Xerox 2008 Annual Report Download - page 47

need to recognize a material accrual, or should any of these
matters result in a final adverse judgment or be settled for
significant amounts, they could have a material adverse effect on
our results of operations, cash flows and financial position in the
period or periods in which such change in determination, judgment
or settlement occurs.
Unrecognized Tax Benefits
As of December 31, 2008, we had $170 million of unrecognized
tax benefits. This represents the tax benefits associated with
various tax positions taken, or expected to be taken, on domestic
and international tax returns that have not been recognized in our
financial statements due to uncertainty regarding their resolution.
The resolution or settlement of these tax positions with the taxing
authorities is at various stages and therefore we are unable to
make a reliable estimate of the eventual cash flows by period that
may be required to settle these matters. In addition, certain of
these matters may not require cash settlement due to the
existence of credit and net operating loss carryforwards as well as
other offsets, including the indirect benefit from other taxing
jurisdictions that may be available.
Off-Balance Sheet Arrangements
Although we rarely 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 in the Consolidated
Financial Statements. Additionally, we have utilized special purpose
entities (“SPEs”) in conjunction with certain financing transactions.
The SPEs utilized in conjunction with these transactions are
consolidated in our financial statements. These transactions, which
are discussed further in Note 4 – Receivables, Net in 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 in the Consolidated Financial
Statements for further information regarding our guarantees,
indemnifications and warranty liabilities.
Financial Risk Management
We are exposed 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 in 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, 2008, 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,
2008. A 10% appreciation or depreciation of the U.S. Dollar
against all currencies from the quoted foreign currency exchange
rates at December 31, 2008 would have an $824 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 $8.2 billion at December 31, 2008.
Interest Rate Risk Management
The consolidated weighted-average interest rates related to our
debt and liabilities to subsidiary trust issuing preferred securities for
2008, 2007 and 2006 approximated 6.6%, 7.1%, and 6.8%,
respectively. Interest expense includes the impact of our interest
rate derivatives.
Virtually all customer-financing assets earn fixed rates of interest.
The interest rates on a significant portion of the Company’s term
debt are fixed.
As of December 31, 2008, approximately $1.1 billion of our debt
and liability to subsidiary trust issuing preferred securities carried
variable interest rates, including the effect of pay-variable interest
rate swaps we are utilizing with the intent to reduce the effective
interest rate on our high coupon debt.
The fair market values of our fixed-rate financial instruments are
sensitive to changes in interest rates. At December 31, 2008, a
10% change in market interest rates would change the fair values
of such financial instruments by approximately $317 million. The
recent market events have not required us to materially modify or
change our financial risk management strategies with respect to
our exposures to interest rate and foreign currency risk.
Xerox 2008 Annual Report 45