Xerox 2010 Annual Report Download - page 50

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Management’s Discussion
Xerox 2010 Annual Report
As of December 31, 2010, the total amounts related to the unreserved
portion of the tax and labor contingencies, inclusive of any related
interest, amounted to approximately $1,274 million, with the increase
from the December 31, 2009 balance of $1,225 million primarily related
to currency and current-year interest indexation partially offset by
matters that have been closed. With respect to the unreserved balance
of $1,274 million, the majority has been assessed by management as
being remote as to the likelihood of ultimately resulting in a loss to the
Company. 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,
2010 we had $276 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
$160 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 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 17 – 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 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.
PensionandOtherPost-retirementBenetPlans
We sponsor defined benefit pension plans and retiree health
plans that require periodic cash contributions. Our 2010
contributions for these plans were $237 million for our defined
benefit pension plans and $92 million for our retiree health plans.
In 2011 we expect, based on current actuarial calculations, to
make contributions of approximately $500 million to our worldwide
defined benefit pension plans and approximately $90 million to our
retiree health benefit plans. Contributions to our defined benefit
pension plans have increased from the prior year due to a decrease
in the discount rate, prior years’ investment performance as well as
the requirement in the U.S. to make quarterly contributions for the
current plan year. Contributions in subsequent years will depend on
a number of factors, including the investment performance of plan
assets and discount rates as well as potential legislative and plan
changes. We currently expect contributions to our defined benefit
pension plans to decline in years subsequent to 2011.
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 during the year. The amounts
reported in the above table as retiree health payments represent our
estimate of future benefit payments.
FujiXerox
We purchased products, including parts and supplies, from Fuji Xerox
totaling $2.1 billion, $1.6 billion and $2.1 billion in 2010, 2009 and
2008, respectively. Our purchase commitments with Fuji Xerox are
entered into 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 are 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,
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
positions. 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.