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Xerox Annual Report 2007 2
Listening, connected,
committed to…
Annual Report 2007

Table of contents

  • Page 1
    Listening, connected, committed to... Annual Report 2007 Xerox Annual Report 2007 2

  • Page 2
    ...adoption of color. Driving The New Business of Printing. Expanding participation in small and medium businesses. Leading with services. ® ...value we bring to you. For us that means creating a great experience for you, our customer...delivering greater returns for you, our shareholder...and acting...

  • Page 3
    ... Customer features 28 Board of directors 30 Our business 52 Management's Discussion and Analysis of Results of Operations and Financial Condition 77 Financial statements Inside back cover Corporate information and officers Financial overview (in millions, except EPS) 2007 Total revenue Equipment...

  • Page 4
    ... earnings per share grew 13 percent in 2007* . ‡ Operating cash ï¬,ow of $1.9 billion. ‡ Total revenue of $17.2 billion, an increase of $1.3 billion or 8 percent. Excluding the benefit of our acquisition of Global Imaging Systems, which we purchased in May last year, revenue was up 4 percent in...

  • Page 5
    ...trusted partner that can help our customers make the most of their IT infrastructure and bridge the paper and digital worlds. The Xerox once known for copiers, printers and paper has greatly expanded its footprint. New technology and services offerings are generating billions of dollars in recurring...

  • Page 6
    ...rm, Xerox accounts for half of the total worldwide color pages printed by high-speed digital systems. And, for us, the power really is in the pages. We operate an annuity-based business with more than 70 percent of our total revenue coming from recurring revenue streams, what we call our "post sale...

  • Page 7
    ... Xerox color systems, an increase of 31 percent and way ahead of competitors. Driving The New Business of Printing® Our leadership in digital high-volume printing complements traditional offset printing. This market transition is The New Business of Printing. The opportunity for digital production...

  • Page 8
    ...29 office products that garnered 190 industry awards and broadened and deepened our offerings in this highly competitive market. At the same time, we acquired Global Imaging Systems, which immediately put some 1,400 new sales people on the street and brought more than 200,000 new customers into the...

  • Page 9
    ...A few facts make the point. In 2007, the value of services signings was up 18 percent. Services generated $3.4 billion in annuity revenue - up 8 percent over the previous year. Some of the most prestigious enterprises in the world - brands as diverse as United Technologies, HSBC, NASA, EUROPART, The...

  • Page 10
    ... reach even more potential customers in businesses of any size. Acquiring Global Imaging was a step in the right direction, as was giving our agents and resellers access to more Xerox products and packaged services to sell. We need to - and we will - take this to the next level now by broadening the...

  • Page 11
    ... stronger. We have a powerful blend of direct sales people and indirect agents, concessionaires, resellers, dealers and Web-based channels. They have at their disposal a wide array of experts in color, production printing, solutions, software, services and more. Our reach is worldwide, providing...

  • Page 12
    ...to you. Playing offense with high expectations and great opportunities Our performance in 2008 will be driven by growing our profitable annuity stream - fueled by color and services - and continued discipline in managing costs while generating significant operating cash ï¬,ow. And, with our strong...

  • Page 13
    ... 0.25 (0.50) 0.07 0.01 $ 1.05 $ 1,135 $ 1.19 Global Imaging Systems Revenue Benefit: (in millions) Equipment Sales Revenue: As Reported As Adjusted Post Sale, Financing and Other Revenue: As Reported As Adjusted Total Revenue: As Reported As Adjusted 2007 $ 4,753 $ 4,753 $ 12,475 $ 12,475 $ 17...

  • Page 14
    12

  • Page 15
    What we heard: "For printing and related services, we need to improve efficiency and productivity and build a platform for continuous improvement." David Smith, Commercial Director U.K. Department for Work and Pensions Xerox Annual Report 2007 13

  • Page 16
    U.K. Department for Work and Pensions What we did: In order to integrate document services across all of DWP's 1,000+ offices and eliminate redundancies, Xerox assembled a group of leading companies in their fields to simplify a fragmented supply chain. 14

  • Page 17
    ... the delivery of human services. Listening As the United Kingdom's largest central and civil government department, the Department for Work and Pensions (DWP) delivers services directly to over 20 million citizens and pays out more than $500 million in benefits every year. From "child support" to...

  • Page 18
    16

  • Page 19
    What we heard: "If you want to communicate something important, put it on a monthly statement." Håkan Larsson, Technical Director Strålfors Xerox Annual Report 2007 17

  • Page 20
    Strålfors What we did: Strålfors and Xerox worked together to make individualized customer messages come to life in vibrant color and on paper that can be light enough to keep down mailing costs. 18

  • Page 21
    ... a great approach to customer care. Listening High-speed, continuous-feed color printing. It might not sound like a warm and fuzzy solution to greater customer care. But for the high-volume customers of Strålfors, one of Europe's preeminent printers and managers of information logistics, it is the...

  • Page 22
    20

  • Page 23
    What we heard: "Customers have to validate their paint choices. To do so, they need an accurate printout of what they've selected." Mary Rice, VP, Marketing Behr Xerox Annual Report 2007 21

  • Page 24
    Behr What we did: Xerox Phaser color printers are critical links in the process - making sure that what customers choose in the store accurately matches what they want for their home. That step requires true, high-quality printouts of the colors selected. ® 22

  • Page 25
    ... printed page, so it can be tested at home? For Behr, the choice was an easy one: the Xerox Phaser® 8500 color printer, whose solid-ink technology is extraordinary in its simulation of the entire range of paint colors. The added advantage of Xerox's proprietary solid ink: cartridgefree ink sticks...

  • Page 26
    24

  • Page 27
    What we heard: "Packaging is as much our product as what our customers put in their gardens or in their living rooms. It's got to be top-flight." Stefan Yauchzee, General Manager Potting Shed Creations, Ltd.TM Xerox Annual Report 2007 25

  • Page 28
    Potting Shed Creations, Ltd. â„¢ What we did: Developed affordable, easy-to-use color technology that delivers the quality, reliability and speed small businesses need to showcase their company. 26

  • Page 29
    ... easy-to-use office printer can provide. That meant the ability to print labels, brochures and other materials that are high in quality and low in cost. Committed Potting Shed Creations chose Xerox color laser printers to get the job done. The reliable Xerox technology adds the speed, adaptability...

  • Page 30
    ... Governance Committee D: Member of the Finance Committee 1. Anne M. Mulcahy Chairman and Chief Executive Officer Xerox Corporation Norwalk, CT 2. Ursula M. Burns President Xerox Corporation Norwalk, CT 3. N. J. Nicholas, Jr.B, D Investor New York, NY 4. William Curt Hunter A, C Dean, Tippie College...

  • Page 31
    ... of Common Shareholder's Equity 81 Notes to the Consolidated Financial Statements 132 Reports of Management 133 Report of Independent Registered Public Accounting Firm 134 Quarterly Results of Operations (Unaudited) 135 Five Years in Review 136 Corporate information Xerox Annual Report 2007 29

  • Page 32
    ... to digital systems, to color, and to an increased reliance on electronic documents. More and more, businesses are creating and storing documents digitally and using the Internet to exchange electronic documents. We believe these trends play to the strengths of our product and service offerings and...

  • Page 33
    ... on optimizing the production environment as well as operating in-house production centers; and 3) Business Process Services, where we show our customers how to use digital workï¬,ow to re-engineer their business processes and develop online document repositories. Xerox Annual Report 2007 31

  • Page 34
    ...up new growth opportunities. Our products include high-end printing and publishing systems; digital multifunctional devices (MFDs) which can print, copy, scan and fax; digital copiers; laser and solid ink printers; fax machines; document-management software; and supplies such as toner, paper and ink...

  • Page 35
    ...as sales for accounting purposes or outright cash sales. I 72% The remaining 72% of our revenue, "Post sale and financing," includes annuity-based revenue from maintenance, services, supplies and financing, as well as revenue from rentals and operating lease arrangements. The number of equipment...

  • Page 36
    ... total opportunity for document-related offerings is estimated at $16 billion. GIS currently serves about 200,000 customers with about 1,400 sales representatives and 1,700 service technicians. Since acquiring GIS, they acquired four additional companies in 2007, further expanding our distribution...

  • Page 37
    ... segment includes revenue primarily from paper sales, wide-format systems, value-added services and Global Imaging Systems network integration solutions and electronic presentation systems. Segment information Our reportable segments are Production, Office, Developing Markets Operations (DMO), and...

  • Page 38
    ... the total worldwide page volume printed by high speed production color printers. We are the industry leader in the number of pages produced on digital production color presses, with our ï¬,agship Xerox iGen3 Digital Production Press and DocuColor® Digital Presses. In 2007, we continued to build on...

  • Page 39
    ... Xerox's unparalleled experience and expertise, world-class resources and industry-leading support. Some of the newest additions include an audio sales training course, a kit to assist customers pursuing the digital book opportunity, and a new financial modeling tool that will increase productivity...

  • Page 40
    ... toner based full color roll fed printer that produces up to 986 full color duplex images per minute. This system is ideal for the Transactional/Promotional and Direct Mail market segments that require high speed, high volume variable data printing. • Xerox 495 Continuous Feed Duplex Printer...

  • Page 41
    ...'s fastest letter-size color laser printer. • WorkCentre 7328/7335/7345 - In April, we introduced the WorkCentre 7300 product family. These devices print and copy at speeds ranging from 26 to 35 ppm color and 28 to 45 ppm black-and-white. The systems also scan and fax, and include new tools to...

  • Page 42
    ... WorkCentre 5632/5638/5645/5655/5665/5675 - Introduced in August, the 5600 product family refreshed the entire black-and-white multifunction product line in the Segments 3-5 market. • Xerox 4595 Digital Copier/Printer - Introduced in April, the 4595 is a high-volume, black-and-white copier/printer...

  • Page 43
    ... supplies, service, and labor. We report the revenue from managed services contracts in the Production, Office, or DMO segments. In 2007, the combined value-added services and managed services revenue, including equipment, totaled $3.8 billion. In our wide-format systems business, we offer document...

  • Page 44
    ... agreement, whether rental or operating lease, and report it in "post sale and other revenue." Our accounting policies for revenue recognition for leases and bundled arrangements are included in Note 1-Summary of Significant Accounting Policies in the Consolidated Financial Statements in our 2007...

  • Page 45
    ... value by: • Creating new differentiated products and services. • Enabling cost competitiveness through disruptive products and services. • Enabling new ways to serve customers. • Creating new business opportunities to drive future growth by reaching new customers. Xerox Annual Report 2007...

  • Page 46
    ... applications to drive the "New Business of Printing®", extending our color capabilities, expanding our services offerings and delivering lower-cost platforms and customer productivity enablers. The Xerox iGen3, an advanced next-generation digital printing press that produces photographic-quality...

  • Page 47
    ... relationships and large customer base are important competitive advantages. We and our competitors continue to develop and market new and innovative products at competitive prices, and, at any given time, we may set new market standards for quality, speed and function. Xerox Annual Report 2007 45

  • Page 48
    ... a network of independent agents, dealers, value-added resellers and systems integrators. We use our direct sales force to address our customers' more advanced technology, solutions and services requirements, and use cost-effective indirect distribution channels for basic product offerings. 46

  • Page 49
    ... the largest direct sales and service delivery force in the industry available on a globally consistent manner. This can range from hardware, software or services in whatever combination is necessary to meet the needs of that customer. In 2007 we substantially increased our distribution capabilities...

  • Page 50
    ...reseller contract with Fujifilm Imaging Systems in both the U.S. and Canada to enable a channel for production products that support the digital photo specialty application market. We also have an alliance with Electronic Data Systems (EDS) which is designed to integrate EDS' information technology...

  • Page 51
    ... service force of approximately 13,000 employees and an extensive variable contract service force. We are expanding our use of cost-effective remote service technology for basic product offerings while utilizing our direct service force and a variable contract service force to address customers...

  • Page 52
    ... 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. In 2007 Xerox opened a $60 million emulsion aggregation (EA) toner...

  • Page 53
    ... 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...

  • Page 54
    ...more toner coverage per page than traditional black-and-white printing. Financial Overview In 2007, we grew revenue, expanded earnings and generated strong operating cash flow. Our investments in the growing areas of digital production and office systems, particularly with respect to color products...

  • Page 55
    ... focused on optimizing operating cash flows and returning value to shareholders through acquisitions, share repurchase and dividends. We continue to maintain debt levels primarily to support our customer financing operations as debt associated with our acquisition of GIS was effectively repaid...

  • Page 56
    ... in office multifunction color and production color install activity was offset by overall price declines of between 5%-10%, declines in production black-and-white products and color printers, as well as an increased proportion of equipment installed under operating lease contracts where revenue is...

  • Page 57
    ... sale revenue is largely a function of the equipment placed at customer locations, the volume of prints and copies that our customers make on that equipment, the mix of color pages, as well as associated services. (2) Color revenues represent a subset of total revenues and excludes the impact of GIS...

  • Page 58
    ... to our lease accounting are the determination of the economic life and the fair value of equipment, including the residual value. For purposes of determining the economic life, we consider the most objective measure to be the original contract term, since most equipment is returned by lessees...

  • Page 59
    ... of cash selling prices must be reasonably consistent with the lease selling prices, taking into account residual values that accrue to our benefit, in order for us to determine that such lease prices are indicative of fair value. Our pricing interest rates, which are used in determining customer...

  • Page 60
    ... that attempt to anticipate future events are used in calculating the expense, liability and asset values related to our pension and post-retirement benefit plans. These factors include assumptions we make about the discount rate, expected return on plan assets, rate of increase in healthcare costs...

  • Page 61
    ...financial position in the period or periods in which such change in determination, judgment or settlement occurs. Business Combinations and Goodwill: The application of the purchase method of accounting for business combinations requires the use of significant estimates and Xerox Annual Report 2007...

  • Page 62
    ... Financial Statements for further discussion on our segment operating revenues and segment operating profit. Revenue by segment for the years ended 2007, 2006 and 2005 were as follows: Year Ended December 31, (in millions) Production Office DMO Other Total 2007 Equipment sales ...Post sale...

  • Page 63
    ...post sale and other revenue, including a benefit from currency of 1-percentage point. Growth in revenue from color multifunction products, black-and-white and color printers, were partially offset by declines in black-and-white multifunction and older light lens technology. Xerox Annual Report 2007...

  • Page 64
    ... and black-and-white products. In addition, an increased proportion of office equipment installed under operating lease contracts were recognized in post sale revenue. 35% increase in installs of office color multifunction systems. 8% increase in installs of black-and-white digital copiers and...

  • Page 65
    ...ratio (refer to Note 11- Debt in the Consolidated Financial Statements for further information). Research, Development and Engineering Expenses ("R,D&E") (in millions) Year Ended December 31, Change 2007 2006 2005 2007 2006 Total R,D&E expenses . . R,D&E % Revenue ... $912 $922 $943 $ 10 $ (21...

  • Page 66
    ... to support GIS operations. 2006 R,D&E of $922 million decreased $21 million from 2005 reflecting lower environmental compliance spending. • R&D of $761 million increased $6 million from 2005 reflecting higher expenditures in the Production and Office segments primarily related to expected 2007...

  • Page 67
    ... of any foreign exchange contracts utilized to hedge those foreign currencydenominated assets and liabilities and the mark-to-market impact of hedges of anticipated transactions, primarily future inventory purchases, for those we do not apply cash flow hedge accounting treatment. In 2007, 2006 and...

  • Page 68
    ... of the mortgage in connection with the sale of our Corporate headquarters in Stamford, Connecticut. ...related to the European Union Waste Directive. Income Taxes (in millions) Year Ended December 31, 2007 2006 2005 Pre-tax income ...Income tax expenses (benefits) ...Effective tax rate ...The 2007...

  • Page 69
    ... in Note 15 - Income and Other Taxes in the Consolidated Financial Statements, in June 2005 the 1996-1998 Internal Revenue Service ("IRS") audit was finalized. Of the total tax benefits realized, $53 million was attributed to our discontinued operations. Our effective tax rate will change based on...

  • Page 70
    ... financial information for our operating segments for each of the years ended December 31, 2007, 2006 and 2005, respectively, on the new basis (in millions): Production Office Other Total 2007 Equipment sales ...Post sale and other revenue ...Finance income ...Total Segment revenues ...Segment...

  • Page 71
    ... Short-term investments reported in our Consolidated Financial Statements were as follows (in millions): 2007 2006 Cash and cash equivalents ...Short-term investments ...Total Cash, cash equivalents and Short-term investments ...For the year ended December 31, 2007, net cash provided by operating...

  • Page 72
    ... to complete its exit from the insurance business. As a result of this agreement and pursuant to a liquidation plan, excess cash held by Ridge Re was distributed back to the Company (Refer to Note 19-Divestitures and Other Sales in the Consolidated Financial Statements for further information). 70

  • Page 73
    ...offerings. We have arrangements in certain international countries and domestically through the acquisition of GIS, in which third party financial institutions originate lease contracts directly with our customers. In these arrangements, we sell and transfer title of the equipment to these financial...

  • Page 74
    ... in which we operate, (2) the legal requirements of the agreements to which we are a party and (3) the policies and cooperation of the financial institutions we utilize to maintain and provide cash management services. As of December 31, 2007, we had $1.1 billion of cash and cash equivalents and...

  • Page 75
    ... Financial Statements for additional information and interest payments related to long-term debt (amounts above include principal portion only). (2) Refer to Note 6 - Land, Buildings and Equipment, Net in our Consolidated Financial Statements for additional information related to minimum operating...

  • Page 76
    ... related to domestic operations. Cash contributions are made each year to cover medical claims costs incurred in that year. The amounts reported in the above table as retiree health payments represent our estimated future benefit payments. Fuji Xerox: We purchased products from Fuji Xerox totaling...

  • Page 77
    ... Financial Statements for further information regarding our guarantees, indemnifications and warranty liabilities. Financial Risk Management We are exposed to market risk from foreign currency exchange rates and interest rates, which could affect operating results, financial position and cash...

  • Page 78
    ...subject to a number of factors that may cause actual results to differ materially. Information concerning these factors is included in our 2007 Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC"). We do not intend to update these forward-looking statements, except as...

  • Page 79
    ...CONSOLIDATED STATEMENTS OF INCOME (in millions, except per-share data) Year Ended December 31, 2007 2006 2005 Revenues Sales ...Service, outsourcing and rentals ...Finance income ...Total Revenues ...Costs and Expenses Cost of sales ...Cost of service, outsourcing and rentals ...Equipment financing...

  • Page 80
    ...Total cash, cash equivalents and short-term investments ...Accounts receivable, net ...Billed portion of finance receivables, net ...Finance receivables, net ...Inventories ...Other current assets ...Total current assets ...Finance receivables due after one year, net ...Equipment on operating leases...

  • Page 81
    ... ...Stock-based compensation ...Restructuring and asset impairment charges ...Cash payments for restructurings ...Contributions to pension benefit plans ...(Increase) decrease in inventories ...Increase in equipment on operating leases ...Decrease in finance receivables ...Increase in accounts...

  • Page 82
    ...Change in Accounting Principles (Refer to Note 1) ...Changes in defined benefit plans (Refer to Note 14)(2) ...Other unrealized losses ...Comprehensive income ...Cash dividends declared ...Common stock ($0.0425 per share) ...Stock option and incentive plans, net ...Payments to acquire treasury stock...

  • Page 83
    ... estimates used in the preparation of our Consolidated Financial Statements will change as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes. Actual results could differ from those estimates. Xerox Annual Report 2007 81

  • Page 84
    ...obsolete and excess inventory ...Provisions for litigation and regulatory matters ...Depreciation and obsolescence of equipment on operating leases ...Depreciation of buildings and equipment ...Amortization of internal use and product software ...Pension benefits - net periodic benefit cost ...Other...

  • Page 85
    ... benefit plans. We also recorded a $44 after-tax charge to equity for our portion of a minimum pension liability adjustment recorded by FX prior to their adoption of FAS 158 for a total equity charge in 2007 related to the funded status of FX's benefit plans of $49. Xerox Annual Report 2007 83

  • Page 86
    ... option for our financial instruments is expected to be limited. Stock-Based Compensation: In 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment" ("FAS 123(R)"), which requires companies to recognize compensation expense using a fair value based method for costs related to all share-based...

  • Page 87
    ... accounted for by the operating lease method and are recognized as earned over the lease term, which is generally on a straight-line basis. Service: Service revenues are derived primarily from maintenance contracts on our equipment sold to customers and are recognized over the term of the contracts...

  • Page 88
    ... recognized upon shipment or utilization by customers in accordance with the sales terms. Software: Software included within our equipment and services is generally considered incidental and is therefore accounted for as part of the equipment sales or services revenues. Software accessories sold in...

  • Page 89
    ... cost or market. Inventories also include equipment that is returned at the end of the lease term. Returned equipment is recorded at the lower of remaining net book value or salvage value. Salvage value consists of the estimated market value (generally determined based Xerox Annual Report 2007 87

  • Page 90
    ... estimated useful life. Equipment on operating leases is depreciated to estimated residual value over the lease term. Depreciation is computed using the straight-line method. Significant improvements are capitalized and maintenance and repairs are expensed. Refer to Note 5-Inventories and Equipment...

  • Page 91
    ... accounted for based on specific plan terms). For purposes of determining the expected return on plan assets, we utilize a calculated value approach in determining the value of the pension plan assets, as opposed to a fair market value approach. The primary difference between the two methods relates...

  • Page 92
    ... through direct and indirect sales channels in North America and Europe to global, national and mid-size commercial customers as well as government, education and other public sector customers. Approximately 75% of GIS' revenue is included in our Office segment representing those sales and services...

  • Page 93
    ...THE CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions, except per-share data and unless otherwise indicated) value-added services, Wide Format Systems, Xerox Technology Enterprises, royalty and licensing revenues, GIS network integration solutions and electronic presentation systems, equity net...

  • Page 94
    ...comprised of (i) land, buildings and equipment, net, (ii) equipment on operating leases, net, (iii) internal use software, net and (iv) capitalized software costs, net. Note 3 - Acquisitions Global Imaging Systems, Inc: In May 2007, we acquired GIS, a provider of office technology for small and mid...

  • Page 95
    ..., GIS acquired four businesses that provide office-imaging solutions and related services for $39 in cash. The operating results of these entities are not material to our financial statements, and are included within our Office segment from the date of acquisition as part of GIS. The purchase prices...

  • Page 96
    ... entity. The operating results of Amici were not material to our financial statements and are included within our Other segment from the date of acquisition. The purchase price was allocated to Net assets $2, Intangible assets $37 (consisting of customer relationships of $29 and software of $8), and...

  • Page 97
    ... by the third-party as of December 31, 2007. Accounts Receivable Sales Arrangement: We have a facility in Europe that enables us to sell, on an on-going basis, certain accounts receivables without recourse to a third-party. During 2007 and 2006, we sold approximately Xerox Annual Report 2007 95

  • Page 98
    ...Total Inventories ... $1,099 70 136 $1,305 $ 967 67 129 $1,163 Equipment on operating leases and similar arrangements consists of our equipment rented to customers and depreciated to estimated residual value at the end of the lease term. The transfer of equipment from our inventories to equipment...

  • Page 99
    ... or remaining non-cancelable lease terms in excess of one year at December 31, 2007 were as follows: 2008 2009 2010 2011 2012 Thereafter $266 $212 $169 $129 $90 $158 We have an information management contract with Electronic Data Systems Corp. ("EDS") through June 30, 2009. Services to be...

  • Page 100
    ...834 40 $874 Fuji Xerox ...Other investments ...Total ... $ 89 8 $ 107 7 $ 90 8 $97 $114 $98 Fuji Xerox is headquartered in Tokyo and operates in Japan, China, Australia, New Zealand and other areas of the Pacific Rim. Our investment in Fuji Xerox of $887 at December 31, 2007, differs from our...

  • Page 101
    ... royalty revenues under this agreement of $108, $117 and $123, respectively, which are included in Service, outsourcing and rental revenues in the Consolidated Statements of Income. We also have arrangements with Fuji Xerox whereby we purchase inventory from and sell inventory to Fuji Xerox. Pricing...

  • Page 102
    ... due to Fuji Xerox were $205 and $169, respectively. Note 8 - Goodwill and Intangible Assets, Net Goodwill: The following table presents the changes in the carrying amount of goodwill, by operating segment, for the three years ended December 31, 2007 (in millions): Production Office DMO Other Total...

  • Page 103
    ... charges in the Consolidated Statements of Income totaled $(6), $385 and $366 in 2007, 2006 and 2005, respectively. Detailed information related to restructuring program activity during the three years ended December 31, 2007 is outlined below (in millions): Lease Cancellation and Other Costs...

  • Page 104
    ... were focused on cost reductions in service, manufacturing and back office support Reconciliation to Consolidated Statements operations primarily within the Office and Production of Cash Flows segments. These charges were offset by reversals of $27 primarily related to changes in estimates in Years...

  • Page 105
    ... 17 Product warranties ...25 21 Dividends payable ...40 - Other ...694 546 Total Other current liabilities ...$1,512 $1,417 Other long-term assets Prepaid pension costs ...$ 322 $ 19 Net investment in discontinued 277 295 operations(1) ...Internal use software, net ...270 217 Restricted cash ...219...

  • Page 106
    ...(1) ...Senior Notes due 2016(1) ...Senior Notes due 2017(1) ...Zero Coupon Notes due 2022 ...Subtotal ...Xerox Credit Corporation Yen Notes due 2007 ...Notes due 2012 ...Notes due 2013 ...Notes due 2014 ...Notes due 2018 ...Subtotal ...Other U.S. Operations Borrowings secured by finance receivables...

  • Page 107
    ... could result in a termination by the lenders and the acceleration of all our obligations under the Facility. These events of default include, without limitation: (i) payment defaults, (ii) breaches of covenants under the Facility (certain of which breaches do not have Xerox Annual Report 2007 105

  • Page 108
    ... CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions, except per-share data and unless otherwise indicated) any grace period), (iii) cross-defaults and acceleration to certain of our other obligations and (iv) a change of control of Xerox. Guarantees: At December 31, 2007, we have guaranteed $37...

  • Page 109
    ... but are effective as economic hedges of our inventory purchases and currency exposure. These derivative contracts are accounted for using the mark-to-market accounting method and accordingly are exposed to some level of volatility. The level of volatility will vary with the type and amount...

  • Page 110
    ... Libor Libor 2010 2016 2011 2027 Cash Flow Hedges: During 2006, pay fixed/receive variable interest rate swaps with notional amounts of £200 million ($392) and a net asset fair value of $1, associated with the U.K. GE secured borrowing were designated and accounted for as cash flow hedges. The...

  • Page 111
    ... in value for a majority of these derivatives were recorded directly through earnings. However, during 2007 we started to designate certain contracts hedging our foreign currency denominated inventory purchases as cash- flow hedges - see "Cash Flow Hedges" below for additional information. Issuance...

  • Page 112
    ... purchases. The changes in fair value for these contracts were reported in AOCL and reclassified to Cost of Sales in the period or periods during which the related inventory was sold. No amount of ineffectiveness was recorded in the Consolidated Statements of Income for these designated cash...

  • Page 113
    ... - "New Accounting Standards and Accounting Changes" for further information regarding recent accounting changes for our benefit plans. Information regarding our benefit plans is presented below (in millions): Pension Benefits 2007 2006 Retiree Health 2007 2006 Change in Benefit Obligation Benefit...

  • Page 114
    ... calculated under a formula that provides for the accumulation of salary and interest credits during an employee's work life, or (iii) the individual account balance from the Company's prior defined contribution plan (Transitional Retirement Account or TRA). Pension Benefits (in millions) 2007...

  • Page 115
    ... 60% invested in equities, 35% in fixed income and 5% in real estate. Cash investments are sufficient to handle expected cash requirements for benefit payments and will vary throughout the year. The expected long-term rate of return on the U.S. pension assets is 8.75%. Xerox Annual Report 2007 113

  • Page 116
    ... liabilities. Risk tolerance is established through careful consideration of plan liabilities, plan funded status, and corporate financial condition. This consideration involves the use of long-term measures that address both return and risk. The investment portfolio contains a diversified blend of...

  • Page 117
    ... CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions, except per-share data and unless otherwise indicated) 2008 Pension Benefits 2007 2006 2005 2008 Retiree Health 2007 2006 2005 Weighted-average assumptions used to determine net periodic benefit cost for years ended December 31 Discount rate...

  • Page 118
    ... and 2005, respectively. Total income tax expense (benefit) for the three years ended December 31, 2007 was allocated as follows (in millions): 2007 2006 2005 Pre-tax income ...Common shareholders' equity: Defined benefit plans/ minimum pension liability(1) ...Stock option and incentive plans, net...

  • Page 119
    ... and we currently do not plan to initiate any action that would precipitate the payment of income taxes thereon. It is not practicable to estimate the amount of additional tax that might be payable on the foreign earnings. Our 2001 sale of half of our ownership interest in Fuji Xerox resulted in our...

  • Page 120
    ...of loss, we do not believe that the ultimate resolution of these matters will materially impact our results of operations, financial position or cash flows. The labor matters principally relate to claims made by former employees and contract labor Total deferred taxes, net ... The above amounts are...

  • Page 121
    ... of the Securities Exchange Act of 1934, as amended ("1934 Act"), and SEC Rule 10b-5 thereunder, each of the defendants is liable as a participant in a fraudulent scheme and course of business that operated as a fraud or deceit on purchasers of the Company's common stock during the Class Period by...

  • Page 122
    ... scheme that operated as a fraud and deceit on purchasers of the Company's common stock and bonds by disseminating materially false and misleading statements and/or concealing material adverse facts relating to various of the Company's accounting and reporting practices and financial condition. The...

  • Page 123
    ... adverse facts relating to the Company's financial condition and accounting and reporting practices. The plaintiffs contend that in relying on false and misleading statements allegedly made by the defendants, at various times from 1997 through 2000 they bought shares of the Company's common stock at...

  • Page 124
    ... duties under ERISA to protect the Plan's assets and act in the interest of Plan participants. Specifically, plaintiffs claim that the defendants failed to provide accurate and complete material information to participants concerning Xerox stock, including accounting practices which allegedly...

  • Page 125
    ...the dispute. The panel has established a schedule for hearing preliminary dispositive motions with oral argument to be held in May, 2008. In the course of litigation, we periodically engage in discussions with MPI's counsel for possible resolution of the matter. Should Xerox Annual Report 2007 123

  • Page 126
    ... State of New York, County of New York against the Company and several current and former officers and/or members of the Board of Directors. Plaintiff claims that it issued an Excess Directors & Officers Liability and Corporate Reimbursement Policy to the Company in reliance on information from the...

  • Page 127
    ... on the subsidiary's books and certain improper payments in connection with sales to government customers. These transactions were not material to the Company's financial statements. We reported these transactions to the Indian authorities, the U.S. Department of Justice and to the SEC. The private...

  • Page 128
    ... of acquisition. • Guarantees on behalf of our subsidiaries with respect to real estate leases. These lease guarantees may remain in effect subsequent to the sale of the subsidiary. • Agreements to indemnify various service providers, trustees and bank agents from any third party claims related...

  • Page 129
    ... lease term or the expected useful life under a cash sale. The service agreements involve the payment of fees in return for our performance of repairs and maintenance. As a consequence, we do not have any significant product warranty obligations including any obligations under customer satisfaction...

  • Page 130
    ... PSs and expanded the use of RSUs. Each of these awards is subject to settlement with newly issued shares of our common stock. At December 31, 2007 and 2006, 19 million and 25 million shares, respectively, were available for grant of awards. Total compensation related to these programs was $89, $64...

  • Page 131
    ... provides information relating to the status of, and changes in, stock options granted for each of the three years ended December 31, 2007 (stock options in thousands): 2007 Employee Stock Options Stock Options Average Option Price 2006 Average Stock Option Options Price 2005 Average Stock Option...

  • Page 132
    ... table provides information relating to stock option exercises for the three years ended December 31, 2007: (in millions) 2007 2006 2005 Total intrinsic value ...Cash received ...Tax benefit realized for tax deductions ...Treasury Stock: The Board of Directors has authorized programs for the...

  • Page 133
    ...continuing operations ...Earnings from discontinued operations ...Loss from cumulative effect of change in accounting ...stock options, respectively, because their respective exercise prices were greater than the corresponding market value per share of our common stock. Xerox Annual Report 2007...

  • Page 134
    ... adequate internal control over financial reporting, as such term is defined in the rules promulgated under the Securities Exchange Act of 1934. Under the supervision and with the participation of our management, including our principal executive, financial and accounting officers, we have conducted...

  • Page 135
    ...; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may...

  • Page 136
    ... Quarter Second Quarter Third Quarter Fourth Quarter Full Year 2007 Revenues ...Costs and Expenses ...Income from Continuing Operations before Income Taxes, Equity Income, Discontinued Operations and Cumulative Effect of Change in Accounting Principle ...Income tax expenses ...Equity in net income...

  • Page 137
    ... Accounting Changes" for further information representing the effect of adopting FAS 158. (2) In 2005, includes $98 reported in other current liabilities. (3) 2007 results include the acquisition of GIS. Refer to Note 3-Acquisitions in the Consolidated Financial Statements. Xerox Annual Report 2007...

  • Page 138
    ... INFORMATION Stock Listed and Traded Xerox common stock (XRX) is listed on the New York Stock Exchange and the Chicago Stock Exchange. It is also traded on the Boston, Cincinnati, Pacific Coast, Philadelphia and Switzerland exchanges. Xerox Common Stock Prices and Dividends: New York Stock Exchange...

  • Page 139
    ... North America John E. McDermott Vice President Chief Information Officer Ivy Thomas McKinney Vice President Deputy General Counsel Patricia M. Nazemetz Vice President Chief Human Resources and Ethics Officer Shaun W. Pantling Vice President Director and General Manager Xerox Global Services Europe...

  • Page 140
    ... 203.849.2478 Contact: Evelyn Shockley Diversity Programs and EEO-1 Reports 585.423.6157 www.xerox.com/diversity Minority and Women Owned Business Suppliers 585.422.2295 www.xerox.com/supplierdiversity Xerox Ethics Helpline 866.XRX.0001 North America; International numbers and Web submission tool on...