Xerox 2009 Annual Report Download - page 29

27Xerox 2009 Annual Report
Management’s Discussion
Assuming settlement losses in 2010 are consistent with 2009, our
2010 net periodic defined benefit pension cost is expected to be
approximately $70 million higher than 2009, primarily as a result
of a decrease in the discount rate and increased amortization of
actuarial losses, which includes the impact of the significant asset
losses in 2008.
On a consolidated basis, we recognized net periodic pension cost
of $270 million, $254 million and $315 million for the years ended
December 31, 2009, 2008 and 2007, respectively. The costs associated
with our defined contribution plans, which are included in net periodic
pension cost, were $38 million, $80 million and $80 million for the years
ended December 31, 2009, 2008 and 2007, respectively. The decrease
in 2009 was primarily due to the April 2009 suspension of the 401(k)
match in the U.S. Pension cost is included in several income statement
components based on the related underlying employee costs. Pension
and post-retirement benefit plan assumptions are included in Note
14 – Employee Benefit Plans in the Consolidated Financial Statements.
Holding all other assumptions constant, a 0.25% increase or decrease
in the discount rate would change the 2010 projected net periodic
pension cost by $12 million. Likewise, a 0.25% increase or decrease in
the expected return on plan assets would change the 2010 projected
net periodic pension cost by $11 million.
IncomeTaxesandTaxValuationAllowances
We record the estimated future tax effects of temporary differences
between the tax bases of assets and liabilities and amounts reported in
our Consolidated Balance Sheets, as well as operating loss and tax credit
carryforwards. We follow very specific and detailed guidelines in each
tax jurisdiction regarding the recoverability of any tax assets recorded in
our Consolidated Balance Sheets and provide valuation allowances as
required. We regularly review our deferred tax assets for recoverability
considering historical profitability, projected future taxable income, the
expected timing of the reversals of existing temporary differences and
tax planning strategies. If we continue to operate at a loss in certain
jurisdictions or are unable to generate sufficient future taxable income,
or if there is a material change in the actual effective tax rates or time
period within which the underlying temporary differences become
taxable or deductible, we could be required to increase the valuation
allowance against all or a significant portion of our deferred tax assets,
resulting in a substantial increase in our effective tax rate and a material
adverse impact on our operating results. Conversely, if and when our
operations in some jurisdictions were to become sufficiently profitable
to recover previously reserved deferred tax assets, we would reduce all
or a portion of the applicable valuation allowance in the period when
such determination is made. This would result in an increase to reported
earnings in such period. Adjustments to our valuation allowance,
through (credits) charges to income tax expense, were $(11) million,
$17 million and $14 million for the years ended December 31, 2009,
2008 and 2007, respectively. There were other (decreases) increases to
our valuation allowance, including the effects of currency, of $55 million,
$(136) million and $86 million for the years ended December 31, 2009,
Cumulative actuarial losses for our pension plans of $1.8 billion as of
December 31, 2009 were flat as compared to December 31, 2008.
Positive returns on plan assets in 2009 as compared to expected returns
offset a decrease in discount rates. The total actuarial loss will be
amortized in the future, subject to offsetting gains or losses that will
change the future amortization amount.
We have utilized a weighted average expected rate of return on plan
assets of 7.4% for 2009 and 7.6% for both 2008 and 2007, on a
worldwide basis.
During 2009, the actual return on plan assets was $720 million, primarily
as a result of an improvement in the equity markets. In estimating
the 2010 expected rate of return, in addition to assessing recent
performance, we considered the historical returns earned on plan assets,
the rates of return expected in the future and our investment strategy
and asset mix with respect to the plans’ funds. The weighted average
expected rate of return on plan assets we will utilize for 2010 will be
7.3% as compared to 7.4% in 2009 and 7.6% in 2008.
For purposes of determining the expected return on plan assets, we
utilize a calculated value approach in determining the value of the
pension plan assets, as opposed to a fair market value approach. The
primary difference between the two methods relates to a systematic
recognition of changes in fair value over time (generally two years)
versus immediate recognition of changes in fair value. Our expected rate
of return on plan assets is then applied to the calculated asset value to
determine the amount of the expected return on plan assets to be used
in the determination of the net periodic pension cost. The calculated
value approach reduces the volatility in net periodic pension cost that
can result from using the fair market value approach. The difference
between the actual return on plan assets and the expected return on
plan assets is added to, or subtracted from, any cumulative differences
that arose in prior years. This amount is a component of the net
actuarial gain or loss.
Another significant assumption affecting our pension and post-
retirement benefit obligations and the net periodic pension and other
post-retirement benefit cost is the rate that we use to discount our
future anticipated benefit obligations. The discount rate reflects the
current rate at which the pension liabilities could be effectively settled
considering the timing of expected payments for plan participants. In
estimating this rate, we consider rates of return on high-quality fixed-
income investments included in various published bond indices, adjusted
to eliminate the effects of call provisions and differences in the timing
and amounts of cash outflows related to the bonds. In the U.S. and
the U.K., which comprise approximately 80% of our projected benefit
obligations, we consider the Moody’s Aa Corporate Bond Index and the
International Index Company’s iBoxx Sterling Corporate AA Cash Bond
Index, respectively, in the determination of the appropriate discount rate
assumptions. The weighted average discount rate we utilized to measure
our pension obligation as of December 31, 2009 and to calculate our
2010 expense was 5.7%, which is a decrease of 0.6% from 6.3% used
in determining our 2009 expense.