RNS Number:5847Q
Xerox Corp
28 January 2002
For additional information contact:
Leslie F. Varon James A. Ramsey Cynthia B. Johnston
Vice President & Director, Investor Manager, Investor
Secretary Relations Relations
203-968-3110 203-968-3807 203-968-3489
Leslie.Varon@usa.xerox.com James.Ramsey@usa.xerox.com Cindy.Johnston@usa.
xerox.com
Fax (203)968-4301 Fax (203) 968-3944 Fax (203) 968-3944
XEROX REPORTS FOURTH-QUARTER RESULTS:
RETURNS TO OPERATIONAL PROFITABILITY
Precise Execution Of Turnaround Strengthens Core Operations
STAMFORD, Conn., Jan. 28, 2002 -- After a year of taking aggressive actions to
restore the company's financial strength and improve performance, Xerox
Corporation (NYSE: XRX) today reported a return to operational profitability
with fourth-quarter results that exceed expectations. The company announced
fourth-quarter earnings of 15 cents per share, excluding restructuring charges
and the effects of unhedged currency. Including restructuring charges of 19
cents as well as a 6-cent gain from foreign currency and a 3-cent loss from the
Argentina devaluation, Xerox reported a fourth-quarter net loss of 1 cent per
share.
"Today's results are all about execution - the precise execution of a turnaround
strategy that has significantly strengthened Xerox's core operations while
effectively positioning the company to exploit future market opportunities in
its production, office and services businesses," said Anne M. Mulcahy, Xerox
chairman and chief executive officer. "With the clear objective of creating a
leaner, faster, and more flexible enterprise, we made the difficult but
necessary decisions this past year to exit certain businesses, outsource some
internal functions and dramatically reduce our cost base. The benefits of these
actions resulted in the strong performance delivered in the fourth quarter
including increased gross margins; lower selling, administrative and general
expenses; reduction of inventory to historically low levels; and improved
receivables. The outcome is a return to operational profitability,
representative of the new Xerox that is emerging from our successful
turnaround."
Xerox delivered gross margins of 38.3 percent, a 3.2 percentage point year-over-
year increase. Selling, administrative and general expenses were down 25 percent
and improved 4.5 percentage points to 27.7 percent of revenue. Continuing
progress in inventory reductions resulted in a $600 million or 30-percent
decrease for the year, including a $200 million reduction from third-quarter
2001.
Fourth-quarter Days Sales Outstanding, an important measure of how quickly Xerox
collects cash from its customers, was at its best level in more than two years.
DSO improved by three days from fourth-quarter 2000 and by six days from the
third quarter of 2001.
As previously reported, Xerox continues to enhance its liquidity. The company's
current cash position has increased to $4.5 billion including $746 million
received earlier this month from the sale of Senior Notes and following the
repayment of $200 million in first-quarter 2002 debt. Net debt for the fourth
quarter was down $4.1 billion from Dec. 31, 2000, a 25-percent reduction.
"Xerox's strengthened financial position is an important factor in our active
negotiations with the bank group to refinance a portion of the revolver and to
extend its maturity," said Mulcahy in reference to the company's $7 billion
revolving line of credit.
Xerox reported fourth-quarter revenue of $4.3 billion, 13 percent lower than
fourth-quarter 2000, including a 26-percent revenue decline in its developing
markets operations.
"Weakened economic conditions continue to impact revenue, especially in high-end
and color products. Yet, the decline also reflects our strategic decision to
pursue profitable growth opportunities versus sales that expand market share but
weaken the bottom line," said Mulcahy. "These efforts are paying off. North
America delivered another quarter of increased profits and our European business
turned the corner, posting a profit in the fourth quarter."
Xerox also made additional progress in reducing its cost base in the fourth
quarter. By the end of 2001, the company had implemented actions that account
for $1.1 billion in annualized savings. Employment declined 4,400 in the fourth
quarter including the transfer of positions through the outsourcing of certain
office manufacturing operations to Flextronics. Xerox's year-end employment was
78,900, down 13,600 from the end of 2000.
"During a year of aggressive cost reductions and restructuring, we remained
focused on innovation by continuing research and development spending at 6
percent of revenue, a level that we intend to sustain in 2002," added Mulcahy.
"Our investments in the future growth of Xerox will accelerate this year with
launches of five new platforms, the recent introduction of a new global
advertising campaign, and the continued expansion of sales coverage through
various channels. With these investments and a robust portfolio of products,
services and solutions, we're on solid ground to compete effectively in today's
demanding marketplace."
Commenting on expectations for the first quarter, Mulcahy said, "The benefits of
our turnaround actions along with additional cost reductions will continue to
enhance our bottom line. This performance will be partially offset by seasonal
first-quarter revenue declines. However, we are comfortable with the range of
analysts' expectations for first quarter, updated to reflect the increased
interest expense related to the recent Senior Notes offering. And, we remain
confident in our plan to return to full-year operational profitability in line
with current expectations."
Full-Year 2001 Results
For the year, Xerox reported a 2001 net loss of 43 cents per share or $293
million. Revenues in 2001 were $16.5 billion, compared with $18.7 billion in
2000.
For additional information about The Document Company Xerox, please visit out
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
September 30, 2001.
XEROX(R), The Document Company(R) and the digital X(R) are trademarks of XEROX
CORPORATION.
Xerox Corporation Net Income (Loss), as adjusted
Excludes restructuring, SOHO disengagement, gains or losses on sales of
businesses and unhedged foreign currency gains or losses
Three Months Twelve Months
Ended December 31, Ended December 31,
(In millions, except per-share data) unaudited 2001 2000** % Change 2001 2000** % Change
Revenues $ 4,262 $ 4,880 (13%) $ 16,502 $ 18,701 (12%)
Net Loss $ (4) $ (20) 80% $ (293) $ (257) (14%)
Loss before extraordinary gain and cumulative
effect of change in accounting principle $ (8) $ (20) 60% $ (331) $ (257) (29%)
Adjustments to exclude certain items included
in GAAP net loss, before extraordinary gain
and cumulative effect of change in accounting
principle
SOHO disengagement charge, net of taxes of
$3 and $76 7 - 196 -
Restructuring & Tektronix IPRD charges, net
of taxes of $75, $9, $125, and $210 132 33 271 472
Gain on sale of 50% of interest in Fuji
Xerox, net of taxes of ($469) (3) - (304) -
Gain on sale of China operations, net of
taxes of ($81) - (119) - (119)
Unhedged foreign currency gains, net (20) (55) (11) (67)
Adjustments 116 (141) 152 286
Net income (loss), as adjusted $ 108 $ (161) * $ (179) $ 29 *
Earnings (Loss) per Share
Loss before extraordinary gain and cumulative
effect of change in accounting principle $ (0.01) $ (0.04) 75% $ (0.49) $ (0.44) (11%)
Adjustments to exclude certain items included
in GAAP loss per share
SOHO disengagement charge, net 0.01 - 0.28 -
Restructuring & Tektronix IPRD charges,
net 0.18 0.05 0.39 0.71
Gain on sale of 50% of interest in Fuji
Xerox, net - - (0.43) -
Gain on sale of China operations, net - (0.18) - (0.18)
Unhedged foreign currency gains, net (0.03) (0.08) (0.02) (0.10)
Adjustments 0.16 (0.21) 0.22 0.43
Earnings (Loss) per Share, as adjusted $ 0.15 $ (0.25) * $ (0.27) $ (0.01) *
* Calculation not meaningful
** As restated
Note:
The company's calculation of net income, as adjusted and earnings (loss) per
share, as adjusted excluding special items may not be comparable to similarly
titled measures reported by other companies, since companies and investors may
differ as to what type of events constitute special items and warrant
adjustment. Net income, as adjusted and earnings (loss) per share, as adjusted
excluding the above items are not measures of performance under generally
accepted accounting principles (GAAP) and should not be construed as substitutes
for consolidated net income (loss) and earnings (loss) per share as a measure of
performance. However, management uses these measures in comparing the company's
historical performance and believes that they provide meaningful and comparable
information to investors and analysts to aid in their analysis of the company's
performance relative to prior periods and to its competitors. In the fourth
quarter 2001, Xerox revised its definition of net income, as adjusted, to
exclude net unhedged foreign currency gains or losses.
Xerox Condensed Consolidated Statements of Operations
Three Months Twelve Months
Ended December 31, Ended December 31,
(In millions, except per share data) unaudited 2001 2000** % Change 2001 2000** % Change
Revenues
Sales $ 2,150 $ 2,719 (21%) $ 8,028 $ 10,059 (20%)
Service, outsourcing, financing and rentals 2,112 2,161 (2%) 8,474 8,642 (2%)
Total Revenues 4,262 4,880 (13%) 16,502 18,701 (12%)
Costs and Expenses
Cost of sales 1,303 1,737 (25%) 5,352 6,197 (14%)
Cost of service, outsourcing, financing and
rentals 1,314 1,431 (8%) 5,174 5,418 (5%)
Inventory charges 12 - * 41 90 (54%)
Research and development expenses 231 270 (14%) 1,010 1,044 (3%)
Selling, administrative and general expenses 1,181 1,574 (25%) 4,810 5,649 (15%)
Restructuring charges and asset impairments 197 36 * 628 540 16%
Gain on sale of 50% of interest in Fuji Xerox (3) - * (773) - *
Gain on sale of China operations - (200) * - (200) *
Gain on affiliate's sale of stock (4) - * (4) (21) (81%)
Purchased in-process research and development - - * - 27 *
Other, net 31 67 (54%) 401 341 18%
Total Costs and Expenses 4,262 4,915 (13%) 16,639 19,085 (13%)
Loss before Income Taxes (Benefits), Equity
Income, Minorities' Interests, Extraordinary
Gain, and Cumulative Effect of Change in
Accounting Principle - (35) * (137) (384) 64%
Income taxes (benefits) 6 (24) * 193 (109) *
Loss after Income Taxes (Benefits)
before Equity Income and Minorities' Interests (6) (11) 45% (330) (275) (20%)
Equity in net income of unconsolidated affiliates 15 1 * 47 61 (23%)
Minorities' interests in earnings of
subsidiaries 17 10 70% 48 43 12%
Loss before extraordinary gain and
cumulative effect of change in accounting
principle (8) (20) 60% (331) (257) (29%)
Extraordinary gain, net of taxes of $3 and $26 4 - * 40 - *
Cumulative effect of change in accounting
principle - - - (2) - *
Net Loss $ (4) $ (20) 80% $ (293) $ (257) (14%)
Calculation of Loss Per Share
Loss before extraordinary gain and
cumulative effect of change in accounting
principle $ (8) $ (20) 60% $ (331) $ (257) (29%)
Preferred dividends, net of tax and other - (8) * (11) (34) 68%
Loss available for common shareholders $ (8) $ (28) 71% $ (342) $ (291) (17%)
Weighted average shares outstanding 722.0 668.6 704.2 667.6
Diluted Loss per Share before extraordinary
gain and cumulative effect of change in
accounting principle $ (0.01) $ (0.04) 75% $ (0.49) $ (0.44) (11%)
Extraordinary gain and cumulative effect
of change in accounting principle - - * 0.06 - *
Diluted Loss per Share $ (0.01) $ (0.04) 75% $ (0.43) $ (0.44) 2%
* Calculation not meaningful
** As restated
Xerox Condensed Consolidated Balance Sheet
December 31, December 31,
(In millions) unaudited 2001 2000
Assets
Cash and Cash Equivalents $3,991 $1,741
Accounts and Finance Receivables, net 6,557 7,378
Inventories 1,345 1,932
Equipment on Operating Lease, net 521 724
Deferred Taxes and Other Current
Assets 1,451 1,247
Total Current Assets 13,865 13,022
Finance Receivables Due after One
Year, net 6,336 7,957
Land, Buildings and Equipment, net 1,992 2,495
Other Long-Term Assets 4,365 4,423
Goodwill, net 1,475 1,578
Total Assets $28,033 $29,475
Liabilities and Equity
Short-Term Debt and Current Portion of
Long-Term Debt $9,737 $2,693
All Other Current Liabilities 3,671 3,575
Total Current Liabilities 13,408 6,268
Long-Term Debt 6,484 15,404
Other Long-Term Liabilities 2,752 3,073
Total Liabilities 22,644 24,745
Deferred ESOP Benefits (135) (221)
Minorities' Interests in Equity of
Subsidiaries 84 95
Obligation for Equity Put Options - 32
Mandatorily Redeemable Preferred Stock 1,687 684
Preferred Stock 605 647
Common Shareholders' Equity 3,148 3,493
Total Liabilities and Equity $28,033 $29,475
Financial Review
Summary
The company has restated its 1999 and 1998 consolidated financial statements.
This restatement has also impacted the quarterly financial information
previously presented for the quarter ended December 31, 2000. These restatements
are the result of two separate investigations conducted by the Audit Committee
of the Board of Directors involving previously disclosed issues in our Mexico
operations and a review of our accounting policies and procedures and the
application thereof. The restatements are fully discussed in the company's Form
10-K for the year ended December 31, 2000, as amended, and the Form 10-Q for the
quarter ended September 30, 2001, as amended. The following table presents the
effects of the adjustments, which reduced the pre-tax loss:
Three Months Ended
Dec. 31, 2000
Rank Group Acquisition $ 6
Lease issues, net 16
Other, net 113
Total $135
A status of the previously disclosed investigation by the Division of
Enforcement and the review by the Office of Chief Accountant ("OCA") of the
Securities and Exchange Commission ("SEC") is included in the discussion of
Recent Events in this Financial Summary.
Total fourth quarter 2001 revenues of $4.3 billion declined 13 percent from $4.9
billion in the 2000 fourth quarter. Approximately half the decline reflects the
significant revenue reductions in Developing Markets Operations (DMO) as well as
our exit from the small office / home office (SOHO) business and the sale of our
China operations. DMO fourth quarter 2001 revenues were 26 percent below the
2000 fourth quarter due to some weak economies and the reconfiguration of our
Latin American Operations to a new business approach prioritizing liquidity and
profitable revenue rather than market share. Fourth quarter 2001 revenue in
North America and Europe declined from the 2000 fourth quarter reflecting
continued economic weakness, market place competition and a focus on profitable
transactions. Profitability improved in both regions reflecting improved gross
profit margins and our restructured cost base.
Including additional net after-tax restructuring provisions of $139 million
associated with the company's previously announced Turnaround Program and
disengagement from our worldwide SOHO business, a $3 million adjustment to the
after tax gain on the previous sale of half our interest in Fuji Xerox and a $4
million after tax gain on early retirement of debt, the fourth quarter 2001 net
loss was $4 million. Excluding these nonrecurring items and net gains of $20
million from unhedged currency exposures, fourth quarter 2001 net income, as
adjusted would have been $108 million, reflecting significantly improved
operating margins due to both improved gross profit margins and reductions in
selling, administrative and general expenses. In the 2001 fourth quarter, we
earned $19 million from our worldwide SOHO operations primarily from our ongoing
SOHO consumables sales.
Our loss per share was $0.01 in the 2001 fourth quarter compared to a loss of
$0.04 in the fourth quarter 2000. Excluding the nonrecurring items and gains
from unhedged currency exposures discussed above, earnings per share would have
been $0.15 in the fourth quarter 2001 compared with a $0.25 loss in the fourth
quarter 2000, which excludes restructuring charges and gains from the sale of
our China operations and unhedged currency.
Liquidity
The company's worldwide cash balance at December 31, 2001 was $4.0 billion
versus $2.4 billion at September 30, 2001 and $1.7 billion at December 31, 2000.
The increase in cash from September 30, 2001 largely reflects the net receipt of
$1.5 billion of financing from GE Capital, the net receipt of $775 million from
the sale of convertible trust preferred securities and operating cash flows
partially offset by debt repayments.
In the 2001 fourth quarter, the company repaid approximately $1.2 billion of
debt. Total debt at December 31, 2001 was $16.2 billion. Total debt net of cash
at December 31, 2001 was $12.2 billion, reflecting reductions of approximately
$1.4 billion from September 30, 2001 and $4.1 billion from December 31, 2000.
The company defines EBITDA as earnings before interest expense, income taxes,
depreciation, amortization, minorities' interests, equity in income of
unconsolidated affiliates, and non-recurring and non-operating items. The
company believes that EBITDA provides investors and analysts 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 used by other companies.
The following is a summary of EBITDA and operating and other cash flows for the
three months ended December 31, 2001 and 2000 (in millions) unaudited:
2001 2000
Net Loss $ (4) $ (20)
Income tax provision (benefit) 9 (24)
Depreciation and amortization 288 269
Restructuring charges 218 26
Interest expense 185 292
Gains on sales of businesses (3) (200)
Other items (45) (53)
EBITDA $ 648 $ 290
Less financing and interest income (228) (245)
Adjusted EBITDA $ 420 $ 45
Working capital and other changes 162 1,108
On-Lease equipment spending (29) (169)
Capital spending (62) (128)
Restructuring payments (110) (150)
Operating Cash Flow* $ 381 $ 706
Financing cash flow 296 15
Interest payments (206) (292)
Preferred Securities Sales 775
Borrowings, net 334 954
Dividends and other non-operating items (148) (346)
Proceeds from sales of businesses** 132 550
Net Change in Cash $ 1,564 $ 1,587
* The primary difference between this amount and the Cash Flows from Operations
reported in our Statements of Cash Flows, is the inclusion of Capital Spending
in, and the exclusion of Financing Cash Flow and Interest Payments from, the
amount shown above. Beginning in the fourth quarter 2001, interest payments were
removed from operating cash flow and reported in a manner consistent with the
financing cash flow and borrowings to which they relate.
** Includes proceeds from Flextronics transactions.
Fourth quarter 2001 adjusted EBITDA of $420 million improved significantly
compared to $45 million in the fourth quarter 2000, reflecting significant
improvements in our cost base and improved gross margins. 2001 fourth quarter
inventory improved by approximately $200 million compared to an improvement of
over $500 million in the fourth quarter 2000. Inventory at December 31, 2001
declined approximately $600 million, or 30 percent, from the December 31, 2000
level. The inventory reductions reflect management's continued efforts to
improve inventory turns, and changes in the supply/demand and logistics
processes. Fourth quarter 2001 days sales outstanding (DSO) improved by
approximately 3 days from the 2000 fourth quarter and by approximately 6 days
from the 2001 third quarter. Capital spending was $62 million in the fourth
quarter 2001 compared to $128 million in the fourth quarter 2000 and $221
million for the full year 2001 compared with $452 million for full year 2000.
At December 31, 2001 the company had approximately $0.6 billion of maturing debt
obligations expected to be repaid during the first quarter of 2002. Debt
obligations due throughout 2002 total approximately $9.7 billion and include the
$7 billion Revolving Credit Agreement (Revolver), which matures in October. We
are currently in negotiations with our banks to refinance a portion of the
Revolver and extend its maturity. We continue to be in full compliance with our
debt covenants and we had a cushion of approximately $1.3 billion in the
Consolidated Tangible Net Worth covenant at December 31, 2001.
On October 23, 2001, Standard & Poors reduced its rating of our senior debt to
below investment grade, further constraining our ability to enter into new
derivative agreements, and requiring us to immediately repurchase certain of our
then-outstanding out-of-the-money interest-rate and cross-currency interest-rate
derivative agreements for a total of $148 million. This transaction is
classified as a non-operating item in the EBITDA presentation above. We replaced
two of the terminated derivatives with a new contract, which will require us to
collateralize any out-of-the-money positions going forward.
In November 2001 we raised more than $1 billion through a convertible trust
preferred securities offering, which, net of fees and escrowed future interest
payments, generated proceeds of $775 million. In January 2002, we raised $746
million through an offering in the U.S. and Europe of 9.75 percent Senior Notes
due in 2009. These fundings will be used for general corporate purposes,
including the repayment of debt or other obligations.
The company continues 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. The company's objective is to fund the
2002 debt maturities with cash on hand, operating cash flows, proceeds from
asset sales and other liquidity and financing initiatives, including
renegotiation of the Revolver.
A key initiative in enhancing the company's liquidity is our plan to transition
customer financing to third party vendors. In September 2001 Xerox and GE
Capital announced a framework agreement for GE Capital's Vendor Financial
Services unit to become the primary equipment financing provider for Xerox
customers in the United States. As part of this transaction, Xerox will
transition nearly all of its U.S. customer administration operations into a
jointly managed joint venture with GE Capital Vendor Financial Services. It is
anticipated that Xerox employees who work in Xerox customer financing and
administration offices will join the new joint venture. Their work, which
includes order processing, credit approval, financing programs, billing and
collections, is expected to continue in the current locations, ensuring further
continuity for Xerox customers and employees. The framework agreement is subject
to negotiation of definitive agreements and satisfaction of closing conditions,
including completion of due diligence.
During the fourth quarter 2001, Xerox received three loans from GE Capital with
net proceeds of $1.5 billion. Two of the three loans with total proceeds of $1.2
billion were secured by portions of Xerox's U.S. lease receivables and were
accounted for as secured borrowings. Additional funding is expected in the first
quarter 2002, secured by additional lease receivables. Of the $1.2 billion
received in the U.S., $115 million of proceeds were placed in an escrow account
as security for our performance of our service and supply obligations under the
associated leases. The escrow amounts will be released back to us as we pay down
the associated loans. The third loan, for $450 million, was secured by certain
lease receivables in the U.K.
Similar to an agreement developed between the two companies for U.S. customers,
Xerox and GE Capital have developed a Framework Agreement for the Canadian
division of GE Capital's Vendor Financial Services to become the primary source
of equipment financing for Xerox customers in Canada. Upon completion of this
transaction, Xerox will transition its Canadian customer administration
operations into a separate Canadian venture that will be jointly owned but
managed by GE Capital Vendor Financial Services. The companies agreed to the
principal terms of a financing arrangement under which GE Capital Canada will
provide Xerox with about $300 million, secured by portions of Xerox's lease
receivables in Canada. The framework arrangement and financing are subject to
Canadian regulatory approval, negotiation of definitive agreements and
satisfaction of closing conditions, including completion of due diligence.
In December 2001 we announced a framework agreement for GE Capital's European
Equipment Finance to become the primary equipment financing provider for Xerox
customers in France and Germany. In addition, GE Capital intends to buy portions
of Xerox's current lease receivables in France and Germany for approximately
$570 million. The framework agreement for vendor financing and the sale of lease
receivables are subject to regulatory approval, negotiation of definitive
agreements and satisfaction of closing conditions, including completion of due
diligence as well as notifying and consulting with local works councils.
In December 2001 we formed a joint venture with De Lage Landen International BV
(DLL) to manage equipment financing for Xerox customers in the Netherlands. DLL,
a subsidiary of the Dutch Rabobank Group, will own 51 percent of the new venture
with Xerox owning 49 percent. As part of the companies' agreement, DLL will
provide the funding to support new equipment leases. The joint venture, named
Xerox Financial Services BV, will manage the financing, billing and collections
for all Xerox financed equipment orders in the Netherlands. It is anticipated
that the signing of service agreements and the commencement of business
activities will begin in the first quarter 2002.
In October 2001 we announced a manufacturing agreement with Flextronics, a $12
billion global electronics manufacturing services company. The agreement
includes a five-year supply contract for Flextronics to manufacture certain
office equipment and components, the purchase of inventory, property and
equipment at a modest premium over book value, and the assumption of certain
liabilities. The premium will be amortized over the life of the five-year supply
contract. In total, the agreement with Flextronics represents approximately 50
percent of our overall manufacturing operations.
In the fourth quarter 2001 we completed the first in a series of asset sales to
transfer Xerox's office product manufacturing operations to Flextronics. The
companies completed the sale of Xerox's plants in Toronto, Canada;
Aguascalientes, Mexico; and Penang, Malaysia to Flextronics for approximately
$118 million plus the assumption of certain liabilities and subject to certain
closing adjustments. The approximately 2,500 current Xerox employees in these
operations transferred to Flextronics. In January 2002, we completed the sale of
our office manufacturing operation in Venray, The Netherlands for $18 million
plus the assumption of certain liabilities. Approximately 1,000 current Xerox
employees in this operation transfer to Flextronics. We anticipate completing
the sale of the Resende, Brazil office manufacturing operations by the end of
the first quarter 2002.
By the end of the second quarter 2002, we plan to stop production at our printed
circuit board factory in El Segundo, California, and our customer replaceable
unit plant in Utica, New York. In addition, we have been in consultations with
European works councils regarding the transfer to Flextronics of some work
currently performed at our site in Mitcheldean, England. Included with the
fourth quarter 2001 Turnaround Program are restructuring charges of $25 million
related to the outsourcing of office manufacturing to Flextronics.
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 "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 one
percent weaker in the 2001 fourth quarter than in the 2000 fourth quarter. As a
result, currency translation did not have a material impact on total revenue
growth.
Segment Analysis
Revenues and year-over-year revenue growth rates by segment are as follows:
4Q 2001
Post Memo: 2001
Currency Pre-Currency Revenue Growth Full Year
Revenues Growth Q1 Q2 Q3 Q4 FY Revenues
Total Revenues $4.3 (13)% (5)% (12)% (12)% (13)% (11)% $16.5
Production 1.6 (11) (2) (8) (7) (11) (7) 5.8
Office 1.7 (7) 3 (5) (4) (7) (3) 6.8
Developing Markets 0.4 (26) (21) (31) (33) (24) (28) 1.8
SOHO 0.1 (53) (24) (30) (22) (53) (33) 0.4
Other 0.5 (13) (16) (17) (26) (13) (18) 1.7
Memo: Color 0.8 (10) 17 1 (4) (10) - 2.9
Dollars are post currency in billions.
Production revenues include DocuTech, 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. Fourth quarter 2001 revenues declined 11 percent. 2001 fourth quarter
monochrome production revenues declined from the 2000 fourth quarter reflecting
continued weakness in the economy, competitive product introductions in the low
end of the market and continued movement to distributed printing and electronic
substitutes. 2001 fourth quarter monochrome production printing and publishing
equipment sales stabilized in North America, but weakness in Europe continued.
Post equipment install revenues continue to be adversely affected by reduced
equipment placements in earlier quarters and lower print volumes. Production
color revenues declined as the weaker economic environment and competitive
product introductions impacted sales of color equipment, although post equipment
install revenues increased. Production revenues represented 36 percent of fourth
quarter 2001 revenues compared with 35 percent in the 2000 fourth quarter.
Fourth quarter 2001 gross margin for the production segment was in line with the
2000 fourth quarter.
Office revenues include our family of Document Centre digital multi-function
products; light-lens copiers under 90 pages per minute; and our color laser,
solid ink and monochrome laser desktop printers, digital copiers and facsimile
products sold through direct and indirect sales channels in North America and
Europe. Fourth quarter 2001 revenues declined 7 percent from the fourth quarter
2000. Strong office color revenue growth reflects both the Document Centre
ColorSeries 50 and strong color printer equipment sales including the Phaser 860
and Phaser 7700. Both the Phaser 860 and the Phaser 7700 use single pass color
technology and are the fastest in their class. 2001 fourth quarter equipment
sales in North America were essentially unchanged from the fourth quarter 2000
as strong placements of the Document Centre 490, which was launched in September
2001 and strong office color growth was offset by monochrome laser printer and
light-lens declines. Fourth quarter 2001 European equipment sales declined
reflecting the weaker economy, continued competitive pressure and our decision
to reduce our participation in very aggressively priced competitive customer
bids and tenders as we reorient our focus from market share to profitable
revenue. The European launch of the Document Centre 490 begins in February 2002.
Office revenues represented 41 percent of fourth quarter 2001 revenues compared
with 38 percent in the 2000 fourth quarter. In the fourth quarter 2001 gross
margin for the office segment improved significantly from the 2000 fourth
quarter primarily as a result of reduced participation in very aggressively
priced competitive bids and tenders, favorable currency, better mix including
the initial Document Centre 490 placements and improved productivity in
manufacturing, service and document outsourcing.
Developing Markets Operations (DMO) includes operations in Latin America,
Russia, India, Eurasia, the Middle East and Africa. Fourth quarter 2001 revenue
declined significantly in Brazil from the 2000 fourth quarter reflecting reduced
equipment placements and the transition of its business model to maximize
liquidity and profitable revenue rather than market share, compounded by an
average 24 percent devaluation of the Brazilian Real. Fourth quarter 2000
equipment sale revenues in Brazil included a $16 million structured transaction
but there were no similar transactions in the 2001 fourth quarter.
Revenues declined throughout most other countries due to weaker economies and
our decision to focus on liquidity and profitable revenue rather than market
share. DMO revenues represented 10 percent of fourth quarter 2001 revenues
compared with 12 percent in the 2000 fourth quarter. DMO incurred a substantial
pre-tax loss in the fourth quarter 2001. The Argentine Peso devaluation and weak
economy resulted in a $31 million currency loss. DMO fourth quarter gross
margins declined, largely as a result of lower equipment margins, currency
devaluation not offset by price increases, weak mix and the absence of any
structured transaction in Brazil.
As previously announced, we are disengaging from our Small Office/Home Office
(SOHO) business. SOHO revenues primarily consist of consumables for the inkjet
printers and personal copiers previously sold through indirect channels in North
America and Europe. Fourth quarter 2001 SOHO revenues declined 53 percent from
the 2000 fourth quarter, as equipment inventory had been predominately
liquidated in the 2001 third quarter. SOHO revenues represented 2 percent of
total revenues in the fourth quarter 2001 compared to 3 percent in the fourth
quarter 2000.
Revenue By Type
The pre-currency growth rates by type of revenue are as follows:
2000* 2001
Q1 Q2 Q3 Q4 FY Q1 Q2 Q3 Q4 FY
Equipment Sales 13% (1)% (9)% (21)% (8)% (13)% (27)% (27)% (24)% (23)%
All Other Revenues 6 1 2 1 2 (2) (3) (5) (6) (4)
Total Revenues 8% -% (2)% (9)% (1)% (5)% (12)% (12)% (13)% (11)%
*As restated
2000 pre-currency revenue growth includes the beneficial impact of the January
1, 2000 acquisition of the Tektronix, Inc. Color Printing and Imaging Division.
Fourth quarter 2001 equipment sales declined 24 percent from the fourth quarter
2000. Approximately half the decline was due to our SOHO exit and a 54 percent
decline in DMO as we focus on liquidity and profitable revenue. 2001 fourth
quarter equipment sales declined 8 percent in North America and 26 percent in
Europe from the fourth quarter 2000. These results reflect continued weakness in
the economy, marketplace competition and our decision in Europe to reduce
participation in aggressively priced bids and tenders as we reorient our focus
from market share to profitable revenue.
All other revenues include service, document outsourcing, rentals, standalone
software, supplies, paper and finance income, representing the revenue stream
that follows equipment placement. All other revenues in the 2001 fourth quarter
declined 6 percent from the fourth quarter 2000. Approximately two percentage
points of the decline was due to the December 2000 sale of our China Operations
and lower paper revenues, reflecting both lower European prices and lower DMO
volumes. The balance largely reflects service and supplies revenues, which
continue to be adversely affected by reduced equipment placements in earlier
quarters and lower page print volumes. Financing income declined reflecting
lower equipment sales, lower interest rates and initial effects of the movement
to third party finance providers.
Document Outsourcing revenues are split between equipment sales and all other
revenues. 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 all other revenues. Fourth quarter 2001
Document Outsourcing, excluding equipment sale revenues, declined slightly from
the 2000 fourth quarter and the gross margins improved significantly, reflecting
improved pricing discipline and other operational improvements. In the 2001
fourth quarter, the backlog of future estimated document outsourcing revenue was
approximately $8 billion.
Key Ratios and Expenses
The trend in key ratios was as follows:
2000* 2001
Q1 Q2 Q3 Q4 FY Q1 Q2 Q3 Q4 FY
Gross Margin 39.1%* 40.4% 35.0% 35.1% 37.4%* 33.6% 35.8%** 36.1%** 38.3%** 36.0%**
SAG % Revenue 28.0 28.8 31.7 32.2 30.2 27.4 30.6 31.1 27.7 29.2
*Includes inventory charges associated with the first quarter 2000
restructuring. If excluded the gross margin would have been 41.1 percent and
37.9 percent, respectively.
**Includes inventory charges associated with the SOHO disengagement. If excluded
the gross margin would have been 36.4 percent, 36.2 percent and 38.6 for the
second, third and fourth quarters respectively and 36.2 percent for the full
year.
The fourth quarter 2001 gross margin of 38.3 percent improved by 3.2 percentage
points from the 2000 fourth quarter. Approximately one half the increase
reflects our SOHO exit and the prior liquidation of equipment inventory. In
addition, improved manufacturing and service productivity and favorable mix and
currency more than offset competitive price pressures.
Selling, administrative and general expenses (SAG) declined 25 percent in the
2001 fourth quarter from the fourth quarter 2000 reflecting continued benefits
from our Turnaround Program including significantly lower labor costs, lower
advertising and market communications spending and reduced SOHO spending
partially offset by professional costs related to litigation, SEC issues and
related matters. Fourth quarter 2001 bad debt expense of $123 million was $55
million lower than the 2000 fourth quarter, reflecting year over year fourth
quarter reductions in North America and Europe, partially offset by higher
provisions in certain DMO countries, including Argentina. For the full year 2001
bad debt expense was $524 million compared to $595 million in the full year
2000.
Research and development (R&D) expense was $39 million lower in the 2001 fourth
quarter than the 2000 fourth quarter mainly reflecting the SOHO disengagement.
Full year 2001 R&D spending represented 6.1 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 6 percent of revenue. Xerox R&D remains
technologically competitive and is strategically coordinated with Fuji Xerox.
Worldwide employment declined by 4,400 in the 2001 fourth quarter to 78,900 as a
result of 1,700 employees leaving the company, largely under our restructuring
programs, and the transfer of 2,700 employees primarily as part of our office
manufacturing outsourcing to Flextronics. Worldwide employment has declined by
13,600 for the full year.
Other, net was $31 million in the 2001 fourth quarter compared to $67 million in
the fourth quarter 2000. The improvement in Other, net reflects lower net non-
financing interest expense of $91 million reflecting lower interest rates and
lower net debt levels as compared to the prior year. Interest expense in the
2001 fourth quarter includes net losses of $17 million from the mark-to-market
of our remaining interest rate swaps required to be recorded as a result of
applying SFAS 133 accounting rules. This was primarily driven by an increase in
the forward rate yield curves in the quarter. Differences between the contract
terms of our interest rate swaps and the underlying related debt restricts hedge
accounting treatment in accordance with SFAS 133 which requires us to record the
mark-to-market valuation of these derivatives directly through earnings. Lower
net currency gains partially offset the favorable interest expense. In the
fourth quarter 2001 we realized $27 million of net currency gains resulting from
the re-measurement of unhedged foreign currency-denominated assets and
liabilities. Exchange gains on yen loans and some sequential strengthening of
the Brazilian Real more than offset losses on a Euro loan and the $31 million
exchange loss resulting from the Peso devaluation in Argentina. Net currency
gains totaled $81 million in the fourth quarter 2000. These currency exposures
are the result of net unhedged positions largely caused by our restricted access
to the derivatives markets. Due to the inherent volatility in the interest and
foreign currency markets, the company is unable to predict the amount of the
above-noted re-measurement and mark-to-market gains or losses in future periods.
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. We announced plans that were designed to reduce costs
by at least $1 billion annually, the majority of which will affect 2001. In the
fourth quarter 2001 we took additional actions which are expected to further
reduce costs by approximately $100 million in 2002. 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 fourth quarter 2001 we provided an incremental $199
million ($132 million after taxes) to complete our open initiatives under the
Turnaround and March 2000 restructuring plans. We expect additional provisions
will be required in 2002 as additional plans are finalized and are committed to.
The restructuring reserve balance at December 31, 2001 for the Turnaround
Program was $241 million.
Income Taxes, Equity in Net Income of Unconsolidated Affiliates and Minorities'
Interests in Earnings of Subsidiaries
Pre-tax income (loss) was breakeven in the fourth quarter 2001 compared to a
pre-tax loss of $35 million in the fourth quarter 2000.
Income tax expense for the fourth quarter 2001 was $6 million. Therefore the
effective tax rate for the fourth quarter 2001 is not meaningful. Excluding
other items, primarily restructuring, the 2001 fourth quarter tax rate was 26.7
percent compared to the 2000 fourth quarter tax benefit of 45.6 percent.
The change in the third quarter 2001 year to date tax rate of 33.7 percent to
the full year rate of 26.7 required a catch up adjustment to the previously
recorded tax benefits. This catch-up adjustment increased both the tax provision
and the fourth quarter 2001 net.loss by $32 million. The reduction in the tax
rate is due primarily to continued losses in low-tax jurisdictions and in
jurisdictions where losses could not be tax effected, partially offset by
favorable resolution of a tax audit and additional tax benefits arising from
restructuring provisions related to prior years.
Equity in net income of unconsolidated affiliates is principally our 25 percent
share of Fuji Xerox income. Total 2001 fourth quarter equity in net income
increased by $14 million from the fourth quarter 2000. The absence of our $19
million share of a restructuring charge Fuji Xerox recorded in the fourth
quarter 2000 more than offset the decline resulting from our reduced ownership
in Fuji Xerox.
Recent Events
We have previously disclosed the investigation by the Division of Enforcement
and the review by the Office of Chief Accountant ("OCA") of the Securities and
Exchange Commission ("SEC"). The review concerned whether our method of
accounting for sales-type leases applies the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 13 ("SFAS No. 13") in
the allocation of gross lease payments among the various elements in our sales-
type leases: equipment, financing, service and supplies. The OCA has advised us
that it believes our methodology for accounting for sales-type leases does not
follow the methodology required by SFAS No. 13. We apply a methodology that
accounts for the fair values of the components that we believe results in no
material difference between the application of our methodology and the OCA's
view. Thus, we believe the financial results we report are in accordance with
GAAP.
We understand that the Division of Enforcement's continuing investigation
includes an evaluation of our accounting for sales-type lease transactions. We
cannot predict when the SEC will conclude its investigation or the outcome or
impact thereof.
We expect to resume our discussions with the SEC's Division of Corporation
Finance with respect to the content of disclosures which the Division would
require to be made in future filings. We cannot predict when such discussions
will be concluded or the content of any required disclosure.
In the fourth quarter 2001, we retired $35 million of long-term debt through the
exchange of 3.8 million shares of common stock valued at $28 million which
resulted in a pre-tax extraordinary gain of $7 million ($4 million after taxes).
For the full year 2001, we retired $374 million of debt through the exchange of
41 million shares of common stock valued at $311 million, resulting in pre-tax
extraordinary gains of $66 million ($40 million after taxes) for a net equity
increase of approximately $351 million.
In connection with the June 2001 disengagement from our SOHO business, fourth
quarter 2001 changes in estimates for employee termination and other costs and
asset write downs increased the charge by approximately $10 million ($7 million
after taxes). The SOHO disengagement reserve balance at December 31, 2001 was
$23 million. During the fourth quarter we depleted our inventory of personal
inkjet and xerographic printers, copiers, facsimile machines and multi-function
devices which are sold primarily through retail channels to small offices, home
offices and personal users (consumers). We will continue to provide service,
support and supplies, including the manufacturing of such supplies, for
customers who currently own SOHO products during a phase-down period to meet
customer commitments.
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 third
quarter 2001 10-Q filed with the SEC. We do not intend to update these
forward-looking statements.
This information is provided by RNS
The company news service from the London Stock Exchange
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