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, 1996
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 30,1996
Common Stock 107,867,241 shares
Class B Stock 1,000 shares
This document consists of 25 pages.
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(THIS PAGE IS INTENTIONALLY LEFT BLANK)
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Xerox Corporation
Form 10-Q
March 31, 1996
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
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Document Processing 10
Discontinued Operations 16
Capital Resources and Liquidity 19
Hedging Instruments 20
Part II - Other Information
Item 1. Legal Proceedings 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
Exhibit Index
Computation of Net Income per Common Share 24
Computation of Ratio of Earnings to Fixed Charges 25
Financial Data Schedule (filed in electronic form only)
3
PART I - FINANCIAL INFORMATION
Xerox Corporation
Consolidated Statements of Income
Three months ended
March 31,
(In millions, except per-share data) 1996 1995
Revenues
Sales $ 1,917 $ 1,864
Service and rentals 1,755 1,651
Finance income 256 252
Total Revenues 3,928 3,767
Costs and Expenses
Cost of sales 1,092 1,102
Cost of service and rentals 898 837
Equipment financing interest 130 125
Research and development expenses 254 218
Selling, administrative and general
expenses 1,166 1,099
Other, net 4 19
Total Costs and Expenses 3,544 3,400
Income before Income Taxes, Equity Income
and Minorities' Interests 384 367
Income taxes 139 142
Equity in net income of unconsolidated
affiliates 20 13
Minorities' interests in earnings of
subsidiaries 28 51
Income from Continuing Operations 237 187
Discontinued Operations - (40)
Net Income $ 237 $ 147
Primary Earnings per Share
Continuing Operations $ 2.03 $ 1.60
Discontinued Operations - (.37)
Primary Earnings per Share $ 2.03 $ 1.23
Fully Diluted Earnings per Share
Continuing Operations $ 1.95 $ 1.54
Discontinued Operations - (.34)
Fully Diluted Earnings per Share $ 1.95 $ 1.20
See accompanying notes.
4
Xerox Corporation
Consolidated Balance Sheets
March 31, December 31,
(In millions, except share data in thousands) 1996 1995
Assets
Cash $ 5 $ 136
Accounts receivable, net 2,183 1,914
Finance receivables, net 3,998 4,069
Inventories 2,911 2,656
Deferred taxes and other current assets 1,112 1,095
Total Current Assets 10,209 9,870
Finance receivables due after one year, net 6,350 6,406
Land, buildings and equipment, net 2,135 2,105
Investments in affiliates, at equity 1,261 1,314
Goodwill 625 627
Other assets 976 876
Investment in discontinued operations 4,819 4,810
Total Assets $ 26,375 $ 26,008
Liabilities and Equity
Short-term debt and current portion of
long-term debt $ 3,208 $ 3,274
Accounts payable 503 578
Accrued compensation and benefit costs 499 731
Unearned income 229 228
Other current liabilities 2,242 2,216
Total Current Liabilities 6,681 7,027
Long-term debt 8,709 7,867
Postretirement medical benefits 1,024 1,018
Deferred taxes and other liabilities 2,401 2,437
Discontinued operations liabilities -
policyholders' deposits and other 2,724 2,810
Deferred ESOP benefits (547) (547)
Minorities' interests in equity of subsidiaries 754 755
Preferred stock 759 763
Common shareholders' equity 3,870 3,878
Total Liabilities and Equity $ 26,375 $ 26,008
Shares of common stock issued and outstanding 107,990 108,343
See accompanying notes.
5
Xerox Corporation
Consolidated Statements of Cash Flows
Three months ended March 31 (In millions) 1996 1995
Cash Flows from Operating Activities
Income from Continuing Operations $ 237 $ 187
Adjustments required to reconcile income to cash
flows from operating activities:
Depreciation and amortization 150 158
Provisions for doubtful accounts 47 39
Provision for postretirement medical benefits 11 15
Charges against 1993 restructuring reserve (50) (111)
Minorities' interests in earnings of subsidiaries 28 51
Undistributed equity in income of affiliated companies (20) (13)
Increase in inventories (325) (342)
Decrease in finance receivables 19 46
Increase in accounts receivable (287) (151)
Decrease in accounts payable and accrued compensation
and benefit costs (317) (219)
Net change in current and deferred income taxes 54 39
Other, net (154) 78
Total (607) (223)
Cash Flows from Investing Activities
Cost of additions to land, buildings and equipment (148) (43)
Proceeds from sales of land, buildings and equipment 31 14
Purchase of additional interest in Rank Xerox - (972)
Total (117) (1,001)
Cash Flows from Financing Activities
Net change in debt 861 1,372
Dividends on common and preferred stock (110) (97)
Proceeds from sale of common stock 32 60
Repurchase of common and preferred stock (96) (4)
Dividends to minority shareholders - (26)
Total 687 1,305
Effect of Exchange Rate Changes on Cash - (4)
Cash Provided (Used) by Continuing Operations (37) 77
Cash Used by Discontinued Operations (94) (91)
Decrease in Cash (131) (14)
Cash at Beginning of Period 136 43
Cash at End of Period $ 5 $ 29
See accompanying notes.
6
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 1995 Annual Report
to Shareholders and should be read in conjunction with the notes
thereto. Effective with 1996 reporting, the Company's China
operations are fully consolidated. The 1995 financial statements
presented herein have been restated to reflect this change and
several other accounting reclassifications to conform with the
1996 presentation. The impact of these changes is not material
and did not affect net income.
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,
1996 1995
Finished products $ 1,790 $ 1,646
Work in process 115 88
Raw materials and supplies 371 295
Equipment on operating leases, net 635 627
Total $ 2,911 $ 2,656
3. Common shareholders' equity consists of (in millions):
March 31, December 31,
1996 1995
Common stock $ 110 $ 109
Additional paid-in-capital 1,581 1,552
Retained earnings 2,449 2,321
Net unrealized gain (loss) on
investment securities 3 (1)
Translation adjustments (187) (103)
Treasury stock (86) -
Total $ 3,870 $ 3,878
4. The Company's Consolidated Balance Sheet at March 31, 1996
includes current and non-current accrued liabilities of $240
million and $112 million, respectively, associated with the
Document Processing restructuring program announced in December
1993. At December 31, 1995, the corresponding accrued
liabilities aggregated $395 million. During the three month
period ended March 31, 1996, restructuring-related activity
7
Xerox Corporation
Notes to Consolidated Financial Statements
reduced the accrued liability by $43 million. Management
believes the aggregate reserve balance of $352 million at March
31, 1996 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 13.
5. Interest expense totaled $148 million and $137 million for the
three months ended March 31, 1996 and 1995, respectively.
6. Litigation
Continuing Operations
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. Claims for individual lost
profits of ISOs who were not named parties were not included in
that class action. One of the plaintiffs in the suit filed in
California subsequently filed its own complaint alleging
essentially the same claims. In one of the pending cases damages
are unspecified and in the other two damages in excess of $10
million are sought. In addition, injunctive relief is sought in
each of the actions. The actions have been consolidated for
pretrial proceedings in the District of Kansas. The Company has
asserted counter-claims against certain of the plaintiffs
alleging patent and copyright infringement, misappropriation of
Xerox trade secrets, conversion and unfair competition and/or
false advertising. On December 11, 1995, the District Court
issued a preliminary injunction against the parent company of the
Kansas City and St. Louis ISOs for copyright infringement. The
Company denies any wrongdoing and intends to vigorously defend
these actions and pursue its counterclaims.
Discontinued Operations
Farm & Home Savings Association (Farm & Home) and certain Talegen
insurance companies (Insurance Companies) entered into an
agreement (Indemnification Agreement) under which the Insurance
Companies are required to defend and indemnify Farm & Home from
certain actual and punitive damage claims being made against Farm
& Home relating to the Brio superfund site (Brio). In a number
8
Xerox Corporation
Notes to Consolidated Financial Statements
of lawsuits pending against Farm & Home in the District Courts of
Harris County, Texas, several hundred 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 certain of the claims fall under
the coverage of either the policies or the Indemnification
Agreement. The Insurance Companies have been successful in
having some claims dismissed which were brought by plaintiffs who
were unable to demonstrate a pertinent nexus to the Southbend
subdivision. However, there are numerous plaintiffs who do have
a nexus to the Southbend subdivision. The Insurance Companies
have been in settlement discussions with respect to claims
brought by plaintiffs who have or had a pertinent nexus to the
Southbend subdivision. If not settled, one or more of these
cases can be expected to be tried in 1996.
9
Xerox Corporation
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Document Processing
Underlying Growth
To understand the trends in the business, we believe 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. We refer to this adjusted growth
as "underlying growth."
When compared with the major European currencies, the U.S. dollar
was approximately 1 percent weaker in the 1996 first quarter than
in the 1995 first quarter. As a result, foreign currency
translation had only a marginal impact on our total revenue and
expense growth in the 1996 first quarter.
We do not hedge the translation of foreign currency-denominated
revenues.
Revenues
We estimate that the components of underlying revenue growth were
as follows:
Underlying Growth
1996 1995
Q1 FY Q4 Q3 Q2 Q1
Total Revenues 4% 7% 2% 8% 8% 11%
Sales
Equipment* 7 6 (1) 12 8 8
Supplies - 9 (1) 9 10 21
Paper (2) 39 22 42 42 54
Total 2 9 - 11 12 18
Service/Rentals/Document Outsourcing
Service 1 2 1 1 4 3
Rentals 2 1 1 3 (2) 3
Document Outsourcing 48 46 51 44 43 46
Total 6 6 5 6 6 6
Finance Income (1) (4) (1) (7) (2) (4)
Memo:
Revenues Excluding
Equipment Sales 3 9 6 8 9 12
* Only includes equipment sales to end-users
10
The increase in equipment sales to end users in the first
quarter, compared with the 1995 fourth quarter, primarily
reflects double digit growth in the United States, Latin America
and Canada, partially offset by a decline in Rank Xerox.
Revenues from supplies, paper, service, rentals, document
outsourcing and other revenues, and income from customer
financing represented 72 percent of total revenues in the 1996
first quarter. Growth in these revenues is primarily a function
of the growth in our installed population of equipment, usage and
pricing. The significant decline in growth in the first quarter
reflects the reduced growth in supplies and paper sales.
Supplies sales: Flat revenues in the 1996 first quarter are
due to an unusually strong 1995 first quarter when supplies
sales increased 21 percent.
Paper sales: Our strategy is to charge a spread over mill
wholesale prices to cover our costs and value added as a
distributor. The decline in the 1996 first quarter is due to
lower sales volumes compared with the 1995 first quarter when
customers were stocking in anticipation of shortages,
partially offset by higher average prices as a result of
significant price increases in the first half of 1995.
Service revenues: The modest growth in recent quarters
reflects the trend to document outsourcing and competitive
pricing pressures.
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 has been an increasing
trend toward cost-per-copy rental plans, which adversely
affects up-front equipment sales, service revenues and finance
income.
Document Outsourcing: This growth reflects the trend of
customers to outsource their document processing requirements
to Xerox. This has the effect of diverting revenue from
equipment sales, service and finance income. This trend
reduces current period total revenues but increases revenues
in future periods.
Finance income: Our strategy for financing equipment sales is
to charge a spread over our cost of borrowing and to lock in
that spread by match-funding the notes receivable with
borrowings of similar maturities. Strong growth in the
financing of equipment sales in Brazil more than offset a
decline in interest income in the U.S. and Rank Xerox
resulting from lower average interest rates and the trend to
document outsourcing.
11
Geographically, the underlying revenue growth rates are
estimated as follows:
1996 1995
Q1 FY Q4 Q3 Q2 Q1
Total Revenues 4% 7% 2% 8% 8% 11%
United States 5 3 (3) 5 5 8
Rank Xerox (2) 8 10 2 5 13
Other Areas 11 16 2 27 25 17
U.S. revenues increased 5 percent in the 1996 first quarter,
compared with a decline of 3 percent in the 1995 fourth quarter.
The improvement in the 1996 first quarter was driven by
exceptional sales of the DocuTech and color products resulting
from improvements implemented since mid-1995.
Rank Xerox (Rank Xerox Limited and related companies)
manufactures and markets Xerox products principally in Europe.
Rank Xerox revenues declined 2 percent in the first quarter
compared with a very strong first quarter last year. The decline
was also a result of some weakness in the economic environments
in France, Germany and Russia. Revenues in the United Kingdom
declined modestly compared with a strong 1995 first quarter.
Other Areas include operations principally in Latin America and
Canada. Revenue growth was excellent in Brazil and strong in
Mexico and Canada. In 1995, our revenues were approximately $1.4
billion in Brazil and $200 million in Mexico.
For the major product categories, the underlying revenue growth
rates are estimated as follows:
1996 1995
Q1 FY Q4 Q3 Q2 Q1
Total Revenues 4% 7% 2% 8% 8% 11%
Black & White Copiers - 2 (2) 3 2 4
Enterprise Printing 19 17 10 18 20 22
Revenues from black-and-white copying represented 59 percent of
total document processing revenues in the 1996 first quarter and
for the 1995 full year. Strong growth in Latin America was
offset by a modest decline in Rank Xerox. Revenues from
enterprise printing, including production publishing, data center
printing, network printing, and color printing and copying,
represented 27 percent of total revenues in the 1996 first
quarter compared with 25 percent for the 1995 full year.
12
Exceptional U.S. sales of the DocuTech and color products were
tempered by weak Rank Xerox performance.
Productivity Initiatives
In 1993, we announced a restructuring program to significantly
reduce the cost base and to improve productivity. Our objectives
were to reduce our worldwide work force by more than 10,000
employees and to close or consolidate a number of facilities.
To date, the activities associated with the 1993 restructuring
program have reduced employment by 12,400, achieved pre-tax cost
reductions of approximately $350 million in 1994 and $650 million
in 1995, and we are on track towards achieving our restructuring
program objectives. However, a portion of the savings has been
reinvested to reengineer business processes, to support the
expansion in growth markets, and to mitigate anticipated
continued pricing pressures.
Gross Profit and Expenses
Employment increased by 800 in the 1996 first quarter to 86,700
in the quarter as a result of the hiring of additional sales
representatives for our worldwide operations and the hiring of
employees to support our fast-growing document outsourcing
business. Reductions from our ongoing productivity program
totaled 400 in the quarter.
Gross profit increased 6 percent as a result of volume and an
improvement in gross margins.
The gross margins by revenue stream were as follows:
Gross Margins
1996 1995
Q1 FY Q4 Q3 Q2 Q1
Total Gross Margin % 46.0% 46.1% 46.7% 46.0% 46.5% 45.2%
Sales 43.0 43.0 45.0 42.7 42.7 40.9
Service and Rentals 48.9 49.6 48.9 49.3 50.8 49.3
Financing 49.0 49.7 50.1 50.1 48.3 50.4
Total gross margins improved by 0.8 percentage points in the 1996
first quarter from the 1995 first quarter. The improvement of
2.1 percentage points in the sales gross margin from the 1995
first quarter was principally due to cost reductions and
favorable product and geographical mix, partially offset by
pricing pressures. The erosion in the service and rentals gross
margin of 0.4 percentage points from the 1995 first quarter was
13
largely due to pricing pressures and economic cost increases,
partially offset by the benefits from productivity initiatives.
Research and development (R&D) expense increased 17 percent
compared with a low 1995 first quarter reflecting increased
investment in future product introductions. Although this rate
of growth is unlikely to be sustained, we will continue to invest
in technological development to maintain our premier position in
the rapidly changing document processing market. We expect to
introduce a stream of new, technologically innovative products in
the coming months, the most recent was the DocuColor 40 which was
announced in April, 1996. Xerox 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 $600 million in R&D
in 1995.
Selling, administrative and general expenses (SAG) increased 6
percent in the 1996 first quarter due to economic cost increases,
expansion in growth markets, principally in our Brazilian
operations, and investments to increase worldwide sales
effectiveness, including the expansion of direct sales coverage
and indirect distribution channels, partially offset by improved
productivity. SAG was 29.7 percent of revenue in the first
quarter, an increase of 0.5 percentage points from the 1995 first
quarter.
The $15 million decrease in other expenses, net, in the 1996
first quarter reflects increased interest and investment income
and reduced foreign currency losses from balance sheet
translation, partially offset by higher interest expense,
principally due to the financing of the increased financial
interest in Rank Xerox.
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 5
percent to $384 million in the 1996 first quarter from $367
million in the 1995 first quarter.
The effective tax rate was 36.3 percent in the 1996 first quarter
and 38.6 percent in the 1995 full year. The decline was
primarily due to a lower statutory tax rate in Brazil.
Equity in the net income of unconsolidated affiliates,
principally Fuji Xerox, increased in the 1996 first quarter to
$20 million from $13 million in the 1995 first quarter. The
increase in Fuji Xerox income was due to revenue growth in their
domestic market.
14
Minorities' interests in the earnings of subsidiaries was $28
million in the 1996 first quarter compared with $51 million in
the 1995 first quarter. The decline was due to lower Rank Xerox
income and our increased financial interest in Rank Xerox. On
February 28, 1995, we increased our financial interest in Rank
Xerox to 80 percent from 67 percent.
Income
Income in the 1996 first quarter was $237 million, a growth of 26
percent compared with $187 million in the 1995 first quarter
Primary earnings per share increased 27 percent to $2.03 in the
1996 first quarter. Fully diluted earnings per share increased
27 percent to $1.95.
China Operations Consolidation and Other Reclassifications
Effective with 1996 reporting, our China operations are fully
consolidated. Prior year financial and operating results have
been restated to reflect this change and several other accounting
reclassifications to conform with 1996 reporting. The impact of
these changes on the financial statements and underlying trends
is not material and there is no change in income.
15
Discontinued Operations
The investment in the discontinued financial services businesses
which includes Insurance, Other Financial Service, Third-Party /
Real-Estate and assigned debt totaled $2.1 billion at March 31,
1996 compared with $2.0 billion at December 31, 1995. The
increase primarily includes scheduled payments to Ridge Re for
annual premium installments and associated finance charges. A
discussion of the discontinued businesses follow.
Insurance Segment
In January 1996, Xerox announced agreements to sell all of our
Remaining Talegen insurance units (Coregis Group, Inc., Crum &
Forster Holdings, Inc., Industrial Indemnity Holdings, Inc.,
Westchester Specialty Group, Inc. and three insurance-related
service companies) and The Resolution Group, Inc. (TRG) to
investor groups led by Kohlberg Kravis Roberts & Co. (KKR) and
senior management of the Remaining companies. The sales, expected
to close in the middle of this year, will consist of two
concurrent transactions with proceeds totaling $2.7 billion,
including the assumption of Talegen debt. The transactions are
subject to customary closing conditions, including buyer
financing and regulatory approvals. In connection with the
announced sales, the Company recorded a fourth quarter, 1995,
$1,546 million after-tax charge. As a result of the sales of the
Talegen units, the insurance segment has been classified as a
discontinued operation for all periods presented and its
operating results did not affect the Company's earnings in the
first quarter of 1996.
Operating results for the discontinued insurance segment in the
first quarter of 1996 and 1995 follow:
Revenue After-Tax Income
(In Millions) 1996 1995 1996 1995
Talegen/TRG $530 $683 $ 24 $ 20
Total Insurance $525 $674 $(10) $(40)
The improvement in the 1996 after-tax income compared with 1995
reflects the absence of the 1995 settlement between Monsanto and
Talegen which totaled $22 million after-tax. The 1996 Total
Insurance after-tax loss of $10 million was charged to reserves
established for this purpose and, therefore, does not impact the
Company's earnings. The investment at March 31, 1996 totaled
$1,786 million compared with a restated balance of $1,678 million
at December 31, 1995. The increase primarily includes
contractual payments to Ridge Re for annual premium installments
and associated finance charges. Under the terms of the
16
aforementioned sales agreements, the investment is considered to
be fully recoverable by management.
Other Financial Services
Other Financial Services (OFS), which were discontinued in the
fourth quarter of 1993, had no after-tax income in the first
quarter of 1996 and 1995. The net investment in OFS at March 31,
1996 was $95 million compared with a restated $114 million at
December 31, 1995. The decrease in the investment primarily
reflects the sale of the remaining portion of First Quadrant
Corp. Management currently believes that the liquidation of the
remaining OFS units will not result in a net loss.
On June 1, 1995, Xerox Financial services, Inc. (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 (OakRe), 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 the Cova Companies.
As a result of the Coinsurance Agreements, at March 31, 1996,
OakRe retained approximately $2.4 billion of investment portfolio
assets (transferred from the Xerox Life Companies) and
liabilities related to the reinsured SPDA policies. Interest
rates on these policies are fixed and were established upon
issuance of the respective policies. Substantially all of these
policies will reach their rate reset periods within the next five
years and will be assumed under the Agreements as described
above. At March 31, 1996 the "maturities" of OakRe's assets and
liabilities were not fully matched as the Xerox Life Companies'
portfolio was designed to recognize that policy renewals
extended liability "maturities", thereby permitting investments
of somewhat longer average duration. OakRe's practice is to
selectively improve this match over time as market conditions
allow. As of March 31, 1996 we estimate that "maturities" are
effectively matched for approximately 60% of ultimate policy
liabilities.
17
In connection with the aforementioned sale, XFSI established a
$500 million letter of credit and line of credit with a group of
banks to support OakRe's coinsurance obligations. The term of
this letter of credit is five years and it is unused and
available at March 31, 1996. 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.
Third-Party / Real-Estate
During the first quarter of 1996, sales of real-estate and third-
party assets and run-off activity reduced assets associated with
these businesses by $14 million to a total of $475 million.
Assigned debt totaled $211 million at March 31, 1996, a $20
million decline from the year-end 1995 level. The net decrease
in the investment in 1996 is mainly the result of run-off and
selected sales of discontinued third-party financing 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.
18
Capital Resources and Liquidity
Total debt, including ESOP and Discontinued Operations debt not
shown separately in our consolidated balance sheets, increased to
$12,529 million at March 31, 1996, from $11,794 million at
December 31,1995. The principal causes for the change in
consolidated indebtedness since year end, and versus first
quarter 1995, are as follows:
(In millions) 1996 1995
Total Debt as of January 1 $11,794 $10,939
Non-Financing Businesses:
Document Processing Operations 773 590
Increased financial interest in Rank Xerox - 972
Discontinued Businesses 73 132
Total Non-Financing 846 1,694
Financing Businesses (146) (104)
Total Operations 700 1,590
Shareholder dividends 110 97
Equity-related and other changes, net (75) (67)
Total Debt as of March 31 $12,529 $12,559
For purposes of capital ratio analysis, total equity includes
common equity, preferred stock and minorities' interests in the
equity of subsidiaries.
The following table summarizes the changes in total equity during
the first three months of 1996:
(In millions)
Total equity as of January 1,1996 $5,396
Income from Continuing Operations $237
Shareholder Dividends Paid (110)
Common stock repurchased (91)
All Other, net (49)
Balance as of March 31, 1996 $5,383
On a consolidated basis, the debt-to-capital ratio at March 31,
1996 was 72 percent compared with 71 percent December 31, 1995.
19
Non-Financing Operations
The following table summarizes Document Processing non-financing
operations cash generation and borrowing for the three months
ended March 31, 1996 and 1995:
Cash Generated/(Borrowed)
Three Months Ended March 31,
(In millions) 1996 1995
Document Processing
Non-Financing:
Income $185 $130
Depreciation and Amortization 150 158
Restructuring Payments (50) (111)
Capital Expenditures (148) (43)
Assets Sold 31 14
Working Capital/Other (941) (738)
$(773) $(590)
First quarter 1996 cash usage of $773 million was $183 million
greater than in the first three months of 1995 due primarily to
increased capital spending related to facilities infrastructure
investments and an abnormally low level of spending during the
first three months of 1995 and increased receivables. These
factors were partially offset by higher net income and lower
restructuring payments in 1996.
Financing Businesses
Financing business debt was reduced by $146 million and $104
million during the first three months of 1996 and 1995,
respectively as increased financing related to higher equipment
sales in the U.S. was more than offset by lower RX sales activity
and a reduction in discontinued third-party financing debt.
Financial leverage remained equal to our 6.5:1 debt-to-equity
guideline as of March 31, 1996.
Hedging Instruments
We have entered into certain financial instruments to manage
interest rate and foreign currency exposures. These instruments
are held solely for hedging purposes and include interest rate
swap agreements, forward foreign exchange contracts and foreign
currency swap agreements. We have 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. We do
not enter into derivative instrument transactions for trading
purposes.
20
Currency derivatives are primarily arranged in conjunction with
underlying transactions that 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 foreign-exchange contract to fix the rate
at which a dividend will be paid by a foreign subsidiary. In
addition, when cost-effective, currency derivatives are also used
to hedge balance sheet exposures in hyperinflationary economies.
We do not hedge foreign currency-denominated revenues of our
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, we
"lock 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. We
refer to the effect of these conservative practices as "match
funding" customer financing assets. This practice effectively
eliminates the risk of a major decline in interest margins
resulting from a rising interest rate environment. Conversely,
this practice does effectively eliminate the opportunity to
materially increase margins when interest rates are declining.
More specifically, pay fixed-rate and receive variable-rate swaps
are typically used in place of more expensive fixed-rate debt.
Pay variable-rate and receive variable-rate swaps are used to
transform variable-rate medium-term debt into commercial paper or
local currency LIBOR obligations. Additionally, pay variable-rate
and receive fixed-rate swaps are used from time to time to
transform longer-term fixed-rate debt into commercial paper or
libor-based rate obligations. The transactions performed within
each of these three categories enable the cost effective
management of interest rate exposures. The potential risk
attendant to this strategy is the performance of the swap
counterparty. We address 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.
Our currency and interest rate hedging are typically unaffected
by changes in market conditions as forward contracts, options and
swaps are normally held to maturity consistent with our objective
to lock in currency rates and interest rate spreads on the
underlying transactions.
21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The information set forth under note 6 contained in the "Notes to
Consolidated Financial Statements" on pages 8-9 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.
Exhibit 27 Financial Data Schedule(in electronic form only)
(b) Current Reports on Form 8-K dated January 18, 1996 and
January 24, 1996 reporting Item 5 "Other Events" were filed
during the quarter for which this Quarterly Report is filed.
22
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 8, 1996 By Philip D. Fishbach
Vice President and Controller
(Principal Accounting Officer)
23
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,
1996 1995
I. Primary Net Income Per
Common Share
Income from continuing operations $ 237 $ 187
Accrued dividends on ESOP preferred stock, net (11) (11)
Accrued dividends on redeemable preferred stock (1) (1)
Adjusted income from continuing operations 225 175
Discontinued operations - (40)
Adjusted net income $ 225 $ 135
Average common shares outstanding
during the period 108,331 106,359
Common shares issuable with respect
to common stock equivalents for
stock options, incentive and
exchangeable shares 2,679 2,834
Adjusted average shares outstanding
for the period 111,010 109,193
Primary earnings per share:
Continuing operations $ 2.03 $ 1.60
Discontinued operations - (.37)
Primary earnings per share $ 2.03 $ 1.23
II.Fully Diluted Net Income Per
Common Share
Income from continuing operations $ 237 $ 187
Accrued dividends on redeemable preferred stock (1) (1)
ESOP expense adjustment, net of tax (1) (2)
Interest on convertible debt, net of tax 1 1
Adjusted income from continuing operations 236 185
Discontinued operations - (40)
Adjusted net income $ 236 $ 145
Average common shares outstanding
during the period 108,331 106,359
Stock options, incentive and
exchangeable shares 2,679 3,047
Convertible debt 881 881
ESOP preferred stock 9,406 9,649
Adjusted average shares outstanding
for the period 121,297 119,936
Fully diluted earnings per share:
Continuing operations $ 1.95 $ 1.54
Discontinued operations - (.34)
Fully diluted earnings per share $ 1.95 $ 1.20
24
Exhibit 12 Xerox Corporation
Computation of Ratio of Earnings to Fixed Charges
Three months ended Year ended
March 31, December 31,
(In Millions) 1996 1995 1995 1994 1993* 1992 1991
Fixed charges:
Interest expense $ 148 $ 137 $ 605 $ 520 $ 540 $ 627 $ 596
Rental expense 35 41 142 170 180 187 178
Total fixed charges
before capitalized
interest 183 178 747 690 720 814 774
Capitalized interest - 0 - 2 5 17 3
Total fixed charges $ 183 $ 178 $ 747 $ 692 $ 725 $ 831 $ 777
Earnings available for
fixed charges:
Earnings** $ 404 $ 380 $1,979 $1,602 $ (193) $1,183 $1,035
Less undistributed
income in minority
owned companies (20) (13) (90) (54) (51) (52) (70)
Add fixed charges before
capitalized interest 183 178 747 690 720 814 774
Total earnings
available for
fixed charges $ 567 $ 545 $2,636 $2,238 $ 476 $1,945 $1,739
Ratio of earnings to
fixed charges (1)(2) 3.10 3.06 3.53 3.23 0.66 2.34 2.24
(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. Debt has been assigned to discontinued operations based on
historical levels assigned to the businesses when they were continuing
operations adjusted for subsequent paydowns. The discontinued operations
consist of the Company's Insurance and Other Financial Services businesses
and its real-estate development and third-party financing 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 are more highly leveraged and, therefore,
tend to operate at lower earnings to fixed charges ratio levels than do
non-financial businesses.
* 1993 earnings were inadequate to cover fixed charges. The coverage
deficiency was $249 million.
** Sum of "Income before Income Taxes, Equity Income and Minorities'
Interests" and "Equity in Net Income of Unconsolidated Affiliates."
25
5
1,000,000
3-MOS
DEC-31-1996
MAR-31-1996
5
0
12,925
394
2,911
10,209
4,827
2,692
26,375
6,681
12,178
25
734
110
3,760
26,375
1,917
3,928
1,092
2,120
1,424
31
148
384
139
237
0
0
0
237
2.03
1.95
