Xerox 2008 Annual Report Download - page 46

Management’s Discussion
Pension and Other Post-Retirement Benefit Plans
We sponsor pension and other post-retirement benefit plans that
may require periodic cash contributions. Our 2008 cash fundings
for these plans were $299 million for pensions and $105 million for
our retiree health plans. Our required cash fundings for 2009 are
approximately $108 million for pensions and approximately $105
million for our retiree health plans. Cash contribution requirements
for our domestic tax qualified pension plans are governed by the
Employment Retirement Income Security Act (“ERISA”) and the
Internal Revenue Code. Cash contribution requirements for our
international plans are subject to the applicable regulations in each
country. The expected 2009 pension contributions do not include
contributions to the domestic tax-qualified plans because none are
required due to the availability of a credit balance which resulted
from funding prior to 2008 in excess of minimum requirements.
This credit balance can be utilized in lieu of any 2009 pension
contributions. However, once the January 1, 2009 actuarial
valuations and projected results as of the end of the 2009
measurement year are available, the desirability of additional
contributions will be assessed. Based on these results, we may
voluntarily decide to contribute to these plans, even though no
contribution is required. In prior years, after making this
assessment, we decided to contribute $165 million and $158
million in 2008 and 2007, respectively, to our domestic tax
qualified plans in order to make them 100% funded on a current
liability basis under the ERISA funding rules.
Our retiree health 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 purchased products, including parts and supplies, from Fuji
Xerox totaling $2.1 billion, $1.9 billion and $1.7 billion in 2008,
2007 and 2006, respectively. Our purchase commitments with Fuji
Xerox are in the normal course of business and typically have a
lead time of three months. We do not anticipate 2009 purchases
from Fuji Xerox to exceed 2008 levels. Related party transactions
with Fuji Xerox are discussed in Note 7 – Investments in Affiliates,
at Equity in the Consolidated Financial Statements.
Brazil Tax and Labor Contingencies
As of December 31, 2008, our Brazilian operations are 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 and current reserves for those matters deemed
probable of loss, 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 the most recent trends in
the outcomes of these matters, we reassessed the probable
estimated loss and, as a result, recorded an additional reserve of
$36 million in 2008. As of December 31, 2008, the total amounts
related to the unreserved portion of the tax and labor
contingencies, inclusive of any related interest, amounted to
approximately $839 million, with the decrease from the
December 31, 2007 balance of $1.1 billion primarily related to
currency partially offset by the additional reserve. 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, 2008
we had $167 million of escrow cash deposits for matters we are
disputing and there are liens on certain Brazilian assets with a net
book value of $30 million and additional letters of credit of
approximately $88 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.
Other Contingencies and Commitments
As more fully discussed in Note 16 – Contingencies in the
Consolidated Financial Statements, we are involved in a variety of
claims, lawsuits, investigations and proceedings concerning
securities law, intellectual property law, environmental law,
employment law and the Employee Retirement Income Security
Act. In addition, guarantees, indemnifications and claims may arise
during the ordinary course of business from relationships with
suppliers, customers and nonconsolidated affiliates.
Nonperformance under a contract including a guarantee,
indemnification or claim could trigger an obligation of the
Company. We determine whether an estimated loss from a
contingency should be accrued by assessing whether a loss is
deemed probable and can be reasonably estimated. Should
developments in any of these areas cause a change in our
determination as to an unfavorable outcome and result in the
44 Xerox 2008 Annual Report