Information  X 
Enter a valid email address

Xerox Corp. (BB63)

  Print   

Thursday 27 January, 2000

Xerox Corp.

4th Quarter & Final Rslts,etc

Xerox Corp
25 January 2000

     Xerox Announces Fourth Quarter Earnings Per Share of 41 Cents;
                    Plans First Quarter Restructuring Charge
 
          'There are encouraging reasons for renewed confidence'

STAMFORD, Conn., Jan 25, 2000 -- Xerox Corporation (NYSE:XRX) today announced
fourth quarter earnings per share of 41 cents. The company also announced that
it will take a substantial restructuring charge, most likely in the first
quarter.
 
'While our fourth quarter was a major disappointment, we've made substantial
progress on our key issues and -- while we remain realistic about the challenges
ahead -- there are encouraging reasons for renewed confidence,' said Rick
Thoman, Xerox president and CEO.
 
'We have definitely turned the corner in resolving our customer administration
issues in the United States, as demonstrated by a leading indicator -- our
substantial improvement in U.S. receivables performance. However, there are some
lagging impacts that will continue to affect earnings,' said Thoman.
'Additionally, while our sales people will need time to cement new customer
relationships, future results will benefit from completion of the sales force
realignment on an industry basis. Finally, we believe the Y2K effect is largely
behind us, results from Fuji Xerox have improved and there are signs of some
strengthening in Brazil. We fully expect that these positive developments will
become significant, especially during the second half of 2000.'
 
Xerox reiterated its previously stated outlook that some issues could reduce
earnings in the first quarter proportionately to the fourth quarter decline and,
to a lesser extent, in the second quarter, followed by meaningful growth later
in the year.
 
Thoman also said the company would announce this year significant new
technologically innovative products and solutions designed to build marketplace
momentum and enhance the company's position in the digital office. These
capabilities will also drive revenue in three strategic fast-growth areas:
production-publishing solutions, the document outsourcing business, and small
and home office-focused inkjet printing and network laser printing -- enhanced
by the acquisition of the Tektronix color printing division, which was completed
January 1. 

As a result of an ongoing, comprehensive review by senior executives to identify
substantial additional operational productivity and cost-saving opportunities
that can be brought to the bottom line, the company will announce a series of
actions and take a substantial restructuring charge, most likely in the first
quarter. 'Virtually everything is on the table, with the exception of direct
sales, and research and development,' said Thoman. 'We're counting on our sales
force to come through -- as they have for us every other time this company has
faced challenges -- and research is the engine that maintains our leadership
edge in products and services.' 

Fourth Quarter Review 

Fourth quarter results were generally consistent with expectations disclosed
last month. Pre-currency revenues in the 1999 fourth quarter were flat year over
year, excluding Brazil. Including Brazil, where revenues declined substantially
due to the devaluation and economic weakness, fourth quarter revenues declined 3
percent from the 1998 fourth quarter. Including the unfavorable effects of
European currency, total 1999 fourth quarter revenues of $5.4 billion declined 6
percent compared with $5.8 billion in the 1998 fourth quarter. 

Income of $294 million in the 1999 fourth quarter declined 52 percent year over
year, reflecting primarily the revenue decline and gross margin deterioration,
which were partially offset by lower selling, administrative and general
expenses and reduced research and development spending. 

Fourth quarter 1999 revenue and income reflected reduced revenue and profits
from Brazil, lower production printing and publishing sales due to Y2K, the
impact from the U.S. customer administration reorganization and issues related
to the final phase of the salesforce realignment by industry, which was
completed at the beginning of this month. Performance was also affected by
increased competitive pressures on products and service, and unfavorable
currency translation. 

Despite revenue shortfalls in several key areas in the fourth quarter, Xerox
highlighted several positive results, including: record revenues and
installations of the Document Centre digital multifunction family, outstanding
sales of the newly introduced DocuColor 12 and Document Centre ColorSeries 50
products, and significant growth in laser and inkjet printers sold through
indirect channels. Revenue from digital products in the 1999 fourth quarter
reached 57 percent of total revenue, compared with 52 percent in the 1998 fourth
quarter. The Fuji Xerox earnings contribution reflected improved business
performance as well as favorable currency translation. 

Full Year Results 

For the full year 1999, diluted earnings per share of $1.96 and income of $1.4
billion from continuing operations decreased 16 percent from $2.33 and $1.7
billion, respectively, before the 1998 restructuring program charge. Including
the 1998 restructuring program charge and a 1998 discontinued operations loss,
Xerox reported 1998 diluted earnings per share of 52 cents and net income of
$395 million. 

    Revenues in 1999 were $19.2 billion, compared with $19.4 billion in 1998.


For additional information about The Document Company Xerox, please visit our
Worldwide Web site at http://www..xerox.com/Investor.



Financial Summary


                                 Three Months            Twelve Months
                              Ended December 31,       Ended December 31,       
   
(in millions, except                           %                        %
per-share data)           1999      1998    Growth    1999     1998    Growth
                                   
Revenues                 $ 5,438  $ 5,794     (6%)  $ 19,228  $ 19,447     (1%)
                                   
Net Income                                   
Continuing Ops., before 
restructuring charge       $ 294   $  615    (52%)  $  1,424  $  1,692    (16%)
Restructuring Charge           -        -       -          -    (1,107)     *
Continuing Ops., after 
restructuring charge         294      615    (52%)     1,424       585      *
Discontinued Operations        -        -       -          -      (190)     *
                                   
Net Income                 $ 294    $ 615    (52%)   $ 1,424   $   395      *
                                   
                                   
Basic Earnings per Share                                   

Continuing Ops., before 
restructuring charge     $   .43    $ .92    (53%)   $  2.09   $  2.50    (16%)
Restructuring Charge           -         -     -           -     (1.68)     *
Continuing Ops., after 
restructuring charge         .43      .92    (53%)      2.09       .82      *
Discontinued Operations        -         -     -           -      (.29)     *
                                   
Basic Earnings per Share $   .43    $ .92    (53%)   $  2.09     $ .53      *
                                   
                                   
Diluted Earnings per Share                                   

Continuing Ops., before 
restructuring charge     $   .41    $ .84    (51%)    $ 1.96     $ 2.33   (16%)
Restructuring Charge**         -        -       -          -      (1.53)     *
Continuing Ops., after 
restructuring charge         .41      .84    (51%)      1.96        .80      *
Discontinued Operations        -        -       -          -       (.28)     *
                                   
Diluted Earnings 
per Share                $   .41    $ .84    (51%)    $ 1.96      $ .52      *
                                   
* Calculation not meaningful 
**Impact of restructuring charge limited due to antidilutive restrictions 

Xerox Statement of Income (Without Restructuring)

                                 Three Months            Twelve Months
                              Ended December 31,       Ended December 31,       
                     
(in millions, except                         %                          %
per-share data)            1999    1998    Growth   1999     1998     Growth
                                   
Revenues                                   
  Sales                  $ 3,206  $ 3,487   (8%)   $ 10,346  $ 10,696     (3%)
  Service, outsourcing 
  and rentals              1,995    2,034   (2%)      7,856     7,678       2%
  Finance income             237      273  (13%)      1,026     1,073      (4%)
                                   
  Total Revenues           5,438    5,794   (6%)     19,228    19,447      (1%)
                                   
Costs and Expenses                                   
  Cost of sales            1,846    1,742    6%       5,744     5,662       1%
  Cost of service, 
  outsourcing and rentals  1,187    1,129    5%       4,481     4,205       7%
  Equipment financing 
  interest                   131      144   (9%)        547       570      (4%)
  Research and development 
  expenses                   242      271   (11%)       979     1,040      (6%)
  Selling, administrative 
  and general expenses     1,513     1,553   (3%)     5,144     5,321      (3%)
  Other, net                 115        78   47%        297       242       23%
                                   
  Total Costs and Expenses 5,034     4,917    2%     17,192    17,040        1%
                                   
Income before Income Taxes, 
Equity Income and Minorities' 
Interests                    404       877   (54%)    2,036     2,407     (15%)
  Income taxes               125       272   (54%)      631       762     (17%)
  Equity in net income of 
  unconsolidated affiliates   29        20     45%       68        92     (26%)
  Minorities' interests in 
  earnings of subsidiaries    14        10     40%       49        45       9%
                                   
Income from Continuing 
Operations                   294       615    (52%)    1,424    1,692     (16%)
  Discontinued operations      -         -       -         -     (190)      *
                                   
Net Income                 $ 294     $ 615    (52%)  $ 1,424  $ 1,502     (5%)
                                   
                                   
Calculation of Continuing Operations
Earnings Per Share                                    
                                   
Net Income from Continuing 
Operations                $ 294       $ 615   (52%)  $ 1,424   $ 1,692    (16%)
                                   
Basic Earnings per Share                                   
Preferred dividends, 
net of tax and other         (9)        (11)   (18%)     (38)      (46)   (17%)
                                   
  Income available 
  for common              $ 285       $ 604    (53%)  $ 1,386   $ 1,646   (16%)
Adjusted average shares 
outstanding               665.4       659.4             663.5     659.0         
                        
Basic Earnings per Share  $ .43       $ .92    (53%)  $  2.09   $  2.50   (16%)
                                   
                                   
Diluted Earnings per Share                                   
ESOP expense adjustment, 
net of tax                $  -        $   1      *    $     5   $     5     *
Interest on convertible 
debt, net of tax             1            4     (75%)      17        12     42%
                                   
  Income available 
  for common             $ 295        $ 620     (52%)  $ 1,446  $ 1,709   (15%)
Adjusted average 
shares outstanding       728.1        735.8              737.4    733.0     
                                   
Diluted Earnings 
per Share                $ .41        $ .84     (51%)  $  1.96  $ 2.33    (16%)
                                   
*Calculation not meaningful 

Xerox Statement of Income (With Restructuring)

                       Three Months              Twelve Months
                     Ended December 31,          Ended December 31,
(in millions, except 
per-share data)         1999     1998  % Growth   1999     1998     % Growth
                                   
Revenues                                   
Sales                 $ 3,206  $ 3,487    (8%)  $ 10,346 $ 10,696      (3%)
Service, outsourcing 
and rentals             1,995    2,034    (2%)     7,856    7,678       2%
Finance income            237      273    (13%)    1,026    1,073      (4%)
                                   
Total Revenues          5,438    5,794     (6%)   19,228   19,447      (1%)
                                   
Costs and Expenses                                   
Cost of sales           1,846    1,742      6%     5,744    5,662       1%
Cost of service, 
outsourcing and rentals 1,187    1,129      5%     4,481    4,205       7%
Inventory charges        -        -         -       -         113       *
Equipment financing 
interest                  131      144     (9%)      547      570      (4%)
Research and development 
expenses                  242      271    (11%)      979    1,040      (6%)
Selling, administrative 
and general expenses    1,513    1,553     (3%)    5,144    5,321      (3%)
Restructuring charge 
and asset impairments    -        -         -       -       1,531       *
Other, net                115       78    47%        297      242      23%
                                   
Total Costs and 
Expenses                5,034    4,917     2%     17,192   18,684      (8%)
                                   
Income before Income 
Taxes, Equity Income and 
Minorities' Interests     404      877    (54%)    2,036      763       *
Income Taxes              125      272    (54%)      631      207       *
Equity in net income of 
unconsolidated affiliates  29       20     45%        68       74      (8%)
Minorities' interests in 
earnings of subsidiaries   14       10     40%        49       45       9%
                                   
Income from Continuing 
Operations                294      615    (52%)    1,424      585       *
Discontinued operations   -       -        -        -        (190)      *
                                   
Net Income              $ 294    $ 615    (52%)  $ 1,424    $ 395       *
                                   
Calculation of Continuing Operations
Earnings Per Share                                    
                                   
Net Income from 
Continuing Operations   $ 294    $ 615    (52%)  $ 1,424    $ 585       *
                                   
Basic Earnings per Share                                   
Preferred dividends, 
net of tax and other       (9)     (11)   (18%)      (38)     (46)     (17%)
                                   
Income available for 
common                  $ 285    $ 604    (53%)  $ 1,386    $ 539        *
Adjusted average 
shares outstanding      665.4    659.4             663.5    659.0     
                                   
Basic Earnings per 
Share                   $ .43    $ .92    (53%)   $ 2.09    $ .82        *
                                   
Diluted Earnings per Share**                                   
ESOP expense adjustment, 
net of tax              $ -        $ 1      *        $ 5    $ (46)       *
Interest on convertible 
debt, net of tax            1        4    (75%)       17        3        *
                                   
Income available 
for common              $ 295    $ 620    (52%)  $ 1,446    $ 542        *
Adjusted average 
shares outstanding      728.1    735.8             737.4    674.1     
                                   
Diluted Earnings per 
Share                   $ .41    $ .84    (51%)   $ 1.96    $ .80        *
                                   
*Calculation not meaningful 

**Impact of restructuring charge limited due to antidilutive restrictions 

Summary 

Total 1999 fourth quarter revenues, including the effect of adverse European
currency translation, declined 6 percent from the 1998 fourth quarter to $5.4
billion. Pre-currency revenues declined 3 percent including Brazil where
revenues declined substantially due to the continuing effects of the January
currency devaluation and the weak economic environment. Excluding Brazil,
pre-currency revenues were flat in the 1999 fourth quarter reflecting a 5
percent decline in the United States offset by revenue growth of 4 percent in
Europe and 11 percent in the rest of the world. 

Income in the 1999 fourth quarter declined 52 percent to $294 million from $615
million in the 1998 fourth quarter reflecting the revenue decline and
significant gross margin deterioration which were only partially offset by lower
selling, administrative and general expenses and lower research and development
spending. 

Fourth quarter 1999 revenue and income reflect significantly reduced revenues
and profits from Brazil, lower production printing and publishing equipment
sales due in large part to customer focus on Y2K mitigation efforts and network
lockdowns, increased competitive pressures on products and service and
unfavorable currency. In addition, sales activity was significantly impacted by
the ongoing disruptive effects of the U.S. customer administration
reorganization and preparations for the January, 2000 final phase of the
realignment of the sales organization to an industry approach, particularly in
the U.S. 

Diluted earnings per share declined 51 percent to $0.41 in the 1999 fourth
quarter from $0.84 in the 1998 fourth quarter. 

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 foreign currencies into U.S. dollars. We refer to
this adjusted growth as 'pre-currency growth.'  Latin American currencies are
shown at actual exchange rates for both pre-currency and post-currency
reporting, since these countries generally have volatile currency and
inflationary environments, and our operations in these countries have
historically implemented pricing actions to recover the impact of inflation and
devaluation. 

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 currencies on a
revenue-weighted basis, the U.S. dollar was approximately 9 percent stronger in
the 1999 fourth quarter than in the 1998 fourth quarter. As a result, European
currency translation had an unfavorable impact of approximately three percentage
points on revenue growth. 

The unfavorable impact of our Brazilian operation on our total revenue growth
was approximately 3 percentage points. This included the continued impact of the
very significant currency devaluation and a weak economic environment. The
average Real exchange rate declined 38 percent to 1.91 in the 1998 fourth
quarter from 1.19 in the 1998 fourth quarter. 

Revenues denominated in currencies where the local currency is the functional
currency, including the Brazilian Real, are not hedged for purposes of
translation into U.S. dollars. 

Revenues 

Total pre-currency revenues declined 3 percent in the 1999 fourth quarter and
were flat, excluding Brazil.  For the major product categories, the pre-currency
revenue growth rates are as follows:
 
                                                       1999                     
                       
                                                                                
                         1998                                (Excl. Brazil)     
              
                                                                                
                 Q1  Q2   Q3  Q4  FY   Q1   Q2  Q3  Q4  FY  Q1  Q2  Q3  Q4  FY
                                                                                
Total Revenues  10%  10%  6%  7%  8%  (1)%  4%  2%  (3)% -%  3%  7%  6% -%  4%
                                                                                
Digital
 Products       34   41  38  33   36  28   26  19    6  18  33  32  24  9  22
Light-Lens
 Copiers        (4)  (8)(15)(16) (11)(24) (20)(19) (22)(21)(20)(18)(14)(19)(18) 

Digital product revenue growth slowed to 6 percent in the 1999 fourth quarter as
production publishing and production printing revenues declined and growth
slowed in color, black-and-white digital multi-function and desktop printing
products. Production publishing revenues declined 6 percent and production
printing revenues declined 5 percent reflecting customer Y2K mitigation efforts
and network lockdowns, the disruption associated with the realignment of the
sales force on an industry basis, particularly in the U.S. and the ongoing
disruptive impacts of our U.S. customer administration reorganization. Despite
record placements of our expanding family of black-and-white Document Centre
digital multi-function products, particularly our third generation 32 and 40
page-per-minute products, revenue growth slowed to 28 percent as competition and
pricing pressures intensified. Color copying and printing revenue growth slowed
to 3 percent in the 1999 fourth quarter, compared with 8 percent, 11 percent and
13 percent in the first three quarters of 1999, respectively. Office color
revenues declined, as unit volume increases were more than offset by pricing
pressures and a continued shift to lower-speed, lower-priced models reflecting
the exceptional success of our recently-introduced DocuColor 12 and Document
Centre ColorSeries 50, the first color-enabled digital multi-function product.
Production color unit and equipment sales growth slowed, although total revenue
growth was excellent due to accelerating recurring revenue growth. While
indirect channels color laser and inkjet placements grew significantly, inkjet
revenue growth was moderated by equipment price declines. Revenue growth from
our DocuPrint N series of monochrome laser printers and new and expanding line
of monochrome digital copiers sold through indirect sales channels was
excellent, but the growth was concentrated in lower-end products. Digital
products reached 57 percent of total revenues in the 1999 fourth quarter
compared with 52 percent of total revenues in the 1998 fourth quarter. 

Black-and-white light-lens copier revenues declined 22 percent in the 1999
fourth quarter as a result of customer transition to digital devices and
continuing pricing pressures. 

Geographically, the pre-currency revenue growth rates are as follows: 

                       1998                              1999                   

                                                       
                  Q1   Q2    Q3   Q4   FY       Q1   Q2   Q3   Q4    FY
                                                       
Total Revenues    10%  10%   6%    7%   8%      (1)%  4%   2%   (3)%  -%
                                                       
United States      7   13   10    11   10        4    9    6    (5)   3
Europe            13   10    5     8    9        2    6    3     4    4
Other Areas       11    6   (4)   (4)   1      (16) (12) (10)   (9) (11)
                                                       
Memo: Fuji Xerox   2   (4)  (6)   (4)  (3)      (1)  (3)   -     7    1

U.S. revenues declined 5 percent in the 1999 fourth quarter as sales activity
was significantly affected by the ongoing disruptive impacts of the customer
administration reorganization and preparations for the January, 2000 final phase
of the realignment of the sales organization to an industry approach. In
addition, customer Y2K mitigation efforts and network lockdowns significantly
impacted production publishing and printing equipment sales and the competitive
environment intensified. 

European revenues grew 4 percent in the 1999 fourth quarter reflecting good
production publishing revenue growth and strong production printing revenue
growth as customer Y2K mitigation efforts in Europe were less pronounced than in
the U.S.  Increased competitive and pricing pressures continued, particularly in
large bid and tender transactions. France, Germany, Italy and Spain had strong
revenue growth in the 1999 fourth quarter and the U.K. had modest revenue
growth, while revenues in Holland declined. 

Other Areas include operations in Latin America, Canada, China, Russia, India,
the Middle East and Africa. Revenue in Brazil declined by 42 percent in the 1999
fourth quarter, primarily reflecting the very significant currency devaluation
as well as the weak economic environment. Brazilian revenues represented
approximately 5 percent of Xerox revenues in the 1999 fourth quarter compared
with 8 percent in the 1998 fourth quarter. Excluding Brazil, revenue in Other
Areas grew 11 percent, including excellent growth in Mexico, Russia, Venezuela
and Central America while revenue in Canada declined modestly. 

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 7 percent in the 1999 fourth
quarter reflecting good revenue growth in Japan and strong revenue growth in
Fuji Xerox' other Asia Pacific territories. 


The pre-currency growth rates by type of revenue are as follows: 
                                 
                                                             1999               
                     1998                                    (Excl. Brazil)     
              
                                                                                
             Q1  Q2  Q3  Q4   FY   Q1   Q2  Q3  Q4  FY   Q1  Q2  Q3   Q4  FY
                                                                                
Equipment
Sales       17% 19%  7%  10%  12%  (3)% 2%  5% (8)% (2)% 4%  12% 13% (3)%  5%
Recurring 
Revenues     6   6   5    4    5   1    4   -   -    1   3    4   3   2    3

Total 
Revenues    10% 10%  6%   7%   8% (1)%  4%  2% (3)% -%   3%   7%  6%  -%   4%


Memo:                                                                          
Document 
Out-
 sourcing*   29  39   36   44  38   31  34   32  16  26   34   35  34  16   28


*Includes equipment accounted for as equipment sales. 

Equipment sales declined 8 percent in the 1999 fourth quarter reflecting the
currency devaluation and the weak economic environment in Brazil, intensified
competitive and pricing pressures and a decline in the U.S. due to customer Y2K
mitigation efforts and network lockdowns, issues related to the final phase of
the salesforce realignment by industry as well as the ongoing impacts of the
customer administration reorganization. Equipment sales grew modestly in Europe,
as customer Y2K mitigation efforts were less pronounced than in the U.S.
Indirect channels equipment sales slowed as substantial unit placement increases
were essentially offset by equipment price declines, unfavorable product mix and
the absence of the channel buildup which occurred with the introduction of
digital copiers in the 1998 fourth quarter. The substantial increase in indirect
channels equipment placements should result in higher future supplies revenue.
 
Recurring revenues, including revenues from service, document outsourcing,
rentals, 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.
Recurring revenues in the 1999 fourth quarter were equal to the 1998 fourth
quarter. Recurring revenues were adversely impacted by the devaluation and
weakness in Brazil, lower service revenues reflecting lower equipment sales and
lower page volume growth as pages diverted from light-lens copiers to printers
have not yet been fully offset by page volume increases on network-connected
Document Centre multi-function products. In the 1999 fourth quarter, finance
income included an $11 million gain from the securitization of $345 million of
finance receivables which was more than offset by the unfavorable flow-through
impact of the 1999 second and third quarter securitizations. Proceeds from the
securitizations were used to repay debt, which has resulted in lower equipment
financing interest expense. 

Total Document Outsourcing revenue growth slowed to 16 percent in the fourth
quarter primarily due to reduced production publishing and printing equipment
sales associated with U.S. customer Y2K mitigation efforts and network
lockdowns. In the U.S. document outsourcing revenue, excluding equipment sales,
grew at the same rate as earlier quarters, although growth in Europe temporarily
slowed. At the end of the 1999 fourth quarter, the future minimum value of
document outsourcing revenue under contract is over $8 billion, representing an
approximate 20 percent increase from the third quarter. 


Key Ratios and Expenses 

The trend in key ratios was as follows: 
                             1998                              1999             
      
                                                       
            Q1    Q2    Q3     Q4     FY       Q1     Q2     Q3     Q4     FY
                                                       
Gross 
Margin    44.9%  45.6% 46.3%  48.0%  46.3%    45.9%  45.3%  43.3%  41.8% 44.0%
SAG % 
Revenue   27.8    27.3 27.7   26.8   27.3     27.2   25.8   26.1   27.8  26.8

The gross margin declined by 6.2 percentage points in the 1999 fourth quarter
from the 1998 fourth quarter. The impact on gross margin resulting from the
higher revenue growth in the lower-margin document outsourcing and channels
businesses represented 1.5 percentage points of the decline. Another factor
contributing to the gross margin decline was the significant revenue decline in
the higher-margin Brazilian operation together with a gross margin decline there
compared with prior year. In addition, the gross margin was adversely impacted
by declines in high-margin production printing and publishing equipment sales
due to customer Y2K mitigation efforts and the salesforce realignment by
industry, unfavorable office color and channels product mix, unfavorable
currency and some decline in service gross margins as service revenue declines
have not been accompanied by corresponding cost reductions. Substantial
competitive price pressures were offset by manufacturing and other productivity
improvements. 

Selling, administrative and general expenses (SAG) were flat in the 1999 fourth
quarter as the benefits of our 1998 restructuring program, expense controls,
substantially lower management and employee bonuses and profit sharing and the
beneficial currency translation impact of the devaluation of the Brazilian
currency were offset by the impact of U.S. customer administration issues. In
the 1999 fourth quarter, SAG represented 27.8 percent of revenue, a
deterioration of 1.0 percentage points from the 1998 fourth quarter. For the
full year, SAG declined 2 percent and the ratio was 26.8 percent, a 0.5
percentage point improvement.
 
Research and development (R&D) expense in the 1999 fourth quarter declined 11
percent from the 1998 fourth quarter largely due to substantially lower
management and employee bonuses and profit sharing. 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. Xerox R&D is strategically coordinated with that
of Fuji Xerox which invested $585 million in R&D in the 1999 full year, for a
combined total of $1.6 billion. 

Worldwide employment increased by 1,100 in the 1999 fourth quarter to 94,600 as
a result of our acquisition of majority ownership in India with 2,000 employees
and the net hiring of 100 employees, primarily for the company's fast-growing
document outsourcing business and staffing for the centralized European customer
care and shared services operations in Ireland, which was partially offset by
1,000 employees leaving the company under the worldwide restructuring program. 


The $37 million increase in other expenses, net, from the 1998 fourth quarter
reflects increased non-financing interest expense resulting from higher debt and
several non-recurring charges partially offset by a $29 million gain from the
sale of InConcert, Inc., a developer of business integration software for
telecommunications companies. 

Income Taxes, Equity in Net Income of Unconsolidated Affiliates and Minorities'
Interests in Earnings of Subsidiaries 

Income before income taxes declined 54 percent to $404 million in the 1999
fourth quarter from $877 million in the 1998 fourth quarter. 

The effective tax rate of 31.0 percent in the 1999 fourth quarter was the same
as the 1998 fourth quarter and the 1999 full year rates. We expect the 2000 tax
rate to be similar to the 1999 full year rate. 

Equity in net income of unconsolidated affiliates is principally our 50 percent
share of Fuji Xerox income. Total equity in net income increased significantly
in the 1999 fourth quarter reflecting improved Fuji Xerox business results and
favorable currency translation. 

On April 7, 1998, we announced a worldwide restructuring program associated with
enhancing our competitive position and lowering our overall cost structure. In
connection with this program, we recorded a second quarter 1998 pre-tax
provision of $1,644 million ($1,107 million after taxes and 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 December 31, 1999, approximately 10,000 employees had left the company
under the restructuring program. The reserve balance of $394 million at December
31, 1999 relates to cash expenditures to be incurred primarily during 2000. 

On January 1, 2000 we acquired the Tektronix, Inc. Color Printing and Imaging
Division (CPID) for $925 million in cash including $75 million paid by Fuji
Xerox for the Asia Pacific operations of CPID. This transaction will result in
goodwill and other identifiable intangible assets of approximately $575 million,
which will be amortized over their useful lives, predominantly 20 years. 

This earnings release and financial review contain forward-looking statements
and information relating to Xerox that are based on our beliefs as well as
assumptions made by and information currently available to us. The words
'anticipate,' 'believe,' 'estimate,' 'expect,' 'intend,' 'will' and similar
expressions, as they relate to us, are intended to identify forward-looking
statements. Actual results could differ materially from those projected in such
forward-looking statements. Information concerning certain factors that could
cause actual results to differ materially is included in the company's third
quarter 1999 10-Q. We do not intend to update these forward-looking statements. 

                                                                                                                                                                                                                 

a d v e r t i s e m e n t