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Income Taxes and Tax Valuation Allowances: We
record the estimated future tax effects of temporary
differences between the tax bases of assets and liabilities
and amounts reported in our Consolidated Balance
Sheets, as well as operating loss and tax credit
carryforwards. We follow very specific and detailed
guidelines in each tax jurisdiction regarding the
recoverability of any tax assets recorded in our
Consolidated Balance Sheets and provide necessary
valuation allowances as required. We regularly review
our deferred tax assets for recoverability considering
historical profitability, projected future taxable income,
the expected timing of the reversals of existing temporary
differences and tax planning strategies. If we continue to
operate at a loss in certain jurisdictions or are unable to
generate sufficient future taxable income, or if there is a
material change in the actual effective tax rates or time
period within which the underlying temporary differences
become taxable or deductible, we could be required to
increase the valuation allowance against all or a
significant portion of our deferred tax assets resulting in a
substantial increase in our effective tax rate and a material
adverse impact on our operating results. Conversely, if
and when our operations in some jurisdictions were to
become sufficiently profitable to recover previously
reserved deferred tax assets, we would reduce all or a
portion of the applicable valuation allowance in the
period when such determination is made. This would
result in an increase to reported earnings in such period.
Adjustments to our valuation allowance, through (credits)
charges to income tax expense, were $12 million, $(38)
million, and $12 million for the years ended
December 31, 2006, 2005 and 2004, respectively. There
were other increases/(decreases) to our valuation
allowance, including the effects of currency, of $45
million, $61 million, and $(21) million for the years
ended December 31, 2006, 2005 and 2004, respectively,
that did not affect income tax expense in total as there
was a corresponding adjustment to deferred tax assets or
other comprehensive income. Gross deferred tax assets of
$3.9 billion and $3.6 billion had valuation allowances of
$647 million and $590 million at December 31, 2006 and
2005, respectively. We plan on adopting FASB
Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes – an Interpretation of FASB Statement
No. 109,” beginning January 1, 2007. The adoption of this
interpretation will change the way we evaluate
recognition and measurement of uncertain tax positions.
Refer to Note 1 – “New Accounting Standards and
Accounting Changes” to the Consolidated Financial
Statements for further information regarding the adoption
of this interpretation.
We are subject to ongoing tax examinations and
assessments in various jurisdictions. Accordingly, we
may incur additional tax expense based upon our
assessment of the probable outcomes of such matters. In
addition, when applicable, we adjust the previously
recorded tax expense to reflect examination results. Our
ongoing assessments of the probable outcomes of the
examinations and related tax positions require judgment
and can materially increase or decrease our effective tax
rate as well as impact our operating results.
Legal Contingencies: We are involved in a variety of
claims, lawsuits, investigations and proceedings
concerning securities law, intellectual property law,
environmental law, employment law and ERISA, as
discussed in Note 16 – Contingencies to the Consolidated
Financial Statements. We determine whether an estimated
loss from a contingency should be accrued by assessing
whether a loss is deemed probable and can be reasonably
estimated. We assess our potential liability by analyzing
our litigation and regulatory matters using available
information. We develop our views on estimated losses in
consultation with outside counsel handling our defense in
these matters, which involves an analysis of potential
results, assuming a combination of litigation and
settlement strategies. Should developments in any of
these matters cause a change in our determination as to an
unfavorable outcome and result in the need to recognize a
material accrual, or should any of these matters result in a
final adverse judgment or be settled for significant
amounts, they could have a material adverse effect on our
results of operations, cash flows and financial position in
the period or periods in which such change in
determination, judgment or settlement occurs.
Results of Operations
Segment Revenue
Our reportable segments are consistent with how we
manage the business and view the markets we serve. Our
reportable segments are Production, Office, DMO and
Other. Our offerings include hardware, services, solutions
and consumable supplies. The Production segment
includes black-and-white products, which operate at
speeds over 90 pages per minute (“ppm”) and color
products which operate at speeds over 40 ppm, excluding
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