Xerox 2005 Annual Report Download - page 46

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
38
In 2003, legal matters costs primarily consisted of a $239
million provision for litigation relating to the court-approved
settlement of the Berger v. Retirement Income Guarantee Plan
(“RIGP”) litigation. RIGP represents the primary U.S. pension
plan for salaried employees. The settlement was paid from
RIGP assets and was reflected in our 2004 actuarial valuation.
The obligation related to this settlement was included in plan
amendments in the change in the benefit obligation.
Refer to Note 16 – Contingencies in the Consolidated Financial
Statements for additional information regarding litigation against
the Company.
All Other Expenses, Net: In 2005 all other expenses, net, included
the following individually significant items:
•$15 million for losses sustained from Hurricane Katrina
related to property damage and impaired receivables. We
continue to reassess the estimate of our losses from the
effects of Hurricane Katrina. Our current estimate as of
December 31, 2005, of total assets at risk in the affected
areas, primarily finance receivables from customers, was
approximately $20 million.
•$26 million charge related to the European Union Waste
Directive, including the associated adoption of FASB Staff
Position No. 143-1, “Accounting for Electronic Equipment
Waste Obligations,” which provided guidance on accounting
for the European Union (EU) Directive on the disposal of elec-
tronic equipment. Refer to Note 1 – Summary of Significant
Accounting Policies in the Consolidated Financial Statements.
In 2003, all other expenses, net, included a $73 million loss on
early extinguishment of debt reflecting the write-off of the remain-
ing unamortized fees associated with the 2002 Credit Facility.
Income tax (benefits) expenses were as follows (in millions):
Year Ended December 31, 2005 2004 2003
Pre-tax income $ 830 $ 965 $ 436
Income tax (benefits) expenses (5) 340 134
Effective tax rate (0.6)% 35.2% 30.7%
The 2005 effective tax rate of (0.6)% was lower than the U.S.
statutory tax rate primarily due to:
•Tax benefits of $253 million associated with the finalization of
the 1996-1998 IRS audit in the second quarter.
•Tax benefits of $42 million primarily from the realization of
foreign tax credits offset by the geographical mix of income
and the related tax rates in those jurisdictions.
•Tax benefits of $31 million from the reversal of a valuation
allowance on deferred tax assets associated with foreign
net operating loss carryforwards. This reversal followed
a re-evaluation of their future realization resulting from a
refinancing of a foreign operation.
•These impacts were partially offset by losses in certain
jurisdictions where we are not providing tax benefits and
continue to maintain deferred tax valuation allowances.
The 2004 effective tax rate of 35.2% was comparable to the
U.S. statutory tax rate, primarily reflecting:
•The impact of nondeductible expenses and $20 million of
unrecognized tax benefits primarily related to recurring
losses in certain jurisdictions where we maintained deferred
tax asset valuation allowances.
•Partially offset by tax benefits from other foreign adjustments,
including earnings taxed at different rates, tax law changes of
$14 million and other items that are individually insignificant.
The 2003 effective tax rate of 30.7% was lower than the U.S.
statutory tax rate, primarily reflecting:
•Tax benefits of $35 million resulting from the reversal of
valuation allowances on deferred tax assets following a
re-evaluation of their future realization due to improved financial
performance, other foreign adjustments, including earnings
taxed at different rates, the impact of Series B Convertible
Preferred Stock dividends and state tax benefits.
•Partially offset by tax expense for audit and other tax return
adjustments, as well as $19 million of unrecognized tax benefits
primarily related to recurring losses in certain jurisdictions
wherewe maintained deferred tax asset valuation allowances.
Our effective tax rate is based on recurring factors including the
geographical mix of income beforetaxes and the related tax
rates in those jurisdictions, as well as available foreign tax credits.
In addition, our effective tax rate will change based on discrete
or other nonrecurring events (such as audit settlements) that
may not be predictable. Weanticipate that our effective tax rate
for 2006 will approximate 34.0%, excluding the effects of any
discrete items.
Equity in Net Income of Unconsolidated Affiliates: Equity in net
income of unconsolidated affiliates of $98 million, principally
related to our 25% share of Fuji Xerox income, decreased $53
million in 2005 as compared to 2004, reflecting the following:
•A$44 million decrease in our 25% share of Fuji Xerox’s net
income. The lower net income related to the absence of the
$38 million pension settlement gain in 2004. Refer to Note 7 –
Investments in Affiliates, at Equity in the Consolidated Financial
Statements for condensed financial data of Fuji Xerox.
•The absence of $7 million of equity income from Integic
Corporation. In the first quarter of 2005, we sold our entire
equity interest in Integic Corporation.
Xerox Annual Report 2005