Xerox 2006 Annual Report Download - page 50

order to make them 100% funded on a current liability
basis under the ERISA funding rules. In addition, our debt
ratings, which are periodically reviewed by major rating
agencies, have steadily improved over the past three
years. Since the rating on the Company’s senior
unsecured debt has now reached investment grade, the
Company will have increased flexibility when
considering these funding decisions.
Our other post-retirement benefit plans are
non-funded and are almost entirely related to domestic
operations. Cash contributions are made each year to
cover medical claims costs incurred in that year. The
amounts reported in the above table as retiree health
payments represent our estimated future benefit
payments.
Fuji Xerox: We had product purchases from Fuji
Xerox totaling $1.7 billion, $1.5 billion, and $1.1 billion
in 2006, 2005 and 2004, respectively. Our purchase
commitments with Fuji Xerox are in the normal course of
business and typically have a lead time of three months.
We anticipate that we will purchase approximately $1.7
billion of products from Fuji Xerox in 2007. Related party
transactions with Fuji Xerox are discussed in Note 7 –
Investments in Affiliates, at Equity to the Consolidated
Financial Statements.
Brazil Tax and Labor Contingencies: At
December 31, 2006, our Brazilian operations were
involved in various litigation matters and have been the
subject of numerous governmental assessments related to
indirect and other taxes as well as disputes associated
with former employees and contract labor. The tax
matters, which comprise a significant portion of the total
contingencies, principally relate to claims for taxes on the
internal transfer of inventory, municipal service taxes on
rentals and gross revenue taxes. We are disputing these
tax 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. The labor matters principally
relate to claims made by former employees and contract
labor for the equivalent payment of all social security and
other related labor benefits, as well as consequential tax
claims, as if they were regular employees. Following our
assessment of a negative trend in recent settlements and a
decision to change our legal strategy, we reassessed the
probable estimated loss on these matters and, as a result,
recorded an additional provision of $68 million in 2006.
As of December 31, 2006, the total amounts related to the
unreserved portion of the tax and labor contingencies,
inclusive of any related interest, amounted to
approximately $960 million, with the increase from
December 31, 2005 balance of $900 million primarily
related to indexation, interest and currency partially offset
by the additional provision. In connection with the above
proceedings, customary local regulations may require us
to make escrow cash deposits or post other security of up
to half of the total amount in dispute. As of December 31,
2006 we had $154 million of escrow cash deposits for
matters we are disputing and there are liens on certain
Brazilian assets with a net book value of $18 million and
additional letters of credit of approximately $60 million.
Generally, any escrowed amounts would be refundable
and any liens would be removed to the extent the matters
are resolved in our favor. We routinely assess all 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
nature of these lease arrangements is discussed in Note
6 – Land, Buildings and Equipment, Net 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 are consolidated in
our financial statements in accordance with applicable
accounting standards. These transactions, which are
discussed further in Note 4 – Receivables, Net 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.
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