Xerox 2009 Annual Report Download - page 42

40 Xerox 2009 Annual Report
Management’s Discussion
estimated. Should developments in any of these areas cause a change in
our determination as to an unfavorable outcome and result in the 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, 2009 we had $148 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 settle-
ment 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. In addition, we have facilities in the U.S.,
Canada and several countries in Europe that enable us to sell, on
an ongoing basis, certain short-term accounts receivable without
recourse to third parties. Refer to Note 4 – Receivables, Net in the
Consolidated Financial Statements for further information.
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.
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. Refer to
Note 13 – Financial Instruments in the Consolidated Financial
Statements for further discussion on our financial risk management.
FujiXerox
We purchased products, including parts and supplies, from Fuji Xerox
totaling $1.6 billion, $2.1 billion and $1.9 billion in 2009, 2008 and
2007, respectively. Our purchase commitments with Fuji Xerox are
in the normal course of business and typically have a lead time of
three months. 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
Our Brazilian operations were involved in various litigation matters
and have received or 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, princi-
pally 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. As of December 31, 2009 the total amounts
related to the unreserved portion of the tax and labor contingencies,
inclusive of any related interest, amounted to approximately $1,225
million, with the increase from the December 31, 2008 balance of
$839 million primarily related to currency and current-year interest
indexation. 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, 2009 we had $240 million of escrow cash deposits
for matters we are disputing, and there are liens on certain Brazilian
assets with a net book value of $19 million and additional letters of
credit of approximately $137 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, law suits,
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