash restructuring payments were $93 million and $101 million in 2002
and 2001, respectively.
Investing cash flows for the three months ended September 30, 2002
were primarily related to proceeds of $67 million from the sale of our
investment in Katun, partially offset by capital spending. Investing
cash flows in the 2001 third quarter largely consisted of capital
spending.
Third quarter 2002 financing activities included $700 million of
debt repayments under the renegotiated New Credit Facility, and $435
million of other net payments of maturing debt, offset by proceeds
from secured borrowings from GE Capital in the U.S., Canada and the
U.K. totaling $828 million. Financing activities for the 2001 third
quarter consisted of scheduled debt repayments of approximately $450
million, which were more than offset by $480 million of proceeds
received from the issuance of asset-backed notes in the U.S.
The EBITDA-based cash flow presentation below illustrates the way
we look at cash flows from a cash management perspective. We define
EBITDA as earnings excluding financing income and before interest
expense, income taxes, depreciation, amortization, minorities'
interests, equity in income of unconsolidated affiliates, and
non-recurring and non-operating items. We believe that EBITDA provides
investors with a useful measure of liquidity generated from recurring
operations. EBITDA is not intended to represent an alternative to
either operating income or cash flows from operating activities (as
those terms are defined in GAAP). While EBITDA is frequently used to
analyze companies, the definition of EBITDA that we employ, as
presented herein, may be different than definitions of EBITDA used by
other companies.
EBITDA and the related cash flows for the three and nine months
ended September 30, 2002 and 2001 were as follows (in millions):
-0-
*T
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ------------------
2002 2001 2002 2001
Restated Restated
Non-financing revenues $3,546 $3,779 $10,842 $11,775
Non-financing cost of sales 2,092 2,422 6,447 7,575
------------------- ------------------
Non-financing gross profit 1,454 1,357 4,395 4,200
Research and development
expenses (229) (257) (699) (765)
Selling, administrative and
general expenses (1,023) (1,175) (3,302) (3,544)
Depreciation and amortization
expense(a) 204 296 744 931
------------------- ------------------
EBITDA 406 221 1,138 822
Working capital and other
changes 26 (39) (53) 433
Increase in on-lease equipment (7) (50) (98) (231)
Cost of additions to land,
buildings and equipment (38) (38) (109) (159)
Cash payments for
restructurings (93) (101) (276) (365)
Interest payments (189) (183) (523) (789)
Equipment financing 507 434 1,520 1,136
Debt repayments, net (289) 5 (3,238) (1,414)
Dividends and other non-
operating items - - (45) (393)
Proceeds from divestitures 67 - (25)(b) 1,635
------------------- ------------------
Net increase (decrease) in
cash and cash equivalents $390 $249 ($1,709) $675
=================== ==================
(a) Excludes goodwill and intangible assets amortization
(b) Amount includes the tax payments associated with the Fuji Xerox
sale. Such amount is included in operating activities in our GAAP
Condensed Consolidated Statement of Cash Flows.
*T
Debt
At September 30, 2002 we had approximately $1.1 billion of
maturing debt obligations expected to be repaid during the remainder
of 2002. Our scheduled quarterly debt maturities for the remainder of
2002 and full year 2003 are as follows (in billions):
-0-
*T
2002 2003
---- ----
First Quarter $0.6
Second Quarter 1.2
Third Quarter 0.6
Fourth Quarter $1.1 1.5
---- -----
Full Year $1.1 $3.9
==== ====
*T
The following table summarizes our secured and unsecured debt as
of September 30, 2002 (in millions):
-0-
*T
New Credit Facility - debt secured under the 20% net worth
limitation $900 (1)
New Credit Facility - debt secured outside the 20%
limitation 600
Debt secured by finance receivables 3,209 (2)
Capital leases 24
Debt secured by other assets 97
--------
Total Secured Debt 4,830
New Credit Facility - unsecured 2,000 (1)
Senior Notes 835
Subordinated debt 581
Other Debt 5,738
--------
Total Unsecured Debt 9,154
--------
Total Debt $13,984
========
*T
(1) The amount of New Credit Facility debt secured under the 20%
Consolidated Net Worth limitation represents an estimate based
on Consolidated Net Worth at September 30, 2002 and an
estimate of the amount of other debt, as defined, secured
under the 20% limitation. Any change to the amount indicated
would correspondingly change the amount of the unsecured
portion of the New Credit Facility.
(2) Of this amount, $2,614 is secured by assets owned by special
purpose entities (SPEs).
Vendor Financing
Our plan to transition customer financing to third party vendors
is an important initiative in enhancing our liquidity. A history of
our progress can be found in our second quarter 10-Q filed with the
SEC. In the third quarter 2002, we received proceeds of $828 million
from secured borrowings from GE, consisting of $519 million in the
U.S, $147 million in Canada and $162 million in the UK.
On Monday, October 21, 2002 we announced an eight-year agreement
with GE Vendor Financial Services, whereby GE will finance the
majority of lease receivables in the United States through monthly
securitizations based on new lease originations. The new agreement is
in addition to the $2.5 billion that we have already received from GE
in the U.S. and calls for GE to provide funding through 2010 of up to
$5 billion outstanding at any time. The agreement also includes
opportunities to increase the financing levels over time, consistent
with our expected revenue growth. Through this agreement, the
financing debt and the receivables remain on our balance sheet with
the debt funded by the contracted GE securitizations. The agreement
became effective immediately and allows GE to securitize our U.S.
lease receivables at over-collaterization rates of approximately 10
percent.
New Credit Facility
In June 2002, we entered into an Amended and Restated Credit
Agreement (the "New Credit Facility") with a group of lenders,
replacing our prior $7 billion facility (the "Old Revolver"). The New
Credit Facility (currently $3.5 billion outstanding) consists of two
tranches of term loans totaling $2.0 billion and a $1.5 billion
revolving facility that includes a $200 million letter of credit
sub-facility. The New Credit Facility is discussed in detail in our
second quarter 10-Q and the complete agreement is filed on Form 8-K
with the SEC.
At September 30, 2002, we are in compliance with all aspects of
the New Credit Facility including financial covenants.
Recent Events
Settlement with the SEC
On April 11, 2002, we reached a settlement with the SEC relating
to matters that had been under investigation by the SEC since June
2000. In connection with the settlement, we agreed to restate our
financial statements as of and for the years ended December 31, 1997
through 2000 and undertake a review of our material internal controls
and accounting policies. In addition, as a result of the re-audit of
our 2000 and 1999 Consolidated Financial Statements, additional
adjustments were recorded. The restatement reflects adjustments which
are corrections of errors made in the application of U.S. generally
accepted accounting principles (GAAP) and includes (i) adjustments
related to the application of the provisions of SFAS No. 13
"Accounting for Leases" and (ii) adjustments that arose as a result of
other errors in the application of GAAP. The principal adjustments
made to our Condensed Consolidated Financial Statements as of and for
the three months ended September 30, 2001, reflect changes discussed
in our 2001 Annual Report on Form 10-K.
Adoption of SFAS No. 142 "Goodwill and Other Intangible Assets"
Effective January 1, 2002, we adopted the provisions of SFAS No.
142 "Goodwill and Other Intangible Assets", which is discussed in our
Notes to Consolidated Financial Statements in our 2001 Annual Report
on Form 10-K. Accordingly, the amortization of goodwill was
discontinued in 2002 and was replaced by annual impairment testing of
such goodwill. In addition, we have completed the first step of the
SFAS No. 142 goodwill impairment test. Based upon this testing we have
identified potential goodwill impairments in the reporting units
included in our DMO operating segment. Total DMO goodwill is $63
million as of September 30, 2002. We cannot presently estimate the
amount of the potential impairment charge and we expect to finalize
step two of the impairment test during the fourth quarter 2002. Any
non-cash charge would be retroactively recorded as a cumulative effect
of change in accounting principle in the first quarter 2002.
Berger Litigation
As previously reported, in the class action Berger, et al. v.
RIGP, on September 30, 2002, the United States District Court for the
Southern District of Illinois entered a final judgment for the
plaintiffs and adopted their methodology for calculating damages. In
December of 2001, the plaintiffs had submitted papers claiming $284
million pursuant to such methodology.
The Company's Retirement Income Guarantee Plan (RIGP) filed an
appeal of the court's rulings on liability and damages on October 9,
2002. We believe, based on advice of legal counsel, that it is
probable that the judgment will be overturned. The company cannot
estimate the amount of loss that might result from this matter. As
previously disclosed, any final judgment after appeal would be paid
from RIGP assets. However, such payment will require us to make
additional contributions to RIGP in the future based on a potential
shortfall in the plan assets available to pay other plan liabilities.
RIGP denies any wrongdoing and believes it will prevail on appeal.
Pensions
Market performance over the last two years has decreased the value
of the assets held by our pension plans and has correspondingly
increased the amount by which our worldwide pension plans are
under-funded. We are in the process of estimating the under-funding
amount of our major worldwide pension plans. As a result of the
decline in the value of our pension plan assets, a decline in interest
rates, and the resultant increase in the under-funded pension
obligations for certain European and US pension plans, it is likely
that we will record a fourth quarter non-cash charge to shareholders'
equity, which could total several hundred million dollars. The amount
of the under-funded obligation and the non-cash charge will depend on
fourth quarter asset returns and interest rate changes.
We are contemplating reducing our discount rate and reducing the
expected return on plan assets assumptions for our major pension plans
in 2003. During the fourth quarter we expect to complete our actuarial
assessments for 2003 which will likely increase our 2003 pension
expense. In the event that market performance continues to be poor, we
would expect that our 2003 pension plan cash funding requirements will
increase modestly.
Xerox Corporation Securitization
In 2000, Xerox Corporation securitized certain accounts
receivables in the U.S. generating gross proceeds of $290 million.
This transaction was accounted for as a sale of receivables. In May
2002, a Moody's downgrade constituted an event of termination under
this agreement, which we have allowed to run off. In October 2002, the
counter-party received $231 million of the cash proceeds resulting
from the pool of the then existing receivables within the facility of
this agreement. We have no further obligation to the counter-party as
such facility has been terminated.
Forward-Looking Statements
This earnings release and financial review contain forward-looking
statements and information relating to Xerox that are based on our
beliefs as well as assumptions made by and information currently
available to us. The words "anticipate," "believe," "estimate,"
"expect," "intend," "will" and similar expressions, as they relate to
us, are intended to identify forward-looking statements. Actual
results could differ materially from those projected in such
forward-looking statements. Information concerning certain factors
that could cause actual results to differ materially is included in
the company's second quarter 2002 Form 10-Q filed with the SEC. We do
not intend to update these forward-looking statements.
Short Name: Xerox Corp.
Category Code: QRT
Sequence Number: 00001029
Time of Receipt (offset from UTC): 20021023T102426+0100
--30--kam/in*
CONTACT: Xerox Corporation
James A. Ramsey
Director, Investor Relations
203-968-3807
James.Ramsey@usa.xerox.com
Fax (203) 968-3944
or
Cynthia B. Johnston
Manager, Investor Relations
203-968-3489
Cindy.Johnston@usa.xerox.com
Fax (203) 968-3944
KEYWORD: UNITED KINGDOM INTERNATIONAL EUROPE
INDUSTRY KEYWORD:
SOURCE: Xerox Corp.
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