Xerox 2005 Annual Report Download - page 53

Xerox Corporation
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of inventory, municipal service taxes on rentals and gross
revenue taxes. We are disputing these tax and labor matters
and intend to vigorously defend our position. Based on the
opinion of legal counsel, we do not believe that the ultimate
resolution of these matters will materially impact our results of
operations, financial position or cash flows. In connection with
these proceedings, customary local regulations may require
us to make escrow cash deposits or post other security of up
to one-half of the total amount in dispute. As of December 31,
2005, we have made escrow cash deposits of $117 million for
matters we are disputing and there are liens on certain of our
Brazilian assets. Generally, any escrowed amounts would be
refundable and any liens would be removed to the extent the
matter is resolved in our favor. We routinely assess these matters
as to probability of ultimately incurring a liability against our
Brazilian operations and record our best estimate of the ultimate
loss in situations where we assess the likelihood of an ultimate
loss as probable of occurring.
Off-Balance-Sheet Arrangements
Although we generally do not utilize off-balance-sheet arrangements
in our operations, we enter into operating leases in the normal
course of business. The natureof these lease arrangements is
discussed in Note 6 to the Consolidated Financial Statements.
Additionally, we utilize special-purpose entities (“SPEs”) in
conjunction with certain financing transactions. The SPEs utilized
in conjunction with these transactions areconsolidated in our
financial statements in accordance with applicable accounting
standards. These transactions, which arediscussed further in
Note 4 to the Consolidated Financial Statements, have been
accounted for as secured borrowings with the debt and related
assets remaining on our balance sheets. Although the obligations
related to these transactions are included in our balance sheet,
recourse is generally limited to the secured assets and no other
assets of the Company.
Refer to Note 16 – Contingencies for further information regarding
our guarantees, indemnifications and warranty liabilities.
Financial Risk Management
Weareexposed to market risk from foreign currency exchange
rates and interest rates, which could affect operating results,
financial position and cash flows. We manage our exposure to
these market risks through our regular operating and financing
activities and, when appropriate, through the use of derivative
financial instruments. These derivative financial instruments are
utilized to hedge economic exposures as well as reduce earnings
and cash flow volatility resulting from shifts in market rates.
Refer to Note 13 – Financial Instruments to the Consolidated
Financial Statements for further discussion on our financial
risk management.
Assuming a 10% appreciation or depreciation in foreign currency
exchange rates from the quoted foreign currency exchange rates
at December 31, 2005, the potential change in the fair value of
foreign currency-denominated assets and liabilities in each entity
would not be significant because all material currency asset and
liability exposures were economically hedged as of December 31,
2005. A 10% appreciation or depreciation of the U.S. Dollar against
all currencies from the quoted foreign currency exchange rates
at December 31, 2005 would have a $582 million impact on our
cumulative translation adjustment portion of equity. The amount
permanently invested in foreign subsidiaries and affiliates, primarily
Xerox Limited, Fuji Xerox, Xerox Canada Inc. and Xerox do Brasil,
and translated into dollars using the year-end exchange rates,
was $5.8 billion at December 31, 2005, net of foreign currency-
denominated liabilities designated as a hedge of our net investment.
Interest Rate Risk Management: The consolidated weighted-
average interest rates related to our debt and liabilities to
subsidiary trusts issuing preferred securities for 2005, 2004 and
2003 approximated 6.0%, 5.8% and 6.0%, respectively. Interest
expense includes the impact of our interest rate derivatives.
Virtually all customer-financing assets earn fixed rates of interest.
As discussed above, a significant portion of those assets has been
pledged as collateral for secured financing arrangements and
the interest rates on a significant portion of those loans arefixed.
As of December 31, 2005, approximately $2.9 billion of our debt
carried variable interest rates, including the effect of pay-variable
interest rate swaps we areutilizing with the intent to reduce the
effective interest rate on our debt.
The fair market values of our fixed-rate financial instruments are
sensitive to changes in interest rates. At December 31, 2005, a
10% change in market interest rates would change the fair values
of such financial instruments by approximately $257 million.
Forward-Looking Statements
This Annual Report contains forward-looking statements and
information relating to Xerox that are based on our beliefs, as well
as assumptions made by and information currently available to us.
The words “anticipate,” “believe,” “estimate,” “expect,” “intend,”
“will,” “should” and similar expressions, as they relate to us, are
intended to identify forward-looking statements. Actual results
could differ materially from those projected in such forward-looking
statements. Information concerning certain factors that could
cause actual results to differ materially is included in our 2005
Annual Report on Form 10-K filed with the SEC. We do not intend
to update these forward-looking statements.
Xerox Annual Report 2005