RNS Number:0074M
Xerox Corp
23 October 2001
For additional Information contact:
Leslie P. Varon Cynthia B. Johnston
Vice President, Investor Relations Manager, Investor Relations
203-968-3110 203-968-3489
Leslie.Varon@usa.xerox com Cynthia.Johnston@usa.xerox.com
Xerox 2001 Third Quarter
Earnings Announcement Reminder
Conference Call and Live Webcast
Xerox Corporation will be holding a telephone conference with Anne Mulcahy,
President and Chief Executive Officer, and Barry Romeril, Vice Chairman and
Chief Financial Officer at 10:00 a.m. (Eastern Time) Tuesday, October 23, 2001
following the release of our 2001 third quarter financial results.
The conference will be available by live webcast in Real Audio at
www.xerox.com/investor or http://ir.ccbn.com/ir.zhtml?t=XRX&s=1100 or by
calling (847) 413-3237 at approximately 9:45 a.m.
You may also hear a recording of the conference in Real Audio at
www.xerox.com/investor or http://ir.ccbn.com/ir.zhtml?t=XRX&s=1100 or by calling
(402) 220-4350 after 12:30 P.M. on October 23rd. No password is required. The
telephone recording will be available until October 25th.
The earnings announcement will be available by 7:00 a.m. on First Call, e-mail,
and the Internet at www.xerox.com/investor
We look forward to your participation.
XEROX REPORTS THIRD-QUARTER RESULTS
STAMFORD, Conn., Oct. 23, 2001 - Xerox Corporation (NYSE: XRX) today announced a
third-quarter loss of 24 cents per share, excluding restructuring charges of 5
cents per share. The loss includes 5 cents from unhedged currency exposure, 3
cents from an adjustment to the underlying tax rate on the 2001 first-half loss,
and 1 cent from a $10 million property insurance loss related to the Sept, 11
tragedy.
As previously reported, Xerox's liquidity position continued to improve. The
company had $2.4 billion in cash as of Sept. 30 compared to $2.2 billion at the
end of June. Xerox's net debt is down $3.4 billion since the end of September
2000, a 20 percent reduction. The company said that it has recently initiated
discussions with its agent banks to refinance a portion of its $7 billion
revolving line of credit and extend its maturity from October 2002.
Third-quarter revenue was $3.9 billion, 13 percent lower than the third quarter
of last year. Pre-currency revenue declined 12 percent.
"Xerox was prepared for significant challenges in the third quarter due to
weakened economies. Despite expected revenue declines, our results in July and
August exceeded expectations, evidence of our much improved operations," said
Anne M. Mulcahy, Xerox president and chief executive officer. "However, the
dramatic economic downturn since the events of Sept. 11 resulted in an
unprecedented loss in September, driven by disproportionate revenue decreases
during the last two weeks of the month."
While revenue in North America and Europe declined, both regions showed
significant year-over-year bottom-line improvement led by increased
profitability in North America. Revenue in the company's developing markets was
down 34 percent, reflecting weakened economies and reduced equipment placements
in Latin America as the company reconfigures these operations to maximize
liquidity versus gaining market share. Gross margins increased from the third
quarter of last year to 36.2 percent, and represent the first year-over-year
margin improvement since Xerox launched its turnaround program in the fourth
quarter of 2000.
In October of last year, Xerox announced plans to reduce $1 billion in costs by
the close of 2001. Today the company reported that it has implemented actions
that will achieve the entire $1 billion target, including the reduction of close
to 11,000 positions worldwide through the combination of early retirement and
voluntary leave programs, attrition and layoffs.
"In the past 12 months, Xerox has implemented a strategy to restore the
company's financial strength by generating cash, reducing debt and cutting costs
- all while investing in the future through research and development," added
Mulcahy. "While our progress to date has been significant, we will intensify our
cost-reduction activities to help lessen the impact from heightened economic
concerns."
Commenting on expectations for the fourth quarter, Mulcahy said, "We remain
cautiously optimistic that the benefits from our turnaround program will
position the company for a return to operational profitability. However, the
uncertainty in the marketplace presents significant challenges and will lessen
the sequential increase in fourth-quarter revenue."
Xerox also reiterated that it remains in full compliance with its debt covenants
and estimates that its consolidated tangible net worth cushion is approximately
$175 million.
This release contains forward-looking statements and information relating to
Xerox that are based on our beliefs as well as assumptions made by and
information currently available to us. The words "anticipate," "believe,"
"estimate," "expect," "intend," "will" and similar expressions, as they relate
to us, are intended to identify forward-looking statements. Actual results could
differ materially from those projected in such forward-looking statements.
Information concerning certain factors that could cause actual results to differ
materially is included in the company's Form 10-Q for the quarter ended June 30,
2001.
XEROX(R), The Document Company(R) and the digital X(R) are trademarks of XEROX
CORPORATION.
Xerox Corporation
Financial Summary
Three Months Nine Months
Ended September 30, Ended September 30,
(In millions, except per-share data)
(unaudited) 2001 2000** % 2001 2000** %
Growth Growth
Revenues $ 3,902 $ 4,503 (13%) $12,241 $13,820 (11%)
Income (Loss) before special
items, extraordinary gain &
cumulative effect of change in
accounting principle $ (175) $ (193) 9% $ (294) $ 202 (246%)
SOHO disengagement charge, net of
taxes of $6 and ($72) 6 - * (190) - *
Restructuring & Tektronix IPRD
charges, net of taxes of
($13), $2, ($50), and ($182) (43) 2 * (139) (439) 68%
Gain on sale of 50% of interest
in Fuji Xerox, net of taxes
of $469 - - - 300 - *
Loss before extraordinary gain &
cumulative effect of change in
accounting principle (212) (191) (11%) (323) (237) (36%)
Extraordinary gain, net of taxes
of $1 and $23 1 - * 36 - *
Cumulative effect of change in
accounting principle, net of taxes
of ($1) - - - (2) - *
Net Loss $ (211) $ (191) (10%) $ (289) $ (237) (22%)
Diluted Earnings (Loss) per Share
Income (Loss) before special items,
extraordinary item & cumulative
effect of change in accounting
principle $(0.24) $(0.30) 20% $ (0.44) $ 0.27) (263%)
SOHO disengagement charge 0.01 - (0.27) - *
Restructuring & Tektronix IPRD
charges (0.06) - * (0.20) (0.66) 70%
Gain on sale of 50% of interest
in Fuji Xerox - - - 0.43 - *
Diluted Loss per share before
extraordinary gain & cumulative
effect of change in accounting
principle (0.29) (0.30) 3% (0.48) (0.39) (23%)
Extraordinary gain, net - - - 0.05 - *
Cumulative effect of change in
accounting principle - - - - - -
Diluted Loss per Share $(0.29) $(0.30) 3% $ (0.43) $(0.39) (10%)
* Calculation not meaningful
** As restated
Xerox Consolidated Statements of Operations
Three Months Nine Months
Ended September 30, Ended September 30,
(In millions, except per-share data)
(unaudited) 2001 2000** % 2001 2000** %
Growth Growth
Revenues
Sales $ 1,842 $ 2,420 (24%) $ 5,878 $ 7,341 (20%)
Service, outsourcing, financing
and rentals 2,060 2,083 (1%) 6,363 6,479 (2%)
Total Revenues 3,902 4,503 (13%) 12,241 13,820 (11%)
Costs and Expenses
Cost of sales 1,262 1,582 (20%) 4,049 4,460 (9%)
Cost of service, outsourcing,
financing and rentals 1,226 1,344 (9%) 3,860 3,986 (3%)
Inventory charges - - - 24 90 (73%)
Research and development expenses 284 269 6% 779 774 1%
Selling, administrative and
general expenses 1,215 1,428 (15%) 3,629 4,074 (11%)
Restructuring charge and asset
impairments 44 - * 436 504 (13%)
Gain on sale of half of interest
in Fuji Xerox - - - (769) - *
Gain on affiliate's sale of stock - - - - (21) *
Purchased in-process research and
development - - - - 27 *
Other, net 119 115 3% 370 274 35%
Total Costs and Expenses 4,150 4,738 (12%) 12,378 14,168 (13%)
Income (Loss) before Income Taxes
(Benefits), Equity Income (Loss),
Minorities' Interests,
Extraordinary Gain, and Cumulative
Effect of Change in Accounting
Principle (248) (235) (6%) (137) (348) 61%
Income taxes (benefits) (56) (44) (27%) 187 (84) *
Income (Loss) after Income Taxes
(Benefits) before Equity Income
and Minorities' Interests (192) (191) (1%) (324) (264) (23%)
Equity in net income of
unconsolidated affiliates (1) 10 (110%) 32 60 (47%)
Minorities' interests in earnings
of subsidiaries 19 10 90% 31 33 (6%)
Net Loss before extraordinary gain
and principle (212) (191) (11%) (323) (237) (36%)
Extraordinary gain, net of taxes
of $1 and $23 1 - * 36 - *
Cumulative effect of change in
accounting principle - - - (2) - *
Net Loss $ (211) $ (191) (10%) $ (289) $ (237) (22%)
Calculation of Loss Per Share
Net Loss $ (211) $ (191) (10%) $ (289) $ (237) (22%)
Diluted Earnings (Loss) per Share
Preferred dividends, net of tax
and other - (8) * (12) (26) 54%
Interest on convertible debt,
net of tax - - - 1 - *
Income(Loss) available for common (211) (199) (6%) (300) (263) (14%)
Weighted average shares
outstanding 717.6 666.7 8% 697.9 667.2 5%
Diluted Earnings (Loss)
per Share $ (0.29) $ (0.30) 3% $(0.43) $(0.39) (10%)
*Calculation not meaningful
** As restated
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 September 30, 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 Form
10-K filed June 27, 2001 and the Form 10-Q filed August 13, 2001 with the
Securities and Exchange Commission.
The following table presents the effects of the adjustments on pre-tax income
(loss)*:
Three Months Ended
Sept. 30, 2000
Increase (decrease) to pre-tax income (loss)*:
Mexico $ 21
Lease issues, net 22
Other, net (82)
Total $(39)
*Pre-tax income (loss) refers to income (loss) from Operations before income
taxes (benefits), Equity Income (Loss), Minorities Interests, Extraordinary
gain, and Cumulative effect of change in accounting principle.
Throughout the following Financial Review all referenced amounts reflect the
above described restatement adjustments.
Total third quarter 2001 revenues of $3.9 billion declined 13 percent (12
percent pre-currency) from $4.5 billion in the 2000 third quarter. This decline
was driven by increased competitive pressure and continued weakness in the
economy exacerbated by the events of September 11. While revenue in North
America and Europe declined, both regions showed significant year-over-year
profitability improvements led by North America. Developing Markets Operations
third quarter 2001 revenues were 34 percent below the 2000 third quarter as we
reconfigure our Latin American Operations to a new business approach
prioritizing liquidity and profitable revenue rather than market share.
Including additional net after-tax restructuring provisions of $37 million
associated with the company's previously announced Turnaround Program and
disengagement from our worldwide small office / home office (SOHO) business and
a $1 million after tax gain on early retirement of debt, the third quarter 2001
net loss was $211 million. Excluding these items, the third quarter 2001 after
tax loss was $175 million. In the 2001 third quarter, we incurred a $37 million
loss in our worldwide SOHO operations. The 2001 third quarter loss reflected the
revenue decline, but our operating margin stabilized together with an
improvement in the gross margin.
Our loss per share was $0.29 in the 2001 third quarter. Excluding the $0.05
restructuring provision the 2001 third quarter loss was $0.24 compared with a
$0.30 loss per share in the 2000 third quarter.
Liquidity
The company's worldwide cash balance at September 30, 2001 was $2.4 billion
versus $2.2 billion at June 30, 2001 and $1.7 billion at December 31, 2000.
Total debt, net of cash on hand at September 30, 2001, was $13.6 billion,
reflecting reductions of approximately $0.4 billion from June 30, 2001 and $2.7
billion from December 31, 2000. The decrease from June 30, 2001 largely reflects
the July 2001 sale of $0.5 billion of asset-backed securities supported by U.S.
finance receivables.
Inventory at September 30, 2001 declined approximately $850 million from the
September 30, 2000 level, approximately $400 million from December 31, 2000 and
approximately $25 million from June 30, 2001. Third quarter 2001 days sales
outstanding improved by approximately 4 days from the 2000 third quarter but
deteriorated by approximately 5 days from the 2001 second quarter. Capital
spending was approximately $40 million in the third quarter 2001. 2001 year to
date capital spending was approximately $160 million compared with $324 million
through the first 9 months in 2000.
At September 30, 2001 the company had approximately $1.3 billion of debt
obligations expected to be repaid during the remainder of 2001 including $0.2
billion related to the recently approved early redemption of #125 million ($184
million) 8 3/4 percent bonds. Debt obligations due in 2002 of $9.0 billion
include $7.0 billion under our Revolving Credit Agreement (Revolver), which
matures in October 2002. We have recently initiated discussions with our agent
banks to refinance a portion of the Revolver and extend its maturity. We
continue to be in full compliance with our debt covenants and have a cushion of
approximately $175 million in the Consolidated Tangible Net Worth covenant at
September 30, 2001.
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
debt maturities in 2001 and 2002 with cash on hand, operating cash flows,
proceeds from asset sales and other liquidity and financing initiatives,
including renegotiation of the Revolver.
Several initiatives which enhance liquidity were announced since the end of the
2001 second quarter. In July we completed the offering of floating rate asset
backed notes supported by U.S. finance receivables for proceeds of $480 million.
As part of our plan to transition customer equipment financing to third parties,
in September we announced a framework agreement with GE Capital under which, GE
Capital's Vendor Financial Services Group will become the primary equipment
financing provider for Xerox customers in the United States. We also agreed to
the principal terms of a financing agreement under which we will receive
approximately $1 billion from GE Capital, secured by portions of Xerox's U.S.
finance receivables. We expect both agreements to close in the fourth quarter.
In October we announced a manufacturing agreement with Flextronics which
includes payment to Xerox of approximately $220 million and assumption of
certain liabilities for the sale of inventory, property and equipment and a
five-year contract for Flextronics to manufacture certain office equipment and
components. The actual amount of cash proceeds will vary based upon the actual
net asset levels at the time of the closings. The first sales are expected to
close in the fourth quarter.
A more complete discussion of the company's liquidity strategies is included in
Form 10-Q filed August 13, 2001 with the Securities and Exchange Commission.
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 2
percent stronger in the 2001 third quarter than in the 2000 third quarter. As a
result, currency translation had an unfavorable impact of approximately one
percentage point on revenue growth.
Segment Analysis
Revenues and year-over-year revenue growth rates by segment are as follows:
Pre-Currency Revenue Growth 3Q 2001
2000* 2001 Post Currency
Q1 Q2 Q3 Q4 FY Q1 Q2 Q3 Revenue Growth
Total Revenues 8% *% (2)% (9)% (1)% (5)% (12)% (12)% $ 3.9 (13)%
Production 1 (2) (8) (12) (6) (2) (8) (7) 1.4 (8)
Office 4 5 4 (3) 2 3 (5) (4) 1.6 (5)
Small Office / 35 (3) (2) 1 6 (24) (30) (22) 0.1 (23)
Home Office
Developing Markets 36 4 (3) (21) - (21) (31) (33) 0.4 (34)
Other 7 (9) (1) (4) (2) (16) (17) (26) 0.4 (27)
Memo: Color 64 60 74 54 62 17 1 (4) 0.7 (6)
* As restated
Dollars are in billions. 2000 pre-currency revenue growth includes the
beneficial impact of the January 1, 2000 acquisition of the Tektronix, Inc.
Color Printing and Imaging Division.
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. Third quarter 2001 revenues declined 8 percent (7 percent pre-currency).
Third quarter 2001 pre-currency revenues declined 3 percent in North America and
7 percent in Europe from the 2000 third quarter. Monochrome production revenue
declines reflect the downturn in the economy, competitive product introductions
and continued movement to distributed printing and electronic substitutes. In
addition, revenue was adversely impacted by reduced DocuTech sales to Fuji Xerox
and unfavorable product mix reflecting installations of the recently introduced
DocuTech 75 and DocuPrint 75. 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 impacted sales of color equipment and competitive product
introductions continued. Revenues from the successful DocuColor 2000 series,
which began shipments in June 2000, continued to grow reflecting increased
equipment sales and recurring revenues. Reduced DocuColor 30/40 and mid-range
installs combined with more aggressive pricing resulted in revenue declines.
Production revenues represented 35 percent of third quarter 2001 revenues
compared with 33 percent in the 2000 third quarter. Third quarter 2001 gross
margin for the production segment improved from the 2000 third quarter as
significant improvement in document outsourcing margins and improved service
productivity were only partially offset by unfavorable mix.
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. Third quarter 2001 revenues declined 5 percent (4 percent pre-currency)
from the third quarter 2000. Black and white revenues declined as equipment
sales were impacted by the weaker economy, continued competitive pressures and
light lens declines and our decision in Europe to reduce our participation in
very aggressively priced competitive customer bids and tenders as we reorient
our focus from market share to profitable revenue. Shipments of the Document
Centre 490, the fastest in its class at 90 pages-per-minute began in North
America in September. European launch is scheduled for the first quarter 2002.
Strong office color revenue growth was driven by continued growth in the
Document Centre ColorSeries 50 partially offset by office color printer
equipment sales declines. The Document Centre ColorSeries 50 is the industry's
first color-enabled digital multi-function product. Office revenues represented
41 percent of third quarter 2001 revenues compared with 38 percent in the 2000
third quarter. Third quarter 2001 gross margin for the office segment improved
significantly from the 2000 third quarter primarily as a result of our reduced
participation in very aggressively priced competitive bids and tenders,
improving Document Centre margins facilitated by strong Document Centre 480
placements and initial Document Centre 490 placements, improved manufacturing
and service productivity, favorable currency and significantly improved document
outsourcing margins.
Small Office/Home Office (SOHO) revenues include inkjet printers and personal
copiers sold through indirect channels in North America and Europe. On June 14
we announced our disengagement from the SOHO business. Third quarter 2001 SOHO
revenues declined 23 percent (22 percent pre-currency) from the 2000 third
quarter and gross margin declined as we exit this business and reduce equipment
inventory in a very difficult market environment. SOHO revenues represented 3
percent of revenues in both the 2001 and 2000 third quarters.
Developing Markets Operations (DMO) includes operations in Latin America,
Russia, India, the Middle East and Africa. Third quarter 2001 revenue declined
significantly in Brazil from the 2000 third 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 29 percent
devaluation in the Brazilian Real.
Third quarter 2000 revenues in Brazil included a $30 million structured
transaction but there were no similar arrangements in the 2001 third quarter.
Revenue declined throughout the other Latin American countries due to weaker
economies and our decision to focus on liquidity and profitable revenue rather
than market share. DMO revenues represented 11 percent of third quarter 2001
revenues compared with 14 percent in the 2000 third quarter. DMO incurred a
substantial pre-tax loss in the third quarter 2001. Gross margin declined in DMO
as a result of lower equipment and service margins, currency devaluation not
offset by price increases, weak mix and the absence of any structured
transaction in Brazil.
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
Equipment Sales 13% (1)% (9)% (21)% (8)% (13)% (27)% (27)%
All Other Revenues 6 1 2 1 2 (2) (3) (5)
Total Revenues 8% -% (2)% (9)% (1)% (5)% (12)% (12)%
*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.
Third quarter 2001 equipment sales declined 27 percent from the third quarter
2000 as increased competition and the weakened economic environment following
the events of September 11 significantly impacted sales for the balance of the
month which are typically the strongest weeks of the quarter. Third quarter 2001
equipment sales declined 60 percent in DMO and 53 percent in SOHO compared to
the 2000 third quarter. 2001 third quarter equipment sales declined 10 percent
in North America and 15 percent in Europe from the third quarter 2000.
All other revenues, including revenues from service, document outsourcing,
rentals, standalone software, supplies, paper and finance income, represent the
revenue stream that follows equipment placement. All other revenues in the 2001
third quarter declined 5 percent from the third quarter 2000. Over one
percentage point of the decline was due to lower third quarter 2001 paper
revenues reflecting lower European volume and prices and the transfer of certain
accounts to Georgia Pacific following the June 2000 sale of our North American
commodity paper business. Approximately one percentage point of the decline was
due to the December 2000 sale of our China Operations, Service and supplies
revenues continue to be adversely affected by reduced equipment placements in
earlier quarters and lower page volumes.
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. Document Outsourcing,
excluding equipment sales revenue, grew 8 percent in the 2001 third quarter and
the gross margin improved significantly. The backlog of future estimated
document outsourcing revenue was $8.4 billion in the 2001 third quarter, a 4
percent decline from the 2000 third quarter largely due to a focus on only
entering those contracts with satisfactory margins.
Key Ratios and Expenses
The trend in key ratios was as follows:
2000* 2001
Q1 Q2 Q3 Q4 FY Q1 Q2 Q3
Gross Margin 39.1%* 40.4% 35.0% 35.1% 37.4%* 33.6% 35.8%** 36.2%
SAG % Revenue 28.0 28.8 31.7 32.2 30.2 27.4 30.6 31.1
*Includes inventory charges associated with the 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.
The third quarter 2001 gross margin improved by 1.2 percentage points from the
2000 third quarter as improved manufacturing and service productivity and
favorable currency were only partially offset by unfavorable mix. Weak
performance in DMO reduced the gross margin by 0.7 percentage points. Excluding
SOHO operations, the 2001 third quarter gross margin was 37.7 percent.
Selling, administrative and general expenses (SAG) declined 15 percent (14
percent pre-currency) in the 2001 third quarter from the third quarter 2000
reflecting continued benefits from our Turnaround Program including
significantly lower labor costs and advertising and marketing communications
spending. These reductions were partially offset by professional costs related
to our regulatory filings and related matters. Third quarter 2001 bad debt
provisions of $185 million were $14 million higher than the 2000 third quarter
despite an improvement in Mexico. Increased provisions in North America
primarily associated with higher risk smaller customers in this weakened
economic environment more than offset the 2000 third quarter provisions in
Mexico.
Research and development (R&D) expense was $15 million higher in the 2001 third
quarter than the 2000 third quarter reflecting increased DocuColor iGen3
expenses. Full year 2001 R&D spending is expected to represent 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. Xerox R&D remains technologically competitive and is
strategically coordinated with Fuji Xerox.
Worldwide employment declined by 2,300 in the 2001 third quarter to 83,300
primarily as a result of employees leaving the company under our restructuring
programs. Excluding divestitures, worldwide employment has declined by 10,900
since implementation of our Turnaround Program in October, 2000.
Other, net was $119 million in the 2001 third quarter compared to $115 million
in the third quarter 2000. In the third quarter 2001 we incurred $54 million of
net currency losses resulting from the remeasurement of unhedged foreign
currency-denominated assets and liabilities. These currency exposures are
unhedged in 2001 largely due to our restricted access to the derivatives
markets. Also included in Other, net in the 2001 third quarter is $10 million of
property losses related to the September 11 incident. In addition, the 2000
third quarter included approximately $30 million of non-recurring interest
income related to an income tax refund receivable. Lower third quarter 2001 net
non-financing interest expense of $94 million primarily reflects lower interest
rates and lower debt levels as compared to the prior year, including net gains
of $46 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 sharply lower variable rates in the quarter. Differences
between the contract terms of our interest rate swaps and the underlying related
debt preclude hedge accounting treatment in accordance with SFAS 133 which
requires us to record the mark-to-market valuation of these derivatives directly
through earnings. Due to the inherent volatility in the interest and foreign
currency markets, the company is unable to predict the amount of the above-noted
remeasurement 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. We announced plans that were designed to reduce costs by at
least $1.0 billion annually, the majority of which will affect 2001. As part of
the cost cutting program, we continue to take additional charges for finalized
initiatives under the Turnaround Program. As a result of these actions and
changes in estimates related to previously established reserves, in the 2001
third quarter we provided an incremental $56 million ($43 million after taxes)
to complete our open initiatives under the Turnaround and March 2000 plans. We
expect additional provisions will be required in 2001 as additional plans are
finalized. The restructuring reserve balance at September 30, 2001 for both the
Turnaround Program and March 2000 program was $142 million.
Income Taxes, Equity in Net Income of Unconsolidated Affiliates and Minorities'
Interests in Earnings of Subsidiaries
Pre-tax income (loss) was $(248) million in the 2001 third quarter including the
restructuring provisions. Excluding these items, the pre-tax loss was $(204)
million in the 2001 third quarter compared to a loss of $(235) million in the
2000 third quarter.
The effective tax rate, including the net tax benefit related to additional
restructuring provisions and an adjustment to the underlying tax rate on the
2001 first half loss was 22.6 percent in the 2001 third quarter. Excluding these
items, the 2001 third quarter tax rate was 33.7 percent compared to the 2000
third quarter tax rate of 34.9 percent. This reduction in the tax rate is due
primarily to continued losses in low-tax rate jurisdictions and in jurisdictions
where losses could not be tax effected, offset by a favorable tax audit.
The third quarter change in the tax rate from 42.0 percent to 33.7 percent
required a catch up adjustment to the previously recorded first half tax
benefits. This catch-up adjustment reduced the tax benefit and increased the
third quarter 2001 net loss by $21 million. A similar 2000 third quarter
adjustment reduced that tax benefit and increased the net loss by $41 million.
Equity in net income of unconsolidated affiliates is principally our 25 percent
share of Fuji Xerox income. Total 2001 third quarter equity in net income
declined by $11 million from the third quarter 2000 largely reflecting our
reduced ownership in Fuji Xerox. Our share of total Fuji Xerox net income of $4
million in the 2001 third quarter decreased by $11 million from the 2000 third
quarter.
In the third quarter 2001, we retired $12 million of long-term debt through the
exchange of 1.2 million shares of common stock valued at $10 million which
resulted in a pre-tax extraordinary gain of $1.7 million. In the first nine
months of 2001, we retired $340 million of debt through the exchange of 37.4
million shares of common stock valued at $283 million, resulting in pre-tax
extraordinary gains of $59 million ($36 million after taxes) for a net equity
increase of approximately $319 million.
In the 2001 second quarter, we sold our leasing businesses in four European
countries to Resonia Leasing AB for proceeds of approximately $370 million.
These sales are part of an agreement under which Resonia will provide on-going,
exclusive equipment financing to our customers in those countries.
In June 2001, the Ad Hoc Committee of the Board of Directors approved the
disengagement from our SOHO business. In connection with this disengagement in
the second quarter, we recorded a pre-tax charge of $274 million including
provisions for the elimination of approximately 1,200 jobs worldwide by the end
of 2001, the closing of facilities and the write-down of certain assets to net
realizable value. As we continue to disengage from the SOHO business, charges
associated with this action are updated accordingly. In the 2001 third quarter,
changes in estimates for employee termination and decommitment costs reduced the
original reserve by approximately $12 million ($6 million after taxes). The year
to date $262 million pretax charge for the SOHO disengagement consists of
approximately $30 million in employee termination costs, $144 million of asset
impairments, $29 million in inventory charges, $24 million in purchase
commitments, $16 million in decommitment costs, and $19 million in other
miscellaneous charges. The SOHO disengagement reserve balance at September 30,
2001 was $49 million.
Over the remainder of the fourth quarter we will discontinue our line 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 intend to sell the
remaining inventory through current channels. 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.
In July 2001, we completed the offering of $513 million of floating rate asset
backed notes. In conjunction with this offering, we received cash proceeds of
$480 million net of $3 million paid in expenses and fees. The remaining cash
proceeds of approximately $30 million will be held in reserve over the term of
the asset backed notes. As part of the transaction we sold approximately $639
million of domestic finance receivables to a qualified special purpose entity in
which we have a retained interest of approximately $159 million, including the
cash proceeds held in reserve. The transaction was accounted for as a sale of
finance receivables at approximately book value.
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. The two companies
also agreed to the principal terms of a financing arrangement under which Xerox
will receive from GE Capital approximately $1 billion secured by portions of
Xerox's finance receivables 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 on January 2, 2002. 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 arrangements are expected to close in the fourth
quarter subject to the negotiation of definitive agreements and satisfaction of
closing conditions, including completion of due diligence.
In October 2001, we announced a manufacturing agreement with Flextronics, a $12
billion global electronics manufacturing services (EMS) company. The agreement
includes a five-year supply contract for Flextronics to manufacture certain
office equipment and components, payment of approximately $220 million to Xerox
for 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. As a result of these actions, we expect
to incur restructuring charges in the fourth quarter of 2001.
Flextronics will purchase four Xerox office manufacturing operations including
manufacturing assets and inventory. The approximately 3,650 current Xerox
employees in these operations are expected to transfer to Flextronics. We will
also stop production by the end of the second quarter 2002 at our printed
circuit board factory in El Segundo, California, and our customer replaceable
unit plant in Utica, New York. Flextronics will build this work into its global
network of manufacturing plants. In addition, we have begun consultations with
European works councils regarding the sale of our office manufacturing
operations in Venray, The Netherlands, and the transfer to Flextronics of some
production work currently performed at our site in Mitcheldean, England. In
total, the agreement with Flextronics represents approximately 50 percent of our
overall manufacturing operations. The first sales are expected to close in the
fourth quarter, beginning a one-year transition period for Flextronics to assume
manufacturing of Xerox-designed office products and related components. The
actual cash proceeds will vary, based upon the actual net asset levels at the
time of the closings.
The SEC is continuing its investigation into Mexican accounting issues and other
accounting matters. The company is continuing to fully cooperate with the
investigation. The company cannot predict when the SEC will conclude its
investigation or its outcome.
Forward-Looking Statements
This earnings release and financial review contain forward-looking statements
and information relating to Xerox that are based on our beliefs as well as
assumptions made by and information currently available to us. The words
"anticipate," "believe," "estimate," "expect," "intend," "will" and similar
expressions, as they relate to us, are intended to identify forward-looking
statements. Actual results could differ materially from those projected in such
forward-looking statements. Information concerning certain factors that could
cause actual results to differ materially is included in the company's second
quarter 2001 10-Q filed with the SEC. We do not intend to update these forward-
looking statements.
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