Xerox 2006 Annual Report Download - page 26

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is continually trained on our products and their diagnostic
equipment is state-of-the-art. We offer service 24 hours a
day, 7 days a week, in major metropolitan areas around
the world, providing a consistent and superior level of
service worldwide.
Manufacturing Outsourcing
We are currently in the first one-year automatic
renewal period under a five year master supply
agreement with Flextronics, a global electronics
manufacturing services company, to outsource portions
of manufacturing for our Office segment. Our inventory
purchases from Flextronics currently represent
approximately 20% of our overall worldwide inventory
procurement. We have agreed to purchase from
Flextronics some products and consumables within
specified product families. Flextronics must acquire
inventory in anticipation of meeting our forecasted
requirements and must maintain sufficient manufacturing
capacity to satisfy these requirements. Under certain
circumstances, we may be obligated to repurchase
inventory that remains unused for more than 180 days or
becomes obsolete, or on the termination of the supply
agreement.
We acquire other Office products from various third
parties, to increase the breadth of our product portfolio,
and to meet channel requirements. We also have
arrangements with Fuji Xerox under which we purchase
some products from and sell other products to Fuji Xerox.
Some of these purchases and sales are the result of mutual
research and development arrangements. Our remaining
manufacturing operations are primarily located in
Rochester, New York and Dundalk, Ireland for our
high-end production products and consumables, and in
Wilsonville, Oregon for solid ink products, consumable
supplies, and components for our Office segment products.
Fuji Xerox
Fuji Xerox Co., Limited is an unconsolidated entity
in which we currently own 25% and FUJIFILM Holdings
Corporation (“FujiFilm”) owns 75%. Fuji Xerox
develops, manufactures and distributes document
processing products in Japan, China, Hong Kong and
other areas of the Pacific Rim, Australia and New
Zealand. We retain significant rights as a minority
shareholder. Our technology licensing agreements with
Fuji Xerox ensure that the two companies retain
uninterrupted access to each other’s portfolio of patents,
technology and products.
International Operations
We are incorporating by reference the financial
measures by geographical area for 2006, 2005 and 2004
that are included in Note 2 – Segment Reporting to the
Consolidated Financial Statements in our 2006 Annual
Report.
Contract Signings
We believe that contract signings provide a
meaningful measure of future business prospects for
document management services. Contract signings
represent management’s estimate of the total contract life
value of managed services and value-added services
contracts signed within the period. This estimate includes
new contracts, renewals, extensions, and amendments to
existing contracts. The total contract life value is defined
as the average monthly commitment minimum multiplied
by the number of months in the contract, plus an estimate
of any other revenue related to the contract, but not
included in the minimum. If a contract does not have a
monthly commitment minimum, management develops
an estimate based on historical and expected usage
patterns and other relevant information. Our contracts
have terms that generally range from 3 to 5 years. During
2006, signings for document management services were
up about 15% from 2005.
Backlog
We believe that backlog, or the value of unfilled
orders, is not a meaningful indicator of future business
prospects because of the significant proportion of our
revenue that follows equipment installation, the large
volume of products we deliver from shelf inventories,
and the shortening of product life cycles.
Seasonality
Our revenues are affected by such factors as the
introduction of new products, the length of the sales
cycles, and the seasonality of technology purchases. As a
result, our operating results are difficult to predict. These
factors have historically resulted in lower revenue in the
first quarter than in the immediately preceding fourth
quarter.
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