*NEWS*XEROX:NEW LEASE ON LIFE !
*NEWS*XEROX:NEW LEASE ON LIFE !
2003-10-27 at 10:15:00 am #7890Eric Tutterow, a high-yield bond analyst with KDP Investment Advisors, is one analyst encouraged by Xerox’s recent financings. “They have total access to the capital markets,” he says, and because the company can either refinance or issue more stock, “they have a lot of options financially.”
Richard Stice, an equities analyst with Standard & Poor’s, attributes the recent appreciation in Xerox’s share price to the company’s progress in cutting costs, restructuring its sales force, and selling assets. While the SEC’s investigation likely “brought more of the restructuring to the forefront and hastened many of the changes from the strategy standpoint,” he says, “they are basically two separate things.”
Xerox also appears to be making changes to its finance department, whether for Sarbanes-Oxley compliance or as a direct response to its past. The major initiative in the last year has been to realign the global accounting function within the office of the chief accountant, Gary Kabureck.
Xerox is also investing about $10 million to $15 million to update its financial IT systems with IBM, to help ensure greater control as well as timely and precise consolidation of its financial results. The first key component to the upgrade, a new financial consolidation system, is expected to be completed early next year and is being spearheaded by controller Harry Beeth, who left Big Blue last year to join Xerox.
KDP’s Tutterow doubts Xerox will relive its accounting woes under its new leadership. “Anytime the SEC comes in and breathes down your neck, you’re going to make sure your internal controls are impeccable,” he says. “Management is also very forward-looking in the market and has done a good job of refocusing the company on different market segments and moving the company to higher margin products.”
New Board Blood
The California Public Employees’ Retirement System has also been trying to effect change at Xerox. In March 2003, Calpers put the company at the top of its corporate governance focus list, in part for having “one of the most ineffective boards.”
Calpers asked Xerox to take immediate steps to add three independent directors; at the time, the board still comprised the same members who oversaw Xerox during its accounting scandal. Xerox also apparently had a policy that its board members were “‘strongly recommended’ not to communicate directly with institutional investors,” noted Rob Feckner, chairman of the Calpers investment committee. “This is reason enough to ensure that a fresh perspective is added to this board.”
In response, Xerox appointed an independent director, Ann Reese, and said it would add at least one additional independent director by the end of the year. The board, however, remains less amenable to some of Calpers’ other requests, including the separation of the chairman and CEO titles.
While high debt and the SEC investigation have weakened Xerox’s market share, Tutterow doubts that the company’s brand image suffered much in the wake of the accounting scandal. Prospective customers “care a lot less about the corporate image of Xerox and more about the quality of the product,” he says. “From the investor perspective, you are concerned about how [the SEC investigation] will impact earnings going forward, and whether they have the cash flow streams to work through the problems.” Nowadays, he adds, “everyone is really focused on the turnaround and how the restructuring efforts have improved the quality of earnings.”
Management’s attempt to rebuild investor confidence after the SEC probe suffered a setback when Xerox announced another restatement in December 2002. This time, the company said it had miscalculated interest expense stemming from a debt instrument and a related interest-rate swap agreement. The error caused Xerox to understate interest expense by about $5 million to $6 million after tax, or less than 1 cent per share, in each quarter of 2001 and the first three quarters of 2002.Stice, who like other analysts was told that the company had put its problems behind it and implemented certain safeguards, remain cautious on the stock because of the surprise. “They’re still not out of the woods yet,” he adds. “It takes awhile to regain credibility.”Tutterow is decidedly more bullish about Xerox’s prospects. He’s modeling for the company to generate $2.9 billion in cash flow this year and $3 billion in 2004. Much of that is free cash flow because Xerox’s annual interest expense is under $800 million. Considering Xerox’s fairly low capital expenditure, Tutterow expects Xerox to generate between $1.5 billion and $2 billion each year of free cash flow; that figure was $1.93 billion for the trailing twelve months as of June 30. “They’re on Their way, probably on the way back to an investment-grade rating,” Tutterow adds. “It may take some time, but they’ll get there eventually.”