FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 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 July 31,1996
Common Stock 324,799,357 shares
This document consists of 26 pages.
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(THIS PAGE IS INTENTIONALLY LEFT BLANK)
2
Xerox Corporation
Form 10-Q
June 30, 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 4. Submission of Matters to a Vote of Security Holders 22
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
Exhibit Index
Computation of Net Income per Common Share 25
Computation of Ratio of Earnings to Fixed Charges 26
Financial Data Schedule (filed in electronic form only)
3
PART I - FINANCIAL INFORMATION
Xerox Corporation
Consolidated Statements of Income
Three months ended Six months ended
June 30, June 30,
(In millions, except per-share data) 1996 1995 1996 1995
Revenues
Sales $ 2,200 $ 2,081 $ 4,117 $ 3,945
Service and rentals 1,770 1,722 3,525 3,373
Finance income 247 251 503 503
Total Revenues 4,217 4,054 8,145 7,821
Costs and Expenses
Cost of sales 1,193 1,193 2,285 2,295
Cost of service and rentals 880 846 1,778 1,683
Equipment financing interest 125 130 255 255
Research and development expenses 264 247 518 465
Selling, administrative and general
expenses 1,269 1,167 2,435 2,266
Other, net 27 59 31 78
Total Costs and Expenses 3,758 3,642 7,302 7,042
Income before Income Taxes, Equity Income
and Minorities' Interests 459 412 843 779
Income taxes 164 160 303 302
Equity in net income of unconsolidated
affiliates 42 51 62 64
Minorities' interests in earnings of
subsidiaries 44 49 72 100
Income from Continuing Operations 293 254 530 441
Discontinued Operations - (16) - (56)
Net Income $ 293 $ 238 $ 530 $ 385
Primary Earnings per Share
Continuing Operations $ 0.85 $ 0.74 $ 1.53 $ 1.27
Discontinued Operations - (.05) - (.17)
Primary Earnings per Share $ 0.85 $ 0.69 $ 1.53 $ 1.10
Fully Diluted Earnings per Share
Continuing Operations $ 0.81 $ 0.70 $ 1.46 $ 1.21
Discontinued Operations - (.05) - (.16)
Fully Diluted Earnings per Share $ 0.81 $ 0.65 $ 1.46 $ 1.05
See accompanying notes.
4
Xerox Corporation
Consolidated Balance Sheets
June 30, December 31,
(In millions, except share data in thousands) 1996 1995
Assets
Cash $ 18 $ 136
Accounts receivable, net 2,158 1,914
Finance receivables, net 4,051 4,069
Inventories 3,001 2,656
Deferred taxes and other current assets 1,053 1,095
Total Current Assets 10,281 9,870
Finance receivables due after one year, net 6,417 6,406
Land, buildings and equipment, net 2,142 2,105
Investments in affiliates, at equity 1,305 1,314
Goodwill 621 627
Other assets 938 876
Investment in discontinued operations 4,614 4,810
Total Assets $ 26,318 $ 26,008
Liabilities and Equity
Short-term debt and current portion of
long-term debt $ 3,254 $ 3,274
Accounts payable 505 578
Accrued compensation and benefit costs 603 731
Unearned income 211 228
Other current liabilities 2,057 2,216
Total Current Liabilities 6,630 7,027
Long-term debt 8,878 7,867
Postretirement medical benefits 1,030 1,018
Deferred taxes and other liabilities 2,326 2,437
Discontinued operations liabilities -
policyholders' deposits and other 2,492 2,810
Deferred ESOP benefits (547) (547)
Minorities' interests in equity of subsidiaries 789 755
Preferred stock 730 763
Common shareholders' equity 3,990 3,878
Total Liabilities and Equity $ 26,318 $ 26,008
Shares of common stock issued and outstanding 323,492 325,029
See accompanying notes.
5
Xerox Corporation
Consolidated Statements of Cash Flows
Six months ended June 30 (In millions) 1996 1995
Cash Flows from Operating Activities
Income from Continuing Operations $ 530 $ 441
Adjustments required to reconcile income to cash
flows from operating activities:
Depreciation and amortization 357 349
Provisions for doubtful accounts 88 90
Provision for postretirement medical benefits 23 30
Charges against 1993 restructuring reserve (91) (194)
Minorities' interests in earnings of subsidiaries 72 100
Undistributed equity in income of affiliated companies (62) (63)
Increase in inventories (543) (614)
Increase in finance receivables (187) (23)
Increase in accounts receivable (282) (218)
Decrease in accounts payable and accrued compensation
and benefit costs (177) (47)
Net change in current and deferred income taxes 124 111
Other, net (353) (89)
Total (501) (127)
Cash Flows from Investing Activities
Cost of additions to land, buildings and equipment (241) (171)
Proceeds from sales of land, buildings and equipment 30 30
Purchase of additional interest in Rank Xerox - (972)
Proceeds from sale of Constitution Re - 421
Total (211) (692)
Cash Flows from Financing Activities
Net change in debt 1,079 1,072
Dividends on common and preferred stock (220) (195)
Proceeds from sale of common stock 74 89
Repurchase of common and preferred stock (215) (60)
Dividends to minority shareholders (1) (42)
Total 717 864
Effect of Exchange Rate Changes on Cash (2) (4)
Cash Provided (Used) by Continuing Operations 3 41
Cash Provided (Used) by Discontinued Operations (121) (40)
Decrease in Cash (118) 1
Cash at Beginning of Period 136 41
Cash at End of Period $ 18 $ 42
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):
June 30, December 31,
1996 1995
Finished products $ 1,850 $ 1,646
Work in process 123 88
Raw materials and supplies 381 295
Equipment on operating leases, net 647 627
Total $ 3,001 $ 2,656
3. Common shareholders' equity consists of (in millions):
June 30, December 31,
1996 1995
Common stock $ 330 $ 327
Additional paid-in-capital 1,381 1,334
Retained earnings 2,628 2,321
Net unrealized gain (loss) on
investment securities 3 (1)
Translation adjustments (213) (103)
Treasury stock (139) -
Total $ 3,990 $ 3,878
4. The Company's Consolidated Balance Sheet at June 30, 1996
includes current and non-current accrued liabilities of $206
million and $95 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 six month period
ended June 30, 1996, restructuring-related activity reduced the
7
Xerox Corporation
Notes to Consolidated Financial Statements
accrued liability by $94 million. Management believes the
aggregate reserve balance of $301 million at June 30, 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 $295 million and $296 million for
the six months ended June 30, 1996 and 1995, respectively.
6. At the Company's annual meeting on May 16, 1996, shareholders
approved an increase in the number of authorized shares of common
stock, from 350 million to 1.05 billion to effect a three-for-one
stock split. The effective date of the split was June 6 for
shareholders of record as of May 23. All share and per share
amounts have been restated to retroactively reflect the stock
split.
7. The Board of Directors has authorized the Company to
repurchase up to $1 billion of Xerox common stock. The stock
will be purchased from time to time on the open market depending
on market conditions. As of June 30, 1996, the Company has
repurchased 4 million shares for $182 million.
8. Litigation
Continuing Operations
On March 10, 1994, a lawsuit was filed in the United States
District Court for the District of Kansas by two independent
service organizations (ISOs) in Kansas City and St. Louis and
their parent company. Plaintiffs claim damages predominately
resulting from the Company's alleged refusal to sell parts or
license diagnostic software for high volume copiers and printers
to plaintiffs prior to 1994 and the Company's alleged continued
refusal to sell parts at nonexclusionary prices or to license
diagnostic software on nonexclusionary terms. In addition to
monetary damages in excess of $10 million (to be trebled),
injunctive relief is sought. The company's policies and
practices with respect to the sale of parts to ISOs were at issue
in an antitrust class action in Texas, which was settled by the
Company during 1994. Claims for individual lost profits of ISOs
who were not named parties, such as the plaintiffs in the Kansas
action, were not included in that class action. The Company has
asserted counterclaims against the plaintiffs alleging patent and
8
Xerox Corporation
Notes to Consolidated Financial Statements
copyright infringement, misappropriation of Xerox trade secrets,
conversion and unfair competition and/or false advertising. On
December 11, 1995, the District Court issued a preliminary
injunction against the parent company for copyright infringement.
A trial date of April 15, 1997 has been set. The Company denies
any wrongdoing and intends to vigorously defend these actions and
pursue its counterclaims.
Xerox has reached an agreement in principle to settle antitrust
litigation with 20 different ISOs. The terms of the settlement
will have no material effect on the Company.
Discontinued Operations
Farm & Home Savings Association, now known as Roosevelt Bank,
(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 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. In
addition, Farm & Home presently has pending motions for summary
judgment which would dispose of many of the claims asserted. If
not settled or resolved by summary judgment, one or more of these
cases can be expected to be tried in late 1996 or 1997.
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 5 percent stronger in the 1996 second quarter
than in the 1995 second quarter. As a result, foreign currency
translation had an unfavorable impact of 2 percentage points on
total revenues in the 1996 second quarter.
A substantial portion of our consolidated revenues is derived
from operations outside of the United States in subsidiaries
where the U.S. dollar is not the functional currency. Revenues
denominated in currencies where the local currency is the
functional currency are not hedged for purposes of translation
into U.S. dollars.
Revenues
We estimate that the components of underlying revenue growth were
as follows:
Underlying Growth
1996 1995
Q2 Q1 FY Q4 Q3 Q2 Q1
Total Revenues 6% 4% 7% 2% 8% 8% 11%
Sales
Equipment* 9 7 6 (1) 12 8 8
Supplies 6 - 9 (1) 9 10 21
Paper (7) (2) 39 22 42 42 54
Total 7 2 9 - 11 12 18
Service/Rentals/Outsourcing/Other
Service (1) 1 2 1 1 4 3
Rentals 2 2 1 1 3 (2) 3
Document Outsourcing 51 48 46 51 44 43 46
Total 4 6 6 5 6 6 6
Finance Income - 1 (4) (1) (7) (2) (4)
Memo: Revenues Excluding
Equipment Sales* 4 2 7 4 6 9 12
* Equipment sales to end-users only
10
The increase in equipment sales to end users in the second
quarter, compared with the 1995 second quarter, primarily
reflects double digit growth in the United States and Latin
America and good growth in Rank Xerox.
Revenues from supplies, paper, service, rentals, document
outsourcing and other revenues, and income from customer
financing represented 68 percent of total revenues in the 1996
second quarter. Growth in these revenues is primarily a function
of the growth in our installed population of equipment, usage and
pricing.
Supplies sales: The improved growth in the 1996 second quarter
from prior quarters is due principally to strong growth in
enterprise printing and an increase in OEM demand.
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 second quarter is due to
lower prices as the paper industry moves into a period of
excess supply.
Service revenues: The decline in growth in the 1996 second
quarter and the modest growth in the several preceding
quarters reflects the increasing customer preference for
rental plans and document outsourcing as well as competitive
pressures.
Rental revenues: Non-U.S. rental revenues continued the long
term decline reflecting a customer preference for outright
purchase. This decline has been offset by increases in the
U.S. where 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 some revenues 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 offset a decline in interest income in the U.S.
and Rank Xerox resulting from lower average interest rates and
the trends to document outsourcing and rental plans.
11
Geographically, the underlying revenue growth rates are estimated
as follows:
1996 1995
Q2 Q1 FY Q4 Q3 Q2 Q1
Total Revenues 6% 4% 7% 2% 8% 8% 11%
United States 6 5 3 (3) 5 5 8
Rank Xerox 2 (2) 8 10 2 5 13
Other Areas 10 11 16 2 27 25 17
The improvement in U.S. revenue growth in the 1996 second quarter
from prior quarters was driven by exceptional sales of the
DocuTech and color products resulting from sales coverage
improvements implemented since mid-1995.
Rank Xerox (Rank Xerox Limited and related companies)
manufactures and markets Xerox products principally in Europe.
The modest revenue growth in Rank Xerox reflects essentially flat
revenues in France, the U.K. and Germany, declines in Spain and
Russia, and good growth in the rest of Europe.
Other Areas include operations principally in Latin America and
Canada. Revenue growth was excellent in Brazil and good in
Mexico, as the economy recovers. Revenues declined modestly in
Canada and the rest of Latin America. Our 1995 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
Q2 Q1 FY Q4 Q3 Q2 Q1
Total Revenues 6% 4% 7% 2% 8% 8% 11%
Black & White Copiers - - 2 (2) 3 2 4
Enterprise Printing 21 19 17 10 18 20 22
Revenues from black-and-white copying represented 57 percent of
total document processing revenues in the 1996 second quarter,
and 59 percent in the 1996 first quarter and for the 1995 full
year. Strong growth in personal copiers and modest growth in
convenience, workgroup and departmental copiers was offset by
declines in duplicators, as volume is transferring to electronic
applications on DocuTech, and copiers for large engineering
drawings due to competitive pressures. Revenues from enterprise
printing, including production publishing, data center printing,
network printing, and color copying and printing, represented 29
12
percent of total revenues in the 1996 second quarter compared
with 27 percent in the 1996 first quarter and 25 percent for the
1995 full year. DocuTech and color products revenue growth was
excellent and printing systems products growth was modest. The 2
percentage points of increased enterprise printing growth from
the 1996 first quarter growth was principally due to the recently
launched Document Centre Systems and DocuColor 40.
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 13,400, 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. A portion of the savings has been reinvested
to reengineer business processes, to support the expansion in
growth markets, and to mitigate pricing pressures.
Employment decreased by 100 in the 1996 second quarter to 86,600.
Reductions from our ongoing productivity program of 1,000 in the
quarter were partially offset by the hiring of additional sales
representatives and employees to support our fast-growing
document outsourcing business.
Gross Profit and Expenses
Gross profit increased 7 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
Q2 Q1 FY Q4 Q3 Q2 Q1
Total Gross Margin % 47.9% 46.0% 46.1% 46.7% 46.0% 46.5% 45.2%
Sales 45.8 43.0 43.0 45.0 42.7 42.7 40.9
Service and Rentals 50.3 48.9 49.6 48.9 49.3 50.8 49.3
Financing 49.5 49.0 49.7 50.1 50.1 48.3 50.4
Total gross margins improved by 1.4 percentage points in the 1996
second quarter from the 1995 second quarter. The improvement of
3.1 percentage points in the sales gross margin from the 1995
second quarter was principally due to cost reductions and
13
favorable product and geographical mix, partially offset by
pricing pressures. The erosion in the service and rentals gross
margin of 0.5 percentage points from the 1995 second quarter was
largely due to pricing pressures and economic cost increases,
partially offset by the benefits from productivity initiatives.
Our objective for the second half is to continue to improve the
total gross margin from the 1995 levels.
Research and development (R&D) expense increased 7 percent
compared with the 1995 second quarter and 12 percent compared
with the 1995 first half reflecting increased investment in
future product introductions. 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. 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 10
percent in the 1996 second quarter and 8 percent in the 1996
first half. SAG was 30.1 percent of revenue in the second
quarter, an increase of 1.3 percentage points from the 1995
second quarter. The growth was due to economic cost increases,
and investments to increase worldwide sales effectiveness,
including the expansion of direct sales coverage and indirect
distribution channels, new product advertising, and systems to
improve productivity, partially offset by expense reductions. Our
objective for the second half is to ensure that SAG growth does
not exceed revenue growth.
The $32 million decrease in other expenses, net, from the 1995
second quarter reflects reduced interest expense, increased
interest income and the non-recurrence of several one-time
charges in the 1995 second quarter, partially offset by increased
currency losses from balance sheet translation in our Latin
American operations.
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 11
percent to $459 million in the 1996 second quarter from $412
million in the 1995 second quarter.
The effective tax rate was 35.7 percent in the 1996 second
quarter and 36 percent in the 1996 first half compared with 38.9
in the 1995 second quarter and 38.8 percent in the 1995 second
half. The decline was primarily due to a lower statutory tax
14
rate in Brazil and the mix of profits from our worldwide
operations.
Equity in the net income of unconsolidated affiliates,
principally Fuji Xerox, decreased in the 1996 second quarter to
$42 million from $51 million in the 1995 second quarter. The
underlying growth in Fuji Xerox income was offset by the adverse
impact of currency translation and there were declines in income
from smaller investments.
Minorities' interests in the earnings of subsidiaries was $44
million in the 1996 second quarter compared with $49 million in
the 1995 second quarter due to lower Rank Xerox income.
Income
Income from continuing operations grew 15 percent to $293 million
in the 1996 second quarter and 20 percent to $530 million in the
1996 first half.
Primary earnings per share increased 15 percent to 85 cents in
the 1996 second quarter and 20 percent to $1.53 in the first
half. Fully diluted earnings per share increased 16 percent to
81 cents and 21 percent to $1.46 for the first half. All
earnings per share amounts reflect the 3 for 1 stock split
effective June 6, 1996.
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 Services, Third-Party /
Real-Estate and assigned debt totaled $2.122 billion at June 30,
1996 compared with $2.000 billion at December 31, 1995. The
increase primarily includes scheduled payments to Ridge Re for
annual premium installments and associated finance charges, and
interest for the period on the assigned debt, partially offset by
reductions in third-party assets, primarily from sales and run-
off activity. The Company believes that the liquidation of the
remaining net discontinued assets will not result in a loss. A
discussion of the discontinued businesses follow.
Insurance Segment
In January 1996, Xerox announced agreements to sell all of its
Remaining Talegen insurance units (Coregis Group, Inc., Crum &
Forster Holdings, Inc., Industrial Indemnity Holdings, Inc.,
Westchester Specialty Group, Inc. and two 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 third quarter, 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 half of 1996.
Operating results for the discontinued insurance segment in the
second quarter and first half of 1996 and 1995 follow:
Revenue After-Tax Income
(In Millions) 1996 1995 1996 1995
Second Quarter
Talegen / TRG $ 547 $ 525 $ 27 $ 37
Total Insurance $ 536 $ 520 $ (6) $(16)
First Half
Talegen / TRG $1,077 $1,045 $ 51 $ 57
Total Insurance $1,061 $1,031 $ (16) $ (56)
The preceding table only includes the revenue of the remaining
insurance units. Constitution Re Corporation (CRC) was sold
during April 1995 and Viking was sold during July 1995. The
revenues from CRC and Viking for the second quarter and first
half of 1995 were $70 million and $233 million, respectively.
16
The total insurance improvement in the second quarter, 1996
results compared with 1995 includes lower insurance losses at
Ridge Re and lower debt service costs. These items were
partially offset by 1995 reserve releases at Talegen which did
not recur in 1996. The improvement in the first half 1996
results compared with 1995 include the aforementioned items and
the absence of the 1995 settlement between Monsanto and Talegen
which totaled $22 million after-tax. The 1996 total insurance
after-tax loss of $6 million in the second quarter and $16
million in the first half was charged to reserves established for
this purpose and, therefore, does not impact the Company's
earnings. The investment at June 30, 1996 totaled $1,844 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 and interest on the insurance debt that will
continue until the closing of the Talegen sale.
Other Financial Services
Other Financial Services (OFS), which were discontinued in the
fourth quarter of 1993, had no after-tax income in the first half
of 1996 and 1995. The net investment in OFS at June 30, 1996 was
$97 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.
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 June 30, 1996,
OakRe retained approximately $2.2 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
17
issuance of the respective policies. Substantially all of these
policies will reach their rate reset periods within the next four
years and will be assumed under the Agreements as described
above. The Xerox Life Companies' portfolio was designed to
recognize that policy renewals extended liability "maturities",
thereby permitting investments with average duration somewhat
beyond the rate reset periods. OakRe's practice is to
selectively improve this match over time as market conditions
allow.
In connection with the aforementioned sale, XFSI established a
$500 million letter of credit and line of credit with a group of
banks to support OakRe's coinsurance obligations. The term of
this letter of credit is five years and it is unused and
available at June 30, 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
Third-party and real-estate assets at June 30, 1996 totaled $468
million, a $21 million reduction from the December 31, 1995
level. The asset decrease includes a $75 million reduction in
third-party assets and a $54 million increase in reported real-
estate net assets. Assigned debt increased to $237 million at
June 30, 1996, a $6 million increase from the year-end 1995
level. The third-party asset decline primarily includes sales of
assets and run-off activity. The increase in reported real-
estate assets and the increase in assigned debt each include $49
million related to the Company's decision to fund the retirement
of certain debt of its discontinued real-estate subsidiary with
lower cost Company financing. This increased the assets and
assigned debt of discontinued operations, but had no effect on
the reported net investment in discontinued operations.
18
Capital Resources and Liquidity
Total debt, including ESOP and Discontinued Operations debt not
shown separately in our consolidated balance sheets, increased to
$12,762 million at June 30, 1996, from $11,794 million at
December 31, 1995. The changes in consolidated indebtedness since
year end and versus first-half 1995 are summarized as follows:
(In millions) 1996 1995
Total Debt as of January 1 $11,794 $10,955
Non-Financing Businesses:
Document Processing Operations 648 616
Increased financial interest in Rank Xerox - 972
Discontinued Businesses 109 (321)
Total Non-Financing 757 1,267
Financing Businesses (14) (111)
Total Operations 743 1,156
Shareholder dividends 220 195
Exercise of stock options (74) (89)
Repurchase of common and preferred stock 215 60
Cash balance and other changes, net (136) (3)
Total Debt as of June 30 $12,762 $12,274
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 six months of 1996 and 1995:
(In millions) 1996 1995
Total equity as of January 1 $5,396 $6,042
Income from Continuing Operations 530 441
Shareholder dividends paid (220) (195)
Exercise of stock options 74 89
Repurchase of common and preferred stock (215) (60)
Change in unrealized gain on
investment securities 4 434
All Other, net (60) (170)
Balance as of June 30 $5,509 $6,581
On a consolidated basis, inclusive of deferred ESOP benefits, the
debt-to-capital ratio at June 30,1996 was 72 percent compared
with 71 percent at December 31, 1995.
19
Non-Financing Operations
The following table summarizes Document Processing non-financing
operations cash generation and borrowing for the six months ended
June 30, 1996 and 1995:
Cash Generated/(Borrowed)
Six Months Ended June 30,
(In millions) 1996 1995
Document Processing
Non-Financing:
Income $ 429 $ 326
Depreciation and Amortization 357 349
Restructuring Payments (91) (194)
Capital Expenditures (241) (171)
Working Capital/Other (1,102) (926)
$ (648) $(616)
First-half 1996 cash usage of $648 million was $32 million
greater than in the first six months of 1995 due primarily to
increased growth in capital spending and receivables largely
offset by higher net income and lower restructuring payments.
Financing Businesses
Financing business debt was reduced by $14 million and $111
million during the first six months of 1996 and 1995,
respectively. This smaller decline in 1996 reflects growth in
new customer financing contracts driven by higher equipment sales
activity. Financial leverage was 6.5:1 as of June 30, 1996,
consistent with our 6.5:1 debt-to-equity guideline.
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
swaps, forward foreign exchange contracts and foreign currency
swaps. We do not enter into derivative instrument transactions
for trading purposes. We do employ long-standing policies
prescribing that derivative instruments are only to be used to
achieve a set of very limited objectives:
Currency derivatives are primarily arranged in conjunction
with underlying transactions that give rise to foreign
currency-denominated payables and receivables: for example, an
option to buy foreign currency to settle the importation of
goods from suppliers, or a forward foreign-exchange contract
to fix the rate at which a dividend will be paid by a foreign
subsidiary. In addition, when cost-effective, currency
20
derivatives may be 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 effectively eliminates opportunities 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 non-performance of swap counterparties. We address this
risk by arranging swaps 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 8 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 4. Submission of matters to a Vote of Security Holders.
The Annual Meeting of Shareholders of Xerox Corporation was duly
called and held on May 16, 1996 at the Ritz-Carlton Buckhead,
3434 Peachtree Road, NE, Atlanta, Georgia.
Proxies for the meeting were solicited on behalf of the Board of
Directors of the Registrant pursuant to Regulation 14A of the
General Rules and Regulations of the Commission. There was no
solicitation in opposition to the Board of Directors' nominees
for election as directors as listed in the Proxy Statement, and
all nominees were elected.
At the meeting, votes were cast upon the Proposals described in
the Proxy Statement for the meeting (filed with the Commission
pursuant to Regulation 14A and incorporated herein by reference)
as follows:
Proposal 1 - Election of directors for the ensuing year.
Name For Withheld Vote
Paul A. Allaire 102,989,329 1,137,602
B. R. Inman 103,129,909 997,023
Antonia Ax:son Johnson 102,296,245 1,830,686
Vernon E. Jordan, Jr. 102,391,032 1,735,899
Yotaro Kobayashi 103,245,876 881,056
Hilmar Kopper 93,137,938 10,988,993
Ralph S. Larsen 103,295,684 831,247
John D. Macomber 103,259,546 867,385
George J. Mitchell 103,105,809 1,021,122
N. J. Nicholas, Jr. 103,267,234 859,697
John E. Pepper 103,277,837 849,094
Martha R. Seger 103,265,260 861,671
Thomas C. Theobald 103,269,140 857,792
Proposal 2 - To elect KPMG Peat Marwick LLP as independent
auditors for the year 1996.
For - 103,380,158
Against - 411,404
Abstain - 335,369
22
Proposal 3 - To approve the amendment to the Certificate of
Incorporation to increase the authorized shares.
For - 101,018,450
Against - 1,915,694
Abstain - 1,192,787
Proposal 4 - To approve and adopt the 1996 Non-Employee Director
Stock Option Plan.
For - 90,392,340
Against - 12,001,573
Abstain - 1,732,928
Proposal 5 - To approve and adopt the Restricted Stock Plan For
Directors.
For - 91,639,998
Against - 10,039,827
Abstain - 2,447,106
Proposal 6 - Shareholder proposal relating to the MacBride
Principles.
For - 15,400,509
Against - 74,726,526
Abstain - 5,917,818
Broker Non-vote - 8,082,078
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) No Current Reports on Form 8-K were filed during the quarter
for which this Quarterly Report is filed.
23
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)
/s/Philip Fishbach
-------------------------
Date: August 7, 1996 By Philip D. Fishbach
Vice President and Controller
(Principal Accounting Officer)
24
Exhibit 11
Xerox Corporation
Computation of Net Income Per Common Share
(Dollars in millions, except per-share data; shares in thousands)
Three months Six months
ended June 30, ended June 30,
1996 1995 1996 1995
I. Primary Net Income Per Common Share
Income from continuing operations $ 293 $ 254 $ 530 $ 441
Accrued dividends on ESOP preferred
stock, net (10) (10) (21) (21)
Accrued dividends on redeemable
preferred stock - (1) (1) (2)
Adjusted income from
continuing operations 283 243 508 418
Discontinued operations - (16) - (56)
Adjusted net income $ 283 $ 227 $ 508 $ 362
Average common shares outstanding
during the period 323,795 321,677 323,492 320,342
Common shares issuable with respect
to common stock equivalents for
stock options, incentive and
exchangeable shares 8,961 8,878 8,961 8,878
Adjusted average shares outstanding
for the period 332,756 330,555 332,453 329,220
Primary earnings per share:
Continuing operations $ 0.85 $ 0.74 $ 1.53 $ 1.27
Discontinued operations - (.05) - (.17)
Primary earnings per share $ 0.85 $ 0.69 $ 1.53 $ 1.10
II.Fully Diluted Net Income Per Common Share
Income from continuing operations $ 293 $ 254 $ 530 $ 441
Accrued dividends on redeemable
preferred stock - (1) (1) (2)
ESOP expense adjustment, net of tax - (2) (1) (4)
Interest on convertible debt,
net of tax - - 1 1
Adjusted income from
continuing operations 293 251 529 436
Discontinued operations - (16) - (56)
Adjusted net income $ 293 $ 235 $ 529 $ 380
Average common shares outstanding
during the period 323,795 321,677 323,492 320,342
Stock options, incentive and
exchangeable shares 9,483 8,878 9,483 8,878
Convertible debt 2,644 2,644 2,644 2,644
ESOP preferred stock 28,137 28,849 28,137 28,849
Adjusted average shares outstanding
for the period 364,059 362,048 363,756 360,713
Fully diluted earnings per share:
Continuing operations $ 0.81 $ 0.70 $ 1.46 $ 1.21
Discontinued operations - (.05) - (.16)
Fully diluted earnings per share $ 0.81 $ 0.65 $ 1.46 $ 1.05
25
Exhibit 12 Xerox Corporation
Computation of Ratio of Earnings to Fixed Charges
Six months ended Year ended
June 30, December 31,
(In Millions) 1996 1995 1995 1994 1993* 1992 1991
Fixed charges:
Interest expense $ 295 $ 296 $ 605 $ 520 $ 540 $ 627 $ 596
Rental expense 74 81 142 170 180 187 178
Total fixed charges
before capitalized
interest 369 377 747 690 720 814 774
Capitalized interest - - - 2 5 17 3
Total fixed charges $ 369 $ 377 $ 747 $ 692 $ 725 $ 831 $ 777
Earnings available for
fixed charges:
Earnings** $ 905 $ 843 $1,979 $1,602 $ (193) $1,183 $1,035
Less undistributed
income in minority
owned companies (62) (63) (90) (54) (51) (52) (70)
Add fixed charges before
capitalized interest 369 377 747 690 720 814 774
Total earnings
available for
fixed charges $1,212 $1,157 $2,636 $2,238 $ 476 $1,945 $1,739
Ratio of earnings to
fixed charges (1)(2) 3.28 3.07 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."
26
5
1,000,000
6-MOS
DEC-31-1996
JUN-30-1996
18
0
12,993
367
3,001
10,281
4,851
2,708
26,318
6,630
12,762
0
730
326
3,064
26,318
4,117
8,145
2,285
4,318
2,984
87
295
843
303
530
0
0
0
530
1.53
1.46
