BW20030728002048 20030728T110039Z UTC
( BW)(XEROX-CORP.)(XRX) Interim Results
Business Editors
UK REGULATORY NEWS
STAMFORD, Conn.--(BUSINESS WIRE)--July 28, 2003--
Xerox Reports Second-Quarter Earnings;
New Digital Products Fuel Equipment Sale Growth
"From significantly strengthening our balance sheet to driving revenue
improvement in key businesses, Xerox is delivering on all fronts."
-- Earnings per share of 9 cents includes 5-cent charge for 2002
credit facility fees
-- Equipment sale growth of 8 percent
-- Total revenue of $3.9 billion
-- Operating cash flow of $682 million
-- Worldwide cash balance of $2.3 billion; debt reduction of $2.5
billion
Xerox Corporation (NYSE: XRX) reported today second-quarter earnings
of 9 cents per share including a 5 cent previously announced charge
for the remaining unamortized fees associated with its terminated 2002
credit facility. Excluding this non-cash charge, the company's results
exceeded expectations due to continued equipment sales improvements
and disciplined cost management.
"Equipment sales growth is a leading indicator of the company's strong
presence in the marketplace and a driver for future post-sale
revenue," said Anne M. Mulcahy, Xerox chairman and chief executive
officer. "That's why Xerox has remained focused on building and
refreshing its product line with competitive offerings in the growing
digital and color markets. These investments are clearly paying off."
Equipment sales grew 8 percent in the second quarter including a 7
percentage point currency benefit. Total revenue for the second
quarter was $3.9 billion, a decline of 1 percent from the second
quarter of 2002 including a 6 percentage point currency benefit. The
decrease is primarily driven by declining post-sale revenue from both
the company's older light lens technology as well as moderating
declines in its developing markets business. Xerox noted that
improving trends in its developing markets operations continue, with
DMO equipment sales growing 39 percent year over year.
"Total revenue from the company's targeted growth areas - office
digital, production digital and value-added services - grew 10 percent
in the quarter and now represents about 70 percent of the company's
revenue," added Mulcahy. "These results are directly aligned with our
growth strategy. We're transforming Xerox into the industry's leading
digital player with black-and-white and color digital systems that are
integrated with a robust portfolio of services, delivering
productivity improvements for our customers through lower cost, higher
quality document management."
As more businesses small to large recognize the advantages of adding
color to their documents, Xerox continues to yield strong revenue
results from its technology in the production color and office color
markets. Total color revenue was up 19 percent in the second quarter
largely due to the success of Xerox's DocuColor series.
The company also said that second-quarter equipment installation rates
grew in key growth markets, evidence of the strong momentum from the
26 new products launched in the past 18 months. For example,
production color installs grew 7 percent in the second quarter led by
increased demand for the Xerox DocuColor 6060 Digital Color Press.
In the office, color multifunction installs increased 64 percent and
black-and-white multifunction grew 8 percent primarily driven by sales
of the Xerox Document Centre 500 Series announced last year. The
company is also seeing the initial benefits from its new and enhanced
office products launched in the second quarter. The new suite of
CopyCentre, WorkCentre, and WorkCentre Pro offerings has speeds
ranging from 16 to 90 pages per minute and prices starting as low as
$899, reflecting the most competitive pricing for the office in
Xerox's history.
Gross margins of 42.4 percent continue to reflect operational
efficiencies. Selling, administrative and general costs declined 2
percent including an adverse impact from currency of 4 percentage
points.
Xerox reported second-quarter operating cash flow of $682 million and
its worldwide cash position was $2.3 billion as of June 30. Debt
decreased $2.5 billion in the quarter due to the company's successful
completion last month of its $3.6 billion recapitalization plan. The
recapitalization included $1.34 billion of new equity, $1.25 billion
of senior unsecured notes, and a new $1 billion credit facility.
"From significantly strengthening our balance sheet to driving revenue
improvement in key businesses, Xerox is delivering on all fronts,"
said Mulcahy. "Despite economic uncertainty, we are well positioned to
compete aggressively and continue strengthening our business through
improved year-over-year equipment sale trends and increased revenue in
important growth markets, yielding strong results for the full year."
For additional information about The Document Company Xerox, please
visit our Worldwide Web site at www.xerox.com/investor.
This release contains forward-looking statements and information
relating to Xerox that are based on our beliefs as well as assumptions
made by and information currently available to us. The words
"anticipate," "believe," "estimate," "expect," "intend," "will" and
similar expressions, as they relate to us, are intended to identify
forward-looking statements. Actual results could differ materially
from those projected in such forward-looking statements. Information
concerning certain factors that could cause actual results to differ
materially is included in the company's Form 10-Q for the quarter
ended March 31, 2003, as filed with the SEC.
XEROX(R), The Document Company(R) and the digital X(R) are trademarks
of XEROX CORPORATION.
Xerox Corporation
Condensed Consolidated Statements of Income (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
(in millions, except % %
per share data) 2003 2002 Change 2003 2002 Change
------------------- ------- ------- -------- ------- ------- ---------
Revenues
Sales $1,696 $1,662 2% $3,285 $3,245 1%
Service,
outsourcing and
rentals 1,970 2,040 (3%) 3,887 4,051 (4%)
Finance income 254 250 2% 505 514 (2%)
------- ------- ------- -------
Total Revenues 3,920 3,952 (1%) 7,677 7,810 (2%)
Costs and Expenses
Cost of sales 1,069 1,017 5% 2,070 2,038 2%
Cost of service,
outsourcing and
rentals 1,096 1,154 (5%) 2,185 2,317 (6%)
Equipment
financing
interest 93 101 (8%) 185 193 (4%)
Research and
development
expenses 225 240 (6%) 461 470 (2%)
Selling,
administrative
and general
expenses 1,089 1,110 (2%) 2,109 2,279 (7%)
Restructuring
and asset
impairment
charges 37 53 (30%) 45 199 (77%)
Provision for
litigation - - (a) 300 - (a)
Gain on
affiliate's
sale of stock (1) - (a) (1) - (a)
Other expenses,
net 166 116 43% 287 214 34%
------------------- ------- ------- ------- -------
Total Costs and
Expenses 3,774 3,791 (0%) 7,641 7,710 (1%)
------------------- ------- ------- ------- -------
Income before
Income Taxes,
Equity Income,
Minorities'
Interests and
Cumulative
Effect
of Change in
Accounting
Principle (b) 146 161 (9%) 36 100 (64%)
Income taxes 53 64 (17%) - 41 (a)
------------------- ------- ------- ------- -------
Income before
Equity Income,
Minorities'
Interests
and Cumulative
Effect of
Change in
Accounting
Principle 93 97 (4%) 36 59 (39%)
Equity in net
income of
unconsolidated
affiliates 16 15 7% 30 26 15%
Minorities'
interests in
earnings of
subsidiaries (23) (25) 8% (45) (49) 8%
------------------- ------- ------- ------- -------
Income before
Cumulative Effect
of Change in
Accounting
Principle 86 87 (1%) 21 36 (42%)
Cumulative
effect of
change in
accounting
principle - - (a) - (63) (a)
------------------- ------- ------- ------- -------
Net Income (Loss) $86 $87 (1%) $21 $(27) 178%
Less: Preferred
stock
dividends, net (11) - (a) (21) - (a)
------------------- ------- ------- ------- -------
Income (Loss)
Available to
Common
Shareholders $75 $87 (14%) $- $(27) (a)
=================== ======= ======= ======= =======
Basic Earnings
(Loss) per share:
Income before
Cumulative
Effect of
Change
in Accounting
Principle $0.10 $0.12 (17%) $0.00 $0.05 (a)
Cumulative
effect of
change in
accounting
principle - - (a) - (0.09) (a)
------- ------- ------- -------
Net Income
(Loss) Per
Share $0.10 $0.12 (17%) $0.00 $(0.04) (a)
=================== ======= ======= ======= =======
Diluted Earnings
(Loss) per share:
Income before
Cumulative
Effect of
Change
in Accounting
Principle $0.09 $0.11 (18%) $0.00 $0.05 (a)
Cumulative
effect of
change in
accounting
principle - - (a) - (0.09) (a)
------- ------- ------- -------
Net Income
(Loss) Per
Share $0.09 $0.11 (18%) $0.00 $(0.04) (a)
=================== ======= ======= ======= =======
Note: Certain reclassifications of prior year amounts have been made
to conform to the current year presentation.
(a) Percent not meaningful
(b) Referred to as "pre-tax income" throughout the remainder of
this document
Xerox Corporation
Condensed Consolidated Balance Sheets (Unaudited)
June December
30, 31,
(in millions) 2003 2002
------------------------------------------------------------- --------
Assets
Cash and cash equivalents $2,279 $2,887
Accounts receivable, net 2,149 2,072
Billed portion of finance receivables, net 491 564
Finance receivables, net 2,993 3,088
Inventories 1,232 1,231
Other current assets 1,297 1,186
---------------------------------------------------- -------- --------
Total Current Assets 10,441 11,028
Finance receivables due after one year, net 5,265 5,353
Equipment on operating leases, net 391 450
Land, buildings and equipment, net 1,771 1,757
Investments in affiliates, at equity 548 628
Intangible assets, net 342 360
Goodwill 1,609 1,564
Deferred tax assets, long-term 1,610 1,592
Other long-term assets 2,572 2,726
---------------------------------------------------- -------- --------
Total Assets $24,549 $25,458
==================================================== ======== ========
Liabilities and Equity
Short-term debt and current portion of
long-term debt $3,870 $4,377
Accounts payable 767 839
Accrued compensation and benefits costs 428 481
Unearned income 243 257
Other current liabilities 1,502 1,833
---------------------------------------------------- -------- --------
Total Current Liabilities 6,810 7,787
Long-term debt 7,928 9,794
Pension liabilities 1,723 1,307
Post-retirement medical benefits 1,265 1,251
Other long-term liabilities 1,162 1,144
---------------------------------------------------- -------- --------
Total Liabilities 18,888 21,283
Minorities' interests in equity of subsidiaries 71 73
Company-obligated, mandatorily redeemable
preferred securities of subsidiary trusts holding
solely subordinated debentures of the Company 1,716 1,701
Preferred stock 521 550
Deferred ESOP benefits (42) (42)
Mandatory convertible preferred stock 889 -
Common stock, including additional paid in capital 3,229 2,739
Retained earnings 1,025 1,025
Accumulated other comprehensive loss (1,748) (1,871)
---------------------------------------------------- -------- --------
Total Liabilities and Equity $24,549 $25,458
==================================================== ======== ========
Shares of common stock issued and outstanding were (in thousands)
789,665 and 738,273 at June 30, 2003 and December 31, 2002
respectively.
Xerox Corporation
Condensed Consolidated Statements of Cash Flows (Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
--------------- ---------------
(in millions) 2003 2002 2003 2002
-------------------------------------- ------- ------- ------- -------
Cash Flows from Operating Activities
Net income (Loss) $86 $87 $21 $(27)
Adjustments required to reconcile net
income (loss) to cash flows from
operating activities:
Provision for litigation - - 300 -
Depreciation and amortization 189 240 388 559
Impairment of goodwill - - - 63
Provisions for receivables and
inventory 98 108 173 257
Restructuring and asset impairment
charges 37 53 45 199
Loss on early extinguishment of
debt 73 - 73 -
Loss (gains) on sales of businesses
and assets, net 6 13 8 (6)
Cash payments for restructurings (73) (61) (253) (183)
Undistributed equity in income of
affiliated companies (7) (15) (20) (26)
Decrease (increase) in inventories 17 24 17 81
Increase in on-lease equipment (36) (55) (72) (91)
Decrease in finance receivables 162 352 345 468
Decrease (increase) in accounts
receivable and billed portion of
finance receivables 100 (101) 75 (102)
Increase (decrease) in accounts
payable and accrued compensation
and benefit costs 89 62 (44) 130
Net change in all income tax assets
and liabilities (35) 72 (113) (325)
Decrease in other current and long-
term liabilities (45) (53) (106) (143)
Other, net 21 (102) 4 (87)
------- ------- ------- -------
Net cash provided by operating
activities 682 624 841 767
------- ------- ------- -------
Cash Flows from Investing Activities
Cost of additions to land, buildings
and equipment (44) (45) (79) (71)
Proceeds from sales of land,
buildings and equipment 3 1 4 4
Cost of additions to internal use
software (14) (3) (24) (14)
Proceeds from divestitures, net 26 228 29 273
Net change in escrow and other
restricted investments 19 (75) (34) (153)
------- ------- ------- -------
Net cash (used in) provided by
investing activities (10) 106 (104) 39
------- ------- ------- -------
Cash Flows from Financing Activities
Cash proceeds from new secured
financings 329 667 1,142 1,178
Debt payments on secured financings (516) (407) (975) (805)
Other cash changes in debt, net (2,598) (3,911) (2,856) (3,322)
Proceeds from issuance of mandatory
convertible
preferred securities, net of
issuance costs 889 - 889 -
Proceeds from sales of common stock,
net of issuance costs 457 2 460 4
Dividends on preferred stock (11) - (22) -
Dividends to minority shareholders (1) - (1) -
------- ------- ------- -------
Net Cash Used In Financing
Activities (1,451) (3,649) (1,363) (2,945)
------- ------- ------- -------
Effect of exchange rate changes on
cash and cash equivalents 23 63 18 40
------- ------- ------- -------
Decrease in cash and cash equivalents (756) (2,856) (608) (2,099)
Cash and cash equivalents at beginning
of period 3,035 4,747 2,887 3,990
------- ------- ------- -------
Cash and cash equivalents at end of
period $2,279 $1,891 $2,279 $1,891
------- ------- ------- -------
Note: Certain reclassifications of prior year amounts have been made
to conform to the current year presentation.
Xerox Corporation
Segment Revenues and Operating Profit
Three Months Ended June 30,
(in millions, except margins) 2003 2002 Change
-------------------------------------------- ------- ------- ---------
Revenues
Production(a) $1,116 $1,113 0%
Office(a) 1,938 1,866 4%
Developing Markets (DMO) 410 462 (11%)
Other(b) 456 511 (11%)
------- ------- ------
Total Revenues $3,920 $3,952 (1%)
------- ------- ------
Memo: Color $814 $686 19%
Operating Profit
Production(a) $113 $97 $16
Office(a) 160 152 8
DMO 48 14 34
Other(b) (122) (33) (89)
------- ------- ------
Total Operating Profit $199 $230 $(31)
======= ======= ======
Operating Margin
Production(a) 10.1% 8.7% 1.4 pts
Office(a) 8.3% 8.1% 0.2 pts
DMO 11.7% 3.0% 8.7 pts
Other(b) (26.8%) (6.5%) (20.3)pts
------- ------- ---------
Total Operating Margin 5.1% 5.8% (0.7)pts
------- ------- ---------
----------------------------------------------------------------------
Reconciliation to pre-tax income
Segment Operating Profit $199 $230
Reconciling items:
Restructuring and asset impairment
charges (37) (53)
Restructuring related inventory
charge - (1)
Allocated item:
Equity in net income of
unconsolidated affiliates (16) (15)
------- -------
Pre-tax income $146 $161
======= =======
(a) In 2003 we reclassified our mid-range color products (11-40 ppm)
from the Production segment to the Office segment. As a result,
2002 revenue of $1,093 million was reclassified from the
Production to the Office segment. The quarterly impact is as
follows: Q1 02 - $237 million, Q2 02 - $259 million, Q3 02 - $259
million, Q4 02 - $338 million. Operating profit was reclassified
for this change as well as for certain changes in corporate and
other expense allocations. The second quarter 2002 impact is to
increase / (decrease) segment operating profit as follows:
Production - ($29) million; Office - $14 million; DMO - $7
million; Other - $8 million. The full year impact is to increase /
(decrease) 2002 segment operating profit as follows: Production -
($175) million; Office - $123 million; DMO - $29 million; Other -
$23 million.
(b) Small Office / Home Office (SOHO) is now reported in Other as it
no longer meets the thresholds for separate reporting.
Production: Monochrome 91+ pages per minute (ppm), Color 41+ ppm;
North America & Europe
Office: Monochrome up to 90 ppm; Color up to 40 ppm; North
America & Europe
DMO: Operations in Latin America, the Middle East, India,
Eurasia, Russia and Africa
Other: Paper, SOHO, Xerox Engineering Systems (XES), Xerox
Technology Enterprises (XTE),
consulting, equity income and non-allocated
corporate items
Financial Review
Summary
Three Months Ended June 30,
(in millions) 2003 2002 Change
---------------------------------- ------- ------- -------
Equipment sales $1,023 $948 8%
Post sale and other revenue 2,643 2,754 (4%)
Finance income 254 250 2%
------- -------
Total Revenues $3,920 $3,952 (1%)
Reconciliation to Condensed Consolidated Statements of
Income
Sales $1,696 $1,662
Less: Supplies, paper and other
sales (673) (714)
------- -------
Equipment Sales $1,023 $948
Service, outsourcing and rentals $1,970 $2,040
Add: Supplies, paper and other
sales 673 714
------- -------
Post sale and other revenue $2,643 $2,754
Total second quarter 2003 revenues of $3.9 billion declined 1 percent
from $4.0 billion in the 2002 second quarter including a 6-percentage
point benefit from currency. Despite continued economic weakness,
equipment sales grew 8 percent including a 7-percentage point benefit
from currency. Equipment sales growth primarily reflects the success
of our color multifunction products, growth in DMO and growth in
digital production. Post sale and other revenue declined 4 percent due
to declines in older technology light lens, DMO and Small Office /
Home Office (SOHO) revenue, which were only partially offset by a
5-percentage point benefit from currency. These declines reflect the
reduction in the number of these machines at customer locations and
related page volume declines. Finance income grew 2 percent, including
a 5-percentage point benefit from currency. Finance income continues
to reflect reduced equipment sales from prior quarters as well as the
2002 sale of our financing business in Italy.
Three Months Ended June 30,
2003 2002 Change
------- ------- -------
Net income (in millions) $86 $87 $(1)
Diluted earnings per share $0.09 $0.11 $(0.02)
The second quarter 2003 net income of $86 million or $0.09 cents per
diluted share included a $45 million after-tax loss ($73 million
pre-tax) on the early extinguishment of debt related to the write-off
of the remaining unamortized fees associated with the terminated 2002
Credit Facility as well as after-tax restructuring charges of $23
million ($37 million pre-tax). Our underlying financial results
reflect the effective implementation of previous expense actions,
which have reduced selling, administrative and general (SAG) expenses.
The second quarter 2002 net income of $87 million or $0.11 cents per
diluted share, included after-tax restructuring charges of $41 million
($53 million pre-tax). Second quarter 2003 net income included gains
from remeasurement of foreign currency balances which were hedged with
option contracts while second quarter 2002 net income included losses
from unhedged currency positions. Such amounts are included as a
component of Other expenses, net in the Condensed Consolidated
Statements of Income. The weighted average common shares outstanding
on a diluted basis during the second quarters of 2003 and 2002 were
808 million and 913 million, respectively.
Operations Review
Revenues for the three months ended June 30, 2003 and 2002 were as
follows:
(in millions) Production Office DMO Other Total
------------------------ ---------- ------- ----- ----- -------
2003
Equipment Sales $289 $594 $100 $40 $1,023
Post Sale and Other 730 1,193 308 412 2,643
Finance Income 97 151 2 4 254
---------- ------- ----- ----- -------
Total Revenue $1,116 $1,938 $410 $456 $3,920
---------- ------- ----- ----- -------
2002
Equipment Sales $260 $561 $72 $55 $948
Post Sale and Other 755 1,156 387 456 2,754
Finance Income 98 149 3 - 250
---------- ------- ----- ----- -------
Total Revenue $1,113 $1,866 $462 $511 $3,952
---------- ------- ----- ----- -------
Equipment sales of $1,023 million in the second quarter 2003 increased
8 percent from $948 million in the second quarter 2002, reflecting the
success of numerous recent product launches and a 7-percentage point
benefit from currency. In the second quarter 2003, approximately 50
percent of equipment sales revenue was generated from products
launched in the previous two years.
Production: 2003 second quarter equipment sales grew 11 percent from
the second quarter 2002 as improved mix and favorable currency more
than offset modest installation declines and price declines of just
over 5 percent. Strong color-equipment sales growth reflected the
combination of modest installation increases and very favorable mix
due to sales of the DocuColor 6060 and DocuColor iGen3, which were
only partially offset by price declines. Production monochrome
installations declined in the low single digits as declines in
production printing and older technology light lens products more than
offset digital light production growth driven by the Xerox 1010. The
Xerox 1010, our 101 page per minute digital device and first digital
light production device was introduced in November 2002.
Office: 2003 second quarter equipment sales increased 6 percent from
the second quarter 2002 reflecting installation growth and favorable
currency, which were only partially offset by low double-digit price
declines and unfavorable mix. Volume growth was led by multi-function
color, which grew just over 60 percent reflecting the success of the
DocuColor 1632, 2240, and recently launched 3535. Monochrome digital
products also delivered strong growth reflecting the success of the
Document Centre 500 series as well as the initial impact of the
expanded product line, which is competitively priced and includes
upgradeable digital copiers, basic multifunction products (MFPs) that
print and copy, and advanced MFPs that print, copy, fax and scan.
DMO: Equipment sales in the second quarter 2003 grew 39 percent from
the 2002 second quarter reflecting volume growth of over 60 percent.
Post sale and other revenues of $2,643 million declined 4 percent from
$2,754 million in the second quarter 2002, including a 5-percentage
point benefit from currency. These declines reflect lower equipment
installations in previous quarters, as post sale revenue is largely a
function of the equipment placed at customer locations and the volume
of prints and copies that our customers make on that equipment as well
as associated services. Second quarter 2003 supplies, paper and other
sales of $673 million (included within post sale and other revenue)
declined 6 percent from 2002 as supplies and other declines were only
partially offset by growth in paper. Supplies declines reflected a
lower installed base of equipment and reduced sales in the SOHO
business, which we exited in 2001. Service, outsourcing and rental
revenue of $1,970 million declined 3 percent from the 2002 second
quarter as declines in rental, outsourcing and other, particularly in
DMO, were only partially offset by growth in service revenue due to
currency.
Production: 2003 second quarter post sale and other revenue declined
by 3 percent as favorable currency and improved mix, driven largely by
an increased volume of color pages, was more than offset by
double-digit older technology light lens equipment page volume
declines.
Office: 2003 second quarter post sale and other revenue grew 3 percent
as favorable currency impacts and strong page growth in digital
products more than offset light lens page volume declines.
DMO: 2003 second quarter post sale and other revenue declined 20
percent due largely to a lower number of machines at customer
locations, page volume declines and currency devaluation. Equipment
populations in DMO are stabilizing and we therefore expect post sale
declines will continue to moderate.
Other: 2003 second quarter post sale and other revenue declined 10
percent from the 2002 second quarter as declines in SOHO and XES more
than offset the impact of favorable currency.
Key Ratios and Expenses
Q2 Q2
2003 2002
--------------------
Gross Margin
Sales 37.0 % 38.8 %
Service, outsourcing and rentals 44.4 43.4
Financing 63.4 59.6
Total 42.4 42.5
R&D % revenue 5.7 6.1
SAG % revenue 27.8 28.1
Second quarter 2003 total gross margin of 42.4 percent decreased 0.1
percentage point, from 42.5 percent in the second quarter 2002,
including higher pension and other employee benefit expenses totaling
$21 million. 2003 second quarter sales gross margin of 37.0 percent
declined 1.8 percentage points from the second quarter 2002. The
decline reflects the impact of planned lower prices on new products,
competitive price pressure and the benefit expense increase, which was
only partially offset by improved manufacturing productivity and
spending reductions. Service, outsourcing and rentals margin improved
one percentage point to 44.4 percent, primarily reflecting improved
productivity. Second quarter 2003 finance income gross margin improved
3.8 percentage points year-over-year in line with declining market
interest rates specific to our financing business.
Research and development (R&D) expense of $225 million, or 5.7 percent
of revenue, in the 2003 second quarter was $15 million lower than the
second quarter 2002, primarily due to reduced DocuColor iGen3
spending, partially offset by higher pension and other employee
benefit expenses. We continue to invest in technological development,
particularly in color, and believe that 2003 R&D spending is at an
adequate level to remain technologically competitive. Xerox R&D
remains strategically coordinated with that of Fuji Xerox.
Selling, administrative and general (SAG) expenses of $1,089 million
in the 2003 second quarter declined $21 million from the 2002 second
quarter. The decline included $51 million of adverse currency impacts.
2003 second quarter SAG expense reductions reflect the benefit from
previous restructuring actions and the absence of professional fees
associated with the 2001 restatement, partially offset by a $27
million increase in pension and other employee benefit expenses.
Second quarter 2003 bad debt expense of $74 million was in line with
recent trends, but $6 million higher than the second quarter 2002 due
largely to currency impacts.
In the second quarter 2003, we recorded restructuring and asset
impairment charges totaling $37 million ($23 million after taxes),
primarily consisting of new severance actions and pension settlements
related to previous employee restructuring actions. The remaining
restructuring reserve balance at June 30, 2003 for all restructuring
programs was $188 million, the majority of which will be spent during
the balance of 2003.
Worldwide employment of 63,900 declined by 800 from the 2003 first
quarter, including reductions due to our restructuring programs and
other attrition.
Other expenses, net for the three months ended June 30, 2003 and 2002
were as follows:
(in millions) 2003 2002
---------------------------------------------- --------- ---------
Non-financing interest expense $112 $69
Currency (gains) losses, net (21) 33
Amortization of intangible assets 9 9
Loss on sales of businesses and assets 6 12
Interest income (12) (22)
Loss on early extinguishment of debt 73 -
All other, net (1) 15
--------- ---------
Total $166 $116
========= =========
Second quarter 2003 non-financing interest expense was $43 million
higher than the 2002 second quarter reflecting the higher variable
interest rate associated with the 2002 Credit Facility, the related
amortization of debt issuance costs and mark-to-market losses on our
interest rate swaps of $3 million compared to gains of $13 million in
the second quarter 2002. These increases were partially offset by
savings related to lower average debt balances compared to the 2002
second quarter. We expect non-financing interest expense to be lower
in future periods due to more favorable interest rates and lower
borrowings associated with the recapitalization, which became
effective on June 25, 2003.
In the second quarter 2003, exchange gains of $21 million were due
largely to strengthening of the Brazilian Real and the Euro against
the U.S. dollar. These gains compared to $33 million of unhedged
exchange losses, primarily in Brazil and other DMO countries, in the
second quarter 2002.
The second quarter 2003 loss on sales of businesses and assets related
primarily to the sale of XES subsidiaries in France and Germany, which
was partially offset by a gain on the sale of our investment in Xerox
South Africa. The 2002 second quarter loss primarily related to the
sale of our Italian leasing subsidiary.
Lower invested cash balances and lower average interest rates in the
second quarter 2003 resulted in a reduction in interest income as
compared to the second quarter 2002.
The second quarter 2003 loss on early extinguishment of debt reflects
the write-off of the remaining unamortized fees associated with the
2002 Credit Facility, which was repaid in June 2003 upon completion of
the 2003 recapitalization plan.
In the second quarter 2003 we recorded income tax expense of $53
million compared to $64 million in the second quarter 2002. The
effective tax rate for the second quarter 2003 and 2002 was 36.3
percent and 39.8 percent, respectively.
Our effective tax rate will change based on nonrecurring events (such
as restructuring initiatives) as well as recurring factors including
the geographical mix of income before taxes and the related tax rates
in those jurisdictions. We anticipate that our full year 2003
effective tax rate will approximate 40 percent.
Equity in net income of unconsolidated affiliates consists of our 25
percent share of Fuji Xerox income as well as income from other
smaller equity investments.
Minorities' interests in earnings of subsidiaries was $23 million and
$25 million in the second quarters of 2003 and 2002 respectively.
These amounts primarily represent the distributions, net of tax, on
our mandatorily redeemable preferred securities.
Capital Resources and Liquidity
Cash Flow Analysis
The following table summarizes our cash flows for the three months
ended June 30, 2003 and 2002 as reported in our Condensed Consolidated
Statements of Cash Flows:
Three Months Ended
June 30,
--------------------
(in millions) 2003 2002
--------------------------------------------- --------- ----------
Operating Cash Flows $682 $624
Investing Cash (Usage) Flows (10) 106
Financing Cash Usage (1,451) (3,649)
Effect of exchange rate changes 23 63
-------- ----------
Decrease in cash and cash equivalents (756) (2,856)
Cash and cash equivalents at beginning of
period 3,035 4,747
-------- ----------
Cash and cash equivalents at end of period $2,279 $1,891
======== ==========
Second quarter 2003 cash flows from operating activities were $682
million and reflect pre-tax income of $146 million and the following
non-cash items: depreciation and amortization of $189 million,
provisions for receivables and inventory of $98 million, the loss on
early extinguishment of debt of $73 million, restructuring provisions
of $37 million and other non-cash items of $6 million. In addition,
reductions in finance receivables and accounts receivables of $162
million and $100 million, respectively, contributed positively to our
operating cash flow. The receivables reductions reflect the collection
of receivables from prior years' sales without offsetting receivables
increases due to lower revenues in previous quarters and our
transition to third party vendor financing arrangements in Italy,
Brazil, Mexico and the Nordic countries. These cash flows were
partially offset by $84 million of tax payments and $73 million of
restructuring payments. The 2003 second quarter operating cash flow
improved by $58 million over the 2002 second quarter, primarily due to
working capital improvements, partially offset by higher cash tax
payments.
Cash flows from investing activities for the three months ended June
30, 2003 primarily consisted of capital and internal use software
spending partially offset by proceeds from the sale of non-core
businesses and decreases in restricted cash. The 2002 second quarter
included proceeds of $228 million from the sales of our Italian
leasing business and certain manufacturing locations to Flextronics,
partially offset by cash outflows related to restricted investments.
Cash flows from financing activities for the three months ended June
30, 2003 included net payments on secured borrowings with GE and other
vendor financing partners of $187 million. In addition, in April 2003
the holders of our Convertible Subordinated Debentures due 2018
exercised their put option, resulting in debt payments of $560
million. Other scheduled debt payments of $431 million were also made
in the quarter. On June 25, 2003, we completed a $3.6 billion
recapitalization that included public offerings of common stock,
3-year mandatory convertible preferred stock and 7-year and 10-year
senior unsecured notes as well as a new $1 billion credit facility
(the "2003 Credit Facility"). Net proceeds from the recapitalization
were as follows: common stock offering - $451 million, convertible
preferred offering - $889 million and unsecured notes offering -
$1,218 million. The 2003 Credit Facility consists of a $700 million
revolving facility and a $300 million term loan, both maturing in
September 2008. The company does not currently intend to draw the
revolver on an ongoing basis. Net proceeds from the term loan were
$271 million. Xerox used the aggregate net proceeds from the
recapitalization as well as a portion of its current cash balance to
repay and terminate, effective June 25, 2003, the $3,096 million
outstanding under the terminated 2002 Credit Facility. In summary, the
cash changes in debt, net, corresponding to our Condensed Consolidated
Statement of Cash Flows for the three months ended June 30, 2003 were
as follows:
Payments
Convertible debentures $(560)
Scheduled debt payments (431)
2002 Credit Facility (3,096)
---------
$(4,087)
---------
Borrowings
2010/2013 Senior Notes $1,218
2003 Credit Facility 271
---------
$1,489
---------
---------
Total $(2,598)
=========
Financing activities for the second quarter 2002 consisted of the $2.8
billion repayment under a previous credit facility, other payments of
maturing debt and net proceeds from secured borrowing activity with GE
and other vendor financing partners of $260 million.
During the second quarter 2003 we originated loans, secured by finance
receivables, generating cash proceeds of $329 million and repaid
loans, secured by finance receivables, of $516 million. The proportion
of total finance receivables that are secured is 54 percent,
consistent with the first quarter 2003. We expect to increase the
proportion of our finance receivables that are securitized to
approximately 60 percent by the end of the year. As of June 30, 2003,
debt secured by finance receivables represented approximately 35
percent of total debt.
The following table compares finance receivables to financing-related
debt as of June 30, 2003:
Finance Debt (2)
(in millions) Receivables
-------------------------------------------- -------------------------
Finance Receivables Encumbered by Loans(1) :
GE Loans - U.S. and Canada $3,208 $2,935
Merrill Lynch Loan - France 514 443
U.S. Asset-backed notes 159 38
GE Loans - Germany 111 111
------------- -----------
Subtotal - SPEs 3,992 3,527
GE Loans - U.K. 672 539
Other Europe 84 81
------------- -----------
Total - Finance Receivable Securitizations $4,748 $4,147
===========
Unencumbered Finance Receivables $4,001
-------------
Total Finance Receivables(3) $8,749
=============
(1) Encumbered Finance receivables represent the net book value of
finance receivables that secure each of the indicated loans.
(2) Represents the debt secured by finance receivables, including
transactions utilizing SPE's.
(3) Includes (i) Billed portion of finance receivables, net (ii)
Finance receivables, net and (iii) Finance receivables due after
one year, net as included in the condensed consolidated balance
sheets as of June 30, 2003.
Debt
Our expected debt maturities for the remainder of 2003 and 2004 by
quarter, and 2005, 2006, 2007 by year and thereafter are as follows:
(in millions) 2003 2004 2005 2006 2007 Thereafter
------- ------- ------- ----- ----- ----------
First Quarter - $853
Second Quarter - 942
Third Quarter $495 682
Fourth Quarter 1,580 1,316
------- ------- ------- ----- ----- ----------
Full Year $2,075 $3,793 $2,270 $257 $293 $3,110
======= ======= ======= ===== ===== ==========
Of the debt maturities shown in the above table, the amount that
relates to debt secured by finance receivables for the years 2003,
2004, 2005 and 2006 are as follows: $857 million, $1,746 million,
$1,319 million, and $225 million, respectively.
Recent Events
Public Offering of French Securitization with Merrill Lynch
In December 2002, we received $362 million from Merrill Lynch secured
by finance receivables in France through a warehouse financing
facility. By June 30, 2003 the balance in this facility had increased
to $443 million due to funding of new lease originations. In July 2003
this 364-day facility from Merrill Lynch was replaced with a long-term
public secured financing. As a result of this public financing, we
reclassified $267 million from Current portion of long-term debt to
Long-term debt in our June 30, 2003 Condensed Consolidated Balance
Sheet. In addition, a new warehouse financing facility has been
established with Merrill Lynch. This facility can provide funding of
up to 350 million Euros, outstanding at anytime, for new lease
originations in France and may be securitized through a similar public
offering within two years.
Adoption of SFAS 150
In May 2003, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 150 "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and
Equity" ("SFAS 150"). This statement establishes standards for how
certain financial instruments with characteristics of liabilities and
equity are classified in the balance sheet. We were required to adopt
SFAS 150 as of July 1, 2003. As a result of adopting SFAS 150, certain
securities included within the balance sheet caption
"Company-obligated, mandatorily redeemable preferred securities of
subsidiary trusts holding solely subordinated debentures of the
Company" which are currently classified between liabilities and equity
in our Condensed Consolidated Balance Sheet, will be reclassified to a
separate line item within liabilities. In addition, the distributions
related to these instruments which are currently reported net of tax
as a component of "Minorities' interests in earnings of subsidiaries"
in our Condensed Consolidated Statement of Income, will be
prospectively accounted for as interest expense with the tax effects
presented separately. As of July 1, 2003, the third quarter 2003
balance sheet reclassification was approximately $700 million.
After-tax annual distributions and related accretion associated with
these instruments are approximately $34 million ($55 million pre-tax).
S-4 Registration of 9.75 percent senior notes due in 2009
In January 2002, we completed an unregistered offering in the U.S.
($600 million) and Europe (225 million Euros) of 9.75 percent senior
notes due in 2009. On July 25, 2003, we filed a pre-effective
amendment to a previously filed registration statement on Form S-4 to
exchange senior registered notes for these notes. This registration
statement has not yet been declared effective. Once declared
effective, the 0.50 percent interest premium currently paid on these
notes will be terminated.
Forward-Looking Statements
This earnings release and financial review contain forward-looking
statements and information relating to Xerox that are based on our
beliefs as well as assumptions made by and information currently
available to us. The words "anticipate," "believe," "estimate,"
"expect," "intend," "will" and similar expressions, as they relate to
us, are intended to identify forward-looking statements. Actual
results could differ materially from those projected in such
forward-looking statements. Information concerning certain factors
that could cause actual results to differ materially is included in
our First Quarter 2003 Form 10-Q filed with the SEC. We do not intend
to update these forward-looking statements.
Short Name: Xerox Corporation
Category Code: IR
Sequence Number: 00007645
Time of Receipt (offset from UTC): 20030727T220952+0100
--30--DB/ny*
CONTACT: Xerox Corporation
Cynthia B. Johnston, 203-968-3489
Fax 203-968-3944
Cindy.Johnston@usa.xerox.com
KEYWORD: CONNECTICUT UNITED KINGDOM INTERNATIONAL EUROPE
INDUSTRY KEYWORD: SOFTWARE HARDWARE PUBLISHING EARNINGS
COMPUTERS/ELECTRONICS
SOURCE: Xerox Corporation
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