Paging Xerox (NYSE:XRX). Come in, Xerox. Do you copy?

Hmm. No answer. I guess we'll have to wait for a call back. Luckily, we won't have to wait long. The world's most recognizable copier brand name has promised to report its third-quarter 2006 earnings numbers bright and early Monday morning.

What analysts say:

  • Buy, sell, or waffle? Ten analysts follow Xerox, giving the firm three buy ratings and seven holds.
  • Revenues. On average, they're looking for less than 2% sales growth tomorrow, to $3.8 billion.
  • Earnings. But a 22% improvement in profits to $0.22 per share.

What management says:
It's been well over a year since I started waling on the now long-dead horse of Xerox's hefty debt load. Not that I think anyone at the company was listening -- but it does seem that Foolish minds think alike. Leading off its earnings release of last quarter, Xerox put the fact that it has paid down $1 billion in debt on the list of its top five recent accomplishments.

Reviewing the rest of the quarter's results, though, CEO Anne Mulcahy spun the results so well as to put a whirling dervish to shame. "Revenue is up," said she. (Um, by 1%.) "We increased gross margins," continued Mulcahy (but they're still down year over year), before concluding that the firm "delivered solid bottom-line results."

What management does:
Fact of the matter is, rolling gross margins have been trending downwards for well over a year, and although they did improve both sequentially and year over year last quarter, the trailing-12-months results show a sequential improvement of just 20 basis points.

Margins %

3/05

6/05

9/05

12/05

3/06

6/06

Gross

42.1

41.8

41.1

41.2

40.8

41.0

Op.

10.4

9.9

9.6

9.7

9.3

9.8

Net

5.2

6.6

5.9

6.2

6.2

5.1
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Operationally, though, Xerox has made improvements. Over the last six months, it has experienced dead flat sales versus the first half of last fiscal year. Cost of goods sold increased 1%, which helps to explain why the gross margins have been sinking. But the firm did a nice job of combating that trend by tightening up on its selling, general, and administrative expenses, knocking 3% off of them versus the same period in 2005.

As for the anemic-looking net margin, well, that's an optical illusion caused by the fact that back in the June 2005 quarter, Xerox benefited from a $233 million tax credit that lifted its net margin to nearly 11% for the 2005 third quarter, and inflated the trailing-12-month numbers for the next three quarters. What happened last quarter is simply that the net margin returned to its pre-tax credit norm.

Before closing, I'll make one final note for you to ponder going into the weekend. Over the last six months, Xerox's balance sheet has shown some disturbing trends in the form of accounts receivable and inventories that are both outpacing sales in their growth. A/R is up 4% year over year, and inventories are, on average, 6% higher. Unless Xerox turns in markedly faster sales growth than the analysts expect on Monday, we'll be hoping to see both of those numbers decline significantly.

Competitors:

  • Eastman Kodak (NYSE:EK)
  • FedEx (NYSE:FDX)
  • Flextronics (NASDAQ:FLEX)
  • Hewlett-Packard (NYSE:HPQ)
  • IKON (NYSE:IKN)
  • Lexmark (NYSE:LXK)

Related Foolishness:

FedEx is a Stock Advisor recommendation. Learn Wall Street's dirtiest secret with our free report.

Fool contributor Rich Smith does not own shares of any company named above.