Xerox 2007 Annual Report Download - page 68

years due to the full amortization of certain intangible
assets from previous acquisitions.
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 in
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 $11
million remaining proceeds from the Palm litigation is
associated with a license and 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 all other legal matters, primarily
reflecting charges for probable losses on cases that
had not yet been resolved.
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 unamortized
deferred debt issuance costs associated with the
termination of a previous credit facility and a $2 million
loss associated with the repayment of the mortgage in
connection with the sale of our Corporate headquarters in
Stamford, Connecticut.
All other expenses, net: In 2006 all other expenses,
net decreased due to the absence of the following 2005
items:
• $15 million for property damage and impaired
receivables losses sustained from Hurricane Katrina.
• $26 million charge related to the European Union
Waste Directive.
Income Taxes
Year Ended December 31,
(in millions) 2007 2006 2005
Pre-tax income ................................................................... $1,438 $ 808 $830
Income tax expenses (benefits) ................................................... 400 (288) (5)
Effective tax rate ................................................................. 27.8% (35.6)% (0.6)%
The 2007 effective tax rate of 27.8% was lower than
the U.S. statutory rate primarily reflecting tax benefits
from the geographical mix of income and the related
effective tax rates in those jurisdictions and the utilization
of foreign tax credits as well as the resolution of other tax
matters. These benefits were partially offset by changes in
tax law.
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 the 1999-2003 IRS audits and
other 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.
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