Notes to the Consolidated Financial Statements
(Dollars in millions, except per-share data and unless otherwise indicated)
Note 7 – Investments in Affiliates, at Equity
Investments in corporate joint ventures and other companies in which we generally have a 20% to 50% ownership interest at December 31, 2007 and 2006 were as follows (in millions):
| 2007 | 2006 | |||||
|
Fuji Xerox |
$ | 887 | $ | 834 | ||
|
All other equity investments |
45 | 40 | ||||
|
Investments in affiliates, at equity |
$ | 932 | $ | 874 | ||
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 implied 25% interest in the underlying net assets, or $972, due primarily to our deferral of gains resulting from sales of assets by us to Fuji Xerox, partially offset by goodwill related to the Fuji Xerox investment established at the time we acquired our remaining 20% of Xerox Limited from The Rank Group plc.
Our equity in net income of our unconsolidated affiliates for the three years ended December 31, 2007 was as follows:
| 2007 | 2006 | 2005 | |||||||
|
Fuji Xerox |
$ | 89 | $ | 107 | $ | 90 | |||
|
Other investments |
8 | 7 | 8 | ||||||
| Total | $ | 97 | $ | 114 | $ | 98 | |||
Equity in net income of Fuji Xerox is affected by certain adjustments to reflect the deferral of profit associated with intercompany sales. These adjustments may result in recorded equity income that is different than that implied by our 25% ownership interest. Equity income for 2007 includes after-tax restructuring charges of $30 primarily reflecting employee related costs as part of Fuji Xerox’s continued cost-reduction actions to improve its competitive position.
Condensed financial data of Fuji Xerox for the three calendar years ended December 31, 2007 was as follows (in millions):
| 2007 | 2006 | 2005 | |||||||
|
Summary of Operations: |
|||||||||
|
Revenues |
$ | 10,218 | $ | 9,859 | $ | 10,009 | |||
|
Costs and expenses |
9,565 | 9,119 | 9,406 | ||||||
|
Income before income taxes |
653 | 740 | 603 | ||||||
|
Income taxes |
252 | 281 | 215 | ||||||
|
Minorities’ interests |
6 | 5 | 8 | ||||||
|
Net income |
$ | 395 | $ | 454 | $ | 380 | |||
|
Balance Sheet Data: |
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|
Assets: |
|||||||||
|
Current assets |
$ | 4,242 | $ | 3,731 | $ | 3,454 | |||
|
Long-term assets |
4,639 | 4,184 | 4,168 | ||||||
| Total Assets | $ | 8,881 | $ | 7,915 | $ | 7,622 | |||
|
Liabilities and Shareholders’ Equity: |
|||||||||
|
Current liabilities |
$ | 3,322 | $ | 2,954 | $ | 2,991 | |||
|
Long-term debt |
900 | 685 | 434 | ||||||
|
Other long-term liabilities |
746 | 590 | 936 | ||||||
|
Minorities’ interests in equity of subsidiaries |
25 | 21 | 17 | ||||||
|
Shareholders’ equity |
3,888 | 3,665 | 3,244 | ||||||
| Total Liabilities and Shareholders’ Equity | $ | 8,881 | $ | 7,915 | $ | 7,622 | |||
In 2007, 2006 and 2005, we received dividends of $37, $41 and $38, respectively, which were reflected as a reduction in our investment. Additionally, we have a technology agreement with Fuji Xerox whereby we receive royalty payments for their use of our Xerox brand trademark, as well as, rights to access their patent portfolio in exchange for access to our patent portfolio. In 2006, we renewed our technology agreement with Fuji Xerox (the “2006 Technology Agreement”). The 2006 Technology Agreement provides that Fuji Xerox pays us royalties based on Fuji Xerox’s revenue. The 2006 Technology Agreement did not result in a material change to the royalty revenues we receive from Fuji Xerox. In general, all other existing agreements with respect to intellectual property between the parties will remain in full force and effect. Therefore, all technology licenses previously granted between the parties will not be subject to the 2006 Technology Agreement but will generally remain subject to the terms of any such prior arrangements. The only exception is that the licenses previously granted under the 1999 Technology Agreement were converted into fully paid-up and royalty free licenses.
In 2007, 2006 and 2005, we earned 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 of the transactions under these arrangements is based upon negotiations conducted at arm’s length. Our purchase commitments with Fuji Xerox are in the normal course of business and typically have a lead time of three months. Purchases from and sales to Fuji Xerox for the three years ended December 31, 2007 were as follows (in millions):
| 2007 | 2006 | 2005 | |||||||
|
Sales |
$ | 186 | $ | 168 | $ | 163 | |||
|
Purchases |
$ | 1,946 | $ | 1,677 | $ | 1,517 | |||
In addition to the amounts described above, in 2007, 2006 and 2005, we paid Fuji Xerox $26, $28 and $28, respectively, and Fuji Xerox paid us $2, $3 and $9, in 2007, 2006 and 2005, respectively, for unique research and development. As of December 31, 2007 and 2006, amounts due to Fuji Xerox were $205 and $169, respectively.
