Xerox 2004 Annual Report Download - page 31

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included higher interest rates and borrowing costs in
the first half of the year associated with the terms of
the 2002 Credit Facility. These increased expenses
were offset by lower borrowing costs in the second
half of 2003 following the June 2003 Recapitalization.
Interest income: Interest income is derived primarily
from our invested cash and cash equivalent balances
and interest resulting from periodic tax settlements.
2004 interest income was $10 million higher than
2003 reflecting interest income of $26 million related
to a domestic tax refund claim in 2004, partially
offset by the absence of $13 million of interest income
related to Brazilian tax credits in 2003. 2003 interest
income was $12 million lower than 2002 reflecting
declining interest rates and lower average cash
balances, partially offset by the $13 million of interest
income related to the Brazilian tax credits.
Net currency losses: Net currency losses primarily
result from the spot/forward premiums on foreign
exchange forward contracts, the re-measurement of
unhedged foreign currency-denominated assets and
liabilities and the mark-to-market impact of economic
hedges of anticipated transactions for which wedo not
qualify for cash flowhedge accounting treatment. In
2004, the majority of the exchange losses of $73 mil-
lion related to spot/forward premiums on foreign
exchange forward contracts as well as the mark-to-
market of derivatives economically hedging the cost of
future inventory purchases. The increase from 2003
was primarily due to the weakening of the U.S. Dollar
against the Euro and the Yen. In 2003, exchange losses
of $11 million were due largely to spot/forward premi-
ums on foreign exchange forward contracts and unfa-
vorable currency movements on economic hedges of
anticipated transactions not qualifying for hedge
accounting treatment. 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
were able to restore hedging capability in the majority
of our key markets. Therefore, the $20 million of cur-
rency losses in the second half of 2002 primarily rep-
resented 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 treatment.
Legal and regulatory matters: Legal and regulato-
ry matters for 2004 reflect expenses associated with
the resolution of various legal matters, none of which
was individually material, partially offset by the
adjustment of an estimate associated with a previous-
ly recorded litigation accrual. See Note 14 to the
Consolidated Financial Statements for additional
information regarding litigation against the Company.
Legal and regulatory matters for 2003 primarily
reflects a $239 million provision for litigation relating
to the court approved settlement of the Berger v.
Retirement Income Guarantee Plan (RIGP) litigation.
Legal and regulatory matters for 2002 includes
$27 million of expenses related to certain litigation,
indemnifications and associated claims, as well as
the $10 million penalty incurred in connection with
our settlement with the SEC.
Loss (gain) on early extinguishment of debt:
In 2003, we recorded a $73 million loss on early
extinguishment of debt reflecting the write-off of the
remaining unamortized fees associated with the 2002
Credit Facility. The 2002 Credit Facility was repaid
upon completion of the June 2003 Recapitalization.
Business divestiture and asset sale losses
(gains): Business divestitures and asset sales in all
years included miscellaneous land, buildings and
equipment sales. The 2004 amount primarily reflects
the $38 million gain from the sale of our interest in
ScanSoft, gains of $14 million primarily related to the
sale of certain excess land and buildings in Europe
and Mexico and a $7 million favorable purchase price
adjustment associated with a prior year business sale.
The 2003amount primarily included losses related to
the sale of XESsubsidiaries in France and Germany,
which were partially offset by a gain on the sale of
our investment in XeroxSouth Africa.
Income Taxes: The following table summarizes our
consolidated income taxes and the related effectivetax
rate for each respectiveperiod ($ in millions):
Year Ended December 31,
20042003 2002
Pre-tax income $965 $436 $104
Income taxes 340 134 4
Effectivetax rate (1) 35.2% 30.7% 3.8%
(1) A detailed reconciliation of the consolidated effective tax rate to the U.S.
federal statutory income tax rate is included in Note 13.
The 2004 consolidated effective income tax rate
of 35.2 percent was comparable to the U.S. federal
statutory income tax rate. The effectiveincome tax
rate reflects the impact of nondeductible expenses and
$20million of unrecognized tax benefits primarily
related to recurring losses in certain jurisdictions
where we continue to maintain deferred tax asset
valuation allowances. This tax expense was partially
offset bytax benefits from other foreign adjustments,
including earnings taxed at different rates, tax law
changes of $14 million and other items that are
individually insignificant.