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, 1997
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 30,1997
Common Stock 323,653,011 shares
This document consists of 26 pages.
This Form 10-Q contains certain forward-looking statements and
information relating to the Company that are based on the beliefs
of management as well as assumptions made by and information
currently available to management. The words "anticipate",
"believe", "estimate", "expect", "intends", and similar
expressions, as they relate to the Company or the Company's
management, are intended to identify forward-looking statements.
Such statements reflect the current views of the Company with
respect to future events and are subject to certain risks,
uncertainties and assumptions. Should one or more of these risks
or uncertainties materialize, or should underlying assumptions
prove incorrect, actual results may vary materially from those
described herein as anticipated, believed, estimated or expected.
The Company does not intend to update these forward-looking
statements.
Xerox Corporation
Form 10-Q
March 31, 1997
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 11
Discontinued Operations 16
Capital Resources and Liquidity 20
Hedging Instruments 22
Part II - Other Information
Item 1. Legal Proceedings 23
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
Exhibit Index
Computation of Net Income per Common Share 25
Computation of Ratio of Earnings to Fixed Charges 26
Financial Data Schedule (filed in electronic form only)
For additional information about The Document Company Xerox,
please visit our World-wide Web site at www.xerox.com and select
"Investor Information."
PART I - FINANCIAL INFORMATION
Item I Xerox Corporation
Consolidated Statements of Income
Three months ended
March 31,
(In millions, except per-share data) 1997 1996
Revenues
Sales $ 1,979 $ 1,910
Service and rentals 1,790 1,762
Finance income 253 256
Total Revenues 4,022 3,928
Costs and Expenses
Cost of sales 1,124 1,091
Cost of service and rentals 898 899
Equipment financing interest 129 130
Research and development expenses 262 254
Selling, administrative and general
expenses 1,180 1,166
Other, net 1 4
Total Costs and Expenses 3,594 3,544
Income before Income Taxes, Equity Income
and Minorities' Interests 428 384
Income taxes 150 139
Equity in net income of unconsolidated
affiliates 22 20
Minorities' interests in earnings of
subsidiaries 30 28
Income from Continuing Operations 270 237
Discontinued Operations - -
Net Income $ 270 $ 237
Primary Earnings per Share
Continuing Operations $ 0.78 $ 0.68
Discontinued Operations - -
Primary Earnings per Share $ 0.78 $ 0.68
Fully Diluted Earnings per Share
Continuing Operations $ 0.75 $ 0.65
Discontinued Operations - -
Fully Diluted Earnings per Share $ 0.75 $ 0.65
See accompanying notes.
Xerox Corporation
Consolidated Balance Sheets
March 31, December 31,
(In millions, except share data in thousands) 1997 1996
Assets
Cash $ 31 $ 104
Accounts receivable, net 2,137 2,022
Finance receivables, net 4,182 4,386
Inventories 2,862 2,676
Deferred taxes and other current assets 974 964
Total Current Assets 10,186 10,152
Finance receivables due after one year, net 6,841 6,986
Land, buildings and equipment, net 2,233 2,256
Investments in affiliates, at equity 1,237 1,282
Goodwill 627 623
Other assets 1,095 1,121
Investment in discontinued operations 4,469 4,398
Total Assets $ 26,688 $ 26,818
Liabilities and Equity
Short-term debt and current portion of
long-term debt $ 3,369 $ 3,536
Accounts payable 518 577
Accrued compensation and benefit costs 512 761
Unearned income 213 208
Other current liabilities 1,860 2,122
Total Current Liabilities 6,472 7,204
Long-term debt 8,456 8,424
Postretirement medical benefits 1,069 1,050
Deferred taxes and other liabilities 2,459 2,429
Discontinued operations liabilities -
policyholders' deposits and other 2,241 2,274
Deferred ESOP benefits (494) (494)
Minorities' interests in equity of subsidiaries 819 843
Mandatorily redeemable preferred stock 637 -
Preferred stock 718 721
Common shareholders' equity 4,311 4,367
Total Liabilities and Equity $ 26,688 $ 26,818
Shares of common stock issued 325,902 325,902
Shares of common stock outstanding 323,661 323,681
See accompanying notes.
Xerox Corporation
Consolidated Statements of Cash Flows
Three months ended March 31 (In millions) 1997 1996
Cash Flows from Operating Activities
Income from Continuing Operations $ 270 $ 237
Adjustments required to reconcile income to cash
flows from operating activities:
Depreciation and amortization 159 150
Provisions for doubtful accounts 47 47
Provision for postretirement medical
benefits, net of payments 9 11
Minorities' interests in earnings of subsidiaries 30 28
Undistributed equity in income of affiliated companies(23) (20)
Increase in inventories (283) (325)
Decrease in finance receivables 60 19
Increase in accounts receivable (132) (287)
Decrease in accounts payable and accrued
compensation and benefit costs (323) (317)
Net change in current and deferred income taxes (12) 54
Other, net (135) (204)
Total (333) (607)
Cash Flows from Investing Activities
Cost of additions to land, buildings and equipment (84) (148)
Proceeds from sales of land, buildings and equipment 15 31
Net change in payables to Discontinued Operations - (1)
Total (69) (118)
Cash Flows from Financing Activities
Net change in debt (45) 861
Dividends on common and preferred stock (119) (110)
Proceeds from sale of common stock 66 27
Repurchase of common and preferred stock (100) (91)
Net proceeds from issuance of mandatorily
redeemable preferred stock 637 -
Total 439 687
Effect of Exchange Rate Changes on Cash (6) -
Cash Provided (Used) by Continuing Operations 31 (38)
Cash Used by Discontinued Operations (104) (93)
Increase (Decrease) in Cash (73) (131)
Cash at Beginning of Period 104 136
Cash at End of Period $ 31 $ 5
See accompanying notes.
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 1996 Annual Report
to Shareholders and should be read in conjunction with the notes
thereto.
Effective 1997, Fuji Xerox changed its reporting period from a
fiscal year ending October 20 to a fiscal year ending December
20. The results of operations during the period between the end
of the 1996 fiscal year and the beginning of the new fiscal year
(the stub period) amounted to a gain of $8 million. The gain was
credited to retained earnings.
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.
References herein to "we" or "our" refer to Xerox and
consolidated subsidiaries unless the context specifically
requires otherwise.
2. Inventories consist of (in millions):
March 31, December 31,
1997 1996
Finished products $ 1,683 $ 1,570
Work in process 106 80
Raw materials and supplies 376 322
Equipment on operating leases, net 697 704
Total $ 2,862 $ 2,676
3. In January 1997, we issued 650,000 shares of 8% Capital
Securities through a consolidated trust for net proceeds, after
discount and fees, of $637 million. Such securities have been
classified as mandatorily redeemable preferred stock on the
consolidated balance sheet. The proceeds were used to reduce
commercial paper. This security is mandatorily redeemable on
February 1, 2027 for $650 million and pays dividends semiannually
at the rate of 8% per annum. The dividends are included in
minorities' interests in earnings of subsidiaries in the
consolidated statement of income. This security is guaranteed by
us.
4. Common shareholders' equity consists of (in millions):
March 31, December 31,
1997 1996
Common stock $ 327 $ 327
Additional paid-in-capital 1,350 1,353
Retained earnings 3,243 3,090
Net unrealized gain (loss) on
investment securities 5 (1)
Translation adjustments (441) (241)
Treasury stock (173) (161)
Total $ 4,311 $ 4,367
5. Interest expense totaled $135 million and $148 million for
the three months ended March 31, 1997 and 1996, respectively.
6. The Board of Directors has authorized the Company to
repurchase up to $1 billion of Xerox common stock. The stock
will be purchased from time to time on the open market depending
on market conditions. As of March 31, 1997, we have repurchased
8.2 million shares for $406 million, some of which have been
reissued to satisfy the exercise of stock options
7. Summarized operating results of Insurance follow:
First Quarter
(In millions) 1997 1996
Revenues
Insurance premiums earned $ 424 $ 418
Investment and other income 111 106
Total Revenues 535 524
Costs and Expenses
Insurance losses and loss expenses 365 343
Insurance acquisition costs and
other operating expenses 148 142
Interest expense 49 54
Administrative and general expenses 11 6
Total Costs and Expenses 573 545
Realized Capital Gains 6 2
Income (Loss) Before Income Taxes (32) (19)
Income Tax Benefits 16 9
Income (Loss) From Insurance * $ (16) $ (10)
* The total Insurance after-tax losses were charged to reserves established
for this purpose and, therefore, did not impact our earnings.
The net assets at March 31, 1997 and December 31, 1996 of the
Insurance businesses included in our consolidated balance sheets
as discontinued operations are as follows:
March 31, December 31,
1997 1996
Insurance Assets
Investments $ 8,001 $ 7,889
Reinsurance recoverable 2,340 2,458
Premiums and other receivables 1,077 1,082
Deferred taxes and other assets 1,155 1,201
Total Insurance assets $12,573 $12,630
Insurance Liabilities
Unpaid losses and loss expenses $ 8,447 $ 8,572
Unearned income 798 812
Notes payable 230 215
Other liabilities 1,163 1,185
Total Insurance Liabilities $10,638 $10,784
Investment in Insurance, net $ 1,935 $ 1,846
8. 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. Plaintiffs claim damages predominately
resulting from the Company's alleged refusal to sell parts for
high volume copiers and printers to plaintiffs prior to 1994. The
Company's policies and practices with respect to the sale of
parts to ISOs were at issue in an 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, such
as the plaintiffs in the Kansas action, were not included in that
class action. In their complaint plaintiffs allege monetary
damages in the form of lost profits in excess of $10 million (to
be trebled) and injunctive relief. In a revised report prepared,
pursuant to Rule 26(a)2)B)of the Federal Rules of Civil
Procedure, an accountant retained by plaintiffs as an expert
indicated that he plans to testify at trial that, allegedly as a
result of Xerox' conduct, plaintiffs have lost profits of
approximately $75 million. The Company has asserted counterclaims
against 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 for copyright infringement. On April 8, 1997,
the District Court granted partial summary judgment in favor of
the Company on plaintiffs' antitrust claims, ruling that the
Company's unilateral refusal to sell or license its patented
parts cannot give rise to antitrust liability. The Court's
ruling did not preclude a finding of antitrust liability based
upon other allegations of exclusionary conduct, including the
refusal to sell unpatented parts. The District Court also
granted summary judgment in favor of the Company on its patent
infringement claim, leaving open with respect to patent
infringement only the issues of willfulness and the amount of
damages, and granted partial summary judgment in favor of the
Company with respect to some of its claims of copyright
infringement. The plaintiffs have indicated that they intend to
move the Court for reconsideration of its rulings or,
alternatively, for certification under 28 U.S.C. Section 1292(b)
for interlocutory appeal to the United States Court of Appeals
for the Federal Circuit.
Discontinued Operations
Farm & Home Savings Association, now known as Roosevelt Bank,
(Farm & Home) and certain Talegen Holdings, Inc. 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 of
lawsuits pending against Farm & Home in the District Courts of
Harris County, Texas, several hundred plaintiffs, former
residents of, or students attending school within, a residential
subdivision known as Southbend, 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. In February 1997, the Insurance Companies
reached an agreement in principle to settle all of the claims
brought by plaintiffs who have or had a pertinent nexus to the
Southbend subdivision, with the exception of a group of 53
plaintiffs. In addition, Farm & Home intends to press its pending
motions for summary judgment which, if granted, would provide a
legal basis for dismissal of any claims asserted in the future.
If the settlement is not consummated, and the claims are not
resolved by summary judgment, one or more of these cases can be
expected to be tried in 1997. The Southbend subdivision has
since been acquired by the Insurance Companies and all of the
structures have been demolished.
Item II Xerox Corporation
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Document Processing
Summary
Income from continuing operations increased 14 percent to $270
million in the 1997 first quarter from $237 million in the 1996
first quarter.
Revenues grew 5 percent on a pre-currency basis to $4.1 billion
in the first quarter, driven by 10 percent growth in equipment
sales (excluding OEM sales) and 41 percent growth in document
outsourcing. Service, paper and rental revenues declined from
the first quarter of 1996. Paper price declines reduced overall
revenue growth by over one percentage point.
Fully diluted earnings per share increased 15 percent to $0.75 in
the first quarter compared with $0.65 in the 1996 first quarter.
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."
A substantial portion of our consolidated revenues is derived
from operations outside of the United States where the U.S.
dollar is not the functional currency, primarily in Europe. When
compared with most of the major European currencies, the U.S.
dollar was over 10 percent stronger in the 1997 first quarter
than in the 1996 first quarter; only the pound sterling was
stronger. As a result, foreign currency translation had an
unfavorable impact of approximately 2 percentage points on total
revenues in the 1997 first quarter.
Revenues denominated in currencies where the local currency is
the functional currency are not hedged for purposes of
translation into U.S. dollars.
Revenues
For the major product categories, the underlying revenue growth
rates are as follows:
1996 1997_
Q1 Q2 Q3 Q4 FY Q1
Total Revenues 4% 6% 5% 8% 6% 5%
Digital Products 19 21 23 26 23 18
Light Lens Copiers - - (4) - (1) (2)
Digital product revenues were 31 percent of total revenues in the
1997 first quarter, compared with 27 percent in the 1996 first
quarter. Growth of 18 percent in the first quarter follows 26
percent growth in the 1996 fourth quarter and precedes major
announcements in the 1997 second quarter of a new family of
digital copiers and important new production publishing and
printing products which we expect will contribute to our revenue
growth in 1997. Computer printing revenues grew 10 percent,
production publishing revenues grew 16 percent, and color copying
and printing revenues grew 44 percent.
Black-and-white light lens copier revenues were 55 percent of
total revenues in the 1997 first quarter compared with 59 percent
in the 1996 first quarter. Strong copier equipment sales growth
in the United States was largely offset by declines in Europe,
reflecting difficult economic environments in several countries,
and in Brazil, following an exceptional 1996 fourth quarter.
Geographically, the underlying revenue growth rates are as
follows:
1996 1997_
Q1 Q2 Q3 Q4 FY Q1
Total Revenues 4% 6% 5% 8% 6% 5%
United States 5 6 5 9 6 6
Rank Xerox (2) 2 2 2 1 3
Other Areas 11 10 6 14 10 3
Memo: Fuji Xerox 13 15 11 11 12 11
First quarter U.S. revenue growth was driven by strong equipment
sales of both digital products and light lens copiers.
Rank Xerox Limited and related companies manufacture and market
Xerox products principally in Europe. The U.K., Germany and
Holland had good revenue growth in the first quarter, and France,
Italy and Spain had modest declines.
Other Areas include operations principally in Latin America,
Canada and China. Mexico and China had excellent revenue growth
in the first quarter, Brazil had modest growth, following
exceptional copier equipment sales growth in the 1996 fourth
quarter, and revenues declined in the rest of Latin America due
to difficult economic environments in a number of countries. Our
1996 full year revenues in Brazil were approximately $1.6
billion.
Fuji Xerox Co., Ltd., an unconsolidated entity, jointly owned by
Rank Xerox Limited and Fuji Photo Film Company Limited, develops,
manufactures and distributes document processing products in
Japan and other areas of the Pacific Rim, Australia and New
Zealand. The strong revenue growth in the first quarter reflects
excellent growth in the Asia Pacific countries and good growth in
Japan.
The underlying growth rates by type of revenue are as follows:
1996 1997_
Q1 Q2 Q3 Q4 FY Q1
Total Revenues 4% 6% 5% 8% 6% 5%
Sales 3 6 7 12 7 5
Equipment (Excluding OEM) 7 9 6 14 10 10
Supplies 1 8 11 11 8 1
Paper (2) (7) (12) (7) (7) (9)
Service/Rentals/
Outsourcing/Other 5 4 4 4 4 4
Service 1 (2) (3) (1) (1) (2)
Rentals 2 2 1 (4) - (11)
Document Outsourcing * 48 51 51 41 47 41
Finance Income 1 - 4 1 1 2
Memo: Revenues Excluding
Equipment Sales 3 4 2 3 3 2
* Excludes equipment in outsourcing contracts that are accounted
for as sales.
Digital products equipment sales revenue growth continued to be
excellent in all geographical areas in the 1997 first quarter.
Strong copier equipment sales growth in the United States was
largely offset by declines in Europe, reflecting difficult
economic environments in several countries, and in Brazil,
following an exceptional 1996 fourth quarter.
Revenues from supplies, paper, service, rentals, document
outsourcing and other revenues, and income from customer
financing represented 70 percent of total revenues in the 1997
first quarter. These revenues are primarily a function of our
installed population of equipment, usage and pricing.
Supplies sales: The decline in growth from the 1996 third and
fourth quarters is due principally to a reduction in sales of OEM
printer cartridges following the buildup of inventory for new
products at OEM customers.
Paper sales: Our strategy is to charge a spread over mill
wholesale prices to cover our costs and value added as a
distributor. The revenue decline from the 1996 first quarter is
the result of lower industry-wide prices, which were partially
offset by volume increases.
Although combined service, rental and document outsourcing
revenues maintained 4 percent growth in the quarter, the
excellent growth in document outsourcing continued to divert
revenues from service, rentals, finance income and supplies.
Service revenues were also impacted by competitive price
pressures and rental revenues also declined due to an increase
during 1996 of customers opting to purchase rather than rent.
The 1997 first quarter and 1996 fourth quarter growth rates in
the total document outsourcing business were comparable with each
of the first three quarters of 1996 after adjusting for an
increase in equipment placements under outsourcing contracts that
were accounted for as equipment sales revenue.
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 finance receivables with borrowings
of similar maturities. Continuing strong growth in the financing
of equipment sales in Latin America has been offset by lower
average interest rates in North America and Europe.
Gross Profit and Expenses
Worldwide employment increased by 1,400 in the first quarter to
88,100 as a result of the net hiring of 600 employees in our
fast-growing document outsourcing business and, late in the
quarter, the acquisition of a majority position in the Xerox
distributor in South Africa which added 900 people, partially
offset by net reductions of 100 in other areas.
The gross margins by revenue stream were as follows:
1996 1997_
Q1 Q2 Q3 Q4 FY Q1
Total Gross Margin 46.0% 47.9% 46.2% 47.1% 46.9% 46.5%
Sales 42.9 45.7 43.9 45.4 44.6 43.2
Service/Rent/DocOut 49.0 50.4 48.8 49.3 49.4 49.9
Financing 49.0 49.5 48.3 51.0 49.5 48.9
The total gross margin improved by 0.5 percentage points in the
1997 first quarter from the 1996 first quarter.
The sales gross margin improved by 0.3 percentage points from the
1996 first quarter principally due to cost reductions, partially
offset by pricing pressures and mix. The service, rentals and
document outsourcing gross margin improved by 0.9 percentage
points from the 1996 first quarter largely due to the benefits
from productivity initiatives, partially offset by pricing
pressures and mix.
Research and development (R&D) expense increased 3 percent in the
1997 first quarter as we 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. Xerox R&D is strategically coordinated with that of Fuji
Xerox which invested $537 million in R&D in the 1996 full year,
for a combined total of $1.6 billion.
Selling, administrative and general expenses (SAG) increased 3
percent in the 1997 first quarter. SAG was 29.3 percent of
revenue in the first quarter, a decrease of 0.4 percentage points
from the 1996 first quarter. The decline was due to productivity
initiatives and expense controls.
The $3 million decrease in other expenses, net, from the 1996
first quarter was due to reduced interest expense partially
offset by increased currency losses from balance sheet
translation due to currency devaluations in our Latin American
operations. In January 1997, we issued $650 million of
mandatorily redeemable preferred stock through a trust and paid
down debt, which resulted in reduced interest expense. The after
tax impact of the dividend on these securities is included in the
income statement in the line item: minorities' interests in
earnings of subsidiaries.
Income Taxes, Equity in Net Income of Unconsolidated Affiliates
and Minorities' Interests in Earnings of Subsidiaries
Income before income taxes increased 11 percent to $428 million
in the 1997 first quarter from $384 million in the 1996 first
quarter.
The effective tax rate was 35.1 percent in the 1997 first quarter
compared with 36.3 percent in the 1996 first quarter. We expect
this rate to be maintained during 1997.
Equity in net income of unconsolidated affiliates is principally
the Rank Xerox share of Fuji Xerox income. In the first quarter,
income increased modestly as the underlying growth in Fuji Xerox
income was largely offset by the adverse impact of currency
translation.
Minorities' interests in earnings of subsidiaries is principally
The Rank Group Plc share of Rank Xerox profits. The increase in
minorities' interests in the first quarter was primarily due to
the dividend on the mandatorily redeemable preferred stock we
issued in January, as noted above, partially offset by Rank
Group's share of lower Rank Xerox profits.
In February 1996, the Board of Directors authorized the
repurchase of up to $1 billion of Xerox common stock. By March
31, the Company had repurchased 8.2 million shares for $406
million, including approximately $100 million in the first
quarter.
Effective 1997, Fuji Xerox changed its reporting period from a
fiscal year ending October 20 to a fiscal year ending December
20. The results of operations during the period between the end
of the 1996 fiscal year and the beginning of the new fiscal year
(the stub period) amounted to a gain of $8 million. The gain was
credited to retained earnings.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128 -
"Earnings per Share." Commencing with our fourth quarter
reporting, SFAS No. 128 will require us to present `basic' and
`diluted' earnings per share (EPS) on the face of the income
statement. The computation of `basic' EPS replaces primary EPS.
If we had implemented SFAS No. 128 during the first quarter, we
would have reported basic EPS of $0.79 and diluted EPS of $0.75
in lieu of primary EPS of $0.78 and fully diluted EPS of $0.75.
Discontinued Operations
The net investment in the discontinued financial services
businesses which includes Insurance, Other Financial Services and
Third-Party Financing and Real-Estate totaled $2,228 million at
March 31, 1997 compared with $2,124 million at December 31, 1996.
The increase primarily includes scheduled funding of reinsurance
coverage to the Talegen Holdings, Inc. (Talegen) companies and
The Resolution Group, Inc. (TRG) by Ridge Reinsurance Limited
(Ridge Re) and interest for the period on the assigned debt. A
discussion of the discontinued businesses follows.
Insurance
In 1995, we recorded a $1,546 million after-tax charge in
connection with agreements to sell all of our "Remaining"
insurance companies, which includes Coregis Group, Inc.
(Coregis), Crum & Forster Holdings, Inc., Industrial Indemnity
Holdings, Inc., Westchester Specialty Group, Inc., TRG and three
insurance-related service companies.
On September 11, 1996, those transactions were terminated. No
additional charges are considered necessary as a result of the
termination. In September 1996, the Board of Directors of Xerox
formally approved a plan of disposal under which we have retained
investment bankers to assist us in the simultaneous disposition
of each of the Remaining insurance and service companies.
During the disposal process, we will continue to be subject to
all business risks and rewards of the insurance businesses.
Although we believe that the disposal of the Remaining insurance
companies will be substantially completed on or before the end of
1997, and that the proceeds received from such disposals will be
consistent with our net carrying value of these businesses, until
such Remaining insurance companies are actually sold, no
assurances can be given as to the ultimate impact the Remaining
insurance companies will have on our total results from
operations.
Our objective is to continue to maximize value from our Insurance
investments. The ultimate value will depend on the success of
operational improvements, timing, level of interest rates, and
relative value of insurance properties.
In January 1997, we announced an agreement to sell Coregis to a
subsidiary of GE Capital Corporation for $375 million in cash and
the assumption of $75 million in debt. The selling price is in
excess of book value and is consistent with the estimated value
for the unit when we discontinued the insurance operations in
1995. As per the sales agreement, the 1997 earnings of Coregis
will accrue to the buyer. The transaction is subject to
customary closing conditions and regulatory approvals and is
expected to close in the second quarter.
Also in January 1997, in an unrelated transaction, Andersen
Consulting LLP agreed to acquire certain assets of Apprise Corp.
(Apprise), one of Talegen's insurance-related service companies.
The financial terms of this transaction, which closed in the
first quarter, were not material.
Insurance Operating Results
Operating results for the discontinued Insurance segment (the
Remaining insurance companies, Ridge Re and Xerox Financial
Services, Inc. holding company expenses, primarily assigned
interest) for the first quarter follow:
First Quarter
(In millions) 1997 1996
Total Insurance Revenue $ 428 $ 421
Insurance Pre-Tax Income (Loss)
Underwriting $ (71) $ (61)
Investment income 96 91
Net realized capital gains - 2
Interest expense (49) (54)
Other 3 (6)
Insurance Pre-Tax Income (Loss) $ (21) $ (28)
After-Tax Income (Loss)
Insurance $ (9) $ (16)
Disposed companies (7) 6
Total After-Tax Income (Loss)* $ (16) $ (10)
* The total Insurance after-tax loss was charged to reserves
established for this purpose and, therefore, does not impact
our earnings.
The preceding table's revenue and pre-tax loss excludes the
results of Coregis and Apprise. The 1997 results of Apprise and
the 1996 results of Coregis and Apprise are shown on an after-tax
basis under the caption "Disposed companies."
Revenues from Insurance totaled $428 million in the first quarter
of 1997 compared with $421 million in the first quarter of 1996,
reflecting a slight improvement in both earned premiums and
investment income.
The improvement in the 1997 first quarter Insurance pre-tax loss
compared with 1996 primarily reflects an improvement in
investment income, lower interest expense due to reduced debt
levels, partially offset by a decrease in underwriting results
due to an increase in Ridge Re's reported reserves.
The investment in Insurance at March 31, 1997 totaled $1,935
million compared with a balance of $1,846 million at December 31,
1996. The increase primarily includes contractual payments to
Ridge Re for annual premium installments and associated finance
charges and interest on the assigned insurance debt that will
continue until the closing of the sales of the Remaining
insurance companies.
Property and Casualty Operating Trends
The industry's profitability can be significantly affected by
cyclical competitive conditions, judicial decisions affecting
insurers' liabilities, and 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). The Remaining insurance companies'
operating results have historically been influenced by these
industry trends, as well as by their exposure to uncollectible
reinsurance, which had been greater than most other insurers.
Other Financial Services
The net investment in Other Financial Services (OFS) at March 31,
1997 was $120 million compared with $101 million at December 31,
1996. The increase in the investment primarily reflects the
effect of a transfer from Insurance which had no effect on the
total net investment in the discontinued financial services
businesses.
On June 1, 1995, Xerox Financial Services, Inc. (XFSI) completed
the sale of Xerox Financial Services Life Insurance Company and
related companies (Xerox Life). In connection with the
transaction, OakRe Life Insurance Company (OakRe), a wholly-owned
XFSI subsidiary, has assumed responsibility, via Coinsurance
Agreements, for existing Single Premium Deferred Annuity (SPDA)
policies issued by Xerox Life. The Coinsurance Agreements
include a provision for the assumption (at their election) by the
purchaser's 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. Other policies (of Immediate, Whole Life, and
Variable annuities as well as a minor amount of SPDAs) were sold
and are now the responsibility of the purchaser's companies.
As a result of the Coinsurance Agreements, at March 31, 1997,
OakRe retained approximately $2.0 billion of investment portfolio
assets (transferred from Xerox Life) 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 through the year 2000 and will be assumed
under the Agreements as described above. Xerox Life's portfolio
was designed to recognize that policy renewals extended liability
"maturities", thereby permitting investments with average
duration somewhat beyond the rate reset periods. OakRe's
practice is to selectively improve this match over time as market
conditions allow.
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, 1997. 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 Financing and Real-Estate
Third-Party Financing and Real-Estate assets at March 31, 1997
totaled $411 million, a $39 million reduction from the December
31, 1996 level due primarily to the continued run-off of third-
party assets. The run-off proceeds were used to reduce assigned
debt to $188 million at March 31, 1997, a $35 million decrease
from the year-end 1996 level.
Capital Resources and Liquidity
Total debt, including ESOP and discontinued operations debt not
shown separately in our consolidated balance sheets, was $12,293
million at March 31, 1997 or $155 million less than at December
31, 1996. The changes in consolidated indebtedness since year-
end and versus the first three months of 1996 are summarized as
follows:
(In millions) 1997 1996
Total Debt as of January 1 $12,448 $11,794
Non-Financing Businesses:
Document Processing operations 635 773
Discontinued Businesses 126 73
Total Non-Financing 761 846
Financing Businesses (353) (146)
Total Operations 408 700
Shareholder dividends 119 110
Mandatorily redeemable preferred stock (637) -
Equity redemption and other changes (45) (75)
Total Debt as of March 31 $12,293 $12,529
The following table summarizes the changes in total equity during
the first three months of 1997 and 1996:
(In millions) 1997 1996
Total equity as of January 1 $5,931 $5,396
Income from Continuing Operations 270 237
Shareholder dividends paid (119) (110)
Exercise of stock options 66 27
Repurchase of common and preferred stock (100) (91)
Net proceeds from issuance of mandatorily
redeemable preferred stock 637 -
All other, net (200) (76)
Balance as of March 31 $6,485 $5,383
Non-Financing Operations
Operational cash flows are highly seasonal. Due primarily to
profit sharing payments and inventory build up, our operations
tend to use cash in the first quarter and generate cash later in
the year.
The following table summarizes Document Processing non-financing
operations cash generation and borrowing for the three months
ended March 31, 1997 and 1996:
Cash Generated/(Borrowed)
Three Months Ended March 31,
(In millions) 1997 1996
Document Processing
Non-Financing:
Income $219 $185
Depreciation and amortization 159 150
Capital expenditures (84) (148)
Assets sold 15 31
Working capital/other (9 44) (991)
Total $(635) $ (773)
Three-month cash usage of $635 million was $138 million less than
in the first three months of 1996 due primarily to higher net
income, lower capital spending due to an unusually high level of
facilities infrastructure investments in the first quarter of
1996, and improved inventory and receivables performance.
Financing Businesses
Financing businesses debt was reduced by $353 million and $146
million during the first three months of 1997 and 1996,
respectively. This larger decline in 1997 reflects currency
translation effects related to the strength of the U.S. dollar
compared with the major European currencies.
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 exchange contracts and foreign currency
swap agreements. We do not enter into derivative instrument
transactions for trading purposes and employ long-standing
policies prescribing that derivative instruments are only to be
used to achieve a set of very limited objectives.
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 exchange contract to fix the U.S. dollar
value of a foreign currency-denominated loan. In addition, when
cost-effective, currency derivatives may be used to hedge balance
sheet exposures.
Revenues denominated in currencies where the local currency is
the functional currency are not hedged.
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 adverse changes in the interest rate environment.
Conversely, this practice effectively eliminates 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
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 obligations.
The transactions performed within each of these three categories
enable more cost-effective management of interest rate exposures.
The potential risk attendant to this strategy is the non-
performance of a 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 is 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.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The information set forth under Note 8 contained in the "Notes to
Consolidated Financial Statements" on pages 9-10 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 3(a)(1) Restated Certificate of Incorporation of
Registrant filed by the Department of State of the State of
New York on October 29, 1996. Incorporated by reference to
Exhibit 3(a)(1) to Registrant's Quarterly Report on Form
10-Q for the Quarter Ended September 30, 1996.
Exhibit 3(b) By-Laws of Registrant, as amended through
May 29, 1991. Incorporated by reference to Exhibit 3(b)(2)
to Registrant's Quarterly Report for the Quarter Ended
June 30, 1991.
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 22, 1997 and April
7, 1997 reporting Item 5 "Other Events" were filed during the
quarter for which this Quarterly Report is filed.
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 12, 1997 By Philip D. Fishbach
Vice President and Controller
(Principal Accounting Officer)
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,
1997 1996
I. Primary Net Income Per
Common Share
Income from continuing operations $ 270 $ 237
Accrued dividends on ESOP preferred stock, net (11) (11)
Accrued dividends on redeemable preferred stock - (1)
Adjusted income from continuing operations 259 225
Discontinued operations - -
Adjusted net income $ 259 $ 225
Average common shares outstanding
during the period 323,857 324,992
Common shares issuable with respect
to common stock equivalents for
stock options, incentive and
exchangeable shares 7,659 8,037
Adjusted average shares outstanding
for the period 331,516 333,029
Primary earnings per share:
Continuing operations $ 0.78 $ 0.68
Discontinued operations - -
Primary earnings per share $ 0.78 $ 0.68
II.Fully Diluted Net Income Per
Common Share
Income from continuing operations $ 270 $ 237
Accrued dividends on redeemable preferred stock - (1)
ESOP expense adjustment, net of tax (1) (1)
Interest on convertible debt, net of tax 1 1
Adjusted income from continuing operations 270 236
Discontinued operations - -
Adjusted net income $ 270 $ 236
Average common shares outstanding
during the period 323,857 324,992
Stock options, incentive and
exchangeable shares 7,661 8,037
Convertible debt 2,644 2,644
ESOP preferred stock 27,575 28,217
Adjusted average shares outstanding
for the period 361,737 363,890
Fully diluted earnings per share:
Continuing operations $ 0.75 $ 0.65
Discontinued operations - -
Fully diluted earnings per share $ 0.75 $ 0.65
Exhibit 12
Xerox Corporation
Computation of Ratio of Earnings to Fixed Charges
Three months ended Year ended
March 31, December 31,
(In millions) 1997 1996 1996 1995 1994 1993* 1992
Fixed charges:
Interest expense $ 135 $ 148 $ 592 $ 603 $ 520 $ 540 $ 627
Rental expense 34 35 140 142 170 180 187
Preferred stock divi-
dend of subsidiary 6 - - - - - -
Total fixed charges
before capitalized
interest 175 183 732 745 690 720 814
Capitalized interest - - - - 2 5 17
Total fixed charges$ 175 $ 183 $ 732 $ 745 $ 692 $ 725 $ 831
Earnings available for
fixed charges:
Earnings** $ 450 $ 404 $2,067 $1,980 $1,602 $ (193) $1,183
Less undistributed
income in minority
owned companies (23) (20) (84) (90) (54) (51) (52)
Add fixed charges before
capitalized interest 175 183 732 745 690 720 814
Total earnings
available for
fixed charges $ 602 $ 567 $2,715 $2,635 $2,238 $ 476 $1,945
Ratio of earnings to
fixed charges (1)(2) 3.44 3.10 3.71 3.54 3.23 0.66 2.34
(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. 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."
5
1,000,000
3-MOS
DEC-31-1997
MAR-31-1997
31
0
13578
419
2862
10186
4979
2746
26688
6472
12063
637
718
327
3984
26688
1979
4022
1124
2151
1443
47
135
428
150
270
0
0
0
270
0.78
0.75
