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BW20020725002132 20020725T120934Z UTC
( BW)(XEROX-CORP)(BB63) Xerox Interim Results
Business Editors
UK REGULATORY NEWS
STAMFORD, Conn.--(BUSINESS WIRE)--July 25, 2002--
Xerox Reports Second-quarter Earnings of 12 Cents Per Share; Return To
Profitability Driven By Significantly Improved Operational Performance
Xerox Corporation (NYSE: XRX) announced today a return to
profitability based on the company's strongest quarterly operational
performance since beginning a significant transformation in October
2000. The company reported second-quarter earnings of 12 cents per
share including restructuring charges of 4 cents per share and a
3-cent per share loss from unhedged foreign currency.
"Xerox has its eye on one clear objective: building value for our
customers and shareholders. We continue to improve all areas of our
global operations, reducing costs, enhancing liquidity and generating
cash from operations," said Anne M. Mulcahy, Xerox chairman and chief
executive officer. "This management team has put difficult matters
behind us while creating a new Xerox that is stronger, leaner, and
faster. The result: a return to profitability that speaks to the
resiliency of our people and the confidence of our customers who
recognize the value and competitive advantages of Xerox's strengthened
offerings."
Operational improvements led to gross margins of 42.5 percent, a
year-over-year increase of 3.4 percentage points. Selling,
administrative and general costs decreased $110 million or 9 percent
from second quarter 2001.
In the second quarter, Xerox generated operating cash flow of $541
million, reflecting improved profitability and disciplined management
of the balance sheet.
While investing in growth, Xerox also continued its relentless
focus on cost reductions. The company implemented initiatives in 2001
that will reduce its annualized cost base by more than $1.1 billion
and has taken additional actions in the first half of this year that
will further reduce costs by about $175 million. Worldwide employment
declined 2,200 in the second quarter to 72,400. Research and
development spending was 6 percent of revenue, reflecting the
company's commitment to fostering innovation in its three key markets:
the office, production and services.
Xerox reported second-quarter revenue of $4 billion, a
year-over-year decline of 8 percent. Approximately 30 percent of the
second-quarter revenue decline was due to the company's exit last year
from the retail small office/home office equipment business as well as
reductions in its developing markets operations. The DMO revenue
decline reflects the transition to a business structure that
prioritizes cash flow and profitable revenue. This strategy along with
operational efficiencies led to a profitable quarter for Xerox's
developing markets business.
Delivering on a commitment to strengthen its product portfolio,
Xerox recently launched several breakthrough products including the
next-generation Document Centre and DocuColor multifunction systems
and an expanded line of Phaser color printers for the office. Mulcahy
noted that these new products, along with the company's launch this
year of the DocuColor iGen3 digital production press, place Xerox in a
strong competitive position to capture market share.
"Xerox's portfolio of offerings has never been stronger and,
supported by a breadth of services and solutions, is strategically
designed to exploit key opportunities in our core businesses. At the
same time, we are significantly improving margins in the office and
production markets where we're winning customers with our
competitively priced and superior technology."
Commenting on the company's financial health, Lawrence A.
Zimmerman, Xerox senior vice president and chief financial officer,
said, "In a short period of time, Xerox has taken the right steps to
improve its liquidity, reducing debt by 14 percent in the past year
while maintaining a strong worldwide cash position of about $1.9
billion at the end of June."
Zimmerman also noted that Xerox recently completed the
renegotiation of its bank facility, repaying $2.8 billion, agreeing to
pay an additional $700 million by Sept. 15 and extending the maturity
date for the remaining balance.
"The flow through from operational improvements, a rich product
portfolio and a fortified balance sheet are the key enablers to
building value for customers and shareholders. We're making impressive
progress in each area and will continue to deliver on a well-defined
strategy that focuses on long-term financial health. And, we are doing
so with a commitment to the highest integrity of financial reporting
and strengthened internal controls," he said.
Mulcahy added, "We will continue to build momentum in the
marketplace through new product and service offerings as well as
operational improvements that will strengthen bottom-line performance.
These actions position us well for a return to 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 First Quarter 2002 Form 10-Q
filed with the SEC.
XEROX(R), The Document Company(R) and the digital X(R) are
trademarks of XEROX CORPORATION.
-0-
*T
Xerox Corporation
Condensed Consolidated Statements of Income (Unaudited)
Three Months Ended June 30,
(in millions, except per share data) 2001 % Change 2002
------------------------------------- ------------------------------
Restated
Revenues
Sales $ 1,662 $ 1,858 (11%)
Service, outsourcing and rentals 2,040 2,139 (5%)
Finance 250 286 (13%)
------ --------
Total Revenues 3,952 4,283 (8%)
Costs and Expenses
Cost of Sales 998 1,301 (23%)
Cost of service, outsourcing
and rentals 1,173 1,183 (1%)
Equipment financing interest 101 125 (19%)
Research and development expenses 240 257 (7%)
Selling, administrative and general
expenses 1,110 1,220 (9%)
Restructuring and asset impairment
charges 53 295 (82%)
Gain on sale of half of interest
in-Fuji Xerox -- - *
Other expenses, net 107 144 (26%)
------ ------ ------
Total Costs and Expenses 3,782 4,525 (16%)
====== ======
Income (Loss) before Income Taxes (Benefits),
Equity Income, Minorities' Interest
and, and Cumulativeive Effect of Change
in Accounting Principle 170 (242) 184%
------ ------
Income Taxes (Benefits) 67 (120) 156%
Income (Loss) before Equity Income,
Minorities' Interests and Cumulative
Effect of Change In Accounting Principle 103 (242) 170%
Equity in net income of unconsolidated
affiliates 15 31 (52%)
Minorities' Interests in earnings
of subsidiaries (25) (10) 150%
------ ------
Income (Loss) before Cumulative Effect of
Change in Accounting Principle 93 (101) 192%
Cumulative effect of change in accounting
principle, net - - *
Net Income (Loss) $ 93 ($101) 192%
====== =======
Basic Earnings (Loss) per Share:
Preferred dividends -- --
------ ------
Income (Loss) available for
common shareholders 93 (101) 192%
Weighted average shares outstanding 728 701 4%
------ ------
Net Earnings (Loss) Per Share $ 0.13 ($0.14) 193%
====== ======
Diluted Earnings (Loss) per Share:
ESOP expense adjustment, net of tax -- -- *
Interest on Convertible Debt, net of tax -- -- --
Distributions on Convertible Trust
Securities, net of tax 13 -- *
----- ------
Income (Loss) available for common
shareholders 106 101 205%
Weighted average shares outstanding 913 701 30%
----- ------
Net Earnings (Loss) Per Share $ 0.12 ($0.14) 186%
* Percent not meaningful
Six Months Ended June 30,
2002 2001 % Change
---------------------------
Restated
Revenues
Sales $ 3,245 $ 3,723 (13%)
Service, outsourcing and rentals 4,051 4,273 (5%)
Finance 514 578 (11%)
--------- ---------
Total Revenues 7,810 8,574 (9%)
Costs and Expenses
Cost of Sales 2,023 2,678 (24%)
Cost of service, outsourcing
and rentals 2,332 2,475 (6%)
Equipment financing interest 193 255 (24%)
Research and development expenses 470 508 (7%)
Selling, administrative and general
expenses 2,279 2,369 (4%)
Restructuring and asset impairment
charges 199 424 (53%)
Gain on sale of half of interest
in-Fuji Xerox -- (769) *
Other expenses, net 197 202 (2%)
--------- ---------
Total Costs and Expenses 7,693 8,142 (6%)
========= =========
Income (Loss) before Income Taxes (Benefits),
Equity Income, Minorities' Interest
and, and Cumulativeive Effect of Change
in Accounting Principle 117 432 (73%)
Income Taxes (Benefits) 47 321 (85%)
------- ---------
Income (Loss) before Equity Income,
Minorities' Interests and Cumulative
Effect of Change in Accounting Principle 70 111 (37%)
Equity in net income of unconsolidated
affiliates 26 34 (24%)
Minorities' Interests in earnings
subsidiaries (49) (17) 188%
Income (Loss) before Cumulative Effect of
Change in Accounting Principle 47 128 (63%)
Cumulative effect of change in accounting
principle, net -- (2) *
Net Income (Loss) $ 47 $ 126 (63%)
======= ==========
Basic Earnings (Loss) per Share:
Preferred dividends - (12) *
*
------- ----------
Income (Loss) available for common
shareholders 47 114 (59%)
Weighted average shares outstanding 727 690 5%
------- ----------
Net Earnings (Loss) Per Share $ 0.07 $ 0.17 (59%)
Diluted Earnings (Loss) per Share:
ESOP expense adjustment, net of tax -- (8) *
Interest on Convertible Debt, net of tax -- 1
Distributions on Convertible Trust1
Securities, net of tax -- -- *
Income (Loss) available for common
shareholders 47 119 (61%)
Weighted average shares outstanding 795 779 2%
Net Earnings (Loss) Per Share $ 0.06 $ 0.15 (60%)
* Percent not meaningful
Xerox Corporation
Condensed Consolidated Balance Sheet (Unaudited)
June 30, December 31,
(in millions) 2002 2001
----------------------------------------------------------------------
Assets
Cash and cash equivalents $1,891 $3,990
Accounts receivable, net 1,935 1,896
Finance receivables, net 3,489 3,922
Inventories 1,245 1,364
Deferred taxes and
other current assets 1,488 1,428
-------------------------------------------------------------------
Total Current Assets 10,048 12,600
Finance receivables due after
one year, net 5,704 5,756
Equipment on operating leases, net 631 804
Land, buildings and equipment, net 1,872 1,999
Other long-term assets 5,203 5,085
Goodwill, net 1,559 1,445
-------------------------------------------------------------------
Total Assets $25,017 $27,689
===================================================================
Liabilities and Equity
Short-term debt and current portion of
long-term debt $3,904 $6,637
Other current liabilites 3,256 3,623
-------------------------------------------------------------------
Total Current Liabilities 7,160 10,260
Long-term debt 10,354 10,128
Other long-term liabilities 3,285 3,251
-------------------------------------------------------------------
Total Liabilities 20,799 23,639
Deferred ESOP benefits (135) (135)
Minorities' interests in
equity of subsidiaries 78 73
Company-obligated mandatorily redeemable
preferred securities of subsidiary
trusts holding solely subordinated
debentures of the Company 1,694 1,687
Preferred stock 573 605
Common shareholders' equity 2,008 1,820
-------------------------------------------------------------------
Total Liabilities and Equity $25,017 $27,689
===================================================================
Xerox Corporation
Condensed Consolidated Statement of Cash Flows (Unaudited)
Three Months Ended
June 30, June 30,
(In Millions) 2002 2001
---------- ---------
Cash Flows from Operating Activities
Net Income (Loss) $ 93 $ (101)
Adjustments required to
reconcile income to cash flows
from operating activities:
Depreciation and amortization 240 319
Provisions for receivables and inventory 108 206
Restructuring and asset impairment charges 53 295
Cash payments for restructurings (61) (108)
Decrease in inventories 2 82
Decrease in finance receivables 300 11
Increase in accounts receivable (49) (37)
All other operating changes (145) (23)
--------- ---------
Net cash provided by operating
activities 541 644
--------- ---------
Cash Flows from Investing Activities
Cost of additions to land,
buildings and equipment (45) (52)
Proceeds from divestitures 228 352
All other investing changes 5 (277)
--------- ----------
Net cash provided by investing
activities 188 23
--------- ----------
Cash Flows from Financing Activities
Debt payments and issuance costs, net
of new borrowings (3,651) (1,207)
All other financing changes 2 (48)
--------- ----------
Net cash used in financing
activities (3,649) (1,255)
--------- ----------
Effect of Exchange Rate Changes on Cash 64 (13)
--------- ----------
Decrease in cash
and cash equivalents (2,856) (601)
Cash and cash equivalents
at beginning of period 4,747 2,777
--------- ----------
Cash and cash equivalents at
end of period $ 1,891 $ 2,176
========= ==========
*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. We also
restated our 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 June 30, 2001 was to increase
revenue by $146 million and decrease pre-tax loss by $211 million.
During the three months ended June 30, 2002 we recognized
approximately $210 million of revenue that had been restated from
prior periods. In total, approximately $1.5 billion of revenue
recognized in periods prior to June 30, 2002 has been reversed and is
estimated to be recognized as follows: $390 million - second half of
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 second quarter 2002 revenues of $4.0 billion declined 8
percent from $4.3 billion in the second quarter of 2001 reflecting
continued economic weakness and marketplace competition. Approximately
two percentage points of the 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
liquidity and profitable revenue. Monochrome revenues declined as
Document Centre digital multifunction revenue growth, reflecting
continued customer transition to connected office devices, was more
than offset by light lens and production printing and publishing
declines. Second quarter 2002 results included improved gross margins
and reduced selling, administrative and general expenses reflecting
the benefits from our cost saving initiatives. During the second
quarter 2002 we were profitable in all geographies: North America,
Europe and DMO.
Second quarter 2002 net income of $93 million or $0.12 cents per
diluted share, included after-tax restructuring charges of $41 million
($53 million pre-tax), and net after-tax losses from unhedged foreign
currency exposures of $24 million ($33 million pre-tax). The second
quarter 2001 net loss of $101 million, or $0.14 cents per share,
included after-tax restructuring charges of $222 million ($295 million
pre-tax), net after-tax losses from unhedged foreign currency
exposures of $10 million ($13 million pre-tax), after-tax goodwill
amortization of $15 million ($16 million pre-tax) and an after-tax
gain of $18 million ($30 million pre-tax) reflecting the early
extinguishment of debt. The gain from debt extinguishment was
previously classified as an extraordinary item; this classification
has changed due to the adoption of Statement of Financial Accounting
Standards ("SFAS") No.145 issued in April 2002 and discussed in the
"Other expenses, net" section of this Financial Review.
Cash Flow
The company's worldwide cash balance at June 30, 2002 was
approximately $1.9 billion, a decrease from $4.7 billion at March 31,
2001 and $4.0 billion at December 31, 2001. The $2.8 billion reduction
in cash from the first quarter 2002 largely reflects the second
quarter 2002 repayment of $4.2 billion of debt, which was partially
offset by cash proceeds of $667 million from new GE loans which are
secured by portions of our lease receivables in the U.S., the U.K. and
Germany and operating cash flow of $541 million. Operating cash flows
grew from the first quarter, reflecting the improvement in net income
and cash generation from finance receivables due to reduced equipment
placements and our transition to third party vendor financing in
certain countries. In addition we received cash proceeds of $200
million from the sale of our leasing business in Italy.
The $4.2 billion of debt repayments in the second quarter included
$2.8 billion in connection with the previously announced restructuring
of our Credit Facility with a group of banks (the "New Credit
Facility"). We expect that the higher interest rates under the New
Credit Facility will increase our interest expense by approximately
$90 million in 2002 and $140 million in 2003, including amortization
of transaction fees and net of interest income from invested cash
balances.
The table that follows summarizes the movement in cash including
EBITDA and the related cash flows for the three months ended June 30,
2002 and 2001. We define EBITDA as earnings excluding finance 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 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 used by other
companies.
EBITDA and the related cash flows presentation for the three
months ended June 30, 2002 and 2001 were as follows (in millions,
unaudited):
*T
2002 2001
Non-financing revenues $3,702 $3,997
Non-financing cost of sales 2,171 2,484
----------- ------------
Non-financing gross profit 1,531 1,513
Research and development expenses (240) (257)
Selling, administrative and
general expenses (1,110) (1,220)
Depreciation and amortization expense,
excluding goodwill and intangibles 231 297
------------ ------------
EBITDA 412 333
Working capital and other changes (51) 245
Increase in on-lease equipment (55) (87)
Cost of additions to land,
buildings and equipment (45) (52)
Cash payments for restructurings (61) (108)
Interest payments (204) (350)
Equipment financing 571 319
Debt repayments, net (3,651) (1,207)
Dividends and other non-operating items - (46)
Proceeds from divestitures 228 352
------------- -------------
Net decrease in cash and
cash equivalents ($2,856) ($601)
============= =============
*T
EBITDA in the second quarter 2002 improved by $78 million over the
second quarter of 2001 driven by lower costs resulting from our
productivity actions offset in part by lower revenues. Cash generated
by working capital and other changes was $296 million less than in the
2001 second quarter largely due to significant inventory reductions
made in 2001 and growth in restricted cash in 2002 related to secured
borrowings. The decline in capital spending was due primarily to
significant spending constraints, which continue throughout 2002. The
decline in on-lease equipment spending reflected declining rental
placement activity and populations, particularly in our
older-generation light lens products. The reduction in cash
restructuring payments reflects the roll-off of the Turnaround Program
actions taken in 2001 that drove the productivity improvements noted
in EBITDA.
Significantly lower interest payments in the second quarter of
2002 reflected reductions of our debt levels together with lower
market interest rates.
The second quarter 2002 increase in cash flows from equipment
financing was driven by a continuing reduction of our finance
receivable portfolio as lower equipment sales levels continue to
result in a lower level of new finance receivable originations.
Further, as the portfolio continues to decline, we are generating
lower levels of financing income.
The improvement in Dividends and other non-operating items was due
to cash savings resulting from our elimination and suspension of our
common and Series B Preferred dividends, respectively, which we
announced in July 2001. In the second quarter 2002, we sold our
leasing business in Italy. Asset sale proceeds in 2001 quarter were
from the sale of our financing businesses in the Nordic countries.
Debt
Debt at June 30, 2002 was $14.3 billion, $3.2 billion lower than
March 31, 2002 and $2.5 billion lower than December 31, 2001. Total
debt net of cash was $12.4 billion, $302 million lower than the March
31, 2002 level and $408 million lower than December 31, 2001.
At June 30, 2002 we had approximately $2.1 billion of maturing
debt obligations expected to be repaid during the remainder of 2002,
including $700 million due September 15th under our New Credit
Facility. Our scheduled quarterly debt maturities for the remainder of
2002 and full year 2003 are as follows (in billions):
*T
2002 2003
---- ----
First Quarter $0.6
Second Quarter 1.2
Third Quarter $1.1 0.5
Fourth Quarter 1.0 1.4
----- -----
Full Year $2.1 $3.7
==== ====
*T
Liquidity
We continue to implement global initiatives to reduce costs,
improve operations, transition customer equipment financing to
third-party vendors and sell certain assets that we believe will
positively affect our capital resources and liquidity position when
completed. Our objective is to fund 2002 debt maturities with a
combination of cash on hand, operating cash flows, proceeds from
finance receivables monetizations and other liquidity and financing
initiatives.
Our current plans include opportunistically accessing the capital
markets in 2002, however, we are not dependent on such access to
maintain adequate liquidity in 2002. Our ability to maintain
sufficient liquidity through 2003 is highly dependent on achieving
expected operating results, including capturing the benefits from
restructuring activities, and completing announced vendor financing
and other initiatives. There is no assurance that these initiatives
will be successful. Failure to successfully complete these initiatives
could have a material adverse effect on our liquidity and our
operations, and could require us to consider further measures,
including deferring planned capital expenditures, modifying current
restructuring plans, reducing discretionary spending, selling
additional assets and, if necessary, restructuring existing debt.
We also expect that improvements in our debt ratings, and our
related ability to fully access certain unsecured public debt markets,
namely the commercial paper markets, will depend on (1) our ability to
demonstrate sustained EBITDA growth and operating cash generation and
(2) continued progress on our vendor financing initiatives. Until such
time, we expect some bank lines to continue to be unavailable, and we
intend to access other segments of the capital markets as business
conditions allow, which could provide significant sources of
additional funds until full access to the unsecured public debt
markets is restored.
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 first quarter 2002 10-Q filed with
the SEC. Our second quarter 2002 progress includes:
United States: In May 2002 we received our fourth secured loan
from GE Capital, totaling $499 million. Cash proceeds of $496 million
were net of $3 million of fees. Through June 30, 2002 approximately
$1.9 billion of loans has been funded under our monetization agreement
with GE Capital, which provides for a series of loans, secured by
certain of our finance receivables, in the United States up to an
aggregate of $2.6 billion.
Also in the U.S., Xerox Capital Services (XCS), our venture with
GE Capital Vendor Financial Services, became operational on May 1,
2002. XCS manages Xerox's customer administration and leasing
activities in the U.S., including various financing programs, credit
approval, order processing, billing and collections.
Italy: In April 2002 we sold our leasing business in Italy to a
third party for $200 million in cash plus the assumption of $20
million of debt. This sale is part of an agreement under which the
third-party will provide on-going, exclusive equipment financing to
our customers in Italy.
United Kingdom: In May 2002 we received a loan from GE Capital of
$106 million secured by portions of our U.K. finance receivables
portfolio.
Germany: In May 2002 we received a $77 million loan from GE
Capital, secured by certain of our finance receivables in Germany.
Cash proceeds of $65 million were net of $12 million of escrow
requirements. As part of the transaction we transferred leasing
employees to a GE Capital entity which will also finance certain new
leasing business prospectively.
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 currencies 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 3 percent weaker in the 2002 second quarter
than in the 2001 second quarter. As a result, foreign currency
translation favorably impacted revenue growth by approximately one
percentage point in the second quarter 2002.
Revenues by Type
Year-over-year percent changes by type of revenue were as follows:
*T
Pre
Post Currency Currency
2001 2002 2002
Q1 Q2 Q3 Q4 FY Q1 Q2 Q2
-- -- -- -- -- -- -- --
% % % % % % % %
Equipment Sales (10) (20) (19) (21) (18) (19) (15) (15)
Post Sale and
Other Revenue (5) (7) (6) (8) (6) (7) (5) (5)
Financing Income 1 (1) (7) (5) (3) (10) (13) (14)
Total Revenue (6) (10) (9) (12) (9) (10) (8) (8)
*T
Note: Total 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 second quarter 2002 declined 15
percent from the second quarter 2001 with approximately three
percentage points of the decline due to our exit from the SOHO
business. While office color printer growth was excellent, continued
competitive pressures and economic weakness adversely impacted
equipment sales in most other areas.
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. Second quarter
2002 post sale and other revenues declined 5 percent from the 2001
second quarter, reflecting lower equipment populations due to reduced
placements in earlier periods and lower page print volumes.
Document outsourcing revenues are split between equipment sales
and post sale and other revenue. Where document outsourcing contracts
include revenue accounted for as equipment sales, this revenue is
included in equipment sales, and all other document outsourcing
revenues, including service, equipment rental, supplies, paper, and
labor are included in post sale and other revenues. 2002 second
quarter document outsourcing revenue declined 8 percent (9 percent
pre-currency) from the 2001 second quarter as revenue growth in Europe
was more than offset by declines in North America. In the 2002 second
quarter, the estimated value of future document outsourcing revenue
from existing contracts declined 11 percent to approximately $6.8
billion from approximately $7.6 billion in the 2001 second quarter.
These values are determined as the estimated services to be provided
under committed contracts as of a point in time. We expect total
document outsourcing revenue to continue to decline as we focus on
more profitable service contracts. This will be partially offset by
our intensified focus on customers who are seeking a bundled value
added solution.
Financing Income declined 13 percent in the second quarter 2002
from the second quarter 2001 reflecting continued equipment sale
declines and the initial effects of our transition to third party
financing, primarily in Europe. Third party financing arrangements
were in place for the second quarter in the Nordic countries, Italy
and the Netherlands. During the second quarter 2002 we transitioned
certain equipment financing to third parties in Germany and fully
transitioned equipment financing to third parties in Mexico and
Brazil.
Key Ratios and Expenses
The trend in key ratios was as follows:
*T
2001 2002
Q1 Q2 Q3 Q4 FY Q1 Q2
-- -- -- -- -- -- --
% % % % % % %
Total Gross Margin 34.8 39.1 37.6 41.4 38.2 41.0 42.5
R&D % Revenue 5.8 6.0 6.3 5.3 5.9 6.0 6.1
SAG % Revenue 26.8 28.5 29.0 27.0 27.8 30.3 28.1
*T
Second quarter 2002 gross margin of 42.5 percent improved 3.4
percentage points from 39.1 percent in the second quarter 2001.
Approximately two percentage points of the increase reflect the prior
liquidation of equipment inventory associated with our SOHO exit. In
addition, improved manufacturing and service productivity more than
offset the adverse impact of competitive price pressures.
Research and development (R&D) expense of $240 million was $17
million lower in the 2002 second quarter than the second quarter 2001.
The R&D expense reduction primarily reflects our SOHO exit, helped
further by benefits from cost restructuring actions. R&D spending in
the 2002 second quarter represented approximately 6 percent of revenue
as we continue to invest in technological development, particularly
color, to maintain our position in the rapidly changing document
processing market. We expect 2002 R&D spending will represent
approximately 5-6 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
$110 million or 9 percent in the 2002 second quarter to $1,110 million
reflecting benefits from our Turnaround Program partially offset by
increased advertising spending and higher professional fees associated
with the SEC settlement, restatement and related activities. Second
quarter 2002 bad debt expense of $68 million was $25 million lower
than 2001 primarily due to lower provisions in North America due to
reduced receivables associated with lower sales as well as improved
aging and historical write-off trends for both accounts and finance
receivables.
During the fourth quarter of 2000 we announced a Turnaround
Program in which we outlined a wide-ranging plan to sell assets, cut
costs and strengthen our strategic core business. In 2001 we exceeded
our target by implementing actions which reduce annualized costs by at
least $1.1 billion. We have continued to initiate additional actions
in the first half of 2002 that are expected to further reduce
annualized costs by approximately $175 million, $70 million of which
were initiated in the second quarter. As part of these cost-cutting
measures, we continue to record additional charges for initiatives
under the Turnaround Program. The recognition of such charges is based
on having a formal and committed plan, in accordance with existing
accounting rules. As a result of these actions and changes in
estimates related to previously established reserves, in the second
quarter 2002, we provided an incremental $53 million ($41 million
after taxes), net of reversals of $9 million, primarily for new
initiatives under the Turnaround Program. We expect additional
provisions will be required in 2002 as additional plans are finalized
and are committed to. The restructuring reserve balance at June 30,
2002 for the Turnaround Program was $222 million.
Worldwide employment declined by approximately 2,200 in the 2002
second quarter to 72,400 largely as a result of employees leaving
under our restructuring programs.
Other expenses, net for the quarters ended June 30, 2002 and 2001
were as follows:
*T
Q2 Q2
($ in millions) 2002 2001
Non-financing interest expense $60 $141
Currency losses, net 33 13
Amortization of goodwill (2001 only)
and intangibles 9 22
Interest Income (22) (23)
Gain on early extinguishment of debt - (30)
Loss on sale of businesses and assets 12 5
All other, net 15 16
---- ----
Total $107 $144
---- ----
*T
Other expenses, net were $107 million in the second quarter 2002
and $144 million in the second quarter 2001. Significantly lower
non-financing interest expense reflected lower debt levels and reduced
borrowing costs, as the terms of the new bank facility were only
effective for a few days of the quarter.
Net currency losses of $33 million in the 2002 second quarter
primarily reflect $24 million of exchange losses in Brazil and other
DMO countries. In addition, we recorded a $9 million loss reflecting
the impact of marking to market hedges on our underlying trade
exposures. In the second quarter 2001 losses of $13 million primarily
related to losses on Yen denominated debt. These currency exposures
are the result of net unhedged positions largely caused by our
restricted access to the derivatives markets. Although we have been
able to re-enter the derivatives market on a limited basis in 2002 to
hedge certain balance sheet exposures, we continue to remain largely
unhedged in certain of our DMO affiliates. Accordingly, we may
continue to experience volatility in this area in the future.
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 under SFAS No. 142.
The second quarter 2001 included $16 million of goodwill amortization.
Interest income is primarily derived from our invested cash
balances. We expect interest income will decline as a result of our
lower cash balances following our recent debt repayments, which
included a partial pay-down on the old Credit Facility.
Effective April 1, 2002 we adopted the provisions of SFAS No. 145
"Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections". Accordingly, we have
reclassified the second quarter 2001 gain on extinguishment of debt
from Extraordinary items to Other expenses, net. In the second quarter
2001 we retired $205 million of debt through the exchange of 20.7
million shares of common stock resulting in a gain of $30 million.
In the second quarter 2002 we sold our Italian leasing subsidiary
to a third party for $200 million cash plus the assumption of $20
million of debt. The loss on this transaction totaled $11 million
primarily related to recognition of cumulative translation adjustment
losses.
Income Taxes, Equity in Net Income of Unconsolidated Affiliates
and Minorities' Interests in Earnings of Subsidiaries
Pre-tax income was $170 million in the second quarter 2002
compared to a pre-tax loss of $242 million in the second quarter 2001.
In the 2002 second quarter, we recorded an income tax expense of
$67 million compared to an income tax benefit of $120 million in the
second quarter of 2001. The consolidated effective tax rate for the
2002 second quarter was 39.4 percent and 40.2 percent on a
year-to-date basis. The 2002 second quarter and year-to-date tax rates
reflect losses in certain jurisdictions where we are not providing tax
benefits.
Our 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 be in the mid 50 percent range. Before
restructuring charges, we expect that our 2002 effective tax rate will
be in the low to mid 40 percent range.
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. Lower equity in net income for the second
quarter 2002 primarily reflects the reduction of Fuji Xerox net income
due to weak economic conditions in Japan.
Minorities interest in earnings of subsidiaries increased by $15
million to $25 million in the second quarter 2002 primarily due to the
quarterly distribution on the Convertible Trust Preferred Securities
issued in November 2001.
Business Performance by Segment
Our business 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:
*T
2002
2001 % Change
Full Post Pre
Year Q2 Currency Currency
Revenue* Revenue* Q1 Q2 Q2
-------- -------- -- -- --
Production $5.9 $1.4 (9) (8) (9)
Office 6.9 1.7 (6) (4) (5)
DMO 2.0 0.4 (11) (10) (8)
SOHO 0.4 0.1 (43) (42) (42)
Other 1.8 0.4 (19) (11) (13)
----- -----
Total $17.0 $4.0 (10) (8) (8)
===== =====
Memo: Color $2.8 $0.7 (8) 1 0
* Dollars are in billions
Segment profit (loss) and margins are as follows:
2001 2002
Segment
Segment Profit (Loss)* Margin
Q1 Q2 Q3 Q4 FY Q1 Q2 Q2
Production $112 $101 $73 $180 $466 $105 $125 9.1%
Office 47 98 63 157 365 91 138 8.3%
DMO (70) 5 (12) (48) (125) (5) 7 1.5%
SOHO (79) (84) (54) 22 (195) 27 15 26.8%
Other (1) (42) (101) 35 (109) (112) (47)(11.5%)
---- ---- ---- ---- ---- ---- ---- ----
Total $9 $78 ($31) $346 $402 $106 $238 6.0%
==== ==== ==== ==== ==== ==== ==== ====
* Dollars are in millions
*T
Note: For purposes of comparability, 2001 segment information has been
adjusted to reflect a change in measurement of segment profit or loss
that was enacted 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 second quarter of 2002 declined 8 percent (9 percent pre-currency)
from the 2001 second quarter. Production monochrome declines reflect
customer transition from light lens to digital offerings and the
continued movement to distributed printing and electronic substitutes.
Second quarter 2002 color production revenues were stable from the
2001 second quarter as accelerated growth in the DocuColor 2000 family
and modest DocuColor 12 growth was offset by declines in prior
generation color products reflecting continued marketplace
competition. In June 2002 we launched the DocuColor 2240 and 1632
Printers/Copiers, which deliver affordability and speed, with a
benchmark cost for color pages of less than 10 cents a page.
Improvements in operating costs are supported by a new emulsion
aggregation (EA) color toner, which delivers superior quality and
improved efficiency. Production revenues represented 35 percent of
total revenue in both the second quarters of 2002 and 2001.
Second quarter 2002 production segment profit increased by $24
million to $125 million and the segment margin improved by 2.3
percentage points to 9.1 percent. Improvements reflect cost 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. Second quarter 2002 revenues declined 4
percent (5 percent pre-currency) from the 2001 second quarter
reflecting accelerating reductions in light lens revenues,
particularly in North America, and reduced participation in very
aggressively priced competitive bids and tenders in Europe. Monochrome
revenues declined as growth in digital was insufficient to offset
light lens declines. In June, 2002 we launched the Document Centre 500
Series digital multifunction systems, which bring unparalleled
productivity and features to small and mid-sized workgroups at
significantly lower manufacturing costs. Digital devices now represent
over 98 percent of our combined office light lens and digital
equipment revenues. Strong office color revenue growth reflects
excellent activity from our Phaser 6200 laser and Phaser 8200 solid
ink color printers launched in May 2002. They 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 42 percent of total revenue in the second
quarter 2002 and 40 percent in the second quarter 2001.
Second quarter 2002 office segment profit increased by $40 million
to $138 million and the segment margin improved by 2.6 percentage
points to 8.3 percent. Improvements reflect expense benefits from our
cost saving initiatives and improved gross margins driven by our focus
on more profitable revenue and improved manufacturing and service
productivity.
DMO includes operations in Latin America, the Middle East, India,
Eurasia, Russia and Africa. DMO revenue declined 10 percent (8 percent
pre currency) in the 2002 second quarter. Approximately half the
decline was due to major economic disruptions in Argentina and
Venezuela. In addition, revenue in Brazil declined due to the weak
economy and our continued focus on liquidity and profitable revenue.
Second quarter 2002 DMO segment profit increased by $2 million to
$7 million and the segment margin improved by 0.5 percentage points to
1.5 percent, despite increased unhedged currency losses of $26
million. The improvement reflects significantly lower SAG spending
resulting from our cost saving initiatives and lower bad debt
provisions.
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. Second quarter 2002 SOHO
revenues declined 42 percent from 2001, primarily due to the absence
of equipment revenue. Second 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, but 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, Xerox Technology
Enterprises (XTE), 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 second quarter revenue
declined 11 percent (13 percent pre currency) principally due to
higher inter-segment revenue eliminations which are recognized in the
Other segment. The increased loss reflects higher advertising expense,
higher professional fees related to the restatement and SEC
settlement, partially offset by lower non-financing interest expense.
Second quarter 2002 Adjusted Average Shares Outstanding of 913
million for our diluted EPS calculation increased by approximately 212
million shares from the 2001 second quarter. 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 our Employee Stock Ownership Plan (ESOP) and
for the Convertible Trust Preferred Securities issued in November
2001.
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 second quarter 2002,
approximately 66 million common shares were included in the adjusted
average shares outstanding, resulting from the assumed conversion of
the 7.4 million ESOP Preferred Shares currently outstanding at the
quarterly average share price of approximately $8.83 per share.
In November 2001 Xerox Capital Trust II, a trust sponsored and
wholly-owned by us, issued 20.7 million 7.5 percent convertible trust
preferred securities. The securities are convertible at any time, at
the option of the holders, into 5.4795 shares of our common stock per
trust security or a total of 113.4 million shares. When computing
diluted EPS, the "if converted" methodology requires us to assume
conversion of these preferred securities into common stock, assuming
they are dilutive. The securities are dilutive when our quarterly
basic EPS is greater than $0.12 per share.
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 June 30, 2002, 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. 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 segment. Total DMO goodwill is $63 million as of
June 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 second half of 2002. Any non-cash charge
would be retroactively recorded as a cumulative effect of change in
accounting principle in the first quarter 2002.
Sale of Katun
In July 2002, we sold our 27.6 percent investment in Katun
Corporation, a supplier of aftermarket parts and supplies, for
proceeds of approximately $67 million. The determination of the gain
on sale, if any, is subject to purchase price adjustments.
Debt for Equity Swaps
In July 2002, we exchanged $32 million of long-term debt through
the exchange of 4 million shares of common stock.
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 first 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: IR
Sequence Number: 00000515
Time of Receipt (offset from UTC): 20020725T103229+0100
--30--kam/in*
CONTACT: Xerox Corporation
James A. Ramsey, 203/968-3807
Fax: 203/968-3944
James.Ramsey@usa.xerox.com
KEYWORD: UNITED KINGDOM INTERNATIONAL EUROPE
INDUSTRY KEYWORD: COMPUTERS/ELECTRONICS HARDWARE EARNINGS
SOURCE: Xerox Corp.
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