Xerox 2010 Annual Report Download - page 35

33Xerox 2010 Annual Report
Management’s Discussion
of the long-term rate of growth for our business; the useful life over which
cash flows will occur; determination of our weighted average cost of
capital for purposes of establishing a discount rate; and consideration
of relevant market data.
Our annual impairment test of goodwill is performed in the fourth
quarter of each year. The estimated fair values of our reporting units
were based on discounted cash flow models derived from internal
earnings forecasts and assumptions. The assumptions and estimates
used in those valuations considered the current economic environment.
In performing our 2010 impairment test, the following were the overall
composite assumptions regarding revenue and expense growth, which
formed the basis for estimating future cash flows used in the discounted
cash flow model: (1) revenue growth 3–5%; (2) gross margin 33–35%;
(3) RD&E 3%; (4) SAG 19–20%; and (5) return on sales 10–12%. We
believe these assumptions are appropriate because they are consistent
with historical results (inclusive of ACS), generally consistent with our
forecasted long-term business model and give appropriate consideration
to the current economic environment.
Based on these valuations, we determined that the fair values of
our reporting units exceeded their carrying values and no goodwill
impairment charge was required during the fourth quarter 2010.
Refer to Note 1 – Summary of Significant Accounting Policies – “Goodwill
and Intangible Assets” for additional information regarding our goodwill
impairment testing, as well as Note 8 – Goodwill and Intangible Assets,
Net in the Consolidated Financial Statements for additional information
regarding goodwill by operating segment.
Operations Review of Segment Revenue
and Operating Profit
Our reportable segments are consistent with how we manage the
business and view the markets we serve. Our reportable segments are
Technology, Services and Other.
2010 Segment Reporting Change
In 2010, as a result of our acquisition of ACS, we realigned our
internal financial reporting structure and began reporting our financial
performance based on two primary segments – Technology and Services.
The Technology segment represents the combination of our former
Production and Office segments excluding the document outsourcing
business. The Services segment represents the combination of our
document outsourcing business, which includes Xerox’s historic business
process services, and ACS’s business process outsourcing and information
technology outsourcing businesses. We believe this realignment improves
our view of the expanded markets we now serve and will help us to better
manage our business which is primarily centered around equipment
systems and outsourcing services. Our Technology segment operations
involve the sale and support of a broad range of document systems from
entry level to the high-end. Our Services segment operations involve
delivery of a broad range of outsourcing services including document,
business processing and IT. Our 2009 and 2008 segment disclosures have
been restated to reflect our new 2010 internal reporting structure. Refer to
Note 2 – Segment Reporting in the Consolidated Financial Statements for
further description of these segments.
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 more-likely-than-not outcomes of such
matters. In addition, when applicable, we adjust the previously recorded
tax expense to reflect examination results. Our ongoing assessments of
the more-likely-than-not 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.
We file income tax returns in the U.S. Federal jurisdiction and in various
foreign jurisdictions. In the U.S., with the exception of ACS, we are no
longer subject to U.S. Federal income tax examinations for years before
2007. ACS is no longer subject to such examination for years before
2004. With respect to our major foreign jurisdictions, we are no longer
subject to tax examinations by tax authorities for years before 2000.
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 17
– Contingencies in 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.
BusinessCombinationsandGoodwill
The application of the purchase method of accounting for business
combinations requires the use of significant estimates and assumptions
in the determination of the fair value of assets acquired and liabilities
assumed in order to properly allocate purchase price consideration
between assets that are depreciated and those that are amortized
from goodwill. Our estimates of the fair values of assets and liabilities
acquired are based upon assumptions believed to be reasonable, and
when appropriate, include assistance from independent third-party
appraisal firms.
As a result of our acquisition of ACS, as well as other acquisitions
including GIS, we have a significant amount of goodwill. Goodwill
is tested for impairment annually or more frequently if an event or
circumstance indicates that an impairment loss may have been
incurred. Application of the goodwill impairment test requires judgment,
including the identification of reporting units, assignment of assets
and liabilities to reporting units, assignment of goodwill to reporting
units and determination of the fair value of each reporting unit. We
estimate the fair value of each reporting unit using a discounted cash
flow methodology. This requires significant judgment including: estimation
of future cash flows, which is dependent on internal forecasts; estimation