SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (date of earliest event reported):
April 19, 2001
XEROX CORPORATION
(Exact name of registrant as specified in its charter)
New York 1-4471 16-0468020
(State or other (Commission File (IRS Employer
jurisdiction of Number) Identification
incorporation) No.)
800 Long Ridge Road
P. O. Box 1600
Stamford, Connecticut 06904-1600
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code:
(203) 968-3000
Item 5. Other Events
This Current Report on Form 8-K consists of the following two exhibits:
Exhibit 99.1 Registrant's First Quarter 2001 Earnings Release made on
April 19, 2001.
Exhibit 99.2 Registrant's 2000 Basic Financial Statements and Summary
Information.
--------------------------------------------------------------
Forward-Looking Statements
From time to time Xerox Corporation (the Registrant or the Company) and its
representatives may provide information, whether orally or in writing, including
certain statements in this Current Report on Form 8-K, which are deemed to be
"forward-looking" within the meaning of the Private Securities Litigation Reform
Act of 1995 ("Litigation Reform Act"). These forward-looking statements and
other information relating to the Company are based on the beliefs of management
as well as assumptions made by and information currently available to
management.
The words "anticipate", "believe", "estimate", "expect", "intend", "will", and
similar expressions, as they relate to the Company or the Company's management,
are intended to identify forward-looking statements. Such statements reflect the
current views of the Registrant with respect to future events and are subject to
certain risks, uncertainties and assumptions. Should one or more of these risks
or uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described herein as anticipated,
believed, estimated or expected. The Registrant does not intend to update these
forward-looking statements.
In accordance with the provisions of the Litigation Reform Act we are making
investors aware that such "forward-looking" statements, because they relate to
future events, are by their very nature subject to many important factors which
could cause actual results to differ materially from those contained in the
"forward-looking" statements. Such factors include but are not limited to the
following:
Competition - the Registrant operates in an environment of significant
competition, driven by rapid technological advances and the demands of customers
to become more efficient. There are a number of companies worldwide with
significant financial resources which compete with the Registrant to provide
document processing products and services in each of the markets served by the
Registrant, some of whom operate on a global basis. The Registrant's success in
its future performance is largely dependent upon its ability to compete
successfully in its currently-served markets and to expand into additional
market segments.
Transition to Digital - presently black and white light-lens copiers represent
approximately 30% of the Registrant's revenues. This segment of the market is
mature with anticipated declining industry revenues as the market transitions to
digital technology. Some of the Registrant's new digital products replace or
compete with the Registrant's current light-lens equipment. Changes in the mix
of products from light-lens to digital, and the pace of that change as well as
competitive developments could cause actual results to vary from those expected.
Expansion of Color - color printing and copying represents an important and
growing segment of the market. Printing from computers has both facilitated and
increased the demand for color. A significant part of the Registrant's strategy
and ultimate success in this changing market is its ability to develop and
market machines that produce color copies quickly and at reduced cost. The
Registrant's continuing success in this strategy depends on its ability to make
the investments and commit the necessary resources in this highly competitive
market.
Pricing - the Registrant's ability to succeed is dependent upon its ability to
obtain adequate pricing for its products and services which provide a reasonable
return to shareholders. Depending on competitive market factors, future prices
the Registrant can obtain for its products and services may vary from historical
levels. In addition, pricing actions to offset currency devaluations may not
prove sufficient to offset further devaluations or may not hold in the face of
customer resistance and/or competition.
Customer Financing Activities - On average, 75 - 80 percent of the Registrant's
equipment sales are financed through the Registrant. To fund these arrangements,
the Registrant must access the credit markets and the long-term viability and
profitability of its customer financing activities is dependent on its ability
to borrow and its cost of borrowing in these markets. This ability and cost, in
turn, is dependent on the Registrant's credit ratings. Currently the
Registrant's credit ratings are such as to effectively preclude its ready access
to capital markets and the Registrant is currently funding its customer
financing activity from cash on hand. There is no assurance that the Registrant
will be able to continue to fund its customer financing activity at present
levels. The Registrant is actively seeking third parties to provide financing to
its customers. In the near-term the Registrant's ability to continue to offer
customer financing and be successful in the placement of its equipment with
customers is largely dependent upon obtaining such third party financing.
Productivity - the Registrant's ability to sustain and improve its profit
margins is largely dependent on its ability to maintain an efficient, cost-
effective operation. Productivity improvements through process reengineering,
design efficiency and supplier cost improvements are required to offset labor
cost inflation and potential materials cost changes and competitive price
pressures.
International Operations - the Registrant derives approximately half its revenue
from operations outside of the United States. In addition, the Registrant
manufactures many of its products and/or their components outside the United
States. The Registrant's future revenue, cost and profit results could be
affected by a number of factors, including changes in foreign currency exchange
rates, changes in economic conditions from country to country, changes in a
country's political conditions, trade protection measures, licensing
requirements and local tax issues. Our ability to enter into new foreign
exchange contracts to manage foreign exchange risk is currently severely
limited, and we anticipate increased volatility in our results of operations due
to changes in foreign exchange rates.
New Products/Research and Development - the process of developing new high
technology products and solutions is inherently complex and uncertain. It
requires accurate anticipation of customers' changing needs and emerging
technological trends. The Registrant must then make long-term investments and
commit significant resources before knowing whether these investments will
eventually result in products that achieve customer acceptance and generate the
revenues required to provide anticipated returns from these investments.
Revenue Growth - the Registrant's ability to attain a consistent trend of
revenue growth over the intermediate to longer term is largely dependent upon
expansion of its equipment sales worldwide and usage growth (i.e., an increase
in the number of hard copy images produced by customers). The ability to achieve
equipment sales growth is subject to the successful implementation of our
initiatives to provide industry-oriented global solutions for major customers
and expansion of our distribution channels in the face of global competition and
pricing pressures. The ability to grow usage may be adversely impacted by the
movement towards distributed printing and electronic substitutes. Our inability
to attain a consistent trend of revenue growth could materially affect the trend
of our actual results.
Turnaround Plan - In October 2000, the Registrant announced a turnaround program
which includes a wide-ranging plan to generate cash, return to profitability and
pay down debt. The success of the turnaround program is dependent upon
successful and timely sales of assets, restructuring the cost base, placement of
greater operational focus on the core business and the transfer of the financing
of customer equipment purchases to third parties. Cost base restructuring is
dependent upon effective and timely elimination of employees, closing and
consolidation of facilities, outsourcing of certain manufacturing and logistics
operations, reductions in operational expenses and the successful implementation
of process and systems changes.
The Registrant's liquidity is dependent on the timely implementation and
execution of the various turnaround program initiatives as well as its ability
to generate positive cash flow from operations and various financing strategies
including securitizations. Should the Registrant not be able to successfully
complete the turnaround program, including positive cash generation on a timely
or satisfactory basis, the Registrant will need to obtain additional sources of
funds through other operating improvements, financing from third parties, or a
combination thereof.
_____________________________________________________________________________
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant
has duly authorized this report to be signed on its behalf by the undersigned
duly authorized.
XEROX CORPORATION
/s/ MARTIN S. WAGNER
----------------------------
By: MARTIN S. WAGNER
Assistant Secretary
Date: April 19, 2001
Exhibit 99.1
XEROX ANNOUNCES FIRST QUARTER EARNINGS;
OPERATIONAL IMPROVEMENTS EXCEED EXPECTATIONS
"Our first quarter results provide a solid foundation for Xerox's turnaround."
STAMFORD, Conn., April 19, 2001 -- Xerox Corporation (NYSE:XRX)
today announced a first quarter operations loss of 12 cents per share, better
than expectations. Including gains from asset sales and net restructuring
charges, the company reported earnings of 19 cents per share.
"Xerox's performance in the first quarter is evidence of significant cash
and operational improvements as well as the effectiveness of our turnaround
strategy," said Paul A. Allaire, Xerox chairman and chief executive officer.
"Xerox people delivered on a commitment to improve results by winning
customers' confidence and aggressively reducing costs. We are executing a
successful turnaround that we expect will return Xerox to profitability this
year."
"Several of the issues negatively affecting performance in 2000
improved in the first quarter, including a strengthened North American sales
force that captured significant customer wins and delivered profitable results,"
said Anne M. Mulcahy, president and chief operating officer. "Driven by
revenue growth in North America and a stabilization in Europe, our first quarter
results provide a solid foundation for Xerox's turnaround."
First quarter revenue was $4.2 billion, 8 percent lower than the first
quarter of 2000. Pre-currency revenue declined 6 percent, significantly
improving from a double- digit decline in the fourth quarter. Modest North
American revenue growth was offset by a slight decline in Europe and a 20
percent decline in developing markets as the company reconfigures its
operations in Latin America to prioritize cash and profitability. Gross margins
in the first quarter stabilized from fourth quarter 2000 despite adverse
performance in developing markets.
Black-and-white production revenues improved from recent trends. Color
revenue in the first quarter grew 16 percent led by continued strong placements
of the DocuColor 12 and 2000 families and Phaser color printers.
Recurring document outsourcing revenues were up 18 percent in the first
quarter, reflecting continued growth and solidifying the company's leadership
position in the document services market.
Xerox also reported progress in reducing its overall cost base.
"With selling, general and administrative expenses down 5 percent and
an unprecedented first quarter reduction in excess of $100 million in inventory,
we are clearly benefiting from the aggressive attack on our cost base and focus
on operational improvements," said Mulcahy. "We are ahead of schedule in
implementing our cost-reduction plans and have taken actions that account for
substantially more than half of our $1 billion year-end target, including the
reduction of 4,300 jobs worldwide in the first quarter."
Research and development spending remained stable from the first
quarter of 2000 as Xerox continued to invest in advanced product technologies
and innovative document solutions. The company also recorded unhedged
currency gains of 5 cents per share.
Xerox noted progress on all elements of its turnaround program, citing
the recent $1.3 billion cash sale of half its stake in Fuji Xerox to Fuji Photo
Film and the agreement with Resonia Leasing AB to provide equipment financing
for Xerox's Nordic customers. Xerox is also selling its Nordic lease
receivables to Resonia for approximately $370 million. As reported, after
receiving $285 million from Resonia, the company's worldwide cash balance was
$3.1 billion, up from $1.7 billion from year-end 2000. Xerox today also filed
a form 8-K with the Securities and Exchange Commission containing unaudited 2000
basic financial statements and other company information.
Looking forward, Allaire commented that the company expects an operations loss
in the second quarter in line with first-quarter results. "Our expectation is
to return Xerox to profitability in the second half and for the full year,"
said Allaire.
- -XXX-
For additional information about The Document Company Xerox, please visit
our Worldwide Web site at www.xerox.com/investor.
Note to Editors: 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 8-K filed
with the SEC on April 4, 2001.
XEROX(r), The Document Company(r) and the digital X(r) are trademarks of XEROX
CORPORATION.
Xerox Corporation
Financial Summary
Three Months
Ended March 31,
-----------------------------
(in millions, except per-share data) 2001 2000 % Growth
- --------------------------------------------------------------------------------
Revenues $ 4,156 $ 4,504 (8%)
Net Income (Loss)
Income (Loss) before special items, extraordinary
item & cumulative effect of change in accounting
principle $ (86) $ 220 *
Restructuring & Tektronix IPRD charges (71) (463) *
Gain on sale of half of interest in Fuji Xerox 300 - *
-----------------------------
Income before extraordinary gain & cumulative
effect of change in accounting principle 143 (243) *
Extraordinary gain, net 17 - *
Cumulative effect of change in accounting principle (2) - *
-----------------------------
Net Income (Loss) $ 158 $ (243) *
=============================
Diluted Earnings (Loss) per Share
Income (Loss) before special items, extraordinary
item & cumulative effect of change in accounting
principle $ (.12) $ .30 *
Restructuring & Tektronix IPRD charges (.09) (.68) *
Gain on sale of half of interest in Fuji Xerox .38 - *
-----------------------------
Diluted Earnings (Loss) per share before
extraordinary gain & cumulative effect of change
in accounting principle .17 (.38) *
Extraordinary gain, net .02 - *
Cumulative effect of change in accounting principle - - *
-----------------------------
Diluted Earnings (Loss) per share $ .19 $ (.38) *
=============================
*Calculation not meaningful
Xerox Statements of Income
Three Months Ended March 31,
(in millions, except per-share data)
2001 2000 %
Growth
Revenues1
Sales $ 2,027 $ 2,341 (13%)
Service, outsourcing, financing and rentals 2,129 2,163 (2%)
Total Revenues 4,156 4,504 (8%)
Costs and Expenses1
Cost of sales 1,409 1,319 7%
Cost of service, outsourcing,
financing and rentals 1,355 1,324 2%
Inventory charges - 119 *
Research and development expenses 246 249 (1%)
Selling, administrative and general expenses 1,150 1,231 (7%)
Restructuring charge and asset impairments 105 506 (79%)
Gain on sale of half of interest in Fuji Xerox (769) - *
Gain on affiliate's sale of stock - (21) *
Tektronix in-process research
and development costs - 27 *
Other, net 136 99 37%
Total Costs and Expenses 3,632 4,853 (25%)
Income (Loss) before Income Taxes (Benefits),
Equity Income and Minorities' Interests 524 (349) *
Income taxes (benefits) 376 (113) *
Equity in net income of unconsolidated
affiliates 2 4 (50%)
Minorities' interests in earnings
of subsidiaries 7 11 (36%)
Net Income (Loss) before extraordinary
gain and cumulative effect of change in
accounting principle 143 (243) *
Extraordinary gain on early extinguishment
of debt (less income taxes of $11) 17 - *
Cumulative effect of change in accounting
principle (less income tax benefit of $1) (2) - *
Net Income (Loss) $ 158 $ (243) *
Calculation of Earnings (Loss) Per Share
Net Income (Loss) $ 158 (243) *
Basic Earnings (Loss) per Share
Preferred dividends, net of tax and other (12) (11) 9%
Income (Loss) available for common $ 146 $ (254) *
Adjusted average shares outstanding 679.4 666.7
Basic Earnings (Loss) per Share $ 0.21 $ (0.38) *
Diluted Earnings (Loss) per Share
ESOP expense adjustment, net of tax $ (7) $ - *
Preferred dividends, net of tax and other - (11) *
Interest on convertible debt, net of tax - - *
Income (Loss) available for common $ 151 $ (254) *
Adjusted average shares outstanding 781.2 666.7
Diluted Earnings (Loss) per Share $ 0.19 $ (0.38) *
*Calculation not meaningful
1 Revenues and costs and expenses have been restated as required by FASB EITF
2000-10 for 2000 to include shipping and handling charges billed to customers
as revenues. These amounts were historically reported as a reduction of cost
of goods sold.
Financial Review
Summary
Total first quarter 2001 revenues of $4.2 billion declined 8 percent (6 percent
pre-currency) from $4.5 billion in the 2000 first quarter reflecting a
significant improvement from the fourth quarter decline. U.S. direct sales force
stability resulted in modest year over year revenue growth in North America for
the first time in 6 quarters. Pre-currency revenues declined modestly in
Europe. Pre-currency revenues in Developing Markets declined 20 percent as we
reconfigure our Latin American operations to a new business approach
prioritizing cash and profitable revenue.
First quarter 2001 net income was $158 million including a $300 million after
tax gain related to the company's March 30, 2001 sale of half its stake in Fuji
Xerox to Fuji Photo Film, an additional net after tax restructuring provision of
$71 million associated with the company's previously announced Turnaround
Program and a $17 million after tax gain on early retirement of debt. The first
quarter 2000 net loss was $243 million including a $444 million after tax
restructuring provision and a $19 million after tax in-process research and
development charge associated with the January 1, 2000 acquisition of the
Tektronix, Inc. Color Printing and Imaging Division (CPID). Excluding all
special items, the first quarter 2001 loss was $86 million compared with net
income of $220 million in the 2000 first quarter. The 2001 first quarter loss
reflected the revenue decline as well as a significant gross margin decline
partially offset by lower SAG expenses reflecting the initial benefits from our
Turnaround Program.
Earnings per share was $0.19 in the 2001 first quarter including the $0.38
earnings per share gain from the Fuji Xerox sale, the $0.09 restructuring
provision and the $0.02 gain from the early retirement of debt. The first
quarter 2000 loss per share was $0.38 including charges of $0.68 for
restructuring and acquired CPID in-process R&D. Excluding all special items,
the first quarter 2001 loss per share was $0.12 compared with $0.30 earnings per
share in the 2000 first quarter.
Liquidity
The company's worldwide cash balance at March 31, 2001 was $2.8 billion
versus $1.7 billion at December 31, 2000. Total debt, net of cash on hand at
March 31, 2001, was $14.8 billion, reflecting decreases of approximately $1.6
billion from December 31, 2000 and approximately $2.2 billion from September
30, 2000. The decreases largely reflect completed asset sales, plus a modest
reduction due to foreign currency exchange rate changes and $122 million of
debt exchanged for shares of common stock.
Inventory at March 31, 2001 declined approximately $800 million from the
March 31, 2000 level and approximately $150 million from December 31, 2000.
These declines largely reflect continued management actions to improve
inventory turns. The management actions have been successful in breaking
the historical pattern of inventory levels increasing in the first quarter of
the year. First quarter 2001 days sales outstanding improved by approximately
10 days from the 2000 first quarter and represented a slight improvement versus
the 2000 fourth quarter.
At March 31, 2001 the company had approximately $2.6 billion of debt
obligations expected to be repaid during the remainder of 2001. Of this
amount, approximately $1.3 billion, $0.3 billion, and $1.0 billion are expected
to be due in the second, third and fourth quarters, respectively.
The company is implementing global initiatives to reduce costs, improve
operations and sell certain assets that should positively affect our capital
resources and liquidity position when completed. The company's objective is to
fund the debt maturities in 2001 with cash on hand, operating cash flows,
proceeds from asset sales and other liquidity and financing initiatives.
In January 2001 the company received $435 million in financing from GE
Capital secured by the Xerox portfolio of lease receivables in the U.K. In
March 2001 the company completed the sale of one half of its interest in Fuji
Xerox Co., Ltd. to Fuji Photo Film Co., Ltd. for approximately $1.3 billion. In
April 2001 the company announced the sale of its lease portfolios in four
European countries to Resonia Leasing AB for approximately $370 million as
part of an agreement under which Resonia will provide on-going, exclusive
equipment financing to Xerox customers in those countries. These transactions
are part of our plan to transition customer equipment financing to third-party
vendors.
A fuller discussion of the company's liquidity is included in the Form 8-K being
filed today 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."
A substantial portion of our consolidated revenues is derived from operations
outside of the United States where the U.S. dollar is not the functional
currency. When compared with the average of the major European and Canadian
currencies on a revenue-weighted basis, the U.S. dollar was approximately 7
percent stronger in the 2001 first quarter than in the 2000 first quarter. As a
result, currency translation had an unfavorable impact of approximately two
percentage points on revenue growth.
Revenues
Total revenues declined 8 percent (6 percent pre-currency) in the 2001 first
quarter from the 2000 first quarter significantly improving from the 15 percent
(11 percent pre-currency) decline in the 2000 fourth quarter (excluding the
beneficial impact of the 2000 CPID acquisition). Excluding our China
operations which we sold to Fuji Xerox in December 2000, first quarter 2001
pre-currency revenues declined 5 percent.
Beginning this quarter we have changed our revenue reporting to the
following segments: Production, Office, Small Office/Home Office and we will
continue to separately disclose revenues in Developing Markets Operations.
Revenue By Segment
Revenues and year-over-year revenue growth rates by segment are as follows:
1Q 2001
Memo: 2000 2000 Post- Pre-
Pre-Currency Revenue Growth Full Year Currency Currency
Q1 Q2 Q3 Q4 FY Revenues Revenues Growth Growth
Total Revenues 6% (1)% (1)% (9)% (2)% $18.6 $4.2 (8)% (6)%
Production 1 (3) (7) (13) (6) 6.3 1.4 (5) (3)
Office 4 5 5 (3) 2 6.8 1.7 - 2
Small Office / 35 (3) (2) 1 6 0.6 0.1 (25) (24)
Home Office
Developing Markets 15 (2) 2 (15) (2) 2.6 0.5 (22) (20)
Other Businesses 7 (9) (1) (4) (2) 2.3 0.5 (19) (16)
Memo: Color 64 60 74 54 62 2.8 0.7 14 16
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 for North America and Europe. First quarter 2001 revenues declined
5 percent (3 percent pre-currency), an improvement from recent trends. Strong
growth in production color revenues, including the successful DocuColor 2000
series which began shipments in June, 2000 and the DocuColor 12, are not yet
sufficient to offset monochrome revenue declines, particularly in light lens
products. Pre-currency equipment sales declined 6 percent and post equipment
install revenues declined one percent. The improved sales force productivity
resulting from filled sales territories and the increasing average tenure of
the sales force was somewhat offset by a weaker economic environment,
increased competition and continued movement to distributed printing and
electronic substitutes. Post equipment install revenues were also adversely
affected by reduced equipment placements in earlier quarters. Production
revenues represented 34 percent of first quarter 2001 revenues compared with
33 percent in the 2000 first 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 indirect sales channels for North America and Europe.
First quarter 2001 revenues were essentially unchanged from the first quarter
2000 (grew 2 percent pre-currency). First quarter 2001 pre-currency black and
white office revenues were essentially unchanged from the first quarter 2000.
Black and white copying revenues grew in North America reflecting strong
Document Centre departmental equipment sales growth including the
Document Centre 480 which prints and copies at 75 pages per minute.
European monochrome copying revenue declined reflecting our decision to
reduce our participation in very aggressively priced competitive customer bids
and tenders as we reorient our focus from marketshare to profitable revenue.
Monochrome laser printing revenues had excellent growth in the 2001 first
quarter reflecting good equipment sales growth and excellent supplies revenue
growth. Excellent office color revenue growth reflected continued excellent
placements of the Document Centre ColorSeries 50, the industry's first color-
enabled digital multi-function product and good revenue growth from our Phaser
line of laser and solid ink networked printers. Office revenues represented 41
percent of first quarter 2001 revenues compared with 38 percent in the 2000
first quarter.
Small Office/Home Office (SOHO) revenues include inkjet printers and
personal copiers sold through indirect channels in North America and Europe.
SOHO revenues declined 25 percent (24 percent pre-currency). Modest inkjet
revenue growth reflected modest shipment growth due to weak market
conditions and very aggressive competitive equipment pricing only partially
offset by strong supplies growth. Monochrome revenues in this segment
declined reflecting customers' strong preference for color. SOHO revenues
represented 3 percent of first quarter 2001 revenues compared with 4 percent
in the 2000 first quarter.
Developing Markets Operations (DMO) includes operations in Latin America,
Russia, India, the Middle East and Africa. (2000 revenues included China prior
to the December, 2000 sale of that operation to Fuji Xerox) First quarter 2001
revenue declined significantly in Brazil from the 2000 first quarter reflecting
reduced equipment placements, an increased competitive environment and
lower prices as the company focused on reducing inventory. Revenue declined
throughout Latin America due to some weaker economies and our decision to
focus on cash and profitable revenue generation rather than market share.
Revenue in Mexico declined as it continues to implement its own turnaround
plan. The Middle East and Africa had strong revenue growth in the first quarter
and Russia had excellent revenue growth.
Revenue By Type
The pre-currency growth rates by type of revenue are as follows:
2000 2001
Q1 Q2 Q3 Q4 FY Q1
Equipment Sales 5% (5)% (9)% (19)% (9)% (15)%
All Other Revenues 6 2 4 - 3 (1)
Total Revenues 6% (1)% (1)% (9)% (2)% (6)%
2000 pre-currency revenue growth includes the beneficial impact of the January
1, 2000 acquisition of the Tektronix, Inc. Color Printing and Imaging Division
First quarter 2001 equipment sales declined 15 percent from the first quarter
2000 reflecting a reduced rate of decline from the much higher fourth quarter
decline (fourth quarter 2000 decline was 21 percent excluding the beneficial
impact of the CPID acquisition).
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 first quarter declined one percent, an improvement compared to the 4
percent decline in the 2000 fourth quarter (excluding the beneficial impact of
the CPID acquisition in 2000). All other revenues benefited from 18 percent
growth in document outsourcing. Revenues were adversely impacted by lower year-
over-year service revenues reflecting the recent trend of lower equipment sales
and more aggressive pricing and continue to be adversely affected by the page
volume impact of distributed printing and pages diverted from copiers to
printers. First quarter 2000 revenues included approximately $40 million of
licensing and standalone software revenues.
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 18 percent in the
2001 first quarter. The backlog of future estimated document outsourcing
revenue grew to $9.3 billion in the 2001 first quarter, an increase of 13
percent from the 2000 first quarter.
Key Ratios and Expenses
The trend in key ratios was as follows:
2000 2001
Q1 Q2 Q3 Q4 FY Q1
Gross Margin 41.3% 40.2% 36.1% 33.7% 37.8% 33.5%
SAG % Revenue 27.3 28.1 30.4 33.1 29.8 27.7%
The gross margin declined by 7.8 percentage points in the 2001 first quarter
from the 2000 first quarter and 0.2 percentage points from the 2000 fourth
quarter. Approximately 2 percentage points of the year over year gross margin
decline reflected weak Production results. An additional 2 percentage points of
the decline was due to weak performance in Developing Markets. In addition,
lower manufacturing productivity as we reduced inventory, competitive pricing
pressures and unfavorable transaction currency adversely impacted results.
The 2000 first quarter gross margin benefited by approximately 0.5 percentage
points from increased licensing and stand-alone software revenues associated
with the licensing of a number of patents from our intellectual property
portfolio.
Selling, administrative and general expenses (SAG) declined 7 percent (5
percent pre-currency) in the 2001 first quarter reflecting initial benefits from
our Turnaround Program cost reduction efforts partially offset by higher bad
debt provisions. SAG includes $92 million in bad debt provisions in the 2001
first quarter which is $15 million higher than the 2000 first quarter, equally
split between North America and Europe. In the 2001 first quarter SAG
represented 27.7 percent of revenue compared with 27.3 percent in the 2000 first
quarter and 33.1 percent in the 2000 fourth quarter.
Research and development (R&D) expense was essentially unchanged in the
2001 first quarter from the 2000 first quarter 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 4,300 in the 2001 first quarter to 88,200
primarily as a result of employees leaving the company under our restructuring
programs.
Other, net was $136 million versus $99 million in 2000. Increases in net non-
financing interest expense of $57 million and individually insignificant
increases in various other expense items of approximately $40 million were
offset by $41 million of net currency gains resulting from the remeasurement of
unhedged foreign currency-denominated assets and liabilities and $22 million of
mark-to-market gains recorded as a result of the new accounting required under
FAS 133. Due to the inherent volatility in the foreign currency markets, the
company is unable to predict the amount of any such mark-to-market gains or
losses in future periods.
On March 30, 2001 the company completed the sale of half of its stake in
Fuji Xerox Co., Ltd. to Fuji Photo Film Co., Ltd. for approximately $1.3
billion, resulting in a pre-tax gain of approximately $769 million. The
company's ownership interest in Fuji Xerox decreased to 25 percent while
Fujifilm's ownership interest increased to 75 percent. The company will retain
significant rights as a minority shareholder and all product and technology
agreements between Xerox and Fuji Xerox will continue, ensuring that the two
companies retain uninterrupted access to each other's portfolio of patents.
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. At the same time we adjusted
our balances for reserves recorded for the original March, 2000 reserve program
based on actual results. As a result of these actions, in the first quarter
of 2001 we provided an incremental $105 million pre-tax of reserves necessary to
complete our open initiatives under both of these plans. We expect additional
provisions will be required in 2001 as additional plans are finalized. The
restructuring reserve balance for both these programs at March 31, 2001
amounted to $244 million.
Income Taxes, Equity in Net Income of Unconsolidated Affiliates and
Minorities' Interests in Earnings of Subsidiaries
Income (Loss) before income taxes was $524 million in the 2001 first quarter
including gains from the Fuji Xerox sale and the restructuring provision.
Excluding these items, the loss before income taxes was $140 million in the
2001 first quarter. The 2000 first quarter loss of $349 million included a $625
million restructuring provision and $27 million CPID of in-process research and
development charges. Excluding these items, the first quarter 2000 income
before taxes was $303 million.
The effective tax rate, including the tax provision on the Fuji Xerox sale and
the tax benefit related to the additional net restructuring provision, was 71.8
percent in the 2001 first quarter. Excluding these items, the 2001 first quarter
tax rate was 42.0 percent compared to 31.0 percent in the 2000 first quarter.
For the full year 2000, the underlying effective tax rate was 38.0 percent due
to higher than anticipated losses in a low-tax rate jurisdiction, partially
offset by favorable resolution of tax audits. The increase in the underlying
effective tax rate from 38.0 percent to 42.0 percent in 2001 is due primarily to
continued losses in a low-tax rate jurisdiction.
Equity in net income of unconsolidated affiliates is principally our 50
percent share of Fuji Xerox income. Total equity in net income declined by $2
million in the 2001 first quarter from the first quarter 2000. Our share of
total Fuji Xerox net income of $3 million in the 2001 first quarter decreased by
$3 million from the 2000 first quarter.
In March 2001, we retired $122 million of long-term debt through the exchange
of 15.5 million shares of common stock valued at $94 million. The retirements
resulted in an after tax extraordinary gain of $17 million or 2 cents per share
($28 million pre-tax) and a net equity increase of approximately $111 million.
In January 2001 certain put options were net cash settled for $28 million.
Funds for this net cash settlement were obtained by selling 5.9 million
unregistered shares of our common stock for proceeds of $28 million. No other
put options are currently outstanding.
First quarter 2001 Adjusted Average Shares Outstanding for our diluted EPS
calculation increased by approximately 115 million shares from the 2000 first
quarter. Approximately 11 million of the average share increase reflects the
issuance of shares during the first quarter for the cash settlement of equity
put options and the retirement of debt. The remainder of the increase reflects
share dilution resulting from the application of the "if converted" methodology
in the calculation of our diluted EPS for the Preferred Shares held by our 1989
Employee Stock Ownership Plan. This methodology requires us to assume
conversion of the preferred shares into common stock when computing our
diluted EPS. Normally, the conversion assumes that each preferred share is
converted into six common shares as long as our common stock price is above
the $13 per share floor price. The increase of approximately 96 million shares
in this quarter also reflects the conversion of the 8 million ESOP Preferred
Shares at the quarterly average share price of approximately $7 per share. The
increase in the number of shares diluted EPS by approximately $0.02 per share
during the quarter.
We adopted Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities", and SFAS No.
138, as of January 1, 2001. Upon adoption of SFAS 133 we recorded a net
cumulative after-tax loss of $2 million in the first quarter Income Statement
and a net cumulative after-tax loss of $19 million in Accumulated Other
Comprehensive Income. The adoption of SFAS 133 is expected to increase the
future volatility of reported earnings and other comprehensive income. In
general, the amount of volatility will vary with the level of derivative and
hedging activities and the market volatility during any period.
During the first quarter, the net effect from the mark-to-market valuation of
our interest rate derivatives recorded in earnings was not material. With
respect to our currency derivatives, the majority of the mark-to-market
valuations partially offset the remeasurement gains and losses of the underlying
foreign currency assets and liabilities and are included in Other, net. However,
the accounting required under SFAS 133 for certain cross currency interest rate
derivatives did result in a net gain of $22 million and is also included in
Other, net.
The $21 million gain on affiliate's sale of stock in 2000 reflected our
proportionate share of the increase in equity of Scansoft Inc. (NASDAQ:SSFT)
resulting from Scansoft's issuance of stock in connection with an acquisition.
This gain was partially offset by a $5 million charge reflecting our share of
Scansoft's write-off of in-process research and development associated with
this acquisition, which is included in Equity in net income of unconsolidated
affiliates.
Financial Information Unaudited
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.
On April 2, 2001, Xerox announced that the filing of its year 2000 10-K report
would be delayed in connection with an internal review commenced during the
last week of March 2001 by the company's Audit Committee in cooperation with
the company's auditors, KPMG. Xerox and its Audit Committee have concluded
that the fuller review was appropriate in light of the previously disclosed
investigation by the Securities and Exchange Commission. KPMG has advised
the company that it believes that such fuller review is needed for it to
satisfy its auditing responsibilities, and that it will work with the Audit
Committee to complete the review as quickly as possible although no fixed time
frame has been established.
This earnings release and financial review of Xerox Corporation ("Xerox")
includes consolidated financial data and information for Xerox for the quarter
ending March 31, 2001 ("Financial Information") which has been prepared by
the management of Xerox on a basis consistent with prior practice. The
Financial Information has not been audited or passed upon by Xerox's outside
auditors. The Financial Information is subject to the outcome of this internal
review and completion of the 2000 audit.
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 Form 8-K being filed today with the SEC. We do not intend to update
these forward-looking statements.
For additional Information contact:
Leslie F. Varon
Director, Investor Relations
203-968-3110
Leslie.Varon@usa.xerox.com
Timothy J. Fogal
Manager, Investor Relations
203-968-3489
Timothy.J.Fogal@usa.xerox.com
800 Long Ridge Road
Stamford, Connecticut 06904
Fax (203) 968-3944
www.xerox.com/investor
Exhibit 99.2
Xerox Corporation 2000 Basic Financial Statements and Summary Information
(Unaudited)
On April 2, 2001, Xerox announced that the filing of its year 2000 10-K report
would be delayed in connection with an internal review commenced during the last
week of March 2001 by the Company's Audit Committee in cooperation with the
Company's auditors, KPMG.
KPMG has advised the Company that it believes that such fuller review is needed
for it to satisfy its auditing responsibilities, and that it will work with the
Audit Committee to complete the review as quickly as possible. The review has
been designed to ensure that the company has not improperly used any accounting
adjustments, processes or procedures in connection with its financial reporting.
Xerox and its Audit Committee have concluded that the fuller review was
appropriate in light of the previously disclosed investigation by the Securities
and Exchange Commission.
On April 3, 2001, Xerox and its subsidiary, Xerox Credit Corporation, filed
reports on Form 12b-25 with the Securities and Exchange Commission in which it
was reported that the 2000 10-K report would be delayed because audited
financial statements for 2000 were not presently available pending completion of
the internal review. Earlier, on January 29, 2001, Xerox publicly disclosed in
a press release unaudited 2000 results of operations, including net income
(loss) of $(384) million for 2000 compared to $1,424 million for 1999. This
information remains subject to the outcome of the internal review by the Audit
Committee and completion of the 2000 audit by KPMG.
Pending completion of these activities, Xerox has filed on its April 19, 2001
Form 8-K with the Securities and Exchange Commission unaudited 2000 Basic
Financial Statements and Summary Information consisting of Consolidated
Statements of Operations, Consolidated Balance Sheets, Consolidated Statements
of Cash Flows, Supplemental Information Regarding Capital Resources, Liquidity
and other Summary Information. Additionally, the Company has attached as
Exhibit 1 to the April 19, 2001 Form 8-K, Xerox's first quarter 2001 earnings
press release also dated April 19, 2001.
In the earnings release, Xerox reported a first quarter operating loss of 12
cents per share, a smaller loss than the Company's expectations. Including the
gains from asset sales, net restructuring charges and extraordinary gains,
Xerox reported earnings of 19 cents per share. Xerox also provided summary
financial review information and referenced in the press release the further
information that was incorporated into the April 19, 2001 Form 8-K filed with
the Securities and Exchange Commission.
The summary consolidated financial information included in the April 19, 2001
Form 8-K as of and for the year ended December 31, 2000 and for the first
quarter of 2001 has been prepared by the management of Xerox on a basis
consistent with prior practice. This summary information has not been audited
by Xerox's outside auditors or passed upon by the Audit Committee and does not
include all of the information that year-end financial statements and related
notes or quarterly reports would contain. There can be no assurance that as a
result of the internal review underway and completion of the 2000 audit there
will not be changes in or modifications to this financial information.
Consolidated Statements of Operations (Unaudited)
Year ended December 31 (in millions, except per-share data)
2000 1999 1998
- --------------------------------------------------------------------------------
Revenues
Sales $10,069 $10,557 $10,887
Service, outsourcing, and rentals 7,666 7,965 7,787
Finance income 897 1,026 1,073
- -------------------------------------------------------------------------------
Total Revenues 18,632 19,548 19,747
- -------------------------------------------------------------------------------
Costs and Expenses
Cost of sales 6,198 5,956 5,853
Cost of service, outsourcing, and rentals 4,791 4,589 4,314
Inventory charges 119 - 113
Equipment financing interest 605 547 570
Research and development expenses 1,045 979 1,040
Selling, administrative and general expenses 5,547 5,144 5,321
Restructuring charge and asset impairments 540 - 1,531
Mexico provision 170 - -
Gain on affiliates sale of stock (21) - -
Purchased in-process research and development 27 - -
Gain on sale of China operations (200) - -
Other, net 367 297 242
- -------------------------------------------------------------------------------
Total Costs and Expenses 19,188 17,512 18,984
- -------------------------------------------------------------------------------
Income (Loss) before Income Taxes (Benefits),
Equity Income and Minorities' Interests (556) 2,036 763
Income taxes (benefits) (154) 631 207
Equity in net income of unconsolidated affiliates 61 68 74
Minorities' interests in earnings of subsidiaries 43 49 45
- -------------------------------------------------------------------------------
Income (Loss) from Continuing Operations (384) 1,424 585
Discontinued operations - - (190)
- -------------------------------------------------------------------------------
Net Income (Loss) $ (384) $ 1,424 $ 395
- -------------------------------------------------------------------------------
Basic Earnings (Loss) per Share
Continuing operations $ (0.63) $ 2.09 $ 0.82
Discontinued operations - - (0.29)
- -------------------------------------------------------------------------------
Basic Earnings (Loss) per Share $ (0.63) $ 2.09 $ 0.53
- -------------------------------------------------------------------------------
Diluted Earnings (Loss) per Share
Continuing operations $ (0.63) $ 1.96 $ 0.80
Discontinued operations - - (0.28)
- -------------------------------------------------------------------------------
Diluted Earnings (Loss) per Share $ (0.63) $ 1.96 $ 0.52
- -------------------------------------------------------------------------------
Consolidated Balance Sheets (Unaudited)
December 31 (in millions) 2000 1999
- -------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 1,741 $ 126
Accounts receivable, net 2,281 2,622
Finance receivables, net 5,141 5,115
Inventories 1,930 2,285
Equipment on operating leases, net 717 676
Deferred taxes and other current assets 1,284 1,230
- -------------------------------------------------------------------------------
Total Current Assets 13,094 12,054
Finance receivables due after one year, net 8,035 8,203
Land, buildings and equipment, net 2,495 2,456
Investments in affiliates, at equity 1,362 1,615
Intangible and other assets 3,062 2,831
Goodwill, net 1,639 1,724
- -------------------------------------------------------------------------------
Total Assets $29,687 $28,883
- -------------------------------------------------------------------------------
Liabilities and Equity
Short-term debt and current portion of long-term debt $ 2,693 $ 3,957
Accounts payable 1,033 1,016
Accrued compensation and benefits costs 662 715
Unearned income 250 186
Other current liabilities 1,648 2,163
- -------------------------------------------------------------------------------
Total Current Liabilities 6,286 8,037
Long-term debt 15,404 11,044
Postretirement medical benefits 1,197 1,133
Deferred taxes and other liabilities 1,933 2,623
Deferred ESOP benefits (221) (299)
Minorities' interests in equity of subsidiaries 141 127
Obligation for equity put options 32 -
Company-obligated, mandatorily redeemable preferred
securities of subsidiary trust holding solely subordinated
debentures of the Company 638 638
Preferred stock 647 669
Common shareholders' equity 3,630 4,911
- -------------------------------------------------------------------------------
Total Liabilities and Equity $29,687 $28,883
- -------------------------------------------------------------------------------
Shares of common stock issued and outstanding at December 31, 2000 were (in
thousands) 668,576. Shares of common stock issued and outstanding at December
31, 1999 were (in thousands) 665,156.
Consolidated Statements of Cash Flows (Unaudited)
Year ended December 31 (in millions) 2000 1999 1998
- -------------------------------------------------------------------------------
Cash Flows from Operating Activities
Income (loss) from continuing operations $ (384) $ 1,424 $ 585
Adjustments required to reconcile income
(loss) from continuing operations to cash flows
from operating activities:
Depreciation and amortization 1,127 935 821
Provision for doubtful accounts 546 359 301
Restructuring and other charges 856 - 1,644
Gains on sales of businesses and assets (295) - -
Cash payments for restructurings (372) (437) (332)
Minorities' interests in earnings
of subsidiaries 43 49 45
Undistributed equity in income of
affiliated companies (20) (68) (27)
Decrease (increase) in inventories 247 66 (558)
Increase in on-lease equipment (704) (401) (473)
Increase in finance receivables (947) (1,788) (2,169)
Proceeds from securitization of
finance receivables - 1,495 -
Increase in accounts receivable (270) (400) (596)
Proceeds from securitization of
accounts receivable 328 288 56
(Decrease) increase in accounts payable and
accrued compensation and benefit costs (3) (94) 127
Net change in current and deferred
income taxes (579) 277 (192)
Change in other current and
non-current liabilities 29 13 100
Other, net (265) (359) (288)
--------------------------------
Total (663) 1,359 (956)
--------------------------------
Cash Flows from Investing Activities
Cost of additions to land, buildings
and equipment (452) (594) (566)
Proceeds from sales of land, buildings
and equipment 44 99 74
Proceeds from sale of China operations 550 - -
Proceeds from sales of other businesses 90 - -
Acquisitions, net of cash acquired (856) (107) (380)
Other, net (20) (25) 5
--------------------------------
Total (644) (627) (867)
--------------------------------
Cash Flows from Financing Activities
Net change in debt 3,573 (183) 2,437
Dividends on common and preferred stock (587) (586) (531)
Proceeds from sales of common stock - 128 126
Settlements of equity put options, net (68) (5) -
Repurchase of preferred and common stock - - (172)
Dividends to minority shareholders (7) (30) (4)
--------------------------------
Total 2,911 (676) 1,856
--------------------------------
Effect of exchange rate changes on
cash and cash equivalents 11 (9) (29)
--------------------------------
Increase in cash and cash equivalents 1,615 47 4
Cash and cash equivalents at beginning of year 126 79 75
--------------------------------
Cash and cash equivalents at end of year $1,741 $ 126 $ 79
--------------------------------
Supplemental Information Regarding Capital Resources and Liquidity
Historically, we managed the capital structure of our non-financing operations
separately from that of our captive finance companies, which employ a more
highly leveraged capital structure typical of captive finance companies.
At December 31, 2000, 1999 and 1998, total debt, including ESOP debt, was
$18,097 million, $15,001 million and $15,107 million, respectively, and cash on
hand was $1,741 million, $126 million and $79 million, respectively. Total debt,
net of cash on hand, increased by $1,481 million in 2000, decreased by $153
million in 1999, and increased by $2,200 million in 1998.
(in millions) 2000 1999 1998
- -------------------------------------------------------------------------------
Total net debt* as of January 1 $14,875 $15,028 $12,828
Non-Financing operations:
Non-Financing operations
operating cash
usage (generation) 557 (353) (99)
Mexico finance receivable
writeoff 146 - -
Brazil dollar debt reallocation 55 505 -
Acquisitions, net of cash
acquired 856 107 380
Sale of China Operations (550) - -
Proceeds from other
divestitures (90) - -
Discontinued businesses 22 (114) (381)
Change in ESOP debt (78) (71) (64)
- -------------------------------------------------------------------------------
Non-Financing operations 918 74 (164)
Financing operations 7 (847) 1,764
Shareholder dividends 587 586 531
All other changes (31) 34 69
- -------------------------------------------------------------------------------
Total net debt* as of
December 31 $16,356 $14,875 $15,028
- -------------------------------------------------------------------------------
* Net of cash on hand of $1,741 million at December 31, 2000, $126 million at
December 31, 1999, $79 million at December 31, 1998 and $75 million at January
1, 1998.
The consolidated ratio of total debt to common and preferred equity was 4.2:1,
2.7:1 and 2.7:1 as of December 31, 2000, 1999 and 1998, respectively. The
increase in this ratio is attributable to the 2000 operating loss and the impact
of currency devaluation on the net equity of our foreign operations. This ratio
also reflects the full draw-down on our $7.0 billion Revolving Credit Agreement
(the "Revolver") during 2000 to maintain financial flexibility, as discussed
below, which resulted in cash on hand of $1.7 billion at December 31, 2000. Had
the Company's cash balance at December 31, 2000 been consistent with historical
levels, the debt to equity ratio would have been approximately 3.8:1.
The Company believes that an analytical review of debt and equity provides a
more meaningful understanding of our operations. For this purpose, debt is
defined as total debt less cash on hand, and equity is defined as common equity,
ESOP preferred stock, one-half of the mandatorily redeemable preferred
securities, and minorities' interests. Furthermore, the analytical review of
debt and equity divides the Company's operations into customer financing and
non-financing operations.
Total analytical equity decreased by $1,289 million in 2000, increased by $39
million in 1999, and decreased by $148 million in 1998. The following is a
summary of analytical equity, as defined, as of December 31, 2000, 1999, and
1998:
(in millions) 2000 1999 1998
- -----------------------------------------------------
Minorities' interests $ 141 $ 127 $ 124
Mandatorily redeemable
securities 638 638 638
Preferred stock 647 669 687
Common equity 3,630 4,911 4,857
- -----------------------------------------------------
Subtotal 5,056 6,345 6,306
Less one-half mandatorily
redeemable securities * (319) (319) (319)
- -----------------------------------------------------
Total Analytical Equity 4,737 6,026 5,987
Less Financing Equity 1,397 1,396 1,602
- -----------------------------------------------------
Non-Financing Equity $3,340 $4,630 $4,385
- -----------------------------------------------------
* Analytically assigned to debt.
Debt, net of cash on hand, related to non-financing operations grew by $1,474
million, $694 million and $436 million in 2000, 1999 and 1998, respectively. The
analytical non-financing debt-to-capital ratio increased to 62.2 percent at
year-end 2000 compared to 46.5 percent and 43.2 percent as of year-end 1999 and
1998, respectively. The increase in the ratio in 2000 reflects the impact on
debt from the January 2000 acquisition of CPID and the impact on debt and equity
from the 2000 full year operating loss, shareholder dividends and currency
effects, partially offset by the sale of our China business to Fuji Xerox in
December 2000, which reduced debt and increased equity. The increase in the
ratio in 1999 reflects the adverse impact on equity due to the significant
devaluation of the Brazilian Real, partially offset by net cash from operations
and income net of shareholder dividends.
The following table summarizes the results of capital and coverage
calculations commonly used to measure the Company's financial condition:
(in millions) 2000 1999 1998
- ------------------------------------------------------------------------------
Non-Financing
Debt/1/ $ 7,244 $ 4,155 $ 3,414
Equity/1/ 3,340 4,630 4,385
- ------------------------------------------------------------------------------
Total Capital $10,584 $ 8,785 $ 7,799
- ------------------------------------------------------------------------------
Debt-to-Capital 68.4% 47.3% 43.8%
Debt, net of cash/1,3/ $ 5,503 $ 4,029 $ 3,335
Equity/1/ 3,340 4,630 4,385
- ------------------------------------------------------------------------------
Total Capital $ 8,843 $ 8,659 $ 7,720
- ------------------------------------------------------------------------------
Debt-to-Capital, net of cash/3/ 62.2% 46.5% 43.2%
Ratio of earnings to interest
expense, before special
items/2/ 0.6x 5.9x 7.1x
Ratio of earnings to interest
expense, after special
items/2/ - 5.9x 2.0x
Ratio of earnings to fixed
charges, before special
items/2,4/ 0.7x 4.4x 5.0x
Ratio of earnings to fixed
charges, after special
items/2,4/ - 4.4x 1.7x
Financing:
Debt $11,172 $11,165 $12,012
Equity 1,397 1,396 1,602
- --------------------------------------------------------------------------------
Total Capital $12,569 $12,561 $13,614
- --------------------------------------------------------------------------------
Debt-to-Equity 8.0x 8.0x 7.5x
Ratio of earnings to interest
expense 1.5x 1.9x 1.8x
- --------------------------------------------------------------------------------
/1/ Includes $319 (one-half) share of mandatorily redeemable preferred
securities.
/2/ Includes one-half share of dividends on mandatorily redeemable
preferred securities of $27 million in 2000, 1999 and 1998.
/3/ Net of cash on hand of $1,741 million at December 31, 2000,
$126 million at December 31, 1999 and $79 million at December 31, 1998.
/4/ Before special charges, the 2000 operating loss resulted in a coverage
deficiency of $182 million. After special charges, the coverage deficiency
was $838 million.
Non-Financing Operations
The following table summarizes cash usage and generation from non-financing
operations for 2000, 1999 and 1998:
(in millions) 2000 1999 1998
- -----------------------------------------------------------
Income (loss) $ (600) $1,114 $ 274
Add back special items:
Restructuring charges, net 484 - 1,107
Tektronix IPRD charge, net 16 - -
Gain on sale of China
operations, net (119) - -
Mexico charge, net 120 - -
- -----------------------------------------------------------
Income (loss) before
special items (99) 1,114 1,381
Depreciation* and amortization 1,127 935 821
- -----------------------------------------------------------
Cash from Operations 1,028 2,049 2,202
Additions to land, buildings
and equipment (452) (594) (566)
Decrease (increase) in
inventories 247 66 (558)
Increase in on-lease equipment (704) (401) (473)
Increase in accounts receivable (270) (400) (596)
Proceeds from accounts
receivable securitizations 328 288 56
All other changes, net (362) (218) 366
- -----------------------------------------------------------
Sub-total (185) 790 431
Cash payments for
restructurings (372) (437) (332)
- -----------------------------------------------------------
Net Cash (Usage)
Generation $ (557) $ 353 $ 99
- -----------------------------------------------------------
* Includes on-lease equipment depreciation of $630, $463 and $411 in 2000, 1999
and 1998, respectively.
Cash from operations was $1,028 million in 2000 versus $2,049 million in 1999
and $2,202 million in 1998, as lower net income was only partially offset by
higher non-cash depreciation and amortization expenses. Additions to land,
buildings and equipment primarily include office furniture and fixtures,
production tooling and our investments in Ireland, where we are consolidating
European customer support centers and investing in inkjet supplies
manufacturing. The significant decline in 2000 spending versus 1999 is primarily
due to substantial completion of the Ireland projects as well as significant
spending constraints. We expect capital spending in 2001 to be approximately 25
percent below 2000 levels. The inventory reduction of $247 million in 2000
reflects management actions to improve inventory turns, including price
reductions on slower-moving products in the latter part of 2000 and changes in
the supply/demand and logistics processes. The inventory reduction of $66
million in 1999 followed growth of $558 million in 1998, reflecting an
accelerated transition of our business to new digital products. We expect to
further reduce inventory levels in 2001. On-lease
equipment investments of $704 million in 2000, $401 million in 1999 and $473
million in 1998 reflect the growth in our document outsourcing business, and we
expect further growth in 2001. Accounts receivable cash usage of $270 million in
2000 largely reflects the unwinding of 1999 short-term securitizations of $288
million. We began to show some progress reducing receivables in 2000, which has
been hampered by the persistent effects of changes we made in 1998 to the U.S.
customer administration centers. These changes were primarily responsible for
the $400 million and $596 million increases in 1999 and 1998, respectively, due
to higher days sales outstanding (DSO). We expect to continue making progress
improving DSO in 2001. The increases in All Other Changes, net in 2000 and 1999
largely reflect higher cash tax payments and lower deferred tax accruals. Cash
generated by our exit from discontinued businesses has decreased significantly
over the last two years as we approach completion of these activities.
Cash restructuring payments were $372 million, $437 million and $332 million
in 2000, 1999 and 1998, respectively. The 2000 spending includes $217 million
related to the 1998 program, reflecting the overall wind-down of the 1998
program. The remaining $155 million reflects new 2000 initiatives.
Financing Operations
Customer financing-related debt increased by $7 million in 2000, decreased by
$847 million in 1999, and increased by $1,764 million in 1998. The small
increase in 2000 reflects the reductions in our finance receivables portfolio
from the sale of our China operations and the Mexico finance receivables
writeoff, offset by increases in the portfolio due to new originations. New
originations in 2000 were funded with normal portfolio runoff, financing income
and higher deferred taxes. The 1999 change reflects the impact of
securitizations, which were treated as asset sales, as well as a re-allocation
of $505 million of debt to non-financing operations. This re-allocation, based
on our 8:1 debt-to-equity guideline in the financing operations, was necessary
because of the impact on our Brazilian finance receivables of the significant
devaluation of the Brazilian Real in early 1999. The increase in 1998 largely
reflects improved sales growth over 1997 as well as currency translation
effects.
Liquidity and Funding Plans for 2001
Historically, the Company's primary sources of funding have been cash flows from
operations, borrowings under our commercial paper and term funding programs, and
securitizations of finance and trade receivables. The Company's overall funding
requirements have been to finance customers' purchases of Xerox equipment, to
fund working capital requirements and to finance acquisitions.
During 2000, the agencies that assign ratings to the Company's debt downgraded
the Company's senior debt and short-term debt several times. As of March 7,
2001, debt ratings by Moody's are Ba1 and Not Prime, respectively, and the
ratings outlook is negative; debt ratings by Fitch are BB and B, respectively,
and the ratings outlook is stable; and debt ratings by Standard and Poors are
BBB- and A-3, respectively, and the ratings outlook is negative. Since October
2000, the capital markets and uncommitted bank lines of credit have been, and
are expected to continue to be, largely unavailable to us. We expect this to
result in higher borrowing costs going forward.
Consequently, in the fourth quarter 2000, we drew down the entire $7.0 billion
available to us under the Revolver, primarily to maintain financial flexibility
and pay down debt obligations as they came due. At December 31, 2000, $5.6
billion of the proceeds under the Revolver was used, with the balance of $1.4
billion invested in short-term securities and included in Cash and cash
equivalents in our consolidated balance sheets. We are presently in compliance
with the covenants, terms and conditions in the Revolver, which matures on
October 22, 2002. The only financial covenant in the Revolver requires the
Company to maintain a minimum of $3.2 billion of Consolidated Tangible Net
Worth, as defined (CTNW). At December 31, 2000, our CTNW was $676 million in
excess of the minimum requirement. Further operating losses, restructuring costs
and adverse currency translation adjustments would erode this cushion, while
gains on asset sales, operating profits and favorable currency translation would
improve the cushion.
The above referenced downgrades and the resulting withdrawal by certain banks
of uncommitted lines of credit eliminated a primary source of liquidity for many
of our Latin American affiliates. As a result, Xerox Corporation has increased
its level of intercompany lending to those affiliates to fund their operational
requirements.
As of December 31, 2000, the Company had approximately $2.7 billion and
$9.0 billion of commercial paper, medium term notes and bank obligations
maturing in 2001 and 2002, respectively, as summarized below:
(in billions) 2001 2002
- -------------------------------------------------------------------------------
First Quarter $ 0.6 $ 0.3
Second Quarter 0.9 0.9
Third Quarter 0.2 0.0
Fourth Quarter 1.0 7.8*
- --------------------------------------------------------------------------------
Full Year $ 2.7 $ 9.0
- --------------------------------------------------------------------------------
* Includes $7.0 billion maturity under the Revolver.
In April 2001, $660 million of letters of credit expire which support $660
million of Ridge Reinsurance ceded reinsurance obligations. The Company intends
to replace the letters of credit with new letters of credit which will be
collateralized by the approximately $400 million Ridge Reinsurance investment
portfolio, which is included in Intangible and Other Assets in our
consolidated balance sheets, plus approximately $260 million in cash. The
Company does not have any other material short-term obligations in 2001
unless the Company's debt ratings are further downgraded as discussed below.
The Company is implementing a global turnaround plan which includes
initiatives to reduce costs, improve operations, and sell certain assets that
should positively affect the Company's capital resources and liquidity position
when completed. In connection with these initiatives, the Company announced and
completed the sale of its China operations to Fuji Xerox in the fourth quarter
of 2000, which generated $550 million of cash and transferred debt of $118
million to Fuji Xerox. In January 2001 the Company received $435 million in
financing from GE Capital secured by the Xerox portfolio of lease receivables in
the U.K. In March 2001 the Company completed the sale of one half of its
interest in Fuji Xerox Co., Ltd. to Fuji Photo Film Co., Ltd. for approximately
$1.3 billion. In April 2001 the Company announced the sale of its lease
portfolios in four European countries to Resonia Leasing AB for approximately
$370 million as part of an agreement under which Resonia will provide on-going,
exclusive equipment financing to Xerox customers in those countries. The
Resonia transactions are part of our plan to transition customer equipment
financing to third-party vendors.
The Company has also initiated a worldwide cost reduction program
which should result in annualized expense savings of at least $1 billion by the
end of 2001. In addition, the Company has initiated discussions to implement
third-party vendor financing programs, which would significantly reduce the
Company's debt levels going forward. The Company is also in discussions to
consider selling portions of the existing finance receivables portfolio, and is
continuing to actively pursue alternative forms of financing including
securitizations and secured borrowings.
The availability of worldwide cash, cash equivalents and liquidity resources for
Xerox and its material subsidiaries and affiliates is managed by the companies
through cash management systems and internal policies and procedures of the
companies. The management of such worldwide cash, cash equivalents and
liquidity resources is also subject to statutes, regulations and practices of
local jurisdictions in which the companies operate and legal agreements to which
the companies are parties. In that regard, on April 18, 2001, Xerox Finance
(Nederland) B.V., a wholly-owned European subsidiary of Xerox Corporation,
announced by press release that it is convening a meeting of holders of its
GBP 125 million 8 3/4% Guaranteed Bonds issued in 1993 in order to consider a
proposal to repay the bonds early at par plus accrued interest. The Bond, which
is guaranteed by Xerox Limited, is due to mature in 2003. Xerox also confirmed
that repaying the bonds early will reduce outstanding indebtedness and interest
costs as it continues to make progress on its turnaround strategy announced in
October 2000. Completion of the transaction and elimination of certain
restrictive covenants in the Bond and related documents will also provide
additional flexibility to Xerox and its subsidiaries and affiliates in
connection with their cash management systems and practices.
The Company believes its liquidity is presently sufficient to meet current
and anticipated needs going forward, subject to timely implementation and
execution of the various global initiatives discussed above. Should the Company
not be able to successfully complete these initiatives on a timely or
satisfactory basis, the Company will need to obtain additional sources of funds
through other operating improvements, financing from third parties, or a
combination thereof. The adequacy of the Company's continuing liquidity depends
on its ability to successfully generate positive cash flow from an appropriate
combination of these sources.
On December 1, 2000, Moody's reduced its rating of the Company's debt below
investment grade, effectively eliminating the Company's ability to enter into
new foreign-currency and interest rate derivative agreements and requiring the
Company to immediately repurchase certain of its then-outstanding derivative
agreements in the aggregate amount of $108 million, including $16 million of
accrued interest. In addition, the Company negotiated with certain
counterparties to maintain certain other outstanding derivative agreements, for
which the Company posted collateral totaling approximately $5 million. To
minimize its resulting exposures, the Company also voluntarily terminated other
derivative agreements, which required gross payments to counterparties of $42
million and resulted in gross receipts from counterparties of $50 million. At
December 31, 2000, the remaining derivative portfolio has a current net positive
value to the Company of $70 million. Should the Company be downgraded by
Standard and Poors to below investment grade, the Company may be required to
repurchase certain of the out-of-the-money derivative agreements currently in
place, in the approximate aggregate amount as of December 31, 2000 of $100
million, including accrued interest of $5 million. However, it is also possible
that some counterparties may require, or agree to, the repurchase of certain of
the in-the-money derivatives currently in place, which could reduce or eliminate
this cash requirement.
On April 3, 2001, Standard & Poor's disclosed by press release that it was
affirming Xerox's "BBB-" long-term and "A-3" short-term ratings, its lowest
investment grades, and that the Company's April 2, 2001 announcement that it
would delay filing its annual report pending a more thorough audit should not
have an "immediate impact" on its ratings, absent any "material adverse change"
to Xerox's previously reported full-year results. The ratings agency also said
that any additional unexpected material disclosures or lack of a prompt
resolution of the audit review will "result in a rating review and/or
downgrade". There is no assurance that the Company's credit ratings will be
maintained, or that the various counterparties to derivative and securitization
agreements would not require the obligations to be repurchased in cases where
the agreements permit such termination.
As discussed above, the company's 2000 financial statements have not yet been
audited and the company has delayed the filing of its Annual Report on Form 10-K
with the SEC. As a result, the company is at present unable to deliver its 2000
audited financial statements to lenders as required under certain debt
instruments, including indentures. Should the company continue to be unable to
meet these requirements in a timely manner, the company could be declared to be
in default and the debt thereunder could be accelerated and become immediately
due and payable. In addition, the occurrence of such an acceleration could
entitle the holders of other debt of the company to demand immediate repayment
by the company as well. The earliest date that an acceleration from a failure
to deliver audited financial statements could occur is May 31, 2001 for
approximately $220 million of debt. The company is presently seeking a waiver
with respect to such default in the event the audit of its 2000 financial
statements has not been completed by May 31st. In the event a waiver is not
obtained, the company would be required to repay the $220 million at such time.
The earliest that any additional such defaults and possible accelerations can
occur would be beginning in July. There can be no assurance that such waiver
or any waiver in respect of any such subsequent defaults will be obtained or
that the occurrence of any such acceleration will not have a material adverse
effect on the company or its liquidity.
In the fourth quarter 2000, we recorded mark-to-market gains of $69 million
on foreign currency-denominated assets and liabilities which were not hedged
following the repurchase of the derivative contracts described above. Due to the
inherent volatility in the foreign currency and interest rate markets, the
Company is unable to predict the amount of any such mark-to-market gains or
losses in future periods.
In the third quarter 2000, Xerox Credit Corporation (XCC) securitized
certain finance receivables in the United States, generating gross proceeds of
$411 million. This revolving facility was accounted for as a secured borrowing.
In the fourth quarter 2000, Xerox Canada Limited securitized certain
accounts receivable in Canada, generating gross proceeds of $38 million. In the
third quarter 2000, Xerox Corporation securitized certain accounts receivable in
the United States, generating gross proceeds of $315 million. Both of these
revolving facilities were accounted for as sales of receivables, and the related
amounts were removed from the respective balance sheets.
As a result of the debt downgrade in December 2000, Xerox Corporation
renegotiated the $315 million accounts receivable securitization facility, which
might otherwise have been required to be runoff, reducing the facility size by
$25 million to $290 million. The facility size will remain at $290 million
so long as the Company's debt is not downgraded to or below BB by Standard and
Poors and Ba2 by Moody's. In such event the Company would seek to renegotiate
the terms of the facility. In connection with the foregoing, the Company also
renegotiated the XCC 2000 finance receivables securitization transaction with
one of the same counterparties, resulting in a one-time payment of approximately
$40 million, and bringing the outstanding balance on that amortizing facility to
$325 million at December 31, 2000.
In 1999, XCC and Xerox Canada Limited securitized certain finance
receivables in the United States and Canada, generating gross proceeds of $1,150
million and $345 million, respectively. These amortizing facilities were
accounted for as sales of receivables, and the related amounts were removed from
the respective balance sheets.
In December 1999, primarily to provide additional liquidity in advance of
Y2K, Xerox Corporation and certain of its subsidiaries securitized accounts
receivable, generating aggregate gross proceeds of $288 million. These short-
term transactions were accounted for as sales of receivables, and the related
amounts were removed from the respective balance sheets.
In 1998, Xerox Canada Limited and Xerox France securitized accounts
receivable, generating aggregate gross proceeds of $20 million and $36 million,
respectively. These short-term transactions were accounted for as sales of
receivables, and the related amounts were removed from the respective balance
sheets.
During 2000, 1999, and 1998, we sold 7.5 million, 0.8 million and 1.0
million equity put options, respectively, for proceeds of $24 million, $0.4
million, and $5.8 million, respectively. Equity put options give the
counterparty the right to sell our common shares back to us at a specified
strike price. In the fourth quarter 2000, we were required to pay $92 million to
settle the put options that we issued in 2000. In 1999, we paid $5 million to
settle the put options that we issued in 1998. As of December 31, 2000, the put
options we issued in 1999 remained outstanding, at a strike price of
approximately $41 per share. In January 2001, we paid $28 million to settle
these put options, which we funded by issuing 5.9 million unregistered common
shares.
The March 2001 sale of half of our ownership interest in Fuji Xerox to
Fujifilm for approximately $1.3 billion in cash improved our CTNW by
approximately $300 million. In March 2001, we also negotiated the conversion of
$122 million of outstanding debt into 15.5 million shares of common stock of the
Company, which increased our CTNW by approximately $111 million.
Risk Management
Xerox is typical of multinational corporations because it is exposed to market
risk from changes in foreign currency exchange rates and interest rates that
could affect our results of operations and financial condition.
We have historically entered into certain derivative contracts to manage
interest rate and foreign currency exposures. These instruments are held solely
for hedging purposes. As described above, our ability to currently enter into
new derivative contracts is severely constrained. Therefore, while the following
paragraphs describe our overall risk management strategy, our ability to employ
that strategy effectively has been severely limited. Any future downgrades of
our debt could further limit our ability to execute this risk management
strategy effectively.
The derivative instruments we utilize include interest rate swap
agreements, forward exchange contracts and foreign currency swap agreements. We
do not enter into derivative instrument transactions for trading purposes, and
we employ long-standing policies prescribing that derivative instruments are
only to be used to achieve a set of very limited objectives.
Currency derivatives are primarily arranged in conjunction with underlying
transactions that give rise to foreign currency-denominated payables and
receivables. For example, we would purchase an option to buy foreign currency to
settle the importation of goods from foreign suppliers denominated in that same
currency, or a forward exchange contract to fix the dollar value of a foreign
currency-denominated loan.
As of December 31, 2000, 1999 and 1998, our primary foreign currency market
exposures include the Japanese yen, Euro, Brazilian real, British pound sterling
and Canadian dollar. In order to manage the risk of foreign currency exchange
rate fluctuations, we hedge a significant portion of all cross-border cash
transactions denominated in a currency other than the functional currency
applicable to each of our legal entities. From time to time (when cost-
effective) foreign currency debt and currency derivatives are used to hedge
international equity investments. Consistent with the nature of economic hedges
of such foreign currency exchange contracts, associated unrealized gains or
losses would be offset by corresponding changes in the value of the underlying
asset or liability being hedged.
Assuming a 10 percent appreciation or depreciation in foreign currency
exchange rates from the quoted foreign currency exchange rates at December 31,
2000, the potential change in the fair value of foreign currency-denominated
assets and liabilities in each entity would aggregate approximately $43 million,
and a 10 percent appreciation or depreciation of the U.S. Dollar against all
currencies from the quoted foreign currency exchange rates at December 31, 2000,
would have a $664 million impact on our Cumulative Translation Adjustment
portion of equity. The amount permanently invested in foreign subsidiaries and
affiliates - primarily Xerox Limited, Fuji Xerox and Xerox do Brasil - and
translated into dollars using the year-end exchange rate, was $6.6 billion at
December 31, 2000, net of foreign currency-denominated liabilities designated as
a hedge of our net investment.
With regard to interest rate hedging, virtually all customer-financing
assets earn fixed rates of interest. Therefore, within industrialized economies,
we have historically "locked in" an interest rate spread by arranging fixed-rate
liabilities with similar maturities as the underlying assets, and we have funded
the assets with liabilities in the same currency. We refer to the effect of
these conservative practices as "match funding" customer financing assets. This
practice effectively eliminates the risk of a major decline in interest margins
during a period of rising interest rates. Conversely, this practice effectively
eliminates the opportunity to materially increase margins when interest rates
are declining.
Pay fixed-rate and receive variable-rate swaps are often used in place of
more expensive fixed-rate debt. Additionally, pay variable-rate and receive
fixed-rate swaps are used from time to time to transform longer-term fixed-rate
debt into variable-rate obligations. The transactions performed within each of
these categories enable more cost-effective management of interest rate
exposures. The potential risk attendant to this strategy is the non-performance
of the swap counterparty. We address this risk by arranging swaps with a diverse
group of strong-credit counterparties, regularly monitoring their credit ratings
and determining the replacement cost, if any, of existing transactions.
On a consolidated basis, including the impact of our hedging activities,
weighted-average interest rates for 2000, 1999 and 1998 approximated 6.2
percent, 5.6 percent and 6.1 percent, respectively.
Many of the financial instruments we use are sensitive to changes in
interest rates. Hypothetically, interest rate changes result in gains or losses
related to the market value of our term debt and interest rate swaps due to
differences between current market interest rates and the stated interest rates
within the instrument. Applying an assumed 10 percent reduction or increase in
the yield curves at December 31, 2000, the fair value of our interest rate swaps
would increase or decrease by approximately $16 million. Because the fair value
of our debt instruments has been severely impacted by our current debt ratings,
normal changes in interest rates will not materially affect the fair value of
our debt instruments.
Our currency and interest rate hedging are typically unaffected by changes
in market conditions as forward contracts, options and swaps are normally held
to maturity consistent with our objective to lock in currency rates and interest
rate spreads on the underlying transactions.
As described above, the downgrades of our debt during 2000 significantly
reduced our access to capital markets. Furthermore, the specific downgrade of
our debt on December 1, 2000 triggered the repurchase of a number of derivative
contracts which were in place at that time, and further downgrades could require
the Company to repurchase additional outstanding contracts. Therefore, the
Company's ability to continue to effectively manage the risks associated with
interest rate and foreign currency fluctuations, including our ability to
continue effectively employing our match funding strategy, is severely
constrained, and we anticipate increased volatility in our results of operations
due to market changes in interest rates and foreign currency rates.
Note For Supplemental Information:
Dollars are in Millions unless otherwise indicated.
Supplemental Information Regarding Receivables, Net
Finance Receivables. Finance receivables result from installment sales and
sales-type leases arising from the marketing of our business equipment products.
These receivables generally mature over two to five years and are typically
collateralized by a security interest in the underlying assets.
The components of finance receivables, net at December 31, 2000, 1999 and 1998
follow:
2000 1999 1998
- -------------------------------------------------------------------
Gross receivables $ 14,623 $ 14,666 $ 16,139
Unearned income (1,708) (1,677) (2,084)
Unguaranteed residual
values 711 752 699
Allowance for doubtful
accounts (450) (423) (441)
- -------------------------------------------------------------------
Finance receivables, net 13,176 13,318 14,313
Less current portion 5,141 5,115 5,220
- -------------------------------------------------------------------
Amounts due after one
year, net $ 8,035 $ 8,203 $ 9,093
- -------------------------------------------------------------------
Contractual maturities of our gross finance receivables subsequent to December
31, 2000 follow:
2001 2002 2003 2004 2005 Thereafter
- -----------------------------------------------------------
$ 5,680 $ 3,998 $ 2,719 $ 1,587 $ 543 $ 96
- -----------------------------------------------------------
Experience has shown that a portion of these finance receivables will be
prepaid prior to maturity. Accordingly, the preceding schedule of contractual
maturities should not be considered a forecast of future cash collections.
Unguaranteed residual values are assigned primarily to our high volume
copying, printing and production publishing products. The assigned values are
generally established in order to result in a normal profit margin in the
subsequent transaction.
In September 2000, we transferred $457 of finance receivables to a special
purpose entity for cash proceeds of $411 and a retained interest of $46. The
transfer agreement includes a repurchase option; accordingly the proceeds were
accounted for as a secured borrowing. At December 31, 2000 the balance of
receivables transferred was $411 and is included in Finance receivables, net in
the consolidated balance sheets. The remaining secured borrowing balance of $325
is included in Debt.
In 1999, we sold $1,495 of finance receivables and recorded a net increase in
finance income of approximately $17 which includes the unfavorable flow-through
impacts. The retained interests remaining from these sales were not material at
December 31, 2000.
Accounts Receivable. In 2000, we entered into agreements to sell, on an ongoing
basis, a defined pool of accounts receivable to wholly-owned special purpose
entities. At December 31, 2000, the total pool of accounts receivable
transferred was approximately $900. The special purpose entities, in turn, sell
participating interests in such accounts receivable to investors up to a maximum
amount of $330. Under the terms of the agreement, new receivables are added to
the pool as collections reduce previously sold accounts receivable. Investors
have a priority collection interest in the entire pool of receivables, and as a
result, we have retained credit risk to the extent the pool exceeds the amount
sold to investors. We continue to service the receivables on behalf of the
special purpose entities and receive a servicing fee adequate to compensate for
our responsibilities.
At December 31, 2000, $328 in net proceeds were received from sales of
participating interests to investors and were recorded as a reduction in
Accounts receivable, net in the consolidated balance sheets. The earnings impact
related to the receivables sold under these agreements was not material.
Our retained interests, which are included in Accounts receivable, net, are
recorded at fair value using estimates of dilution based on historical
experience. These estimates are adjusted regularly based on actual experience
with the pool, including defaults and credit deterioration.
If historical dilution percentages were to increase one percentage point, the
value of the Company's retained interest would be reduced by approximately $9.
Allowances for doubtful accounts on our accounts receivable balances at
December 31, 2000, 1999 and 1998 amounted to $282, $137 and $102, respectively.
Supplemental Information Regarding Debt
Short-Term Debt. Short-term borrowings data at December 31, 2000 and 1999
follow:
Weighted
Average Interest
Rates at
12/31/00 2000 1999
- ------------------------------------------------------------------------------
Notes payable 10.20% $ 169 $ -
Commercial paper 7.01 141 -
- ------------------------------------------------------------------------------
Total short-term debt 310 -
Current maturities of
long-term debt 2,383 3,957
- ------------------------------------------------------------------------------
Total $2,693 $3,957
==============================================================================
Debt classification. Prior to the year 2000 we had employed a match funding
policy for customer financing assets and related liabilities. Under this policy,
the interest and currency characteristics of the indebtedness were, in most
cases, matched to the interest and currency characteristics of the finance
receivables. At December 31, 1999, our debt was classified based on the expected
date of repayment of such indebtedness in accordance with our match funding
policy. Further, at December 31, 1999, certain other short-term obligations were
classified as long-term based on management's intent to refinance certain of
these obligations on a long-term basis and the ability to do so with credit
available under the Revolving Credit Agreement (Revolver).
The full utilization of our Revolver and our recent credit downgrades
significantly changed the nature of our indebtedness and impacted our ability to
continue with our historical match funding policy. We no longer match fund our
indebtedness with cash collections expected to be generated from finance
receivables. We expect to pay down our outstanding obligations as they mature.
Accordingly, at December 31, 2000, our debt has been classified in the
consolidated balance sheets, based on the contractual maturity dates of the
underlying debt instruments.
The Company believes its liquidity is presently sufficient to meet current and
anticipated needs going forward, subject to the timely implementation and
execution of various business initiatives.
Long-Term Debt. A summary of long-term debt by final maturity date at December
31, 2000 and 1999 follows:
Weighted
Average Interest
Rates at
12/31/00 2000 1999
- -----------------------------------------------------------------
U.S. Operations
Xerox Corporation
(parent company)
Guaranteed ESOP
notes due 2000-2003 7.53% $ 221 $ 299
Notes due 2000 - - 2,041
Notes due 2001 6.50 737 721
Notes due 2002 7.59 330 230
Notes due 2003 5.61 1,313 1,398
Notes due 2004 5.01 483 502
Notes due 2006 7.25 25 -
Notes due 2007 7.38 25 -
Notes due 2011 7.01 50 -
Notes due 2016 7.20 250 250
Convertible notes due 2018 3.63 617 601
Notes due 2038 5.96 25 25
Revolving credit agreement,
maturing in 2002 6.93 4,400 -
Capital leases and other debt
due 2000-2018 8.17 91 120
- -----------------------------------------------------------------
Subtotal 8,567 6,187
- -----------------------------------------------------------------
Xerox Credit Corporation
Notes due 2000 - - 2,026
Notes due 2001 6.66 326 401
Notes due 2002 2.80/1/ 666 668
Notes due 2003 6.61 460 200
Notes due 2005 1.50/1/ 904 -
Notes due 2007 2.00/1/ 270 -
Notes due 2008 6.30 25 -
Notes due 2012 7.09 125 -
Notes due 2013 6.50 60 -
Notes due 2014 6.06 50 -
Notes due 2018 7.00 25 -
Secured borrowings
due 2001-2003 6.70 325 -
Revolving credit agreement,
maturing in 2002 6.94 1,020 -
Floating rate notes due 2048 6.44 60 60
- -----------------------------------------------------------------
Subtotal 4,316 3,355
- -----------------------------------------------------------------
Total U.S. operations $12,883 $9,542
=================================================================
/1/ Weighted average interest rates include Japanese yen bonds of
$1,174 and $488 issued by Xerox Credit Corporation in 2000 and 1999,
respectively, with interest rates ranging from 1.50-2.00% and 0.80%,
respectively.
Weighted
Average Interest
Rates at
12/31/00 2000 1999
- ------------------------------------------------------------------------
International Operations
Xerox Capital (Europe) plc
Various obligations,
payable in:
Euros
due 2000-2008 5.50% $ 698 $ 755
Japanese yen
due 2001-2005 0.53 950 -
U.S. dollars
due 2000-2008 6.10 1,025 1,991
Revolving credit agreement,
maturing in 2002
(U.S. Dollars) 6.96 1,080 -
- ------------------------------------------------------------------------
Subtotal 3,753 2,746
- ------------------------------------------------------------------------
Other International Operations
Various obligations,
payable in:
Canadian dollars
due 2000-2007 11.74 55 88
Pounds sterling
due 2000-2003 9.00 187 202
Italian lire
due 2000-2001 4.72 117 133
Euros
due 2000-2008 7.90 159 194
U.S. dollars
due 2000-2008 7.67 128 249
Revolving credit agreement,
maturing in 2002
(U.S. dollars) 6.83 500 -
Capital leases and other debt
due 2000-2004 6.23 5 20
- ------------------------------------------------------------------------
Subtotal 1,151 886
- ------------------------------------------------------------------------
Total international
operations 4,904 3,632
- ------------------------------------------------------------------------
Other borrowings
deemed long-term - 1,827
- ------------------------------------------------------------------------
Subtotal 17,787 15,001
Less current maturities 2,383 3,957
- ------------------------------------------------------------------------
Total long-term debt $15,404 $11,044
========================================================================
Consolidated Long-Term Debt Maturities.
Payments due on long-term debt for the next five years and thereafter follow:
2001 2002 2003 2004 2005 Thereafter
- --------------------------------------------------
$2,383 $8,994 $2,630 $1,718 $1,010 $1,052
- --------------------------------------------------
Certain of our debt agreements allow us to redeem outstanding debt prior to
scheduled maturity. Outstanding debt issues with call features are classified in
the preceding five-year maturity table in accordance with management's current
expectations. The actual decision as to early
redemption will be made at the time the early redemption option becomes
exercisable and will be based on liquidity, prevailing economic and business
conditions, and the relative costs of new borrowing.
Convertible Debt. In 1998, we issued convertible subordinated debentures for
net proceeds of $575. The amount due upon maturity in April 2018 is $1,012,
resulting in an effective interest rate of 3.625 percent per annum, including
1.003 percent payable in cash semiannually beginning in October 1998. These
debentures are convertible at any time at the option of the holder into 7.808
shares of our stock per $1,000 principal amount at maturity of debentures. This
debt contains a put option which requires us to purchase any debenture, at the
option of the holder, on April 21, 2003, for a price of $649 per $1,000
principal. We may elect to settle the obligation in cash, shares of common
stock, or any combination thereof.
Lines of Credit. We have a $7 billion revolving credit agreement with a group of
banks, which matures in October 2002. This revolver is also accessible by the
following wholly owned subsidiaries: Xerox Credit Corporation (up to a $7
billion limit) and Xerox Canada Capital Ltd. and Xerox Capital (Europe) plc (up
to a $4 billion limit) with our guarantee. Amounts borrowed under this facility
are at rates based, at the borrower's option, on spreads above certain reference
rates such as LIBOR. This agreement contains certain covenants the most
restrictive of which require that we maintain a minimum level of tangible net
worth and limit the amounts of outstanding secured borrowings, as defined in the
agreement. We are in compliance with these covenants at December 31, 2000. The
balance outstanding under this line of credit was $7 billion at December 31,
2000. In addition, our foreign subsidiaries had unused committed long-term lines
of credit used to back short-term indebtedness that aggregate $43 in various
currencies at prevailing interest rates.
Guarantees. At December 31, 2000, we have guaranteed the borrowings of our ESOP
and $4,710 of indebtedness of our foreign subsidiaries.
Interest. Interest paid by us on our short- and long-term debt, amounted to
$1,024, $787 and $859 for the years ended December 31, 2000, 1999 and 1998,
respectively.
A summary of the cash related changes in consolidated indebtedness for the
three years ended December 31, 2000 follows:
2000 1999 1998
- ---------------------------------------------------------
Cash proceeds from
(payments of)
short-term debt, net $(1,234) $(4,140) $ 553
Cash proceeds from
long-term debt 10,520 5,446 3,464
Principal payments on
long-term debt (5,713) (1,489) (1,580)
- ---------------------------------------------------------
Total net cash changes
in debt $ 3,573/1/ $(183)/2/ $ 2,437
- ---------------------------------------------------------
/1/ Excludes debt of $118, which was assumed by Fuji Xerox in connection with
the divestiture of our China operations, and accretion of $16 on convertible
debt.
/2/ Excludes debt of $51 assumed with the increased ownership in our India joint
venture and accretion of $26 on convertible debt.
