-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CdnMmk+MppWU6Div7nCCD0kHEFtZ9LsNY4QGQ8+I3cGTlUuFTc7KExRGlb1vZf1w LyvLdkjlucXyrfG7kCtG8g== 0000108772-96-000010.txt : 19960509 0000108772-96-000010.hdr.sgml : 19960509 ACCESSION NUMBER: 0000108772-96-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960508 SROS: BSE SROS: CSE SROS: CSX SROS: NYSE SROS: PHLX SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: XEROX CORP CENTRAL INDEX KEY: 0000108772 STANDARD INDUSTRIAL CLASSIFICATION: PHOTOGRAPHIC EQUIPMENT & SUPPLIES [3861] IRS NUMBER: 160468020 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04471 FILM NUMBER: 96557965 BUSINESS ADDRESS: STREET 1: P O BOX 1600 STREET 2: 800 LONG RIDGE ROAD CITY: STAMFORD STATE: CT ZIP: 069041600 BUSINESS PHONE: 2039683000 MAIL ADDRESS: STREET 1: 800 LONG RIDGE ROAD STREET 2: PO BOX 1600 CITY: STAMFORD STATE: CT ZIP: 06904 FORMER COMPANY: FORMER CONFORMED NAME: HALOID XEROX INC DATE OF NAME CHANGE: 19730813 10-Q 1 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. 1 (THIS PAGE IS INTENTIONALLY LEFT BLANK) 2 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 EX-11 2 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 EX-12 3 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 EX-27 4 ART. 5 FDS FOR 1ST QUARTER 1996 10-Q
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM XEROX CORPORATION'S MARCH 31, 1996 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 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
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