Xerox Corporation is a long-established company whose very name has been lent to the process of copying documents. The firm develops copying technology through an extensive research program and manufactures and markets a large range of document processing products. Many of its sales are made with lease financing arrangements through its Xerox Credit Corporation in the United States and through other subsidiaries worldwide. The firm's traditional black and white lens copiers (which provided 40 percent of revenues in 1999) were under challenge in the late 1990s from new digital technology, and Xerox developed digital copiers, printers, and production publishers in response.
Xerox initiated a major restructuring of its operations in 1998, and the implementation of the restructuring caused some difficulties in the field. In 1999, total revenues of $19.2 billion were down 1 percent from $19.4 billion in 1998. An announcement that revenues would not meet expectations in October 1999 resulted in a 24 percent share price drop. During 1999 Xerox's share price dropped from $59 to $24. However, income from continuing operations for the full 1999 year, ending December 31, was $1.43 billion, up from $585 million in 1998.
Xerox's income statements for 1997, 1998, and 1999 are reproduced in Exhibit 17.4, along with sections of its cash flow statements. Also given are extracts from the 1999 footnotes. Peruse the statements and footnotes. What questions arise about the quality of the earnings reported in 1998 and 1999?
The following footnote extracts refer to 1999. Dollar amounts are in millions.
2 Restructuring
In 1998, we announced a worldwide restructuring program intended to enhance our competitive position and lower our overall cost structure. In connection with this program, we recorded a pretax provision of $1,644. The program includes the elimination of approximately 9,000 jobs, net, worldwide, the closing and consolidation of facilities, and the write down of certain assets. The charges associated with this restructuring program include $113 of inventory charges recorded as cost of revenues and $316 of asset impairments. Included in the asset impairment charge is facility fixed asset write-downs of $156 and other asset write downs of $160. Key initiatives of the restructuring include:
1. Consolidating 56 European customer support centers into one facility and implementing a shared services organization for back-office operations.
2. Streamlining manufacturing, logistics, distribution, and service operations. This will include centralizing U.S. parts depots and outsourcing storage and distribution.
3. Overhauling our internal processes and associated resources, including closing one of four geographically organized U.S. customer administrative centers.
4. The reductions are occurring primarily in administrative functions, but also impact service, research, and manufacturing. The following table summarizes the status of the restructuring reserve (in millions):
5. Finance Receivables, Net Finance receivables result from installment sales and sales-type leases arising from the marketing of our business equipment products. These receivables generally mature over two to five years and are typically collateralized by a security interest in the underlying assets. The components of finance receivables, net at December 31, 1999, 1998, and1997 follow:
6. Inventories
The components of inventories at December 3J, 1999, 1998, and1997 follow:
7. Investments in Affiliates, at Equity Investments in corporate joint ventures and other companies in which we generally have a 20 to 50 percent ownership interest at December 31, 1999, 1998, and 1997 follow:
Xerox Limited owns 50 percent of the outstanding stock of Fuji Xerox, a corporate joint venture with Fuji Photo Film Co. Ltd. (Fuji Photo). Fuji Xerox is headquartered in Tokyo and operates in Japan and other areas of the Pacific Rim, Australia, and New Zealand, except for China. Condensed financial data of Fuji Xerox for its last three fiscal years follow:
8. Segment Reporting Our reportable segments are as follows: Core Business, Fuji Xerox, Paper and Media, and Other.