FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to___________
Commission File Number 1-4471
XEROX CORPORATION
(Exact Name of Registrant as
specified in its charter)
New York 16-0468020
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
P.O. Box 1600
Stamford, Connecticut 06904-1600
(Address of principal executive offices)
(Zip Code)
(203) 968-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at April 30,1995
Common Stock 107,017,183 shares
Class B Stock 1,000 shares
This document consists of 36 pages.
1
(THIS PAGE IS INTENTIONALLY LEFT BLANK)
2
Xerox Corporation
Form 10-Q
March 31, 1995
Table of Contents
Page
Part I - Financial Information
Item 1. Financial Statements
Consolidated Statements of Income 4
Consolidated Balance Sheets 5
Consolidated Statements of Cash Flows 6
Supplemental Cash Flows Information 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Financial Summary 13
Document Processing 15
Insurance 21
Discontinued Operations 27
Liquidity and Capital Structure 29
Capital Resources 30
Hedging Instruments 31
Part II - Other Information
Item 1. Legal Proceedings 33
Item 6. Exhibits and Reports on Form 8-K 33
Signatures 34
Exhibit Index
Computation of Net Income per Common Share 35
Computation of Ratio of Earnings to Fixed Charges 36
3
PART I - FINANCIAL INFORMATION
Xerox Corporation
Consolidated Statements of Income
Three months ended
March 31,
(In millions, except per-share data) 1995 1994
Document Processing
Revenues
Sales $ 1,873 $ 1,529
Service and rentals 1,645 1,490
Finance income 252 252
Total Revenues 3,770 3,271
Costs and Expenses
Cost of sales 1,101 912
Cost of service and rentals 837 717
Equipment financing interest 126 128
Research and development expenses 219 196
Selling, administrative and general
expenses 1,102 993
Other, net 18 63
Total Costs and Expenses 3,403 3,009
Income before Income Taxes, Equity Income
and Minorities' Interests 367 262
Income Taxes 142 104
Equity in Net Income of Unconsolidated
Affiliates 13 5
Minorities' Interests in Earnings of
Subsidiaries 51 32
Income from Document Processing 187 131
Insurance
Revenues
Insurance premiums earned 553 578
Investment and other income 121 105
Total Revenues 674 683
Costs and Expenses
Insurance losses and loss expenses 473 445
Insurance acquisition costs and other
insurance operating expenses 184 191
Interest expense 61 52
Administrative and general expenses 29 13
Total Costs and Expenses 747 701
Realized Capital Gains 4 7
Income (loss) before Income Taxes (69) (11)
Income Taxes (Benefits) (29) (9)
Income (loss) from Insurance (40) (2)
Total Company
Net Income $ 147 $ 129
Primary Earnings per Share $ 1.23 $ 1.05
Fully Diluted Earnings per Share $ 1.20 $ 1.03
See accompanying notes.
4
Xerox Corporation
Consolidated Balance Sheets
March 31, December 31,
(In millions, except share data in thousands) 1995 1994
Assets
Document Processing
Cash $ 22 $ 35
Accounts Receivable, net 1,940 1,811
Finance Receivables, net 3,884 3,910
Inventories 2,601 2,294
Deferred Taxes and Other Current Assets 1,056 1,199
Total Current Assets 9,503 9,249
Finance Receivables Due after One Year, net 5,987 6,038
Land, Buildings and Equipment, net 2,055 2,108
Investments in Affiliates, at equity 1,266 1,278
Goodwill 639 66
Other Assets 637 635
Total Document Processing Assets 20,087 19,374
Insurance
Cash 7 21
Investments Available-for-Sale 8,637 8,384
Reinsurance Recoverable 2,957 3,063
Premiums and Other Receivables 1,306 1,276
Goodwill 282 284
Deferred Taxes and Other Assets 1,390 1,438
Total Insurance Assets 14,579 14,466
Investment in Discontinued Operations 4,704 4,692
Total Assets $ 39,370 $ 38,532
Liabilities and Equity
Document Processing
Short-Term Debt and Current Portion of
Long-Term Debt $ 3,113 $ 3,159
Accounts Payable 472 562
Accrued Compensation and Benefit Costs 464 709
Unearned Income 287 298
Other Current Liabilities 2,121 2,110
Total Current Liabilities 6,457 6,838
Long-Term Debt 6,402 5,494
Liability for Postretirement Medical Benefits 1,016 1,006
Deferred Taxes and Other Liabilities 1,949 2,210
Total Document Processing Liabilities 15,824 15,548
Insurance
Unpaid Losses and Loss Expenses 8,742 8,809
Unearned Income 1,064 1,066
Notes Payable 419 425
Other Liabilities 837 954
Total Insurance Operating Liabilities 11,062 11,254
Discontinued Operations Liabilities -
Policyholders' Deposits and Other 4,219 4,194
Other Long-Term Debt and Obligations 2,855 2,102
Deferred ESOP Benefits (596) (596)
Minorities' Interests in Equity of Subsidiaries 659 1,021
Preferred Stock 828 832
Common Shareholders' Equity 4,519 4,177
Total Liabilities and Equity $ 39,370 $ 38,532
Shares of common stock issued and outstanding 106,872 105,993
See accompanying notes.
5
Xerox Corporation
Consolidated Statements of Cash Flows
Three months ended March 31 (In millions) 1995 1994
Cash at Beginning of Period
Document Processing $ 35 $ 68
Insurance 21 18
Total 56 86
Document Processing
Cash Flows from Operating Activities (222) (295)
Cash Flows from Investing Activities
Cost of additions to land, buildings and equipment (43) (76)
Proceeds from sales of land, buildings and equipment 14 7
Purchase of additional interest in Rank Xerox (972) -
Net change in payables to Insurance 1 (11)
Net transactions with Insurance 26 30
Net transactions with Discontinued Operations 24 14
Total (950) (36)
Cash Flows from Financing Activities
Net change in debt 1,230 370
Dividends on common and preferred stock (97) (101)
Proceeds from sale of common stock 60 52
Redemption of preferred stock (4) (1)
Dividends to minority shareholders (26) (21)
Proceeds received from minority shareholders - 3
Total 1,163 302
Effect of Exchange Rate Changes on Cash (4) (38)
Net Cash Flows from Document Processing (13) (67)
Insurance
Cash Flows from Operating Activities (90) (81)
Cash Flows from Investing Activities
Purchase of portfolio investments (478) (520)
Proceeds from sales of portfolio investments 197 267
Decrease in short-term investments 271 234
Subtotal (10) (19)
Other, net (12) 2
Net transactions with Discontinued Operations (12) 8
Total (34) (9)
Cash Flows from Financing Activities
Net change in notes payable (6) -
Net change in debt 142 122
Net transactions with Document Processing (26) (30)
Total 110 92
Net Cash Flows from Insurance (14) 2
Discontinued Operations
Income from discontinued operations - -
Collections and changes in assets, net (13) 38
Net change in debt 12 (31)
Net change in operating liabilities 13 15
Net transactions with Document Processing (24) (14)
Net transactions with Insurance 12 (8)
Net Cash Flows from Discontinued Operations - -
Cash at End of Period
Document Processing 22 1
Insurance 7 20
Total $ 29 $ 21
See Supplemental Cash Flows Information and accompanying notes.
6
Xerox Corporation
Consolidated Statements of Cash Flows
Supplemental Cash Flows Information
Reconciliation of income to cash flows from operating activities:
Three months ended March 31, (In millions) 1995 1994
Document Processing
Income from Document Processing $ 187 $ 131
Adjustments required to reconcile income to cash
flows from operating activities:
Depreciation and amortization 158 152
Provisions for doubtful accounts 50 31
Provision for postretirement medical benefits 15 13
Charges against 1993 restructuring reserve (111) (80)
Minorities' interests in earnings of subsidiaries 51 32
Undistributed equity in income of affiliated companies (13) (2)
Increase in inventory (342) (278)
(Increase)decrease in finance receivables 35 (37)
Increase in accounts receivable (151) (97)
Decrease in accounts payable and accrued compensation
and benefit costs (219) (174)
Net change in current and deferred income taxes 39 (61)
Other, net 79 75
Cash Flows from Operating Activities $(222) $ (295)
Insurance
Loss from Insurance $ (40) $ (2)
Adjustments required to reconcile loss to cash
flows from operating activities:
Depreciation and amortization 9 8
Provisions for doubtful accounts 7 1
Realized capital gains (4) (7)
Decrease in receivables 70 94
Decrease in accounts payable and accrued compensation
and benefit costs (57) (60)
Increase(decrease) in unearned income (2) 4
Decrease in unpaid losses and loss expenses (64) (69)
Other, net (9) (50)
Cash Flows from Operating Activities $ (90) $ (81)
See accompanying notes.
7
Xerox Corporation
Notes to Consolidated Financial Statements
1. The consolidated financial statements presented herein have
been prepared by Xerox Corporation ("the Company") in accordance
with the accounting policies described in its 1994 Annual Report
to Shareholders and should be read in conjunction with the notes
thereto. The 1994 financial statements presented herein have been
reclassified to conform with the 1995 presentation.
In the opinion of management, all adjustments (consisting only of
normal recurring adjustments) which are necessary for a fair
statement of operating results for the interim periods presented
have been made. Interim financial data presented herein are
unaudited.
2. Inventories consist of (in millions):
March 31, December 31,
1995 1994
Finished products $ 1,609 $ 1,458
Work in process 107 88
Raw materials and supplies 347 268
Equipment on operating leases, net 538 480
Total $ 2,601 $ 2,294
3. Common shareholders' equity consists of (in millions):
March 31, December 31,
1995 1994
Common stock $ 108 $ 107
Additional paid-in-capital 1,467 1,406
Retained earnings 3,228 3,197
Net unrealized loss on
investment securities (193) (433)
Translation adjustments (91) (100)
Total $ 4,519 $ 4,177
4. Effective January 1, 1995, the Company changed the reporting
periods of the companies owned jointly with The Rank Organisation
Plc ("RO")("the Rank Xerox Companies") and Latin American
operations from fiscal years ending October 31 and November 30,
respectively, to a calendar year ending December 31. The results
of these operations during the period between the end of the 1994
fiscal year and the beginning of the new fiscal year ("the stub
period") were recorded as a direct charge to retained earnings
and amounted to a loss of $21 million. The charge to retained
earnings was necessary to avoid reporting more than twelve months
results of operations in one year. Accordingly, the Company's
first quarter 1995 Consolidated Statement of Income reflects the
results of worldwide operations for the period from January 1,
1995, to March 31, 1995. The Consolidated Statement of Cash
8
Xerox Corporation
Notes to Consolidated Financial Statements
Flows reflects the cash activity for the stub period in the
"Other, net" line of the Document Processing Operating Activities
section.
5. On February 28, 1995, the Company paid RO 620 million pounds sterling,
or approximately $972 million, for a 40 percent interest in RO's
financial interest in the Rank Xerox Companies. The transaction
increased the Company's financial interest in the Rank Xerox
Companies to approximately 80 percent from 67 percent. Based on
the preliminary allocation of the purchase price, this
transaction resulted in goodwill of approximately $574 million
(including an initial estimate of transaction costs), a decline
in minorities' interests in the equity of subsidiaries of
approximately $400 million, and an increase in long-term debt of
approximately $972 million. The goodwill will be amortized on a
straight-line basis over 40 years. This transaction reduced first
quarter minorities' interest by approximately $6 million and, net
of after-tax interest expense and the amortization of goodwill,
increased income by about $2 million.
6. The Company's Consolidated Balance Sheet at March 31, 1995
includes current and non-current accrued liabilities of $379
million and $248 million, respectively, associated with the
Document Processing restructuring program announced in December
1993. At December 31, 1994, the corresponding accrued
liabilities aggregated $765 million. During the stub period and
the three month period ended March 31, 1995, $30 million and $108
million of net pre-tax charges, respectively, were charged
against the aggregate reserve balance. Management believes the
aggregate reserve balance of $627 million at March 31, 1995 is
adequate for the completion of the restructuring program.
Additional information concerning the progress of the
restructuring program is included in the accompanying
Management's Discussion and Analysis on Pages 17 and 18.
7. Other Information on the Company's Consolidated Statements
follows:
Interest expense totaled $200 million and $181 million for the
three months ended March 31, 1995 and 1994, respectively.
Long-term debt, excluding the current portion, totaled $9,446
million at March 31, 1995 and $7,780 million at December 31,
1994.
9
Xerox Corporation
Notes to Consolidated Financial Statements
8. Subsequent Events
On April 26, 1995, Talegen Holdings, Inc. ("Talegen"), a
subsidiary of the Company, entered into an agreement with
Guaranty National Corporation for the sale of Viking Insurance
Holdings, Inc., ("Viking") a Talegen subsidiary, for total
consideration of in excess of $100 million, which approximates
book value. Revenues for Viking were (in millions) $161, $182,
and $224 for the years ended December 31, 1994, 1993, and 1992,
respectively.
Also on April 26, 1995, the sale of Constitution Re Corporation,
another Talegen subsidiary, to EXOR America Inc. closed for a
final purchase price of $421 million in cash, and resulted in a
net loss of approximately $7 million.
9. Litigation
Document Processing
On March 10, 1994, a lawsuit was filed in the United States
District Court for the District of Kansas by two independent
service organizations (ISOs) in Kansas City and St. Louis and
their parent company. On April 15, 1994, another case was filed
in the United States District Court for the Northern District of
California by 21 different ISOs from 12 states. Plaintiffs in
these actions claim damages (to be trebled) to their individual
businesses resulting from essentially the same alleged violations
of law at issue in the antitrust class action in Texas, which was
settled by the Company during 1994. In one of the cases damages
are unspecified and in the other damages in excess of $10 million
are sought. In addition, injunctive relief is sought in both
actions. Claims for individual lost profits of ISOs who were not
named parties were not included in the class action. The two
actions have been consolidated for pretrial proceedings in the
District of Kansas. The Company has asserted counterclaims
against the plaintiffs alleging patent and copyright infringement
and misappropriation of Xerox trade secrets. Discovery is in its
early stages. The Company denies any wrongdoing and intends to
vigorously defend these actions and pursue its counterclaims.
Insurance
On September 15, 1992, International Surplus Lines Insurance
Company, which has since been merged into International Insurance
Company (International Insurance), a subsidiary of Talegen, filed
a complaint in the United States District Court for the Southern
District of Ohio, Eastern District, in Columbus, Ohio against
certain underwriting syndicates at Lloyd's of London and other
foreign reinsurance companies. The complaint seeks a declaratory
judgment that the defendants are obligated to reimburse
10
Xerox Corporation
Notes to Consolidated Financial Statements
International Insurance under various reinsurance contracts for
approximately $255 million in payments made or to be made to
Owens-Corning Fiberglas (OCF) for asbestos-related losses. In an
Opinion and Order dated September 27, 1994, International
Insurance's motion for summary judgment was granted. The court
ruled that International Insurance's payment of OCF's losses,
based on the determination that the manufacture, sale and
distribution of products containing asbestos constituted a single
occurrence, was reasonable and therefore binding on International
Insurance's reinsurers. The defendants filed motions for
reconsideration of the September 27 order. In order to avoid the
expense of further litigation and possible appeals, International
Insurance has executed settlement agreements with most of the
defendants in the action. The recovery pursuant to the settlement
agreements approximates the recorded reinsurance recoverable
balance after consideration for amounts written-off for
uncollectible reinsurance in prior years. Settlement discussions
with the remaining defendants are continuing and are expected to
result in additional executed settlement agreements with some or
all defendants. As of April 30, 1995, approximately $14.9 million
is outstanding with these remaining reinsurers. The litigation is
currently stayed by agreement of the parties pending the current
discussions to settle the litigation in its entirety.
In another OCF matter, on December 13, 1993, a complaint was
filed in the United States District Court for the District of New
Jersey against The North River Insurance Company (North River), a
subsidiary of Talegen, by certain foreign insurance companies and
underwriting syndicates at Lloyd's of London seeking to recover
certain sums paid, and to avoid certain sums to be paid, by them
to North River under various reinsurance contracts. Such sums
relate to approximately $106 million in defense expense costs
North River paid under insurance policies it issued for asbestos
bodily injury coverage to OCF; the payments resulted from a
decision rendered in favor of OCF in a binding arbitration. The
reinsurers allege that North River misrepresented and withheld
certain facts surrounding the decision and breached certain
duties to its reinsurers. As part of the Talegen restructuring,
International Insurance has assumed the rights and obligations
with respect to these reinsurance contracts. A motion by North
River to dismiss the complaint for lack of subject matter
jurisdiction has been granted by the Court. Plaintiffs have 30
days within which to seek to appeal this decision. International
Insurance believes it is entitled to the full payment of these
reinsurance recoverables and will vigorously defend the foregoing
action and denies any wrongdoing.
Farm & Home Savings Association (Farm & Home) filed a lawsuit in
the United States District Court for the Western District of
Missouri, Southwest Division alleging that under an agreement
previously entered into by certain Talegen insurance companies
11
Xerox Corporation
Notes to Consolidated Financial Statements
(Insurance Companies) with Farm & Home (Indemnification
Agreement), the Insurance Companies are required to defend and
indemnify Farm & Home from actual and punitive damage claims
being made against Farm & Home relating to the Brio superfund
site (Brio). The Indemnification Agreement had been entered into
in connection with the settlement of disputes between Farm & Home
and the Insurance Companies regarding policies issued to Farm &
Home during the time it was developing the Southbend subdivision
in Friendswood, Texas (Southbend), which is close to Brio. Under
the Indemnification Agreement, the Insurance Companies are
required to indemnify Farm & Home only as to claims asserted by
current or former residents of Southbend itself, or persons whose
injuries are alleged to have been incurred as a direct
consequence of exposure to allegedly hazardous substances within
Southbend emanating from the Brio site. Farm & Home alleges that
the Indemnification Agreement covers claims for injuries arising
elsewhere than Southbend. The Insurance Companies deny any
liability to Farm & Home and intend to continue to vigorously
contest coverage under the Indemnification Agreement for injuries
not related to Southbend. Cross motions for summary judgment in
the action are pending.
In a number of lawsuits pending against Farm & Home in the
District Courts of Harris County, Texas, plaintiffs seek both
actual and punitive damages allegedly relating to injuries
arising out of the hazardous substances at Brio. The Insurance
Companies have been defending these cases under a reservation of
rights because it is unclear whether the claims fall under the
coverage of either the policies or the Indemnification Agreement.
In one of the pending cases, the court dismissed claims brought
by plaintiffs who were unable to demonstrate a pertinent nexus to
the Southbend subdivision.
12
Xerox Corporation
Management's Discussion and Analysis of
Results of Operations and Financial Condition
The financial summary for the first quarter and this discussion
present separately the operating results of Document Processing
and Insurance. Income from Insurance, as shown in the financial
summary, includes assigned interest expense from the parent
company.
Financial Summary
First Quarter
(In millions, except per-share data) 1995 1994 % Growth
Revenues
Document Processing $ 3,770 $ 3,271 15%
Insurance 674 683 (1)
Total Revenues $ 4,444 $ 3,954 12
Net Income
Document Processing $ 187 $ 131 43
Insurance (40) (2) *
Net Income $ 147 $ 129 14
Primary Earnings per Share
Document Processing $ 1.60 $ 1.07 50
Insurance (.37) (.02) *
Primary Earnings per Share $ 1.23 $ 1.05 17
Fully Diluted Earnings per Share
Document Processing $ 1.54 $ 1.04 48
Insurance (.34) (.01) *
Fully Diluted Earnings per Share $ 1.20 $ 1.03 17
* Calculation not meaningful.
13
Summary of Total Company Results
In view of the Company's 1993 decision to concentrate its
resources on its core Document Processing business and disengage
from the Insurance and Other Financial Services (IOFS)
businesses, management believes the most meaningful and
appropriate portrayal of the Company's operating results and
financial position is to report the Document Processing and
Insurance businesses on a tiered basis within the Company's
consolidated financial statements.
Document Processing revenues in the 1995 first quarter were $3.8
billion, an increase of 15 percent from the first quarter of
1994. Excluding the effects of changes in the translation of
foreign currencies into U.S. dollars, Document Processing
revenues increased 11 percent in the quarter. Insurance revenues
in the 1995 and 1994 first quarters were $0.7 billion.
Document Processing income grew 43 percent in the 1995 first
quarter to $187 million from $131 million in the 1994 first
quarter.
Insurance loss was $40 million in the 1995 first quarter compared
with a loss of $2 million in the 1994 first quarter.
Net income in the 1995 first quarter was $147 million compared
with $129 million in the first quarter of 1994.
The MD&A on page 13 discloses earnings per share (EPS) for the
Company's consolidated operations and for the Document Processing
and Insurance Operations. The presentation of separate Document
Processing and Insurance EPS amounts is not in accordance with
generally accepted accounting principles. The Company believes,
however, that for analytical purposes, these EPS amounts
represent the contributions of the Company's two businesses to
the consolidated results of operations and that the Document
Processing results are an appropriate basis for comparison with
future financial results from Document Processing. EPS amounts
presented in accordance with generally accepted accounting
principles are on page 4.
14
Document Processing
Underlying Growth
To understand the trends in the business, the Company believes
that it is helpful to adjust revenue and expense growth (except
for ratios) to exclude the impact of changes in the translation
of foreign currencies into U.S. dollars. This adjusted growth
is referred to as "underlying growth."
When compared with the major European currencies, the U.S.
dollar was approximately 12 percent weaker in the 1995 first
quarter than in the 1994 first quarter. As a result, foreign
currency translation had a favorable impact of 4 percentage
points on total revenues in the 1995 first quarter. The
Company does not hedge the translation of foreign currency-
denominated revenues.
Revenues
Management estimates that the components of underlying revenue
growth were as follows:
Underlying Growth
1995 1994
Q1 FY Q4 Q3 Q2 Q1
Total Revenues 11% 7% 11% 4% 6% 5%
Sales
Equipment 9 10 13 4 11 9
Supplies 22 10 21 9 4 9
Paper 52 6 23 2 (1) -
Total 18 10 14 5 9 9
Service/Rentals/FacMgmt/Other
Service 3 4 6 4 4 3
Rentals 3 (1) 5 (4) (3) (7)
Facilities Management/Other 33 20 22 20 22 17
Total 6 5 8 5 5 3
Finance Income (4) (4) (3) (3) (6) (7)
Memo:
Non-Equipment Revenues 12 5 9 4 4 3
Total revenue growth of 11 percent in the 1995 first quarter
was driven by equipment sales, as well as strong growth in the
facilities management business and paper and supplies sales.
The good growth in equipment sales in the first quarter
reflected excellent growth in production publishing and color
15
copying and printing and good growth in black-and-white
copying. OEM printer sales also had excellent growth.
Non-Equipment revenues from supplies, paper, service, rentals,
facilities management and other revenues, and income from
customer financing represented 72 percent of total revenues in
the 1995 first quarter. Growth in these revenues is primarily
a function of the growth in the Company's installed population
of equipment, usage and pricing.
Supplies sales: The growth in the 1995 first quarter is due
to excellent growth in cartridge sales for personal copiers
and OEM printers, as well as excellent growth in all product
segments of enterprise digital printing.
Paper sales: The Company's strategy is to charge a spread
over mill wholesale prices to cover its costs and value
added as a distributor. The improvement in the growth rate
in the first quarter was due to higher worldwide prices and
volume. Although the higher prices and volume significantly
increased revenues, the gross margin declined, principally
due to a shift in mix to mill direct shipments.
Service revenues: Growth slowed somewhat, reflecting the
growth in facilities management and some shift towards
rental in the U.S. in recent quarters.
Rental revenues: The increase reflects an increasing trend
in the U.S. toward cost-per-copy rental plans, which
adversely affects the growth of equipment sales, service
revenues and financing income. Outside the U.S., rental
revenues continued the long term decline reflecting a
customer preference for outright purchase.
Facilities management, copy centers and other revenue: This
growth reflects the trend of customers focusing on their
core businesses and outsourcing their document processing
requirements to Xerox. This has the effect of diverting
revenue from equipment sales, service and financing income.
Finance income: The decline in 1995 reflects lower interest
rates on financing contracts year-over-year. However, the
gross margin remains at about 50%.
16
Geographically, the underlying revenue growth rates are
estimated as follows:
Underlying Growth
1995 1994
Q1 FY Q4 Q3 Q2 Q1
Total Revenues 11% 7% 11% 4% 6% 5%
United States 8 7 10 6 7 4
Rank Xerox 13 7 13 3 7 6
Other Areas 17 7 10 4 2 5
Rank Xerox Limited and related companies (Rank Xerox)
manufactures and markets Xerox products principally in Europe.
Revenue growth in the first quarter was excellent in Italy,
Spain, Eastern Europe and the former Soviet Union, strong in
Germany, the United Kingdom and the Nordic countries, and
modest in France.
Other Areas includes operations principally in Latin America
and Canada. Revenue growth in the first quarter was excellent
in Brazil and the smaller Latin American countries, and good in
Canada. Revenues declined significantly in Mexico due to
currency and the economic disruption following devaluation of
the Mexican peso in December 1994.
For the major product categories, the underlying revenue growth
rates are estimated as follows:
Underlying Growth
1995 1994
Q1 FY Q4 Q3 Q2 Q1
Total Revenues 11% 7% 11% 4% 6% 5%
Black & White Copiers 4 4 7 - 4 3
Enterprise Printing 22 20 22 17 22 21
Revenues from black-and-white copying represented 61 percent of
total document processing revenues in the 1995 first quarter
and 63 percent for the 1994 full year. Revenues from enterprise
printing, including production publishing, data center
printing, and color printing and copying, represented 23
percent of total revenues in the 1995 first quarter and 22
percent for the 1994 full year.
Productivity Initiatives
In December 1993, the Company announced a restructuring program
with the objectives of continuing to significantly reduce the
17
cost base and to improve productivity. The Company expects to
ultimately reduce its worldwide work force by more than 10,000
employees and to close or consolidate a number of facilities.
The Company estimates that this program achieved pre-tax cost
reductions of approximately $350 million in 1994, and will
achieve approximately $700 million in 1995 and higher amounts
thereafter. The Company stated, however, that it expected a
portion of these savings to be reinvested to reengineer
business processes, to support expansion in emerging markets,
and to mitigate anticipated continued pressure on gross
margins.
Employment declined by 10,700 from year-end 1993 to 86,300
employees at the end of the 1995 first quarter; 9,500 of the
reductions were due to restructuring program initiatives and
1,300 employees were transferred to Electronic Data Systems
Corp. (EDS), partially offset by 100 additions, net of replaced
attrition. Employment declined by 1,300 in the first quarter,
consisting of 1,900 due to the restructuring program, partially
offset by the addition of 600 employees to support the rapidly
growing facilities management business.
To date, the activities associated with the productivity
initiatives are on track towards achieving the Company's
objectives.
Costs and Expenses
The gross margins by revenue stream were as follows:
Gross Margins
1995 1994
Q1 FY Q4 Q3 Q2 Q1
Total Gross Margin % 45.2% 45.8% 45.3% 45.7% 46.2% 46.3%
Sales 41.2 40.7 41.5 40.1 40.6 40.3
Service/Rental 49.1 51.6 50.9 51.5 52.1 51.9
Financing 50.1 50.1 50.1 51.2 49.8 49.3
The improvement in the sales gross margin from the first
quarter 1994 was principally due to favorable product mix and
cost reductions, partially offset by continuing pricing
pressures and adverse currency. The erosion in the service and
rentals gross margin was largely due to pricing pressures,
significant inflationary cost increases which were not offset
by pricing in Brazil, and adverse currency, partially offset by
productivity improvements.
Research and development (R&D) expense increased 11 percent in
the 1995 first quarter. The Company expects to continue to
increase its investment in technological development to
maintain its premier position in the rapidly changing document
processing market and expects to introduce a stream of new
18
products in the coming months. The Company's R&D is
strategically coordinated with that of Fuji Xerox Co., Ltd., an
unconsolidated joint venture between Rank Xerox Limited and
Fuji Photo Film Company Limited. Fuji Xerox invested
approximately $500 million in R&D in 1994.
Selling, administrative and general expenses (SAG) increased 7
percent in the 1995 first quarter principally due to increased
commissions and other expenses related to the revenue growth,
and economic cost increases, particularly in Brazil, partially
offset by improved productivity. SAG was 29.2 percent of
revenue in the first quarter, an improvement of 1.2 percentage
points from the 1994 first quarter.
Overall, the Company's Brazilian operations had excellent
profit growth in the 1995 first quarter principally due to
increased equipment sales revenues. In spite of significant
operational difficulties in the Company's Mexican operations,
total Latin American operations also had excellent profit
growth in the 1995 first quarter. The Brazilian currency
devaluation of 6 percent in the 1995 first quarter resulted in
a net $3 million of balance sheet translation losses after
recognition of the impacts of the new economic plan implemented
by the Brazilian government on July 1, 1994. The $58 million
year-over-year reduction in losses from balance sheet
translation due to a lower rate of net devaluation was largely
offset by inflationary cost and expense increases. Consistent
with the government imposed moratorium on price increases on
one-year contracts, as part of the new economic plan, these
inflationary increases have not yet been recovered through
price increases.
Income Taxes, Equity in Net Income of Unconsolidated Affiliates
and Minorities' Interests in the Earnings of Subsidiaries
Income before income taxes, equity in income of unconsolidated
affiliates and minorities' interests increased 40 percent to
$367 million in the 1995 first quarter from $262 million in the
1994 first quarter.
The effective tax rate was 38.7 percent in the 1995 first
quarter compared with 39.8 percent in the 1994 first quarter
and 39.3 percent in the 1994 full year. The change in rates
resulted from the mix of domestic and international earnings.
Equity in net income of unconsolidated affiliates increased in
the 1995 first quarter to $13 million from $5 million in the
1994 first quarter, principally due to Fuji Xerox operations,
which improved in spite of a provision for losses related to
the Kobe earthquake.
The increase in minorities' interests in the earnings of
subsidiaries to $51 million in the 1995 first quarter from $32
19
million in the 1994 first quarter was due to excellent growth
in Rank Xerox income.
On February 28, 1995, Xerox increased its financial interest in
Rank Xerox to about 80 percent from 67 percent. This
transaction reduced first quarter minorities' interest by
approximately $6 million and, net of after-tax interest expense
and the amortization of goodwill, increased income by about $2
million.
Income
Income in the 1995 first quarter was $187 million, a growth of
43 percent compared with 1994.
The 1995 first quarter Document Processing primary earnings per
share increased 50 percent to $1.60 and fully diluted earnings
per share increased 48 percent to $1.54.
Rank Xerox and Latin American Fiscal-Year Change in 1995
Effective January 1, 1995, the Company changed Rank Xerox and
Latin American operations to calendar-year financial reporting.
The 1994 fiscal year ended on October 31 for Rank Xerox and on
November 30 for Latin American operations. The results of
these non-U.S. operations that occurred between the 1994 and
1995 fiscal years (the stub period) were accounted for as a
direct charge to equity. A loss of $21 million was charged to
equity in the stub period, primarily due to the currency
devaluation and related economic dislocations in Mexico.
Excluding the Mexican devaluation and related economic
dislocations, income during the stub period was $4 million.
Brazilian Tax Rate
In January, the Brazilian Congress approved an indefinite
increase in the statutory tax rate. The President of Brazil has
issued a Provisional Measure limiting that tax rate increase to
1995. If the Provisional Measure expires without approval by
the Brazilian Congress and is not again reissued by the
President of Brazil, the original indefinite tax rate increase
will take effect, which would result in a one-time charge of
approximately $30 million to deferred tax expense.
20
Insurance
Insurance Operating Results
The results of Insurance and Other Financial Services ("IOFS")
are separated into the continuing Insurance segment and
discontinued operations, which include Other Financial Services
("OFS"), (discontinued in 1993) and third-party financing and
real-estate development (discontinued in 1990). The Insurance
segment includes Talegen Holdings, Inc. ("Talegen"), Ridge
Reinsurance Limited ("Ridge Re") and that portion of Xerox
Financial Services, Inc. ("XFSI") interest expense and other
costs associated with the continuing business activities. Under
an agreement between Talegen and EXOR America Inc. ("EXOR")
providing for the sale of Constitution Re Corporation
("Constitution Re"), which was in effect during the first quarter
1995, earnings of Constitution Re would accrue to the buyer. The
Constitution Re sale was completed on April 26,1995 for a cash
sale price of $421 million. The transaction resulted in a net
loss of approximately $7 million. Net proceeds from the sale of
Constitution Re to EXOR will largely be used to pay down Xerox
debt in line with the Company's previously announced strategy to
disengage from its financial services businesses. Talegen
continues to own Crum and Forster Holdings, Inc., Industrial
Indemnity Holdings, Inc., Coregis Group, Inc., Westchester
Specialty Group, Inc., Viking Insurance Holdings, Inc., The
Resolution Group, Inc. and three insurance related service
companies (which, including Talegen, are referred to as the
"Remaining Companies"). Income after-tax from the Insurance
segment was a $40 million loss in the first quarter, 1995,
compared with a $2 million loss in the first quarter, 1994, as
summarized in the following table.
Q1 Q1
(In Millions) 1995 1994
Talegen Remaining Companies $ 34 * $ 31
Monsanto Settlement (Holding Co. Portion) (14)* -
Constitution Re - 6
Total Talegen 20 37
Cessions To Ridge Re (20)* -
Interest/Other (40) (39)
Total Insurance $(40)* $ (2)
* The after-tax impact of the March 2, 1995 settlement between
Monsanto Company and Talegen and four of its insurance
subsidiaries was a total of $22 million, which includes $1
million in Remaining Companies, $14 million at the holding
company level and $7 million in cessions to Ridge Re.
The Remaining Companies had after-tax income of $34 million in
the first quarter, 1995, compared with $31 million in the first
quarter, 1994. The year-over-year improvement primarily includes
improved underwriting results and higher investment income
21
partially offset by interest expense related to the $425 million
in debt issued in the fourth quarter 1994 and lower net realized
capital gains.
In late April, 1995, an agreement was signed with Guaranty
National Corporation for its purchase of Viking Insurance
Holdings, Inc., a Talegen subsidiary for total consideration in
excess of $100 million, which is approximately the same as book
value. Completion of the sale of Viking is subject to the usual
closing conditions and regulatory approvals. Net proceeds from
the sale will largely be used to pay down Xerox debt in line with
the Company's previously announced strategy to disengage from its
financial services businesses.
Revenues from the Insurance businesses were $674 million in the
first quarter, 1995, a decline of 1 percent from the first
quarter, 1994. The lower revenues in 1995 reflect a 4 percent
decrease in earned premiums, partially offset by a 15 percent
increase in investment and other income. Further details on
premium levels are included in the individual Talegen insurance
operating group results.
The underwriting loss for the Remaining Companies in 1995
improved by $5 million to $45 million, compared with $50 million
in the first quarter, 1994. The overall decrease in 1995
primarily reflects improvements in losses.
First quarter, 1995, underwriting results include cessions to
Ridge Re (a wholly owned subsidiary of Xerox Financial Services,
Inc. that provides reinsurance coverage to the Talegen insurance
companies) of $31 million pre-tax and $20 million after-tax of
adverse loss development related to 1992 and prior accident
years. There were no cessions to Ridge Re in the first quarter,
1994.
Catastrophe losses for the Remaining Companies were approximately
$1 million in 1995 compared with $19 million in 1994. The
reduction reflects the minimal losses in 1995 compared with the
first quarter of 1994, which included the California earthquake
and Northeast winter storms.
Underwriting results (expressed in terms of gross written
premiums and combined ratios) and after-tax income for each of
Talegen's five ongoing insurance operating groups included in the
Remaining Companies performance are summarized in the following
table. Underwriting results for The Resolution Group are not
meaningful on this basis since that unit has insignificant run-
off premiums and, therefore, are not displayed.
22
Gross Combined After-Tax
Premiums Growth Ratio Income
($ in millions) Written % 1995 1994 1995 1994
First Quarter
Coregis $ 91 16% 108.5 109.9 $ 4 $ 2
Crum & Forster Insurance 271 6 110.6 109.7 12 11
Industrial Indemnity 82 (26) 115.6 109.8 5 10
Viking 36 (9) 100.6 98.2 2 2
Westchester Specialty Group 62 (19) 116.3 107.5 6 6
The combined ratio is a standard insurance industry measurement
of underwriting results. It measures the relationship of losses
and expenses to net earned premiums. It does not include income
from an insurer's investments. The combined ratio is the sum of
the three ratios: (i) the loss and loss adjustment expense ratio,
(ii) the underwriting expense ratio and (iii) the dividend ratio.
The loss and loss adjustment expense ratio reflects claims
expenses, the underwriting expense ratio reflects policy
acquisition and administrative costs, and the dividend ratio
reflects dividends to policyholders. The objective of the
combined ratio is to match costs with revenues. Generally, a
combined ratio under 100 percent indicates underwriting profits
while a combined ratio exceeding 100 percent indicates
underwriting losses.
The following are the key reasons for the year-over-year
performance changes for each of these insurance operating groups.
At Coregis gross premiums grew by 16 percent compared with the
same period in 1994 due to good renewal retentions and new
business in selected programs. The combined ratio decreased 1.4
points to 108.5 for the quarter because of continued improvement
in underwriting results offset by somewhat higher operating
expenses. Net income increased $2 million due to increased
production and higher net investment income.
Crum & Forster Insurance's continued strong renewal retentions
and new business from the company's custom agents led to an
increase in gross written premiums of 6 percent for the first
quarter. The combined ratio increased 0.9 points from 1994 to
110.6 due to higher loss funding. Improved net investment
income, offset the higher loss funding and interest expense on
debt issued in the fourth quarter of 1994, resulted in a $1
million increase in net income.
At Industrial Indemnity the combined ratio increased 5.8 points,
while gross premium volume declined 26 percent reflecting the
impact of increased competition in California's open rating
environment, which is the company's largest market. Overall,
volume was also affected by lower loss-sensitive premiums due to
improved claims experience. Lower production in California, and
interest expense on debt issued in the fourth quarter of 1994,
resulted in a $5 million decrease in net income.
23
Viking's combined ratio for the quarter was 2.4 points higher
than the first quarter of 1994 because of the recognition in 1994
of favorable loss experience relating to prior years. Gross
written premiums declined 9 percent for the quarter due to the
company's continued focus on improving profitability versus
maintaining market share in the nonstandard automobile market.
Net income remained level at $2 million.
At Westchester Specialty Group gross premium volume declined 19
percent for the first quarter as continuing market pressure on
casualty prices, and related exposure reductions, were partially
offset by growth in profitable property business. Reflecting
adverse loss development, the company has strengthened its loss
reserves for this business. This, in conjunction with intense
pricing pressure, has caused the combined ratio to increase 8.8
points for the quarter to 116.3. Improved net investment income
helped offset the adverse underwriting results allowing net
income to remain level with the prior year.
The Resolution Group's combined ratio is not meaningful due to
the absence of new and renewal business, and gross premium volume
for the quarter was insignificant representing the run-off of
discontinued business. Net income of $5 million in the first
quarter of 1995 was $6 million higher than the first quarter of
1994 due to increased net investment income from reinsurance
recoveries in the fourth quarter of 1994.
Investment income for Talegen Remaining Companies was $101
million in the first quarter, 1995, compared with $85 million in
the first quarter, 1994. The increase in 1995 primarily reflects
a higher level of invested assets.
Realized pre-tax capital gains for Talegen Remaining Companies
totaled $4 million in the first quarter, 1995, compared with $7
million in the first quarter, 1994. The level of capital gains
in 1995 reflects normal investment activities coupled with fewer
opportunities to realize gains due to the impact of higher
interest rates on bond portfolio values.
Property and Casualty Operating Trends
The industry's profitability can be significantly affected by
cyclical competitive conditions as well as by volatile and
unpredictable developments, including changes in the propensity
of courts to grant large awards, fluctuations in interest rates
and other changes in the investment environment (which affect
market prices of insurance companies' investments, the income
from those investments and inflationary pressures that may tend
to affect the size of losses), and judicial decisions affecting
insurers' liabilities. Talegen operating results have
historically been influenced by these industry trends, as well as
by Talegen's exposure to uncollectible reinsurance, which had
been greater than most other insurers.
24
Disengagement from Insurance Business
During the disengagement process, the Company will continue to be
subject to all the business risks and rewards of its insurance
businesses. The Company anticipates that future income or losses
from its insurance businesses may vary widely as the
disengagement strategy is implemented, due to, among other
reasons, the recognition of proceeds of sales or other forms of
disengagement and the results from operations of the remaining
insurance businesses. No assurances can be given as to the
timing of the disengagement process, the amount and timing of
proceeds of sales or other forms of disengagement from insurance
units or the impact the remaining insurance businesses will have
on the Company's total results from operations during the
disengagement process.
The Company's objective is to continue to obtain value from the Insurance
investments. The ultimate value, which will depend on the success of the
operational improvements, timing, the level of interest rates, and the
relative values of insurance properties, can not be projected at this time and
a sizable charge to income could occur.
Talegen Reserves
The methodologies for establishing reserve for unpaid losses,
loss expenses and for uncollectible reinsurance are discussed in
the Company's Form 10-K. The following table sets forth gross
unpaid losses and loss expenses, reinsurance recoverables on
unpaid losses and loss expenses and the resultant net unpaid
losses and loss expenses for the insurance companies within the
Remaining Companies as of March 31, 1995 and December 31, 1994:
Unpaid Losses and Loss Expenses
March 31, 1995 December 31, 1994
Reinsurance Reinsurance
Gross Recover- Net Gross Recover- Net
($ in millions) Reserves able Reserves Reserves able Reserves
Coregis $1,018 $ 273 $ 745 $ 995 $271 $ 724
Crum & Forster Insurance 2,927 781 2,146 2,941 768 2,173
Industrial Indemnity 1,425 192 1,233 1,445 188 1,257
The Resolution Group 1,578 929 649 1,680 983 697
Viking 94 - 94 97 - 97
Westchester Specialty Group 1,236 490 746 1,225 485 740
Ceded balances to affiliates (410) (410) - (451) (451) -
Total $7,868 $2,255 $5,613 $7,932 $2,244 $5,688
Memo: Constitution Re's gross and net reserves were (in
millions) $879 and $682, compared to $881 and $681, as of March
31, 1995 and December 31, 1994, respectively. These amounts are
excluded from the above table due to the sale of the company
which was completed on April 26, 1995.
25
The changes in gross reserves represent reserves established for
premiums earned during the quarter offset by claim payments made.
Additionally, insurance companies within the Crum and Forster
Insurance, the Westchester Specialty Group and The Resolution
Group strengthened their net reserves during the quarter by $22
million, $15 million and $6 million, respectively, for
development on 1994 and prior accident year reserves. Of these
amounts, $16 million, $10 million and $5 million were ceded to
Ridge Re. Cessions to Ridge Re, while beneficial to Talegen, do
not result in a benefit to the Insurance Segment or consolidated
Xerox accounts.
The Company's Form 10-K discusses the complexity and uncertainty
pertaining to claims resulting from asbestos bodily injury,
asbestos-in-building, hazardous waste, other latent or long-tail
losses, and provides a discussion on what Talegen and the
insurance operating groups believed to be reasonably possible
exposure on known claims in these claim categories as of December
31, 1994. Talegen continues to gather and analyze developing
legal and factual information with regard to claims in these
areas and makes adjustments to the reserves in the period that
the related uncertainties are resolved. Total reserves for
asbestos bodily injury, asbestos-in-building, hazardous waste and
other latent or long-tail claims for the insurance companies
within the Remaining Companies as of March 31, 1995 and December
31, 1994 are as follows:
Total Reserves (1) by Claim Categories
Millions March 31, 1995 December 31, 1994
Gross Net Gross Net
Crum & Forster Insurance
Asbestos Bodily Injury $ 63 $ 41 $ 58 $ 40
Asbestos-in-Building - - - -
Hazardous Waste 73 58 79 61
Other Latent or Long-Tail Claims 95 56 110 57
Total $231 $155 $247 $158
The Resolution Group
Asbestos Bodily Injury $166 $ 16 $170 $ 17
Asbestos-in-Building 20 1 21 2
Hazardous Waste 101 36 101 36
Other Latent or Long-Tail Claims 48 4 48 2
Total $335 $ 57 $340 $ 57
Westchester Specialty Group
Asbestos Bodily Injury $ 35 $ 9 $ 38 $ 11
Asbestos-in-Building 46 1 45 1
Hazardous Waste 31 19 34 21
Other Latent or Long-Tail Claims 9 1 9 1
Total $121 $ 30 $126 $ 34
Total (1)
Asbestos Bodily Injury $264 $ 66 $266 $ 68
Asbestos-in-Building 66 2 66 3
Hazardous Waste 205 113 214 118
Other Latent or Long-Tail Claims 152 61 167 60
Total $687 $242 $713 $249
26
(1) Included are case, IBNR and allocated loss adjustment expense reserves.
Total excludes $2 million of hazardous waste reserves as of both March 31,
1995 and December 31, 1994 for Coregis Insurance Company, an insurance company
within the Coregis insurance operating group. Hazardous waste exposures for
Coregis are not significant primarily because 1986 was the first year
significant business volume was written by insurance companies within the
Coregis insurance operating group.
Changes in reserves for the above claim categories were not
significant in the first quarter.
Ridge Re & Related/Other
The Ridge Re related first quarter 1995 after-tax underwriting
loss (recorded under Ridge Re's excess of loss reinsurance
contracts) was $20 million, based upon loss cessions from three
of the Talegen insurers (Crum & Forster Insurance - $10 million,
Westchester Specialty Group - $7 million and The Resolution Group
- - $3 million).
Interest and other charges on an after-tax basis were $40 million
in the first quarter, 1995, compared with $39 million in the
first quarter, 1994. The charges primarily include net interest
expense.
Discontinued Operations
Other Financial Services (OFS), which were discontinued in the
fourth quarter of 1993, had no after-tax income in the first
quarter of 1995 and 1994. The net investment in OFS was $244
million and $232 million at March 31, 1995 and December 31, 1994,
respectively. Management currently believes that the liquidation
of the remaining OFS units will not result in a net loss.
The sale of the business and assets of Shields, a former Furman
Selz subsidiary, and Regent, a subsidiary of Shields, to Alliance
Capital Management L. P. was completed in March, 1994. Under the
terms of the Furman Selz sales agreement, the sales proceeds
yielded cash of approximately $60 million before settlement of
related liabilities.
General American Life Insurance Company and XFSI signed a
definitive agreement in January, 1995, for a wholly-owned
subsidiary of General American (New Owner) to acquire Xerox Life
and related companies. Closing of the sale is subject to the
customary closing conditions and regulatory approvals, and is
targeted for the second quarter, 1995. At closing, New Owner
will rename the Xerox Life companies. OakRe Life Insurance
Company, an XFSI subsidiary formed in 1994, will assume
responsibility for existing Single Premium Deferred Annuity
(SPDA) policies issued by Xerox Life's Missouri and California
companies (Life Companies) via a coinsurance agreement
(Agreement). The Agreement includes a provision for the
assumption (at their election) by the Life Companies, of all of
27
the SPDA policies at the end of their current rate reset periods.
A Novation Agreement with a new owner affiliate provides for the
assumption of the liability under the Coinsurance Agreement for
any SPDA policies not so assumed by the Life Companies. Other
policyholders (of Immediate, Whole Life, and Variable annuities
as well as a minor amount of SPDAs issued by Xerox Life New York)
will continue to be the responsibility of the New Owner.
During the first quarter 1995, sales of real-estate and third-
party assets and run-off activity reduced assets associated with
these businesses by $13 million to a total of $534 million.
Assigned debt increased by $12 million to $243 million primarily
as a result of a tax payment made in 1995 relating to the 1994
sale of a portion of the Direct Financing Lease portfolio.
Management believes that the combination of existing reserves
together with run-off profits should adequately provide for any
credit losses or losses on disposition.
28
Liquidity and Capital Structure
The following table summarizes funds generation and usage for the
quarters ended March 31, 1995 and 1994 and the related impacts on
cash and debt balances. These data exclude restricted cash flows
of the insurance businesses.
Funds Generation/(Use)
Year-to-Date March 31, Better/
(In Millions) 1995 1994 (Worse)
Non-Financing:
Document Processing $ (590) $ (434) $ (156)
Rank Xerox Purchase (972) - (972)
IOFS-related/other (132) (122) (10)
Non-Financing (1,694) (556) (1,138)
Financing:
Xerox Equipment Financing 116 81 35
Third-Party Financing (12) 31 (43)
Financing 104 112 (8)
Operations generation(use) (1,590) (444) (1,146)
Shareholder Dividends (97) (101) 4
Equity issuance and changes in cash 68 118 (50)
Debt(increase)decrease $(1,619) $ (427) $(1,192)
The following table summarizes Document Processing non-financing
operations funds generation and usage, after investments in the
business, for the quarters ended March 31, 1995 and 1994:
Funds Generation/(Use)
Year-to-Date March 31, Better/
(In Millions) 1995 1994 (Worse)
Document Processing
Non-Financing:
Income $ 130 $ 77 $ 53
Depreciation and Amortization 158 152 6
Restructuring Payments (111) (80) (31)
Capital Expenditures (43) (76) 33
Assets Sold 14 7 7
Working Capital/Other (738) (514) (224)
$ (590) $ (434) $ (156)
The increased usage in quarter over quarter funds was largely due
to the 1995 payment of 1994 profit sharing compared with no
payments in 1994, partially offset by lower tax payments and
higher income.
29
Capital Resources
In management's opinion, funds usage and debt changes are best
understood by examining the more highly leveraged financing
businesses separately from the Company's other businesses.
Non-Financing Businesses
Business Equipment funds usage of $590 million was $156 million
greater than in the first three months of 1994 as a result of
higher profit sharing payments only partially offset by higher
income, and cash outlays related to the year end 1993
restructuring decision. On February 28, 1995, $972 million was
paid to The Rank Organisation Plc whereby Xerox increased its
financial interest in Rank Xerox to about 80 percent from 67
percent.
IOFS-related funds usage was $132 million or $10 million more
than in 1994 reflecting somewhat higher debt service costs.
Financing Businesses
Xerox Equipment Financing generated $116 million of funds during
the first three months of 1995 or $35 million more than in 1994
resulting from slightly lower penetration rates due to product
mix and increased sales in markets which do not participate in
our financing programs.
Third Party Financing funds usage was $12 million during the
first quarter of 1995 compared with $31 million of funds
generation in 1994 due to a tax payment related to certain
leveraged-lease sales arranged in 1994.
Total Company Debt
Total debt increased by $1,619 million in the first three months
of 1995. This growth is attributable to the purchase of
incremental interest in Rank Xerox, capital contributions to
Ridge Re and an increase in Business Equipment funds usage (which
included the payment of 1994 profit sharing in 1995).
Management believes that the Company has adequate short-term
credit facilities available to fund its day-to-day operations and
readily available access to the capital markets to meet any
longer-term financing requirements. The Company's domestic operations
have three revolving credit agreements totaling $5.0 billion, of which
$1.3 billion expires December 1995 and the remainder in 1999. In
addition, the Company's foreign subsidiaries had unused committed lines
of credit aggregating $1.9 billion in various currencies at prevailing
interest rates.
The Company's subsidiary, Xerox Financial Services, Inc.(XFSI)
has agreed to provide support for Talegen in the form of excess
30
of loss reinsurance protection through Ridge Reinsurance Limited
(Ridge Re), XFSI's single-purpose, wholly-owned Bermuda
reinsurance company. XFSI is obligated to pay annual
installments of $49 million in the aggregate each year, plus
related financing charges, payable for up to ten years, for
coverage of $1,245 million, net of 15 percent coinsurance.
During the 1995 first quarter XFSI paid the required 1995
installment which, including the related financing charges, was
$81 million.
In addition to XFSI's original contribution of $25 million to the
capitalization of Ridge Re, XFSI is obligated, under certain
circumstances to purchase over time additional redeemable
preferred shares up to a maximum of $301 million. XFSI has
guaranteed to the Talegen insurance companies that Ridge Re will
meet all of its financial obligations under all of the foregoing
excess of loss reinsurance issued to them. In addition, the
Company has guaranteed to the Talegen insurance companies the
payment by XFSI of all of the required premiums for such excess
of loss reinsurance to Ridge Re.
Management believes that the funds to meet the foregoing
obligations will be available from dividends from the earnings of
the Talegen insurance companies(to the extent permitted under
insurance laws), proceeds from the sale of all or part of the
Talegen insurance companies, cash flow from operations and
borrowings.
Hedging Instruments
Certain financial instruments have been entered into by the
Company to manage its Document Processing related interest rate
and foreign currency exposures. These instruments are held
solely for hedging purposes and include interest rate swap
agreements and forward-foreign exchange agreements. The Company
has long-standing policies prescribing that derivative
instruments are only to be used to achieve a set of very limited
objectives: to lock-in the value of cross-border cash flows and
to reduce the impact of currency and interest rate volatility on
costs, assets and liabilities. The Company does not enter into
derivative instrument transactions for trading purposes.
Currency derivatives are only arranged in conjunction with
underlying transactions which give rise to foreign currency-
denominated payables and receivables: for example, an option to
buy foreign currency to settle the importation of goods from
suppliers, or, a forward exchange contract to fix the rate at
which a dividend will be paid by a foreign subsidiary.
The Company does not hedge foreign currency-denominated revenues
of its foreign subsidiaries since these do not represent cross-
border cash flows.
31
With regard to interest rate hedging, virtually all customer
financing assets earn fixed rates of interest and, therefore, the
Company "locks-in" an interest rate spread by arranging fixed-
rate liabilities with similar maturities as the underlying
assets. Additionally, customer financing assets in one currency
are consistently funded with liabilities in the same currency.
The Company refers to the effect of these conservative practices
as "match funding" its customer financing assets.
More specifically, pay fixed-/receive variable-rate swaps are
typically used in place of more expensive fixed-rate debt for the
purpose of match funding fixed-rate, customer contracts. Pay
variable-/receive variable-rate swaps are used to transform
variable-rate medium term debt into commercial paper or local
currency libor obligations. Additionally, pay variable-/receive
fixed-rate swaps are used infrequently to transform longer-term
fixed-rate debt into commercial paper based rate obligations.
The transactions performed within each of these three categories
enable the Company to manage its interest rate exposures. The
potential risk attendant to this strategy is the performance of
the swap counterparty. The Company addresses this risk by
arranging swaps exclusively with a diverse group of strong-credit
counterparties, regularly monitoring their credit ratings, and
determining the replacement cost, if any, of existing
transactions.
The Company's currency and interest rate hedging are typically
not affected by changes in market conditions as forward
contracts, options and swaps are normally held to maturity in
order to lock-in currency rates and interest rate spreads on the
underlying transactions.
32
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The information set forth under note 9 contained in the "Notes to
Consolidated Financial Statements" on pages 10-12 of this
Quarterly Report, on Form 10-Q, is incorporated by reference in
answer to this item.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit 11 Computation of Net Income per Common Share.
Exhibit 12 Computation of Ratio of Earnings to Fixed
Charges.
(b) Current Reports on Form 8-K dated December 15, 1994,
December 19, 1994 and January 12, 1995, respectively, reporting
Item 5 "Other Events" were filed during the quarter for which
this Quarterly Report is filed.
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
XEROX CORPORATION
(Registrant)
_____________________________
Date: May 15, 1995 By Philip D. Fishbach
Vice President and Controller
(Principal Accounting Officer)
34
Exhibit 11
Xerox Corporation
Computation of Net Income Per Common Share
(Dollars in millions, except per-share data; shares in thousands)
Three months ended
March 31,
1995 1994
I. Primary Net Income Per
Common Share
Net income $ 147 $ 129
Accrued dividends on ESOP preferred
stock, net (11) (9)
Accrued dividends on redeemable
preferred stock (1) (6)
Adjusted net income $ 135 $ 114
Average common shares outstanding
during the period 106,359 104,769
Common shares issuable with respect
to common stock equivalents for
stock options, incentive and
exchangeable shares 2,832 3,144
Adjusted average shares outstanding
for the period 109,191 107,913
Primary earnings per share $ 1.23 $ 1.05
II.Fully Diluted Net Income Per
Common Share
Net income $ 147 $ 129
Accrued dividends on redeemable
preferred stock (1) (6)
ESOP expense adjustment, net of tax (2) (2)
Interest on convertible debt, net
of tax 1 1
Adjusted net income $ 145 $ 122
Average common shares outstanding
during the period 106,359 104,769
Stock options, incentive and
exchangeable shares 3,045 3,146
Convertible debt 881 881
ESOP preferred stock 9,649 9,830
Adjusted average shares outstanding
for the period 119,934 118,626
Fully diluted earnings per share $ 1.20 $ 1.03
35
Exhibit 12 Xerox Corporation
Computation of Ratio of Earnings to Fixed Charges
Three months ended Year ended
March 31, December 31,
(In Millions) 1995 1994 1994 1993* 1992** 1991*** 1990
Fixed charges:
Interest expense $ 200 $ 181 $ 732 $ 755 $ 788 $ 758 $ 799
Rental expense 46 48 190 201 208 206 191
Total fixed charges
before capitalized
interest 246 229 922 956 996 964 990
Capitalized interest - 1 2 5 17 3 -
Total fixed charges $ 246 $ 230 $ 924 $ 961 $1,013 $ 967 $ 990
Earnings available for
fixed charges:
Earnings**** $ 311 $ 256 $1,558 $ (227) $ 192 $ 939 $1,116
Less undistributed
income in minority
owned companies (13) (2) (54) (51) (52) (70) (60)
Add fixed charges before
capitalized interest 246 229 922 956 996 964 990
Total earnings
available for
fixed charges $ 544 $ 483 $2,426 $ 678 $1,136 $1,833 $2,046
Ratio of earnings to
fixed charges (1)(2) 2.21 2.10 2.63 0.71 1.12 1.90 2.07
(1) The ratio of earnings to fixed charges has been computed based on the
Company's continuing operations by dividing total earnings available for fixed
charges, excluding capitalized interest, by total fixed charges. Fixed
charges consist of interest, including capitalized interest, and one-third of
rent expense as representative of the interest portion of rentals. Interest
expense has been assigned to discontinued operations principally on the basis
of the relative amount of gross assets of the discontinued operations.
Management believes that this allocation method is reasonable in light of the
debt specifically assigned to discontinued operations. The discontinued
operations consist of the Company's real-estate development and related
financing operations and its third-party financing and leasing businesses, and
Other Financial Services businesses.
(2) The Company's ratio of earnings to fixed charges includes the effect of
the Company's finance subsidiaries which primarily finance Xerox equipment.
Financing businesses, due to their nature, traditionally operate at lower
earnings to fixed charges ratio levels than do non-financial companies.
* In 1993, the ratio of earnings to fixed charges includes the effect of the
$1,373 million before-tax ($813 million after-tax) charge incurred in
connection with the restructuring provision and litigation settlements.
Excluding this charge, the ratio was 2.13. 1993 earnings were inadequate to
cover fixed charges. The coverage deficiency was $283 million.
** In 1992, the ratio of earnings to fixed charges includes the effect of the
$936 million before-tax ($778 million after-tax) charge incurred in connection
with the decision to disengage from the Company's Insurance and Other
Financial Services businesses. Excluding this charge, the ratio was 2.05.
*** In 1991, the ratio of earnings to fixed charges includes the effect of the
$175 million before-tax ($101 million after-tax) charge incurred in connection
with a Document Processing work-force reduction. Excluding this charge, the
ratio was 2.08.
****Sum of income before income taxes and income attributable to minority
ownership.
36
CT
1,000,000
3-MOS
DEC-31-1995
MAR-31-1995
39,370
108
75
753
4,411
39,370
4,444
113
147
0
0
0
147
1.23
1.20
5
1,000,000
3-MOS
DEC-31-1995
MAR-31-1995
22
0
12,206
395
2,601
9,503
4,688
2,633
20,087
6,457
9,515
1,873
3,770
1,101
2,064
1,339
47
200
367
142
187
7
1,000,000
3-MOS
DEC-31-1995
MAR-31-1995
7,730
0
0
176
0
0
8,637
7
2,957
198
14,579
8,742
1,022
0
0
419
553
118
4
6
473
111
73
(69)
(29)
(40)
8,809
0
0
0
0
0
0
DATA NOT AVAILABLE FOR INTERIM REPORTING.
