Xerox 2002 Annual Report Download - page 24

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and Resende, Brazil to Flextronics for $167 million. In
addition, Flextronics purchased the related inventory,
property and equipment. We expect these sales, to a
company that specializes in manufacturing as their
core competency, will help us reduce manufacturing
costs and help effectively manage our inventory lev-
els. In total, approximately 4,100 employees in these
operations transferred to Flextronics. For further dis-
cussion, refer to Note 4 to our Consolidated Financial
Statements.
We also exited certain non-core businesses in
2001 and 2002. These sales included the sale of Katun
Corporation in 2002, a supplier of after market copi-
er/printer parts and supplies, for net proceeds of
$67 million and the sale of Delphax in 2001, a manu-
facturer of high-speed electron beam imaging digital
printing systems and related parts, supplies and
services, for net proceeds of $16 million. These sales
were essentially break-even. The sale of these busi-
nesses did not have a material effect on our financial
position, results of operations or cash flows.
At this time, we have substantially completed our
restructuring initiatives, although we expect 2003
restructuring charges of approximately $115 million
as further described in Note 2 to our Consolidated
Financial Statements.
Worldwide employment declined by approximately
11,100 in 2002, to approximately 67,800, largely as a
result of our restructuring programs, and the transfer
of employees to Flextronics, as part of our office man-
ufacturing outsourcing. Worldwide employment was
approximately 78,900 and 91,500 at December 31,
2001 and 2000, respectively.
Other Expenses, Net: Other expenses, net for the
three years ended December 31, 2002 consisted of
the following ($ in millions):
Year Ended December 31,
2002 2001 2000
Non-financing interest expense $350 $ 480 $ 592
Currency losses (gains), net 77 (29) (103)
Legal and regulatory matters 37 — —
Amortization of goodwill
(2001 and 2000) and intangibles 36 94 86
Interest income (77) (101) (77)
Gain on early extinguishment
of debt (1) (63) —
Business divestiture and asset sale
(gains) losses (1) 10 (67)
Purchased in-process research
and development —— 27
All other, net 24 53 93
$445 $ 444 $ 551
2002 non-financing interest expense was $130
million lower than 2001 reflecting lower debt levels
throughout 2002 and lower borrowing costs in the
first half of the year, partially offset by higher interest
rates and borrowing costs in the second half of the
year associated with the terms of the New Credit
Facility. Lower borrowing costs reflect the continued
decline in interest rates throughout 2002, coupled
with our higher proportion of variable rate debt in
2002 as compared to 2001. Our current credit ratings
are below investment grade and effectively constrain
our ability to fully use derivative contracts to manage
interest rate risk. Accordingly, although we benefited
from lower interest rates in 2002, we have greater
exposure to volatility in our results of operations. 2002
non-financing interest expense included net gains of
$12 million from the mark-to-market valuation of our
interest rate swaps. Differences between the contract
terms of our interest rate swaps and the underlying
related debt restricts hedge accounting treatment in
accordance with Statement of Financial Accounting
Standards No. 133 “Accounting for Derivative and
Hedging Activities” (“SFAS No. 133”), which required
us to record the mark-to-market valuation of these
derivatives directly to earnings. 2001 non-financing
interest expense was $112 million lower than 2000,
reflecting lower interest rates and lower debt levels.
Non-financing interest expense in 2001 included net
losses of $2 million from the mark-to-market of our
interest rate swaps. Due to the inherent volatility in
the interest rate markets, we are unable to predict the
amount of the above noted mark-to-market gains or
losses in future periods. Such gains or losses could be
material to the financial statements in any future
reporting period.
Net currency losses (gains) result from the
re-measurement of unhedged foreign currency-
denominated assets and liabilities, the spot/forward
premiums on foreign exchange forward contracts in
those markets where we have been able to restore
economic hedging capability and economic hedges of
anticipated transactions for which we do not qualify
for cash flow hedge accounting treatment under
SFAS No. 133. In the first half of 2002, we incurred
$57 million of exchange losses, primarily in Brazil and
Argentina due to the devaluation of the underlying
currencies. In the latter half of 2002, we have been
able to restore hedging capability in the majority of
our key markets. Therefore, the $20 million of curren-
cy losses in the second half of 2002 primarily repre-
sents the spot/forward premiums on foreign
exchange forward contracts and unfavorable currency
movements on economic hedges of anticipated trans-
actions not qualifying for hedge accounting treat-
ment. In 2001, exchange gains on yen debt of
$107 million more than offset losses on Euro loans of