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Xerox reports profits more than doubled

Xerox Corp. on Monday reported second-quarter profits more than doubled, but excluding one-time gains and charges the results were lower than Wall Street expectations.
/ Source: The Associated Press

Copier and printer maker Xerox Corp. on Monday reported second-quarter profits more than doubled, but excluding one-time gains and charges the results were lower than Wall Street expectations.

Xerox also forecasts profit for the third quarter that is below current Wall Street forecasts, but said it would meet its full-year guidance.

"We're very bullish on market demand," Anne Mulcahy, Xerox's chief executive, told analysts. "We're really not concerned about market demand."

The Stamford-based maker of copiers, printers, scanners and fax machines said earnings available to common shareholders were $408 million, or 40 cents per share, for the three months ended June 30, up from $187 million, or 21 cents per share, a year ago. Those figures exclude preferred dividend payments.

Excluding items such as a tax gain and restructuring charges, earnings from continuing operations were about $210 million, or 20 cents per share, Xerox said.

Revenue edged up 2 percent to $3.92 billion, mostly because of higher overall equipment sales and favorable exchange rates. Sales of equipment grew 4 percent as sales of color products rose 17 percent. Revenue from digital systems and services offset declines from its older, light-lens technology, the company said.

On average, analysts surveyed by Thomson Financial expected earnings of 23 cents per share on revenue of $3.68 billion.

Second-quarter gross margins came in below expectations at 39 percent of profits, the company said. Xerox attributed this to a shift toward lower-margin desktop office products along with light production and color systems.

"These equipment sales will drive future post-sale gains, and, at the same time, we're adjusting our business model to respond to the resulting pressure on margins," Mulcahy said.

Company officials said they are responding aggressively with 24 new products, software and services, and a restructuring plan that is eliminating 2,600 jobs.

Earlier in the year, Xerox cut 1,100 positions, bringing total job reductions for 2005 to 3,700. The company, which has already made some of the newest cuts, currently has about 57,300 employees.

In late June, the company unveiled the restructuring plan aimed at cutting jobs globally and expected to result in a charge of about $200 million.

The company on June 30 said it would record a tax benefit during the quarter of $330 million. Most of the benefit is the result of a 2002 change in tax law, while some was due to a favorable resolutions of other tax matters between 1996 to 1998.

Mulcahy forecast third-quarter earnings of 16 cents to 18 cents per share, or 17 cents to 19 cents per share excluding a restructuring charge. Analysts had expected adjusted earnings of 22 cents per share.

She said that Xerox expects to meet its full-year net earnings guidance of $1.04 to $1.14 per share, but likely on the low end, and that the company expects a strong second half, citing the impact of new products.

While concerned about the lower margins, analysts said they were not worried about a return to troubles at Xerox. The company, which has become profitable in recent years after an accounting scandal, a loss of market share and other troubles, has strong cash flow and is improving its balance sheet, analysts said.

"I think the top line and the product sales were very strong," said Shannon Cross, principle of Cross Research in Short Hill, N.J. "I think their products are well positioned relative to their competitors."

The new products should generate higher profit margins, said Ulysses Yannas, broker with Buckman, Buckman and Reid Inc. in New York.

"When you are going through a transformation as big as they did, this type of swing is not unusual," Yannas said.