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: September 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to___________
Commission File Number 1-4471
XEROX CORPORATION
(Exact Name of Registrant as
specified in its charter)
New York 16-0468020
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
P.O. Box 1600
Stamford, Connecticut 06904-1600
(Address of principal executive offices)
(Zip Code)
(203) 968-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at September 30,1995
Common Stock 107,852,063 shares
Class B Stock 1,000 shares
This document consists of 39 pages.
1
(THIS PAGE IS INTENTIONALLY LEFT BLANK)
2
Xerox Corporation
Form 10-Q
September 30, 1995
Table of Contents
Page
Part I - Financial Information
Item 1. Financial Statements
Consolidated Statements of Income 4
Consolidated Balance Sheets 5
Consolidated Statements of Cash Flows 6
Supplemental Cash Flows Information 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Financial Summary 14
Document Processing 16
Insurance 23
Discontinued Operations 30
Liquidity and Capital Structure 32
Capital Resources 33
Hedging Instruments 34
Part II - Other Information
Item 1. Legal Proceedings 36
Item 6. Exhibits and Reports on Form 8-K 36
Signatures 37
Exhibit Index
Computation of Net Income per Common Share 38
Computation of Ratio of Earnings to Fixed Charges 39
3
PART I - FINANCIAL INFORMATION
Xerox Corporation
Consolidated Statements of Income
Three months ended Nine months ended
September 30, September 30,
(In millions, except per-share data) 1995 1994 1995 1994
Document Processing
Revenues
Sales $ 2,087 $ 1,830 $ 6,048 $ 5,154
Service and rentals 1,694 1,552 5,054 4,587
Finance income 246 254 749 750
Total Revenues 4,027 3,636 11,851 10,491
Costs and Expenses
Cost of sales 1,181 1,097 3,466 3,074
Cost of service and rentals 856 752 2,540 2,209
Equipment financing interest 123 124 378 374
Research and development expenses 243 217 709 639
Selling, administrative and general
expenses 1,164 1,067 3,442 3,134
Other, net 45 33 122 143
Total Costs and Expenses 3,612 3,290 10,657 9,573
Income before Income Taxes, Equity Income
and Minorities' Interests 415 346 1,194 918
Income Taxes 160 136 462 361
Equity in Net Income of Unconsolidated
Affiliates 38 25 102 63
Minorities' Interests in Earnings of
Subsidiaries 37 50 137 137
Income from Document Processing 256 185 697 483
Insurance
Revenues
Insurance premiums earned 464 550 1,497 1,726
Investment and other income 106 112 337 323
Total Revenues 570 662 1,834 2,049
Costs and Expenses
Insurance losses and loss expenses 406 434 1,261 1,333
Insurance acquisition costs and other
insurance operating expenses 145 168 475 553
Interest expense 54 51 175 155
Administrative and general expenses 33 20 102 43
Total Costs and Expenses 638 673 2,013 2,084
Realized Capital Gains 32 4 46 13
Income (loss) before Income Taxes (36) (7) (133) (22)
Income Tax Benefits 16 8 57 22
Income (loss) from Insurance (20) 1 (76) -
Total Company
Net Income $ 236 $ 186 $ 621 $ 483
Primary Earnings per Share $ 2.03 $ 1.61 $ 5.33 $ 3.97
Fully Diluted Earnings per Share $ 1.93 $ 1.53 $ 5.09 $ 3.84
See accompanying notes.
4
Xerox Corporation
Consolidated Balance Sheets
September 30, December 31,
(In millions, except share data in thousands) 1995 1994
Assets
Document Processing
Cash $ 51 $ 35
Accounts Receivable, net 2,005 1,811
Finance Receivables, net 3,895 3,910
Inventories 2,946 2,294
Deferred Taxes and Other Current Assets 1,057 1,199
Total Current Assets 9,954 9,249
Finance Receivables Due after One Year, net 6,077 6,038
Land, Buildings and Equipment, net 2,075 2,108
Investments in Affiliates, at equity 1,492 1,278
Goodwill 631 66
Other Assets 691 635
Total Document Processing Assets 20,920 19,374
Insurance
Cash 86 21
Investments Available-for-Sale 7,148 8,384
Reinsurance Recoverable 2,588 3,063
Premiums and Other Receivables 1,808 1,276
Goodwill 248 284
Deferred Taxes and Other Assets 1,171 1,438
Total Insurance Assets 13,049 14,466
Investment in Discontinued Operations 3,657 4,692
Total Assets $ 37,626 $ 38,532
Liabilities and Equity
Document Processing
Short-Term Debt and Current Portion of
Long-Term Debt $ 3,081 $ 3,159
Accounts Payable 432 562
Accrued Compensation and Benefit Costs 664 709
Unearned Income 240 298
Other Current Liabilities 1,937 2,110
Total Current Liabilities 6,354 6,838
Long-Term Debt 6,401 5,494
Liability for Postretirement Medical Benefits 1,027 1,006
Deferred Taxes and Other Liabilities 2,131 2,210
Total Document Processing Liabilities 15,913 15,548
Insurance
Unpaid Losses and Loss Expenses 7,711 8,809
Unearned Income 885 1,066
Notes Payable 388 425
Other Liabilities 928 954
Total Insurance Operating Liabilities 9,912 11,254
Discontinued Operations Liabilities -
Life Reinsurance Payable and Other 3,256 4,194
Other Long-Term Debt and Obligations 2,436 2,102
Deferred ESOP Benefits (596) (596)
Minorities' Interests in Equity of Subsidiaries 748 1,021
Preferred Stock 767 832
Common Shareholders' Equity 5,190 4,177
Total Liabilities and Equity $ 37,626 $ 38,532
Shares of common stock issued and outstanding 107,852 105,993
See accompanying notes.
5
Xerox Corporation
Consolidated Statements of Cash Flows
Nine months ended September 30, (In millions) 1995 1994
Cash at Beginning of Period
Document Processing $ 35 $ 68
Insurance 21 18
Total 56 86
Document Processing
Cash Flows from Operating Activities 24 (81)
Cash Flows from Investing Activities
Cost of additions to land, buildings and equipment (295) (255)
Proceeds from sales of land, buildings and equipment 46 152
Purchase of additional interest in Rank Xerox (972) -
Net change in payables to Insurance (43) (9)
Net transactions with Insurance 112 47
Net transactions with Discontinued Operations 35 25
Total (1,117) (40)
Cash Flows from Financing Activities
Net change in debt 1,392 840
Yen financing repayment - (116)
Dividends on common and preferred stock (292) (297)
Proceeds from sale of common stock 120 78
Redemption of preferred stock (65) (241)
Dividends to minority shareholders (64) (69)
Net proceeds (returned to)/received from
minority shareholders 20 (32)
Total 1,111 163
Effect of Exchange Rate Changes on Cash (2) (68)
Net Cash Flows from Document Processing 16 (26)
Insurance
Cash Flows from Operating Activities (364) (110)
Cash Flows from Investing Activities
Proceeds from sale of Constitution Re 421 -
Proceeds from sale of Viking 105 -
Purchase of portfolio investments (1,310) (1,807)
Proceeds from sales of portfolio investments 6,135 575
(Increase)decrease in short-term investments (4,416) 976
Subtotal 935 (256)
Other, net (35) (13)
Net transactions with Discontinued Operations 61 12
Total 961 (257)
Cash Flows from Financing Activities
Net change in notes payable (37) 210
Net change in debt (383) 196
Net transactions with Document Processing (112) (47)
Total (532) 359
Net Cash Flows from Insurance 65 (8)
Discontinued Operations
Income from discontinued operations - -
Collections and changes in assets, net 1,034 164
Net change in debt 10 (126)
Net change in operating liabilities (948) (1)
Net transactions with Document Processing (35) (25)
Net transactions with Insurance (61) (12)
Net Cash Flows from Discontinued Operations - -
Cash at End of Period
Document Processing 51 42
Insurance 86 10
Total $ 137 $ 52
See Supplemental Cash Flows Information and accompanying notes.
6
Xerox Corporation
Consolidated Statements of Cash Flows
Supplemental Cash Flows Information
Reconciliation of income to cash flows from operating activities:
Nine months ended September 30, (In millions) 1995 1994
Document Processing
Income from Document Processing $ 697 $ 483
Adjustments required to reconcile income to cash
flows from operating activities:
Depreciation and amortization 486 476
Provisions for doubtful accounts 201 161
Provision for postretirement medical benefits 37 41
Charges against 1993 restructuring reserve (258) (295)
Minorities' interests in earnings of subsidiaries 137 137
Undistributed equity in income of affiliated companies (99) (58)
Increase in inventory (819) (635)
Increase in finance receivables (172) (255)
Increase in accounts receivable (256) (248)
Decrease in accounts payable and accrued compensation
and benefit costs (34) (26)
Net change in current and deferred income taxes 207 72
Other, net (103) 66
Cash Flows from Operating Activities $ 24 $ (81)
Insurance
Loss from Insurance $ (76) $ -
Adjustments required to reconcile income to cash
flows from operating activities:
Depreciation and amortization 27 24
Provisions for doubtful accounts 9 5
Realized capital gains (46) (13)
(Increase)decrease in receivables (213) 277
Increase in accounts payable and accrued
compensation and benefit costs 49 17
Increase in unearned income 47 34
Decrease in unpaid losses and loss expenses (304) (411)
Other, net 143 (43)
Cash Flows from Operating Activities $ (364) $ (110)
See accompanying notes.
7
Xerox Corporation
Notes to Consolidated Financial Statements
1. The consolidated financial statements presented herein have
been prepared by Xerox Corporation ("the Company") in accordance
with the accounting policies described in its 1994 Annual Report
to Shareholders and should be read in conjunction with the notes
thereto. The 1994 financial statements presented herein have been
reclassified to conform with the 1995 presentation.
In the opinion of management, all adjustments (consisting only of
normal recurring adjustments) which are necessary for a fair
statement of operating results for the interim periods presented
have been made. Interim financial data presented herein are
unaudited.
2. Inventories consist of (in millions):
September 30, December 31,
1995 1994
Finished products $ 1,905 $ 1,458
Work in process 100 88
Raw materials and supplies 369 268
Equipment on operating leases, net 572 480
Total $ 2,946 $ 2,294
3. Common shareholders' equity consists of (in millions):
September 30, December 31,
1995 1994
Common stock $ 109 $ 107
Additional paid-in-capital 1,531 1,406
Retained earnings 3,511 3,197
Net unrealized loss on
investment securities (1) (433)
Translation adjustments 40 (100)
Total $ 5,190 $ 4,177
4. Effective January 1, 1995, the Company changed the reporting
periods of the companies owned jointly with The Rank Organisation
Plc ("RO")("the Rank Xerox Companies") and Latin American
operations from fiscal years ending October 31 and November 30,
respectively, to a calendar year ending December 31. The results
of these operations during the period between the end of the 1994
fiscal year and the beginning of the new calendar year ("the stub
period") were recorded as a direct charge to retained earnings
and amounted to a loss of $21 million. The charge to retained
earnings was made to avoid reporting more than twelve months
results of operations in one year. Accordingly, the Company's
1995 Consolidated Statements of Income reflect the results of
worldwide operations for periods beginning January 1, 1995. The
Consolidated Statement of Cash Flows reflects the cash activity
8
Xerox Corporation
Notes to Consolidated Financial Statements
for the stub period in the "Other, net" line of the Document
Processing Operating Activities section.
5. On February 28, 1995, the Company paid RO 620 million pounds sterling, or
approximately $972 million, for 40 percent of RO's financial
interest in the Rank Xerox Companies. The transaction increased
the Company's financial interest in the Rank Xerox Companies to
80 percent from 67 percent. Based on the allocation of the
purchase price, this transaction resulted in goodwill of
approximately $574 million (including transaction costs), a
decline in minorities' interests in the equity of subsidiaries of
approximately $400 million, and an increase in long-term debt of
$972 million. The goodwill will be amortized on a straight-line
basis over 40 years.
6. The Company's Consolidated Balance Sheet at September 30, 1995
includes current and non-current accrued liabilities of $258
million and $221 million, respectively, associated with the
Document Processing restructuring program announced in December
1993. At December 31, 1994, the corresponding accrued
liabilities aggregated $765 million. During the stub period and
the nine month period ended September 30, 1995, $30 million and
$256 million of net pre-tax charges, respectively, were charged
against the aggregate reserve balance. Management believes the
aggregate reserve balance of $479 million at September 30, 1995
is adequate for the completion of the restructuring program.
Additional information concerning the progress of the
restructuring program is included in the accompanying
Management's Discussion and Analysis on page 19.
7. Other Information on the Company's Consolidated Statements
follows:
Interest expense totaled $203 million and $181 million for the
three months ended September 30, 1995 and 1994, respectively.
Interest expense was $620 million and $541 million for the nine
month periods then ended.
Long-term debt, excluding the current portion, totaled $9,037
million at September 30, 1995 and $7,780 million at December 31,
1994.
8. During April 1995, Talegen Holdings, Inc. ("Talegen"), a
subsidiary of the Company, entered into an agreement with
Guaranty National Corporation for the sale of Viking Insurance
Holdings, Inc., ("Viking") a Talegen subsidiary. Revenues for
Viking were (in millions) $161, $182, and $224 for the years
9
Xerox Corporation
Notes to Consolidated Financial Statements
ended December 31, 1994, 1993, and 1992, respectively. On July
18, 1995, the sale of Viking closed for approximately $103
million in cash plus future upward price adjustments based on
loss reserve development. The transaction approximated book
value.
9. On April 26, 1995, the sale of Constitution Re Corporation,
another Talegen subsidiary, to EXOR America Inc. closed for a
final purchase price of $421 million in cash, and resulted in a
net loss of approximately $7 million.
10. On June 1, 1995, Xerox Financial Services, Inc. (XFSI)
completed the sale of its discontinued Xerox Financial Services
Life Insurance Company and related subsidiaries to a subsidiary
of General American Life Insurance Company for approximately $104
million before settlement costs and capital funding of OakRe Life
Insurance Company, another XFSI subsidiary. OakRe Life assumed
responsibility for the Single Premium Deferred Annuity (SPDAs)
policies issued by Xerox Life's Missouri and California companies
via a coinsurance agreement. As a result of this coinsurance
agreement, the Company has retained on its consolidated balance
sheet approximately $3.0 billion of investment portfolio assets
and reinsurance reserves related to its former SPDA policies.
These amounts will decrease over the next five years as the SPDA
policies are either terminated by the policyholder or renewed and
transferred to General American.
11. On June 1, 1995, XFSI established a $500 million letter of
credit and line of credit with a group of banks to support OakRe
Life's coinsurance obligations. The term of this letter of
credit is five years and it is unused and available at September
30, 1995. Upon a drawing under the letter of credit, XFSI has
the option to cover the drawing in cash or to draw upon the
credit line.
12. Litigation
Document Processing
On March 10, 1994, a lawsuit was filed in the United States
District Court for the District of Kansas by two independent
service organizations (ISOs) in Kansas City and St. Louis and
their parent company. On April 15, 1994, another case was filed
in the United States District Court for the Northern District of
California by 21 different ISOs from 12 states. Plaintiffs in
these actions claim damages (to be trebled) to their individual
businesses resulting from essentially the same alleged violations
10
Xerox Corporation
Notes to Consolidated Financial Statements
of law at issue in the antitrust class action in Texas, which was
settled by the Company during 1994. In one of the cases damages
are unspecified and in the other damages in excess of $10 million
are sought. In addition, injunctive relief is sought in both
actions. Claims for individual lost profits of ISOs who were not
named parties were not included in the class action. The two
actions have been consolidated for pretrial proceedings in the
District of Kansas. The Company has asserted counterclaims
against certain of the plaintiffs alleging patent and copyright
infringement, misappropriation of Xerox trade secrets, conversion
and unfair competition and/or false advertising. The Company
denies any wrongdoing and intends to vigorously defend these
actions and pursue its counterclaims.
Insurance
On September 15, 1992, International Surplus Lines Insurance
Company, which has since been merged into International Insurance
Company (International Insurance), a subsidiary of Talegen, filed
a complaint in the United States District Court for the Southern
District of Ohio, Eastern District, in Columbus, Ohio against
certain underwriting syndicates at Lloyds of London and other
foreign reinsurance companies. The complaint seeks a declaratory
judgment that the defendants are obligated to reimburse
International Insurance under various reinsurance contracts for
approximately $255 million in payments made or to be made to
Owens-Corning Fiberglas (OCF) for asbestos-related losses. In an
Opinion and Order dated September 27, 1994, International
Insurance's motion for summary judgment was granted. The court
ruled that International Insurance's payment of OCF's losses,
based on the determination that the manufacture, sale and
distribution of products containing asbestos constituted a single
occurrence, was reasonable and therefore binding on International
Insurance's reinsurers. The defendants filed motions for
reconsideration of the September 27 order. In order to avoid
the expense of further litigation and possible appeals, International
Insurance has executed settlement agreements with most of the
defendants in the action. The recovery pursuant to the settlement
agreements approximates the recorded reinsurance recoverable
balance after consideration for amounts written-off for
uncollectible reinsurance in prior years. Settlement discussions
with the remaining defendants are continuing and are expected to
result in additional executed settlement agreements with some or
all defendants. As of September 30, 1995, approximately $18.6
million is outstanding with these remaining reinsurers. The
litigation is currently stayed by agreement of the parties
pending the current discussions to settle the litigation in its
entirety.
In another OCF matter, on December 13, 1993, a complaint was
filed in the United States District Court for the District of New
11
Xerox Corporation
Notes to Consolidated Financial Statements
Jersey against The North River Insurance Company (North River), a
subsidiary of Talegen, by certain foreign insurance companies and
underwriting syndicates at Lloyds of London seeking to recover
certain sums paid, and to avoid certain sums to be paid, by them
to North River under various reinsurance contracts. Such sums
relate to approximately $106 million in defense expense costs
North River paid under insurance policies it issued for asbestos
bodily injury coverage to OCF; the payments resulted from a
decision rendered in favor of OCF in a binding arbitration. Of
this amount, plaintiffs paid North River approximately $68
million; approximately $38 million remains unpaid. The reinsurers
allege that North River misrepresented and withheld certain facts
surrounding the decision and breached certain duties to its
reinsurers. As part of the Talegen restructuring, International
Insurance has assumed the rights and obligations with respect to
these reinsurance contracts. A motion by North River to dismiss
the complaint for lack of federal subject matter jurisdiction was
granted on May 3, 1995. Plaintiffs refiled their claims in New
York state court on June 28, 1995. On July 31, 1995,
International Insurance filed a counterclaim for amounts
plaintiffs have not paid. International Insurance believes it is
entitled to the full payment of these reinsurance recoverables
and will vigorously defend the foregoing action.
Farm & Home Savings Association (Farm & Home) filed a lawsuit in
the United States District Court for the Western District of
Missouri, Southwest Division alleging that under an agreement
previously entered into by certain Talegen insurance companies
(Insurance Companies) with Farm & Home (Indemnification
Agreement), the Insurance Companies are required to defend and
indemnify Farm & Home from actual and punitive damage claims
being made against Farm & Home relating to the Brio superfund
site (Brio). The Indemnification Agreement had been entered into
in connection with the settlement of disputes between Farm & Home
and the Insurance Companies regarding policies issued to Farm &
Home during the time it was developing the Southbend subdivision
in Friendswood, Texas (Southbend), which is close to Brio. Under
the Indemnification Agreement, the Insurance Companies are
required to indemnify Farm & Home only as to claims asserted by
current or former residents of Southbend itself, or persons whose
injuries are alleged to have been incurred as a direct
consequence of exposure to allegedly hazardous substances within
Southbend emanating from the Brio site. Farm & Home alleges that
the Indemnification Agreement covers claims for injuries arising
elsewhere than Southbend. The Insurance Companies deny any
liability to Farm & Home. Cross motions for summary judgment in
the action are pending. However, the parties have reached
agreement in principle on a stand-still whereby the litigation
will be dismissed with all parties reserving their rights.
12
Xerox Corporation
Notes to Consolidated Financial Statements
In a number of lawsuits pending against Farm & Home in the
District Courts of Harris County, Texas, plaintiffs seek both
actual and punitive damages allegedly relating to injuries
arising out of the hazardous substances at Brio. The Insurance
Companies have been defending these cases under a reservation of
rights because it is unclear whether certain of the claims fall
under the coverage of either the policies or the Indemnification
Agreement. In one of the pending cases, the court dismissed
claims brought by plaintiffs who were unable to demonstrate a
pertinent nexus to the Southbend subdivision. In a second case,
the plaintiffs' attorney has agreed to dismiss claims asserted by
similarly situated plaintiffs.
13
Xerox Corporation
Management's Discussion and Analysis of
Results of Operations and Financial Condition
The financial summary for the third quarter and year-to-date and
this discussion present the operating results from Document
Processing and Insurance with discontinued operations discussed
separately. Income from Insurance, as shown in the financial
summary, includes assigned interest expense from the parent
company.
Financial Summary
Year-to-date
(In millions, Third quarter September 30,
except per-share data) 1995 1994 % Growth 1995 1994 % Growth
Revenues
Document Processing $4,027 $3,636 11% $11,851 $10,491 13%
Insurance 570 662 (14) 1,834 2,049 (10)
Total Revenues $4,597 $4,298 7 $13,685 $12,540 9
Net Income (Loss)
Document Processing $ 256 $ 185 38 $ 697 $ 483 44
Insurance (20) 1 * (76) - *
Net Income $ 236 $ 186 27 $ 621 $ 483 29
Primary Earnings (Loss)
per Share
Document Processing $ 2.21 $ 1.60 38 $ 6.02 $ 3.97 52
Insurance (.18) .01 * (.69) - *
Primary Earnings per Share $ 2.03 $ 1.61 26 $ 5.33 $ 3.97 34
Fully Diluted Earnings (Loss)
per Share
Document Processing $ 2.09 $ 1.53 37 $ 5.72 $ 3.84 49
Insurance (.16) - * (.63) - *
Fully Diluted Earnings
per Share $ 1.93 $ 1.53 26 $ 5.09 $ 3.84 33
* Calculation not meaningful.
14
Summary of Total Company Results
In view of the Company's 1993 decision to concentrate its
resources on its core Document Processing business and disengage
from the Insurance and Other Financial Services (IOFS) businesses,
management believes the most meaningful and appropriate portrayal
of the Company's operating results and financial position is to
report the Document Processing and Insurance businesses on a
tiered basis within the Company's consolidated financial
statements.
The MD&A on page 14 discloses earnings per share (EPS) for the
Company's consolidated operations and for the Document Processing
and Insurance Operations. The presentation of separate Document
Processing and Insurance EPS amounts is not in accordance with
generally accepted accounting principles. The Company believes,
however, that for analytical purposes, these EPS amounts represent
the contributions of the Company's two businesses to the
consolidated results of operations and that the Document
Processing results are an appropriate basis for comparison with
future financial results from Document Processing. EPS amounts
presented in accordance with generally accepted accounting
principles are on page 4.
15
Document Processing
Underlying Growth
To understand the trends in the business, the Company believes
that it is helpful to adjust revenue and expense growth (except
for ratios) to exclude the impact of changes in the translation of
foreign currencies into U.S. dollars. This adjusted growth is
referred to as "underlying growth."
When compared with the major European currencies, the U.S. dollar
was approximately 10 percent weaker in the 1995 third quarter than
in the 1994 third quarter, and approximately 13 percent weaker in
the 1995 first nine months than in the 1994 first nine months. As
a result, foreign currency translation had a favorable impact of 3
percentage points on total revenues in the 1995 third quarter and
4 percentage points on total revenues in the 1995 first nine
months.
The Company does not hedge the translation of foreign currency-
denominated revenues.
Revenues
Management estimates that the components of underlying revenue
growth were as follows:
Underlying Growth
1995 1994
Q3 Q2 Q1 FY Q4 Q3 Q2 Q1
Total Revenues 8% 8% 11% 7% 11% 4% 6% 5%
Sales
Equipment 7 8 9 10 13 4 11 9
Supplies 9 10 22 11 22 10 3 10
Paper 42 42 52 4 21 1 (2) (1)
Total 11 12 18 10 14 5 9 9
Service/Rentals/FacMgmt/Other
Service 1 4 3 4 6 4 4 3
Rentals 3 (2) 3 (1) 5 (4) (3) (7)
Facilities Management/Other 38 28 33 20 22 20 22 17
Total 6 6 6 5 8 5 5 3
Finance Income (7) (2) (4) (4) (3) (3) (6) (7)
Memo:
Non-Equipment Revenues 8 9 12 5 9 4 4 3
Total revenue growth of 8 percent in the 1995 third quarter was
unchanged from the 1995 second quarter and a decline from the
16
growth of 11 percent in the 1995 first quarter and the 1994 fourth
quarter.
The good growth in equipment sales in the third quarter reflected
excellent growth in data center printing and color copying and
printing, and good growth in production publishing and black-and-
white copying, which was somewhat offset by lower printer engine
sales to original equipment manufacturers due to unusually high
shipments in the third quarter of last year. Excluding these OEM
sales, equipment sales grew 12 percent which represents an
improvement from earlier quarters this year. On a geographical
basis, continuing excellent growth in Brazil was moderated by
demand in the U.S. and Europe.
Non-Equipment revenues from supplies, paper, service, rentals,
facilities management and other revenues, and income from customer
financing represented 68 percent of total revenues in the 1995
third quarter, unchanged from the 1995 second quarter but a
decline from 72 percent in the 1995 first quarter. Growth in
these revenues is primarily a function of the growth in the
Company's installed population of equipment, usage and pricing.
Supplies sales: The good growth in the 1995 third quarter and
1995 second quarter, and the excellent growth in the 1995 first
quarter are due principally to continued excellent growth in
enterprise printing and cartridge sales for personal copiers.
The declining sequential trend this year reflects lower OEM
sales.
Paper sales: The Company's policy is to charge a spread over
mill wholesale prices to cover its costs and value added as a
distributor. The excellent growth this year is due primarily
to higher worldwide prices.
Service revenues: The modest growth in recent quarters reflects
the diversionary trend to facilities management 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 is an increasing trend
toward cost-per-copy rental plans, which adversely affects
upfront equipment sales, service revenues and finance income.
This trend toward rentals rather than equipment sales also
increases revenues in future periods but reduces current period
total revenues.
Facilities management, copy centers and other revenues: This
growth reflects the trend of customers focusing on their core
businesses and outsourcing their document processing
requirements to Xerox. This has the effect of diverting
17
revenue from equipment sales, service and finance income. This
trend toward facilities management rather than equipment sales
can also increase revenues in future periods but reduce current
period total revenues.
Finance income: The decline is due to a continuation of the
trend of lower interest rates on financing contracts.
Geographic Revenues
Geographically, the underlying revenue growth rates are estimated
as follows:
1995 1994
Q3 Q2 Q1 FY Q4 Q3 Q2 Q1
Total Revenues 8% 8% 11% 7% 11% 4% 6% 5%
United States 5 5 8 7 10 6 7 4
Rank Xerox 2 5 13 7 13 3 7 6
Other Areas 27 25 17 7 10 4 2 5
The Company's U.S. revenues grew 5 percent in the third quarter,
equal to the second quarter and a decrease from the 1995 first
quarter. However, U.S. revenues, grew 9 percent in the third
quarter excluding the impact of unusually high OEM printer engine
sales in the third quarter last year, when a new customer placed a
large order to fill its distribution channel. Third quarter
revenue growth was also adversely affected by some residual
disruption from sales force productivity initiatives begun earlier
this year.
Rank Xerox Limited and related companies (Rank Xerox) manufactures
and markets Xerox products principally in Europe. The Rank Xerox
revenue growth rate declined from 13 percent in the 1995 first
quarter and the 1994 fourth quarter to 5 percent in the 1995
second quarter to 2 percent in the 1995 third quarter. In the
1995 third quarter revenue growth was good in the United Kingdom,
Holland and the smaller European countries, and modest in Germany.
Revenue in France declined for the second consecutive quarter
primarily due to reduced government spending. Due to the change
to calendar-year financial reporting, the traditionally slow month
of August falls in the third quarter this year compared with the
fourth quarter in 1994. Revenue in Italy had no growth after
excellent growth in the first half. Revenue in Spain declined
after strong growth in the first half.
Other Areas includes operations principally in Latin America and
Canada. Revenue growth has been substantial in Brazil, strong in
the smaller Latin American countries, and good in Canada. In
Brazil, since a new economic plan was implemented in July 1994,
inflation has declined to 1-3 percent per month and the economy
18
has shown strong growth. In Mexico, revenues have declined
significantly this year due to devaluation and the continuing
economic disruption following devaluation of the Mexican peso in
December 1994. In 1994, full year revenues were $300 million in
Mexico and over $1 billion in Brazil.
Major Product Categories
For the major product categories, the underlying revenue growth
rates are estimated as follows:
1995 1994
Q3 Q2 Q1 FY Q4 Q3 Q2 Q1
Total Revenues 8% 8% 11% 7% 11% 4% 6% 5%
Black & White Copiers 3 2 4 4 7 - 4 3
Enterprise Printing 18 20 22 20 22 17 22 21
Revenues from black-and-white copying represented 60 percent of
total document processing revenues in the 1995 third and second
quarters, 61 percent in the 1995 first quarter and 63 percent for
the 1994 full year. Revenues from enterprise printing, including
production publishing, data center printing, network printing, and
color printing and copying, represented 24 percent of total
revenues in the 1995 third and second quarters, 23 percent in the
1995 first quarter and 22 percent for the 1994 full year.
Productivity Initiatives
In December 1993, the Company announced a restructuring program
with the objectives of continuing to significantly reduce the cost
base and to improve productivity. The Company's objective was to
reduce its worldwide work force by more than 10,000 employees and
to close or consolidate a number of facilities. The Company
achieved pre-tax cost reductions of approximately $350 million in
1994, and expects to achieve approximately $700 million in 1995
and higher amounts thereafter. However, a portion of these savings
is being reinvested to reengineer business processes, to support
expansion in emerging markets, and to mitigate anticipated
continued pressure on gross margins.
Employment declined by 11,400 from year-end 1993 to 85,600
employees at the end of the 1995 third quarter; 11,100 of the
reductions were due to restructuring program initiatives and 1,300
employees were transferred to Electronic Data Systems Corp. (EDS),
partially offset by 1,000 net hires. Employment declined by 200
in the 1995 third quarter, including 500 due to the restructuring
program, partially offset by the addition of 300 employees,
principally to support the rapidly growing facilities management
business. For the 1995 first nine months, employment declined by
2,000, including 3,500 due to the restructuring program, partially
19
offset by the addition of 1,500 employees, principally to support
the facilities management business.
To date, the activities associated with the productivity
initiatives are on track towards achieving the Company's
objectives.
Costs and Expenses
The gross margins by revenue stream were as follows:
Gross Margins
1995 1994
Q3 Q2 Q1 FY Q4 Q3 Q2 Q1
Total Gross Margin 46.4% 46.7% 45.2% 45.8% 45.3% 45.7% 46.2% 46.3%
Sales 43.4 43.3 41.2 40.7 41.5 40.1 40.6 40.3
Service/Rental 49.5 50.6 49.1 51.6 50.9 51.5 52.1 51.9
Financing 49.8 48.5 50.1 50.1 50.1 51.2 49.8 49.3
Total gross margins improved by 0.7 percentage points in the 1995
third quarter from the 1994 third quarter. The improvement of 3.3
percentage points in the sales gross margin from the 1994 third
quarter was principally due to cost reductions and favorable
product and geographical mix, principally Brazil, partially offset
by currency and increasing pricing pressures. The erosion in the
service and rentals gross margin of 2.0 percentage points from the
1994 third quarter was largely due to significant inflationary
cost increases which were not offset by pricing in Brazil, and
pricing pressures, partially offset by productivity improvements.
Research and development (R&D) expense increased 12 percent in the
1995 third quarter and 11 percent for the 1995 first nine months.
The Company expects to continue to invest in technological
development to maintain its premier position in the rapidly
changing document processing market and expects to introduce a
stream of new, technologically innovative products in the coming
months. The Company's R&D is strategically coordinated with that
of Fuji Xerox Co., Ltd., an unconsolidated joint venture between
Rank Xerox Limited and Fuji Photo Film Company Limited. Fuji
Xerox invested approximately $500 million in R&D in 1994.
Selling, administrative and general expenses (SAG) increased 6
percent in the 1995 third quarter and the 1995 first nine months
principally due to economic cost increases, particularly in
Brazil, and investments in improved systems and sales distribution
channels, partially offset by improved productivity. SAG was 28.9
percent of revenue in the third quarter, consistent with earlier
quarters this year, and an improvement of 0.4 percentage points
from the 1994 third quarter.
The increase in other expenses, net in the 1995 third quarter
reflects higher interest expense principally due to the financing
20
of the Company's increased financial interest in Rank Xerox.
Foreign currency losses from balance sheet translation in the
Company's Brazilian operations continued to be modest and declined
somewhat from the 1994 third quarter. This decline was offset
somewhat by increased losses in other Latin American operations,
primarily in Colombia. In the 1995 first half a reduction of
year-over-year losses from balance sheet translation was primarily
due to a lower rate of net currency devaluation in Brazil.
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 20 percent to $415
million in the 1995 third quarter from $346 million in the 1994
third quarter. For the 1995 first nine months, this income
increased 30 percent to $1,194 million from $918 million in the
1994 first nine months. The excellent profit growth in the third
quarter and the first nine months reflects the benefits from
productivity initiatives and was particularly influenced by
substantial profit growth in the Company's Brazilian operations.
The effective tax rate was 38.6 percent in the 1995 third quarter
compared with 39.3 percent in the 1994 third quarter, and 39.3
percent in the 1994 full year. In the 1995 first nine months, the
effective tax rate was 38.7 percent.
Equity in the net income of unconsolidated affiliates, principally
Fuji Xerox, increased in the 1995 third quarter to $38 million
from $25 million in the 1994 third quarter. This equity in net
income was $102 million in the 1995 first nine months compared
with $63 million in the 1994 first nine months. The increase in
Fuji Xerox income in the third quarter and the first nine months
was due to revenue growth in their domestic market and currency
translation.
Minorities' interests in the earnings of subsidiaries was $37
million in the 1995 third quarter compared with $50 million in the
1994 third quarter, and was $137 million for the 1995 first nine
months, equal to the 1994 first nine months. The decrease in the
third quarter was due to the Company's increased financial
interest in Rank Xerox partially offset by excellent growth in
Rank Xerox income. For the first nine months, the decrease due to
the Company's increased financial interest in Rank Xerox was
offset by excellent growth in Rank Xerox income.
On February 28, 1995, Xerox increased its financial interest in
Rank Xerox to 80 percent from 67 percent. This transaction
reduced third quarter and the first nine months minorities'
interest by approximately $25 million and $89 million,
respectively.
21
Income
Income in the 1995 third quarter was $256 million, a growth of 38
percent compared with the 1994 third quarter. For the 1995 first
nine months, income was $697 million, a growth of 44 percent from
the $483 million of income in the 1994 first nine months.
The 1995 third quarter Document Processing primary earnings per
share increased 38 percent to $2.21 and the 1995 first nine months
primary earnings per share increased 52 percent to $6.02. Fully
diluted earnings per share increased 37 percent to $2.09 in the
1995 third quarter and by 49 percent in the 1995 first nine months
to $5.72.
Rank Xerox and Latin American Fiscal-Year Change in 1995
Effective January 1, 1995, the Company changed Rank Xerox and
Latin American operations to calendar-year financial reporting.
The 1994 fiscal year ended on October 31 for Rank Xerox and on
November 30 for Latin American operations. The results of these
non-U.S. operations that occurred between the 1994 and 1995 fiscal
years (the stub period) were accounted for as a direct charge to
equity. A loss of $21 million was charged to equity in the stub
period, primarily due to the currency devaluation and related
economic dislocations in Mexico. Excluding the Mexican
devaluation and related economic dislocations, income during the
stub period was $4 million.
22
Insurance
Insurance Operating Results
The results of Insurance and Other Financial Services ("IOFS") are
separated into the continuing Insurance segment and discontinued
operations, which include Other Financial Services ("OFS"),
(discontinued in 1993) and third-party financing and real-estate
development (discontinued in 1990). The Insurance segment
includes Talegen Holdings, Inc. ("Talegen"), Ridge Reinsurance
Limited ("Ridge Re") and that portion of Xerox Financial Services,
Inc. ("XFSI") interest expense and other costs associated with the
continuing business activities. The Constitution Re Corporation
("Constitution Re") sale to EXOR America Inc. ("EXOR") was
completed on April 26, 1995 for a cash sale price of $421 million.
The transaction resulted in a net loss of approximately $7
million. On July 18, 1995 Xerox completed the sale of Viking
Insurance Holdings, Inc., a Talegen subsidiary, to Guaranty
National Corporation ("GNC") for approximately $103 million in
cash plus future upward price adjustments based on loss reserve
development. The transaction approximated book value. On August
31, 1995, Xerox completed the sale of First Quadrant Corporation's
insurance investment management segment to American Re Asset
Management, Inc. ("ARAM"), a subsidiary of American Re
Corporation. Net proceeds from the sales of Constitution Re to
EXOR, Viking to GNC and First Quadrant insurance segment to ARAM
have largely been used to pay down debt and are in line with the
Company's previously announced strategy to disengage from
financial services and redeploy capital into its more profitable
document processing business. Talegen continues to own Crum &
Forster Holdings, Inc., Industrial Indemnity Holdings, Inc.,
Coregis Group, Inc., Westchester Specialty Group, Inc., The
Resolution Group, Inc. and three service companies (which,
including Talegen, are referred to as the "Remaining Companies").
Income after-tax from the Insurance segment was a $20 million loss
in the third quarter, 1995, compared with a $1 million profit in
the third quarter, 1994. For the first nine months, 1995, income
after-tax was a $76 million loss compared to break even in the
first nine months, 1994. Third quarter and first nine months
results are summarized in the following table.
Third Quarter Nine Months
(In millions) 1995 1994 1995 1994
Talegen Remaining Companies $ 46 $ 38 $124 * $101
Monsanto Settlement (Holding Co. Portion) - - (14)* -
Talegen Dispositioned Companies 4 13 (3) 33
Total Talegen 50 51 107 134
Cessions To Ridge Re (22) (11) (56)* (17)
Interest/Other (48) (39) (127) (117)
Total Insurance $(20) $ 1 $(76)* $ -
23
* The first nine months, 1995, includes the $22 million after-tax
impact of the March 2, 1995 settlement between Monsanto Company
and Talegen and four of its insurance subsidiaries ($1 million in
Remaining Companies, $14 million at the holding company level and
$7 million in cessions to Ridge Re).
The Remaining Companies had after-tax income of $46 million in the
third quarter, 1995, compared with $38 million in the third
quarter, 1994. For the first nine months, 1995, after-tax income
totaled $124 million compared with $101 million in the first nine
months, 1994. The year-over-year improvements in both the third
quarter and year-to-date are due to generally improved
underwriting results, higher investment income and higher net
realized capital gains, partially offset by higher catastrophe
losses and interest expense related to the $425 million in debt
issued in the fourth quarter, 1994.
Revenues from the Insurance businesses were $570 million in the
third quarter, 1995, a decline of 14 percent from the third
quarter, 1994. Revenues for the first nine months, 1995, totaled
$1,834 million, a 10 percent decline from the first nine months,
1994. The lower revenues in both the third quarter and first nine
months 1995 reflect the absence of 1995 earned premium volumes for
Constitution Re and Viking subsequent to their sales. For the
Remaining Companies, year-over-year earned premiums increased in
the third quarter and were approximately flat for the nine months.
Further details on premium levels are included in the individual
Talegen insurance operating group results.
The overall underwriting loss for the Remaining Companies in the
third quarter, 1995, increased by $10 million to $49 million,
compared with $39 million in the third quarter, 1994. The increase
in the third quarter 1995 includes approximately $11 million
after-tax impact for catastrophe losses associated with Hurricanes
Erin and Marilyn compared to nominal catastrophe losses in the
prior year period. For the first nine months, the underwriting
loss improved by $2 million to $126 million. The nine month
improvement in 1995 primarily reflects more favorable loss
experience in certain insurance operating groups on current and
prior years' business and continuing overall expense controls,
partially offset by higher catastrophe losses.
Third quarter, 1995, underwriting results include cessions to
Ridge Re (a wholly owned subsidiary of XFSI that provides
reinsurance coverage to current and former Talegen Insurance
Operating Groups) of $33 million pre-tax ($22 million after-tax)
of adverse development related to 1992 and prior accident years.
For the first nine months, 1995, cessions total $86 million pre-
tax ($56 million after-tax). Cessions to Ridge Re in 1994 totaled
$16 million pre-tax ($11 million after-tax) for the third quarter
and $25 million pre-tax ($17 million after-tax) for the first nine
months.
24
Pre-tax catastrophe losses for the Remaining Companies were
approximately $17 million in the third quarter, 1995, compared
with approximately $1 million in the third quarter, 1994. For the
first nine months, 1995 losses totaled $26 million compared with
$19 million in the first nine months, 1994. The increase in the
third quarter reflects losses related to Hurricanes Erin and
Marilyn, while the year-to-date increase reflects the impact of
heavier storm activity in the Midwest and the aforementioned
hurricanes compared with the Northridge earthquake in California
and Northeast winter storms in 1994.
Underwriting results (expressed in terms of gross written premiums
and combined ratios) and after-tax income for each of Talegen's
four ongoing insurance operating groups included in the Remaining
Companies results are summarized in the following table.
Underwriting results for The Resolution Group are not meaningful
on this basis since that unit has insignificant run-off premiums
and, therefore, are not displayed.
Gross Combined After-Tax
Premiums Growth Ratio Income
($ in millions) Written % 1995 1994 1995 1994
Third Quarter
Coregis $ 155 5% 105.0 102.1 $10 $ 8
Crum & Forster Insurance 318 29 108.8 105.7 43 20
Industrial Indemnity 73 (21) 104.5 98.2 8 13
Westchester Specialty Group 77 (13) 117.8 106.7 5 8
Nine Months
Coregis $ 322 10% 101.4 105.8 $30 $16
Crum & Forster Insurance 870 16 109.1 107.0 77 47
Industrial Indemnity 230 (23) 107.5 106.9 16 27
Westchester Specialty Group 224 (14) 115.1 106.9 17 20
The combined ratio is a standard insurance industry measurement of
underwriting results. It measures the relationship of losses and
expenses to net earned premiums. It does not include income from
an insurer's investments. The combined ratio is the sum of three
ratios: (i) the loss and loss adjustment expense ratio, (ii) the
underwriting expense ratio and (iii) the dividend ratio. The loss
and loss adjustment expense ratio reflects claims expenses, the
underwriting expense ratio reflects policy acquisition and
administrative costs, and the dividend ratio reflects dividends to
policyholders. The objective of the combined ratio is to match
costs with revenues. Generally, a combined ratio under 100
percent indicates underwriting profits while a combined ratio
exceeding 100 percent indicates underwriting losses.
The following are the key reasons for the year-over-year
performance changes for each Insurance Operating Group.
25
At Coregis, strong program management disciplines resulted in
gross written premium growth of 5 percent for the quarter and 10
percent for nine months as good renewal retentions and expansion
in various core programs continued. The combined ratio increased
2.9 points to 105.0 for the quarter, but decreased 4.4 points to
101.4 for nine months. Improved loss experience in 1995 was
partially offset by higher operating expenses in the third
quarter. Net income increased $2 million for the quarter and $14
million for the nine months due to increased production, improved
loss experience, and higher net investment income and net realized
capital gains. These positive impacts were partially offset by
interest expense on debt issued in the fourth quarter of 1994.
Crum & Forster Insurance continued to achieve new business
expansion and strong renewal retentions with the company's custom
agents as reflected in gross written premium growth of 29 percent
for the third quarter and 16 percent for nine months. The
combined ratio increased 3.1 points for the quarter to 108.8 and
2.1 points to 109.1 for the nine months primarily due to loss
funding on prior years' business. Net income increased $23
million for the quarter and $30 million year-to-date reflecting
higher net investment income and net realized capital gains,
partially offset by interest expense on debt issued in the fourth
quarter of 1994.
At Industrial Indemnity gross premium volume declined 21 percent
for the quarter and 23 percent for the first nine months due to
the continued competitive open rating environment for workers
compensation business in California, the company's largest market.
The combined ratio was 104.5 for the third quarter, a favorable
result, although 6.3 points higher than the prior year period due
to the release of loss reserves in 1994. The year-to-date combined
ratio was 107.5, or 0.6 point higher than the first nine months of
1994 due to reserve releases. The lower production in California
and interest expense on debt issued in the fourth quarter of 1994
contributed to decreases of $5 million in net income for the
quarter and $11 million for the nine months.
Gross premium volume at Westchester Specialty declined 13 percent
for the third quarter and 14 percent for nine months. Continuing
the trend of recent quarters, casualty business declined due to
market pressure on prices and related exposure reductions, while
premiums grew in profitable property business. The company has
strengthened its loss funding for casualty business causing the
combined ratio to increase 11.1 points for the quarter to 117.8
and 8.2 points for the nine months to 115.1. The effects of
higher loss funding and interest expense on debt issued in the
fourth quarter of 1994 were largely offset by improved net
investment income and net realized capital gains, resulting in a
$3 million decline in net income for the quarter and nine months.
The Resolution Group's combined ratio is not meaningful due to the
absence of new and renewal business. In addition, gross premium
26
volume continues to be insignificant and represents the run-off of
discontinued business. Net income was minimal.
Investment income for Talegen Remaining Companies was $100 million
in the third quarter, 1995, compared with $91 million in the third
quarter, 1994. For the first nine months, 1995, investment income
was $297 million compared with $261 million in the first nine
months, 1994. The increase in 1995 investment income primarily
reflects a higher level of invested assets and higher yields.
Realized pre-tax capital gains for Talegen Remaining Companies
totaled $33 million in the third quarter, 1995, compared to $4
million in the third quarter, 1994. For the first nine months,
1995, gains totaled $46 million compared to $14 million in the
first nine months, 1994. The third quarter, 1995 capital gains
included the impact from repositioning the Remaining Companies
portfolios.
Property and Casualty Operating Trends
The industry's profitability can be significantly affected by
cyclical competitive conditions, as well as, by volatile and
unpredictable developments, including changes in the propensity of
courts to grant large awards, fluctuations in interest rates and
other changes in the investment environment (which affect market
prices of insurance companies' investments, the income from those
investments and inflationary pressures that may tend to affect the
size of losses), and judicial decisions affecting insurers'
liabilities. Talegen's operating results have historically been
influenced by these industry trends, as well as, by Talegen's
exposure to uncollectible reinsurance, which had been greater than
most other insurers.
Disengagement From Insurance Business
During the disengagement process, the Company will continue to be
subject to all business risks and rewards of its insurance
businesses. The Company anticipates that future income or losses
from its insurance businesses may vary widely as the disengagement
strategy is implemented, due to, among other reasons, the
recognition of proceeds of sales or other forms of disengagement
and the results from operations of the remaining insurance
businesses. No assurances can be given as to the timing of the
disengagement process, the amount and timing of proceeds of sales
or other forms of disengagement from insurance units or the impact
the remaining insurance businesses will have on the Company's
total results from operations during the disengagement process.
The Company's objective is to continue to obtain value from the
Insurance investments. The ultimate value will depend on
the success of the operational improvements, timing, the level of
interest rates, and the relative values of insurance properties,
and a sizable charge to income could occur.
27
Talegen Reserves
The methodologies for establishing reserves for unpaid losses and
loss expenses and reserves for uncollectible reinsurance are
discussed in the Company's Form 10-K. The following table sets
forth gross unpaid losses and loss expenses, reinsurance
recoverables on unpaid losses and loss expenses and the resultant
net unpaid losses and loss expenses for the insurance companies
within the Remaining Companies as of September 30, 1995 and
December 31, 1994:
Unpaid Losses and Loss Expenses
September 30, 1995 December 31, 1994
Reinsurance Reinsurance
Gross Recover- Net Gross Recover- Net
($ in millions) Reserves ables Reserves Reserves ables Reserves
Coregis $1,040 $ 281 $ 759 $ 995 $271 $ 724
Crum & Forster Insurance 2,954 788 2,166 2,941 768 2,173
Industrial Indemnity 1,324 180 1,144 1,445 188 1,257
The Resolution Group 1,629 1,002 627 1,680 983 697
Westchester Specialty Group 1,220 485 735 1,225 485 740
Ceded balances to affiliates (456) (456) - (451) (451) -
Total $7,711 $2,280 $5,431 $7,835 $2,244 $5,591
Memo Item:
1) Included in the above reinsurance recoverable balances are
recoverables from Ridge Re of $139 million and $53 million at
September 30, 1995 and December 31, 1994, respectively.
The changes in gross reserves over the nine months ending
September 30, 1995 represent reserves established for premiums
earned during the nine month period offset by claim and loss
expense payments made. Additionally, insurance companies within
Crum & Forster Insurance, Westchester Specialty Group and The
Resolution Group strengthened gross reserves for development on
1994 and prior accident year claims, by $48 million, $45 million
and $34 million, respectively, whereas insurance companies within
Coregis and Industrial Indemnity reduced gross reserves by $20
million and $5 million, respectively. Of the reserve
strengthening amounts, $26 million, $31 million and $29 million,
respectively, were ceded to Ridge Re. Cessions to Ridge Re,
while beneficial to Talegen, do not result in a benefit to the
Insurance Segment or consolidated Xerox accounts.
The Company's Form 10-K discusses the complexity and uncertainty
pertaining to claims resulting from asbestos bodily injury,
asbestos-in-building, hazardous waste and other latent or long-
tail losses, and provides a discussion on what Talegen and the
insurance operating groups believed to be reasonably possible
exposure on known claims in these claim categories as of December
31, 1994. Talegen continues to gather and analyze developing
28
legal and factual information with regard to claims in these areas
and makes adjustments to the reserves in the period that the
related uncertainties are clarified. Total reserves for asbestos
bodily injury, asbestos-in-building, hazardous waste and other
latent or long-tail claims for the insurance companies within the
Remaining Companies as of September 30, 1995 and December 31, 1994
are as follows:
Total Reserves (1) by Claim Categories
($ in millions) September 30, 1995 December 31, 1994
Gross Net Gross Net
Crum & Forster Insurance
Asbestos Bodily Injury $ 71 $ 28 $ 58 $ 40
Asbestos-in-Building - - - -
Hazardous Waste 62 46 79 61
Other Latent or Long-Tail Claims 66 44 110 57
Total $199 $118 $247 $158
The Resolution Group
Asbestos Bodily Injury $153 $ 12 $170 $ 17
Asbestos-in-Building 19 1 21 2
Hazardous Waste 83 29 101 36
Other Latent or Long-Tail Claims 47 4 48 2
Total $302 $ 46 $340 $ 57
Westchester Specialty Group
Asbestos Bodily Injury $ 38 $ 11 $ 38 $ 11
Asbestos-in-Building 45 1 45 1
Hazardous Waste 25 15 34 21
Other Latent or Long-Tail Claims 9 1 9 1
Total $117 $ 28 $126 $ 34
Total (1)
Asbestos Bodily Injury $262 $ 51 $266 $ 68
Asbestos-in-Building 64 2 66 3
Hazardous Waste 170 90 214 118
Other Latent or Long-Tail Claims 122 49 167 60
Total $618 $192 $713 $249
(1) The total excludes $2 million of hazardous waste reserves as of September
30, 1995 and December 31, 1994 for Coregis Insurance Company, an insurance
company within the Coregis insurance operating group. Hazardous waste
exposures for Coregis are not significant primarily because 1986 was the first
year significant business volume was written by insurance companies within the
Coregis insurance operating group.
The reduction in hazardous waste reserves during the nine months
ended September 30, 1995 primarily results from payments on claims
and allocated loss adjustment expenses whereas the reduction in
other latent or long-tail claim reserves is primarily caused by
claims resolved in connection with the March 2, 1995 Monsanto
settlement.
29
Ridge Re Cessions
Third quarter, 1995, underwriting results include cessions to
Ridge Re (a wholly owned subsidiary of XFSI that provides
reinsurance coverage to current and former Talegen Insurance
Operating Groups) of $33 million pre-tax ($22 million after-tax)
of adverse loss development related to 1992 and prior accident
years. First nine months, 1995, cessions total $86 million pre-
tax ($56 million after-tax) and were from three of the Talegen
insurers (Crum & Forster Insurance - $17 million, Westchester
Specialty Group - $20 million and The Resolution Group - $19
million). Cessions to Ridge Re in the first nine months, 1994
totaled $25 million pre-tax ($17 million after-tax).
Interest and Other
Interest and other charges on an after-tax basis were $48 million
in the third quarter, 1995 compared with $39 million in the third
quarter, 1994. First nine months, 1995, interest and other
charges totaled $127 million compared with $117 million in the
first nine months, 1994. The increase includes disengagement
related costs, partially offset by declines in net interest
expense.
During the third quarter, 1995, the Other Postretirement Benefit
accrual related to employees of the Talegen Remaining Companies
was reduced by $3 million after-tax as a result of various
amendments made by the insurance operating groups to their retiree
medical plans. Through nine months, 1995, the reduction totaled
$22 million after-tax.
In the third quarter and nine months of 1995, after-tax provisions
of $3 million and $22 million, respectively, were recorded related
to disengagement from various Insurance businesses in light of
uncertainties surrounding the ultimate values to be obtained from
these operations.
Discontinued Operations
Other Financial Services (OFS), which were discontinued in the
fourth quarter of 1993, had no after-tax income in the first nine
months of 1995 and 1994. The net investment in OFS was $171
million and $232 million at September 30, 1995 and December 31,
1994, respectively. Management currently believes that the
liquidation of the remaining OFS units will not result in a net
loss.
The sale of the business and assets of Shields, a former Furman
Selz subsidiary, and Regent, a subsidiary of Shields, to Alliance
Capital Management L. P. was completed in March, 1994. Under the
terms of the Furman Selz sales agreement, the sales proceeds
yielded cash of approximately $60 million before settlement of
related liabilities.
30
On June 1, 1995, XFSI completed the sale of Xerox Financial
Services Life Insurance Company and related companies ("Xerox Life
Companies") to a subsidiary of General American Life Insurance
Company. After the sale, the Xerox Life Companies names were
changed to replace the name "Xerox" in the corporate titles with
the name "Cova" ("Cova Companies"). OakRe Life Insurance Company,
an XFSI subsidiary formed in 1994, has assumed responsibility for
existing Single Premium Deferred Annuity (SPDA) policies issued by
Xerox Life's Missouri and California companies via coinsurance
agreement ("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. The sale of Xerox Life
Companies is part of the Company's strategy to exit the financial
services business and focus on its core document processing
business, which was announced in June 1993.
During the first nine months, 1995, sales of real-estate and
third-party assets and run-off activity reduced assets associated
with these businesses by $26 million to a total of $521 million.
Assigned debt increased by $13 million to $244 million. The debt
increase includes a tax payment made in 1995 relating to the 1994
sale of a portion of the Direct Financing Lease portfolio,
partially offset by the run-off related reduction of assets.
Management believes that the combination of existing reserves
together with run-off profits should adequately provide for any
credit losses or losses on disposition.
31
Liquidity and Capital Structure
The following table summarizes funds generation and usage for the
nine months ended September 30, 1995 and 1994 and the related
impacts on cash and debt balances. These data exclude restricted
cash flows of the insurance businesses.
Funds Generation/(Use)
Year-to-Date September 30, Better/
(In millions) 1995 1994 (Worse)
Non-Financing:
Document Processing $ (515) $ (115) $ (400)
Rank Xerox Purchase (972) - (972)
Yen Financing Repayment - (116) 116
IOFS-related/other 421 (410) 831
Non-Financing (1,066) (641) (425)
Financing:
Xerox Equipment Financing 150 (226) 376
Third-Party Financing (10) 126 (136)
Financing 140 (100) 240
Operations generation(use) (926) (741) (185)
Shareholder Dividends (292) (297) 5
Equity issuance/(redemption)
and changes in cash 39 (138) 177
Debt(increase)decrease $(1,179) $(1,176) $ (3)
The following table summarizes Document Processing non-financing
operations funds generation and usage, after investments in the
business, for the nine months ended September 30, 1995 and 1994:
Funds Generation/(Use)
Year-to-Date September 30, Better/
(In millions) 1995 1994 (Worse)
Document Processing
Non-Financing:
Income $ 534 $ 314 $ 220
Depreciation and Amortization 486 476 10
Restructuring Payments (258) (295) 37
Capital Expenditures (295) (255) (40)
Assets Sold 46 152 (106)
Working Capital/Other (1,028) (507) (521)
$ (515) $ (115) $ (400)
32
Capital Resources
In management's opinion, funds usage and debt changes are best
understood by examining the more highly leveraged financing
businesses separately from the Company's other businesses.
Non-Financing Businesses
Business Equipment funds usage of $515 million was $400 million
greater than in the first nine months of 1994 as a result of
increased profit sharing payments, higher inventory growth, and
lower asset sales partially offset by higher income. The lower
asset sales reflect third quarter 1994 sales to EDS.
On February 28, 1995, $972 million was paid to The Rank
Organisation Plc whereby Xerox increased its financial interest in
Rank Xerox to about 80 percent from 67 percent.
IOFS-related funds generation was $421 million or $831 million
better than in 1994 reflecting proceeds from sales of Constitution
Re, Viking, and Xerox Life and the absence of new debt at Talegen
compared with 1994.
Financing Businesses
Xerox Equipment Financing generated $150 million of funds during
the first nine months of 1995 or $376 million more than in 1994
resulting from slightly lower penetration rates due to product
mix, increased sales in markets which do not participate in our
financing programs, and a trend toward rentals in the U.S.
Third Party Financing funds usage was $10 million during the first
nine months of 1995 compared with $126 million of funds generation
in 1994 due to a tax payment related to certain leveraged-lease
sales arranged in 1994 and to lower collections on the portfolio
consistent with the reduction in the asset base.
Total Company Debt
Total debt increased by $1,179 million in the first nine months of
1995. This growth is attributable to the purchase of incremental
interest in Rank Xerox, Business Equipment funds usage, and
premium payments and related financing payments to Ridge Re
partially offset by the proceeds from the sales of Constitution Re
and Viking.
Management believes that the Company has adequate short-term
credit facilities available to fund its day-to-day operations and
readily available access to the capital markets to meet any
longer-term financing requirements. The Company's domestic
operations have three revolving credit agreements totaling $5.0
billion, of which $1.3 billion expires in December 1995 and the
33
remainder in 1999. In addition, the Company's foreign
subsidiaries had unused committed lines of credit aggregating $1.9
billion in various currencies at prevailing interest rates.
The Company's subsidiary, Xerox Financial Services, Inc.(XFSI) has
agreed to provide support for Talegen in the form of excess of
loss reinsurance protection through Ridge Reinsurance Limited
(Ridge Re), XFSI's single-purpose, wholly-owned Bermuda
reinsurance company. XFSI is obligated to pay annual installments
of $49 million in the aggregate each year, plus related financing
charges, payable for up to ten years, for coverage of $1,245
million, net of 15 percent coinsurance. During the first nine
months of 1995 XFSI paid the required 1995 installment which,
including the related financing charges, was $81 million.
In addition to XFSI's original contribution of $25 million to the
capitalization of Ridge Re, XFSI is obligated, under certain
circumstances to purchase over time additional redeemable
preferred shares up to a maximum of $301 million. XFSI has
guaranteed to the Talegen insurance companies that Ridge Re will
meet all of its financial obligations under all of the foregoing
excess of loss reinsurance issued to them. In addition, the
Company has guaranteed to the Talegen insurance companies the
payment by XFSI of all of the required premiums for such excess of
loss reinsurance to Ridge Re.
Management believes that the funds to meet the foregoing
obligations will be available from dividends from the earnings of
the Talegen insurance companies(to the extent permitted under
insurance laws), proceeds from the sale of all or part of the
Talegen insurance companies, cash flow from operations and
borrowings.
Hedging Instruments
Certain financial instruments have been entered into by the
Company to manage its Document Processing related interest rate
and foreign currency exposures. These instruments are held solely
for hedging purposes and include interest rate swap agreements and
forward-foreign exchange agreements. The Company has long-
standing policies prescribing that derivative instruments are only
to be used to achieve a set of very limited objectives: to lock-in
the value of cross-border cash flows and to reduce the impact of
currency and interest rate volatility on costs, assets and
liabilities. The Company does not enter into derivative
instrument transactions for trading purposes.
Currency derivatives are only arranged in conjunction with
underlying transactions which give rise to foreign currency-
denominated payables and receivables: for example, an option to
buy foreign currency to settle the importation of goods from
suppliers, or, a forward exchange contract to fix the rate at
which a dividend will be paid by a foreign subsidiary.
34
The Company does not hedge foreign currency-denominated revenues
of its foreign subsidiaries since these do not represent cross-
border cash flows.
With regard to interest rate hedging, virtually all customer
financing assets earn fixed rates of interest and, therefore, the
Company "locks-in" an interest rate spread by arranging fixed-rate
liabilities with similar maturities as the underlying assets.
Additionally, customer financing assets in one currency are
consistently funded with liabilities in the same currency. The
Company refers to the effect of these conservative practices as
"match funding" its customer financing assets.
More specifically, pay fixed-/receive variable-rate swaps are
typically used in place of more expensive fixed-rate debt for the
purpose of match funding fixed-rate, customer contracts. Pay
variable-/receive variable-rate swaps are used to transform
variable-rate medium term debt into commercial paper or local
currency LIBOR obligations. Additionally, pay variable-/receive
fixed-rate swaps are used infrequently to transform longer-term
fixed-rate debt into commercial paper based rate obligations. The
transactions performed within each of these three categories
enable the Company to manage its interest rate exposures. The
potential risk attendant to this strategy is the performance of
the swap counterparty. The Company addresses this risk by
arranging swaps exclusively with a diverse group of strong-credit
counterparties, regularly monitoring their credit ratings, and
determining the replacement cost, if any, of existing
transactions.
The Company's currency and interest rate hedging are typically not
affected by changes in market conditions as forward contracts,
options and swaps are normally held to maturity in order to lock-
in currency rates and interest rate spreads on the underlying
transactions.
35
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The information set forth under note 12 contained in the "Notes to
Consolidated Financial Statements" on pages 10 - 13 of this
Quarterly Report, on Form 10-Q, is incorporated by reference in
answer to this item.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit 11 Computation of Net Income per Common Share.
Exhibit 12 Computation of Ratio of Earnings to Fixed
Charges.
(b) No Current Reports on Form 8-K were filed during the quarter
for which this Quarterly Report is filed.
36
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
XEROX CORPORATION
(Registrant)
_____________________________
Date: November 2, 1995 By Philip D. Fishbach
Vice President and Controller
(Principal Accounting Officer)
37
Exhibit 11
Xerox Corporation
Computation of Net Income Per Common Share
(Dollars in millions, except per-share data; shares in thousands)
Three months Nine months
ended September 30, ended September 30,
1995 1994 1995 1994
I. Primary Net Income Per
Common Share
Net income $ 236 $ 186 $ 621 $ 483
Accrued dividends on ESOP preferred
stock, net (11) (10) (32) (31)
Accrued dividends on redeemable
preferred stock - (2) (2) (11)
Call premium on redeemable preferred
stock - - - (11)
Adjusted net income $ 225 $ 174 $ 587 $ 430
Average common shares outstanding
during the period 107,774 105,683 107,101 105,277
Common shares issuable with respect
to common stock equivalents for
stock options, incentive and
exchangeable shares 3,016 3,079 3,016 3,079
Adjusted average shares outstanding
for the period 110,790 108,762 110,117 108,356
Primary earnings per share $ 2.03 $ 1.61 $ 5.33 $ 3.97
II.Fully Diluted Net Income Per
Common Share
Net income $ 236 $ 186 $ 621 $ 483
Accrued dividends on redeemable
preferred stock - (2) (2) (11)
Call premium on redeemable preferred
stock - - - (11)
ESOP expense adjustment, net of tax (2) (2) (6) (6)
Interest on convertible debt, net
of tax 1 1 2 2
Adjusted net income $ 235 $ 183 $ 615 $ 457
Average common shares outstanding
during the period 107,774 105,683 107,101 105,277
Stock options, incentive and
exchangeable shares 3,256 3,121 3,256 3,121
Convertible debt 881 881 881 881
ESOP preferred stock 9,585 9,792 9,585 9,792
Adjusted average shares outstanding
for the period 121,496 119,477 120,823 119,071
Fully diluted earnings per share $ 1.93 $ 1.53 $ 5.09 $ 3.84
38
Exhibit 12 Xerox Corporation
Computation of Ratio of Earnings to Fixed Charges
Nine months ended Year ended
September 30, December 31,
(In Millions) 1995 1994 1994 1993* 1992 1991 1990
Fixed charges:
Interest expense $ 620 $ 541 $ 732 $ 755 $ 788 $ 758 $ 799
Rental expense 134 144 190 201 208 206 191
Total fixed charges
before capitalized
interest 754 685 922 956 996 964 990
Capitalized interest - 2 2 5 17 3 -
Total fixed charges $ 754 $ 687 $ 924 $ 961 $1,013 $ 967 $ 990
Earnings available for
fixed charges:
Earnings** $1,163 $ 959 $1,558 $ (227) $ 192 $ 939 $1,116
Less undistributed
income in minority
owned companies (99) (58) (54) (51) (52) (70) (60)
Add fixed charges before
capitalized interest 754 685 922 956 996 964 990
Total earnings
available for
fixed charges $1,818 $1,586 $2,426 $ 678 $1,136 $1,833 $2,046
Ratio of earnings to
fixed charges (1)(2) 2.41 2.31 2.63 0.71 1.12 1.90 2.07
(1) The ratio of earnings to fixed charges has been computed based on the
Company's continuing operations by dividing total earnings available for fixed
charges, excluding capitalized interest, by total fixed charges. Fixed charges
consist of interest, including capitalized interest, and one-third of rent
expense as representative of the interest portion of rentals. Debt has been
assigned to discontinued operations based on the net assets of the discontinued
operations and debt to equity ratios that existed at the time the assets were
acquired. Management believes that this allocation method is reasonable. The
discontinued operations consist of the Company's real-estate development and
related financing operations and its third-party financing and leasing
businesses, and Other Financial Services businesses.
(2) The Company's ratio of earnings to fixed charges includes the effect of the
Company's finance subsidiaries which primarily finance Xerox equipment.
Financing businesses 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 $283 million.
** Sum of "Income before Income Taxes, Equity Income and Minorities' Interests"
from Document Processing, "Income(loss) before Income Taxes" from Insurance and
"Equity in Net Income of Unconsolidated Affiliates".
39
CT
1,000,000
9-MOS
DEC-31-1995
SEP-30-1995
37,626
109
25
742
5,081
37,626
13,685
405
621
0
0
0
621
5.33
5.09
5
1,000,000
9-MOS
DEC-31-1995
SEP-30-1995
51
0
12,374
397
2,946
9,954
4,785
2,710
20,920
6,354
9,482
6,048
11,851
3,466
6,384
4,273
180
620
1,194
462
697
7
1,000,000
9-MOS
DEC-31-1995
SEP-30-1995
1,838
0
0
0
0
0
7,148
86
2,588
147
13,049
7,711
845
0
0
388
1,497
321
46
16
1,261
281
194
(133)
(57)
(76)
8,809
0
0
0
0
0
0
DATA NOT AVAILABLE FOR INTERIM REPORTING.
