Xerox Reports First-Quarter Earnings of 20 Cents Per Share

Xerox Reports First-Quarter Earnings of 20 Cents Per Share

    Business Editors

    STAMFORD, Conn.--(BUSINESS WIRE)--April 21, 2005--Xerox Corporation (NYSE: XRX)

--	Earnings per share from continuing operations up 18 percent
--	Total revenue declined 1 percent
--	Revenue from color up 15 percent
--	$337 million operating cash flow; $3.3 billion cash balance

    Xerox Corporation (NYSE: XRX) announced today first-quarter earnings that reflect increased sales of its digital color systems, growth in document services and strong operational performance. Earnings per share from continuing operations increased 18 percent compared to first quarter of last year.
    The company reported first-quarter 2005 earnings per share of 20 cents including a 6-cent gain from the previously announced sale of Xerox's equity interest in Integic Corp., which was offset by restructuring charges of 6 cents per share.
    "Our profit performance in the first quarter met the high range of our expectations through increased gross margins and operational improvements that help ensure Xerox is cost-competitive in every area of our business," said Anne M. Mulcahy, Xerox chairman and chief executive officer.
    "Xerox's industry-leading color technology and expertise in document-related consulting services continued to be the key drivers of the company's growth initiatives," she added. "Despite a quarter when market conditions slowed overall equipment sales, we grew color revenue by 15 percent and delivered another quarter of double-digit revenue from Xerox Global Services."
    First-quarter equipment sales were flat year over year, and total revenue of $3.8 billion declined 1 percent. Both equipment sales and total revenue included a currency benefit of 2 percentage points. Revenue growth continued to be impacted by post-sale revenue declines from the company's older light-lens technology. Weak performance in Brazil also impacted post-sale and total revenue in the first quarter, although trends are improving in this operation.
    Revenue from the company's value-added service offerings grew 23 percent in the first quarter as demand increased for consulting, imaging and content management from Xerox Global Services, which provides customers with practical solutions to reduce document costs and simplify work processes.
    Xerox's production business provides commercial printers and document-intensive industries with high-speed digital technology that enables on-demand, personalized printing. Production equipment sales grew 2 percent with total production revenue down 2 percent due to a decline in post-sale revenue from older light-lens products as well as declines in production publishing. First-quarter install activity for production monochrome systems declined 9 percent while production color installs grew 18 percent, largely due to strong placements of the Xerox DocuColor(R) 5252 and 8000 series as well as the Xerox iGen3(R) Digital Production Press. In March, Xerox launched a faster version of the company's flagship iGen3, which now prints 10 percent to 20 percent faster at speeds up to 120 pages per minute. Next month Xerox will add to its portfolio of production systems, software and solutions, continuing to strengthen its leadership position in this market.
    In Xerox's office business, which provides technology and services for workgroups of any size, equipment sales were flat year over year and total revenue declined 2 percent. Equipment sale revenue was impacted by product mix with the company selling a greater proportion of lower-priced monochrome desktop units compared to the first quarter of last year. Installs of digital office monochrome systems were up 17 percent reflecting increased placements of Xerox WorkCentre(R) desktop multifunction products. In office color, activity was strong with installs of office color multifunction systems up 21 percent and office color printing installs up 180 percent. Late last month, Xerox announced the WorkCentre C2424 office color multifunction system. The industry's first solid ink device that prints, scans and copies, the WorkCentre C2424 is 30 percent to 60 percent more affordable and has color speeds twice as fast as leading comparable products in its class. Additional enhancements to Xerox's office systems and services will be announced in late June.
    Xerox increased its advertising in the first quarter through its "Xerox Color: It Makes Business Sense" campaign that highlights the value of the company's color technology. At the same time, Xerox maintained its sharp focus on costs and operational performance. As a result, selling, administrative and general expenses decreased year over year by $27 million. First-quarter gross margins were up nearly 1 percent to 40.7 percent.
    The company generated operating cash flow of $337 million in the first quarter and closed the quarter with $3.3 billion in cash. Debt was down close to $1 billion year over year.
    For the second quarter of 2005, Mulcahy said she expects earnings in the range of 21-24 cents per share.
    NOTE TO EDITORS: This release contains forward-looking statements and information relating to Xerox that are based on our beliefs as well as assumptions made by and information currently available to us. The words "anticipate," "believe," "estimate," "expect," "intend," "will" and similar expressions, as they relate to us, are intended to identify forward-looking statements. Actual results could differ materially from those projected in such forward-looking statements. Information concerning certain factors that could cause actual results to differ materially is included in the company's 2004 Form 10-K filed with the SEC.
    For presentation slides and more information about Xerox, visit www.xerox.com/investor. XEROX(R), Xerox Nuvera(TM), iGen3(R), Phaser(R), WorkCentre(R) and Smarter Document Management(SM) are trademarks of XEROX CORPORATION. DocuColor is a registered trademark licensed to Xerox Corporation.

Xerox Corporation Condensed Consolidated Statements of Income (Unaudited)

Three Months Ended March 31, (in millions, except per share data) 2005 2004 % Change -------------------------------------------- ------- ------- ---------

Revenues Sales $1,694 $1,681 1% Service, outsourcing and rentals 1,849 1,908 (3%) Finance income 228 238 (4%) ------- ------- Total Revenues 3,771 3,827 (1%)

Costs and Expenses Cost of sales 1,086 1,112 (2%) Cost of service, outsourcing and rentals 1,065 1,102 (3%) Equipment financing interest 86 89 (3%) Research and development expenses 183 193 (5%) Selling, administrative and general expenses 1,009 1,036 (3%) Restructuring charges 85 6 * Other (income) expenses, net (32) 87 * -------------------------------------------- ------- ------- Total Costs and Expenses 3,482 3,625 (4%) -------------------------------------------- ------- -------

Income from Continuing Operations before Income taxes and Equity Income** 289 202 43% Income taxes 116 67 73% Equity in net income of unconsolidated affiliates 37 30 23% -------------------------------------------- ------- -------

Income from Continuing Operations 210 165 27% Gain on sale of ContentGuard, net of income taxes of $26 - 83 * -------------------------------------------- ------- -------

Net Income $ 210 $ 248 (15%) Less: Preferred stock dividends, net (14) (24) (42%) -------------------------------------------- ------- -------

Income Available to Common Shareholders $ 196 $ 224 (13%) ============================================ ======= =======

Basic Earnings per share: Earnings from Continuing Operations $ 0.20 $ 0.18 11% Basic Earnings per Share $ 0.20 $ 0.28 (29%)

Diluted Earnings per share Earnings from Continuing Operations $ 0.20 $ 0.17 18% Diluted Earnings per Share $ 0.20 $ 0.25 (20%)

Note: Certain reclassifications of prior year amounts have been made to these financial statements to conform to the current year presentation.

* Percent not meaningful.

** Referred to as "pre-tax income" throughout the remainder of this document.

Xerox Corporation Condensed Consolidated Balance Sheets (Unaudited)

March December 31, 31, (in millions) 2005 2004 ------------------------------------------------------------- -------- Assets

Cash and cash equivalents $ 3,298 $ 3,218 Accounts receivable, net 2,047 2,076 Billed portion of finance receivables, net 357 377 Finance receivables, net 2,699 2,932 Inventories 1,229 1,143 Other current assets 1,038 1,182 ---------------------------------------------------- -------- -------- Total Current Assets 10,668 10,928 Finance receivables due after one year, net 5,104 5,188 Equipment on operating leases, net 397 398 Land, buildings and equipment, net 1,700 1,759 Investments in affiliates, at equity 837 845 Intangible assets, net 288 297 Goodwill 1,803 1,848 Deferred tax assets, long-term 1,450 1,521 Other long-term assets 2,026 2,100 ---------------------------------------------------- -------- -------- Total Assets $24,273 $24,884 ==================================================== ======== ========

Liabilities and Equity

Short-term debt and current portion of long-term debt $ 2,727 $ 3,074 Accounts payable 1,075 1,037 Accrued compensation and benefits costs 724 637 Unearned income 218 243 Other current liabilities 1,157 1,309 ---------------------------------------------------- -------- -------- Total Current Liabilities 5,901 6,300 Long-term debt 6,896 7,050 Liability to subsidiary trusts issuing preferred securities 719 717 Pension and other benefit liabilities 999 1,189 Post-retirement medical benefits 1,180 1,180 Other long-term liabilities 1,399 1,315 ---------------------------------------------------- -------- -------- Total Liabilities 17,094 17,751

Series C mandatory convertible preferred stock 889 889 Common stock, including additional paid in capital 4,909 4,881 Retained earnings 2,297 2,101 Accumulated other comprehensive loss (916) (738) ---------------------------------------------------- -------- -------- Total Liabilities and Equity $24,273 $24,884 ==================================================== ======== ========

Shares of common stock issued and outstanding were (in thousands) 958,186 and 955,997 at March 31, 2005 and December 31, 2004 respectively.

Xerox Corporation Condensed Consolidated Statements of Cash Flows (Unaudited)

Three Months Ended March 31, (in millions) 2005 2004 ------------------------------------------------------ ------- -------

Cash Flows from Operating Activities Net income $ 210 $ 248 Adjustments required to reconcile net income to cash flows from operating activities: Depreciation and amortization 159 175 Provisions for receivables and inventory 27 51 Net gain on sales of businesses and assets (98) (14) Undistributed equity in net income of unconsolidated affiliates (35) (23) Gain on sale of ContentGuard - (83) Restructuring and other charges 85 6 Cash payments for restructurings (36) (60) Contributions to pension benefit plans (24) (17) Early termination of derivative contracts - 60 Increase in inventories (116) (73) Increase in on-lease equipment (52) (40) Decrease in finance receivables 179 178 (Increase) decrease in accounts receivable and billed portion of finance receivables (8) 39 Decrease in accounts payable and accrued benefits (1) (83) Net change in income tax assets and liabilities 73 20 Decrease in other current and long-term liabilities (98) (85) Other, net 72 (56) ------- ------- Net cash provided by operating activities 337 243 ------- -------

Cash Flows from Investing Activities Cost of additions to land, buildings and equipment (33) (48) Proceeds from sales of land, buildings and equipment 2 32 Cost of additions to internal use software (12) (8) Proceeds from divestitures and investments, net 105 67 Net change in escrow and other restricted investments 31 33 ------- ------- Net cash provided by investing activities 93 76 ------- -------

Cash Flows from Financing Activities Cash proceeds from new secured financings 247 504 Debt payments on secured financings (468) (573) Net cash payments on other debt (112) (409) Preferred Stock Dividends (14) (25) Proceeds from issuances of common stock 14 29 Other 9 - ------- ------- Net cash used in financing activities (324) (474) ------- ------- Effect of exchange rate changes on cash and cash equivalents (26) (24) ------- -------

Increase (decrease) in cash and cash equivalents 80 (179) Cash and cash equivalents at beginning of period 3,218 2,477 ------- ------- Cash and cash equivalents at end of period $3,298 $2,298 ------- -------

Xerox Corporation Segment Revenues and Operating Profit

Three Months Ended March 31, (in millions, except margins) 2005 2004 Change -------------------------------------------- ------- ------- ---------

Revenues Production $1,072 $1,094 (2%) Office 1,829 1,857 (2%) Developing Markets (DMO) 412 420 (2%) Other 458 456 - ------- ------- -------- Total Revenues $3,771 $3,827 (1%) ------- ------- --------

Memo: Color* $1,035 $ 903 15%

Operating Profit Production** $ 101 $ 82 $ 19 Office** 192 169 23 DMO** 10 19 (9) Other** 109 (32) 141 ------- ------- -------- Total Operating Profit $ 412 $ 238 $174 ======= ======= ========

Operating Margin Production** 9.4% 7.5% 1.9 pts Office** 10.5% 9.1% 1.4 pts DMO** 2.4% 4.5% (2.1)pts Other** 23.8% (7.0%) 30.8 pts ------- ------- --------- Total Operating Margin 10.9% 6.2% 4.7 pts ------- ------- ---------

---------------------------------------------------- ------- ---------

Reconciliation to pre-tax income: Three Months ended March 31, ------------------ 2005 2004 ------- ------- Total segment profit $ 412 $ 238 Reconciling items: Restructuring and asset impairment charges (85) (6) Other Expenses (1) - Other item: Equity in net income of unconsolidated affiliates (37) (30) ------- -------

Pre-tax income: $ 289 $ 202

* Color revenues represent a subset of total revenues.

** Our reportable segments are consistent with how we manage the business and view the markets we serve. Our reportable segments are Production, Office, Developing Markets Operations ("DMO") and Other. The Production and Office segments are centered around strategic product groups which share common technology, manufacturing and product platforms, as well as classes of customers. During the quarter ended March 31, 2005, we implemented a new financial reporting system which has enabled greater efficiencies in financial reporting and provides enhanced analytical capabilities including activity-based cost analysis on shared services and internal cost allocations. As a result of the implementation, changes in the allocation of certain segment costs and expenses were made. These changes include a reallocation of costs associated with corporate and certain shared service functions.

Production: Monochrome 91+ pages per minute (ppm), Color 41+ ppm; North America & Europe

Office: Monochrome up to 90 ppm; Color up to 40 ppm; North America & Europe

DMO: Operations in Latin America, Central-Eastern Europe, Middle East, India, Eurasia, Russia and Africa

Other: Paper, SOHO, Wide Format Systems, Xerox Technology Enterprises (XTE), consulting, equity income and non-allocated corporate items

--30--SW/ny*

CONTACT: Media Contacts: Xerox Corporation Christa Carone, 203-968-4644 christa.carone@xerox.com Bill McKee, 585-423-4476 bill.mckee@xerox.com

KEYWORD: CONNECTICUT INDUSTRY KEYWORD: HARDWARE COMPUTERS/ELECTRONICS EARNINGS CONFERENCE CALLS SOURCE: Xerox Corporation

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