FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to___________
Commission File Number 1-4471
XEROX CORPORATION
(Exact Name of Registrant as
specified in its charter)
New York 16-0468020 _
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
P.O. Box 1600
Stamford, Connecticut 06904-1600
(Address of principal executive offices)
(Zip Code)
(203) 968-3000 _
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at April 30,1998
Common Stock 328,234,105 shares
This document consists of 29 pages.
Forward-Looking Statements
From time to time Xerox Corporation (the Registrant or the Company) and its
representatives may provide information, whether orally or in writing,
including certain statements in this Form 10-Q under "Management's Discussion
and Analysis of Financial Condition and Results of Operations," which are
deemed to be "forward-looking" within the meaning of the Private Securities
Litigation Reform Act of 1995 ("Litigation Reform Act"). These forward-
looking statements and other information relating to the Company are based on
the beliefs of management as well as assumptions made by and information
currently available to management.
The words "anticipate," "believe," "estimate," "expect," "intend," "will," and
similar expressions, as they relate to the Company or the Company's
management, are intended to identify forward-looking statements. Such
statements reflect the current views of the Registrant with respect to future
events and are subject to certain risks, uncertainties and assumptions.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially
from those described herein as anticipated, believed, estimated or expected.
The Registrant does not intend to update these forward-looking statements.
In accordance with the provisions of the Litigation Reform Act we are making
investors aware that such "forward-looking" statements, because they relate to
future events, are by their very nature subject to many important factors
which could cause actual results to differ materially from those contained in
the "forward-looking" statements. Such factors include but are not limited to
the following:
Competition - the Registrant operates in an environment of significant
competition, driven by rapid technological advances and the demands of
customers to become more efficient. There are a number of companies worldwide
with significant financial resources which compete with the Registrant to
provide document processing products and services in each of the markets
served by the Registrant, some of whom operate on a global basis. The
Registrant's success in its future performance is largely dependent upon its
ability to compete successfully in its currently-served markets and to expand
into additional market segments.
Transition to Digital - presently black and white light-lens copiers represent
approximately half the Registrant's revenues. This segment of the general
office is mature with anticipated declining industry revenues as the market
transitions to digital technology. Some of the Registrant's new digital
products replace or compete with the Registrant's current light-lens
equipment. Changes in the mix of products from light-lens to digital, and the
pace of that change as well as competitive developments could cause actual
results to vary from those expected.
Pricing - the Registrant's ability to succeed is dependent upon its ability to
obtain adequate pricing for its products and services which provide a
reasonable return to shareholders. Depending on competitive market factors,
future prices the Registrant can obtain for its products and services may vary
from historical levels.
Financing Business - a significant portion of the Registrant's profits arise
from the financing of its customers' purchase of the Registrant's equipment.
On average, 75 to 80 percent of equipment sales are financed through the
Registrant. The Registrant's ability to provide such financing at competitive
rates and realize profitable spreads is highly dependent upon its own costs of
borrowing which, in turn, depend upon its credit ratings. Significant changes
in such ratings could reduce the profitability of such financing business
and/or make the Registrant's financing less attractive to customers thus
reducing the volume of financing business done. The Registrant's present
credit ratings permit ready access to the credit markets. There is no
assurance that these credit ratings can be maintained and/or ready access to
the credit markets can be assured.
Productivity - the Registrant's ability to sustain and improve its profit
margins is largely dependent on its ability to maintain an efficient, cost-
effective operation. Productivity improvements through process reengineering,
design efficiency and supplier cost improvements are required to offset labor
and materials cost inflation and competitive price pressures.
International Operations - the Registrant derives approximately half its
revenue from operations outside of the United States. In addition, the
Registrant manufactures many of its products and/or their components outside
the United States. The Registrant's future revenue, cost and profit results
could be adversely affected by a number of factors, including changes in
foreign currency exchange rates, changes in economic conditions from country
to country, changes in a country's political conditions, trade protection
measures, licensing requirements and local tax issues.
New Products/Research and Development - the process of developing new high
technology products and solutions is inherently complex and uncertain. It
requires accurate anticipation of customers' changing needs and emerging
technological trends. The Registrant must then make long-term investments and
commit significant resources before knowing whether these investments will
eventually result in products that achieve customer acceptance and revenues
required to provide anticipated returns from these investments.
Disengagement from Insurance Business - during the process of disengaging from
the insurance business, the Registrant will continue to be subject to all the
business risks and rewards of the remaining unit, Crum & Forster Holdings,
Inc. (CFI). Until CFI is actually sold, no assurances can be given as to the
ultimate impact on the Registrant's total results from operations or whether
the proceeds from CFI's sale will equal its carrying value. The insurance
business is subject to cyclical competitive conditions, judicial decisions
affecting insurers' liabilities, and by volatile and unpredictable
developments, including changes in the propensity of courts to grant large
awards, fluctuations in interest rates, inflationary pressures that may tend
to affect the size of losses and changes in the investment environment that
affect market prices of insurance companies' investments. CFI's operating
results have historically been influenced by these industry trends, as well as
by its exposure to uncollectible reinsurance, which had been greater than for
most other insurers.
Restructuring - the Registrant's ability to ultimately reduce pre-tax annual
expenditures by approximately $1 billion is dependent upon its ability to
successfully implement the 1998 restructuring program including the
elimination of 9,000 jobs worldwide, the closing and consolidation of
facilities,and the successful implementation of process and systems changes.
Xerox Corporation
Form 10-Q
March 31, 1998
Table of Contents
Page
Part I - Financial Information
Item 1. Financial Statements
Consolidated Statements of Income 5
Consolidated Balance Sheets 6
Consolidated Statements of Cash Flows 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Document Processing 13
Discontinued Operations 19
Capital Resources and Liquidity 22
Risk Management 24
Part II - Other Information
Item 1. Legal Proceedings 25
Item 2. Changes in Securities 25
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 27
Exhibit Index
Computation of Net Income per Common Share 28
Computation of Ratio of Earnings to Fixed Charges 29
Financial Data Schedule (filed in electronic form only)
For additional information about The Document Company Xerox,
please visit our World-Wide Web site at www.xerox.com/investor
PART I - FINANCIAL INFORMATION
Item 1 Xerox Corporation
Consolidated Statements of Income (Unaudited)
Three months ended
March 31,
(In millions, except per-share data) 1998 1997
Revenues
Sales $ 2,216 $ 1,976
Service and rentals 1,822 1,788
Finance income 266 253
Total Revenues 4,304 4,017
Costs and Expenses
Cost of sales 1,242 1,118
Cost of service and rentals 984 907
Equipment financing interest 142 129
Research and development expenses 236 258
Selling, administrative and general
expenses 1,199 1,174
Other, net 56 3
Total Costs and Expenses 3,859 3,589
Income before Income Taxes, Equity Income
and Minorities' Interests 445 428
Income taxes 147 150
Equity in net income of unconsolidated
affiliates 14 22
Minorities' interests in earnings of
subsidiaries 11 30
Income from Continuing Operations 301 270
Discontinued Operations (190) -
Net Income $ 111 $ 270
Basic Earnings (Loss) per Share
Continuing Operations $ 0.88 $ 0.79
Discontinued Operations (0.58) -
Basic Earnings per Share $ 0.30 $ 0.79
Diluted Earnings (Loss) per Share
Continuing Operations $ 0.84 $ 0.75
Discontinued Operations (0.52) -
Diluted Earnings per Share $ 0.32 $ 0.75
See accompanying notes.
Xerox Corporation
Consolidated Balance Sheets
March 31, December 31,
(In millions, except share data in thousands) 1998 1997
Assets (Unaudited)
Cash $ 19 $ 75
Accounts receivable, net 2,256 2,145
Finance receivables, net 4,639 4,599
Inventories 3,087 2,792
Deferred taxes and other current assets 1,115 1,155
Total Current Assets 11,116 10,766
Finance receivables due after one year, net 7,645 7,754
Land, buildings and equipment, net 2,373 2,377
Investments in affiliates, at equity 1,309 1,332
Goodwill 1,385 1,375
Other assets 1,160 1,103
Investment in discontinued operations 2,563 3,025
Total Assets $ 27,551 $ 27,732
Liabilities and Equity
Short-term debt and current portion of
long-term debt $ 3,725 $ 3,707
Accounts payable 622 776
Accrued compensation and benefit costs 504 811
Unearned income 216 205
Other current liabilities 2,002 2,193
Total Current Liabilities 7,069 7,692
Long-term debt 9,663 8,779
Postretirement medical benefits 1,085 1,079
Deferred taxes and other liabilities 2,306 2,469
Discontinued operations liabilities -
policyholders' deposits and other 1,456 1,693
Deferred ESOP benefits (434) (434)
Minorities' interests in equity of subsidiaries 127 127
Company-obligated, mandatorily redeemable
preferred securities of subsidiary trust
holding solely subordinated debentures of
the Company 637 637
Preferred stock 705 705
Common shareholders' equity 4,937 4,985
Total Liabilities and Equity $ 27,551 $ 27,732
Shares of common stock issued and outstanding 327,793 326,241
See accompanying notes.
Xerox Corporation
Consolidated Statements of Cash Flows (Unaudited)
Three months ended March 31 (In millions) 1998 1997
Cash Flows from Operating Activities
Income from Continuing Operations $ 301 $ 270
Adjustments required to reconcile income to cash
flows from operating activities:
Depreciation and amortization 200 159
Provisions for doubtful accounts 45 47
Provision for postretirement medical
benefits, net of payments 11 9
Minorities' interests in earnings of subsidiaries 11 30
Undistributed equity in income of affiliated companies (9) (23)
Increase in inventories (410) (283)
(Increase) Decrease in finance receivables (45) 60
Increase in accounts receivable (125) (132)
Decrease in accounts payable and accrued
compensation and benefit costs (472) (323)
Net change in current and deferred income taxes (16) (12)
Other, net (290) (135)
Total (799) (333)
Cash Flows from Investing Activities
Cost of additions to land, buildings and equipment (88) (84)
Proceeds from sales of land, buildings and equipment 7 15
Other, net 1 -
Total (80) (69)
Cash Flows from Financing Activities
Net change in debt 894 (45)
Dividends on common and preferred stock (133) (119)
Proceeds from sale of common stock 26 66
Repurchase of common and preferred stock (1) (100)
Dividends to minority shareholders (3) -
Net proceeds from issuance of mandatorily
redeemable preferred securities - 637
Total 783 439
Effect of Exchange Rate Changes on Cash 5 (6)
Cash Provided (Used) by Continuing Operations (91) 31
Cash Provided (Used) by Discontinued Operations 35 (104)
Decrease in Cash (56) (73)
Cash at Beginning of Period 75 104
Cash at End of Period $ 19 $ 31
See accompanying notes.
1. The unaudited consolidated interim financial statements
presented herein have been prepared by Xerox Corporation ("the
Company") in accordance with the accounting policies described in
its 1997 Annual Report to Shareholders and should be read in
conjunction with the notes thereto.
Effective 1998, Fuji Xerox changed its reporting period from a
fiscal year ending December 20 to a fiscal year ending December
31. The results of operations during the period between the end
of the 1997 fiscal year and the beginning of the new fiscal year
(the stub period) amounted to a loss of $6 million. The loss was
debited to retained earnings.
In the opinion of management, all adjustments (consisting only of
normal recurring adjustments) which are necessary for a fair
statement of operating results for the interim periods presented
have been made.
References herein to "we" or "our" refer to Xerox and
consolidated subsidiaries unless the context specifically
requires otherwise.
2. Inventories consist of (in millions):
March 31, December 31,
1998 1997
Finished products $ 1,711 $ 1,549
Work in process 121 97
Raw materials and supplies 547 406
Equipment on operating leases, net 708 740
Total $ 3,087 $ 2,792
3. On April 7, 1998, we announced a worldwide restructuring
program associated with enhancing our competitive position and
lowering our overall cost structure. We will record a second
quarter provision of approximately $1.0 billion after taxes
related to severance and other exit costs and the write-down of
certain assets. The program will include:
- - Consolidating 56 European customer support centers into one
facility and implementing a shared services organization which
will centralize order entry, invoicing, and other back-office
operations.
- - Streamlining manufacturing, logistics, distribution and service
operations. This will include centralizing U.S. parts depots
and outsourcing storage and distribution.
- - Overhauling our administrative processes and associated
resources, including closing one of four geographically
-organized U.S. customer administrative centers.
The severance costs will result from the elimination of
approximately 9,000 jobs worldwide through layoffs and voluntary
reductions.
4. On March 5, 1998, we announced an agreement to acquire
XLConnect Solutions, Inc. ("XLConnect"), an information
technology services company, and its parent Company, Intelligent
Electronics, Inc. ("Intelligent Electronics") for $415 million in
cash. Under the agreement, we will acquire Intelligent
Electronics, which holds an 80% interest in XLConnect, for $7.60
per share. In addition, we will acquire the 20% of XLConnect
shares publicly held for $20 per share. The transaction must be
approved by the stockholders of both Intelligent Electronics and
XLConnect. The transaction, which is subject to customary
closing conditions, including regulatory approval, is expected to
close in the second quarter of 1998.
5. Common shareholders' equity consists of (in millions):
March 31, December 31,
1998 1997
Common stock $ 329 $ 327
Additional paid-in-capital 1,351 1,303
Retained earnings 4,033 4,060
Net unrealized gain (loss) on
investment securities (1) (1)
Translation adjustments (775) (704)
Total $ 4,937 $ 4,985
Effective January 1, 1998, we adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income."
This Statement requires that companies disclose comprehensive
income, which includes net income, foreign currency translation
adjustments, minimum pension liability adjustments, and
unrealized gains and losses on marketable securities classified
as available-for-sale.
Comprehensive income for the three months ending March 31, 1998
and 1997 is as follows (in millions):
March 31, March 31,
1998 1997
Net income $ 111 $ 270
Fuji Xerox stub period income(loss) (6) 8
Translation adjustments (71) (201)
Unrealized appreciation of equity
adjustments - 2
Comprehensive Income $ 34 $ 79
6. Interest expense totaled $156 million and $135 million for
the three months ended March 31, 1998 and 1997, respectively.
7. Summarized operating results of Insurance for the three
months ending March 31, 1998 and 1997 follow (in millions):
March 31, March 31,
1998 1997
Revenues
Insurance premiums earned $ 231 $ 424
Investment and other income 49 111
Total Revenues 280 535
Costs and Expenses
Insurance losses and loss expenses 196 365
Insurance acquisition costs and
other operating expenses 95 148
Interest expense 26 49
Administrative and general expenses 4 32
Total Costs and Expenses 321 594
Realized Capital Gains 3 6
Income (Loss) Before Income Taxes (38) (53)
Income Tax Benefits 14 21
Income (Loss) From Insurance * $ (24) $ (32)
* The above operating results exclude the gains and losses related to
sales of the Insurance subsidiaries and the $190 million after-tax write
-off taken in the first quarter of 1998. The loss from Insurance
operations as set forth above and the sale-related impacts (excluding the
$190 million after-tax write-off), were charged to reserves established for
this purpose and, therefore, did not impact our earnings.
The net assets at March 31, 1998 and December 31, 1997 of the
Insurance businesses included in our consolidated balance sheets
as discontinued operations are as follows (in millions):
March 31, December 31,
1998 1997
Insurance Assets
Investments $ 3,593 $ 4,597
Reinsurance recoverable 859 1,459
Premiums and other receivables 592 592
Deferred taxes and other assets 926 1,082
Total Insurance assets $ 5,970 $ 7,730
Insurance Liabilities
Unpaid losses and loss expenses $ 3,597 $ 4,999
Unearned income 452 541
Notes payable 115 250
Other liabilities 954 864
Total Insurance liabilities $ 5,118 $ 6,654
Investment in Insurance, net $ 852 $ 1,076
On March 11, 1998, we announced an agreement to sell Crum &
Forster Holdings, Inc. (CFI) to Fairfax Financial Holdings
Limited (Fairfax) of Toronto. Upon closing, the transaction will
effectively complete the sale of the Talegen Holdings, Inc.
insurance properties.
Under terms of the agreement, Fairfax will acquire the stock of
CFI for total consideration of $680 million, including the
repayment of $115 million of debt. We will incur approximately
$75 million in transaction-related costs. The transaction,
expected to close by the third quarter, is subject to customary
closing conditions and regulatory approval.
Upon completion of this transaction, we will have effectively
completed our exit from insurance and financial services. A
write-off of $190 million, after tax, was taken as of March 31,
1998.
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. Subsequently, a single corporate entity,
CSU,L.L.C.("CSU") was substituted for the three affiliated
companies. CSU claims damages predominately resulting from the
Company's alleged refusal to sell parts for high volume copiers
and printers to CSU prior to 1994. The Company's policies and
practices with respect to the sale of parts to ISOs were at issue
in an antitrust class action in Texas, which was settled by the
Company during 1994. Claims for individual lost profits of ISOs
who were not named parties, such as CSU, were not included in
that class action. In its complaint CSU alleges monetary damages
in the form of lost profits in excess of $10 million (to be
trebled) and injunctive relief. In a report prepared, pursuant
to Rule 26(a)2)B)of the Federal Rules of Civil Procedure, an
accountant retained by CSU as an expert indicated that he planned
to testify at trial that, allegedly as a result of Xerox'
conduct, CSU will have lost profits of approximately $75 million.
The Company has asserted counterclaims against CSU alleging
patent and copyright infringement, misappropriation of Xerox
trade secrets and conversion. On December 11, 1995, the District
Court issued a preliminary injunction against CSU for copyright
infringement. On April 8, 1997, the District Court granted
partial summary judgment in favor of the Company on CSU's
antitrust claims, ruling that the Company's unilateral refusal to
sell or license its patented parts cannot give rise to antitrust
liability. The Court's ruling did not preclude a finding of
antitrust liability based upon other allegations of exclusionary
conduct, including the refusal to sell unpatented parts. The
District Court also granted summary judgment in favor of the
Company on its patent infringement claim, leaving open with
respect to patent infringement only the issues of willfulness and
the amount of damages, and granted partial summary judgment in
favor of the Company with respect to some of its claims of
copyright infringement. On March 30, 1998 the District Court
appointed a mediator to mediate counterclaim infringement
damages. No mediation date has been set.
On April 11, 1996, an action was commenced by Accuscan Corp.
(Accuscan), in the United States District Court for the Southern
District of New York, against the Company seeking unspecified
damages for infringement of a patent of Accuscan which expired in
1993. The original suit was directed to facsimile products and
sought damages for sales between 1990 and 1993. In late January
1998, Accuscan provided to the Company its expert report on the
issue of damages seeking $225,000,000 for infringement not only
of facsimile machines but other Company hardware. The Company's
expert report states that it is believed that the appropriate
amount of damages, if liability should be established, is
$150,000. The Company (i) denies any liability to plaintiff,
(ii) denies that the patent in suit is valid or infringed, and
(iii) asserts that the damage calculations used by plaintiff are
inconsistent with the facts in numerous respects. The Company
intends to vigorously defend the action. On April 1, 1998, the
jury entered a verdict in favor of Accuscan against the Company
for infringement of a patent which expired in 1993. The verdict
in favor of Accuscan was for $40,000,000. The Company believes
that the verdict should be set aside and will make appropriate
motions to the Court regarding the verdict and will vigorously
pursue any appeal required.
9. Subsequent Event
In April, we issued convertible subordinated debentures for net
proceeds of $575 million. The proceeds were used to reduce
commercial paper. The amount due upon maturity in April 2018 is
$1,012 million, resulting in an effective interest rate of 3.625%
per annum, including 1.003% payable in cash semiannually,
beginning in October 1998. These debentures are convertible at
any time at the option of the holder into 3.904 shares of our
stock per $1,000 principal amount at maturity of debentures.
Item 2 Xerox Corporation
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Document Processing
Summary
Income from continuing operations increased 12 percent to $301
million in the 1998 first quarter from $270 million in the 1997
first quarter. Including a previously announced after-tax charge
of $190 million in connection with the final exit of the Company's
discontinued financial services operations, income was $111
million in the quarter.
Revenues of $4.3 billion in the quarter represented 10 percent
growth on a pre-currency basis, the second consecutive quarter of
double-digit revenue growth. After the adverse effect of
currency, revenue growth was 7 percent. The pre-currency revenue
growth was driven by 17 percent growth in equipment sales
(excluding OEM sales).
Diluted earnings per share from continuing operations increased 12
percent to $0.84 in the first quarter.
Pre-Currency 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
"pre-currency growth."
A substantial portion of our consolidated revenues is derived from
operations outside of the United States where the U.S. dollar is
not the functional currency, primarily in Europe. When compared
with the average of the major European currencies on a revenue
weighted basis, the U.S. dollar was approximately 6 percent
stronger in the 1998 first quarter than in the 1997 first quarter;
only the pound sterling was stronger. As a result, currency
translation had an unfavorable impact of over 2 percentage points
on total revenues in the 1998 first quarter.
Revenues denominated in currencies where the local currency is the
functional currency are not hedged for purposes of translation
into U.S. dollars.
Revenues
For the major product categories, the pre-currency revenue growth
rates were as follows:
1997 1998_
Q1 Q2 Q3 Q4 FY Q1
Total Revenues 5% 6% 9% 10% 7% 10%
Digital Products 18 24 26 31 25 35
Light Lens Copiers (2) (3) 1 (2) (2) (4)
Digital product revenue growth accelerated to 35 percent in the
1998 first quarter, reaching 39 percent of total revenues compared
with 32 percent of total revenues in the 1997 first quarter.
Orders and installations of the black and white Document Centre
digital copiers introduced in April 1997 represented 15 percentage
points of the year-over-year digital revenue growth. Color copying
and printing grew 43 percent in the 1998 first quarter, with
continued excellent growth in the DocuColor 40 and Empress 5750 6
page-per-minute office color copier. Production publishing grew
16 percent in the 1998 first quarter and computer printing grew 5
percent.
Black-and-white light lens copier revenues declined 4 percent in
the 1998 first quarter due to customer transition to the Company's
new digital products and continued pricing pressures. These
revenues were 46 percent of total revenues in the 1998 first
quarter compared with 53 percent of total revenues in the 1997
first quarter.
Geographically, the pre-currency revenue growth rates were as
follows:
1997 1998_
Q1 Q2 Q3 Q4 FY Q1
Total Revenues 5% 6% 9% 10% 7% 10%
United States 6 3 7 11 7 7
Xerox Limited 3 6 11 10 7 13
Other Areas 3 11 11 7 8 11
Memo: Fuji Xerox 10 3 3 (2) 3 1
First quarter U.S. revenue growth was driven by excellent digital
equipment sales and document outsourcing.
Xerox Limited (formerly Rank Xerox and now fully owned by Xerox)
and related companies manufacture and market Xerox products
principally in Europe. Xerox Limited growth was driven by
excellent digital equipment sales and document outsourcing growth
and strong growth in supplies. Holland had excellent revenue
growth in the first quarter, Italy and Spain had strong growth and
the U.K. and France had good growth, but revenue in Germany
declined modestly.
Other Areas include operations principally in Latin America,
Canada and China. Growth in Other Areas was driven by strong
equipment sales and excellent document outsourcing growth.
Revenue growth in Brazil was strong in the first quarter with
excellent equipment sales of low volume products to smaller
customers. Mexico and a number of the smaller Latin American
affiliates, including Argentina and Chile, had strong growth in
the first quarter while revenue in Canada grew modestly.
Fuji Xerox Co., Ltd., an unconsolidated entity, jointly owned by
Xerox Limited and Fuji Photo Film Company Limited, develops,
manufactures and distributes document processing products in
Japan, Australia, New Zealand, and other areas of the Pacific Rim.
The 1998 first quarter reflects modest revenue growth in Japan
while revenue declined in Fuji Xerox' other Asian territories due
to difficult economic conditions.
The pre-currency growth rates by type of revenue were as follows:
1997 1998_
Q1 Q2 Q3 Q4 FY Q1
Total Revenues 5% 6% 9% 10% 7% 10%
Sales 5 6 12 13 10 15
Equipment (Excluding OEM) 10 11 21 16 15 17
Supplies 1 2 2 5 2 8
Paper (9) (1) 8 9 2 15
Service/Rentals/
Outsourcing/Other 4 5 6 6 5 4
Service (2) 1 2 1 1 3
Rentals (11) (8) (10) (7) (9) (9)
Document Outsourcing * 41 36 31 33 35 24
Finance Income 2 5 - 3 2 8
Memo: Revenues Excluding
Equipment Sales 2 3 5 5 4 6
* Excludes equipment in outsourcing contracts that are accounted
for as sales.
Equipment sales in the 1998 first quarter grew 17 percent and
represented the sixth consecutive quarter of double-digit growth,
reflecting excellent growth in digital product sales.
Approximately 39 percent of 1998 first quarter equipment sales was
due to products introduced in 1997, including the company's new
line of black-and-white digital copiers, the 5750 Empress color
copier/printer, the DocuPrint N32 black and white laser printer,
and the DocuTech 6180.
Supplies sales growth accelerated in the first quarter of 1998 due
to excellent indirect channel sales and good competitive supplies
growth.
Paper sales: Our strategy is to charge a spread over mill
wholesale prices to cover our costs and value added as a
distributor. Strong revenue growth in the 1998 first quarter
primarily reflects volume increases in part due to expanding
distribution channels.
Combined service, rental, document outsourcing and other revenues
grew 4 percent in the 1998 first quarter. Service revenues grew 3
percent as the impact of higher machine populations resulting from
higher equipment sales was partially offset by competitive price
pressures. Rental revenues continued to decline, due primarily to
customers' preference for purchase or document outsourcing rather
than rental.
Document Outsourcing revenues are split between Equipment Sales
and Document Outsourcing. Where document outsourcing contracts
include revenue accounted for as equipment sales, this revenue is
included as Equipment Sales on the income statement. All other
document outsourcing revenue, including service, equipment rental,
supplies, paper, and labor, are included in
Service/Rentals/Outsourcing/Other on the income statement. This
has the effect of diverting some revenues from supplies, paper,
service and rental. The excellent Document Outsourcing growth
reflects the trend of customers focusing on their core businesses
and outsourcing their document processing requirements to Xerox.
Document Outsourcing revenue growth slowed somewhat in the 1998
first quarter compared with our expectations for the full year.
Finance income: Our strategy for financing equipment sales in the
industrialized economies is to charge a spread over our cost of
borrowing and to lock in that spread by match funding the finance
receivables with borrowings of similar maturities. Good growth in
the financing of equipment sales in the U.S., Europe, and Latin
America has been partially offset by lower average interest rates.
Gross Profit and Expenses
The gross margins by revenue stream were as follows:
1997 1998_
Q1 Q2 Q3 Q4 FY Q1
Total Gross Margin 46.4% 47.8% 46.5% 47.0% 46.9% 45.0%
Sales 43.5 46.1 45.8 47.8 46.1 43.9
Service/Rent/DocOut 49.2 49.8 47.4 45.4 47.9 46.0
Financing 48.9 49.2 47.3 48.0 48.4 46.5
The total gross margin declined by 1.4 percentage points in the
1998 first quarter from the 1997 first quarter due to business
mix, including the increasing proportion of lower margin indirect
channels and Document Outsourcing business, continued competitive
price pressures and adverse currency, partially offset by
productivity.
The sales gross margin improved by 0.4 percentage points from the
1997 first quarter due to equipment product mix and manufacturing
productivity, partially offset by competitive pricing pressures,
adverse currency, and an increasing proportion of lower margin
indirect channels business.
The service, rentals and document outsourcing gross margin
declined by 3.2 percentage points from the 1997 first quarter due
primarily to the higher growth in lower margin document
outsourcing revenue, a spike in some service costs, continued
pricing pressures and adverse currency, partially offset by
productivity. The lower document outsourcing gross margin
compared with the combined service, rentals and document
outsourcing gross margin reflects the impact of the labor content
in the document outsourcing business. The financing gross margin
declined by 2.4 percentage points as the interest rate spreads
have narrowed consistent with the current lower interest rate
environment.
Research and development (R&D) expense declined 9 percent in the
1998 first quarter due to product program calendarization. We
continue to invest in technological development to maintain our
premier position in the rapidly changing document processing
market. Xerox R&D is strategically coordinated with that of Fuji
Xerox which invested $612 million in R&D in the 1997 full year,
for a combined total of $1.7 billion. Combined Xerox and Fuji
Xerox R&D spending was slightly lower compared with the 1997 first
quarter.
Selling, administrative and general expenses (SAG) increased 4
percent in the 1998 first quarter due to sales coverage and
advertising investments, while general and administrative expenses
declined. SAG was 27.9 percent of revenue, 1.3 percentage points
better than the 1997 first quarter, primarily due to continuing
productivity initiatives and expense controls.
Worldwide employment increased by 1,000 in the 1998 first quarter
to 92,400 as a result of the net hiring of 800 employees for the
company's fast-growing document outsourcing business, and 300 for
increased sales coverage, partially offset by attrition in other
areas.
The $53 million increase in other expenses, net, from the 1997
first quarter was due to increased non-financing interest expense
and goodwill amortization associated with our June 1997
acquisition of The Rank Group's remaining interest in Xerox
Limited, increased Year 2000 remediation costs, and increased
currency losses from balance sheet translation due to currency
devaluation primarily in Mexico.
Income Taxes, Equity in Net Income of Unconsolidated Affiliates
and Minorities' Interests in the Earnings of Subsidiaries
Income before income taxes increased 4 percent to $445 million in
the 1998 first quarter from $428 million in the 1997 first
quarter.
The effective tax rate was 33.0 percent in the 1998 first quarter
compared with 35.1 percent in the 1997 first quarter due to the
changing mix of profits from our worldwide operations. We expect
the 1998 full year effective tax rate to be in line with the first
quarter.
Equity in the net income of unconsolidated affiliates is
principally the Xerox Limited share of Fuji Xerox income. Total
equity in net income decreased in the 1998 first quarter due to
lower Fuji Xerox income reflecting difficult economic conditions
and adverse currency translation. We expect these factors to
continue to adversely affect Fuji Xerox' operations for the rest
of the year.
The Minorities' interests reduction in the 1998 first quarter was
due primarily to our June 1997 acquisition of the remaining
interest in Xerox Limited.
In April 1998, the Company announced a worldwide restructuring to
enhance its competitive position and further align its cost
structure with the demands of the digital world. The company will
take an after-tax charge of approximately $1 billion in the second
quarter to cover the costs of the program which include the
elimination of about 9,000 jobs worldwide through voluntary
reductions and layoffs; the closing and consolidation of
facilities; and the write-down of certain assets.
When fully implemented, the ongoing pre-tax savings from the
restructuring initiatives will be approximately $1 billion
annually. Initially, more than half of the savings will be
reinvested to implement process and systems changes in order to
enable the restructuring, and in ongoing efforts to broaden and
strengthen marketing programs and distribution channels to enhance
revenue growth. Paybacks will be spread over three or four years,
particularly in Europe where the process of implementation is more
complex.
Sales, administrative and general expenses as a percentage of
revenue will move from the high 20's to the low 20's over time,
driven primarily by large reductions in overhead costs.
Manufacturing and service productivity will also improve. These
benefits will be somewhat offset by slightly lower gross margins
overall due to the increasing proportion of business conducted
through indirect sales channels and outsourcing.
We have announced the reactivation of our $1 billion stock
repurchase program, which was suspended last year when we acquired
the remaining financial interest in Rank Xerox, now Xerox Limited.
Between February 1996 and the program suspension in June 1997, we
repurchased 8.5 million shares for $422 million. The level of
purchases will depend upon market conditions.
In March 1998, the Company announced the $415 million acquisition
of XLConnect Solutions, Inc., an information technology services
company, and its parent company, Intelligent Electronics, Inc.
The transaction, which must be approved by the stockholders of
both Intelligent Electronics and XLConnect, is expected to close
during the second quarter. The earnings impact in 1998 will be
about neutral, with a positive contribution in 1999 and
thereafter.
Discontinued Operations
The net investment in the discontinued financial services
businesses which includes Insurance, Other Financial Services and
Third Party Financing and Real Estate totaled $1,107 million at
March 31, 1998 compared with $1,332 million at December 31, 1997.
The decrease primarily reflects the sale of Westchester Specialty
Group, Inc. (WSG) and a reserve increase recorded in the first
quarter, somewhat offset by scheduled funding of reinsurance
coverage to the present and former Talegen Holdings, Inc.
(Talegen) companies and The Resolution Group, Inc. (TRG) by Ridge
Reinsurance Limited (Ridge Re) and interest for the period on the
assigned debt. A discussion of the discontinued businesses
follows.
Insurance
In 1995, we recorded a $1,546 million after-tax charge in
connection with agreements to sell all of our "Remaining"
insurance companies, which included Coregis Group, Inc. (Coregis),
Crum & Forster Holdings, Inc. (CFI), Industrial Indemnity
Holdings, Inc. (II), WSG, TRG and three insurance-related service
companies.
On September 11, 1996, those transactions were terminated. No
additional charges were considered necessary as a result of the
termination. In September 1996, the Board of Directors of Xerox
formally approved a plan of disposal under which we retained
investment bankers to assist us in the simultaneous disposition of
each of the Remaining insurance and service companies.
Significant progress was made during 1997 and the first quarter of
1998 in the disposition of these companies. Specifically:
- - In the first quarter of 1997, we sold certain assets of Apprise
Corp., one of Talegen's insurance related service companies. The
financial terms of this transaction were not material.
- - In the second quarter of 1997, we completed the sale of Coregis
for $375 million in cash and the assumption of $75 million in
debt.
- - In the third quarter of 1997, we completed the sale of II for
$365 million in cash and the assumption of $79 million in debt.
- - In the fourth quarter of 1997, we completed the sale of TRG for
$150 million in cash and a $462 million performance-based
instrument to an investor group. Ultimate recovery of the value
of this instrument will be dependent on TRG's future cash flows
available for dividends.
- - In the first quarter of 1998, we completed the sale of WSG for
$338 million in cash, less approximately $70 million in
transaction-related costs.
- - On March 11, 1998, we announced an agreement to sell CFI to
Fairfax Financial Holdings Limited of Toronto for $680 million,
including the repayment of $115 million in debt. We will incur
approximately $75 million in transaction-related costs. The
transaction is subject to customary closing conditions and
regulatory approvals and is expected to close by the third quarter
of 1998.
Upon completion of the CFI transaction, we will have effectively
completed our exit from insurance and financial services. A
write-off of $190 million after-tax was recorded in the first
quarter of 1998.
Xerox Financial Services, Inc. (XFSI) continues to provide
aggregate excess of loss reinsurance coverage to the current and
former Talegen and TRG units through Ridge Re, a wholly owned
subsidiary. As of April 1998, XFSI is obligated to pay four
remaining annual premium installments of $45 million, plus finance
charges for coverage totaling $1,109 million (which is net of 15
percent coinsurance). At March 31, 1998, Ridge Re had recognized
approximately $648 million of the available coverage.
The net investment in Insurance at March 31, 1998 totaled $852
million compared with a balance of $1,076 million at December 31,
1997. The decrease primarily reflects the sale of WSG and the
reserve increase recorded in the first quarter of 1998, somewhat
offset by contractual payments to Ridge Re for annual premium
installments and associated finance charges and interest on the
assigned insurance debt.
Property and Casualty Operating Trends
The industry's profitability can be significantly affected by
cyclical competitive conditions, judicial decisions affecting
insurers' liabilities and volatile and unpredictable developments,
including changes in the propensity of courts to grant large
awards, fluctuations in interest rates, inflationary pressures
that may tend to affect the size of losses and changes in the
investment environment that affect market prices of insurance
companies' investments. CFI's operating results have historically
been influenced by these industry trends, as well as by its
exposure to uncollectible reinsurance, which had been greater than
most other insurers.
Other Financial Services
The net investment in Other Financial Services at March 31, 1998
was $127 million compared with $125 million at December 31, 1997.
On June 1, 1995, XFSI completed the sale of Xerox Financial
Services Life Insurance Company and related companies (Xerox
Life). In connection with the transaction, OakRe Life Insurance
Company (OakRe), a wholly-owned XFSI subsidiary, has assumed
responsibility, via Coinsurance Agreements, for existing Single
Premium Deferred Annuity (SPDA) policies issued by Xerox Life.
The Coinsurance Agreements include a provision for the assumption
(at their election) by the purchaser's companies, of all of the
SPDA policies at the end of their current rate reset periods. A
Novation Agreement with an affiliate of the new owner provides for
the assumption of the liability under the Coinsurance Agreements
for any SPDA policies not so assumed. Other policies (of
Immediate, Whole Life, and Variable annuities as well as a minor
amount of SPDAs) were sold and are now the responsibility of the
purchaser's companies.
As a result of the Coinsurance Agreements, at March 31, 1998,
OakRe retained approximately $1.3 billion of investment portfolio
assets (transferred from Xerox Life) and liabilities related to
the reinsured SPDA policies. Interest rates on these policies are
fixed and were established upon issuance of the respective
policies. Substantially all of these policies will reach their
rate reset periods through the year 2000 and will be assumed under
the Agreements as described above. Xerox Life's portfolio was
designed to recognize that policy renewals extended liability
"maturities," thereby permitting investments with average duration
somewhat beyond the rate reset periods. OakRe's practice is to
selectively improve this match over time as market conditions
allow.
In connection with the aforementioned sale, XFSI established a
$500 million letter of credit and line of credit with a group of
banks to support OakRe's coinsurance obligations. The term of
this letter of credit is five years and it is unused and available
at March 31, 1998. Upon a drawing under the letter of credit,
XFSI has the option to cover the drawing in cash or to draw upon
the credit line.
Third Party Financing and Real Estate
Third Party Financing and Real Estate assets at March 31, 1998
totaled $297 million, a $1 million reduction from the December 31,
1997 level.
Capital Resources and Liquidity
Total debt, including ESOP and discontinued operations debt not
shown separately in our consolidated balance sheets, was $13,672
million at March 31, 1998 or $769 million more than at December
31, 1997. The changes in consolidated indebtedness since year-end
and versus the first three months of 1997 are summarized as
follows (in millions):
1998 1997
Total Debt as of January 1 $12,903 $12,448
Non-Financing Businesses:
Document Processing operations 1,017 635
Discontinued Businesses ( 161) 126
Total Non-Financing 856 761
Financing Businesses (99) (353)
Total Operations 757 408
Shareholder dividends 136 119
Mandatorily redeemable preferred stock - (637)
Currency translation, equity
issuance and other changes (124) (45)
Total Debt as of March 31 $13,672 $12,293
For analytical purposes, total equity includes common equity, ESOP
preferred stock, mandatorily redeemable preferred securities and
minorities' interests. The following table summarizes the changes
in total equity during the first three months of 1998 and 1997 (in
millions):
1998 1997
Total equity as of January 1 $6,454 $5,931
Income from Continuing Operations 301 270
Loss from Discontinued Operations (190) -
Shareholder dividends paid (136) (119)
Exercise of stock options 26 66
Repurchase of common and preferred stock (1) (100)
Mandatorily redeemable preferred stock - 637
All other, net (48) (200)
Balance as of March 31 $6,406 $6,485
Non-Financing Operations
Operational cash flows are highly seasonal. Due primarily to the
timing of incentive compensation payments and inventory build up,
our operations tend to use cash in the first quarter and generate
cash later in the year.
The following table summarizes Document Processing non-financing
operations cash generation and borrowing for the three months
ended March 31, 1998 and 1997 (in millions):
Cash Generated/(Borrowed)
March 31, March 31,
1998 1997
Document Processing
Non-Financing:
Income $ 239 $219
Depreciation and amortization 200 159
Capital investment, net (112) (76)
Increase in inventories (378) (276)
Decrease in payables and accrued
compensation (577) (323)
All other, net (389) (338)
Total $(1,017) $(635)
Three-month cash usage of $1,017 million was $382 million more
than in the first three months of 1997 as higher net income and
non-cash charges were more than offset by faster inventory growth
to support customer demand, and lower compensation accruals due to
settlement of three-year bonus plan obligations, and 1998
compensation plan changes.
Financing Businesses
Financing businesses debt was reduced by $99 million and $353
million during the first three months of 1998 and 1997,
respectively. This smaller decline in 1998 reflects growth in
equipment sales partially offset by currency translation effects
related to the strength of the U.S. dollar compared with the major
European currencies during the first three months of 1997.
Risk Management
We have entered into certain financial instruments to manage
interest rate and foreign currency exposures. These instruments
are held solely for hedging purposes and include interest rate
swap agreements, forward exchange contracts and foreign currency
swap agreements. We do not enter into derivative instrument
transactions for trading purposes and employ long-standing
policies prescribing that derivative instruments are only to be
used to achieve a set of very limited objectives.
Currency derivatives are primarily arranged in conjunction with
underlying transactions that give rise to foreign currency-
denominated payables and receivables; for example, an option to
buy foreign currency to settle the importation of goods from
suppliers, or a forward exchange contract to fix the U.S. dollar
value of a foreign currency-denominated loan. In addition, when
cost-effective, currency derivatives may be used to hedge balance
sheet exposures.
Revenues denominated in currencies where the local currency is the
functional currency are not hedged.
With regard to interest rate hedging, virtually all customer
financing assets earn fixed rates of interest and, therefore, we
"lock in" an interest rate spread by arranging fixed-rate
liabilities with similar maturities as the underlying assets.
Additionally, customer financing assets in one currency are
consistently funded with liabilities in the same currency. We
refer to the effect of these conservative practices as "match
funding" customer financing assets. This practice effectively
eliminates the risk of a major decline in interest margins
resulting from adverse changes in the interest rate environment.
Conversely, this practice effectively eliminates the opportunity
to materially increase margins when interest rates are declining.
More specifically, pay fixed-rate and receive variable-rate swaps
are typically used in place of more expensive fixed-rate debt.
Pay variable-rate and receive variable-rate swaps are used to
transform variable-rate medium-term debt into commercial paper or
LIBOR obligations. Additionally, pay variable-rate and receive
fixed-rate swaps are used from time to time to transform longer-
term fixed-rate debt into commercial paper or LIBOR obligations.
The transactions performed within each of these three categories
enable cost-effective management of interest rate exposures. The
potential risk attendant to this strategy is the non-performance
of a swap counterparty. We address this risk by arranging swaps
exclusively with a diverse group of strong-credit counterparties,
regularly monitoring their credit ratings, and determining the
replacement cost, if any, of existing transactions.
Our currency and interest rate hedging is typically unaffected by
changes in market conditions as forward contracts, options and
swaps are normally held to maturity consistent with our objective
to lock in currency rates and interest rate spreads on the
underlying transactions.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The information set forth under Note 8 contained in the "Notes to
Consolidated Financial Statements" on pages 11-12 of this
Quarterly Report on Form 10-Q is incorporated by reference in
answer to this item.
Item 2. Changes in Securities
During the quarter ended March 31, 1998, Registrant issued the
following securities in transactions which were not registered
under the Securities Act of 1933, as amended (the Act):
(a) Securities Sold: on January 1, 1998, Registrant issued
1,568 shares of Common stock, par value $1 per share.
(b) No underwriters participated. The shares were issued to
each of the non-employee Directors of Registrant: B.R.
Inman, A.A.Johnson, V.E. Jordan, Jr., Y. Kobayashi,
H. Kopper, R.S. Larsen, J.D. Macomber, G.J. Mitchell,
N.J. Nicholas, Jr., J.E. Pepper, P. F. Russo, M.R. Seger and
T.C.Theobald.
(c) The shares were issued at a deemed purchase price of $73.875
per share (aggregate price $120,250), based upon the
market value on the date of issuance, in payment of the
quarterly Directors' fees pursuant to Registrant's
Restricted Stock Plan for Directors.
(d) Exemption from registration under the Act was claimed based
upon Section 4(2) as a sale by an issuer not involving a
public offering.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 3(a)(1) Restated Certificate of Incorporation of
Registrant filed by the Department of State of the State of
New York on October 29, 1996. Incorporated by reference to
Exhibit 3(a)(1) to Registrant's Quarterly Report on Form
10-Q for the Quarter Ended September 30, 1996.
Exhibit 3 (b) By-Laws of Registrant, as amended through
February 2, 1998. Incorporated by reference to Exhibit 3 (b)
to Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997.
Exhibit 11 Computation of Net Income per Common Share.
Exhibit 12 Computation of Ratio of Earnings to Fixed
Charges.
Exhibit 27 Financial Data Schedule (in electronic form
only).
(b) Current reports on Form 8-K dated January 16, 1998, March 5,
1998 and March 11, 1998 reporting Item 5 "Other Events" was filed
during the quarter for which this Quarterly Report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
XEROX CORPORATION
(Registrant)
_____________________________
Date: May 13, 1998 By Philip D. Fishbach
Vice President and Controller
(Principal Accounting Officer)
Exhibit 11
Xerox Corporation
Computation of Net Income Per Common Share
(Dollars in millions, except per-share data; shares in thousands)
Three months ended
March 31,
1998 1997
I. Basic Net Income Per
Common Share
Income from continuing operations $ 301 $ 270
Accrued dividends on ESOP preferred stock, net (11) (11)
Adjusted income from continuing operations 290 259
Discontinued operations (190) -
Adjusted net income $ 100 $ 259
Average common shares outstanding
during the period 326,870 323,857
Common shares issuable with respect
to exchangeable shares 1,694 1,914
Adjusted average shares outstanding
for the period 328,564 325,771
Basic earnings per share:
Continuing operations $ 0.88 $ 0.79
Discontinued operations (0.58) -
Basic earnings per share $ 0.30 $ 0.79
II. Diluted Net Income Per
Common Share
Income from continuing operations $ 301 $ 270
ESOP expense adjustment, net of tax 1 (1)
Interest on convertible debt, net of tax 1 1
Adjusted income from continuing operations 303 270
Discontinued operations (190) -
Adjusted net income $ 113 $ 270
Average common shares outstanding
during the period 326,870 323,857
Stock options, incentive and
exchangeable shares 6,029 7,657
Convertible debt 2,644 2,644
ESOP preferred stock 26,989 27,575
Adjusted average shares outstanding
for the period 362,532 361,733
Diluted earnings per share:
Continuing operations $ 0.84 $ 0.75
Discontinued operations (0.52) -
Diluted earnings per share $ 0.32 $ 0.75
Exhibit 12
Xerox Corporation
Computation of Ratio of Earnings to Fixed Charges
Three months ended Year ended
March 31, December 31,
(In millions) 1998 1997 1997 1996 1995 1994 1993*
Fixed charges:
Interest expense $ 156 $ 135 $ 617 $ 592 $ 603 $ 520 $ 540
Rental expense 28 34 140 140 142 170 180
Total fixed charges
before capitalized
interest and preferred
stock dividends of
subsidiaries 184 169 757 732 745 690 720
Preferred stock dividends
of subsidiaries 14 6 50 - - - -
Capitalized interest - - - - - 2 5
Total fixed charges $ 198 $ 175 $ 807 $ 732 $ 745 $ 692 $ 725
Earnings available for
fixed charges:
Earnings** $ 459 $ 450 $2,268 $2,067 $1,980 $1,602 $ (193)
Less undistributed
income in minority
owned companies (9) (23) (84) (84) (90) (54) (51)
Add fixed charges before
capitalized interest
and preferred stock
dividends of
subsidiaries 184 169 757 732 745 690 720
Total earnings
available for
fixed charges $ 634 $ 596 $2,941 $2,715 $2,635 $2,238 $ 476
Ratio of earnings to
fixed charges (1)(2) 3.20 3.41 3.64 3.71 3.54 3.23 0.66
(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 and preferred stock
dividends of subsidiaries, by total fixed charges. Fixed charges consist
of interest, including capitalized interest and preferred stock dividends
of subsidiaries, and one-third of rent expense as representative of the
interest portion of rentals. Debt has been assigned to discontinued
operations based on historical levels assigned to the businesses when
they were continuing operations, adjusted for subsequent paydowns.
Discontinued operations consist of the Company's Insurance, Other
Financial Services, and Third Party Financing and Real Estate businesses.
(2) The Company's ratio of earnings to fixed charges includes the effect of
the Company's finance subsidiaries, which primarily finance Xerox
equipment. Financing businesses are more highly leveraged and,
therefore, tend to operate at lower earnings to fixed charges ratio
levels than do non-financial businesses.
* 1993 earnings were inadequate to cover fixed charges. The coverage
deficiency was $249 million.
** Sum of "Income before Income Taxes, Equity Income and Minorities'
Interests" and "Equity in Net Income of Unconsolidated Affiliates."
5
1,000,000
3-MOS
DEC-31-1998
MAR-31-1998
19
0
14,992
452
3,087
11,116
5,214
2,841
27,551
7,069
13,557
637
705
329
4,608
27,551
2,216
4,304
1,242
2,368
1,491
45
156
445
147
301
(190)
0
0
111
0.30
0.32
