Xerox Management and Financial Analysis

Management and Financial Analysis of Xerox Corporation Prepared for Mrs. Ursula Burns Chief Executive Officer And The Executive Officers of Xerox Corporation Prepared by Cong Chu Tim Hollowell Eric Kleber Matt Nead Jarrod Stewart John Stiglitz 5 Star Consulting, Inc. Muncie, IN December 2009 5 Star Consulting, Inc. 200 N. McKinley Ave. - Muncie, IN 47303 – (765)-285-5476 December 9, 2009 Mrs. Ursula Burns Xerox Corporation 800 Long Ridge Rd. Stamford, CT 06904 Dear Mrs. Burns: 5 Star Consulting, Inc. has completed our management, e-commerce, competition, marketing, and financial analysis of Xerox. With the proposals and implementations we have provided, your company will be able to reach its full profit potential by focusing on research and development and increasing sales. Over the past few weeks, our company has been evaluating your company’s financial records from 2006-2008. We have also taken a look at your company’s management and marketing style, press releases, as well external documents to familiarize ourselves with your company’s operations. We have collected Xerox’s strengths, weaknesses, opportunities, and threats to provide recommendations for areas that need improvement and to capitalize on strengths and improve weaknesses. By taking advantage of these recommendations, we believe that your company will grow and thrive and today’s struggling economy. We at 5 Star Consulting would like to give thanks to Xerox for allowing us to review your company, and the many aspects of the corporation. If there are any questions that you might have, please feel free to contact our office during business hours at (765) 285-5476. Sincerely, Cong ChuTim HollowellEric Kleber Matt NeadJarrod StewartJohn Stiglitz TABLE OF CONTENTS TRANSMITAL LETTER TO CEO INTRODUCTION Research Questions Procedures ANALYSIS AND EVALUATION Analysis of Management Strategies Analysis of Internet Strategies Table 1: Information Systems Analysis Analysis of Industry Competition Analysis of Market Share Analysis of Products Table 2: Product Portfolio Matrix Analysis of Financial Ratios Table 3: Comparability Ratios S.W.O.T. Analysis Strengths/ Opportunities Strengths/ Threats Weaknesses/ Opportunities Weaknesses/ Threats Table 4: S.W.O.T. Matrix Alternative Solutions RECOMMENDATIONS IMPLEMENTATIONS SUMMARY BIBLIOGRAPHY APPENDIX MANAGEMENT AND FINANCIAL ANALYSIS OF XEROX CORPORATION INTRODUCTION After reviewing Xerox Corporation’s 10-K reports for the past three years, our team has found areas where improvements can be made. Although Xerox Corporation has suffered some financial woes over the past two years, it is making efforts to make itself financially sound in the future. Xerox Corporation is currently in the process of acquiring Affiliated Computer Services and is developing printable electronics. Our goal is to analyze Xerox Corporation and recognize strengths and find areas for improvement. We also plan to figure out the financial effects of their future plans. By doing this, we will provide useful information that will help Xerox Corporation enhance its financial potential Research Questions 5 Star Consulting comprised the following questions to further analyze Xerox Corporation: ,[object Object]

How have Xerox’s financial ratios changed over the past three years?

What is Xerox’s marketing strategy and what impact will it have on the company’s market share?

How will government bills affect the future cash flows of Xerox?

What are the strengths, weaknesses, opportunities, and threats of Xerox Corporation?

What is Xerox’s probability of going bankrupt?Procedures Information in this report was retrieved from the company’s 10-K reports from the past three years, magazine articles, and Internet resources. The financial information used to evaluate Xerox Corporation comes from fiscal years 2006-2008. The following ratios were used in the analysis of Xerox’s performance: Profitability: ,[object Object]

Return on net worth (return on equity)Liquidity (Solvency): ,[object Object]

Current liabilities to net worth

Current liabilities to inventory

Total liabilities to net worth

Fixed assets to net worthEfficiency: ,[object Object]

Z- ScoreAfter a thorough analysis of Xerox Corporation, we prepared a S.W.O.T. analysis to better understand the changing business environment. ANALYSIS AND EVALUATION The 5 Star Consulting firm acquired Xerox Corporation’s annual financial statements from 2006-2008. To gain a better understanding of Xerox runs and operates, we have analyzed 10-K reports, annual reports, news articles, and internet resources. In the past couple of years Xerox has run into some financial problems and we believe that we can help the company address and overcome these problems. Xerox needs to expand its product line in order to stay competitive and succeed in today’s market. Analysis of Management Strategies According to Xerox, “we are a $17.6 billion technology and services enterprise and a leader in the global document market. We develop, manufacture, market, service and finance a complete range of document equipment, software, solutions and services” (10-K report, 2009). Xerox is a global company that provides many ways to help its customers get information and print documents worldwide. Document management from Xerox includes color printers, copiers, business consulting services, and copier and printer supplies. To make the company’s operations more efficient, Xerox has come up with strategies to improve the company. The management strategies of Xerox can be classified into four parts: execution of growth initiatives, distribution expansion, future technology leadership securitization, and optimization of productivity and infrastructure (10-K report, 2009). Xerox has decided to improve the “execution of growth initiatives” (10k report, 2009) in several aspects, such as building on service leadership (outsourcing), driving the New Business of printing (new market opportunities with digital printing as a complement to traditional offset printing through a market transition). Most of the traditional office equipment is in black and white. The traditional office equipment no longer satisfies today’s market. More and more individuals and companies favor digital and colorful office equipment. Xerox needs to adapt to this demand in order to meet the needs of the customers and catch up with the main trend in today’s market. By doing this, Xerox can occupy an advantageous position in the market. For example, Xerox improved its position in the electronic market from 11th place in 2007 to 10th place in 2008. According to Gartner Research Vice President Dane Anderson, “It’s unclear what Xerox will do with ACS's IT outsourcing business. It will take time for (Xerox) to decide what to do with itquot;
. As for the Xerox executives’ opinion on ACS, they have said “the IT outsourcing portion of the ACS buy is integral to expanding the company's BPO offerings.”(Overby, 2009) In the distribution expansion (10-K report, 2009) part of Xerox’s management strategies, Xerox has decided to expand its presence in the small- and mid-sized business market. The company also plans to maintain its investments in developing markets as well. Another thing that Xerox is doing is expanding its documenting technology (10-K report, 2009) though its Silver Ink and Reusable Paper projects. Many global companies appreciate China as a country of rapid economic development, and in it exists countless opportunities. Xerox's long-term commitment to sell its advanced digital equipment to the Chinese electronic consumer market has yielded desired results. Currently in the Chinese electronic consumer market for medium and large printers, over 50% of products purchased are that of Xerox. Another thing that Xerox is attempting to do is secure its position as a future leader in technology (10-K report, 2009). Xerox is hoping to accomplish this by yielding a broad technology portfolio, capitalizing on breakthroughs in ink technologies, and expanding document technology (10-K report, 2009). Xerox is using RFID technology (Silver Ink) to help promote the security of documents. Some profiles or documents warrant special security measures, for these cases Xerox has developed a special kind of ink that only shows up under certain conditions. This is just one of the new kinds of ink technology being developed by Xerox. Some industry insiders think that the ACS acquisition was a step taken to secure Xerox’s place as a future leader in technology. Xerox is intending on using ACS’s business process outsourcing (BPO) offerings to generate capital (Overby, 2009). This will allow Xerox to create new products that will be backed by its in-house provider (ACS) of product solutions. Finally, Xerox will need to “optimize productivity and infrastructure” (10-K report, 2009). To do those two things, Xerox will need to improve the efficiency and effectiveness of its resources, both tangible and intangible. Also included in the process is the improvement of marketing, distribution, and management of human resources. In conclusion, Xerox needs to commit to the aforementioned strategies and market-oriented standards in management to increase its market position in today’s fierce market competition. Chart 1: Management & Organization Analysis Analysis of Internet Strategies Xerox has a very attractive and inviting website that provides a lot of information about the products and the company itself. The Xerox company website also includes a search bar so any information can be easily accessed through a quick search. There is also a link to contacts that allow a person to have a live chat with someone at the company and have their questions answered. The site offers information on business to business, business to consumers, business to government, business to the public, business to employees, and potential investor’s relationships. The website also provides quotes for products and even allows customers to purchase them online through Xerox or a number of other companies (Xerox.com). At the top of the homepage there are three main links that provide information on Office Products, Production Equipment, and Document Outsourcing. The links below the picture on the main page breakdown the search, buy, and setup process into four main steps. With both the “upper” and “lower” links on the page there are multiple ways to find the information you need, to answer the questions you may have, or to purchase products. There is also a link on the page where potential employees of Xerox can find information on jobs that may be open within the company. The navigation of Xerox’s website, all in all, is quite simple compared to the websites of some of its competitors. There is a link about two-thirds of the way down on the right side of the page to access the information provided on investor relations. The link contains information to draw investors with things such as a financial profile and annual reports, as well as other financial breakdowns. The link also provides information about the company itself with things like acquisitions, company history, information about the executives, and a profile of the ownership of the company (Xerox.com). As good as the Xerox website is, there is one major item that needs some improvement. The website and company as a whole need some diversification. One way to do this would be to offer some more home-based products, like home-use printers that competitors like Canon, Lexmark, and Hewlett-Packard offer. Table 1: Information Systems Analysis Xerox CorporationDell CorporationCanon Corporationwww.xerox.com www.dellcom www.canon.com B2B 433B2C 343B2E 333B2G432B2P/I243Appeal343Total 192117Scale: 4 = best, 3 = above average, 2 = below average, and 1 = worst. Analysis of Industry Competition While Xerox has long been known as a leader within the global document market, it has faced the same financial pressures as its competitors (10-K Report, 2008). Like Ricoh, Canon, NEC, Fujitsu, and Hewlett-Packard, Xerox was impacted by the economic recession. Although its revenues increased, this was only done through innovative techniques and in fact understates what the company could have done. Xerox is not a Global 500 leader in the industry of Computers and Office Equipment, but this industry is in fact quite a broad one and does not represent Xerox in its entirety (Fortune Magazine). Xerox defines itself as a leader in the global document market, and in fact it is (10-K Report, 2008). This includes manufacturing, developing, marketing, servicing, and financing a full range of document software, equipment, solutions and services (10-K Report, 2008). Even though it is a leader in this market, it faces competition from many companies in its Global 500 industry. The main threat for Xerox comes from emerging technologies and home consumer office solutions. Xerox faces constant pressure for other companies in the industry to come up with new innovations and products. In addition, Hewlett-Packard and Canon both have established product lines for the home consumer, but Xerox has not marketed their low-end printers effectively for home consumers. Xerox also faces the pressure of the current economic condition and an uncertain economic future (10-K Report, 2008). In a volatile market, the demand for supplies, services, and equipment is affected. In a long period of economic decline, this could have a negative effect the company’s financial and operational well-being (10-K Report, 2008). Analysis of Market Share Xerox is a Global 500 ranked company and a top-10 competitor in the 411.9 billion dollar Computers and Office Equipment Industry (Fortune Magazine). Xerox obtained revenues of 17.2 billion dollars or 9.8% of the industry (Fortune Magazine). The industry leader is Hewlett-Packard which controls over 25% of the industry (Fortune Magazine). All of the other companies in the Computer and Office Equipment industry specialize in either computers or office equipment, but not both. Hewlett-Packard sells both computers and office equipment and a full line of accessories. Xerox saw only a slight increase in revenue from 2006 to 2007. In 2008, Xerox’s market share and revenue increased (Fortune Magazine). Despite these increases, the companies’ profits decreased (Fortune Magazine). In 2006, Xerox obtained revenues of 15.7 billion dollars and controlled 3.8% of the market (Fortune Magazine). In 2007, revenues increased slightly to 15.9 billion dollars, a 1.2% increase, and market share decreased from 3.8% to 3.6% as a result of Asustek Computer entering the market (Fortune Magazine). 2008 marked the largest increase in the past three years. Revenues increased 8.1% from 2007 for a total of 17.2 billion dollars and market share increased to 4.2% (Fortune Magazine). As stated before, even though these two indicators increased, Xerox’s total profit decreased from 2007’s total of 552 million dollars to 394 million dollars (10-K Reports). This was due to unfavorable economic conditions which decreased sales and revenue, as well as a rapid shift in the currency exchange rate (10-K Report, 2008). From 2006 to 2008, Xerox has seen small increases in revenue and market share (9.3% and .4% respectively). Although this is positive in an economic downturn, many of the other corporations in the Computers and Office Equipment industry have also been able to increase revenues as well. Apple Computer, for example, has increased revenue by 73.4% from 2006 to 2008 and gained 2.4% market share (Fortune Magazine). Hewlett-Packard has also extended its market share lead and now holds over 25% of the market (Fortune Magazine). Both of these companies have managed high revenue increases, especially Apple Computer. Xerox needs to follow the lead of Apple and Hewlett-Packard if it is to keep increasing its overall market share. Analysis of Products Xerox’s products have been broken down into 4 categories. These consist of: digital presses, printers and copiers, workflow and software, and supplies (Xerox.com). All of the product categories except for workflow and software and a small portion of supplies as well as printers and copiers are in the maturity stage. Workflow and software products are in the growth stage. Introduction Stage Xerox currently has no product categories in the introduction stage, which is one of Xerox’s biggest problems. Xerox has quite a few great ideas which are in the pre-intoduction stage. Xerox created a form of printable electronics which uses silver ink that conducts electricity and can be used to place electronic circuits on plastics, textiles, and films (DigitalBeat, October 2009). Another example is a recent innovation where Xerox developed reusable paper (Xerox.com). Xerox has found a way to print ink onto paper that will disappear in about 16 to 24 hours so that the paper can be used again (Xerox.com). This technology could be used for short term documents which usually get discarded at the end of the day (Xerox.com). Both of these examples are innovations that need to be put into action to help the company continue growing. Growth Stage Workflow and software products are a somewhat growing category for Xerox. Automated tools and applications are becoming more popular. These workflow and software products are helping Xerox-supported businesses to improve productivity by automating business processes (Xerox.com). This also helps businesses connect to customers and reduce costs (Xerox.com). Color printing and scanning is also in higher demand (10-K Report, 2008). This has forced Xerox to create new innovative and cost-efficient products for this market (10-K Report, 2008). Maturity Stage Most of Xerox’s products are in the maturity stage. General printing and copying has been a cash cow for Xerox for quite some time. It continues to steadily create revenue for Xerox and will remain doing so as long as Xerox updates its product line to changing technologies (10-K Report, 2008). Digital presses and supplies are the two other categories that are in the maturity stage. Both of these categories are steady cash generators. Decline Stage One small section of supplies is in the decline stage. These supplies are paper. Many of Xerox’s clients are switching to a more digital workplace and this has decreased some of the demand for paper (10-K Report, 2008). Paper is still an important supply and is heavily used, but it questions the need for paper in the future. Analysis of Financial Ratios When looking at the financial position of Xerox Corporation, there are three areas of ratios to consider—solvency, efficiency, and profitability. The ratios in the solvency area have been extremely low in the last three years. In fact, only the ratio of current liabilities to net worth in 2007 was not in the lower quartile of the industry (Industry Norms, 2007). Although the rest are in the lower quartile, some of the ratios are far worse than others. Looking closer at the ratios comparing current liabilities, total liabilities, and fixed assets to net worth, it is easy to see that all three ratios follow the same pattern. All of the ratios are well below the industry average in 2006 and increase during 2007. Then they all drastically decrease again in 2008 (10K report, 2006, 2007, 2008). Upon closer review of the financial statements, we see that it is giant fluctuations in net worth that is affecting these ratios. Net worth increases over $1.5 billion from 2006 to 2007, but then drops over $2 billion from 2007 to 2008 (10K report, 2006, 2007, 2008). Xerox needs to work on increasing its net worth. By doing this, it will decrease these ratios closer to the industry norms. Chart 8: Total Liabilities to Net Worth The next area of financial ratios is the efficiency area. Xerox is doing a lot better in this area of ratios compared to the solvency area. In the efficiency area, most of the ratios are in the medium to upper quartiles compared to the industry (Industry Norms, 2006, 2007, 2008). Only in the ratio of assets to sales is Xerox continually in the lower quartile. These higher ratios mean that Xerox is pretty efficient. One category that Xerox is exceeding in is the sales to inventory ratio. For the past three years Xerox has been in the upper quartile of the industry. This shows that the company is doing a great job in managing its inventory. Another category that Xerox is doing well in is collection period. This means that Xerox is collecting on its accounts receivable in a timely fashion. In the efficiency area the one ratio that Xerox needs to work on is the assets to sales ratio. Over the past three years Xerox has consistently been in the lower quartile. This means that for the amount of assets that Xerox has, it should have higher sales numbers. Chart 9: Assets to Sales (%) The last ratio area is the profitability area. Xerox is doing extremely well in this area with all of its ratios in the middle and upper quartiles (Industry Norms, 2006, 2007, 2008). The high performance in the return on sales ratio shows that Xerox is earning a pretty good profit per dollar of sales. The ratio has been decreasing steadily over the past three years, which is something that Xerox should keep an eye on. Being in the upper and middle quartiles in the return on assets and return on net worth show that the company is using both its assets and capital invested by owners efficiently. Looking at the profitability ratios, it seems that Xerox is doing well. Chart 10 Return on Sales (%) The following pages contain a table showing the comparison of all the key ratios between Xerox and its industry. Table 3:Comparative Analysis of Xerox Corporation with Photograph Equipment Industry in 2006--2008 200820072006 IndustryXeroxIndustryXeroxIndustryXeroxSolvency Quick Ratio (times)UQ3.7 2.40 4.4 MED1.7 1.30 1.9 LQ1.0 0.626 1.10 0.8720.9 0.766Current Ratio (times)UQ9.0 6.80 5.6 MED3.3 2.40 2.8 LQ1.7 1.495 1.90 2.0951.8 1.83Curr Liab to NW (%)UQ8.0 14.80 13.2 MED29.0 28.10 47.534.0 LQ101.3 87.4 72.80 71.0 66.4Curr Liab to Inv (%)UQ57.0 77.30 126.1 MED109.6 152.70 140.6 LQ246.5 442.4 210.40 312.4263.4 404Total Liab to NW (%)UQ9.2 14.80 19.5 MED30.3 30.60 66.3 LQ101.3 259.8 106.70 174.1117.8 206.6Fixed Assets to NW (%)UQ7.8 3.60 10.8 MED13.7 11.40 18.6 LQ34.4 79.1 20.30 59.348.9 77.8Efficiency Coll Period (days)UQ 34.0 37.20 44.2 MED45.6 45.273 49.30 58.551.8 50.496 LQ58.0 68.60 73.7 Sales to Inv (times)UQ 11.5 14.292 10.20 13.215.4 13.667 MED7.7 7.00 10.2 LQ4.5 4.40 6.2 Assets to Sales (%)UQ 42.3 46.20 38.5 MED81.1 85.50 57.4 LQ106.7 127.5 133.50 136.7107.0 136.6Sales to NWC (times)UQ 6.1 6.521 4.80 6.9 MED4.5 3.20 3.864.2 3.919 LQ1.6 1.80 2.8 Acct Pay to Sales (%)UQ 2.5 2.80 3.7 MED4.3 6.30 7.85.9 7.1 LQ10.3 8.2 12.80 9.5 Profitability Return on Sales (%)UQ8.7 8.10 6.67.5 7.6 MED0.3 1.3 3.70 3.2 LQ(5.5) (1.60)(4.5) Return on Assets (%)UQ6.2 11.40 13.3 MED0.2 1 3.90 4.86.1 5.6 LQ(7.7) (1.90)(4.2) Return on NW (%)UQ7.1 16.20 13.225.7 MED0.3 3.7 9.60 9.4 17.1 LQ(40.2) (0.80) (9.6) (Industry Norms, 2006, 2007, 2008) S.W.O.T. Analysis Our consulting team developed a S.W.O.T. analysis for Xerox Corporation. First we examined financial ratios, 10-K reports, and other resources significant to the evaluation of the company. Next, we examined the products and services offered by the company, as well as management strategies, Internet strategies, and marketing strategies. We then proceeded by identifying Xerox’s strengths, weaknesses, opportunities, and threats. Finally, we created alternative solutions and devised ways to implement these solutions to help make Xerox more profitable. Strengths/Opportunities By combining Xerox’s strengths of the ACS acquisition, mortgage technology innovation, and its global name brand with its opportunities in the silver ink creation, outsourcing capabilities, and reusable paper development, it can be concluded that Xerox’s strengths will make its opportunities viable. ,[object Object]

Xerox’s current position as a power player in electronic loan processing (Wire, 2009)—as the field grows—will provide more cash flow to finance opportunities.

Being a universally known brand in a global market provides a platform for anticipation and reputability for the silver ink and reusable paper project.Strengths/Threats The threats to Xerox’s strengths are not as dark as the opportunities are bright. ,[object Object]

Can’t discriminate due to health position or outlook.

Must cover all costs, cannot be selective about extent of coverage provided.

As always, competition is a threat, but given Xerox’s current position as a leader in printable electronics (silver ink), and outsourcing, it will be unrivaled.

While more companies around the world are going digital, it would seem to pose a major threat to Xerox. The digital increase is not too much to worry about because Xerox is expanding into more digital services, and will get a boost from outsourcing to cover lost revenue.Weaknesses/Opportunities Xerox’s weaknesses include the rising costs of sales and expenses, and a lack of presence in the consumer home electronic market. These weaknesses could create an issue in the company, especially costs of sales and expenses. ,[object Object]

Though the lack of a market share in consumer home electronics is a weakness, it has no effect on the opportunities for Xerox.Weaknesses/Threats Combining Xerox’s weaknesses and threats show some things that Xerox needs to be aware of so that it can protect itself from them. ,[object Object]

Xerox’s Z-Score of 1.178 means that the company has very high probability of going bankrupt within the next couple years. Combine this high probability of bankruptcy with increasing costs of sales and the possibility of increased health expenses, Xerox might soon find itself in a liquidity crisis. Table 4: S.W.O.T. Matrix For Xerox Corporation ,[object Object],Alternative Solutions Based on the S.W.O.T. analysis, the following alternative solutions should be implemented as part Xerox Corporation’s corporate strategy. ,[object Object]

Work to efficiently produce its Silver Ink and Reusable Paper developments.

Invest in Research and Development

Loan processing technologyXerox has been a major player in the midsize to large printer and photo copier markets for decades, but recently due to loss of market cap in the electronic industry and a decline in its stock price, Xerox has needed to revamp itself. To reclaim its lost market value, Xerox has recently made power moves by acquiring ACS, a major outsourcing solutions company, while also developing revolutionary products like Silver Ink and Reusable Paper. The company should focus on making their innovations come to life with a business plan that includes aggressive marketing campaigns coupled with entering into new markets. RECOMMENDATIONS From the aforementioned solutions, recommendations are: ,[object Object]

Position the company to be able to produce Silver Ink and Reusable Paper. While the adjustment to small business and household consumer markets is seen as a safer bet, these two innovations could not only help diversify the company’s sources of revenue, but also transcend the company in its sector. Producing and Marketing should now be the major focus when it comes to these products. Production is the most costly task involving the creation of a product. After its completion marketing is the second-most important aspect of the product after product capabilities. Putting Silver Ink and Reusable Paper on the market quickly is a must for Xerox.

Xerox Management and Financial Analysis

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