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: June 30, 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 July 31,1995
Common Stock 107,536,433 shares
Class B Stock 1,000 shares
This document consists of 39 pages.
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2
Xerox Corporation
Form 10-Q
June 30, 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 14
Document Processing 16
Insurance 22
Discontinued Operations 29
Liquidity and Capital Structure 31
Capital Resources 32
Hedging Instruments 33
Part II - Other Information
Item 1. Legal Proceedings 35
Item 4. Submission of Matters to a Vote of Security Holders 35
Item 6. Exhibits and Reports on Form 8-K 36
Signatures 37
Exhibit Index
Computation of Net Income per Common Share 38
Computation of Ratio of Earnings to Fixed Charges 39
3
PART I - FINANCIAL INFORMATION
Xerox Corporation
Consolidated Statements of Income
Three months ended Six months ended
June 30, June 30,
(In millions, except per-share data) 1995 1994 1995 1994
Document Processing
Revenues
Sales $ 2,088 $ 1,795 $ 3,961 $ 3,324
Service and rentals 1,715 1,545 3,360 3,035
Finance income 251 244 503 496
Total Revenues 4,054 3,584 7,824 6,855
Costs and Expenses
Cost of sales 1,184 1,065 2,285 1,977
Cost of service and rentals 847 740 1,684 1,457
Equipment financing interest 129 122 255 250
Research and development expenses 247 226 466 422
Selling, administrative and general
expenses 1,176 1,074 2,278 2,067
Other, net 59 47 77 110
Total Costs and Expenses 3,642 3,274 7,045 6,283
Income before Income Taxes, Equity Income
and Minorities' Interests 412 310 779 572
Income Taxes 160 121 302 225
Equity in Net Income of Unconsolidated
Affiliates 51 33 64 38
Minorities' Interests in Earnings of
Subsidiaries 49 55 100 87
Income from Document Processing 254 167 441 298
Insurance
Revenues
Insurance premiums earned 480 598 1,033 1,176
Investment and other income 110 106 231 211
Total Revenues 590 704 1,264 1,387
Costs and Expenses
Insurance losses and loss expenses 382 454 855 899
Insurance acquisition costs and other
insurance operating expenses 146 194 330 385
Interest expense 60 52 121 104
Administrative and general expenses 40 10 69 23
Total Costs and Expenses 628 710 1,375 1,411
Realized Capital Gains 10 2 14 9
Income (loss) before Income Taxes (28) (4) (97) (15)
Income Tax Benefits 12 5 41 14
Income (loss) from Insurance (16) 1 (56) (1)
Total Company
Net Income $ 238 $ 168 $ 385 $ 297
Primary Earnings per Share $ 2.07 $ 1.31 $ 3.30 $ 2.36
Fully Diluted Earnings per Share $ 1.96 $ 1.28 $ 3.16 $ 2.31
See accompanying notes.
4
Xerox Corporation
Consolidated Balance Sheets
June 30, December 31,
(In millions, except share data in thousands) 1995 1994
Assets
Document Processing
Cash $ 34 $ 35
Accounts Receivable, net 1,988 1,811
Finance Receivables, net 3,820 3,910
Inventories 2,789 2,294
Deferred Taxes and Other Current Assets 1,105 1,199
Total Current Assets 9,736 9,249
Finance Receivables Due after One Year, net 6,098 6,038
Land, Buildings and Equipment, net 2,062 2,108
Investments in Affiliates, at equity 1,528 1,278
Goodwill 636 66
Other Assets 667 635
Total Document Processing Assets 20,727 19,374
Insurance
Cash 18 21
Investments Available-for-Sale 7,776 8,384
Reinsurance Recoverable 2,723 3,063
Premiums and Other Receivables 1,235 1,276
Goodwill 267 284
Deferred Taxes and Other Assets 1,235 1,438
Total Insurance Assets 13,254 14,466
Investment in Discontinued Operations 3,669 4,692
Total Assets $ 37,650 $ 38,532
Liabilities and Equity
Document Processing
Short-Term Debt and Current Portion of
Long-Term Debt $ 3,053 $ 3,159
Accounts Payable 487 562
Accrued Compensation and Benefit Costs 607 709
Unearned Income 265 298
Other Current Liabilities 1,932 2,110
Total Current Liabilities 6,344 6,838
Long-Term Debt 6,484 5,494
Liability for Postretirement Medical Benefits 1,025 1,006
Deferred Taxes and Other Liabilities 2,060 2,210
Total Document Processing Liabilities 15,913 15,548
Insurance
Unpaid Losses and Loss Expenses 7,842 8,809
Unearned Income 818 1,066
Notes Payable 413 425
Other Liabilities 906 954
Total Insurance Operating Liabilities 9,979 11,254
Discontinued Operations Liabilities -
Life Reinsurance Payable and Other 3,261 4,194
Other Long-Term Debt and Obligations 2,522 2,102
Deferred ESOP Benefits (596) (596)
Minorities' Interests in Equity of Subsidiaries 734 1,021
Preferred Stock 772 832
Common Shareholders' Equity 5,065 4,177
Total Liabilities and Equity $ 37,650 $ 38,532
Shares of common stock issued and outstanding 107,395 105,993
See accompanying notes.
5
Xerox Corporation
Consolidated Statements of Cash Flows
Six months ended June 30, (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 (129) (168)
Cash Flows from Investing Activities
Cost of additions to land, buildings and equipment (171) (159)
Proceeds from sales of land, buildings and equipment 30 98
Purchase of additional interest in Rank Xerox (972) -
Net change in payables to Insurance (30) (28)
Net transactions with Insurance 75 38
Net transactions with Discontinued Operations 31 20
Total (1,037) (31)
Cash Flows from Financing Activities
Net change in debt 1,377 801
Yen financing repayment - (116)
Dividends on common and preferred stock (195) (200)
Proceeds from sale of common stock 89 64
Redemption of preferred stock (60) (237)
Dividends to minority shareholders (42) (44)
Net proceeds returned to minority shareholders - (32)
Total 1,169 236
Effect of Exchange Rate Changes on Cash (4) (67)
Net Cash Flows from Document Processing (1) (30)
Insurance
Cash Flows from Operating Activities 7 (148)
Cash Flows from Investing Activities
Proceeds from sale of Constitution Re 421 -
Purchase of portfolio investments (1,070) (1,453)
Proceeds from sales of portfolio investments 757 416
Decrease in short-term investments 241 1,069
Subtotal 349 32
Other, net (25) (2)
Net transactions with Discontinued Operations 58 12
Total 382 42
Cash Flows from Financing Activities
Net change in notes payable (12) -
Net change in debt (305) 163
Net transactions with Document Processing (75) (38)
Total (392) 125
Net Cash Flows from Insurance (3) 19
Discontinued Operations
Income from discontinued operations - -
Collections and changes in assets, net 1,022 183
Net change in debt (1) (65)
Net change in operating liabilities (932) (86)
Net transactions with Document Processing (31) (20)
Net transactions with Insurance (58) (12)
Net Cash Flows from Discontinued Operations - -
Cash at End of Period
Document Processing 34 38
Insurance 18 37
Total $ 52 $ 75
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:
Six months ended June 30, (In millions) 1995 1994
Document Processing
Income from Document Processing $ 441 $ 298
Adjustments required to reconcile income to cash
flows from operating activities:
Depreciation and amortization 321 320
Provisions for doubtful accounts 117 94
Provision for postretirement medical benefits 30 26
Charges against 1993 restructuring reserve (194) (204)
Minorities' interests in earnings of subsidiaries 100 87
Undistributed equity in income of affiliated companies (63) (35)
Increase in inventory (586) (395)
Increase in finance receivables (50) (170)
Increase in accounts receivable (218) (170)
Decrease in accounts payable and accrued compensation
and benefit costs (47) (61)
Net change in current and deferred income taxes 111 21
Other, net (91) 21
Cash Flows from Operating Activities $ (129) $ (168)
Insurance
Loss from Insurance $ (56) $ (1)
Adjustments required to reconcile loss to cash
flows from operating activities:
Depreciation and amortization 18 15
Provisions for doubtful accounts 5 5
Realized capital gains (14) (9)
Decrease in receivables 231 269
Increase (Decrease) in accounts payable and accrued
compensation and benefit costs 25 (35)
Decrease in unearned income (31) (27)
Decrease in unpaid losses and loss expenses (287) (349)
Other, net 116 (16)
Cash Flows from Operating Activities $ 7 $ (148)
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):
June 30, December 31,
1995 1994
Finished products $ 1,781 $ 1,458
Work in process 100 88
Raw materials and supplies 343 268
Equipment on operating leases, net 565 480
Total $ 2,789 $ 2,294
3. Common shareholders' equity consists of (in millions):
June 30, December 31,
1995 1994
Common stock $ 109 $ 107
Additional paid-in-capital 1,497 1,406
Retained earnings 3,370 3,197
Net unrealized gain (loss) on
investment securities 1 (433)
Translation adjustments 88 (100)
Total $ 5,065 $ 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 calendar 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
1995 Consolidated Statements of Income reflect the results of
worldwide operations for periods beginning January 1, 1995. The
Consolidated Statement of Cash Flows reflects the cash activity
8
Xerox Corporation
Notes to Consolidated Financial Statements
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 40 percent of RO's financial
interest in the Rank Xerox Companies. The transaction increased
the Company's financial interest in the Rank Xerox Companies to
80 percent from 67 percent. Based on the allocation of the
purchase price, this transaction resulted in goodwill of
approximately $574 million (including transaction costs), a
decline in minorities' interests in the equity of subsidiaries of
approximately $400 million, and an increase in long-term debt of
$972 million. The goodwill will be amortized on a straight-line
basis over 40 years.
6. The Company's Consolidated Balance Sheet at June 30, 1995
includes current and non-current accrued liabilities of $290
million and $251 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 six month period ended June 30, 1995, $30 million and $194
million of net pre-tax charges, respectively, were charged
against the aggregate reserve balance. Management believes the
aggregate reserve balance of $541 million at June 30, 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 page 19.
7. Other Information on the Company's Consolidated Statements
follows:
Interest expense totaled $217 million and $179 million for the
three months ended June 30, 1995 and 1994, respectively. Interest
expense was $417 million and $360 million for the six month
periods then ended.
Long-term debt, excluding the current portion, totaled $9,207
million at June 30, 1995 and $7,780 million at December 31, 1994.
8. During April 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. Revenues for
Viking were (in millions) $161, $182, and $224 for the years
ended December 31, 1994, 1993, and 1992, respectively. On July
9
Xerox Corporation
Notes to Consolidated Financial Statements
18, 1995, the sale of Viking closed for approximately $103
million in cash plus future upward price adjustments based on
loss reserve development. The transaction approximated book
value.
9. 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.
10. On June 1, 1995, Xerox Financial Services, Inc. (XFSI)
completed the sale of its discontinued Xerox Financial Services
Life Insurance Company and related subsidiaries to a subsidiary
of General American Life Insurance Company for approximately $104
million before settlement costs and capital funding of OakRe Life
Insurance Company, another XFSI subsidiary. OakRe Life assumed
responsibility for the Single Premium Deferred Annuity (SPDAs)
policies issued by Xerox Life's Missouri and California companies
via a coinsurance agreement. As a result of this coinsurance
agreement, the Company has retained on its consolidated balance
sheet approximately $3.0 billion of investment portfolio assets
and reinsurance reserves related to its former SPDA policies.
These amounts will decrease over the next five years as the SPDA
policies are either terminated by the policyholder or renewed and
transferred to General American.
11. On June 1, 1995, XFSI established a $500 million letter of
credit and line of credit with a group of banks to support OakRe
Life's coinsurance obligations. The term of this letter of
credit is five years and it is unused and available at June 30,
1995. Upon a drawing under the letter of credit, XFSI has the
option to cover the drawing in cash or to draw upon the credit
line.
12. 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
10
Xerox Corporation
Notes to Consolidated Financial Statements
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 and has filed a
motion for leave to assert additional related counterclaims,
including claims for unfair competition and/or false advertising,
as well as a motion for a preliminary injunction requiring
certain plaintiffs/counterclaim defendants immediately to cease
illegal reproduction and conversion of copyrighted Xerox manuals
and software. Discovery is in its initial 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 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 June 30, 1995,
approximately $14.9 million is outstanding with these remaining
11
Xerox Corporation
Notes to Consolidated Financial Statements
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 federal subject matter jurisdiction was
granted on May 3, 1995. Plaintiffs refiled their claims in New
York state court on June 28, 1995. International Insurance
believes it is entitled to the full payment of these
reinsurance recoverables, will vigorously defend the foregoing
action and will counterclaim for remaining amounts due.
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
(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
12
Xerox Corporation
Notes to Consolidated Financial Statements
Indemnification Agreement for injuries not arising out of
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.
13
Xerox Corporation
Management's Discussion and Analysis of
Results of Operations and Financial Condition
The financial summary for the second quarter and year-to-date and
this discussion present the operating results from Document
Processing and Insurance with discontinued operations discussed
separately. Income from Insurance, as shown in the financial
summary, includes allocated interest expense from the parent
company.
Financial Summary
(In millions, Second quarter Year-to-date June 30,
except per-share data) 1995 1994 % Growth 1995 1994 % Growth
Revenues
Document Processing $4,054 $3,584 13% $7,824 $6,855 14%
Insurance 590 704 (16) 1,264 1,387 (9)
Total Revenues $4,644 $4,288 8 $9,088 $8,242 10
Net Income (Loss)
Document Processing $ 254 $ 167 52 $ 441 $ 298 48
Insurance (16) 1 * (56) (1) *
Net Income $ 238 $ 168 42 $ 385 $ 297 30
Primary Earnings (Loss)
per Share
Document Processing $ 2.21 $ 1.30 70 $ 3.81 $ 2.37 61
Insurance (.14) .01 * (.51) (.01) *
Primary Earnings per Share $ 2.07 $ 1.31 58 $ 3.30 $ 2.36 40
Fully Diluted Earnings (Loss)
per Share
Document Processing $ 2.09 $ 1.27 65 $ 3.63 $ 2.31 57
Insurance (.13) .01 * (.47) - *
Fully Diluted Earnings
per Share $ 1.96 $ 1.28 53 $ 3.16 $ 2.31 37
* Calculation not meaningful.
14
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.
The MD&A on page 14 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.
15
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 16 percent weaker in the 1995 second quarter
than in the 1994 second quarter. As a result, foreign currency
translation had a favorable impact of 5 percentage points on
total revenues in the 1995 second 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
Q2 Q1 FY Q4 Q3 Q2 Q1
Total Revenues 8% 11% 7% 11% 4% 6% 5%
Sales
Equipment 8 9 10 13 4 11 9
Supplies 10 22 11 22 10 3 10
Paper 42 52 4 21 1 (2) (1)
Total 12 18 10 14 5 9 9
Service/Rentals/FacMgmt/Other
Service 4 3 4 6 4 4 3
Rentals (2) 3 (1) 5 (4) (3) (7)
Facilities Management/Other 28 33 20 22 20 22 17
Total 6 6 5 8 5 5 3
Finance Income (2) (4) (4) (3) (3) (6) (7)
Memo:
Non-Equipment Revenues 9 12 5 9 4 4 3
Total revenue growth of 8 percent in the 1995 second quarter was
driven by good growth in both equipment sales and non-equipment
revenues.
16
The good growth in equipment sales in the second quarter
reflected excellent growth in production publishing and color
copying and printing and modest growth in black-and-white
copying. Excellent growth in Latin America was moderated by
weaker demand in the U.S. and Europe due to difficult
environments in certain European countries, an increase in
customer preference for equipment rentals in the U.S., and
disruption as we implemented important productivity initiatives
affecting our U.S. sales organization.
Non-Equipment revenues from supplies, paper, service, rentals,
facilities management and other revenues, and income from
customer financing represented 68 percent of total revenues in
the 1995 second 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 strong growth in the 1995 second quarter
is due principally to excellent growth in enterprise printing
and cartridge sales for personal copiers and OEM printers.
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 continued excellent growth in the second
quarter was due to higher worldwide prices. Although the
higher prices significantly increased revenues, the gross
margin declined, principally due to a shift in mix to mill
direct shipments and some lags in passing through price
increases.
Service revenues: The continuing modest growth reflects the
diversionary trend to facilities management as well as a shift
towards equipment rentals in the U.S. in recent quarters.
Rental revenues: Non-U.S. rental revenues continued the long
term decline reflecting a customer preference for outright
purchase. In the U.S., however, there is an increasing trend
toward cost-per-copy rental plans, which adversely affects
equipment sales, service revenues and finance income. This
trend toward rentals rather than equipment sales also
increases revenues in future periods but reduces current
period total revenues.
Facilities management, copy centers and other revenues: 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 finance income. This
trend toward facilities management rather than equipment sales
also increases revenues in future periods but reduces current
period total revenues.
17
Finance income: The decline is due to lower interest rates on
financing contracts year-over-year.
Geographic Revenues
Geographically, the underlying revenue growth rates are estimated
as follows:
1995 1994
Q2 Q1 FY Q4 Q3 Q2 Q1
Total Revenues 8% 11% 7% 11% 4% 6% 5%
United States 5 8 7 10 6 7 4
Rank Xerox 5 13 7 13 3 7 6
Other Areas 25 17 7 10 4 2 5
U.S. revenue growth declined from recent quarters primarily due
to an increase in customer preference for equipment rentals and
disruption as we implemented important productivity initiatives
affecting our U.S. sales organization.
Rank Xerox Limited and related companies (Rank Xerox)
manufactures and markets Xerox products principally in Europe.
Revenue growth in the second quarter was excellent in Italy and
Eastern Europe, strong in Spain, good in the United Kingdom and
modest in Germany and the smaller European countries. Revenue in
France declined modestly.
Other Areas includes operations principally in Latin America and
Canada. Revenue growth in the second quarter was excellent in
Brazil and a number of smaller Latin American countries, and
strong in Canada. Revenues declined significantly in Mexico due
to currency and the continuing economic disruption following
devaluation of the Mexican peso in December 1994.
Major Product Categories
For the major product categories, the underlying revenue growth
rates are estimated as follows:
1995 1994
Q2 Q1 FY Q4 Q3 Q2 Q1
Total Revenues 8% 11% 7% 11% 4% 6% 5%
Black & White Copiers 2 4 4 7 - 4 3
Enterprise Printing 20 22 20 22 17 22 21
Revenues from black-and-white copying represented 60 percent of
total document processing revenues in the 1995 second quarter, 61
percent in the 1995 first quarter and 63 percent for the 1994
full year. Revenues from enterprise printing, including
production publishing, data center printing, network printing,
and color printing and copying, represented 24 percent of total
18
revenues in the 1995 second quarter, 23 percent 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
cost base and to improve productivity. The Company's objective
was to reduce its worldwide work force by more than 10,000
employees and to close or consolidate a number of facilities. The
Company achieved pre-tax cost reductions of approximately $350
million in 1994, and expects to achieve approximately $700
million in 1995 and higher amounts thereafter. The Company has
stated, however, that a portion of these savings will be
reinvested to reengineer business processes, to support expansion
in emerging markets, and to mitigate anticipated continued
pressure on gross margins.
Employment declined by 11,200 from year-end 1993 to 85,800
employees at the end of the 1995 second quarter; 10,600 of the
reductions were due to restructuring program initiatives and
1,300 employees were transferred to Electronic Data Systems Corp.
(EDS), partially offset by 700 net hires. Employment declined by
500 in the second quarter, consisting of 1,100 due to the
restructuring program, partially offset by the addition of 600
employees, principally 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
Q2 Q1 FY Q4 Q3 Q2 Q1
Total Gross Margin 46.7% 45.2% 45.8% 45.3% 45.7% 46.2% 46.3%
Sales 43.3 41.2 40.7 41.5 40.1 40.6 40.3
Service/Rental 50.6 49.1 51.6 50.9 51.5 52.1 51.9
Financing 48.5 50.1 50.1 50.1 51.2 49.8 49.3
Total gross margins improved by 0.5 percentage points in the 1995
second quarter from the 1994 second quarter. The improvement of
2.7 percentage points in the sales gross margin from the 1994
second quarter was principally due to favorable product and
geographical mix and cost reductions, partially offset by
continuing pricing pressures. The erosion in the service and
rentals gross margin of 1.5 percentage points from the 1994
19
second quarter was largely due to significant inflationary cost
increases which were not offset by pricing in Brazil, and pricing
pressures, partially offset by productivity improvements.
Research and development (R&D) expense increased 9 percent in the
1995 second 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, technologically
innovative 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 5
percent in the 1995 second quarter principally due to economic
cost increases, particularly in Brazil, and investments in
improved systems and sales distribution channels, partially
offset by improved productivity. SAG was 29.0 percent of revenue
in the second quarter, an improvement of 1.0 percentage point
from the 1994 second quarter.
Other expenses, net in the 1995 second quarter reflect:
A year-over-year reduction in losses from balance sheet
translation of $81 million, primarily due to a lower rate of
net currency devaluation in Brazil. It should be noted that
the reduced Brazilian currency losses were largely offset by
inflationary cost and expense increases that could not be
offset by price increases. Nevertheless, the Company's Latin
American operations had continued excellent profit growth,
principally due to increased equipment sale revenues.
Higher interest expense principally due to the financing of
the Company's increased financial interest in Rank Xerox and
the redemptions of preferred stock.
The non-recurrence of several 1994 one-time favorable items,
including a change in post-retirement benefits for U.S. union
employees.
Income Taxes, Equity in Net Income of Unconsolidated Affiliates
and Minorities' Interests in the Earnings of Subsidiaries
Income before income taxes, equity in net income of
unconsolidated affiliates and minorities' interests increased 33
percent to $412 million in the 1995 second quarter from $310
million in the 1994 second quarter.
The effective tax rate was 38.8 percent in the 1995 second
quarter compared with 39.0 percent in the 1994 second quarter and
39.3 percent in the 1994 full year.
20
Equity in the net income of unconsolidated affiliates,
principally Fuji Xerox, increased in the 1995 second quarter to
$51 million from $33 million in the 1994 second quarter. The
increase was due to good revenue growth, improved margins and
currency translation at Fuji Xerox.
On February 28, 1995, Xerox increased its financial interest in
Rank Xerox to 80 percent from 67 percent. The decrease in
minorities' interests in the earnings of subsidiaries to $49
million in the 1995 second quarter from $55 million in the 1994
second quarter was due to the Company's increased financial
interest in Rank Xerox, partially offset by excellent growth in
Rank Xerox income. After the increased interest expense and
goodwill amortization associated with the transaction, the
increased financial interest in Rank Xerox resulted in a
significant incremental contribution to income in the 1995 second
quarter.
Income
Income in the 1995 second quarter was $254 million, a growth of
52 percent compared with the 1994 second quarter.
The 1995 second quarter Document Processing primary earnings per
share increased 70 percent to $2.21 and fully diluted earnings
per share increased 65 percent to $2.09. The higher growth in
earnings per share than in income is due to the absence of the
premium for the redemption of preferred stock in the 1994 second
quarter, partially offset by increased common shares.
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
The Brazilian Congress passed a tax law in June, 1995 which
implemented a tax rate increase for subsequent years that was
lower than the initial proposal. The net impact on Xerox income
for this rate change was not significant.
21
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. The
Constitution Re Corporation ("Constitution Re") sale to EXOR
America Inc. ("EXOR") 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. On July 18, 1995, Xerox
completed the sale of Viking Insurance Holdings, Inc., a Talegen
subsidiary, to Guaranty National Corporation for approximately
$103 million in cash plus future upward price adjustments based
on loss reserve development. The transaction approximated book
value. Net proceeds from the sales of Constitution Re to EXOR
and Viking to Guaranty National will largely be used to pay down
debt and are in line with the Company's previously announced
strategy to disengage from financial services and redeploy
capital into its more profitable document processing business.
Talegen continues to own Crum & Forster Holdings, Inc.,
Industrial Indemnity Holdings, Inc., Coregis Group, Inc.,
Westchester Specialty Group, 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 $16 million
loss in the second quarter, 1995, compared with a $1 million
profit in the second quarter, 1994. First half, 1995, income
after-tax was a $56 million loss compared to a $1 million loss in
the first half, 1994. Second quarter and first half results are
summarized in the following table.
Second Quarter First Half
(In millions) 1995 1994 1995 1994
Talegen Remaining Companies $ 46 $ 34 $ 78 * $ 64
Monsanto Settlement (Holding Co. Portion) - - (14)* -
Viking (2) 3 - 4
Constitution Re (7) 9 (7) 15
Total Talegen 37 46 57 83
Cessions To Ridge Re (14) (6) (34)* (6)
Interest/Other (39) (39) (79) (78)
Total Insurance $(16) $ 1 $(56)* $ (1)
* The first half, 1995, includes the $22 million after-tax impact
of the March 2, 1995 settlement between Monsanto Company and
22
Talegen and four of its insurance subsidiaries ($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 $46 million in
the second quarter, 1995, compared with $34 million in the second
quarter, 1994. For the first half, 1995, after-tax income
totaled $78 million compared with $64 million in the first half,
1994. The year-over-year improvement in the second quarter and
first half is due to improved underwriting results, higher
investment income and higher net realized capital gains partially
offset by interest expense related to the $425 million in debt
issued in the fourth quarter, 1994.
Revenues from the Insurance businesses were $590 million in the
second quarter, 1995, a decline of 16 percent from the second
quarter, 1994. Revenues for the first half, 1995, totaled $1,264
million, a 9% decline from the first half, 1994. The lower
revenues in both the second quarter and first half 1995 reflect
decreases in earned premiums resulting from the absence of May
and June, 1995 premium volume for Constitution Re due to its
sale, partially offset by increases in overall 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 the second
quarter, 1995 improved by $6 million to $32 million, compared
with $38 million in the second quarter, 1994. For the first half
of 1995, the underwriting loss improved by $11 million to $77
million, compared to $88 million in the first half, 1994. The
overall decrease in 1995 primarily reflects improved loss
experience in certain Insurance Operating Groups on current and
prior years' business and continuing overall expense controls.
Second quarter, 1995, underwriting results include cessions to
Ridge Re (a wholly owned subsidiary of XFSI that provides
reinsurance coverage to current and former Talegen Insurance
Operating Groups) of $22 million pre-tax and $14 million after-
tax of adverse development related to 1992 and prior accident
years. First half, 1995, cessions total $53 million pre-tax and
$34 million after-tax. Cessions to Ridge Re in the second
quarter and first half, 1994, totaled $9 million pre-tax and $6
million after-tax.
Pre-tax catastrophe losses for the Remaining Companies were
approximately $8 million in the second quarter, 1995, compared
with $3 million in the second quarter, 1994. First half losses
totaled $10 million compared with $22 million in the first half,
1994. The increase in the second quarter compared to the prior
year reflects heavier storm activity primarily in the midwest,
while the year to date reduction reflects the impact of the
Northridge earthquake in California and Northeast winter storms
in 1994.
23
Underwriting results (expressed in terms of gross written
premiums and combined ratios) and after-tax income for each of
Talegen's four ongoing insurance operating groups included in the
Remaining Companies performance are summarized in the following
table. Underwriting results for The Resolution Group are not
meaningful on this basis since that unit has insignificant run-
off premiums and, therefore, are not displayed.
Gross Combined After-Tax
Premiums Growth Ratio Income
($ in millions) Written % 1995 1994 1995 1994
Second Quarter
Coregis $ 76 14% 90.6 105.8 $16 $ 7
Crum & Forster Insurance 281 12 108.2 105.6 22 16
Industrial Indemnity 74 (22) 102.2 112.2 3 4
Westchester Specialty Group 85 (11) 111.3 106.2 6 6
Six Months
Coregis $ 167 15% 99.6 107.8 $20 $ 9
Crum & Forster Insurance 552 9 109.3 107.5 34 27
Industrial Indemnity 157 (24) 108.8 111.0 8 14
Westchester Specialty Group 147 (14) 113.9 106.9 12 12
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
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 Insurance Operating Group.
At Coregis gross premiums grew by 14 percent for the quarter and
15 percent for the six months compared to the same periods in
1994. Growth in both periods was due to continued strength in
its program management discipline as evidenced by good renewal
retentions and expansion in various core programs. The combined
ratio decreased 15.2 points to 90.6 for the quarter and 8.2
points to 99.6 for six months reflecting an adjustment for
favorable loss experience which was partially offset by higher
operating expenses. Net income increased $9 million for the
quarter and $11 million for the six months due to increased
24
production, better underwriting results, higher net investment
income and realized capital gains.
Crum & Forster Insurance continued to achieve growth through new
business and strong renewal retentions with the company's custom
agents. This improved penetration led to an increase in gross
written premiums of 12 percent for the second quarter and 9
percent for the six months. The combined ratio increased 2.6
points for the quarter to 108.2 and 1.8 points to 109.3 for the
six months due to higher loss funding primarily on business
written in prior years. Net income increased $6 million for the
quarter and $7 million year-to-date as the benefits of improved
net investment income were partially offset by interest expense
on debt issued in the fourth quarter of 1994.
At Industrial Indemnity the combined ratio improved 10.0 points
for the quarter and 2.2 points for the six months reflecting
significantly better loss experience on current and prior years'
business. Gross premium volume declined 22 percent for the
quarter and 24 percent for the first half due to continued
intense competition for workers compensation business in
California, the company's largest market, due to the new open
rating environment. Lower production in California and interest
expense on debt issued in the fourth quarter of 1994 resulted in
a $1 million decrease in net income for the quarter and $6
million for the six months.
Gross premium volume at Westchester Specialty declined 11 percent
for the second quarter and 14 percent for the six months.
Continuing the trend of recent quarters, casualty volumes
declined due to market pressure on prices and related exposure
reductions, while premiums grew in profitable property business.
The company has strengthened its loss funding for casualty
business causing the combined ratio to increase 5.1 points for
the quarter to 111.3 and 7.0 points for the six months to 113.9.
Improved net investment income helped offset the decline in
underwriting results allowing net income to remain level for the
quarter and the six months.
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 was higher due to increased
net investment income primarily resulting from reinsurance
recoveries in the fourth quarter of 1994.
Investment income for Talegen Remaining Companies was $98 million
in the second quarter, 1995, compared with $87 million in the
second quarter, 1994. First half, 1995, investment income was
$197 million compared with $170 million in the first half, 1994.
The increase in 1995 investment income primarily reflects a
higher level of invested assets and higher yields.
25
Realized pre-tax capital gains for Talegen Remaining Companies
totaled $9 million in the second quarter, 1995, compared with $3
million in the second quarter, 1994. First half, 1995, gains
totaled $13 million compared to $10 million in the first half,
1994. The level of capital gains in 1995 reflects normal
investment activities.
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's 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.
Disengagement From Insurance Business
During the disengagement process, the Company will continue to be
subject to all 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 reserves for unpaid losses and
loss expenses and reserves 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
26
net unpaid losses and loss expenses for the insurance companies
within the Remaining Companies as of June 30, 1995 and December
31, 1994:
Unpaid Losses and Loss Expenses
June 30, 1995 December 31, 1994
Reinsurance Reinsurance
Gross Recover- Net Gross Recover- Net
($ in millions) Reserves able Reserves Reserves able Reserves
Coregis $1,021 $ 279 $ 742 $ 995 $271 $ 724
Crum & Forster Insurance 2,922 804 2,118 2,941 768 2,173
Industrial Indemnity 1,391 184 1,207 1,445 188 1,257
The Resolution Group 1,604 974 630 1,680 983 697
Westchester Specialty Group 1,249 509 740 1,225 485 740
Ceded balances to affiliates (432) (432) - (451) (451) -
Total $7,755 $2,318 $5,437 $7,835 $2,244 $5,591
Memo Item:
1) Included in the above reinsurance recoverable balances are
recoverables from Ridge Re of $106 million and $53 million
at June 30, 1995 and December 31, 1994, respectively.
The changes in gross reserves over the first half of the year
represent reserves established for premiums earned during the
quarter offset by claim payments made. Additionally, insurance
companies within the Crum & Forster Insurance, the Westchester
Specialty Group and The Resolution Group strengthened gross
reserves for development on 1994 and prior accident year claims,
by $33 million, $30 million and $13 million, respectively,
whereas insurance companies within Coregis reduced gross reserves
by $20 million. Of the reserve strengthening amounts, $21
million, $21 million and $11 million, respectively, 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 and 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 June 30, 1995 and December
31, 1994 are as follows:
27
Total Reserves (1) by Claim Categories
Millions June 30, 1995 December 31, 1994
Gross Net Gross Net
Crum & Forster Insurance
Asbestos Bodily Injury $ 57 $ 34 $ 58 $ 40
Asbestos-in-Building - - - -
Hazardous Waste 71 54 79 61
Other Latent or Long-Tail Claims 83 38 110 57
Total $211 $126 $247 $158
The Resolution Group
Asbestos Bodily Injury $161 $ 16 $170 $ 17
Asbestos-in-Building 20 1 21 2
Hazardous Waste 89 33 101 36
Other Latent or Long-Tail Claims 48 4 48 2
Total $318 $ 54 $340 $ 57
Westchester Specialty Group
Asbestos Bodily Injury $ 36 $ 10 $ 38 $ 11
Asbestos-in-Building 45 1 45 1
Hazardous Waste 29 18 34 21
Other Latent or Long-Tail Claims 9 1 9 1
Total $119 $ 30 $126 $ 34
Total (1)
Asbestos Bodily Injury $254 $ 60 $266 $ 68
Asbestos-in-Building 65 2 66 3
Hazardous Waste 189 105 214 118
Other Latent or Long-Tail Claims 140 43 167 60
Total $648 $210 $713 $249
(1) Included are case, IBNR and allocated loss adjustment expense reserves.
Total excludes $2 million of hazardous waste reserves as of both June 30, 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.
The reduction in other latent or long-tail claim reserves during
the first half of the year primarily results from claims resolved
in connection with the March 2, 1995 Monsanto settlement. The
reduction in hazardous waste reserves for the first half of the
year primarily result from payments on claims.
Ridge Re Cessions
Second quarter, 1995, underwriting results include cessions to
Ridge Re (a wholly owned subsidiary of XFSI that provides
reinsurance coverage to the Talegen Insurance Operating Groups)
of $22 million pre-tax and $14 million after-tax of adverse loss
development related to 1992 and prior accident years. First
half, 1995, cessions total $53 million pre-tax and $34 million
after-tax and were from three of the Talegen insurers (Crum &
Forster Insurance - $14 million, Westchester Specialty Group -
$13 million and The Resolution Group - $7 million). Cessions to
Ridge Re in the second quarter and first half, 1994, totaled $9
million pre-tax and $6 million after-tax.
28
Interest and Other
Interest and other charges on an after-tax basis were $39 million
in both the second quarter, 1995 and 1994. First half, 1995,
interest and other charges totaled $79 million compared with $78
million in the first half, 1994, and primarily relate to
interest.
During the second quarter, 1995, the Other Postretirement Benefit
accrual related to employees of the Talegen Remaining Companies
was reduced by $19 million, after-taxes, as a result of various
amendments made by the Insurance Operating Groups to their
retiree medical plans.
An after-tax provision of $19 million was recorded in the second
quarter of 1995 related to disengagement from the various
Insurance businesses in light of uncertainties surrounding the
ultimate values to be obtained from these operations.
Discontinued Operations
Other Financial Services (OFS), which were discontinued in the
fourth quarter of 1993, had no after-tax income in the first half
of 1995 and 1994. The net investment in OFS was $174 million and
$232 million at June 30, 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.
On June 1, 1995, XFSI completed the sale of Xerox Financial
Services Life Insurance Company and related companies ("Xerox
Life Companies") to a subsidiary of General American Life
Insurance Company. After the sale, the Xerox Life Companies
names were changed to replace the name "Xerox" in the corporate
titles with the name "Cova" ("Cova Companies"). OakRe Life
Insurance Company, an XFSI subsidiary formed in 1994, has assumed
responsibility for existing Single Premium Deferred Annuity
(SPDA) policies issued by Xerox Life's Missouri and California
companies via coinsurance agreements ("Coinsurance Agreements").
The Coinsurance Agreements include a provision for the assumption
(at their election) by the Cova Companies, of all of the SPDA
policies at the end of their current rate reset periods. A
Novation Agreement with an affiliate of the new owner provides
for the assumption of the liability under the Coinsurance
Agreements for any SPDA policies not so assumed by the Cova
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
29
the Cova Companies. The sale of Xerox Life Companies is part of
the Company's strategy to exit the financial services business
and focus on its core document processing business, which was
announced in June 1993.
During the first half, 1995, sales of real-estate and third-party
assets and run-off activity reduced assets associated with these
businesses by $33 million to a total of $514 million. Assigned
debt increased by $3 million to $234 million. The debt increase
includes a tax payment made in 1995 relating to the 1994 sale of
a portion of the Direct Financing Lease portfolio, partially
offset by the run-off related reduction of assets. Management
believes that the combination of existing reserves together with
run-off profits should adequately provide for any credit losses
or losses on disposition.
30
Liquidity and Capital Structure
The following table summarizes funds generation and usage for the
six months ended June 30, 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 June 30, Better/
(In millions) 1995 1994 (Worse)
Non-Financing:
Document Processing $ (616) $ (213) $ (403)
Rank Xerox Purchase (972) - (972)
Yen Financing Repayment - (116) 116
IOFS-related/other 321 (163) 484
Non-Financing (1,267) (492) (775)
Financing:
Xerox Equipment Financing 110 (141) 251
Third-Party Financing 1 65 (64)
Financing 111 (76) 187
Operations generation(use) (1,156) (568) (588)
Shareholder Dividends (195) (200) 5
Equity issuance/(redemption)
and changes in cash 30 (143) 173
Debt(increase)decrease $(1,321) $ (911) $ (410)
The following table summarizes Document Processing non-financing
operations funds generation and usage, after investments in the
business, for the six months ended June 30, 1995 and 1994:
Funds Generation/(Use)
Year-to-Date June 30, Better/
(In millions) 1995 1994 (Worse)
Document Processing
Non-Financing:
Income $ 326 $ 188 $ 138
Depreciation and Amortization 321 320 1
Restructuring Payments (194) (204) 10
Capital Expenditures (171) (159) (12)
Assets Sold 30 98 (68)
Working Capital/Other (928) (456) (472)
$ (616) $ (213) $ (403)
31
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 $616 million was $403 million
greater than in the first six months of 1994 as a result of
higher profit sharing payments and growth in inventory and
receivables partially offset by higher income. 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 generation was $321 million or $484 million
better than in 1994 reflecting proceeds from sales of
Constitution Re and Xerox Life.
Financing Businesses
Xerox Equipment Financing generated $110 million of funds during
the first six months of 1995 or $251 million more than in 1994
resulting from slightly lower penetration rates due to product
mix, increased sales in markets which do not participate in our
financing programs, and a trend toward rentals in the U.S.
Third Party Financing generated funds of $1 million during the
first half of 1995 compared with $65 million of funds generation
in 1994 due to a tax payment related to certain leveraged-lease
sales arranged in 1994 and to lower collections on the portfolio
consistent with the reduction in the asset base.
Total Company Debt
Total debt increased by $1,321 million in the first six months of
1995. This growth is attributable to the purchase of incremental
interest in Rank Xerox, premium payments and related financing
charges 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.
32
The Company's subsidiary, Xerox Financial Services, Inc.(XFSI)
has agreed to provide support for Talegen in the form of excess
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 half 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.
33
The Company does not hedge foreign currency-denominated revenues
of its foreign subsidiaries since these do not represent cross-
border cash flows.
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.
34
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The information set forth under note 13 contained in the "Notes
to Consolidated Financial Statements" on pages 10 - 13 of this
Quarterly Report, on Form 10-Q, is incorporated by reference in
answer to this item.
Item 4. Submission of matters to a Vote of Security Holders.
The Annual Meeting of Shareholders of Xerox Corporation was duly
called and held on May 18, 1995 at The Rittenhouse, 210
Rittenhouse Square, Philadelphia, Pennsylvania.
Proxies for the meeting were solicited on behalf of the Board of
Directors of the Registrant pursuant to Regulation 14A of the
General Rules and Regulations of the Commission. There was no
solicitation in opposition to the Board of Directors' nominees
for election as directors as listed in the Proxy Statement, and
all nominees were elected.
At the meeting, votes were cast upon the Proposals described in
the Proxy Statement for the meeting (filed with the Commission
pursuant to Regulation 14A and incorporated herein by reference)
as follows:
Proposal 1 - Election of directors for the ensuing year.
Name For Withheld Vote
Paul A. Allaire 92,050,207 8,530,638
Robert A. Beck 91,367,069 9,213,776
B. R. Inman 91,821,899 8,758,946
Vernon E. Jordan, Jr. 91,362,573 9,218,272
Yotaro Kobayashi 91,792,929 8,787,916
Hilmar Kopper 83,134,734 17,446,111
Ralph S. Larsen 91,790,949 8,789,876
John D. Macomber 91,777,203 8,803,642
N. J. Nicholas, Jr. 91,779,325 8,801,520
John E. Pepper 91,795,968 8,784,877
35
Martha R. Seger 91,736,202 8,844,643
Thomas C. Theobald 91,791,079 8,789,766
Proposal 2 - To elect KPMG Peat Marwick LLP as independent
auditors for the year 1995.
For - 99,572,177
Against - 649,671
Abstain - 358,996
Proposal 3 - To approve the Xerox Executive Performance Incentive
Plan.
For - 90,166,117
Against - 9,043,886
Abstain - 1,277,670
Broker Non-vote - 93,171
Proposal 4 - Shareholder proposal relating to the MacBride
Principles.
For - 13,881,421
Against - 76,741,062
Abstain - 4,805,929
Broker Non-vote - 5,098,231
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 Report on Form 8-K dated June 1, 1995 reporting Item
5 "Other Events" was filed during the quarter for which this
Quarterly Report is filed.
36
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: August 9, 1995 By Philip D. Fishbach
Vice President and Controller
(Principal Accounting Officer)
37
Exhibit 11
Xerox Corporation
Computation of Net Income Per Common Share
(Dollars in millions, except per-share data; shares in thousands)
Three months Six months
ended June 30, ended June 30,
1995 1994 1995 1994
I. Primary Net Income Per
Common Share
Net income $ 238 $ 168 $ 385 $ 297
Accrued dividends on ESOP preferred
stock, net (10) (12) (21) (21)
Accrued dividends on redeemable
preferred stock (1) (3) (2) (9)
Call premium on redeemable preferred
stock - (11) - (11)
Adjusted net income $ 227 $ 142 $ 362 $ 256
Average common shares outstanding
during the period 107,226 105,481 106,781 105,088
Common shares issuable with respect
to common stock equivalents for
stock options, incentive and
exchangeable shares 2,957 3,106 2,957 3,106
Adjusted average shares outstanding
for the period 110,183 108,587 109,738 108,194
Primary earnings per share $ 2.07 $ 1.31 $ 3.30 $ 2.36
II.Fully Diluted Net Income Per
Common Share
Net income $ 238 $ 168 $ 385 $ 297
Accrued dividends on redeemable
preferred stock (1) (3) (2) (9)
Call premium on redeemable preferred
stock - (11) - (11)
ESOP expense adjustment, net of tax (2) (2) (4) (4)
Interest on convertible debt, net
of tax - - 1 1
Adjusted net income $ 235 $ 152 $ 380 $ 274
Average common shares outstanding
during the period 107,226 105,481 106,781 105,088
Stock options, incentive and
exchangeable shares 2,957 3,106 2,957 3,106
Convertible debt 881 881 881 881
ESOP preferred stock 9,616 9,813 9,616 9,813
Adjusted average shares outstanding
for the period 120,680 119,281 120,235 118,888
Fully diluted earnings per share $ 1.96 $ 1.28 $ 3.16 $ 2.31
38
Exhibit 12 Xerox Corporation
Computation of Ratio of Earnings to Fixed Charges
Six months ended Year ended
June 30, December 31,
(In Millions) 1995 1994 1994 1993* 1992** 1991*** 1990
Fixed charges:
Interest expense $ 417 $ 360 $ 732 $ 755 $ 788 $ 758 $ 799
Rental expense 90 96 190 201 208 206 191
Total fixed charges
before capitalized
interest 507 456 922 956 996 964 990
Capitalized interest - 1 2 5 17 3 -
Total fixed charges $ 507 $ 457 $ 924 $ 961 $1,013 $ 967 $ 990
Earnings available for
fixed charges:
Earnings**** $ 746 $ 595 $1,558 $ (227) $ 192 $ 939 $1,116
Less undistributed
income in minority
owned companies (63) (35) (54) (51) (52) (70) (60)
Add fixed charges before
capitalized interest 507 456 922 956 996 964 990
Total earnings
available for
fixed charges $1,190 $1,016 $2,426 $ 678 $1,136 $1,833 $2,046
Ratio of earnings to
fixed charges (1)(2) 2.35 2.22 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.
39
CT
1,000,000
6-MOS
DEC-31-1995
JUN-30-1995
37,650
109
25
747
4,956
37,650
9,088
261
385
0
0
0
385
3.30
3.16
5
1,000,000
6-MOS
DEC-31-1995
JUN-30-1995
34
0
12,294
388
2,789
9,736
4,744
2,682
20,727
6,344
9,537
3,961
7,824
2,285
4,224
2,821
104
417
779
302
441
7
1,000,000
6-MOS
DEC-31-1995
JUN-30-1995
6,956
0
0
161
0
0
7,776
18
2,723
135
13,254
7,842
777
0
0
413
1,033
220
14
11
855
194
136
(97)
(41)
(56)
8,809
0
0
0
0
0
0
DATA NOT AVAILABLE FOR INTERIM REPORTING.
