Xerox 2014 Annual Report Download - page 48

When performing our discounted cash flow analysis for each reporting unit, we incorporate the use of projected
financial information and discount rates that are developed using market participant-based assumptions. The cash-
flow projections are based on three-year financial forecasts developed by management that include revenue and
expense projections, capital spending trends, and investment in working capital to support anticipated revenue
growth or other changes in the business. The selected discount rates consider the risk and nature of the respective
reporting units' cash flows and an appropriate capital structure and rates of return that market participants would
require to invest their capital in our reporting units.
In performing our 2014 impairment test, the following were the 3-year compounded assumptions for Document
Technology and the five reporting units within our Services segment with respect to revenue, operating income and
margins, which formed the basis for estimating future cash flows used in the discounted cash flow model:
•Document Technology - revenue decline in 2015 moderating in 2016-2017, operating income growth: flat-1%,
and operating margin: 10%-11% - as we continue to manage costs as a result of an expected decline in
revenues.
•Services - revenue growth: 5%-6%, operating income growth: 10%-12%, and operating margin: 10%-12% - as
we benefit from recurring revenue and strong renewals while improving the mix of services and improving the
performance of our government healthcare business as well as restructuring the businesses to achieve
operating margin growth.
We believe these assumptions are appropriate and reflect our forecasted long-term business model, giving
appropriate consideration to our historical results as well as the current economic environment and markets that we
serve. The average discount rate applied to our projected cash flows was approximately 9.5%, which we considered
reasonable based on the estimated capital costs of applicable market participants. Although the sum of the fair
values of our reporting units was in excess of our market capitalization, we believe the difference is reasonable
when market-based control premiums and other factors are taken into consideration, including the evolution of our
business to be predominantly services-based.
When performing our market approach for each reporting unit, we rely specifically on the guideline public company
method. Our guideline public company method incorporates revenues and earnings multiples from publicly traded
companies with operations and other characteristics similar to each reporting unit. The selected multiples consider
each reporting unit’s relative growth, profitability, size and risk relative to the selected publicly traded companies.
After completing our annual impairment reviews for each reporting unit in the fourth quarter of 2014 and 2013, we
concluded that goodwill was not impaired in either of these years. In 2014, no reporting unit had an excess of fair
value over carrying value of less than 20%.
Our impairment assessment methodology includes the use of outside valuation experts and the inclusion of factors
and assumptions related to third-party market participants. In connection with the announced sale of the ITO
business in the fourth quarter 2014, since that business comprised a portion of several reporting units, we tested
the retained goodwill of those reporting units for impairment and concluded that the goodwill remaining was not
impaired since the fair values of those reporting units exceeded their carrying values.
Refer to Note 4 - Divestitures in the Consolidated Financial Statements for additional information regarding the ITO
disposition as well as Note 10 - Goodwill and Intangible Assets, Net in the Consolidated Financial Statements for
additional information regarding goodwill by reportable segment.
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