Xerox 2012 Annual Report Download - page 52

Management’s Discussion
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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, 2012, we had $201 million of unrecognized tax
benefits. This represents the tax benefits associated with various tax
positions taken, or expected to be taken, on domestic and foreign 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
Occasionally we may utilize off-balance sheet arrangements in our
operations (as defined by the SEC Financial Reporting Release 67
(FRR-67), “Disclosure in Management’s Discussion and Analysis
about Off-Balance Sheet Arrangements and Aggregate Contractual
Obligations.”). We enter into the following arrangements that have
off-balance sheet elements:
• Operating leases in the normal course of business. The nature of
these lease arrangements is discussed in Note 7 – Land, Buildings,
Equipment and Software, Net in the Consolidated Financial
Statements.
• We have facilities, primarily in the U.S., Canada and several countries
in Europe, that enable us to sell to third-parties certain accounts
receivable without recourse. In most instances a portion of the sales
proceeds are held back by the purchaser and payment is deferred
until collection of the related sold receivables. Refer to Note 4 –
Accounts Receivables, Net in the Consolidated Financial Statements
for further information regarding these facilities.
• During 2012 we entered into arrangements to sell our entire interest
in certain groups of finance receivables where we received cash and
beneficial interests from the third-party purchaser. Refer to Note 5 –
Finance Receivables, Net in the Consolidated Financial Statements
for further information regarding these sales.
At December 31, 2012, we do not believe we have any off-balance
sheet arrangements that have, or are reasonably likely to have, a
material current or future effect on financial condition, changes
in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources.
In addition, see the table above for the Company’s contractual cash
obligations and other commercial commitments and Note 17 –
Contingencies and Litigation in the Consolidated Financial Statements
for additional information regarding contingencies, 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. We
utilized derivative financial instruments to hedge economic exposures,
as well as reduce earnings and cash flow volatility resulting from shifts
in market rates.
Recent market events have not caused 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
additional discussion on our financial risk management.
Foreign Exchange Risk Management
Assuming a 10% appreciation or depreciation in foreign currency
exchange rates from the quoted foreign currency exchange rates at
December 31, 2012, 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, 2012. A 10%
appreciation or depreciation of the U.S. Dollar against all currencies
from the quoted foreign currency exchange rates at December 31,
2012 would have an impact on our cumulative translation adjustment
portion of equity of approximately $711 million. The net amount
invested in foreign subsidiaries and affiliates, primarily Xerox Limited,
Fuji Xerox, Xerox Canada Inc. and Xerox Brasil, and translated into U.S.
Dollars using the year-end exchange rates, was approximately
$7.1 billion at December 31, 2012.
Interest Rate Risk Management
The consolidated weighted-average interest rates related to our total
debt for 2012, 2011 and 2010 approximated 4.7%, 5.2%, and 5.8%,
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, 2012, $903 million of our total debt of
$8,489 million carried variable interest rates, including the effect of pay
variable interest rate swaps, if any, we may use to reduce the effective
interest rate on our fixed coupon debt.