Xerox 2006 Annual Report Download - page 42

against the Euro and the Yen in 2005, as compared to the
weakening U.S. Dollar in 2004, and decreased costs of
hedging foreign currency denominated assets and liabilities
due to lower spot/forward premiums in 2005.
Legal matters: In 2006 legal matters expenses
consisted of the following:
• $68 million for probable losses on Brazilian labor-
related contingencies – see Note 16 –
Contingencies within the Consolidated Financial
Statements for additional details.
• $33 million associated with probable losses from
various legal matters partially offset by $12 million
of proceeds from the Palm litigation matter. The
remaining proceeds from the Palm litigation matter
of $11 million are associated with a license and are
recorded in Sales as licensing revenue.
In 2005, legal matters expenses consisted of the
following:
• $102 million, including $13 million for interest
expense, related to the MPI arbitration panel ruling.
• $13 million related to other legal matters, primarily
reflecting charges for probable losses on cases that
have not yet been resolved.
In 2004, legal matters expenses consisted of costs
associated with the resolution of legal and regulatory
matters, none of which was individually material,
partially offset by the adjustment of an estimate
associated with a previously recorded litigation accrual.
Refer to Note 16 – Contingencies in the
Consolidated Financial Statements for additional
information regarding litigation against the Company.
Loss on extinguishment of debt: 2006 loss of $15
million includes the $13 million write-off of remaining
unamortized deferred debt issuance costs associated with
the termination of our 2003 Credit Facility and a $2
million loss associated with the mortgage repayment in
connection with the sale of our Corporate headquarters.
All other expenses, net: In 2006 all other expenses,
net decreased due to the absence of the following 2005
items:
• $15 million for losses sustained from Hurricane
Katrina related to property damage and impaired
receivables.
• $26 million charge related to the European Union
Waste Directive.
Income tax (benefits) expenses were as follows (in millions):
Year Ended December 31,
2006 2005 2004
Pre-tax income ........................................................ $ 808 $830 $965
Income tax (benefits) expenses ............................................ (288) (5) 340
Effective tax rate ....................................................... (35.6)% (0.6)% 35.2%
The 2006 effective tax rate of (35.6%) was lower
than the U.S. statutory rate primarily due to:
• Tax benefits of $518 million from the resolution of
tax issues associated with domestic and foreign tax
audits.
• Tax benefits of $19 million as a result of tax law
changes and tax treaty changes.
• $11 million from the reversal of a valuation
allowance on deferred tax assets associated with
foreign net operating loss carryforwards.
• The geographical mix of income and related
effective tax rates in those jurisdictions.
• These benefits were partially offset by losses in
certain jurisdictions where we are not providing tax
benefits and continue to maintain deferred tax
valuation allowances.
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.
• 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.
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