<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to___________
Commission File Number 1-4471
XEROX CORPORATION
(Exact Name of Registrant as
specified in its charter)
New York 16-0468020 _
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
P.O. Box 1600
Stamford, Connecticut 06904-1600
(Address of principal executive offices)
(Zip Code)
(203) 968-3000 _
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at October 31, 2000
Common Stock 667,442,866 shares
This document consists of 50 pages.
Forward-Looking Statements
From time to time the Registrant (or the "Company") and its representatives
may provide information, whether orally or in writing, 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 25% of the Registrant's revenues. This segment of the general
office 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.
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.
Financing Business - a portion of the Registrant's profits arise from the
financing of its customers' purchases of the Registrant's equipment. On
average, 75 to 80 percent of equipment sales are financed through the
Registrant. The Registrant's ability to provide such financing at competitive
rates and realize profitable spreads is highly dependent upon its own costs of
borrowing which, in turn, depend upon its credit ratings. There is no
assurance that the company's credit ratings can be maintained and/or access to
the credit markets can be assured. A downgrade or lowering in such ratings
could restrict access to the credit markets, would reduce the profitability of
such financing business, and/or reduce the volume of financing business done.
In connection with our recently announced turnaround plan, the Company is
exploring alternatives to providing financing to our customers using third
parties.
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. The Registrant's productivity will also be affected by the results
of the Company's recently announced turnaround plan. The Registrant is in the
process of finalizing plans designed to reduce costs by $1.0 billion annually.
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.
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.
Restructuring - the Registrant's ability to ultimately reduce pre-tax annual
expenditures by approximately $1.4 billion, before reinvestments, is dependent
upon its ability to successfully implement the 1998 and 2000 restructuring
programs including the elimination of 14,200 net jobs worldwide (9,000 under
1998 program, 5,200 under 2000 program), the closing and consolidation of
facilities and the successful implementation of process and systems changes.
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 which in turn are dependent upon
the ability to finance internally or through a third party the customer's
purchases of the Registrant's products. 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. Our inability to attain a consistent trend of revenue growth could
materially affect the trend of our actual results.
Liquidity - the Registrant's liquidity is currently provided through its own
cash generation from operations, various financing strategies, including
securitizations, and utilization of its $7 billion Revolving Credit Agreement
with a large group of banks which is available through October, 2002. The
Registrant has embarked upon a process of selling certain assets with the
objective of generating proceeds for the purpose of retiring outstanding debt.
Thus, the Registrant's liquidity is dependent upon its ability to successfully
generate positive cash flow from operations, continuation of securitizations
and other financing alternatives, and completion of asset sales
Xerox Corporation
Form 10-Q
September 30, 2000
Table of Contents
Page
Part I - Financial Information
Item 1. Financial Statements
Consolidated Statements of Income 5
Consolidated Balance Sheets 6
Consolidated Statements of Cash Flows 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Document Processing 25
Discontinued Operations 35
Capital Resources and Liquidity 36
Risk Management 41
Supplemental Revenue Discussion 43
Item 3. Quantitative and Qualitative Disclosure about
Market Risk 45
Part II - Other Information
Item 1. Legal Proceedings 46
Item 2. Changes in Securities 46
Item 6. Exhibits and Reports on Form 8-K 46
Signatures 48
Exhibit Index
Computation of Net Income per Common Share 49
Computation of Ratio of Earnings to Fixed Charges 50
$7 Billion Revolving Credit Agreement Dated
October 22, 1997 (filed in electronic form only)
Financial Data Schedule (filed in electronic form only)
For additional information about The Document Company Xerox,
please visit our Web site at www.xerox.com/investor
PART I - FINANCIAL INFORMATION
Item 1 Xerox Corporation
Consolidated Statements of Income (Unaudited)
Three months ended Nine months ended
September 30, September 30,
(In millions, except per-share data) 2000 1999 2000 1999
Revenues
Sales $ 2,375 $ 2,463 $ 7,192 $ 7,144
Service, outsourcing, financing and
rentals 2,087 2,164 6,389 6,645
Total Revenues 4,462 4,627 13,581 13,789
Costs and Expenses
Cost of sales 1,509 1,385 4,266 3,899
Cost of service, outsourcing, financing
and rentals 1,316 1,238 3,902 3,708
Inventory charges - - 119 -
Research and development expenses 272 230 776 737
Selling, administrative and general
expenses 1,379 1,208 3,947 3,631
Restructuring charge and asset
impairments - - 504 -
Mexico provision 55 - 170 -
Gain on affiliate's sale of stock - - (21) -
Purchased in-process research and
development - - 27 -
Other, net 127 61 276 182
Total Costs and Expenses 4,658 4,122 13,966 12,157
Income (Loss) before Income Taxes
(Benefits), Equity Income and
Minorities' Interests (196) 505 (385) 1,632
Income taxes (benefits) (29) 157 (93) 506
Equity in net income of
unconsolidated affiliates (10) (5) (60) (39)
Minorities' interests in earnings of
subsidiaries 10 14 33 35
Net Income (Loss) $ (167) $ 339 $ (265) $ 1,130
Basic Earnings (Loss) per Share $ (0.26) $ 0.50 $(0.44) $ 1.66
Diluted Earnings (Loss) per Share $ (0.26) $ 0.47 $(0.44) $ 1.55
See accompanying notes.
Xerox Corporation
Consolidated Balance Sheets
September 30, December 31,
(In millions, except share data in thousands) 2000 1999
Assets (Unaudited)
Cash $ 154 $ 126
Accounts receivable, net 2,422 2,622
Finance receivables, net 4,909 5,115
Inventories 3,108 2,961
Deferred taxes and other current assets 1,552 1,230
Total Current Assets 12,145 12,054
Finance receivables due after one year, net 8,155 8,203
Land, buildings and equipment, net 2,499 2,456
Investments in affiliates, at equity 1,582 1,615
Goodwill, net 1,628 1,724
Intangible and other assets 2,481 1,701
Investment in discontinued operations 793 1,130
Total Assets $ 29,283 $ 28,883
Liabilities and Equity
Short-term debt and current portion of
long-term debt $ 4,015 $ 3,957
Accounts payable 997 1,016
Accrued compensation and benefit costs 589 715
Unearned income 232 186
Other current liabilities 1,689 2,163
Total Current Liabilities 7,522 8,037
Long-term debt 13,132 10,994
Postretirement medical benefits 1,183 1,133
Deferred taxes and other liabilities 2,223 2,245
Discontinued operations liabilities -
policyholders' deposits and other 50 428
Deferred ESOP benefits (299) (299)
Minorities' interests in equity of subsidiaries 124 127
Company-obligated, mandatorily redeemable
preferred securities of subsidiary trust
holding solely subordinated debentures of
the Company 638 638
Preferred stock 659 669
Common shareholders' equity 4,051 4,911
Total Liabilities and Equity $ 29,283 $ 28,883
Shares of common stock issued and
outstanding 667,005 665,156
See accompanying notes.
Xerox Corporation
Consolidated Statements of Cash Flows (Unaudited)
Nine months ended September 30 (In millions) 2000 1999
Cash Flows from Operating Activities
Net Income (Loss) $ (265) $ 1,130
Adjustments required to reconcile income to cash
flows from operating activities:
Depreciation and amortization 824 659
Provisions for doubtful accounts 316 205
Restructuring and other charges 623 -
Mexico provision 170 -
Gain on affiliate's sale of stock (21) -
Gain on divestitures (63) -
Purchased in-process research and development 27 -
Provision for postretirement medical
benefits, net of payments 34 31
Cash payments for the 1998 restructuring (153) (339)
Cash payments for the 2000 restructuring (69) -
Minorities' interests in earnings of subsidiaries 33 35
Undistributed equity in income of
affiliated companies (20) (39)
Increase in inventories (217) (60)
Increase in on-lease equipment (483) (249)
Increase in finance receivables (736) (901)
Proceeds from securitization of finance
receivables - 1,150
Increase in accounts receivable (249) (497)
Proceeds from securitization of accounts receivable 315 -
Decrease in accounts payable and accrued
compensation and benefit costs (126) (411)
Net change in current and deferred income taxes (491) 197
Change in other current and noncurrent liabilities (242) (188)
Other, net (278) (432)
Total (1,071) 291
Cash Flows from Investing Activities
Cost of additions to land, buildings and equipment (324) (393)
Proceeds from sales of land, buildings and equipment 80 29
Proceeds from divestitures 90 -
Acquisitions, net of cash acquired (873) (107)
Other, net - (24)
Total (1,027) (495)
Cash Flows from Financing Activities
Net change in debt 2,208 565
Proceeds from secured borrowing 411 -
Dividends on common and preferred stock (441) (439)
Proceeds from sales of common stock 22 125
Proceeds from(settlements of)equity put options 24 (5)
Dividends to minority shareholders (5) (29)
Total 2,219 217
Effect of Exchange Rate Changes on Cash (1) (9)
Cash Provided by Continuing Operations 120 4
Cash Provided (Used) by Discontinued Operations (92) 23
Increase in Cash 28 27
Cash at Beginning of Period 126 79
Cash at End of Period $ 154 $ 106
See accompanying notes
1. The unaudited consolidated interim financial statements
presented herein have been prepared by Xerox Corporation ("the
Company") in accordance with the accounting policies described in
its 1999 Annual Report to Shareholders and should be read in
conjunction with the notes thereto.
In the opinion of management, all adjustments (consisting only of
normal recurring adjustments) which are necessary for a fair
statement of operating results for the interim periods presented
have been made.
Prior years' financial statements have been restated to reflect
certain reclassifications to conform with the 2000 presentation.
The impact of these changes is not material and did not affect
net income.
References herein to "we" or "our" refer to Xerox and
consolidated subsidiaries unless the context specifically
requires otherwise.
2. Accounts receivable Sale Agreement
In September 2000, the Company entered into an agreement to sell,
on an ongoing basis, a defined pool of accounts receivable to a
wholly-owned qualifying bankruptcy-remote special purpose entity.
The special purpose entity, in turn, sells participating
interests in such accounts receivable to financial institutions
up to a maximum amount of $400 million. Under the terms of the
agreement, new receivables are added to the pool as collections
reduce previously sold accounts receivable. The Company
continues to service these receivables on behalf of the special
purpose entity and receives a servicing fee. As of September 30,
2000, $315 million in proceeds were received from the
securitization of accounts receivable under this agreement. The
proceeds were used to reduce outstanding debt and are reflected
as an operating cash flow in the consolidated statement of cash
flows. The earnings impact related to the receivables sold and
securitized under this agreement was not material.
3. Finance receivable Secured Borrowing:
In September 2000, the Company transferred $457 million of
finance receivables to a wholly-owned qualifying bankruptcy-
remote special purpose entity for cash proceeds of $411 million.
The difference of $46 million between the amount transferred and
the proceeds represents the Company's retained interest in these
finance receivables. The Company and the financial institutions
which provided the funding for the special purpose entity's
payment for the transfer of the receivables, through the purchase
of participating interests, intend the transfer to be a "true
sale at law" and have received an opinion to that effect from the
Company's outside legal counsel. However, the agreement includes
a repurchase option and therefore the proceeds of $411 million
received from the financial institutions were accounted for as a
secured borrowing in accordance with the provisions of SFAS No.
125 "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities". The balance of the
receivables transferred was $457 million at September 30, 2000
and continues to be included in Finance receivables, net in the
Consolidated Balance Sheet.
4. Inventories consist of (in millions):
September 30, December 31,
2000 1999
Finished products $ 1,878 $ 1,800
Work in process 162 122
Raw materials and supplies 378 363
Sub-total 2,418 2,285
Equipment on operating leases, net 690 676
Total $ 3,108 $ 2,961
5. On March 31, 2000, we announced details of a worldwide
restructuring program designed to enhance shareholder value, spur
growth and strengthen the company's competitive position in the
digital marketplace primarily through cost and expense
reductions. In connection with this program, in the first quarter
of 2000 we recorded a pre-tax provision of $625 million ($444
million after taxes and including our $18 million share of a
restructuring charge recorded by Fuji Xerox, an unconsolidated
affiliate). The $625 million pre-tax charge includes severance
costs related to the elimination of 5,200 positions worldwide.
Approximately 65 percent of the positions eliminated are in the
U.S., 20 percent are in Europe, and the remainder are
predominantly in Latin America. The employment reductions are
wide-ranging, impacting all levels and business groups. None of
the reductions will reduce sales coverage or affect direct
research and development. The charge also includes $71 million
related to facility closings and other asset write-offs and $119
million for inventory charges, which were recorded as a component
of cost of revenues. For facility fixed assets classified as
assets to be disposed of, the impairment loss recognized is based
on the fair value less cost to sell, with fair value based on
estimates of existing market prices for similar assets. The
inventory charges relate primarily to the consolidation of
distribution centers and warehouses and the exit from certain
product lines. The $625 million pre-tax charge was reduced by $2
million in the second quarter due to a change in estimate.
The restructuring is expected to be completed in early 2001. Key
initiatives of the restructuring, which will result in charges
for severance and exit activities, include the following:
1) Sharpening the company's focus on cost, quality and delivery
in manufacturing by reducing the production infrastructure
and moving certain product lines to regions where they are in
the greatest customer demand.
2) Driving greater efficiency in logistics and supply chain
operations through the consolidation of distribution centers
and warehouses, reducing costs and improving inventory turns.
3) Enhancing customer service delivery by deploying technology
and executing process changes to reduce costs.
4) Implementing an average 10 percent reduction in the number of
middle and upper managers across the various Xerox businesses
in the United States, with similar reductions in other
geographic areas.
5) Eliminating redundancies in support functions by moving to a
shared service model for marketing, human resources and
finance.
6) Outsourcing work in areas not related to the company's core
business operations and where there is economic advantage.
7) Accelerating the integration of business functions in General
Markets Operations to achieve benchmark expenses and
processes for indirect sales channels.
8) Implementing a wide-ranging series of initiatives across
Developing Markets Operations (DMO) geographies to improve
productivity and cost levels.
9) Leveraging Web-based technology to simplify and streamline
processes across internal business operations, and extending
to vendor and customer relationships.
The following table summarizes the status of the restructuring
reserve (in millions):
Charges September 30,
Total Against 2000
Cash Charges: Reserve Reserve Balance
Severance and related costs $384 $ 59 $325
Lease cancellation and other costs 49/1/ 10 39
Sub-total 433 69 364
Non-cash Charges:
Asset impairment 71 71 -
Inventory charges 119 119 -
Sub-total 190 190 -
Currency Impact - 10 (10)
Total $623 $269 $354/2/
/1/ Includes $2 million reduction recorded in second quarter 2000.
/2/ Of this amount, $265 is included in Other current liabilities.
Included in the charge of $49 million is $32 million of various
contractual commitments, other than facility occupancy leases,
that will be terminated early as a result of the restructuring.
The commitments include cancellation of supply contracts and
outsourced vendor contracts. Also included are approximately $17
million of charges related to lease cancellation costs which are
mainly for the consolidation of distribution centers and
warehouses located primarily in the U.S.
Included in the charge of $71 million was: $44 million for
machinery and tooling for products that were discontinued or
alternatively sourced; $7 million for leasehold improvements at
facilities that will be closed; and $20 million of sundry surplus
assets, individually insignificant, from various parts of our
business. These assets were primarily located in the U.S. and
the related product lines generated an immaterial amount of
revenue.
Approximately $100 million of the $119 million of inventory
charges related to excess inventory in many product lines created
by the consolidation of distribution centers and warehouses. The
remainder was related to the exit from certain product lines,
including approximately $15 million of electrostatic machines in
our wide format printing business due to a transition to ink jet
products.
As of September 30, 2000, approximately 1,200 employees have left
the Company under the 2000 restructuring program. There have been
no material changes to the program since its announcement, and
the remaining reserve relates to cash expenditures to be incurred
primarily during the remainder of 2000 and early 2001.
6. In April 1998, in connection with a restructuring program the
Company recorded a pre-tax charge of $1,644 million. The charge
was composed of:
Cash Charges:
Severance and related costs $1,017
Lease cancellation and other costs 198
Sub-total 1,215
Non-cash Charges:
Asset impairment 316
Inventory charges 113
Sub-total 429
Total $1,644
Included in the cash charges were $91 million and $107 million of
lease cancellation costs and of various other contractual
decommitments, respectively. These premises were vacated at
various dates in 1998 and 1999, and by the end of 1999 the
majority of the premises were vacated. The remaining facilities
are expected to be vacated by early 2001. Delays in vacating
these facilities were primarily due to: delays in terminating
employees in European countries as a result of local labor laws,
strong unions and workers councils and socialist governments in
some countries; and delays in implementing key system enablers in
Europe. The other costs totaling $107 million are comprised of
various contractual decommitments, other than facility occupancy
leases, that are being terminated early as a result of the
restructuring. The decommitments, related to information
management contracts and outsourced vendor contracts, are in the
form of either penalties associated with the early termination of
the contract or contractual obligations for which we will not
generate future economic benefit.
The non-cash portion of this restructuring program included $316
million of asset impairments and $113 million of inventory
charges recorded as cost of revenues. The $316 million asset
charge included $156 million for facilities abandonment and $160
million for other asset write-offs. The facilities abandonment
charge affects assets located in numerous locations in the U.S.
and Europe and is comprised of the following: $54 million
primarily for machinery and tooling for light-lens products that
have been discontinued as a result of the restructuring; $40
million for a major training facility to be disposed as training
will transition to more localized processes and $62 million for
other facilities and leasehold improvements at locations to be
abandoned as part of the restructuring. Other assets written off
are primarily comprised of capitalized internal use software and
information management infrastructure totaling $124 million that
are being abandoned as part of our closed facilities or as a
result of the overhauling of internal processes. The remainder
of $36 million is comprised of sundry surplus assets,
individually insignificant, from various parts of our business.
In general, the aforementioned assets were either abandoned or
scrapped and therefore written down to zero and removed from
service at the time the restructuring charge was recorded. These
assets were not previously considered impaired, as they were
expected to generate cash flow sufficient to recover their
carrying value based on the Company's previous business
strategies. The majority of the assets were not utilized after
they were written off. For those assets that we continued to
use, we had the ability to remove these assets from operations at
the time of the restructuring.
The $113 million of inventory charges relate to certain light-
lens products that were scrapped as a result of our decision to
accelerate the transition to digital products and excess spare
parts that were scrapped as a result of our decision to
centralize certain parts depots.
The 1998 Restructuring included provisions for consolidation of
56 European customer support centers into one facility and
implementing a shared services organization for back-office
operations in Ireland.
As of September 30, 2000, the remaining reserve balance for the
1998 restructuring program is $185 million. Approximately $160
million of the remaining reserve is for severance and related
costs with approximately $30 million designated for salary
continuance payments due to employees who have already been
terminated. The 1998 restructuring program called for the
termination of 12,700 employees of which 11,400 have left the
Company as of September 30, 2000. Approximately $130 million of
the severance reserve relates to the 1,300 employees remaining to
be terminated, most of whom are employed in our European
operations. The remaining reserve of $25 million primarily
relates to the run off of lease cancellation payments. We expect
the remaining reserve to be fully encumbered by the end of 2000.
7. Common shareholders' equity consists of (in millions):
September 30, December 31,
2000 1999
Common stock $ 669 $ 667
Additional paid-in-capital 1,665 1,539
Retained earnings 3,792 4,501
Accumulated other comprehensive
income /1/ (2,075) (1,796)
Total $ 4,051 $ 4,911
/1/ Accumulated other comprehensive income at September 30, 2000 is composed
of cumulative translation $(2,055), minimum pension liability of $(33), and
unrealized gains on marketable securities of $13.
Comprehensive income (loss) for the three months and nine months
ended September 30, 2000 and 1999 is as follows (in millions):
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
Net income (loss) $ (167) $ 339 $ (265) $1,130
Translation adjustments (160) (75) (292) (1,051)
Unrealized gains on marketable
Securities - - 14 -
Comprehensive income (loss) $ (327) $ 264 $ (543) $ 79
8. A summary of interest expense follows:
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
Financing interest $ 153 $ 142 $ 450 $ 416
Non-financing interest 112 59 289 190
Total interest expense $ 265 $ 201 $ 739 $ 606
9. Segment Reporting
In the first quarter of 2000, we completed the realignment of our
operations to better align the company to serve its diverse
customers/distribution channels and to provide an industry-
oriented focus for global document services and solutions. As a
result of this realignment, our reportable segments have been
revised accordingly and are as follows: Industry Solutions,
General Markets and Developing Markets.
The Industry Solutions operating segment (ISO) covers the direct
sales and service organizations in North America and Europe. It
is organized around key industries and focused on providing our
largest customers with document solutions consisting of hardware,
software and services, including document outsourcing, systems
integration and document consulting.
The General Markets operating segment (GMO) includes sales agents
in North America, concessionaires in Europe and our Channels
Group which includes retailers and resellers. It is responsible
for increasing penetration of the general market space, including
small office solutions, products for networked work group
environments and personal/home office products. In addition, it
has responsibility for product development and acquisition for
its markets, providing customer- and channel-ready products and
solutions.
The Developing Markets operating segment (DMO) includes
operations in Latin America, China, Russia, India, the Middle
East and Africa. It takes advantage of growth opportunities in
emerging markets/countries around the world, building on the
leadership Xerox has already established in a number of those
markets.
Other businesses include several units, none of which met the
thresholds for separate segment reporting. The revenues included
in this group are primarily from Xerox Supplies Group (XSG) and
Xerox Engineering Systems (XES).
All corporate expenses, including interest, have been allocated
to the operating segments.
Operating segment profit or loss information for the three months
ended September 30, 2000 and 1999 is as follows (in millions):
Industry General Developing Other
Solutions Markets Markets Businesses Total
2000
Revenue from external
customers $ 2,213 $1,206 $ 678 $ 365 $ 4,462
Intercompany revenues 8 33 - (41) -
Total segment revenues $ 2,221 $1,239 $ 678 $ 324 $ 4,462
Segment profit/(loss)/1/ $ (80) $ (58) $ (72) $ 14 $ (196)
1999
Revenue from external
customers $ 2,361 $1,127 $ 671 $ 468 $ 4,627
Intercompany revenues 7 31 - (38) -
Total segment revenues $ 2,368 $1,158 $ 671 $ 430 $ 4,627
Segment profit $ 331 $ 48 $ 69 $ 57 $ 505
Operating segment profit or loss information for the nine months
ended September 30, 2000 and 1999 is as follows (in millions):
Industry General Developing Other
Solutions Markets Markets Businesses Total
2000
Revenue from external
customers $ 6,691 $3,766 $1,980 $1,144 $13,581
Intercompany revenues 31 167 - (198) -
Total segment revenues $ 6,722 $3,933 $1,980 $ 946 $13,581
Segment profit/(loss)/1/ $ 215 $ (22) $(106) $ 178 $ 265
1999
Revenue from external
customers $ 7,124 $3,385 $1,909 $1,371 $13,789
Intercompany revenues 26 73 - (99) -
Total segment revenues $ 7,150 $3,458 $1,909 $1,272 $13,789
Segment profit $ 1,106 $ 194 $ 192 $ 140 $ 1,632
/1/ The following is a reconciliation of segment profit to total Company Income
(Loss) before Income Taxes (Benefits), Equity Income and Minorities'
Interest:
Three months ended Nine months ended
September 30, September 30,
2000 2000
Total segment profit $(196) $ 265
2000 Restructuring:
Inventory charges - (119)
Restructuring charge and asset
impairments - - (504) (623)
CPID purchased in-process R&D - (27)
Income (Loss) before Income Taxes (Benefits),
Equity Income and Minorities' Interests $(196) $(385)
10. Acquisitions
On January 1, 2000, we and Fuji Xerox completed the acquisition
of the Color Printing and Imaging Division of Tektronix, Inc.
(CPID). The aggregate consideration paid of $925 million in
cash, which includes $73 million paid directly by Fuji Xerox, is
subject to certain post-closing adjustments. CPID manufactures
and sells color printers, ink and related products, and supplies.
The acquisition was accounted for in accordance with the purchase
method of accounting. The operating results of CPID have been
included in the consolidated statement of income since January 1,
2000.
The excess of cash paid over the fair value of net assets
acquired has been allocated to identifiable intangible assets and
goodwill. An independent appraiser, using a discounted cash flow
approach, valued the identifiable intangible assets. The value
of the identifiable intangible assets includes $27 million for
acquired in-process research and development which was written
off in the first quarter of 2000. This charge represents the
fair value of certain acquired research and development projects
that were determined not to have reached technological
feasibility as of the date of the acquisition. We determined the
amount of the purchase price to be allocated to in-process
research and development, based on the methodology that focused
on the after-tax cash flows attributable to the in-process
products combined with the consideration of the stage of
completion of the individual research and development project at
the date of acquisition. The remaining excess of the purchase
price was allocated to other identifiable intangible assets and
goodwill. Identifiable intangible assets included in the
valuation, exclusive of intangible assets acquired by Fuji Xerox,
were the installed customer base ($209 million), the distribution
network ($123 million), the existing technology ($103 million),
the workforce ($71 million), and trademarks ($23 million). These
identifiable assets are included in the Intangibles and other
assets in the Consolidated Balance Sheet. The remaining excess
has been assigned to goodwill. Other identifiable intangible
assets and goodwill are being amortized on a straight-line basis
over their estimated useful lives which range from 7 to 25 years.
The valuation of the identifiable intangible assets, referred to
above, is based on studies and valuations which have been
finalized. However the final goodwill amount may be affected by
any post-closing adjustments which could potentially reduce the
purchase price.
11. Divestitures
In April 2000, the Company sold a 25 percent ownership interest
in its wholly-owned subsidiary, ContentGuard, to Microsoft, Inc.
for $50 million and recognized a pre-tax gain of $23 million,
which is included in Other, net. An additional pre-tax gain of
$27 million was deferred and is included in Unearned income in
the Consolidated Balance Sheet. In connection with the sale,
ContentGuard also received $40 million from Microsoft for a non-
exclusive license of its patents and other intellectual property
and a $25 million advance against future royalty income from
Microsoft on sales of products incorporating ContentGuard's
technology. The license payment is being amortized over the life
of the license agreement of 10 years and the royalty advance will
be recognized in income as earned.
In June 2000, the Company completed the sale of its U.S. and
Canadian commodity paper business, including an exclusive license
for the Xerox brand, to Georgia Pacific and recorded a pre-tax
gain of approximately $40 million which is included in Other,
net. In addition to the proceeds from the sale of the business,
the Company will receive royalty payments on future sales of
Xerox branded commodity paper by Georgia Pacific and will earn
commissions on Xerox originated sales of commodity paper as an
agent for Georgia Pacific. The U.S. and Canadian commodity paper
business had annual sales of approximately $275 million of our
$1.0 billion total worldwide paper sales in 1999.
12. Mexico Provision
For the nine months ended September 30, 2000, the Company
recorded a pre-tax provision of $170 million ($120 million after
taxes) related to its previously announced issues in Mexico. A
portion of this provision includes an amount which would
ordinarily represent a charge for uncollectable accounts that
would be included in Selling, administrative, and general
expenses. This amount is presently not determinable.
The provision relates to establishing reserves for uncollectable
long-term receivables, recording liabilities for amounts due to
concessionaires and, to a lesser extent, for adjustments related
to contracts that did not fully meet the requirements to be
recorded as sales-type leases. No further provisions are
expected. The investigation of this matter by the Audit
Committee of our Board of Directors, with the assistance of
outside advisors, is presently being finalized.
In response to these issues, the Company has taken the following
actions - a number of senior local managers in Mexico were held
accountable and removed from the Company; a new general manager
was appointed in Mexico with a strong financial background; the
Audit Committee of the Board of Directors has launched an
independent investigation into the Mexican operation and an
extensive review of the Company's worldwide internal controls was
initiated to ensure that the issues identified in Mexico are not
present elsewhere.
In June 2000, the Company was advised that the Securities and
Exchange Commission (SEC) had entered an order of a formal, non-
public investigation into our accounting and financial reporting
practices in Mexico. We are cooperating fully with the SEC.
13. Litigation
On March 10, 1994, a lawsuit was filed in the United States
District Court for the District of Kansas by two independent
service organizations (ISOs) in Kansas City and St. Louis and
their parent company. Subsequently, a single corporate entity,
CSU, L.L.C. (CSU), was substituted for the three affiliated
companies. CSU claimed damages predominately resulting from the
Company's alleged refusal to sell parts for high-volume copiers
and printers to CSU prior to 1994. The Company's policies and
practices with respect to the sale of parts to ISOs were at issue
in an antitrust class action in Texas, which was settled by the
Company during 1994. Claims for individual lost profits of ISOs
who were not named parties, such as CSU, were not included in
that class action. The Company asserted counter-claims against
CSU alleging patent and copyright infringement relating to the
copying of diagnostic software and service manuals. On April 8,
1997, the District Court granted partial summary judgment in
favor of the Company on CSU's antitrust claims, ruling that the
Company's unilateral refusal to sell or license its patented
parts cannot give rise to antitrust liability. On January 8,
1999, the Court dismissed with prejudice all of CSU's antitrust
claims. The District Court also granted summary judgment in favor
of the Company on its patent infringement claim, leaving open
with respect to patent infringement only the issues of
willfulness and the amount of damages, and granted partial
summary judgment in favor of the Company with respect to some of
its claims of copyright infringement. A judgment in the amount of
$1 million was entered in favor of the Company and against CSU on
the copyright infringement counterclaim. On February 16, 2000,
the United States Court of Appeals for the Federal Circuit
affirmed the judgment of the District Court dismissing CSU's
antitrust claims and on July 11, 2000 CSU petitioned the Supreme
Court for a writ of certiorari to review the Appeals Court's
judgment.
On April 11, 1996, an action was commenced by Accuscan Corp.
(Accuscan), in the United States District Court for the Southern
District of New York, against the Company seeking unspecified
damages for infringement of a patent of Accuscan which expired in
1993. The suit, as amended, was directed to facsimile and certain
other products containing scanning functions and sought damages
for sales between 1990 and 1993. On April 1, 1998, the jury
entered a verdict in favor of Accuscan for $40 million. However,
on September 14, 1998, the Court granted the Company's motion for
a new trial on damages. The trial ended on October 25, 1999 with
a jury verdict of $10 million. The Company's motion to set aside
the verdict or, in the alternative, to grant a new trial was
denied by the Court. The Company is appealing to the Court of
Appeals for the Federal Circuit. Accuscan is appealing the new
trial grant which reduced the verdict from $40 million and
seeking a reversal of the jury's finding of no willful
infringement. We are in the midst of the briefing schedule at
the Court of Appeals.
A consolidated lawsuit was filed in the United States District
Court for the Western District of Texas. It was a consolidation
of two previously separate lawsuits, one of which had been filed
in the United States District Court for the District of New
Jersey and had been transferred to Texas, and the other which was
commenced in Texas. Plaintiffs in both cases claimed that the
withdrawal of Crum & Forster Holdings, Inc. (a former subsidiary
of ours) (C&F) from the Xerox Corporation Employee Stock
Ownership Plan (ESOP) constituted a wrongful termination under
the Employee Retirement Income Security Act (ERISA). Both cases
were also brought as purported class actions. The complaints in
the two cases asserted different legal theories for recovery. In
one case damages of $250 million were alleged and in the other
case damages were unspecified.
On October 4, 2000, the Court granted Xerox's motion for summary
judgment and dismissed the case in its entirety. The plaintiffs
may still attempt to appeal the court's ruling. Xerox will
vigorously defend any such appeal.
On June 24, 1999, Xerox Corporation was served with a summons and
complaint filed in the Superior Court of the State of California
for the County of Los Angeles. The complaint was filed on behalf
of 681 individual plaintiffs claiming damages as a result of
Xerox's alleged disposal and/or release of hazardous substances
into the soil, air and groundwater. On July 22, 1999 and on April
12, 2000,respectively, two additional complaints were filed in
the same Court, which have not yet been served on Xerox. These
separate actions are on behalf of an additional 80 plaintiffs and
140 plaintiffs, respectively, with the same claims for damages as
the June, 1999 action. Plaintiffs in all three cases further
allege that they have been exposed to such hazardous substances
by inhalation, ingestion and dermal contact, including but not
limited to hazardous substances contained within the municipal
drinking water supplied by the City of Pomona and the Southern
California Water Company. Plaintiffs' claims against Xerox
include personal injury, wrongful death (claimed in the first two
complaints), property damage, negligence, trespass, nuisance,
fraudulent concealment, absolute liability for ultra-hazardous
activities, civil conspiracy, battery and violation of the
California Unfair Trade Practices Act. Damages are unspecified.
We deny any liability for the plaintiffs' alleged damages and
intend to vigorously defend these actions. Xerox has not answered
or appeared in any of the cases because all three have either
been stayed by stipulation of the parties or order of the court.
Plaintiffs are currently seeking to have the three cases
coordinated with a number of other unrelated groundwater cases
pending in Southern California. Xerox is opposing coordination of
the cases.
On December 9, 1999, a complaint was filed in the United States
District Court for the District of Connecticut in an action
entitled Giarraputo, et al. vs. Xerox Corporation, Barry Romeril,
Paul Allaire and Richard Thoman which purports to be a class
action on behalf of the named plaintiff and all other purchasers
of Common Stock of the Registrant between January 25, 1999 and
October 7, 1999 (Class Period). On December 13, 1999, an amended
complaint was filed adding an additional named plaintiff,
extending the Class Period through December 10, 1999, and
expanding the class to include individuals who purchased call
options or sold put options. The amended complaint alleges that
pursuant to the Securities Exchange Act of 1934, as amended, each
of the defendants is liable as a participant in a fraudulent
scheme and course of business that operated as a fraud or deceit
on purchasers of the Company's Common Stock during the Class
Period by disseminating materially false and misleading
statements and/or concealing material facts. The amended
complaint further alleges that the alleged scheme: (i) deceived
the investing public regarding the economic capabilities, sales
proficiencies, growth, operations and the intrinsic value of the
Company's Common Stock; (ii) allowed several corporate insiders,
such as the named individual defendants, to sell shares of
privately held Common Stock of the Company while in possession of
materially adverse, non-public information; and (iii) caused the
individual plaintiffs and the other members of the purported
class to purchase Common Stock of the Company at inflated prices.
The amended complaint seeks unspecified compensatory damages in
favor of the plaintiffs and the other members of the purported
class against all defendants, jointly and severally, for all
damages sustained as a result of defendants' alleged wrongdoing,
including interest thereon, together with reasonable costs and
expenses incurred in the action, including counsel fees and
expert fees. Several additional class action complaints alleging
the same or substantially similar claims were filed in the same
Court.
On March 14, 2000, the Court issued an order consolidating all of
these related cases into a single action captioned In re Xerox
Corporation Securities Litigation, and appointing lead
plaintiffs, and lead and liaison counsel. On April 28, 2000
plaintiffs filed an amended consolidated class action complaint
on behalf of a redefined class consisting of themselves and all
other purchasers of Common Stock of Registrant during the period
between October 22, 1998 through October 7, 1999.
On June 12, 2000, the individual named defendants and Xerox
Corporation made a motion to dismiss the amended consolidated
class action complaint for failure to meet the pleading
requirements of the Private Securities Litigation Reform Act.
Plaintiffs filed an opposition to the motion on July 13, 2000.
The motion is pending.
The named individual defendants and we deny any wrongdoing and
intend to vigorously defend the action.
On July 5, 2000, a shareholder derivative action was commenced in
the Supreme Court of the State of New York, County of New York on
behalf of Registrant against all current members of the Board of
Directors (with the exception of Anne M. Mulcahy) (collectively,
the "Individual Defendants"), and Registrant, as a nominal
defendant. Plaintiff claims breach of fiduciary duties related
to certain of the accounts receivable related to Registrant's
operations in Mexico. The complaint alleges that the Individual
Defendants breached their fiduciary duties by, among other
things, permitting wrongful business practices to occur,
inadequately supervising and failing to instruct employees and
managers of Registrant and taking no steps to institute
appropriate legal action against those responsible for
unspecified wrongful conduct. Plaintiff claims that Registrant
has suffered unspecified damages but which are "expected to
exceed tens of millions of dollars", and seeks judgment, among
other things, requiring the Individual Defendants to pay to
Registrant the amounts by which Registrant has been damaged by
reason of their breach of their fiduciary duties and/or to the
extent they have been unjustly enriched and to institute and
enforce appropriate procedural safeguards to prevent the alleged
wrongdoing.
On October 5, 2000, the Individual Defendants and Xerox
Corporation made a motion to dismiss the complaint for failure to
make a pre-suit demand upon the Board and for failure to state a
claim for breach of fiduciary duty. The motion is pending.
The Individual Defendants deny the wrongdoing alleged in the
complaint and intend to vigorously defend the action.
On August 24, 2000, an action was commenced in the United States
District Court for the District of Connecticut against the
Company, KPMG, LLP ("KPMG"), and Paul A. Allaire, G. Richard
Thoman, Anne M. Mulcahy and Barry D. Romeril ("Individual
Defendants"). The action purports to be a class action on behalf
of the named plaintiff and all purchasers of Common Stock of the
Company during the period from January 25, 2000 and July 27, 2000
("Class"). Among other things, the complaint alleges that each
of the Company, KPMG and the Individual Defendants violated
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934,
as amended, and Securities and Exchange Commission Rule 10b-5
thereunder, by participating in a fraudulent scheme that operated
as a fraud and deceit on purchasers of the Company's Common Stock
by disseminating materially false and misleading statements
and/or concealing material adverse facts relating to the
Company's Mexican operations. The complaint alleges that this
scheme deceived the investing public regarding the true state of
the Company's financial condition and caused the named plaintiff
and other members of the alleged Class to purchase the Company's
Common Stock at artificially inflated prices. The complaint
seeks unspecified compensatory damages in favor of the named
plaintiff and the other members of the alleged Class against the
Company, KPMG and the Individual Defendants, jointly and
severally, including interest thereon, together with reasonable
costs and expenses, including counsel fees and expert fees.
Several additional class action complaints alleging the same or
substantially similar claims were filed in the same Court.
The Individual Defendants and we deny any wrongdoing alleged in
the complaint and intend to vigorously defend the action.
14. Subsequent Events
During the third quarter we recorded the receipt of a premium of
approximately $24 million on the sale of equity put options.
This premium was recorded as an addition to Common shareholders'
equity. In October 2000, the holder of these equity put options
exercised their option for early termination and settlement. The
cost of this settlement to the Company was approximately $92
million for 7.5 million shares with an average strike price of
$18.98 per share. This transaction will be recorded as a
reduction of Common shareholders' equity during the fourth
quarter of 2000. These transactions, therefore, have resulted in
a net cash usage of $68 million. On October 24, 2000, we
announced a turnaround program, in which we outlined a wide-
ranging plan to sell assets, cut costs and strengthen our
strategic core. Additionally, we are exploring alternatives to
provide financing for customers in a manner that does not involve
the Xerox balance sheet, and over time will provide financing to
our customers using third parties. We are actively engaged in
discussions to sell certain assets, including: our operations in
China, a portion of the 50 percent ownership in Fuji Xerox, Xerox
Engineering Systems, and our interests in spin-off companies such
as ContentGuard and Inxight. We are in discussions with a number
of parties to make a significant equity investment in our inkjet
business, we are exploring a joint venture with non-competitive
partners for our Palo Alto Research Center, and we are
considering outsourcing or selling certain manufacturing
operations. Furthermore, we are in discussion to form a
strategic alliance for our European paper business and
commercializing our non-core technology assets through
partnerships with venture capital investors. It is expected that
in most cases asset sales will result in a gain.
Regarding the cost reductions, we are in the process of
finalizing plans designed to reduce costs by $1.0 billion
annually, the majority of which will affect 2001. The actions
include:
- reallocating resources from headquarter operations to the
field, eliminating duplicative industry-and-product
organizations and, in certain developing market countries,
moving to a distributor-based product-sales approach,
- reducing more than $200 million in manufacturing and supply
chain costs,
- reducing service costs through greater emphasis on remote
diagnostics and third-party service providers, and by moving
activities into the operating companies to eliminate a
worldwide service staff organization,
- reducing infrastructure and overhead across corporate
headquarters, manufacturing and research and development,
- re-allocating research and development efforts to underpin
growth opportunities in solutions and color, working more
closely with Fuji Xerox to eliminate R&D redundancies and
scrutinizing all programs based on their affordability and
future profitability.
No provisions have been recorded relating to possible employee
separation as our plans have not been finalized.
Item 2 Xerox Corporation
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Document Processing
Summary
Total 2000 third quarter revenues declined 4 percent to $4.5
billion compared with $4.6 billion in the 1999 third quarter.
Excluding adverse currency translation, pre-currency revenues
declined 1 percent. Excluding the beneficial impact of the
January 1, 2000 acquisition of the Tektronix, Inc. Color Printing
and Imaging Division (CPID), pre-currency revenues declined 4
percent.
The 2000 third quarter loss reflected the revenue decline as well
as a significant operating margin decline. Equity income from
Fuji Xerox improved in the 2000 third quarter.
Including an additional $55 million pre-tax provision ($41
million after taxes) related to the company's previously
announced issues in Mexico, the net loss was $167 million in the
2000 third quarter. No further provisions for this issue are
expected. Excluding the Mexico provision, the third quarter 2000
net loss was $126 million compared with net income of $339
million in the 1999 third quarter.
Total revenues in the first nine months of 2000 were $13.6
billion which was a decline of 2 percent compared with $13.8
billion in the first nine months of 1999. Excluding adverse
currency translation, pre-currency revenues increased 1 percent.
Excluding the beneficial impact of the CPID acquisition, pre-
currency revenues declined 2 percent. Year to date 2000 revenues
included an increase of approximately $40 million associated with
excellent growth in licensing patents from our intellectual
property portfolio and selling standalone software.
Including the effect of special items, we had a net loss of $265
million in the first nine months of 2000. Excluding special
items, net income in the first nine months of 2000 declined 72
percent to $315 million from $1,130 million in the first nine
months of 1999. Special items included the following after-tax
charges - $443 million in connection with the 2000 restructuring
program (including our $18 million share of a separate Fuji Xerox
restructuring charge), $17 million for acquired in-process
research and development associated with the CPID acquisition and
$120 million for the Mexico provision. The decline in net income
reflects the significant gross margin deterioration and higher
SAG in the first nine months of 2000.
Diluted earnings/(loss) per share:
Including the 6 cent provision arising from the independent
investigation of our Mexico operations, our loss per share was
$0.26 in the 2000 third quarter. Excluding this provision, the
third quarter 2000 loss per share was $0.20 compared with $0.47
earnings per share in the 1999 third quarter. The catch-up impact
of an effective tax rate increase adversely affected our results
by an estimated 6 cents and unfavorable third quarter year-over-
year currency adversely affected our results by an estimated 5
cents.
The CPID acquisition was non-dilutive on third quarter 2000
earnings as the expected synergies we are capturing from the
integration are offsetting the higher goodwill and interest
expense.
Including special items, the diluted loss per share was $0.44 for
the first nine months of 2000. Excluding special items, diluted
earnings per share declined 72 percent to $0.43 in the first nine
months of 2000 from $1.55 in the first nine months of 1999.
Unfavorable year-over-year currency adversely impacted the first
nine months earnings by approximately 14 cents.
The following table summarizes net income (loss) and diluted
earnings (loss) per share (EPS) for the third quarter and first
nine months of 2000:
(in millions, except per-share data)
Three months ended Nine months ended
September, 30 September, 30
2000 1999 2000 1999
Income before special items $ (128) $ 339 $ 315 $1,130
Restructuring and IPRD charges 2 - (460) -
Mexico Provision (41) - (120) -
Net Income (Loss) $ (167) $ 339 $ (265) $1,130
EPS:
Income before special items $(0.20) $0.47 $ 0.43 $ 1.55
Restructuring and IPRD charges - - (0.69) -
Mexico Provision (0.06) - (0.18) -
Diluted EPS $(0.26) $0.47 $ (0.44) $ 1.55
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 11
percent stronger in the 2000 third quarter than in the 1999 third
quarter. As a result, currency translation had an unfavorable
impact of approximately three percentage points on revenue growth
for both the quarter and year-to-date.
Revenues
Revenue By Segment
Revenues and revenue growth rates by segment are as follows:
Memo:
3Q 2000 Pre-Currency
1999 Revenue Growth Revenue
Full Year Post Pre Growth
Revenues Revenues Currency Currency Q1 Q2
Total Revenues $19.2 $4.5 (4)% (1)% 6% (1)%
Industry Solutions Ops. 10.0 2.2 (6) (3) - (5)
General Markets Ops. 4.7 1.2 7 10 19 14
Developing Markets Ops. 2.7 0.7 1 2 15 (2)
Other Businesses 1.8 0.4 (22) (19) (4) (16)
Memo: Fuji Xerox 7.8 1.9 4 1 2 7
YTD 2000 .
Revenue Growth .
Post Pre
Revenues Currency Currency
Total Revenues $13.6 (2)% 1%
Industry Solutions Ops. 6.7 (6) (3)
General Markets Ops. 3.8 11 14
Developing Markets Ops. 2.0 4 4
Other Businesses 1.1 (17) (13)
Memo: Fuji Xerox 6.2 14 3
Dollars are in billions.
Industry Solutions Operations (ISO) covers the direct sales and
service organizations in North America and Europe. Revenues
declined 6 percent (3 percent pre-currency) in the 2000 third
quarter. Open sales territories and lower sales productivity as a
result of less experienced sales people following higher sales
turnover levels in the early part of this year were compounded by
persistent U.S. customer administration issues at a time when
competitive product capabilities have strengthened. Pricing
pressure increased in certain products including monochrome
digital multi-function products and DocuTech in the U.S. and
monochrome production products in Europe. Revenues in the 2000
third quarter declined in the U.S., France, Germany and Canada,
and reflected good growth in the U.K.
ISO revenues declined 6 percent (3 percent pre-currency) in the
first nine months of 2000 due to the continued sales force and
U.S. customer administration issues and intensified competitive
and pricing pressures.
General Markets Operations (GMO) includes sales agents in North
America, concessionaires in Europe and our Channels Group which
includes retailers and resellers. General Markets Operations
revenues grew 7 percent (10 percent pre-currency) in the 2000
third quarter from the 1999 third quarter including the CPID
acquisition. Excluding CPID, General Markets pre-currency
revenues declined 5 percent in the 2000 third quarter. European
concessionaires had strong growth while revenues from North
American sales agents declined modestly. Excellent Channels
office color network printer and inkjet revenue growth was
somewhat offset by small office/home office monochrome printer
and copier declines. Initial shipments of our new DocuPrint M
series family of inkjet printers, resulting from our alliance
with Sharp Corporation and Fuji Xerox, began in the third
quarter.
GMO revenues increased 11 percent (14 percent pre-currency) in
the first nine months of 2000 including the favorable impact from
the CPID acquisition. Excluding CPID, pre-currency revenues were
flat for the first nine months of 2000, driven by flat revenues
in North American sales agents.
Developing Markets Operations (DMO) includes operations in Latin
America, China, Russia, India, the Middle East and Africa. Third
quarter 2000 revenue growth was strong in Brazil reflecting the
improving economic environment and activity growth. China and
the Middle East and Africa had excellent revenue growth in the
third quarter and Russia had strong revenue growth. Revenue
declined in Argentina as well as a number of other Latin American
countries and in Mexico as this operation recovers from the
previously discussed operational issues.
DMO revenues increased 4 percent (4 percent pre-currency) in the
first nine months of 2000 reflecting excellent revenue growth in
China and the Middle East and Africa, strong growth in India, and
modest growth in Brazil, while revenue declined in Argentina and
Mexico.
The Company's Latin America operations in general, and Brazil in
particular, are subject to volatile economies and currency
fluctuations. Our Brazilian operations currently represent
approximately 5 percent of total revenues, and as such, will
continue to have an impact on the Company's results of
operations. Historically, the Brazilian operations have managed
to offset the impact of devaluation through pricing actions and
reductions in its cost base and accordingly have successfully
managed their operations so as to moderate the effects of these
economic events. To date, the recovery in Brazil has not fully
returned to pre-1999 levels.
Fuji Xerox Co., Ltd., an unconsolidated entity jointly owned by
Xerox Limited and Fuji Photo Film Company Limited, develops,
manufactures and distributes document processing products in
Japan, Australia, New Zealand, and other areas of the Pacific
Rim. Fuji Xerox revenues grew 4 percent (1 percent pre-currency)
in the 2000 third quarter reflecting flat revenues in Japan and
good revenue growth in Fuji Xerox' other Asia Pacific
territories.
Fuji Xerox revenues grew 14 percent (3 percent pre-currency) in
the first nine months of 2000 reflecting modest revenue growth in
Japan and good revenue growth in Fuji Xerox' other Asia Pacific
territories.
Key Ratios and Expenses
The trend in key ratios was as follows:
1999 2000 .
Q1 Q2 Q3 Q4 FY Q1 Q2 Q3 YTD
Gross Margin 45.9% 45.3% 43.3% 41.8% 44.0% 42.0%* 40.8% 36.7% 39.9%*
SAG % Revenue 27.2 25.8 26.1 27.8 26.8 27.8 28.5 30.9 29.1
* Excludes inventory charges associated with the 2000 restructuring program.
If included, the Gross Margin in Q1 and YTD would have been 39.3% and 39.0%,
respectively.
1999 third quarter gross margin, SAG and R&D benefited from
significant reversals of first half 1999 provisions for overall
incentive compensation expense. As a result, the 2000 year over
year unfavorable gross margin and spending comparisons are
accentuated.
The gross margin declined by 6.6 percentage points in the 2000
third quarter from the 1999 third quarter, or 6.5 percentage
points excluding CPID. Approximately two-thirds of the gross
margin decline was the result of weak activity, including
DocuTech and Production Printing equipment sales, and unfavorable
product mix. In addition, unfavorable transaction currency and
competitive pricing pressures were only partially offset by
manufacturing and other productivity improvements.
Gross margin declined by 5.0 percentage points in the first nine
months of 2000 from the first nine months of 1999 or 4.7
percentage points excluding CPID. The decline reflects weak
DocuTech and Production Printing equipment sales, competitive
price pressure and unfavorable currency. In addition, gross
margin was adversely impacted by unfavorable product mix and
lower service gross margins, as service revenue declines have not
yet been accompanied by corresponding cost reductions. Gross
margin in the first quarter of 2000 benefited 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) grew 14
percent in the 2000 third quarter. Excluding the favorable
effect of currency, SAG grew 18 percent, or 15 percent excluding
CPID. SAG includes $138 million and $316 million in bad debt
provisions in the 2000 third quarter and year-to-date which is
$54 million higher than the 1999 third quarter, and $108 million
higher than year-to-date 1999. The main drivers of the increase
in bad debts for both the quarter and year-to-date are primarily
in the U.S. as we continue to resolve aged billing and
receivables issues. SAG growth also includes increased sales
payline and incentive compensation partially offset by the impact
of increased open sales territories; significant transition costs
associated with the implementation of our European shared
services organization; the continuing persistent impact of the
U.S. customer administration issues and significant marketing,
advertising and promotional investments for our major inkjet
printer initiative. In the 2000 third quarter, SAG represented
30.9 percent of revenue compared with 26.1 percent of revenue in
the 1999 third quarter. Year-to-date, SAG represented 29.1
percent of revenue compared with 26.3 percent of revenue in 1999.
Research and development (R&D) expense grew 18 percent in the
2000 third quarter, or 13 percent excluding CPID, reflecting
increased program spending. We continue to invest in
technological development to maintain our position in the rapidly
changing document processing market with an added focus on
increasing the effectiveness and value of that investment. R&D
expense grew 5 percent for the first nine months of 2000, as
compared to 1999. Xerox R&D remains technologically competitive
and is strategically coordinated with Fuji Xerox.
Worldwide employment declined by 300 in the 2000 third quarter to
96,000 as a result of 900 employees leaving the company under the
1998 and 2000 worldwide restructuring programs partially offset
by the net hiring of 600 employees, primarily for the company's
growing document outsourcing business. Worldwide employment
increased by 1,400 in the first nine months of 2000 as a result
of our acquisition of CPID with 2,200 employees and a net hiring
of 1,800 employees, primarily in the second quarter and for the
Company's fast-growing document outsourcing business, partially
offset by 2,600 employees leaving the company under the 1998 and
2000 worldwide restructuring programs.
Gain on affiliate's sale of stock of $21 million, which was
recorded in the first quarter of 2000, reflects our proportionate
share of the increase in equity of Scansoft Inc. resulting from
Scansoft's issuance of stock in connection with an acquisition.
This gain is partially offset by a $5 million charge, in the
first quarter, 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. Scansoft, an equity affiliate, is a
developer of digital imaging software that enables users to
leverage the power of their scanners, digital cameras, and other
electronic devices.
The $66 million increase in Other, net, from the 1999 third
quarter largely reflects increased non-financing interest expense
and goodwill and other identifiable intangibles amortization
associated with the January, 2000 CPID acquisition as well as
increased non-financing interest expense associated with higher
interest rates and higher debt levels. Total non-financing
interest expense was $112 million in the 2000 third quarter which
is $53 million higher than the 1999 third quarter. In the 2000
third quarter we recorded $28 million of increased interest
income on tax audit settlements which on a year-over-year basis
is largely offset by the 1999 third quarter gain of $20 million
on the sale of our remaining interest in Documentum, Inc.
For the first nine months of 2000, Other, net increased $94
million as the asset gains, described below, and the increased
interest income on tax audit settlements were more than offset by
increased non-financing interest expense and goodwill and other
identifiable intangibles amortization associated with the CPID
acquisition as well as increased non-financing interest expense
associated with higher interest rates and higher debt levels.
Total year-to-date non-financing interest expense was $289
million which is $99 million higher than the 1999 year-to-date.
In April 2000, the Company sold a 25 percent ownership interest
in its wholly-owned subsidiary, ContentGuard, to Microsoft, Inc.
and recognized a pre-tax gain of $23 million which is included in
Other, net. In connection with the sale, ContentGuard also
received $40 million from Microsoft for a non-exclusive license
of its patents and other intellectual property. This payment is
being amortized over the life of the license agreement of 10
years. In addition, ContentGuard will receive future royalty
income from Microsoft on sales of Microsoft products
incorporating ContentGuard's technology.
In June 2000, the Company completed the sale of its U.S. and
Canadian commodity paper business, including an exclusive license
for the Xerox brand, to Georgia Pacific and recorded a pre-tax
gain of approximately $40 million which is included in Other,
net. In addition to the proceeds from the sale of the business,
the Company will receive royalty payments on future sales of
Xerox branded commodity paper by Georgia Pacific and will earn
commissions on Xerox originated sales of commodity paper as an
agent for Georgia Pacific. The U.S. and Canadian commodity paper
business had annual sales of approximately $275 million of our
$1.0 billion total worldwide paper sales in 1999. Although future
revenue is expected to be lower as a result of the sale,
operating income should remain essentially unchanged as a result
of payments received under the royalty/agent elements of the
agreement. We expect a cash flow benefit as the existing working
capital is reduced.
During the third quarter, the Company recorded an additional pre-
tax provision of $55 million ($41 million after taxes or $0.06
per share) related to collection issues on long-term receivables
resulting from imprudent business practices associated with the
previously announced issues in Mexico. In the second quarter,
the Company recorded a pre-tax provision of $115 million ($78
million after taxes or $0.11 per share). A portion of these
provisions includes an amount which would ordinarily represent a
charge for uncollectable accounts that would be included in
Selling, administrative, and general expenses. This amount is
presently not determinable.
Over a period of years, several senior managers in Mexico had
collaborated to circumvent Xerox accounting policies and
administrative procedures. The charges related to provisions for
uncollectable long-term receivables, the recording of liabilities
for amounts due to concessionaires and to a lesser extent for
contracts that did not fully meet the requirements to be recorded
as sales-type leases. No further provisions are expected. The
investigation of this matter by the Audit Committee of our Board
of Directors, with the assistance of outside advisors, is
presently being finalized.
In response to these issues, the Company has taken the following
actions - a number of senior local managers in Mexico were held
accountable and removed from the Company; a new general manager
was appointed in Mexico with a strong financial background; the
Audit Committee of the Board of Directors has launched an
independent investigation into the Mexican operation and an
extensive review of the Company's worldwide internal controls was
initiated to ensure that the issues identified in Mexico are not
present elsewhere.
The Company was advised in June, 2000 that the U.S. Securities
and Exchange Commission (SEC) had entered an order of a formal,
non-public investigation into our accounting and financial
reporting practices in Mexico. We are cooperating fully with the
SEC.
Income Taxes, Equity in Net Income of Unconsolidated Affiliates
and Minorities' Interests in Earnings of Subsidiaries
Income (Loss) before income taxes was a loss of $196 million in
the 2000 third quarter including the Mexico provision. Excluding
the Mexico provision, the loss before income taxes was $141
million in the 2000 third quarter compared with income of $505
million in the 1999 third quarter.
Including the effect of special items, the loss before income
taxes was $385 million in the first nine months of 2000.
Excluding special items, income before income taxes in the first
nine months of 2000 declined 73 percent to $435 million from
$1,632 million in the first nine months of 1999. Special items
include the following on a pre-tax basis - a charge of $623
million in connection with the 2000 restructuring program, a $27
million charge for acquired in-process research and development
associated with the CPID acquisition and a $170 million provision
for Mexico.
The effective tax rate, including the tax benefit on the Mexico
provision, was 14.8 percent in the 2000 third quarter and 24.2
percent for the first nine months of 2000. Excluding the tax
benefit of the Mexico provision, the 2000 third quarter rate was
10.6 percent and 20.0 percent for the first nine months of 2000.
The 1999 third quarter, 1999 full year and the underlying 2000
first half tax rate was 31.0 percent. We expect the underlying
2000 full year tax rate to be similar to the underlying year-to-
date rate of 38.0 percent. The adjustment in the underlying tax
rate from 31.0 percent to 38.0 percent that was applied to the
first half income reduced the 2000 third quarter tax benefit and
increased the net loss by $38 million or 6 cents per share. The
increase in the effective tax rate is due primarily to a lower
tax rate on losses in Europe compared with expected profits.
Equity in net income of unconsolidated affiliates is principally
our 50 percent share of Fuji Xerox income. Total equity in net
income increased by $5 million in the 2000 third quarter and $21
million for the first nine months of 2000 reflecting improved
Fuji Xerox business results and favorable currency translation.
Fuji Xerox revenues of $1.9 billion in the 2000 third quarter
increased 4 percent compared with the 1999 third quarter,
including the favorable impact of currency translation resulting
primarily from the strengthening yen compared with the U.S.
dollar. Pre-currency revenue growth was 1 percent. Net income
of $30 million in the 2000 third quarter increased 51 percent
from the 1999 third quarter driven by the higher revenues, higher
gross margin due primarily to manufacturing cost productivity, a
lower statutory tax rate and favorable currency.
Fuji Xerox revenues of $6.2 billion in the first nine months of
2000 increased 14 percent compared with the same period in 1999
including the favorable impact of currency translation. Pre-
currency revenue growth was 3 percent. Net income of $167
million in the first nine months of 2000 increased from the prior
year due to improved business results and favorable currency.
On March 31, 2000 we announced details of a worldwide
restructuring program designed to enhance shareholder value, spur
growth and strengthen the company's competitive position in the
digital marketplace primarily through cost and expense
reductions. In connection with this program, in the first quarter
of 2000 we recorded a pre-tax provision of $625 million ($444
million after taxes including our $18 million share of the Fuji
Xerox restructuring charge). The resulting pre-tax provision of
$625 million includes severance costs related to the elimination
of 5,200 positions, net worldwide through a combination of
voluntary programs and layoffs. The charge also includes $190
million related to facility closings and other asset write-offs
such as scrapping certain inventory. The $625 million pre-tax
charge was reduced by $2 million in the second quarter due to a
change in estimate.
The pre-tax savings from this restructuring plan, net of
implementation costs, are expected to be approximately $95
million in 2000 and an incremental $300 million in 2001. These
savings are not expected to be reinvested. Approximately 60
percent of the savings are expected in SAG with the balance in
other activities. With respect to the headcount reductions we
expect that approximately 3,400 positions will be eliminated by
the end of 2000 and the balance in early 2001.
As of September 30, 2000, approximately 1,200 employees had left
the company under the program, and termination benefits of $59
million have been charged to the reserve. Asset impairment,
inventory charges and other charges of $71 million, $119 million
and $10 million, respectively, have also been charged against the
restructuring reserve. The 2000 restructuring reserve balance at
September 30, 2000 totaled $354 million which relates to cash
expenditures to be incurred primarily during the remainder of
2000 and early 2001.
Additional details regarding the initiatives and status of the
2000 restructuring reserve are included in Note 5 of the "Notes
to Consolidated Financial Statements" of this Quarterly Report on
Form 10-Q.
In April 1998, we announced a worldwide restructuring program.
In connection with this program, we recorded a second quarter
1998 pre-tax provision of $1,644 million ($1,107 million after
taxes including our $18 million share of a restructuring charge
recorded by Fuji Xerox). The program includes employment
reductions, the closing and consolidation of facilities, and the
write-down of certain assets.
As of September 30, 2000, approximately 11,400 employees had left
the company under the 1998 restructuring program. The majority of
the reserve balance of $185 million at September 30, 2000 relates
to expenditures to be incurred primarily during 2000 for the
completion of certain European initiatives and continued payments
associated with the severance and lease cancellation initiatives
already implemented. We expect the remaining reserve to be fully
encumbered by the end of 2000.
The status of the 1998 restructuring reserve is included in Note
6 of the "Notes to Consolidated Financial Statements" of this
Quarterly Report on Form 10-Q.
On January 1, 2000 we completed the acquisition of the Tektronix,
Inc. Color Printing and Imaging Division (CPID) for $925 million
in cash including $73 million paid by Fuji Xerox for the Asia
Pacific operations of CPID. This transaction resulted in
goodwill and other identifiable intangible assets of
approximately $637 million, which will be amortized over their
useful lives, ranging from 7 to 25 years. In addition, we
recognized a $27 million pre-tax charge in the 2000 first quarter
for acquired in-process research and development associated with
this acquisition.
New Accounting Standards. In 1998, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No.133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 133 requires companies to
recognize all derivatives as assets or liabilities measured at
their fair value. Gains or losses resulting from changes in the
values of those derivatives would be accounted for depending on
the use of the derivative and whether it qualifies for hedge
accounting. We will adopt SFAS No. 133, as amended, beginning
January 1, 2001. We do not expect this Statement to have a
material impact on our consolidated financial statements.
Discontinued Operations - Insurance and Other
The net investment in our discontinued businesses which includes
Insurance and Other Discontinued Businesses totaled $743 million
at September 30, 2000 compared with $702 million at December 31,
1999. The increase in the first nine months of 2000 was
primarily caused by the scheduled funding of reinsurance coverage
for certain of the former Talegen Holdings, Inc. companies to
Ridge Reinsurance Limited partially offset by proceeds from real
estate sales.
In July 2000, our OakRe life insurance business entered into an
agreement with a subsidiary of the buyer of Xerox Life whereby
the subsidiary assumed the remaining reinsurance liabilities
associated with the Single Premium Deferred Annuity policies
issued by Xerox Life. The agreement results in the completion of
the run-off of OakRe. We expect that by the end of the 2000, upon
regulatory approval, OakRe will pay a dividend of approximately
$80 million, including $60 million of cash and cash equivalents,
to Xerox Financial Services, Inc., a wholly owned subsidiary of
the Company. The dividend is approximately equal to the remaining
carrying value of our investment in OakRe.
Capital Resources and Liquidity
Historically, the Company's overall funding requirements have
been to finance customers' purchases of Xerox equipment and to a
lesser extent in recent years to fund working capital
requirements. In addition, in 1998 we funded the $413 million
acquisition of XLConnect Solutions. In 1999 we funded the
acquisition of OmniFax and the increase in our ownership in our
joint venture in India for a combined total of $102 million and
in 2000 we funded the $852 million acquisition of CPID. The
primary sources of funding have been cash flows from operations
and borrowings under our commercial paper and term funding
programs plus some securitization of finance and trade
receivables. Since the beginning of October 2000, the Company
has experienced a significant reduction in its ability to access
capital markets and uncommitted bank lines of credit. Decisions
related to funding of our businesses will remain based on the
interest rate environment and capital market conditions as well
as our ability to access these markets. Currently, these markets
and uncommitted bank lines are largely unavailable to us.
As a result, as of October 31, 2000 we had drawn down $5.3
billion under our $7 billion Revolving Credit Agreement dated as
of October 27, 1997 with a group of banks (the "Agreement").
These funds were used primarily to pay down commercial paper,
medium term notes and similar obligations. We are in compliance
with the covenants, terms and conditions in the Agreement, which
matures on October 22, 2002, and we expect that the remaining
balance of the commitments under the Agreement will be fully
available to us to support the Company's business operations
going forward.
We anticipate that we will require approximately $1.1 billion
during the balance of the year to refinance commercial paper,
maturing medium term notes and maturing bank obligations. The
Company does not have any other material short-term obligations
during the balance of the year to be financed through the
Agreement unless the Company's debt ratings are further
downgraded as discussed below.
The Company is implementing several global initiatives to reduce
costs and improve operations and sell certain non-core assets
that should positively affect the Company's capital resources and
liquidity position when completed. These include the
implementation of a non-core asset divestiture program, which is
expected to generate between $2 billion and $4 billion when
completed. In addition, the Company has initiated discussions to
change its current method of financing customer purchases of
Xerox equipment and to evaluate the sale of all or a portion of
the existing finance receivables portfolio, the proceeds of which
would be used primarily to reduce debt.
The Company has also initiated a worldwide cost reduction program
which should result in annualized expense savings of $1 billion
when completed. These initiatives are expected to be completed
during 2001.
We believe that our liquidity is presently sufficient to meet our
current and our anticipated needs going forward, subject to
timely implementation and execution of the non-core asset sales
and the global operating initiatives discussed above. Should the
Company not be able to successfully complete these initiatives or
non-core asset sales on a timely or satisfactory basis, it will
be necessary for the Company to obtain additional sources of
funds through other improvements in our operations or through
bridge or other financing from third parties.
In September 2000, we completed the securitization of certain
finance and accounts receivables in the United States as part of
our overall funding strategy. Gross proceeds from the finance
receivables securitization totaled $411 million. Since this
transaction was accounted for as a secured borrowing, the balance
sheet continues to reflect the receivables and related debt
obligation. Proceeds from the accounts receivable securitization
program totaled $315 million and the related amounts were
deducted from the balance sheet as a result of the sale. The
earnings impact of these transactions was not material.
The credit rating agencies that assign ratings to the Company's
debt have recently taken various actions including downgrading
the Company's senior debt and short-term debt. As of November
13, 2000, Moody's debt ratings were Baa2 and P-2, respectively,
and the Company's long-term and short-term ratings were being
reviewed for possible downgrade; Fitch debt ratings were BBB- and
F3, respectively, and the ratings were on Ratings Watch Negative
and Standard and Poors debt ratings were BBB- and A-3,
respectively, and the ratings outlook was stable.
The recent lowering of the ratings of the Company's debt are
expected to result in higher borrowing costs and limited access
to the capital markets for the Company going forward. Should the
Company be further downgraded by either Moody's or Standard and
Poors to non-investment grade status, the counterparties to
certain of the Company's derivative agreements may require the
Company to repurchase the obligations under such agreements from
the counterparties in the approximate aggregate amount of $110
million. In addition, if both credit rating agencies downgrade
the Company to non-investment grade status, the Company may be
required to repurchase an additional approximate aggregate amount
of $130 million. Finally, if either credit rating agency
downgrades the Company to a non-investment grade status, the
Company may be precluded from making subsequent accounts
receivable sales under the Accounts Receivable Sale Agreement
(see Note 2 of the "Notes to Consolidated Financial Statements"
of this Quarterly Report on Form 10-Q). If this were to occur
the majority of the $315 million would require refinancing from
another source within two to three months. There is no assurance
that the Company's credit ratings will be maintained, the
Company's credit ratings will not be downgraded below investment
grade, the various counterparties to qualifying derivative
agreements would not require the obligations to be repurchased by
the Company and/or that the Company will have ready access to the
credit markets in the future.
Total debt, including ESOP and Discontinued Operations debt not
shown separately in our consolidated balance sheets, was $17,197
million at September 30, 2000, reflecting a decline of $360
million from June 30, 2000 (primarily related to completion of
our accounts receivable securitization program). Compared with
December 31, 1999, total debt increased by $2,196 million. The
changes in total indebtedness during the first nine months of
2000 and 1999 are summarized as follows (in millions):
2000 1999
Total debt* as of January 1 $15,001 $15,107
Non-Financing Businesses:
Document Processing
operations cash usage 1,391 687
Brazil dollar debt reallocation** 15 572
Discontinued businesses*** 92 (109)
Non-Financing Businesses 1,498 1,150
Financing Businesses** (282) (1,154)
Shareholder dividends 441 439
Acquisitions 873 161
Proceeds from divestitures (90) -
All other changes, primarily currency (244) (15)
Total debt* as of September 30 $17,197 $15,688
* Includes discontinued operations.
** Includes reallocation from and to our non-financing businesses of a portion
of Xerox do Brasil's U.S. dollar denominated debt used to fund customer
finance receivables denominated in Brazilian currency. The reallocations were
performed consistent with the 8:1 debt to equity guideline used in our
customer financing businesses.
*** The increase in cash usage primarily reflected a one-time tax payment in
2000 in settlement of prior year tax liability and the reduced net cash
proceeds from the sale of assets in 2000 versus 1999. We anticipate that
discontinued businesses will generate cash for the balance of the year that
will almost fully offset the first nine months usage.
In summary, the Company's liquidity is currently provided through
various financing strategies including securitizations and
utilization of its Revolving Credit Agreement. The Company is
also implementing global initiatives to reduce costs and improve
operations, negotiating the sale of certain non-core assets, and
discussing with third parties possible incremental bridge or
other financing facilities. In addition, the Company has
initiated discussions to change its current method of financing
customer purchases of Xerox equipment and to evaluate the sale of
all or a portion of the existing finance receivables portfolio.
The adequacy of the Company's continuing liquidity is dependent
upon its ability to successfully generate positive cash flow from
an appropriate combination of these sources.
Document Processing Non-Financing Operations
The following table summarizes document processing non-financing
operations cash generation and usage for the nine months ended
September 30, 2000 and 1999 (in millions):
2000 1999
Income (loss) $ (433) $ 886
Add back special items:
Restructuring charge, net 443 -
Tektronix IPRD charge, net 17 -
Mexico charge, net 120 -
Income before special items 147 886
Depreciation* and amortization 824 659
Cash from Operations 971 1,545
Additions to land, buildings
and equipment (324) (393)
Increase in inventories (217) (60)
Increase in on-lease equipment (483) (249)
Decrease/(Increase) in accounts
receivable 66 (497)
Net change in other assets and
liabilities (1,182) (694)
Sub-total (1,169) (348)
Cash payments for 1998 and 2000
restructurings (222) (339)
Net Cash Usage $(1,391) $ (687)
* Includes on-lease equipment depreciation of $452 and $332 million in the
nine months ended September 30, 2000 and 1999, respectively
Non-financing operations' net cash usage during the first nine
months of 2000 and 1999 totaled $1,391 million and $687 million,
respectively. On a year-over-year basis, lower non-financing
income was partially offset by higher non-cash on-lease equipment
depreciation charges and higher goodwill and intangible asset
amortization primarily associated with our January, 2000 CPID
acquisition. During the third quarter of 2000 net cash
generation totaled $131 million.
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 manufacturing.
The decline in the first nine months of 2000 versus 1999 is
primarily due to lower spending for the Ireland projects.
Inventory growth during the first nine months of 2000 was higher
than in the first nine months of 1999 due to lower than
anticipated equipment sales and some inventory build for new
products, primarily the DocuColor 2000 family and Inkjet. On-
lease equipment increased by $234 million more than in 1999,
before depreciation, reflecting growth in our document
outsourcing business and increased customer preference to finance
equipment on operating leases. Accounts receivable cash
generation improved by $563 million reflecting the $315 million
accounts receivable securitization and some improvement in days
sales outstanding. The increase in other asset and liability
usage is due primarily to lower deferred tax accruals due to
lower income as well as higher cash tax payments in 2000 versus
1999. These unfavorable items were partially offset by lower cash
payments made under employee compensation plans and payments
received in connection with the license and royalty elements of
the ContentGuard transaction.
Cash payments related to the 1998 restructuring amounted to $153
million and $339 million in first nine months of 2000 and 1999,
respectively. The decline reflects the maturity and overall
wind-down of the program. Cash payments related to the 2000
restructuring amounted to $69 million. The status of the
restructuring reserves is included in Notes 5 and 6 of the "Notes
to Consolidated Financial Statements" of this Quarterly Report on
Form 10-Q.
Financing Businesses
Customer financing-related debt declined by $282 million in the
first nine months of 2000 and by $1,154 million in the first nine
months of 1999. Year-to-date 2000 new business was funded with
financing business net income and higher deferred taxes. The 1999
change reflects the impact on our Brazilian finance receivables
of the significant first quarter 1999 devaluation of the
Brazilian real and the pay-down of debt with the $1,150 million
proceeds from the June and September 1999 finance receivable
securitizations.
For analytical purposes, total equity includes common equity,
ESOP preferred stock, mandatorily redeemable preferred securities
and minorities' interests.
The following table summarizes the components and changes in
total equity during the first nine months of 2000 and 1999 (in
millions):
2000 1999
Minorities' interests $ 127 $ 124
Mandatorily redeemable preferred
Securities 638 638
Preferred stock 669 687
Common equity 4,911 4,857
Total equity as of January 1 $6,345 $6,306
Net income (loss) (265) 1,130
Shareholder dividends (441) (439)
Exercise of stock options 26 120
Change in minorities' interests (3) (2)
Translation adjustments (292) (1,051)
All other, net 102 81
Total equity as of September 30 $5,472 $6,145
Minorities' interests $ 124 $ 122
Mandatorily redeemable preferred
Securities 638 638
Preferred stock 659 674
Common equity 4,051 4,711
Total equity as of September 30 $5,472 $6,145
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 entered into certain financial instruments to manage
interest rate and foreign currency exposures. These instruments
are held solely for hedging purposes and 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 employ long-standing
policies prescribing that derivative instruments are only to be
used to achieve a set of very limited objectives. Considering our
current situation, there is no assurance we will be able to
continue to execute interest rate and foreign currency swap
transactions with counterparties.
Currency derivatives are primarily arranged in conjunction with
underlying transactions that give rise to foreign currency-
denominated payables and receivables, for example, an option to
buy foreign currency to settle the importation of goods from
foreign suppliers, or a forward exchange contract to fix the
dollar value of a foreign currency-denominated loan.
With regard to interest rate hedging, virtually all customer-
financing assets earn fixed rates of interest. Therefore, within
industrialized economies, we "lock in" an interest rate spread by
arranging fixed-rate liabilities with similar maturities as the
underlying assets and fund 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.
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.
Supplemental Third Quarter Revenue Discussion:
Revenue By Major Product Category
1999 2000 .
FY
Total
Q1 Q2 Q3 Q4 FY $* Q1 Q2 Q3 YTD
Total Revenues (1)% 4% 2% (3)% -% $19.2 6% (1)% (1)% 1%
B&W Office/SOHO (2) 1 - (4) (1) 8.2 (1) (5) (7) (4)
B&W Production (2) 2 1 (8) (2) 5.9 (4) (11) (15) (10)
Color 8 10 11 1 7 1.9 64 60 74 66
*Revenues are pre-currency except total dollars. Dollars are in billions.
Revenues include major product categories only and exclude some small
operations.
Black & White Office and Small Office/Home Office (SOHO) revenues
include our expanding family of Document Centre digital multi-
function products, light-lens copiers under 90 pages per minute,
our DocuPrint N series of laser printers and digital copiers sold
through indirect sales channels, and facsimile products.
Revenues declined 7 percent in the 2000 third quarter from the
1999 third quarter including declines in office copying, indirect
channels laser printing and copying and facsimile. Office copying
revenue declined as equipment sales declined reflecting lower
light-lens copier installations and increasing competitive
pressures partially offset by higher Document Centre equipment
sales. All other revenues include revenues from service, document
outsourcing, rentals, supplies and finance income, and represent
the revenue stream that follows equipment placement. These office
copying third quarter 2000 revenues are essentially unchanged
from the 1999 third quarter as increases in Document Centre have
offset light lens declines. Black & White Office and SOHO
revenues represented 40 percent of third quarter 2000 revenues
compared with 43 percent in the 1999 third quarter.
Black & White Production revenues include DocuTech, Production
Printing, and light-lens copiers over 90 pages per minute.
Revenues declined 15 percent in the 2000 third quarter from the
1999 third quarter reflecting very weak equipment sales and a
modest decline in all other revenues. DocuTech and production
printing revenues declined in the 2000 third quarter, as
equipment sales were very weak due to open sales territories and
fewer experienced sales people; unfavorable product mix;
increased DocuTech competition resulting in increased pricing
pressure, more contested sales and elongated sales cycles; and
the beginning of the movement of some printing to electronic
substitutes. Production light-lens revenues declined
significantly in the 2000 third quarter from the 1999 third
quarter as the transition to digital products continued. Post
equipment install revenues were also adversely affected by
equipment sale revenue declines in earlier quarters. Black &
White Production revenues represented 26 percent of third quarter
2000 revenues compared with 31 percent in the 1999 third quarter.
Color Copying and Printing revenues grew 74 percent in the 2000
third quarter from the 1999 third quarter including the impact of
the CPID acquisition. Excluding CPID, color revenues grew 34
percent reflecting a continued significant acceleration from 1999
and first half 2000 trends. Growth reflects the success of our
DocuColor 2060 and DocuColor 2045 Digital Color Presses which
began shipments in June, 2000 as well as continued excellent
placements of the DocuColor 12 and Document Centre ColorSeries
50, the industry's first color-enabled digital multi-function
product, which were introduced in the 1999 second half. Inkjet
revenue had excellent growth reflecting initial shipments of our
new DocuPrint M series of inkjet printers partially offset by
lower pricing, as anticipated. Including the CPID acquisition,
color revenues represented 16 percent of third quarter 2000
revenues compared with 9 percent in the 1999 third quarter.
Revenue By Type
The pre-currency growth rates by type of revenue are as follows:
1999 2000 .
Q1 Q2 Q3 Q4 FY Q1 Q2 Q3 YTD
Equipment Sales (3)% 2% 5% (8)% (2)% 5% (5)% (9)% (4)%
All Other Revenues 1 4 - - 1 6 2 4 4
Total Revenues (1)% 4% 2% (3)% -% 6% (1)% (1) 1%
Equipment sales declined 9 percent in the 2000 third quarter
including the beneficial impact of the CPID acquisition.
Excluding CPID, equipment sales declined 13 percent due to weak
equipment sales primarily in North America resulting from open
sales territories and lower sales productivity as a result of
less experienced sales people following higher sales turnover
levels in the early part of this year, persistent customer
administration issues, intense competition and pricing pressures.
Channels equipment sales, excluding CPID, reflected weak small
office/home office monochrome laser printer and copier equipment
sales. Inkjet equipment sales had excellent growth reflecting
initial shipments of our new DocuPrint M series of inkjet
printers partially offset by anticipated lower pricing and
unfavorable mix.
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. These revenues are primarily a function of
our installed population of equipment, usage levels, pricing and
interest rates. All other revenues in the 2000 third quarter grew
4 percent compared with the 1999 third quarter. Excluding CPID,
all other revenues grew 1 percent. All other revenues benefited
from excellent growth in document outsourcing and strong supplies
growth from our growing installed population of inkjet and laser
printers and copiers sold through indirect channels. Revenues
were adversely impacted by lower service revenues reflecting the
recent trend of lower equipment sales and continue to be
adversely affected by the page volume impact of distributed
printing and pages diverted from copiers to printers. Finance
income was lower largely due to the unfavorable flow-through
impact of the 1999 finance receivables securitizations and the
year over year impact of the $11 million gain from the third
quarter 1999 securitization as well as lower equipment sales.
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 22 percent
in the 2000 third quarter.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
The information set forth under the caption "Risk Management" on
page 40 of this Quarterly Report on Form 10-Q is hereby
incorporated by reference in answer to this Item.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The information set forth under Note 13 contained in the "Notes to
Consolidated Financial Statements" of this Quarterly Report on
Form 10-Q is incorporated by reference in answer to this item.
Item 2. Changes in Securities
During the quarter ended September 30, 2000, Registrant issued the
following securities in transactions which were not registered
under the Securities Act of 1933, as amended (the Act):
(a) Securities Sold: on July 1, 2000, Registrant issued
4,884 shares of Common stock, par value $1 per share.
(b) No underwriters participated. The shares were issued to
each of the non-employee Directors of Registrant: B.R.
Inman, A.A.Johnson, V.E. Jordan, Jr., Y. Kobayashi,
H. Kopper, R.S. Larsen, G.J. Mitchell, N.J. Nicholas, Jr.,
J.E. Pepper, P. F. Russo, M.R. Seger and T.C.Theobald.
(c) The shares were issued at a deemed purchase price of
$20.75 per share (aggregate price $101,125), based upon the
market value on the date of issuance, in payment of the
quarterly Directors' fees pursuant to Registrant's
Restricted Stock Plan for Directors.
(d) Exemption from registration under the Act was claimed based
upon Section 4(2) as a sale by an issuer not involving a
public offering.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 3(a)(1) Restated Certificate of Incorporation of
Registrant filed by the Department of State of the State of
New York on October 29, 1996. Incorporated by reference to
Exhibit 3(a)(1) to Registrant's Quarterly Report on Form
10-Q for the Quarter Ended September 30, 1996.
Exhibit 3 (b) By-Laws of Registrant, as amended through
May 11, 2000. Incorporated by reference to Exhibit 3 (b)to
Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2000.
Exhibit 4(h) $7,000,000,000 Revolving Credit Agreement dated
October 22, 1997 among Registrant, Xerox Credit Corporation
and certain Overseas Borrowers, as Borrowers, and Various
Lenders and Morgan Guaranty Trust Company of New York, The
Chase Manhattan Bank, Citibank, N.A. and The First National
Bank of Chicago, as Agents"
Exhibit 4(i) Instruments with respect to long-term debt where
the total amount of securities authorized thereunder does not
exceed ten percent of the total assets of the Registrant and
its subsidiaries on a consolidated basis have not been filed.
The Registrant agrees to furnish to the Commission a copy of
each such instrument upon request.
Exhibit 11 Computation of Net Income (Loss) per Common Share.
Exhibit 12 Computation of Ratio of Earnings to Fixed Charges.
Exhibit 27 Financial Data Schedule (in electronic form only).
(b) Current reports on Form 8-K dated July 14, 2000 and August
30, 2000 reporting Item 5 "Other Events" were filed during
the quarter for which this Quarterly Report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
XEROX CORPORATION
(Registrant)
/s/ Gregory B. Tayler
_____________________________
Date: November 14, 2000 By Gregory B. Tayler
Vice President and Controller
(Principal Accounting Officer)
