The Xerox Corporation was incorporated in 1905 in the state of Connecticut. The corporation is in the business of document production and management. It is traded on the New York Stock Exchange (NYSE) under ticker symbol XRX. It offers a wide variety of services in the Global Market Arena. The company produces and manages documents in color, black and white, digital, and paper mediums. They can transmit documents across a network and have both very small and very large companies as their clientele. They offer supplies such as toner, ink and paper. (Yahoo Market Guide, Online, 2002). They are owners and developers of some of the most technologically advanced and fastest duplication equipment in the industry with high-speed copiers that can reproduce documents at 90 pages a minute (Yahoo Market Guide, Online, 2002). The office market includes sales of Xerox machines directly to customers who wish to perform their own duplicating. Xerox operates a Developing Markets Organization that is a separate segment of the parent corporation. This segment develops business in emerging markets such as Eurasia, Russia, Africa, and South America. This segment incurs quite large amount of risk due to changing political and market volatility in the area in which they operate (Yahoo Market Guide, Online, 2002). The corporation has discontinued its small and home office segment of operations due to declining revenues in this area.
Declining sales and rising costs of production have made the financial scene a difficult one for Xerox. In October of 2000, the company reported its first loss in 16 years (Moore, 2001). Annual costs exceeded revenue by approximately $1 billion dollars by July of 2001. All the while, huge debts were mounting up.
As if impending financial disaster were not enough, in June of 2002, Xerox announced that it had to re-state over $6 billion in revenue over the past five years. Originally, the SEC had accused them of mis-accounting for only $3 billion dollars (Countryman, 2002). The probe began in 2000 as a result of an investigation into the company's Mexican division (Taub, 2002, p. 1). Earlier that year, they had been issued a $10 million fine for overstating revenues to investors. In May of 1999, Xerox stocks hit their all time high. Now they were near their all time low due to decreased consumer confidence regarding the bad news (Countryman, 2002).
The restatements primarily involved shifting the $6.4 billion in equipment sales revenue into other line items. The restatement had the following effects (figures in Countryman, 2001).
Combined pre-tax profits
Pre-tax profit (1997) billion
Pre-tax profit (1998)
This restatement effectively reduced operating margins by 43% (Byrnes, 2002). Some of the factors that led to this financial situation include large billing mistakes, stiff competition which offers a similar product at a fraction of the cost (Byrnes, 2002). The SEC feels that the company tried to make up the losses in operating earnings with creative accounting methods (Byrnes, 2002).
The copier machine market is considered to be mature and near the end of its rapid growth cycle. This means that most people have copiers and the prospects for new clients is small, shifting the major portion of the market share into maintenance and replacement of existing machines. Yet, despite this, Xerox still billed itself to investors as a growth stock with expected returns in the teens, which is highly unlikely in a market that is leveling off and reaching maturity (Byrnes, 2002). Xerox has lost the trust of many of its biggest clients who typically sign multi-year contracts. This has allowed their competition to enter into the market and gain a considerable portion of their market share.
Key Financial Comparisons
2001 (Annual Report - ended 12/31/2001)
2002 (Statement Ended 9/30/2002)
2001 (Statement Ended 9/30/2001)
Net Income or Loss after taxes
199 million (Trailing three months)
105 million (Trailing three months)
32 million) (Trailing three months)
Stocks - amounts held
Dividends Paid - Preferred Stock
Dividends Paid - Common Stock
These numbers reflect restatement as of 3/31/2002.
Data source: http://yahoo.marketguide.com/MGI/mg.asp?target=%2Fstocks%2Fcompanyinformation%2Fincomestmt%2Fqincomestd&Ticker=XRX
In summary, while Xerox's assets declined 9% from September 2001 through September 2002, while the liabilities rose 16%. They paid lower dividends to preferred stock holders, as compared to September 2001, and did not pay dividends to common shareholders.
In order to fully understand the financial position of the company, it is important to compare it to its peers and sector. As far as growth and sales are concerned, Xerox performed considerably below its own industry peers. Earnings per share (EPS) growth was also significantly lower. Its current ratio (assets/liabilities) is above the industry, but below the sector (Document reproduction manufacturers). It Debt to Equity is high, in other words, it has much more debt than it is worth. Another sign of doom is its low operating margin, return on assets, receivables turnover and inventory turnover. These ratios paint the picture that, in comparison with its peers, the company has less money with which to operate, fewer sales to fund expenses, assets that do not pay for themselves and a large amount of debt as compared to the assets that they have to back them.
Growth Rates (%)
Sales (TTM) vs. TTM 1 Yr. Ago Sales - 5 Yr. Growth Rate
Gross Margin (TTM) 40.89-47.59-50.72-47.30
EPS (TTM) vs. TTM 1 Yr. Ago EPS - 5 Yr. Growth Rate
Current Ratio (MRQ)
Total Debt to Equity (MRQ)
Operating Margin (TTM)
Return On Assets (TTM)
Receivable Turnover (TTM)
Inventory Turnover (TTM)
Data Source: http://yahoo.marketguide.com/MGI/mg.asp?target=%2Fstocks%2Fcompanyinformation%2Fratio&Ticker=XRX
The above chart tells the story. Prior to April of 2001, the stock price hovered between $20-25.00 per share. It's two-year high was $30.00 per share. It experienced cyclical ups and downs due to the seasonality of their business. However they were for the most part, a stable stock. In April of 2001, when it was announced that the company would pay the $10 million dollar fine due to the accounting "mistakes" the stock price dropped $5 a share that same day and continued a downhill trend until a bottom price of just under $5 was reached in late December, of 2001. The stock has continued to hover between $5-10 per share since that time. The two-year low was $4.90 per share on October 1, 2002. This chart shows the reactions of the stock-owning public to the news about Xerox.
Strategies to regain their Status
Anne M, Mulcahy is the current President and CEO- in- waiting of the Xerox Corporation. In June of 2001, she closed the newly started line of desktop inkjet printers for the Small Business Segment of the Corporation. This move eliminated 1,500 positions in the company (Moore, 2001). Xerox needed cash immediately and this investment would not be profitable for two years. In an effort to save costs, Xerox has cut a total of 8,600 middle managers and factory workers. Mulcahy has made an effort to reduce manufacturing costs, which currently put them at a competitive disadvantage with their peers. Mulcahy realizes that the little things add up to big expenses. For instance, she stopped providing bottled water (Moore, 2001). Mulcahy has been cutting departments that were not profitable and promoting ones that are doing well. She is cutting expense at every opportunity. This has led to lowered revenues, but also lower costs as well (Reuters, 2002).
As of June, 2002 Xerox was faced with a publicity nightmare. They announced that they had to restate $6 billion over the past five years. This all came in the middle of the Worldcom scandal and the Enron scandal. Scandal was the buzzword of the day and now it looked as if Xerox would be guilty before they were tried. In an attempt to quell rumors, Xerox stressed that often a restatement meant shifting revenues from one year to another (Countryman, 2002). None the less, their stock prices dropped rapidly. This news came on the tail of the SEC issuing Xerox $10 million fine saying that the company had "misled and betrayed" investors by overstating revenue of over $3 million dollars (Countryman, 2002). In response to this, CEO Ann Mulcahy chants the mantra to the press, "new management team has put the past behind us" (in Byrnes, 2002).
Mulcahy has focused on making the most profitable segment more price competitive. Their new high end color printing and services are faster with a lower cost per page than their closest competitor, Canon (Byrnes, 2002). Mulcahy still feels that money must be spent on research and development in order to stay competitive now and in the future (Byrnes, 2002). Xerox hopes that the introduction of their Xerox 1010 will…