Xerox 10Q 2016 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________

FORM 10-Q

_______________

(Mark One)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: September 30, 2016



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 001-04471

XEROX CORPORATION

(Exact Name of Registrant as specified in its charter)



New York		16-0468020
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)
P.O. Box 4505, 45 Glover Avenue Norwalk, Connecticut		06856-4505
(Address of principal executive offices)		(Zip Code)

(203) 968-3000

(Registrant’s telephone number, including area code)

_________________________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by a check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x Accelerated filer o Non-accelerated filer o Smaller reporting company o

Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý



Class		Outstanding at September 30, 2016
Common Stock, $1 par value		1,013,776,524 shares

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q and any exhibits to this Report may contain "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “will,” “should” and similar expressions, as they relate to us, are intended to identify forward-looking statements. These statements reflect Management's current beliefs, assumptions and expectations and are subject to a number of factors that may cause actual results to differ materially. Such factors include, but are not limited to: changes in economic conditions, political conditions, trade protection measures, licensing requirements and tax matters in the United States and in the foreign countries in which we do business; changes in foreign currency exchange rates; our ability to successfully develop new products, technologies and service offerings and to protect our intellectual property rights; the risk that multi-year contracts with governmental entities could be terminated prior to the end of the contract term and that civil or criminal penalties and administrative sanctions could be imposed on us if we fail to comply with the terms of such contracts and applicable law; the risk that our bids do not accurately estimate the resources and costs required to implement and service very complex, multi-year governmental and commercial contracts, often in advance of the final determination of the full scope and design of such contracts or as a result of the scope of such contracts being changed during the life of such contracts; the risk that subcontractors, software vendors and utility and network providers will not perform in a timely, quality manner; service interruptions; actions of competitors and our ability to promptly and effectively react to changing technologies and customer expectations; our ability to obtain adequate pricing for our products and services and to maintain and improve cost efficiency of operations, including savings from restructuring actions and the relocation of our service delivery centers; the risk that individually identifiable information of customers, clients and employees could be inadvertently disclosed or disclosed as a result of a breach of our security systems; the risk in the hiring and retention of qualified personnel; the risk that unexpected costs will be incurred; our ability to recover capital investments; the risk that our Services business could be adversely affected if we are unsuccessful in managing the start-up of new contracts; the collectability of our receivables for unbilled services associated with very large, multi-year contracts; reliance on third parties, including subcontractors, for manufacturing of products and provision of services; our ability to expand equipment placements; interest rates, cost of borrowing and access to credit markets; the risk that our products may not comply with applicable worldwide regulatory requirements, particularly environmental regulations and directives; the outcome of litigation and regulatory proceedings to which we may be a party; the possibility that the proposed separation of the Business Process Outsourcing (BPO) business from the Document Technology and Document Outsourcing business will not be consummated within the anticipated time period or at all, including as the result of regulatory, market or other factors; the potential for disruption to our business in connection with the proposed separation; the potential that BPO and Document Technology and Document Outsourcing do not realize all of the expected benefits of the separation, and other factors that are set forth in the “Risk Factors” section, the “Legal Proceedings” section, the “Management's Discussion and Analysis of Financial Condition and Results of Operations” section and other sections of this Quarterly Report on Form 10-Q, our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2016 and June 30, 2016 and our 2015 Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC). Such factors also include, but are not limited to, the factors that are set forth in the "Risk Factors" section, the "Legal Proceedings" section and other sections of the Conduent Incorporated Form 10 Registration Statement, as amended, filed with the SEC. Xerox assumes no obligation to update any forward-looking statements as a result of new information or future events or developments, except as required by law.

Xerox 2016 Form 10-Q

XEROX CORPORATION

FORM 10-Q

September 30, 2016

TABLE OF CONTENTS

For additional information about Xerox Corporation and access to our Annual Reports to Shareholders and SEC filings, free of charge, please visit our website at www.xerox.com/investor. Any information on or linked from the website is not incorporated by reference into this Form 10-Q.

Xerox 2016 Form 10-Q

PART I — FINANCIAL INFORMATION

ITEM 1 — FINANCIAL STATEMENTS

XEROX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) (UNAUDITED)



	Three Months Ended September 30,					Nine Months Ended September 30,
(in millions, except per-share data)	2016		2015			2016			2015
Revenues
Sales	$	1,076	$	1,150		$	3,242		$	3,500
Outsourcing, maintenance and rentals	3,053		3,098			9,388			9,630
Financing	83		85			248			262
Total Revenues	4,212		4,333			12,878			13,392
Costs and Expenses
Cost of sales	657		721			1,988			2,171
Cost of outsourcing, maintenance and rentals	2,216		2,592			6,839			7,316
Cost of financing	32		33			97			98
Research, development and engineering expenses	126		135			388			418
Selling, administrative and general expenses	827		855			2,571			2,676
Restructuring and related costs	32		20			229			191
Amortization of intangible assets	77		77			244			233
Separation costs	39		—			75			—
Other expenses, net	56		73			168			187
Total Costs and Expenses	4,062		4,506			12,599			13,290
Income (Loss) before Income Taxes and Equity Income	150		(173		)	279			102
Income tax expense (benefit)	5		(105		)	(1		)	(75		)
Equity in net income of unconsolidated affiliates	39		40			98			103
Income (Loss) from Continuing Operations	184		(28		)	378			280
Loss from discontinued operations, net of tax	—		(3		)	—			(64		)
Net Income (Loss)	184		(31		)	378			216
Less: Net income attributable to noncontrolling interests	3		3			8			13
Net Income (Loss) Attributable to Xerox	$	181	$	(34	)	$	370		$	203

Amounts Attributable to Xerox:
Net income (loss) from continuing operations	$	181	$	(31	)	$	370		$	267
Net loss from discontinued operations	—		(3		)	—			(64		)
Net Income (Loss) Attributable to Xerox	$	181	$	(34	)	$	370		$	203

Basic Earnings (Loss) per Share:
Continuing operations	$	0.17	$	(0.04	)	$	0.35		$	0.23
Discontinued operations	—		—			—			(0.06		)
Total Basic Earnings (Loss) per Share	$	0.17	$	(0.04	)	$	0.35		$	0.17
Diluted Earnings (Loss) per Share:
Continuing operations	$	0.17	$	(0.04	)	$	0.34		$	0.23
Discontinued operations	—		—			—			(0.06		)
Total Diluted Earnings (Loss) per Share	$	0.17	$	(0.04	)	$	0.34		$	0.17

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

Xerox 2016 Form 10-Q

XEROX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)



	Three Months Ended September 30,						Nine Months Ended September 30,
(in millions)	2016			2015			2016			2015
Net income (loss)	$	184		$	(31	)	$	378		$	216
Less: Net income attributable to noncontrolling interests	3			3			8			13
Net Income (Loss) Attributable to Xerox	181			(34		)	370			203

Other Comprehensive (Loss) Income, Net⁽¹⁾:
Translation adjustments, net	(22		)	(206		)	92			(521		)
Unrealized (losses) gains, net	(9		)	8			24			18
Changes in defined benefit plans, net	(15		)	97			(107		)	262
Other Comprehensive (Loss) Income, Net	(46		)	(101		)	9			(241		)
Less: Other comprehensive loss, net attributable to noncontrolling interests	—			(1		)	(1		)	(1		)
Other Comprehensive (Loss) Income, Net Attributable to Xerox	(46		)	(100		)	10			(240		)

Comprehensive Income (Loss), Net	138			(132		)	387			(25		)
Less: Comprehensive income, net attributable to noncontrolling interests	3			2			7			12
Comprehensive Income (Loss), Net Attributable to Xerox	$	135		$	(134	)	$	380		$	(37	)

(1) Refer to Note 15 - Other Comprehensive (Loss) Income for gross components of Other Comprehensive (Loss) Income, reclassification adjustments out of Accumulated Other Comprehensive Loss and related tax effects.

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

Xerox 2016 Form 10-Q

XEROX CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)



(in millions, except share data in thousands)	September 30, 2016			December 31, 2015
Assets
Cash and cash equivalents	$	1,423		$	1,368
Accounts receivable, net	2,466			2,319
Billed portion of finance receivables, net	99			97
Finance receivables, net	1,279			1,315
Inventories	1,019			942
Other current assets	721			644
Total current assets	7,007			6,685
Finance receivables due after one year, net	2,457			2,576
Equipment on operating leases, net	488			495
Land, buildings and equipment, net	958			996
Investments in affiliates, at equity	1,524			1,389
Intangible assets, net	1,528			1,765
Goodwill	8,688			8,823
Other long-term assets	1,992			2,060
Total Assets	$	24,642		$	24,789
Liabilities and Equity
Short-term debt and current portion of long-term debt	$	2,033		$	985
Accounts payable	1,312			1,614
Accrued compensation and benefits costs	647			651
Unearned income	401			428
Other current liabilities	1,389			1,576
Total current liabilities	5,782			5,254
Long-term debt	5,346			6,354
Pension and other benefit liabilities	2,738			2,513
Post-retirement medical benefits	744			785
Other long-term liabilities	389			417
Total Liabilities	14,999			15,323

Commitments and Contingencies (See Note 17)
Series A Convertible Preferred Stock	349			349

Common stock	1,014			1,013
Additional paid-in capital	3,071			3,017
Retained earnings	9,801			9,686
Accumulated other comprehensive loss	(4,632		)	(4,642		)
Xerox shareholders’ equity	9,254			9,074
Noncontrolling interests	40			43
Total Equity	9,294			9,117
Total Liabilities and Equity	$	24,642		$	24,789

Shares of common stock issued and outstanding	1,013,777			1,012,836

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

Xerox 2016 Form 10-Q

XEROX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)



	Three Months Ended September 30,						Nine Months Ended September 30,
(in millions)	2016			2015			2016			2015
Cash Flows from Operating Activities:
Net income (loss)	$	184		$	(31	)	$	378		$	216
Adjustments required to reconcile net income (loss) to cash flows from operating activities:
Depreciation and amortization	275			317			843			910
Provision for receivables	15			16			42			48
Provision for inventory	6			8			21			24
Net (gain) loss on sales of businesses and assets	(2		)	5			(18		)	67
Undistributed equity in net income of unconsolidated affiliates	(36		)	(37		)	(64		)	(71		)
Stock-based compensation	22			(8		)	49			37
Restructuring and asset impairment charges	13			20			199			191
Payments for restructurings	(55		)	(20		)	(120		)	(81		)
Defined benefit pension cost	32			29			108			102
Contributions to defined benefit pension plans	(35		)	(50		)	(106		)	(148		)
(Increase) decrease in accounts receivable and billed portion of finance receivables	(44		)	115			(312		)	(130		)
Collections of deferred proceeds from sales of receivables	58			58			191			192
Increase in inventories	(12		)	(61		)	(104		)	(254		)
Increase in equipment on operating leases	(74		)	(71		)	(204		)	(210		)
Decrease (increase) in finance receivables	53			(30		)	138			48
Collections on beneficial interest from sales of finance receivables	5			10			20			37
Decrease (increase) in other current and long-term assets	17			(34		)	(43		)	(94		)
Decrease in accounts payable and accrued compensation	(92		)	(96		)	(397		)	(207		)
(Decrease) increase in other current and long-term liabilities	(29		)	271			(215		)	188
Net change in income tax assets and liabilities	(19		)	(142		)	(93		)	(93		)
Net change in derivative assets and liabilities	49			(19		)	—			(17		)
Other operating, net	39			21			209			(22		)
Net cash provided by operating activities	370			271			522			733
Cash Flows from Investing Activities:
Cost of additions to land, buildings and equipment	(52		)	(39		)	(153		)	(191		)
Proceeds from sales of land, buildings and equipment	3			7			23			23
Cost of additions to internal use software	(21		)	(26		)	(65		)	(71		)
Proceeds from sale of businesses	—			6			(53		)	939
Acquisitions, net of cash acquired	—			(153		)	(18		)	(201		)
Other investing, net	1			(1		)	5			28
Net cash (used in) provided by investing activities	(69		)	(206		)	(261		)	527
Cash Flows from Financing Activities:
Net proceeds (payments) on short-term debt	2			(463		)	1,000			51
Proceeds from issuance of long-term debt	5			398			14			1,071
Payments on long-term debt	(8		)	(9		)	(973		)	(1,293		)
Common stock dividends	(79		)	(84		)	(228		)	(231		)
Preferred stock dividends	(6		)	(6		)	(18		)	(18		)
Proceeds from issuances of common stock	3			3			6			17
Excess tax benefits from stock-based compensation	—			14			—			17
Payments to acquire treasury stock, including fees	—			(691		)	—			(1,302		)
Repurchases related to stock-based compensation	—			(49		)	—			(50		)
Distributions to noncontrolling interests	(1		)	(1		)	(13		)	(57		)
Other financing	—			—			(1		)	(1		)
Net cash used in financing activities	(84		)	(888		)	(213		)	(1,796		)
Effect of exchange rate changes on cash and cash equivalents	3			(14		)	7			(71		)
Increase (decrease) in cash and cash equivalents	220			(837		)	55			(607		)
Cash and cash equivalents at beginning of period	1,203			1,641			1,368			1,411
Cash and Cash Equivalents at End of Period	$	1,423		$	804		$	1,423		$	804

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

Xerox 2016 Form 10-Q

XEROX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except per-share data and where otherwise noted)

Note 1 – Basis of Presentation

References herein to “we,” “us,” “our,” the “Company” and “Xerox” refer to Xerox Corporation and its consolidated subsidiaries unless the context suggests otherwise.

We have prepared the accompanying unaudited Condensed Consolidated Financial Statements in accordance with the accounting policies described in our 2015 Annual Report on Form 10-K (2015 Annual Report), and the interim reporting requirements of Form 10-Q. Accordingly, certain information and note disclosures normally included in our annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. You should read these Condensed Consolidated Financial Statements in conjunction with the Consolidated Financial Statements included in our 2015 Annual Report.

In our opinion, all adjustments which are necessary for a fair statement of financial position, operating results and cash flows for the interim periods presented have been made. These adjustments consist of normal recurring items. Interim results of operations are not necessarily indicative of the results of the full year.

For convenience and ease of reference, we refer to the financial statement caption “Income (Loss) before Income Taxes and Equity Income” as “pre-tax income (loss).”

Separation Update

On January 29, 2016, Xerox announced plans for the complete legal and structural separation of the Company's Business Process Outsourcing (BPO) business, to be named Conduent Incorporated (Conduent), from its Document Technology and Document Outsourcing (DT/DO) business, which will retain the Xerox Corporation name. Each of the businesses will operate as an independent, publicly-traded company. The transaction is intended to be tax-free for Xerox shareholders for federal income tax purposes.

including one that provided additional information on its pro-forma capitalization and results and another that named

the majority of its executive management and seven of nine of its directors. Also, Xerox's credit ratings remain investment grade following recent updates from the major rating agencies. Conduent is expected to be a high non-investment grade rated company following the separation. These ratings are in line with management's expectations. In addition, we released Conduent's brand identity and announced that its stock will trade on the New York Stock Exchange (NYSE) under the symbol "CNDT" while Xerox will continue to trade on the NYSE as "XRX".

Xerox has begun the process to separate and is finalizing the transaction structure, which is predicated on a spin-off of the BPO business. To effect the separation, Xerox is currently undertaking a series of internal transactions, following which Conduent will hold, directly or through its subsidiaries, the BPO business. The separation will be completed by way of a pro rata distribution of Conduent shares held by Xerox to Xerox's shareholders.

Our objective is to complete the separation by year-end 2016, subject to customary regulatory approvals, the effectiveness of a Form 10 registration statement with the SEC, tax considerations, securing any necessary financing and final approval of the Xerox Board of Directors. Until the separation is complete, we will continue to operate and report as a single company, and it will continue to be business as usual for our customers and employees.

In conjunction with the separation, Xerox also began a three-year Strategic Transformation program targeting a cumulative $2.4 billion of savings across all segments. The program is inclusive of ongoing activities and $600 of incremental transformation initiatives. Refer to Note 9- Restructuring Programs for additional information.

Xerox 2016 Form 10-Q

Note 2 – Recent Accounting Pronouncements

Revenue Recognition

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), to supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing U.S. GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 is effective for our fiscal year beginning January 1, 2018, with early adoption permitted for fiscal years beginning January 1, 2017. Subsequent to the issuance of ASU 2014-09, the FASB issued the following ASU’s which amend or provide additional guidance on topics addressed in ASU 2014-09. In March 2016, the FASB issued ASU 2016-08, Revenue Recognition - Principal versus Agent (reporting revenue gross versus net). In April 2016, the FASB issued ASU 2016-10, Revenue Recognition - Identifying Performance Obligations and Licenses. In May 2016, the FASB issued ASU 2016-12, Revenue Recognition - Narrow Scope Improvements and Practical Expedients. We will adopt this standard beginning January 1, 2018, and we will use the modified retrospective method. We continue to evaluate the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements.

Leases

In February 2016, the FASB issued ASU 2016-02, Leases. This update requires the recognition of leased assets and lease obligations by lessees for those leases currently classified as operating leases under existing lease guidance. Short term leases with a term of 12 months or less are not required to be recognized. The update also requires disclosure of key information about leasing arrangements to increase transparency and comparability among organizations. The accounting for lessors does not fundamentally change except for changes to conform and align guidance to the lessee guidance as well as to the new revenue recognition guidance in ASU 2014-09. This update is effective for our fiscal year beginning January 1, 2019. We are currently evaluating the impact of the adoption of ASU 2016-02 on our consolidated financial statements.

Cash Flows

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments. This update provides specific guidance on eight cash flow classification issues where current GAAP is either unclear or does not include specific guidance. This update is effective for our fiscal year beginning January 1, 2018. This update includes specific guidance which requires cash collected on beneficial interests received in a sale of receivables be classified as inflows from investing activities. Currently, those collections are reported in operating cash flows. We reported $211 and $305 of collections on beneficial interests as operating cash inflows on the Statement of Cash Flows for the nine months ended September 30, 2016 and for the year ended December 31, 2015, respectively. The other seven issues noted in this update are not expected to have a material impact on our financial condition, results of operations or cash flows.

Stock Compensation

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation, Improvements to Employee Share-Based payment Accounting (Topic 718). This update includes provisions to simplify certain aspects related to the accounting for share-based awards and the related financial statement presentation. The update also requires that excess tax benefits and deficiencies be recorded in the income statement when the awards vest or are settled as compared to equity as allowed under certain conditions by current US GAAP. This change is required to be adopted prospectively in the period of adoption. In addition, the ASU modifies the classification of certain share-based payment activities within the statements of cash flows and these changes are required to be applied retrospectively to all periods presented. ASU 2016-09 is effective for our fiscal year beginning January 1, 2017. The adoption of ASU No. 2016-09 for the most part is not expected to have a material impact on our financial condition, results of operations or cash flows. However, the update may add volatility to our income tax expense in future periods depending upon, among other things, the level of tax expense and the price of the Company's common stock at the date of vesting for share-based awards.

Income Taxes

In October 2016, the FASB issued ASU 2016-16, Income Taxes - Intra-Entity Transfers of Assets Other than Inventory. This update requires recognition of the income-tax consequences of an intra-entity transfer of assets other than inventory when the transfer occurs. Under current GAAP, recognition of the income tax consequences for asset transfers other than inventory could not be recognized until the asset was sold to a third party. This update is effective for our fiscal year beginning January 1, 2018 and should be applied on a modified retrospective basis

Xerox 2016 Form 10-Q

through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. We are currently evaluating the impact of the adoption of ASU 2016-16 on our consolidated financial statements.

Financial Instruments - Credit Losses

In June 2016, the FASB issued ASU 2016-13 Financial Instruments Credit Losses - Measurement of Credit Losses on Financial Instruments, which requires measurement and recognition of expected credit losses for financial assets. The update impacts financial assets and net investment in leases that are not accounted for at fair value through net income. This update is effective for our fiscal year beginning January 1, 2020, with early adoption permitted as of January 1, 2019. We are currently evaluating the impact of the adoption of ASU 2016-13 on our consolidated financial statements.

Equity Method Accounting

In March 2016, the FASB issued ASU 2016-07, Investments - Equity Method and Joint Ventures (Topic 323), Simplifying the Transition to the Equity Method of Accounting. This update eliminates the requirement that when an existing cost method investment qualifies for use of the equity method, an investor must restate its historical financial statements, as if the equity method had been used during all previous periods. Under the new guidance, at the point an investment qualifies for the equity method, any unrealized gain or loss in accumulated other comprehensive income/(loss) ("AOCI") will be recognized through earnings. This update is effective for our fiscal year beginning January 1, 2017, with early adoption permitted. The adoption of this update is not expected to have a material impact on our financial condition, results of operations or cash flows.

Interest

In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. This update requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. In August 2015, the FASB issued ASU 2015-15, which indicated that the SEC staff would not object to an entity deferring and presenting debt issuance costs associated with a line-of-credit arrangement as an asset and subsequently amortizing those costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings. All of our debt issuance costs were reported as deferred charges in Other long-term assets and were $32 at December 31, 2015, $4 of which is related to our credit agreement. Upon adoption of this update effective January 1, 2016, we reclassified $28 of debt issuance costs to long-term debt. Prior periods were retroactively revised. The costs associated with our credit agreement will continue to be reported as a deferred charge in Other long-term assets. The adoption of this standard is not expected to have any effect on our financial condition, results of operations or cash flows.

Other Updates

In 2016 and 2015, the FASB also issued the following Accounting Standards Updates which are not expected to have a material impact on our financial condition, results of operations or cash flows when adopted in future periods. Those updates are as follows:


•	Financial Instruments - Classification and Measurement: ASU 2016-01, Financial Instruments - Recognition and Measurement of Financial Instruments and Financial Liabilities. This update is effective for our fiscal year beginning January 1, 2018.


•	Derivatives and Hedging: ASU 2016-06, Contingent Put and Call Options in Debt Instruments, which is effective for our fiscal year beginning January 1, 2017 with early adoption permitted.


•	Derivatives and Hedging: ASU 2016-05, Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships, which is effective for our fiscal year beginning January 1, 2017 with early adoption permitted.


•	Inventory: ASU 2015-11, Simplifying the Subsequent Measurement of Inventory, which is effective for our fiscal year beginning January 1, 2017.


•	Disclosures of Going Concern Uncertainties: ASU 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40); Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which is effective for our fiscal year ending December 31, 2016.

Xerox 2016 Form 10-Q


•	Stock Compensation: ASU 2014-12, Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide that a Performance Target Could be Achieved after the Requisite Service Period, which was effective for our fiscal year beginning January 1, 2016.

Note 3 – Segment Reporting

Our reportable segments are aligned with how we manage the business and view the markets we serve. We report our financial performance based on the following two primary reportable segments – Services and Document Technology. Our Services segment operations involve delivery of business process and document outsourcing services for a broad range of customers from small businesses to large global enterprises. Our Document Technology segment includes the sale and support of a broad range of document systems from entry level to high-end.

In the first quarter of 2016, we revised our segment reporting to reflect the following changes:


•	The transfer of the Education/Student Loan business from the Services segment to Other as a result of the expected continued run-off of this business. This business does not meet the threshold for separate segment reporting.


•	The exclusion of the non-service elements of our defined-benefit pension and retiree-health plan costs from Segment profit.

Prior year amounts were accordingly revised to reflect these changes.

The Services segment is comprised of two outsourcing service offerings:


•	Business Process Outsourcing (BPO)


•	Document Outsourcing (which includes Managed Print Services) (DO)

Business process outsourcing services include service arrangements where we manage a customer’s business activity or process. We provide multi-industry offerings such as customer care, transaction processing, finance and accounting, and human resources, as well as industry-focused offerings in areas such as healthcare, transportation, financial services, retail and telecommunications. Document outsourcing services include service arrangements that allow customers to streamline, simplify and digitize their document-intensive business processes through automation and deployment of software applications and tools and the management of their printing needs. Document outsourcing also includes revenues from our partner print services offerings.

Our Document Technology segment includes the sale of document systems and supplies, provision of technical service and financing of products. Our products groupings range from:


•	“Entry,” which includes A4 devices and desktop printers; to


•	“Mid-range,” which includes A3 devices that generally serve workgroup environments in mid to large enterprises and includes products that fall into the following market categories: Color 41+ ppm priced at less than $100K and Light Production 91+ ppm priced at less than $100K; to


•	“High-end,” which includes production printing and publishing systems that generally serve the graphic communications marketplace and large enterprises.

Customers range from small and mid-sized businesses to large enterprises. Customers also include graphic communication enterprises as well as channel partners including distributors and resellers. Segment revenues reflect the sale of document systems and supplies, technical services and product financing.

Other includes several units, none of which meet the thresholds for separate segment reporting. This group includes paper sales in our developing market countries, Wide Format Systems, licensing revenues, Global Imaging Systems (GIS) network integration solutions, electronic presentation systems, Education/Student Loan business and non-allocated corporate items including non-financing interest and other items included in Other expenses, net.

Xerox 2016 Form 10-Q

Operating segment revenues and profitability were as follows:



	Three Months Ended September 30,					Nine Months Ended September 30,
	Segment Revenue		Segment Profit (Loss)			Segment Revenue		Segment Profit(Loss)
2016
Services	$	2,398	$	226		$	7,350	$	652
Document Technology	1,626		213			5,017		601
Other	188		(65		)	511		(211		)
Total	$	4,212	$	374		$	12,878	$	1,042
2015
Services ⁽¹⁾	$	2,367	$	(196	)	$	7,360	$	172
Document Technology	1,778		248			5,488		715
Other	188		(55		)	544		(164		)
Total	$	4,333	$	(3	)	$	13,392	$	723

_____________


(1)	Services segment results for the three and nine months ended September 30, 2015 include a charge of $389 related to our Health Enterprise platform implementations in California and Montana. $116 of the charge was recorded as a reduction to revenues and the remainder of $273 was recorded to Cost of outsourcing, maintenance and rentals.



	Three Months Ended September 30,						Nine Months Ended September 30,
Reconciliation to Pre-tax Income	2016			2015			2016			2015
Segment Profit (Loss)	$	374		$	(3	)	$	1,042		$	723
Reconciling items:
Restructuring and related costs	(32		)	(20		)	(229		)	(191		)
Restructuring charges of Fuji Xerox	(2		)	(2		)	(3		)	(4		)
Business transformation costs⁽¹⁾	(2		)	(2		)	(3		)	(9		)
Amortization of intangible assets	(77		)	(77		)	(244		)	(233		)
Non-service retirement-related costs⁽²⁾	(34		)	(30		)	(112		)	(82		)
Equity in net income of unconsolidated affiliates	(39		)	(40		)	(98		)	(103		)
Separation costs⁽³⁾	(39		)	—			(75		)	—
Other	1			1			1			1
Pre-tax Income (Loss)	$	150		$	(173	)	$	279		$	102

__________________________


(1)	Business transformation costs represent incremental costs incurred directly in support of our business transformation and restructuring initiatives such as compensation costs for overlapping staff, consulting costs and training costs.


(2)	Represents the non-service elements of our defined-benefit pension and retiree-health plan costs. Refer to Note 13 - Employee Benefit Plans for details regarding these elements.


(3)	Separation costs are expenses incurred in connection with Xerox's planned separation into two independent, publicly-traded companies. These costs are primarily for third-party investment banking, accounting, legal, consulting and other similar types of services. Refer to Note 1 - Basis of Presentation for additional information regarding Xerox's planned separation.

Note 4 – Divestitures

Information Technology Outsourcing (ITO)

In 2014, we announced an agreement to sell our ITO business to Atos SE (Atos). As a result of this agreement, we reported the ITO business as held for sale and a discontinued operation up through its date of sale, which was completed on June 30, 2015.

In February 2016, we reached an agreement with Atos on the final adjustments to the closing balance of net assets sold as well as the settlement of certain indemnifications and recorded an additional pre-tax loss on the disposal in 2015 of $24 ($14 after-tax). This additional loss was recorded in the 2015 financial statements because the agreement with Atos was reached before the financial statements had been issued, accordingly no adjustment was required in 2016. In the first quarter 2016, we paid Atos approximately $52, representing a $28 adjustment to the final sales price as a result of this agreement and a payment of $24 due from closing. The payment is reflected in Investing cash flows as an adjustment of the sales proceeds.

Xerox 2016 Form 10-Q

Other Discontinued Operations

There were no Discontinued Operations as of September 30, 2016. Summarized financial information for our Discontinued Operations in prior periods is as follows:



	Three Months Ended September 30, 2015								Nine Months Ended September 30, 2015
	ITO			Other		Total			ITO			Other		Total
Revenues	$	—		$	—	$	—		$	619		$	—	$	619
Income from operations ⁽¹⁾	—			—		—			104			—		104
Loss on disposal	(5		)	—		(5		)	(77		)	—		(77		)
Net (loss) income before income taxes	$	(5	)	$	—	$	(5	)	$	27		$	—	$	27
Income tax benefit (expense)	2			—		2			(91		)	—		(91		)
Loss from discontinued operations, net of tax	$	(3	)	$	—	$	(3	)	$	(64	)	$	—	$	(64	)

_______________


(1)	ITO Income from operations for the nine months ended September 30, 2015, excludes approximately $80 of depreciation and amortization expenses (including $14 of intangible amortization) since the business was held for sale.

Note 5 – Accounts Receivable, Net

Accounts receivable, net were as follows:



	September 30, 2016			December 31, 2015
Amounts billed or billable	$	2,180		$	2,110
Unbilled amounts	360			289
Allowance for doubtful accounts	(74		)	(80		)
Accounts Receivable, Net	$	2,466		$	2,319

Unbilled receivables include receivables associated with percentage-of-completion accounting and other earned revenues not currently billable due to contractual provisions. Amounts to be invoiced in the subsequent month for current services provided are included in amounts billable, and at September 30, 2016 and December 31, 2015 were approximately $843 and $849, respectively.

We perform ongoing credit evaluations of our customers and adjust credit limits based upon customer payment history and current creditworthiness. The allowance for uncollectible accounts receivable is determined principally on the basis of past collection experience, as well as consideration of current economic conditions and changes in our customer collection trends.

Accounts Receivable Sales Arrangements

Accounts receivable sales arrangements are utilized in the normal course of business as part of our cash and liquidity management. We have facilities in the U.S., Canada and several countries in Europe that enable us to sell to third parties certain accounts receivable without recourse. The accounts receivable sold are generally short-term trade receivables with payment due dates of less than 60 days.

All of our arrangements involve the sale of our entire interest in groups of accounts receivable for cash. In most instances, a portion of the sales proceeds is held back by the purchaser and payment is deferred until collection of the related receivables sold. Such holdbacks are not considered legal securities nor are they certificated. We report collections on such receivables as operating cash flows in the Condensed Consolidated Statements of Cash Flows because such receivables are the result of an operating activity and the associated interest rate risk is de minimis due to its short-term nature. Our risk of loss following the sales of accounts receivable is limited to the outstanding deferred purchase price receivable. These receivables are included in Other current assets in the accompanying Condensed Consolidated Balance Sheets and were $55 and $61 at September 30, 2016 and December 31, 2015, respectively.

Under most of the arrangements, we continue to service the sold accounts receivable. When applicable, a servicing liability is recorded for the estimated fair value of the servicing. The amounts associated with the servicing liability were not material.

Xerox 2016 Form 10-Q

Of the accounts receivable sold and derecognized from our balance sheet, $540 and $660 remained uncollected as of September 30, 2016 and December 31, 2015, respectively.

Accounts receivable sales were as follows:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Accounts receivable sales	$	591		$	551		$	1,919		$	1,739
Deferred proceeds	54			67			184			186
Loss on sales of accounts receivable	4			3			12			9
Estimated decrease to operating cash flows⁽¹⁾	(60		)	(31		)	(114		)	(45		)

__________________________


(1)	Represents the difference between current and prior period receivable sales adjusted for the effects of: (i) the deferred proceeds, (ii) collections prior to the end of the quarter and, (iii) currency.

Note 6 - Finance Receivables, Net

Sale of Finance Receivables

In 2013 and 2012, we transferred our entire interest in certain groups of lease finance receivables to third-party entities for cash proceeds and beneficial interests. The transfers were accounted for as sales with derecognition of the associated lease receivables. There have been no transfers of finance receivables since the year ended December 31, 2013. We continue to service the sold receivables and record servicing fee income over the expected life of the associated receivables.

The following is a summary of our prior sales activity.



	Year Ended December 31,
	2013		2012
Net carrying value (NCV) sold	$	676	$	682
Allowance included in NCV	17		18
Cash proceeds received	635		630
Beneficial interests received	86		101

The principal value of finance receivables derecognized from our balance sheet was $107 and $238 (sales value of approximately $115 and $256) at September 30, 2016 and December 31, 2015, respectively.

The lease portfolios transferred and sold were from our Document Technology segment. The ultimate purchaser has no recourse to our other assets for the failure of customers to pay principal and interest when due beyond our beneficial interests, which were $26 and $38 at September 30, 2016 and December 31, 2015, respectively, and are included in Other current assets and Other long-term assets in the accompanying Condensed Consolidated Balance Sheets. Beneficial interests of $16 and $30 at September 30, 2016 and December 31, 2015, respectively, are held by bankruptcy-remote subsidiaries and therefore are not available to satisfy any of our creditor obligations. We report collections on the beneficial interests as operating cash flows in the Condensed Consolidated Statements of Cash Flows because such beneficial interests are the result of an operating activity, and the associated interest rate risk is de minimis considering their weighted average lives of less than 2 years.

The net impact from the sales of finance receivables on operating cash flows is summarized below:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Impact from prior sales of finance receivables⁽¹⁾	$	(41	)	$	(79	)	$	(151	)	$	(273	)
Collections on beneficial interest	6			12			24			45
Estimated decrease to operating cash flows	$	(35	)	$	(67	)	$	(127	)	$	(228	)

____________________________

(1) Represents cash that would have been collected had we not sold finance receivables.

Xerox 2016 Form 10-Q

Finance Receivables – Allowance for Credit Losses and Credit Quality

Finance receivables include sales-type leases, direct financing leases and installment loans. Our finance receivable portfolios are primarily in the U.S., Canada and Europe. We generally establish customer credit limits and estimate the allowance for credit losses on a country or geographic basis. Our policy and methodology used to establish our allowance for doubtful accounts has been consistently applied over all periods presented.

The following table is a rollforward of the allowance for doubtful finance receivables as well as the related investment in finance receivables:



Allowance for Credit Losses:	United States			Canada			Europe			Other⁽²⁾			Total
Balance at December 31, 2015⁽¹⁾	$	54		$	17		$	45		$	2		$	118
Provision	4			1			5			—			10
Charge-offs	(2		)	(2		)	(2		)	—			(6		)
Recoveries and other⁽³⁾	1			2			1			—			4
Balance at March 31, 2016	$	57		$	18		$	49		$	2		$	126
Provision	—			1			7			—			8
Charge-offs	(3		)	(2		)	(3		)	—			(8		)
Recoveries and other⁽³⁾	—			1			(2		)	—			(1		)
Balance at June 30, 2016	$	54		$	18		$	51		$	2		$	125
Provision	3			1			5			—			9
Charge-offs	(1		)	(2		)	(3		)	—			(6		)
Recoveries and other⁽³⁾	1			—			—			—			1
Balance at September 30, 2016	$	57		$	17		$	53		$	2		$	129
Finance receivables as of September 30, 2016 collectively evaluated for impairment ⁽⁴⁾	$	2,139		$	377		$	1,382		$	66		$	3,964

Balance at December 31, 2014⁽¹⁾	$	51		$	20		$	58		$	2		$	131
Provision	4			1			5			1			11
Charge-offs	—			(3		)	(1		)	(1		)	(5		)
Recoveries and other⁽³⁾	—			—			(6		)	—			(6		)
Balance at March 31, 2015	$	55		$	18		$	56		$	2		$	131
Provision	3			1			6			—			10
Charge-offs	(3		)	(2		)	(5		)	—			(10		)
Recoveries and other⁽³⁾	(1		)	1			3			—			3
Balance at June 30, 2015	$	54		$	18		$	60		$	2		$	134
Provision	2			1			6			—			9
Charge-offs	—			(3		)	(1		)	—			(4		)
Recoveries and other⁽³⁾	—			—			(1		)	—			(1		)
Balance at September 30, 2015	$	56		$	16		$	64		$	2		$	138
Finance receivables as of September 30, 2015 collectively evaluated for impairment ^(1),(4)	$	2,142		$	366		$	1,562		$	67		$	4,137

__________________


(1)	In the first quarter 2016, as a result of an internal reorganization, a U.S. leasing unit previously classified in Other was reclassified to the U.S. Prior year amounts have been revised to conform to current year presentation.


(2)	Includes developing market countries and smaller units.


(3)	Includes the impacts of foreign currency translation and adjustments to reserves necessary to reflect events of non-payment such as customer accommodations and contract terminations.


(4)	Total Finance receivables exclude the allowance for credit losses of $129 and $138 at September 30, 2016 and 2015, respectively.

We evaluate our customers based on the following credit quality indicators:

•

Investment grade: This rating includes accounts with excellent to good business credit, asset quality and the capacity to meet financial obligations. These customers are less susceptible to adverse effects due to shifts in economic conditions or changes in circumstance. The rating generally equates to a Standard & Poors (S&P) rating of BBB- or better. Loss rates in this category are normally minimal at less than 1%.

Xerox 2016 Form 10-Q

•

Non-investment grade: This rating includes accounts with average credit risk that are more susceptible to loss in the event of adverse business or economic conditions. This rating generally equates to a BB S&P rating. Although we experience higher loss rates associated with this customer class, we believe the risk is somewhat mitigated by the fact that our leases are fairly well dispersed across a large and diverse customer base. In addition, the higher loss rates are largely offset by the higher rates of return we obtain on such leases. Loss rates in this category are generally in the range of 2% to 4%.

•

Substandard: This rating includes accounts that have marginal credit risk such that the customer’s ability to make repayment is impaired or may likely become impaired. We use numerous strategies to mitigate risk including higher rates of interest, prepayments, personal guarantees, etc. Accounts in this category include customers who were downgraded during the term of the lease from investment and non-investment grade status when the lease was originated. Accordingly, there is a distinct possibility for a loss of principal and interest or customer default. The loss rates in this category are approximately 10%.

Credit quality indicators are updated at least annually and the credit quality of any given customer can change during the life of the portfolio. Details about our finance receivables portfolio based on industry and credit quality indicators are as follows:



	September 30, 2016								December 31, 2015⁽⁴⁾
	Investment Grade		Non-investment Grade		Substandard		Total Finance Receivables		Investment Grade		Non-investment Grade		Substandard		Total Finance Receivables
Finance and other services	$	178	$	336	$	94	$	608	$	195	$	285	$	91	$	571
Government and education	553		57		6		616		575		48		7		630
Graphic arts	133		117		98		348		145		92		127		364
Industrial	83		73		25		181		89		62		22		173
Healthcare	77		49		16		142		90		46		19		155
Other	90		102		52		244		121		107		53		281
Total United States	1,114		734		291		2,139		1,215		640		319		2,174
Finance and other services	57		41		10		108		55		35		9		99
Government and education	55		6		1		62		59		7		2		68
Graphic arts	42		38		22		102		45		35		21		101
Industrial	23		13		3		39		23		12		3		38
Other	35		25		6		66		33		23		3		59
Total Canada	212		123		42		377		215		112		38		365
France	192		237		60		489		203		207		101		511
U.K./Ireland	190		73		1		264		235		91		3		329
Central⁽¹⁾	199		162		24		385		206		186		25		417
Southern⁽²⁾	42		134		14		190		36		138		17		191
Nordics⁽³⁾	28		25		1		54		24		35		2		61
Total Europe	651		631		100		1,382		704		657		148		1,509
Other	41		22		3		66		41		16		1		58
Total	$	2,018	$	1,510	$	436	$	3,964	$	2,175	$	1,425	$	506	$	4,106

_____________________________


(1)	Switzerland, Germany, Austria, Belgium and Holland.


(2)	Italy, Greece, Spain and Portugal.


(3)	Sweden, Norway, Denmark and Finland.


(4)	In the first quarter 2016, as a result of an internal reorganization, a U.S. leasing unit previously classified in Other was reclassified to the U.S. Prior year amounts have been reclassified to conform to current year presentation.

Xerox 2016 Form 10-Q

The aging of our billed finance receivables is based upon the number of days an invoice is past due and is as follows:



	September 30, 2016
	Current		31-90 Days Past Due		>90 Days Past Due		Total Billed		Unbilled		Total Finance Receivables		>90 Days and Accruing
Finance and other services	$	12	$	2	$	2	$	16	$	592	$	608	$	11
Government and education	17		1		3		21		595		616		23
Graphic arts	14		1		—		15		333		348		5
Industrial	4		1		1		6		175		181		5
Healthcare	3		1		1		5		137		142		5
Other	10		1		1		12		232		244		6
Total United States	60		7		8		75		2,064		2,139		55
Canada	3		—		—		3		374		377		9
France	4		—		—		4		485		489		28
U.K./Ireland	3		1		—		4		260		264		1
Central⁽¹⁾	2		1		2		5		380		385		12
Southern⁽²⁾	7		2		2		11		179		190		8
Nordics⁽³⁾	1		—		—		1		53		54		3
Total Europe	17		4		4		25		1,357		1,382		52
Other	3		—		—		3		63		66		—
Total	$	83	$	11	$	12	$	106	$	3,858	$	3,964	$	116

	December 31, 2015⁽⁴⁾
	Current		31-90 Days Past Due		>90 Days Past Due		Total Billed		Unbilled		Total Finance Receivables		>90 Days and Accruing
Finance and other services	$	10	$	2	$	2	$	14	$	557	$	571	$	14
Government and education	12		1		4		17		613		630		37
Graphic arts	12		2		1		15		349		364		8
Industrial	5		1		1		7		166		173		7
Healthcare	4		1		1		6		149		155		9
Other	14		2		2		18		263		281		7
Total United States	57		9		11		77		2,097		2,174		82
Canada	3		—		—		3		362		365		9
France	—		—		—		—		511		511		25
U.K./Ireland	1		—		—		1		328		329		1
Central⁽¹⁾	3		1		1		5		412		417		7
Southern⁽²⁾	8		2		3		13		178		191		10
Nordics⁽³⁾	1		—		—		1		60		61		4
Total Europe	13		3		4		20		1,489		1,509		47
Other	1		1		—		2		56		58		—
Total	$	74	$	13	$	15	$	102	$	4,004	$	4,106	$	138

_____________________________


(1)	Switzerland, Germany, Austria, Belgium and Holland.


(2)	Italy, Greece, Spain and Portugal.


(3)	Sweden, Norway, Denmark and Finland.


(4)	In the first quarter 2016, as a result of an internal reorganization, a U.S. leasing unit previously classified in Other was reclassified to the U.S. Prior year amounts have been reclassified to conform to current year presentation.

Xerox 2016 Form 10-Q

Note 7 – Inventories

The following is a summary of Inventories by major category:



	September 30, 2016		December 31, 2015
Finished goods	$	859	$	792
Work-in-process	58		51
Raw materials	102		99
Total Inventories	$	1,019	$	942

Note 8 – Investment in Affiliates, at Equity

Our equity in net income of unconsolidated affiliates was as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Fuji Xerox	$	35	$	34	$	87	$	90
Other investments	4		6		11		13
Total Equity in Net Income of Unconsolidated Affiliates	$	39	$	40	$	98	$	103

Fuji Xerox

Equity in net income of Fuji Xerox is affected by certain adjustments required to reflect the deferral of profit associated with intercompany sales. These adjustments may result in recorded equity income that is different from that implied by our 25% ownership interest.

Condensed financial data of Fuji Xerox was as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Summary of Operations:
Revenues	$	2,695	$	2,518	$	7,823	$	7,638
Costs and expenses	2,492		2,333		7,285		7,064
Income before income taxes	203		185		538		574
Income tax expense	54		57		163		186
Net Income	149		128		375		388
Less: Net income – noncontrolling interests	2		1		5		5
Net Income – Fuji Xerox	$	147	$	127	$	370	$	383
Weighted Average Exchange Rate⁽¹⁾	102.41		122.11		108.45		120.88

_____________________________


(1)	Represents Yen/U.S. Dollar exchange rate used to translate.

Xerox 2016 Form 10-Q

Note 9 – Restructuring Programs

During the nine months ended September 30, 2016, we recorded net restructuring and asset impairment charges of $199, which included approximately $218 of severance costs related to headcount reductions of approximately 5,700 employees worldwide, $4 of lease cancellation costs and $2 of asset impairments. These costs were offset by $20 of net reversals, primarily resulting from changes in estimated reserves from prior period initiatives, as well as a gain of $5 from the sale of real estate impaired in prior periods.

We also recorded $30 of costs during the nine months ended September 30, 2016, primarily related to professional support services associated with the implementation of the strategic transformation program.

Information related to restructuring program activity during the nine months ended September 30, 2016 is outlined below:



	Severance and Related Costs			Lease Cancellation and Other Costs			Asset Impairments⁽²⁾			Total
Balance at December 31, 2015	$	22		$	2		$	—		$	24
Provision	218			4			2			224
Reversals	(20		)	—			(5		)	(25		)
Net Current Period Charges⁽¹⁾	198			4			(3		)	199
Charges against reserve and currency	(118		)	(5		)	3			(120		)
Balance at September 30, 2016	$	102		$	1		$	—		$	103

_____________________________


(1)	Represents net amount recognized within the Condensed Consolidated Statements of Income for the period shown for restructuring and asset impairments charges.


(2)	Charges associated with asset impairments represent the write-down of the related assets to their new cost basis and are recorded concurrently with the recognition of the provision.

Reconciliation to the Condensed Consolidated Statements of Cash Flows:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Charges against reserve	$	(54	)	$	(30	)	$	(120	)	$	(242	)
Asset impairments	—			7			2			153
Effects of foreign currency and other non-cash items	(1		)	3			(2		)	8
Restructuring Cash Payments	$	(55	)	$	(20	)	$	(120	)	$	(81	)

The following table summarizes the total amount of costs incurred in connection with these restructuring programs by segment:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016			2015
Services ⁽¹⁾	$	3	$	11	$	65		$	165
Document Technology	10		1		138			18
Other	—		8		(4		)	8
Total Net Restructuring Charges	$	13	$	20	$	199		$	191

_____________________________


(1)	The nine months ended September 30, 2015 includes $146 of software asset impairment charges.

Xerox 2016 Form 10-Q

Note 10 – Debt

Term Loan Facility

On March 4, 2016, Xerox Corporation entered into a $1.0 billion senior unsecured term facility. The facility was fully drawn by April 1, 2016 and must be repaid on the earlier of 364 days or upon receipt of financing related to the separation of the Company into two independent publicly traded companies. Refer to Note 1- Basis of Presentation for information regarding the planned Company separation. Borrowings under the facility currently bear interest at a rate of LIBOR plus 1.50% and current interest rates vary between 2.02% and 2.15%.

The proceeds of the facility were used to repay maturing debt of $950 ($700 of 6.40% Senior Notes on March 15, 2016 and $250 of 7.20% Notes on April 1, 2016).

Interest Expense and Income

Interest expense and interest income were as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Interest expense⁽¹⁾	$	81	$	88	$	250	$	265
Interest income⁽²⁾	86		87		255		268

____________


(1)	Includes Equipment financing interest as well as non-financing interest expense that is included in Other expenses, net in the Condensed Consolidated Statements of Income.


(2)	Includes Finance income as well as other interest income that is included in Other expenses, net in the Condensed Consolidated Statements of Income.

Note 11 – Financial Instruments

Interest Rate Risk Management

We use interest rate swap agreements to manage our interest rate exposure and to achieve a desired proportion of variable and fixed rate debt. These derivatives may be designated as fair value hedges or cash flow hedges depending on the nature of the risk being hedged.

Fair Value Hedges

As of September 30, 2016, pay variable/receive fixed interest rate swaps with notional amounts of $300 and net asset fair value of $15 were designated and accounted for as fair value hedges. The swaps were structured to hedge the fair value of related debt by converting them from fixed rate instruments to variable rate instruments.

The following is a summary of our fair value hedges at September 30, 2016:



Debt Instrument	Year First Designated	Notional Amount		Net Fair Value		Weighted Average Interest Rate Paid		Interest Rate Received		Basis	Maturity
Senior Note 2021	2014	$	300	$	15	2.56	%	4.5	%	Libor	2021

Foreign Exchange Risk Management

We are a global company that is exposed to foreign currency exchange rate fluctuations in the normal course of our business. As a part of our foreign exchange risk management strategy, we use derivative instruments, primarily forward contracts and purchased option contracts, to hedge the following foreign currency exposures, thereby reducing volatility of earnings or protecting fair values of assets and liabilities:


•	Foreign currency-denominated assets and liabilities


•	Forecasted purchases and sales in foreign currency

Xerox 2016 Form 10-Q

At September 30, 2016 and December 31, 2015, we had outstanding forward exchange and purchased option contracts with gross notional values of $2,473 and $3,212 respectively, with terms of less than 12 months. The associated currency exposures being hedged at September 30, 2016 were consistent with year-end currency exposures, and there has not been any material change in our hedging strategy.

Foreign Currency Cash Flow Hedges

We designate a portion of our foreign currency derivative contracts as cash flow hedges of our foreign currency-denominated expenses. The net asset (liability) fair value of these contracts were $22 and $(1) as of September 30, 2016 and December 31, 2015, respectively.

Summary of Derivative Instruments Fair Value

The following table provides a summary of the fair value amounts of our derivative instruments:



Designation of Derivatives	Balance Sheet Location	September 30, 2016			December 31, 2015
Derivatives Designated as Hedging Instruments
Foreign exchange contracts – forwards	Other current assets	$	24		$	4
	Other current liabilities	(2		)	(4		)
Foreign currency options	Other current liabilities	—			(1		)
Interest rate swaps	Other long-term assets	15			7
	Net Designated Derivative Asset	$	37		$	6

Derivatives NOT Designated as Hedging Instruments
Foreign exchange contracts – forwards	Other current assets	$	62		$	51
	Other current liabilities	(6		)	(8		)
	Net Undesignated Derivative Asset	$	56		$	43

Summary of Derivatives	Total Derivative Assets	$	101		$	62
	Total Derivative Liabilities	(8		)	(13		)
	Net Derivative Asset	$	93		$	49

Summary of Derivative Instruments Gains (Losses)

Derivative gains (losses) affect the income statement based on whether such derivatives are designated as hedges of underlying exposures. The following is a summary of derivative gains (losses).

Designated Derivative Instruments Gains (Losses)

The following table provides a summary of gains (losses) on derivative instruments:



	Three Months Ended September 30,						Nine Months Ended September 30,
Gain (Loss) on Derivative Instruments	2016			2015			2016			2015
Fair Value Hedges - Interest rate contracts
Derivative (loss) gain recognized in interest expense	$	(3	)	$	7		$	8		$	7
Hedged item gain (loss) recognized in interest expense	3			(7		)	(8		)	(7		)

Cash Flow Hedges - Foreign exchange forward contracts and options
Derivative gain recognized in OCI (effective portion)	$	4		$	5		$	61		$	12
Derivative gain (loss) reclassified from AOCI to income - Cost of sales (effective portion)	17			(11		)	24			(21		)

During the three and nine months ended September 30, 2016 and 2015, no amount of ineffectiveness was recorded in earnings for these designated cash flow hedges and all components of each derivative’s gain (loss) was included in the assessment of hedge effectiveness. In addition, no amount was recorded for an underlying exposure that did not occur or was not expected to occur.

Xerox 2016 Form 10-Q

At September 30, 2016, a net after-tax gain of $25 was recorded in accumulated other comprehensive loss associated with our cash flow hedging activity. The entire balance is expected to be reclassified into net income within the next 12 months, providing an offsetting economic impact against the underlying anticipated transactions.

Non-Designated Derivative Instruments Gains (Losses)

Non-designated derivative instruments are primarily instruments used to hedge foreign currency-denominated assets and liabilities. They are not designated as hedges since there is a natural offset for the re-measurement of the underlying foreign currency-denominated asset or liability.

The following table provides a summary of gains (losses) on non-designated derivative instruments:



Derivatives NOT Designated as Hedging Instruments		Three Months Ended September 30,				Nine Months Ended September 30,
Derivatives NOT Designated as Hedging Instruments	Location of Derivative Gain (Loss)	2016		2015		2016		2015
Foreign exchange contracts – forwards	Other expense – Currency gains (loss), net	$	33	$	33	$	182	$	(2	)

Net currency gains and losses are included in Other expenses, net and include the mark-to-market adjustments of the derivatives not designated as hedging instruments and the related cost of those derivatives as well as the re-measurement of foreign currency-denominated assets and liabilities. For the three and nine months ended September 30, 2016, currency losses, net were $3 and $4, respectively. For the three and nine months ended September 30, 2015, currency losses, net were $3 and $4, respectively.

Note 12 – Fair Value of Financial Assets and Liabilities

The following table represents assets and liabilities measured at fair value on a recurring basis. The basis for the measurement at fair value in all cases is Level 2 – Significant Other Observable Inputs.



	September 30, 2016		December 31, 2015
Assets:
Foreign exchange contracts - forwards	$	86	$	55
Interest rate swaps	15		7
Deferred compensation investments in cash surrender life insurance	97		92
Deferred compensation investments in mutual funds	35		33
Total	$	233	$	187
Liabilities:
Foreign exchange contracts - forwards	$	8	$	12
Foreign currency options	—		1
Deferred compensation plan liabilities	127		125
Total	$	135	$	138

We utilize the income approach to measure the fair value for our derivative assets and liabilities. The income approach uses pricing models that rely on market observable inputs such as yield curves, currency exchange rates and forward prices, and therefore are classified as Level 2.

Fair value for our deferred compensation plan investments in Company-owned life insurance is reflected at cash surrender value. Fair value for our deferred compensation plan investments in mutual funds is based on quoted market prices for actively traded investments similar to those held by the plan. Fair value for deferred compensation plan liabilities is based on the fair value of investments corresponding to employees’ investment selections, based on quoted prices for similar assets in actively traded markets.

Summary of Other Financial Assets and Liabilities Not Measured at Fair Value on a Recurring Basis

The estimated fair values of our other financial assets and liabilities not measured at fair value on a recurring basis were as follows:

Xerox 2016 Form 10-Q



	September 30, 2016				December 31, 2015
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Cash and cash equivalents	$	1,423	$	1,423	$	1,368	$	1,368
Accounts receivable, net	2,466		2,466		2,319		2,319
Short-term debt	2,033		2,047		985		976
Long-term debt	5,346		5,537		6,354		6,395

The fair value amounts for Cash and cash equivalents and Accounts receivable, net, approximate carrying amounts due to the short maturities of these instruments. The fair value of Short and Long-term debt was estimated based on the current rates offered to us for debt of similar maturities (Level 2). The difference between the fair value and the carrying value represents the theoretical net premium or discount we would pay or receive to retire all debt at such date.

Note 13 – Employee Benefit Plans

The components of Net periodic benefit cost and other changes in plan assets and benefit obligations were as follows:



	Three Months Ended September 30,
	Pension Benefits
	U.S. Plans						Non-U.S. Plans						Retiree Health
Components of Net Periodic Benefit Costs:	2016			2015			2016			2015			2016			2015
Service cost	$	1		$	1		$	7		$	8		$	1		$	2
Interest cost	33			38			50			53			9			8
Expected return on plan assets	(35		)	(38		)	(63		)	(73		)	—			—
Recognized net actuarial loss	8			5			16			19			—			—
Amortization of prior service credit	—			—			(1		)	—			(2		)	(1		)
Recognized settlement loss	16			16			—			—			—			—
Defined Benefit Plans	23			22			9			7			8			9
Defined contribution plans	16			15			8			8			n/a			n/a
Net Periodic Benefit Cost	39			37			17			15			8			9

Other changes in plan assets and benefit obligations recognized in Other Comprehensive Loss (Income):
Net actuarial loss (gain)⁽¹⁾	113			(40		)	—			—			—			—
Amortization of prior service credit	—			—			1			—			2			1
Amortization of net actuarial loss	(24		)	(21		)	(16		)	(19		)	—			—
Total Recognized in Other Comprehensive Loss (Income)⁽²⁾	89			(61		)	(15		)	(19		)	2			1
Total Recognized in Net Periodic Benefit Cost and Other Comprehensive Loss (Income)	$	128		$	(24	)	$	2		$	(4	)	$	10		$	10

Xerox 2016 Form 10-Q



	Nine Months Ended September 30,
	Pension Benefits
	U.S. Plans						Non-U.S. Plans						Retiree Health
Components of Net Periodic Benefit Costs:	2016			2015			2016			2015			2016			2015
Service cost	$	3		$	3		$	23		$	25		$	4		$	6
Interest cost	106			114			155			159			25			25
Expected return on plan assets	(111		)	(114		)	(196		)	(220		)	—			—
Recognized net actuarial loss	20			18			50			59			1			1
Amortization of prior service credit	(1		)	(1		)	(3		)	(2		)	(4		)	(16		)
Recognized settlement loss	62			61			—			—			—			—
Recognized curtailment gain	—			—			—			—			—			(22		)
Defined Benefit Plans	79			81			29			21			26			(6		)
Defined contribution plans	45			46			28			28			n/a			n/a
Net Periodic Benefit Cost	124			127			57			49			26			(6		)

Other changes in plan assets and benefit obligations recognized in Other Comprehensive Loss (Income):
Net actuarial loss (gain)⁽¹⁾	370			(92		)	—			(2		)	(34		)	(58		)
Amortization of prior service credit	1			1			3			2			4			16
Amortization of net actuarial loss	(82		)	(79		)	(50		)	(59		)	(1		)	(1		)
Curtailment gain - recognition of net prior service credit	—			—			—			—			—			22
Total Recognized in Other Comprehensive Loss (Income)⁽²⁾	289			(170		)	(47		)	(59		)	(31		)	(21		)
Total Recognized in Net Periodic Benefit Cost and Other Comprehensive Loss (Income)	$	413		$	(43	)	$	10		$	(10	)	$	(5	)	$	(27	)

_____________________________


(1)	The net actuarial loss (gain) for U.S. Plans primarily reflects (i) the remeasurement of our primary U.S. pension plans as a result of the payment of periodic settlements; and (ii) adjustments for the actuarial valuation results based on January 1st plan census data.


(2)	Amounts represent the pre-tax effect included within Other comprehensive loss. Refer to Note 15 - Other Comprehensive (Loss) Income for related tax effects and the after-tax amounts.

Contributions

The following table summarizes cash contributions to our defined benefit pension plans and retiree health benefit plans.



	Nine Months Ended September 30,				Year Ended December 31,
	2016		2015		Estimated 2016⁽¹⁾		2015
U.S. Plans	$	20	$	40	$	25	$	177
Non-U.S. Plans	86		108		115		132
Total	$	106	$	148	$	140	$	309

Retiree Health	$	46	$	49	$	65	$	63

___________


(1)	These full year estimates are based on current expectations that we will make additional 2016 cash contributions of $34 ($5 U.S. and $29 Non-U.S) to our defined benefit pension plans and $19 to our retiree health benefit plans.

The 2016 expected pension plan contributions do not include any planned contributions for our domestic tax-qualified defined benefit plans because none are required to meet the minimum funding requirements. However, the desirability of making additional contributions will continue to be assessed, and we may voluntarily decide to contribute to these plans before the end of the year.

Plan Amendments

In June 2015, we amended our U.S. Retiree Health Plan to eliminate future benefit accruals for active salaried employees effective December 31, 2015. There was no change in benefits for union employees or existing retirees or employees that retired before December 31, 2015. As a result of this plan amendment, we recognized a pre-tax curtailment gain of $22 in the second quarter 2015. The gain represents the recognition of deferred gains from

Xerox 2016 Form 10-Q

other prior-year amendments (“prior service credits”) as a result of the discontinuation of the future benefit or service accrual period for active salaried employees.

Note 14 – Shareholders’ Equity



	Common Stock		Additional Paid-in Capital		Retained Earnings			AOCL⁽³⁾			Xerox Shareholders’ Equity			Non-controlling Interests			Total Equity
Balance at December 31, 2015	$	1,013	$	3,017	$	9,686		$	(4,642	)	$	9,074		$	43		$	9,117
Comprehensive income, net	—		—		370			10			380			7			387
Cash dividends declared - common⁽¹⁾	—		—		(237		)	—			(237		)	—			(237		)
Cash dividends declared - preferred⁽²⁾	—		—		(18		)	—			(18		)	—			(18		)
Stock option and incentive plans, net	1		54		—			—			55			—			55
Distributions to noncontrolling interests	—		—		—			—			—			(10		)	(10		)
Balance at September 30, 2016	$	1,014	$	3,071	$	9,801		$	(4,632	)	$	9,254		$	40		$	9,294



	Common Stock			Additional Paid-in Capital			Treasury Stock			Retained Earnings			AOCL⁽³⁾			Xerox Shareholders’ Equity			Non- controlling Interests			Total Equity
Balance at December 31, 2014	$	1,124		$	4,283		$	(105	)	$	9,535		$	(4,159	)	$	10,678		$	75		$	10,753
Comprehensive income (loss), net	—			—			—			203			(240		)	(37		)	12			(25		)
Cash dividends declared - common⁽¹⁾	—			—			—			(227		)	—			(227		)	—			(227		)
Cash dividends declared - preferred⁽²⁾	—			—			—			(18		)	—			(18		)	—			(18		)
Stock option and incentive plans, net	11			8			—			—			—			19			��			19
Payments to acquire treasury stock, including fees	—			—			(1,302		)	—			—			(1,302		)	—			(1,302		)
Cancellation of treasury stock	(57		)	(659		)	716			—			—			—			—			—
Distributions to noncontrolling interests	—			—			—			—			—			—			(43		)	(43		)
Balance at September 30, 2015	$	1,078		$	3,632		$	(691	)	$	9,493		$	(4,399	)	$	9,113		$	44		$	9,157

_____________________________


(1)	Cash dividends declared on common stock of $0.0775 per share in each quarter of 2016 and $0.07 per share in each quarter of 2015.


(2)	Cash dividends declared on preferred stock of $20.00 per share in each quarter of 2016 and 2015.


(3)	Refer to Note 15 - Other Comprehensive (Loss) Income for components of AOCL.

Treasury Stock

There were no repurchases of Xerox Common Stock pursuant to Board authorized share repurchase programs during the third quarter 2016 or for the nine months ended September 30, 2016.

Xerox 2016 Form 10-Q

Note 15 - Other Comprehensive (Loss) Income

Other Comprehensive (Loss) Income is comprised of the following:



	Three Months Ended September 30,												Nine Months Ended September 30,
	2016						2015						2016						2015
	Pre-tax			Net of Tax			Pre-tax			Net of Tax			Pre-tax			Net of Tax			Pre-tax			Net of Tax
Translation Adjustments (Losses) Gains	$	(22	)	$	(22	)	$	(206	)	$	(206	)	$	96		$	92		$	(521	)	$	(521	)
Unrealized Gains (Losses):
Changes in fair value of cash flow hedges - gains	4			3			5			4			61			42			12			11
Changes in cash flow hedges reclassed to earnings⁽¹⁾	(17		)	(12		)	11			5			(24		)	(17		)	21			9
Other losses	—			—			(2		)	(1		)	(1		)	(1		)	(2		)	(2		)
Net Unrealized (Losses) Gains	(13		)	(9		)	14			8			36			24			31			18

Defined Benefit Plans (Losses) Gains:
Net actuarial (losses) gains	(113		)	(69		)	40			25			(336		)	(207		)	152			94
Prior service amortization⁽²⁾	(3		)	(2		)	(1		)	(2		)	(8		)	(5		)	(41		)	(26		)
Actuarial loss amortization/settlement⁽²⁾	40			27			40			27			133			90			139			94
Fuji Xerox changes in defined benefit plans, net⁽³⁾	(8		)	(8		)	(5		)	(5		)	(108		)	(108		)	22			22
Other gains⁽⁴⁾	38			37			51			52			124			123			78			78
Changes in Defined Benefit Plans (Losses) Gains	(46		)	(15		)	125			97			(195		)	(107		)	350			262

Other Comprehensive (Loss) Income	(81		)	(46		)	(67		)	(101		)	(63		)	9			(140		)	(241		)
Less: Other comprehensive loss attributable to noncontrolling interests	—			—			(1		)	(1		)	(1		)	(1		)	(1		)	(1		)
Other Comprehensive (Loss) Income Attributable to Xerox	$	(81	)	$	(46	)	$	(66	)	$	(100	)	$	(62	)	$	10		$	(139	)	$	(240	)

_____________________________


(1)	Reclassified to Cost of sales - refer to Note 11 - Financial Instruments for additional information regarding our cash flow hedges.


(2)	Reclassified to Total Net Periodic Benefit Cost - refer to Note 13 - Employee Benefit Plans for additional information.


(3)	Represents our share of Fuji Xerox's benefit plan changes.


(4)	Primarily represents currency impact on cumulative amount of benefit plan net actuarial losses and prior service credits in AOCL.

Accumulated Other Comprehensive Loss (AOCL)

AOCL is comprised of the following:



	September 30, 2016			December 31, 2015
Cumulative translation adjustments	$	(2,309	)	$	(2,402	)
Other unrealized gains, net	25			1
Benefit plans net actuarial losses and prior service credits⁽¹⁾	(2,348		)	(2,241		)
Total Accumulated Other Comprehensive Loss Attributable to Xerox	$	(4,632	)	$	(4,642	)

_____________________________


(1)	Includes our share of Fuji Xerox.

Xerox 2016 Form 10-Q

Note 16 – Earnings per Share

The following table sets forth the computation of basic and diluted earnings per share of common stock (shares in thousands):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Basic Earnings (Loss) per Share:
Net income (loss) from continuing operations attributable to Xerox	$	181		$	(31	)	$	370		$	267
Accrued dividends on preferred stock	(6		)	(6		)	(18		)	(18		)
Net Income (Loss) From Continuing Operations Available to Common Shareholders	175			(37		)	352			249
Net loss from discontinued operations attributable to Xerox	—			(3		)	—			(64		)
Net Income (Loss) Available to Common Shareholders	$	175		$	(40	)	$	352		$	185

Weighted average common shares outstanding	1,013,718			1,045,131			1,013,360			1,080,020
Basic Earnings (Loss) per Share:
Continuing operations	$	0.17		$	(0.04	)	$	0.35		$	0.23
Discontinued operations	—			—			—			(0.06		)
Total	$	0.17		$	(0.04	)	$	0.35		$	0.17

Diluted Earnings (Loss) per Share:
Net income (loss) from continuing operations attributable to Xerox	$	181		$	(31	)	$	370		$	267
Accrued dividends on preferred stock	(6		)	(6		)	(18		)	(18		)
Net Income (Loss) From Continuing Operations Available to Common Shareholders	$	175		$	(37	)	$	352		$	249
Net loss from discontinued operations attributable to Xerox	—			(3		)	—			(64		)
Net Income (Loss) Available to Common Shareholders	$	175		$	(40	)	$	352		$	185

Weighted average common shares outstanding - Basic	1,013,718			1,045,131			1,013,360			1,080,020
Common shares issuable with respect to:
Stock options	601			—			691			1,265
Restricted stock and performance shares	10,978			—			8,326			11,995
Convertible preferred stock	—			—			—			—
Weighted Average Common Shares Outstanding - Diluted	1,025,297			1,045,131			1,022,377			1,093,280
Diluted Earnings (Loss) per Share:
Continuing operations	$	0.17		$	(0.04	)	$	0.34		$	0.23
Discontinued operations	—			—			—			(0.06		)
Total	$	0.17		$	(0.04	)	$	0.34		$	0.17

The following securities were not included in the computation of diluted earnings per share as they were either contingently issuable shares or shares that if included would have been anti-dilutive:
Stock options	1,307			3,391			1,217			2,125
Restricted stock and performance shares	22,631			25,996			25,283			18,214
Convertible preferred stock	26,966			26,966			26,966			26,966
Total Anti-Dilutive Securities	50,904			56,353			53,466			47,305

Dividends per Common Share	$	0.0775		$	0.0700		$	0.2325		$	0.2100

Xerox 2016 Form 10-Q

Note 17 – Contingencies and Litigation

Legal Matters

We are involved in a variety of claims, lawsuits, investigations and proceedings concerning securities law, intellectual property law, environmental law, employment law, commercial and contracts law, the Employee Retirement Income Security Act (ERISA) and regulatory matters. 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. We assess our potential liability by analyzing our litigation and regulatory matters using available information. We develop our views on estimated losses in consultation with outside counsel handling our defense in these matters, which involves an analysis of potential results, assuming a combination of litigation and settlement strategies. Should developments in any of these matters 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.

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, gross revenue taxes and import taxes and duties. 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 September 30, 2016, the total amounts related to the unreserved portion of the tax and labor contingencies, inclusive of any related interest, amounted to approximately $749, with the increase from our December 31, 2015 balance of approximately $577 primarily related to currency and interest. With respect to the unreserved balance of $749, 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 September 30, 2016, we had $85 of escrow cash deposits for matters we are disputing, and there are liens on certain Brazilian assets with a net book value of $4, and additional letters of credit and surety bonds of approximately $141 and $91, respectively, which include associated indexation. 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.

Litigation Against the Company

State of Texas v. Xerox Corporation, Xerox State Healthcare, LLC, and ACS State Healthcare, LLC: On May 9, 2014, the State of Texas, via the Texas Office of Attorney General (the “State”), filed a lawsuit in the 53rd Judicial District Court of Travis County, Texas. The lawsuit alleges that Xerox Corporation, Xerox State Healthcare, LLC and ACS State Healthcare (collectively, the "Xerox Defendants") violated the Texas Medicaid Fraud Prevention Act in the administration of its contract with the Texas Department of Health and Human Services (“HHSC”). The State alleges that the Xerox Defendants made false representations of material facts regarding the processes, procedures, implementation and results regarding the prior authorization of orthodontic claims. The State seeks recovery of actual damages, two times the amount of any overpayments made as a result of unlawful acts, civil penalties, pre- and post-judgment interest and all costs and attorneys’ fees. The State references the amount in controversy as exceeding hundreds of millions of dollars. The Xerox Defendants filed their Answer in June, 2014 denying all allegations. The Xerox Defendants will continue to vigorously defend themselves in this matter. We do not believe it is probable that we will incur a material loss in excess of the amount accrued for this matter. In the course of litigation, we periodically engage in discussions with plaintiff’s counsel for possible resolution of the matter. Should developments cause a change in our determination as to an unfavorable outcome, or result in a final adverse judgment or settlement for a significant amount, there could be a material adverse effect on our results of

Xerox 2016 Form 10-Q

operations, cash flows and financial position in the period in which such change in determination, judgment or settlement occurs.

Oklahoma Firefighters Pension and Retirement System v. Xerox Corporation, Ursula M. Burns, Luca Maestri, Kathryn A. Mikells, Lynn R. Blodgett and Robert K. Zapfel: On October 21, 2016, the Oklahoma Firefighters Pension and Retirement System (“plaintiff”) filed a purported securities class action complaint against Xerox Corporation, Ursula Burns, Luca Maestri, Kathryn Mikells, Lynn Blodgett and Robert Zapfel in the U.S. District Court for the Southern District of New York on behalf of the plaintiff and certain purchasers or acquirers of Xerox common stock. The complaint alleges that defendants made false and misleading statements, in violation of Sections 10(b) and 20(a) of the Securities Exchange Act and SEC Rule 10b-5, relating to the operations and prospects of Xerox’s Health Enterprise business. Plaintiff seeks, among other things, unspecified monetary damages and attorneys’ fees. Other, similar lawsuits may follow. Xerox and the individual defendants will vigorously defend against this matter. At this time, it is premature to make any conclusion regarding the probability of incurring material losses in this litigation. Should developments cause a change in our determination as to an unfavorable outcome, or result in a final adverse judgment or settlement, there could be a material adverse effect on our results of operations, cash flows and financial position in the period in which such change in determination, judgment, or settlement occurs.

Other Matters

On January 5, 2016, the Consumer Financial Protection Bureau (CFPB) notified Xerox Education Services, Inc. (XES) that, in accordance with the CFPB’s discretionary Notice and Opportunity to Respond and Advise (NORA) process, the CFPB’s Office of Enforcement is considering recommending that the CFPB take legal action against XES, alleging that XES violated the Consumer Financial Protection Act’s prohibition of unfair practices. Should the CFPB commence an action, it may seek restitution, civil monetary penalties, injunctive relief or other corrective action. The purpose of a NORA letter is to provide a party being investigated an opportunity to present its position to the CFPB before an enforcement action is recommended or commenced. This notice stems from an inquiry that commenced in 2014 when the Company, through XES, received and responded to a Civil Investigative Demand containing a broad request for information. During this process, XES self-disclosed to the Department of Education and the CFPB certain adjustments it had become aware that had not been timely made relating to its servicing of a small percentage of third-party student loans under outsourcing arrangements for various financial institutions. The CFPB and the Department of Education, as well as certain states' attorney general offices and other regulatory agencies, began similar reviews. The Company has cooperated and continues to fully cooperate with all regulatory agencies, and XES has submitted its NORA response. The Company cannot provide assurance that the CFPB or another party will not ultimately commence a legal action against XES in this matter nor is the Company able to predict the likely outcome of the investigations into this matter.

Other Contingencies

We have issued or provided the following guarantees as of September 30, 2016:


•	$344 for letters of credit issued to (i) guarantee our performance under certain services contracts; (ii) support certain insurance programs; and (iii) support our obligations related to the Brazil tax and labor contingencies.


•	$775 for outstanding surety bonds. Certain contracts, primarily those involving public sector customers, require us to provide a surety bond as a guarantee of our performance of contractual obligations.

Xerox 2016 Form 10-Q

In general, we would only be liable for the amount of these guarantees in the event of default in our performance of our obligations under each contract; the probability of which we believe is remote. We believe that our capacity in the surety markets as well as under various credit arrangements (including our Credit Facility) is sufficient to allow us to respond to future requests for proposals that require such credit support.

We have service arrangements where we service third party student loans in the Federal Family Education Loan program (FFEL) on behalf of various financial institutions. We service these loans for investors under outsourcing arrangements and do not acquire any servicing rights that are transferable by us to a third party. At September 30, 2016, we serviced a FFEL portfolio of approximately 1.6 million loans with an outstanding principal balance of approximately $24.1 billion. Some servicing agreements contain provisions that, under certain circumstances, require us to purchase the loans from the investor if the loan guaranty has been permanently terminated as a result of a loan default caused by our servicing error. If defaults caused by us are cured during an initial period, any obligation we may have to purchase these loans expires. Loans that we purchase may be subsequently cured, the guaranty reinstated and the loans repackaged for sale to third parties. We evaluate our exposure under our purchase obligations on defaulted loans and establish a reserve for potential losses, or default liability reserve, through a charge to the provision for loss on defaulted loans purchased. The reserve is evaluated periodically and adjusted based upon management’s analysis of the historical performance of the defaulted loans. As of September 30, 2016, other current liabilities included reserves of approximately $4 for losses on defaulted loans purchased. In addition to potential purchase obligations arising from servicing errors, various laws and regulations applicable to student loan borrowers could give rise to fines, penalties and other liabilities associated with loan servicing errors.

Indemnifications

We have indemnified, subject to certain deductibles and limits, the purchasers of businesses or divested assets for the occurrence of specified events under certain of our divestiture agreements. Where appropriate, an obligation for such indemnifications is recorded as a liability. Since the obligated amounts of these types of indemnifications are often not explicitly stated and/or are contingent on the occurrence of future events, the overall maximum amount of the obligation under such indemnifications cannot be reasonably estimated. Other than obligations recorded as liabilities at the time of divestiture, we have not historically made significant payments for these indemnifications. Additionally, under certain of our acquisition agreements, we have provided for additional consideration to be paid to the sellers if established financial targets are achieved post-closing. We have recognized liabilities for these contingent obligations based on an estimate of the fair value of these contingencies at the time of acquisition. Contingent obligations related to indemnifications arising from our divestitures and contingent consideration provided for by our acquisitions are not expected to be material to our financial position, results of operations or cash flows.

Xerox 2016 Form 10-Q

ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis (MD&A) is intended to help the reader understand the results of operations and financial condition of Xerox Corporation. MD&A is provided as a supplement to, and should be read in conjunction with, our Condensed Consolidated Financial Statements and the accompanying notes.

Throughout this document, references to “we,” “our,” the “Company,” and “Xerox” refer to Xerox Corporation and its subsidiaries. References to “Xerox Corporation” refer to the stand-alone parent company and do not include its subsidiaries.

Currency Impact

To understand the trends in the business, we believe that it is helpful to analyze the impact of changes in the translation of foreign currencies into U.S. Dollars on revenue and expenses. We refer to this analysis as "constant currency"; “currency impact” or “the impact from currency.” This impact is calculated by translating current period activity in local currency using the comparable prior year period's currency translation rate. This impact is calculated for all countries where the functional currency is the local country currency. We do not hedge the translation effect of revenues or expenses denominated in currencies where the local currency is the functional currency. In 2016 we revised our calculation of the currency impact on revenue growth, or constant currency revenue growth, to include the currency impacts from the developing market countries (Latin America, Brazil, Middle East, India, Eurasia and Central-Eastern Europe), which had been previously excluded from the calculation. As a result of economic changes in these markets over the past few years, we currently manage our exchange risk in our developing market countries in a similar manner to the exchange risk in our developed market countries, and therefore, the exclusion of the developing market countries from the calculation of the currency effect is no longer warranted. Management believes the constant currency measure provides investors an additional perspective on revenue trends. Currency impact can be determined as the difference between actual growth rates and constant currency growth rates.

Overview

Separation Update

During third quarter 2016, the CFO for Conduent was announced, and several amendments to the Form 10 registration statement for Conduent were filed with the U.S. Securities and Exchange Commission (SEC), including one that provided additional information on its pro-forma capitalization and results and another that named the majority of its executive management and seven of nine of its directors. Also, Xerox's credit ratings remain investment grade following recent updates from the major rating agencies. Conduent is expected to be a high non-investment grade rated company following the separation. These ratings are in line with management’s expectations. In addition, we released Conduent's brand identity and announced that its stock will trade on the New York Stock Exchange (NYSE) under the symbol "CNDT" while Xerox will continue to trade on the NYSE as "XRX".

Our objective is to complete the separation by year-end 2016, subject to customary regulatory approvals, the effectiveness of the Form 10 registration statement with the SEC, tax considerations, securing any necessary financing and final approval of the Xerox Board of Directors. Until the separation is complete, we will continue to operate and report as a single company, and it will continue to be business as usual for our customers and employees.

In conjunction with the separation, Xerox also began a three-year Strategic Transformation program targeting a cumulative $2.4 billion savings across all segments. The program is inclusive of ongoing activities and $600 million of incremental transformation initiatives.

Xerox 2016 Form 10-Q

2015 Health Enterprise (HE) Charge

Prior year results include a pre-tax charge (HE charge) of $389 million ($241 million after-tax or $0.23 cents per share) associated with our third quarter 2015 decision to not fully complete the HE implementations in California and Montana. The charge included a $116 million reduction to revenues with the remaining $273 million recorded to costs of outsourcing, maintenance and rentals. As a result of the significant year-over-year impact of the HE charge on our reported revenues, earnings and key metrics, we are also comparing our current year results to adjusted prior year results, which exclude the HE charge. These adjusted results and comparisons are noted as "adjusted" in the discussion below.

Third Quarter 2016 Review

Although revenues were lower in both segments as compared to the prior year, the third quarter 2016 results reflected the following:


•	Continued cost and productivity progress from on-going restructuring and our Strategic Transformation program resulting in margin improvement in Services and solid margins in Document Technology.


•	Strong Services renewal opportunities and an 86% renewal rate, which drove overall signings growth.


•	Higher year-over-year operating cash flow reflecting the strength of our annuity based business model.

Total revenue of $4.2 billion for the third quarter 2016 declined 3% from third quarter 2015. On an adjusted¹ basis, excluding the third quarter 2015 HE charge, total revenues decreased 5%, with a 1-percentage point negative impact from currency. Services segment revenues of $2.4 billion, which represented 57% of total revenues, increased 1%. On an adjusted¹ basis, Services segment revenue decreased 3%, with a 1-percentage point negative impact from currency as a 4% decrease in Business Process Outsourcing (BPO) revenues was partially offset by a 1% increase in Document Outsourcing revenues. Services segment margin of 9.4% increased 17.7-percentage points from third quarter 2015, or 1.6-percentage points on an adjusted¹basis, primarily reflecting cost and productivity improvements across our BPO business. Document Technology segment revenues of $1.6 billion decreased by 9%, with a 2-percentage point negative impact from currency. Although Document Technology segment margin of 13.1% decreased 0.8-percentage points as compared to prior year, it improved sequentially and reflects continued productivity gains and cost savings from the company’s strategic transformation program.

Total revenue of $12.9 billion for the nine months ended September 30, 2016 declined 4% from the prior year. On an adjusted¹ basis, excluding the third quarter 2015 HE charge, total revenue declined 5%, with a 2-percentage point negative impact from currency. Services segment revenues of $7.4 billion, which represented 57% of total revenues, was relatively flat compared to the prior year. On an adjusted¹ basis, Services segment revenues declined 2% compared to the prior year, with a 2-percentage point negative impact from currency. Services segment margin of 8.9% increased 6.6-percentage points from the prior year or 1.4-percentage points on an adjusted¹ basis. Document Technology segment revenues of $5.0 billion decreased by 9%, with a 2-percentage point negative impact from currency. Document Technology segment margin of 12.0% decreased 1-percentage point as compared to prior year.

Net income from continuing operations attributable to Xerox for the three and nine months ended September 30, 2016 was $181 million and $370 million, respectively, and included after-tax costs of $105 million and $458 million, respectively, related to the amortization of intangible assets, restructuring and related costs, non-service retirement-related costs and separation costs, resulting in adjusted¹ net income from continuing operations attributable to Xerox of $286 million and $828 million, respectively. Net (loss) income from continuing operations attributable to Xerox for the three and nine months ended September 30, 2015 was $(31) million and $267 million, respectively, and included after-tax costs of $320 million and $564 million, respectively, related to the amortization of intangible assets, the HE charge, restructuring and related costs and non-service retirement-related costs, resulting in adjusted¹ net income from continuing operations attributable to Xerox of $289 million and $831 million, respectively. Adjusted¹ net income for the third quarter and year-to-date 2016 periods were relatively flat as compared to the prior year periods as lower operating profit was offset by lower income taxes.

Xerox 2016 Form 10-Q

Cash provided by operating activities was $522 million for the nine months ended September 30, 2016, as compared to cash provided by operating activities of $733 million in the prior year period. The $211 million decrease is primarily due to lower pre-tax earnings before non-cash charges, increased working capital and payments related to the prior year Health Enterprise settlement and separation costs. Cash used in investing activities of $261 million includes a $52 million payment to Atos, reflecting the final working capital adjustments associated with the 2015 sale of the ITO business, and capital expenditures (including internal use software) of $218 million. Cash used in financing activities of $213 million primarily reflects $246 million for dividends and $13 million of distributions to noncontrolling interests partially offset by $41 million of net proceeds on debt.

2016 Outlook

We continue to expect total revenues to decline 2 to 4% in 2016, excluding the impact of currency which at September 30, 2016 exchange rates, is expected to have about a 1-percentage point negative impact on total revenues in 2016. We expect Services segment revenues to be flat to down 1% on an adjusted basis (excluding the HE Charge from 2015 and currency) and we expect full year segment margin to be in line with the third quarter 2016. We continue to expect a 5 to 7% revenue decline before the impact of currency in Document Technology with segment margin in the 12 to 14% range.

2016 full-year earnings are expected to be negatively impacted by separation costs estimated at $175 million to $200 million as well as restructuring and related costs of about $300 million. We also expect to incur additional tax costs related to the separation, which are currently estimated to be in the range of $40 million to $50 million. Reported and adjusted earnings are anticipated to be in line with our full-year expectations.

We expect full year 2016 cash flows from operations to be between $950 million and $1.2 billion reflecting increased cash requirements for separation costs and restructuring. Capital expenditures are expected to be approximately $350 million.

Recent Developments

On June 23, 2016, a referendum was held in the United Kingdom in which it was decided that the United Kingdom would withdraw from the European Union (“Brexit”). The uncertainty related to the impact of Brexit caused financial market volatility during the current period, and we anticipate this volatility will likely continue into the future. Brexit did not, however, have a material impact on our financial statements for the period ended September 30, 2016. Approximately 5% of the Company's total revenues are pound sterling-denominated, and approximately 15% are Euro-denominated.

Xerox 2016 Form 10-Q

Financial Review

Revenues



	Three Months Ended September 30,										Nine Months Ended September 30,										Nine Months Ended September 30,
(in millions)	2016			2015			% Change		CC % Change		2016			2015			% Change		CC % Change		% of Total Revenue 2016		% of Total Revenue 2015
Equipment sales	$	613		$	668		(8	)%	(7	)%	$	1,848		$	2,011		(8	)%	(7	)%	14	%	15	%
Annuity revenue	3,599			3,665			(2	)%	(1	)%	11,030			11,381			(3	)%	(2	)%	86	%	85	%
Total Revenue	$	4,212		$	4,333		(3	)%	(2	)%	$	12,878		$	13,392		(4	)%	(3	)%	100	%	100	%
Reconciliation to Condensed Consolidated Statements of Income:
Sales	$	1,076		$	1,150		(6	)%	(5	)%	$	3,242		$	3,500		(7	)%	(6	)%
Less: Supplies, paper and other sales	(463		)	(482		)	(4	)%	(2	)%	(1,394		)	(1,489		)	(6	)%	(4	)%
Equipment Sales	$	613		$	668		(8	)%	(7	)%	$	1,848		$	2,011		(8	)%	(7	)%

Outsourcing, maintenance and rentals	$	3,053		$	3,098		(1	)%	—	%	$	9,388		$	9,630		(3	)%	(1	)%
Add: Supplies, paper and other sales	463			482			(4	)%	(2	)%	1,394			1,489			(6	)%	(4	)%
Add: Financing	83			85			(2	)%	(2	)%	248			262			(5	)%	(4	)%
Annuity Revenue	$	3,599		$	3,665		(2	)%	(1	)%	$	11,030		$	11,381		(3	)%	(2	)%

Adjusted: ⁽¹⁾
Outsourcing, maintenance and rentals	$	3,053		$	3,214		(5	)%	(4	)%	$	9,388		$	9,746		(4	)%	(3	)%
Annuity revenue	$	3,599		$	3,781		(5	)%	(4	)%	$	11,030		$	11,497		(4	)%	(3	)%
Total Revenue	$	4,212		$	4,449		(5	)%	(4	)%	$	12,878		$	13,508		(5	)%	(3	)%

_______________

(1) Refer to the Revenue/Segment reconciliation table in the "Non-GAAP Financial Measures" section.

CC - See "Non-GAAP Financial Measures" section for description of Constant Currency.

Total revenue for third quarter 2016 decreased 3% as compared to third quarter 2015. On an adjusted¹ basis, excluding the third quarter 2015 HE charge, total revenues decreased 5%, with a 1-percentage point negative impact from currency. On a revenue-weighted basis, our major European currencies and the Canadian Dollar were approximately 3% weaker against the U.S. Dollar as compared to the prior year. Revenues from these major foreign currencies comprise approximately 25% of our total consolidated revenues (revenues from the Pound Sterling represent approximately 5% of the total), while overall non-U.S. revenues represent almost one third of the total. Third quarter 2016 total revenues reflect the following:


•	Annuity revenue decreased 2% as compared to third quarter 2015. On an adjusted¹ basis, annuity revenue decreased 5%, with a 1-percentage point negative impact from currency. Annuity revenue is comprised of the following:

◦

Outsourcing, maintenance and rentals revenue of $3,053 million includes outsourcing revenue within our Services segment and maintenance revenue (including bundled supplies) and rental revenue, both primarily within our Document Technology segment. These revenues declined 1%, or 5% on an adjusted¹ basis, with a 1-percentage point negative impact from currency, primarily due to a continued decline in the Document Technology segment as well as a modest decline in the Services segment.

Xerox 2016 Form 10-Q


◦	Supplies, paper and other sales of $463 million includes unbundled supplies and other sales, primarily within our Document Technology segment. The 4% decline in these revenues included a 2-percentage point negative impact from currency, reduced supplies demand as a result of lower equipment sales in prior periods and lower OEM supplies sales.


◦	Financing revenue is generated from financed equipment sale transactions primarily within the Document Technology segment. The 2% decline in these revenues reflected a declining finance receivables balance due to lower equipment sales in prior periods.

•

Equipment sales revenue is reported primarily within our Document Technology segment and the Document Outsourcing business within our Services segment. Equipment sales revenue decreased 8% as compared to third quarter 2015, with a 1-percentage point negative impact from currency. The decline was driven by fewer large-account sales in North America, lower OEM sales as well as overall price declines that continue to be within our historical range of 5% to 10%. These areas of decline were partially offset by modest growth in developing markets.

Total revenue for the nine months ended September 30, 2016 decreased 4% as compared to the prior period. On an adjusted¹ basis, excluding the third quarter 2015 HE charge, total revenues decreased 5%, with a 2-percentage point negative impact from currency. On a revenue-weighted basis, our major European currencies and the Canadian Dollar were approximately 3% weaker against the U.S. Dollar as compared to the prior year. Revenues from these major foreign currencies comprise approximately 25% of our total consolidated revenues (revenues from the Pound Sterling represent approximately 5% of the total), while overall non-U.S. revenues represent almost one third of the total. Total revenue for the nine months ended September 30, 2016 reflects the following:


•	Annuity revenue for the nine months ended September 30, 2016 decreased 3% as compared to the prior year period. On an adjusted¹basis, annuity revenue decreased 4%, with a 1-percentage point negative impact from currency. Annuity revenue is comprised of the following:

◦

Outsourcing, maintenance and rentals revenue of $9,388 million includes outsourcing revenue within our Services segment and maintenance revenue (including bundled supplies) and rental revenue, both primarily within our Document Technology segment and declined 3% as compared to the prior year period. On an adjusted¹ basis, these revenues decreased 4% with a 1-percentage point negative impact from currency, primarily due to a continued decline in the Document Technology segment as well as a modest decline in the Services segment.


◦	Supplies, paper and other sales of $1,394 million includes unbundled supplies and other sales, primarily within our Document Technology segment. The 6% decline in these revenues included a 2-percentage point negative impact from currency, reduced supplies demand as a result of lower equipment sales in prior periods, continued weakness in developing markets and lower OEM supplies sales.


◦	Financing revenue is generated from financed equipment sale transactions primarily within the Document Technology segment. The 5% decline in these revenues reflected a 1-percentage point negative impact from currency and a declining finance receivables balance due to lower equipment sales in prior periods.

•

Equipment sales revenue is reported primarily within our Document Technology segment and the Document Outsourcing (DO) business within our Services segment. Equipment sales revenue decreased 8% as compared to the prior year period, with a 1-percentage point negative impact from currency. The decline was driven by lower developing market sales, fewer large account sales in North America, lower OEM sales and overall price declines that continue to be within our historical range of 5% to 10%.

Additional analysis of the change in revenue for each business segment is included in the “Segment Review” section.

Xerox 2016 Form 10-Q

Costs, Expenses and Other Income

Summary of Key Financial Ratios

The following is a summary of key financial ratios used to assess our performance:



	Three Months Ended September 30,
	Reported						Adjusted ⁽¹⁾
	2016		2015		B/(W)		2016		2015		B/(W)
Total Gross Margin	31.0	%	22.8	%	8.2	pts.	31.3	%	31.2	%	0.1		pts.
RD&E as a % of Revenue	3.0	%	3.1	%	0.1	pts.	2.8	%	2.9	%	0.1		pts.
SAG as a % of Revenue	19.6	%	19.7	%	0.1	pts.	19.3	%	18.9	%	(0.4	)	pts.

Pre-tax Income Margin	3.6	%	(4.0	)%	7.6	pts.	N/A		N/A		N/A
Operating Margin ⁽¹⁾	N/A		N/A		N/A		9.2	%	9.4	%	(0.2	)	pts.



	Nine Months Ended September 30,
	Reported						Adjusted ⁽¹⁾
	2016		2015		B/(W)		2016		2015		B/(W)
Total Gross Margin	30.7	%	28.4	%	2.3	pts.	31.0	%	31.3	%	(0.3	)	pts.
RD&E as a % of Revenue	3.0	%	3.1	%	0.1	pts.	2.8	%	3.0	%	0.2		pts.
SAG as a % of Revenue	20.0	%	20.0	%	—	pts.	19.6	%	19.5	%	(0.1	)	pts.

Pre-tax Income Margin	2.2	%	0.8	%	1.4	pts.	N/A		N/A		N/A
Operating Margin ⁽¹⁾	N/A		N/A		N/A		8.6	%	8.8	%	(0.2	)	pts.

______________

(1) Refer to the Operating Income/Margin and the Key Financial Ratios reconciliation tables in the "Non-GAAP Financial Measures" section.

Pre-tax Income Margin

Third quarter 2016 pre-tax income margin of 3.6% increased 7.6-percentage points as compared to third quarter

2015. The increase was primarily driven by the third quarter 2015 HE charge of $389 million partially offset by higher 2016 restructuring and related costs as well as separation costs.

Pre-tax income margin for the nine months ended September 30, 2016 of 2.2% increased 1.4-percentage points as compared to prior year. The increase was primarily driven by third quarter 2015 HE charge of $389 million partially offset by higher 2016 restructuring and related costs as well as separation costs. In addition, an increase in non-service retirement related costs of $30 million, due primarily to the $22 million curtailment gain recorded in the second quarter 2015, also partially offset the increase in pre-tax margin.

Pre-tax income margin includes the amortization of intangible assets, restructuring and related costs, separation

costs and other expenses, net, all of which are separately discussed in subsequent sections. Pre-tax income

margin also includes non-service retirement related costs, which increased by $4 million and $30 million, respectively, for the three and nine months ended September 30, 2016. Operating margin, discussed below, excludes all of these items.

Additional analysis on changes in restructuring and related costs, amortization of intangible assets, separation costs and other expenses, net are included in subsequent sections.

Operating Margin

Third quarter 2016 operating margin¹ of 9.2% decreased 0.2-percentage points as compared to third quarter 2015. Benefits from strategic transformation cost and productivity initiatives were more than offset by increased expense, particularly in SAG, due to favorable prior-year compensation and benefit adjustments as well as the decline in total company revenue.

Operating margin¹ for the nine months ended September 30, 2016 of 8.6% decreased 0.2-percentage points as compared to the prior year period. Benefits from strategic transformation cost and productivity initiatives were more than offset by increased expense, particularly in SAG, due to favorable prior-year compensation and benefit adjustments as well as the decline in total company revenue.

Xerox 2016 Form 10-Q

(1)Refer to the Operating Income/Margin reconciliation table in the "Non-GAAP Financial Measures" section.

Gross Margin

Third quarter 2016 gross margin of 31.0% increased 8.2-percentage points as compared to third quarter 2015. On an adjusted¹ basis, gross margin of 31.3% increased by 0.1-percentage point. Services and Document Technology gross margin each improved year-over-year driven by cost and productivity improvements. These improvements were partially offset by the higher proportion of our revenue from Services (which historically has a lower gross margin).

Gross Margin for the nine months ended September 30, 2016 of 30.7% increased 2.3-percentage points as compared to the prior year period. On an adjusted¹ basis, gross margin of 31.0% decreased by 0.3-percentage points. Services and Document Technology gross margin each improved year-over-year driven by cost and productivity improvements. These improvements were partially offset by the higher proportion of our revenue from Services (which historically has a lower gross margin).

Additional analysis of the change in gross margin for each business segment is included in the "Segment Review" section.

Research, Development and Engineering Expenses (RD&E)



	Three Months Ended September 30,							Nine Months Ended September 30,
(in millions)	2016		2015		Change			2016		2015		Change
R&D	$	104	$	103	$	1		$	317	$	324	$	(7	)
Sustaining engineering	22		32		(10		)	71		94		(23		)
Total RD&E Expenses	$	126	$	135	$	(9	)	$	388	$	418	$	(30	)

Third quarter 2016 RD&E as a percentage of revenue of 3.0% decreased 0.1-percentage point from third quarter 2015. On an adjusted¹ basis, RD&E was 2.8% of revenue and decreased 0.1-percentage point due to restructuring savings and a higher mix of Services revenue (which historically has lower RD&E as a percentage of revenue).

RD&E of $126 million decreased by $9 million compared to third quarter 2015. On an adjusted¹basis, RD&E of $119 million decreased by $10 million.

RD&E as a percentage of revenue for the nine months ended September 30, 2016 of 3.0% decreased 0.1-percentage points from the prior year period. On an adjusted¹ basis, RD&E was 2.8% of revenue and decreased 0.2-percentage points due to restructuring savings and a higher mix of Services revenue (which historically has lower RD&E as a percentage of revenue).

RD&E of $388 million decreased by $30 million compared to the nine months ended September 30, 2015. On an adjusted¹basis, RD&E of $367 million decreased by $37 million. We strategically coordinate R&D with Fuji Xerox.

Selling, Administrative and General Expenses (SAG)

SAG as a percentage of revenue of 19.6% decreased 0.1-percentage point from third quarter 2015. On an adjusted¹ basis, SAG was 19.3% of revenue and increased 0.4-percentage points. Restructuring and productivity improvements and a higher mix of Services revenue (which historically has lower SAG as a percentage of revenue) were more than offset by higher compensation and benefit expense and the decline in total company revenue.

SAG of $827 million was $28 million lower than third quarter 2015. On an adjusted¹ basis, SAG of $813 million decreased $28 million, including a $15 million favorable impact from currency, and reflected the following:


•	$33 million decrease in selling expenses.


•	$4 million increase in general and administrative expenses.


•	$1 million increase in bad debt expense. Third quarter 2016 bad debt expense remained at less than one percent of receivables.

SAG as a percentage of revenue for nine months ended September 30, 2016 of 20.0% was flat from the prior year period. On an adjusted¹ basis, SAG was 19.6% of revenue and increased 0.1-percentage point from the prior year period. Restructuring and productivity improvements, a higher mix of Services revenue (which historically has lower SAG as a percentage of revenue), and lower bad debt expense was offset by higher compensation and benefit expense and an overall decline in total company revenue.

Xerox 2016 Form 10-Q

SAG of $2,571 million for nine months ended September 30, 2016 was $105 million lower than the prior year period. On an adjusted¹ basis, SAG of $2,522 million decreased $116 million, including a $42 million favorable impact from currency, and reflected the following:


•	$76 million decrease in selling expenses.


•	$31 million decrease in general and administrative expenses.


•	$9 million decrease in bad debt expense.

Restructuring and Related Costs

During third quarter 2016, Restructuring and related costs of $32 million include restructuring and asset impairment charges of $13 million as well as $19 million of additional costs primarily related to professional support services associated with the implementation of the Strategic Transformation program.

Third quarter 2016 net restructuring and asset impairment charges of $13 million included $21 million of severance costs related to headcount reductions of approximately 550 employees worldwide. Approximately 75% of the charges were related to our Document Technology segment and 25% to our Services segment. The third quarter 2016 actions impacted several functional areas, with approximately 40% of the costs focused on gross margin improvements and approximately 50% on SAG reductions, with the remainder focused on RD&E optimization. These costs were partially offset by $8 million of net reversals for changes in estimated reserves from prior period initiatives.

During the nine months ended September 30, 2016 Restructuring and related costs of $229 million included restructuring and asset impairment charges of $199 million as well as $30 million of additional costs primarily related to professional support services associated with the implementation of the Strategic Transformation program.

During the nine months ended September 30, 2016, we recorded net restructuring and asset impairment charges of $199 million, which included $218 million of severance costs related to headcount reductions of approximately 5,700 employees worldwide, $4 million of lease cancellation costs and $2 million of asset impairments. These costs were partially offset by $20 million of net reversals for changes in estimated reserves from prior period initiatives as well as a $5 million gain from the sale of real estate impaired in prior periods.

Approximately two-thirds of the 2016 charges related to our Document Technology segment, and about a third to our Services segment. 2016 actions impacted several functional areas, with approximately half of the costs focused on gross margin improvements and approximately 40% on SAG reductions, with the remainder focused on RD&E optimization.

During third quarter 2015, we recorded net restructuring and asset impairment charges of $20 million, which included approximately $16 million of severance costs related to headcount reductions of approximately 780 employees primarily related to our Services segment, $1 million of lease cancellation costs and $7 million of asset impairments which were primarily related to a surplus Canadian facility. These costs were partially offset by $4 million of net reversals for changes in estimated reserves from prior period initiatives.

During the nine months ended September 30, 2015, we recorded net restructuring and asset impairment charges of $191 million. Net restructuring charges of $38 million included $54 million of severance costs related to headcount reductions of approximately 1,780 employees worldwide and $4 million of lease cancellation costs partially offset by $20 million of net reversals for changes in estimated reserves from prior period initiatives. Asset impairment charges of $153 million included $146 million recorded in the second quarter 2015 associated with software asset impairments resulting from a change in our Government Healthcare Solutions strategy in the Services segment as well as $7 million of charges incurred in the third quarter 2015. See Services section within "Segment Review" for further discussion.

The restructuring reserve balance as of September 30, 2016 for all programs was $103 million, of which $98 million is expected to be spent over the next twelve months.

We continue to expect restructuring and related costs of approximately $300 million for full-year 2016.

Refer to Note 9 - Restructuring Programs, in the Condensed Consolidated Financial Statements for additional information regarding our restructuring programs.

Xerox 2016 Form 10-Q

Separation costs

Separation costs are primarily for third-party investment banking, accounting, legal, consulting and other similar

types of services related to the separation transaction as well as costs associated with the operational separation of

the two companies, such as those related to human resources, brand management, real estate and information management to the extent not capitalized. Separation costs also include the costs associated with bonuses and restricted stock grants awarded to employees for retention through the separation.

During the three and nine months ended September 30, 2016, we recorded separation costs of $39 million and $75 million, respectively. For full-year 2016, we continue to expect to incur separation costs of approximately $175 to $200 million, which exclude tax-related separation costs discussed below in Income Taxes. We also continue to anticipate separation-related capital spending of approximately $50 million for full-year 2016.

Amortization of Intangible Assets

Amortization of intangible assets for the nine months ended September 30, 2016 of $244 million increased $11 million compared to the prior year period primarily due to the impairment of a customer relationship asset resulting from a lost contract.

Worldwide Employment

Worldwide employment was approximately 131,800 as of September 30, 2016 and decreased by 11,800 from December 31, 2015, due primarily to the impact of restructuring and productivity-related reductions as well as seasonal reductions.

Other Expenses, Net



	Three Months Ended September 30,						Nine Months Ended September 30,
(in millions)	2016			2015			2016			2015
Non-financing interest expense	$	49		$	55		$	153		$	167
Interest income	(3		)	(2		)	(7		)	(6		)
Gains on sales of businesses and assets⁽¹⁾	(2		)	—			(18		)	(10		)
Currency losses, net	3			3			4			4
Litigation matters	3			6			16			8
Loss on sales of accounts receivable	4			3			12			9
Deferred compensation investment (gains) losses	(2		)	5			(5		)	1
All other expenses, net	4			3			13			14
Total Other Expenses, Net	$	56		$	73		$	168		$	187

_______________

⁽¹⁾ Excludes the loss on sale of the ITO business reported in Discontinued Operations.

Note: Total Other Expenses, Net with the exception of Deferred compensation investment (gains) losses are included in the Other segment. Deferred compensation investment (gains) losses are included in the Services segment together with the related deferred compensation expense/income.

Non-Financing Interest Expense: Non-financing interest expense for the three and nine months ended September 30, 2016 of $49 million and $153 million, respectively, was $6 million and $14 million, respectively, lower than the prior year comparable periods. When combined with financing interest expense (cost of financing), total company interest expense declined by $7 million and $15 million, respectively, from the prior year comparable period, driven by a lower average cost of debt, primarily due to a lower rate on our one-year $1.0 billion senior unsecured term facility, and a lower debt balance.

Deferred Compensation Investment

Deferred compensation investment gains for the three and nine months ended September 30, 2016 were $7 million and $6 million higher, respectively, than the prior year comparable periods due to the performance of the underlying investments.

Gains on Sales of Businesses and Assets: The nine months ended September 30, 2016 and 2015 include gains on the sale of surplus technology assets of $17 million and $14 million, respectively.

Xerox 2016 Form 10-Q

Litigation Matters: The nine months ended September 30, 2016 and 2015 litigation matters reflect probable losses and reserves for various legal matters.

Income Taxes

Third quarter 2016 effective tax rate was 3.3%. On an adjusted¹ basis, third quarter 2016 tax rate was 25.3%. Both rates were lower than the U.S. statutory tax rate primarily due to foreign tax credits resulting from anticipated dividends from our foreign subsidiaries. The effective tax rate of 3.3% also included tax-related separation costs, which are discussed below.

The effective tax rate for the nine months ended September 30, 2016 was (0.4%). On an adjusted¹basis, the nine months ended September 30, 2016 tax rate was 21.7%. Both rates were lower than the U.S. statutory tax rate primarily due to foreign tax credits resulting from anticipated dividends from our foreign subsidiaries, the redetermination of certain unrecognized tax positions upon conclusion of several audits, and the geographical mix of profits. The effective tax rate of (0.4%) also included tax-related separation costs, which are discussed below.

Third quarter 2015 effective tax rate was 60.7% which was higher than the U.S. statutory tax rate primarily due to

the discrete tax benefit associated with the HE charge. On an adjusted1 basis, third quarter 2015 tax rate was

27.1%, which was lower than the U.S. statutory tax rate primarily due to foreign tax credits resulting from anticipated

dividends from our foreign subsidiaries, the geographical mix of profits and the reversal of a deferred tax valuation

allowance, partially offset by additions to unrecognized tax positions.

The effective tax rate for the nine months ended September 30, 2015 was (73.5%) and was negative primarily due to the discrete tax benefit associated with the HE charge and the second quarter 2015 software impairment charges. On an adjusted¹ basis, the nine months ended September 30, 2015 tax rate was 26.1%, which was lower than the U.S. statutory tax rate primarily due to foreign tax credits resulting from anticipated dividends from our foreign subsidiaries, the geographical mix of profits and the reversal of a deferred tax valuation allowance, partially offset by additions to unrecognized tax positions.

Xerox operations are widely dispersed. The statutory tax rate in most non-U.S. jurisdictions is lower than the combined U.S. and state tax rate. The amount of income subject to these lower foreign rates relative to the amount of U.S. income will impact our effective tax rate. However, no one country outside of the U.S. is a significant factor to our overall effective tax rate. Certain foreign income is subject to U.S. tax net of any available foreign tax credits. Our estimated full year effective tax rate includes a benefit of approximately 20-percentage points from these non-U.S. operations, which is a result of our current geographical mix of pre-tax income adjusted for any available foreign tax credit benefits.

Our effective tax rate is based on nonrecurring events as well as recurring factors, including the taxation of foreign

income. In addition, our effective tax rate will change based on discrete or other nonrecurring events that may not

be predictable. Excluding the effects of intangibles amortization, restructuring and related costs, non-service

retirement related costs, separation costs and other discrete items, we anticipate that our adjusted1 effective tax

rate will be approximately 25% to 27% for fourth quarter 2016 and approximately 23% to 25% for full year

2016.

Tax-related Separation Costs

We recorded a deferred tax benefit/asset of $15 million related to our separation costs for third quarter 2016 and $29 million for the 2016 year-to-date period. We estimate half of the year-to-date deferred tax asset will be eliminated at the time the separation is executed, as certain separation costs are expected to be non-deductible.

In connection with the actual legal separation of the company, we expect to effect certain internal reorganizations of,

and transactions among, our wholly-owned subsidiaries and operating activities in preparation for the legal form of

separation. Although we believe that, for the most part, this reorganization of entities can be completed in a tax-free

manner, we do expect to incur incremental income tax expense associated with certain elements of the

reorganization. Accordingly, for year-to-date 2016, we recorded $24 million, including a $2 million credit in third quarter 2016, for the estimated income tax on the book/tax basis differences currently associated with our investments in certain subsidiaries that are expected to be impacted by these internal reorganizations. Upon final separation of the company, we also expect to recognize additional income tax expense in certain state and international jurisdictions primarily related to the change in realizability of certain deferred tax assets. At present, we estimate that this additional income tax expense will be approximately $15 to $25 million, for a total of approximately $40 to $50 million for full-year 2016.


(1)	Refer to the Effective Tax Rate reconciliation table in the "Non-GAAP Financial Measures" section.

Xerox 2016 Form 10-Q

Equity in Net Income of Unconsolidated Affiliates



	Three Months Ended September 30,				Nine Months Ended September 30,
(in millions)	2016		2015		2016		2015
Total equity in net income of unconsolidated affiliates	$	39	$	40	$	98	$	103
Fuji Xerox after-tax restructuring costs included in equity income	2		2		3		4

Equity in net income of unconsolidated affiliates primarily reflects our 25% share of Fuji Xerox net income. The decrease in equity income of $1 million and $5 million for the three and nine months ended September 30, 2016, respectively, is primarily due to our share of Fuji Xerox's lower net income, partially offset by translation currency impacts.

Net Income from Continuing Operations

Third quarter 2016 net income from continuing operations attributable to Xerox was $181 million, or $0.17 per diluted share. On an adjusted¹ basis, net income from continuing operations attributable to Xerox was $286 million, or $0.27 per diluted share. Third quarter 2016 adjustments to net income include the amortization of intangible assets, restructuring and related costs, non-service retirement-related costs and separation costs.

Third quarter 2015 net loss from continuing operations attributable to Xerox was $31 million, or $0.04 per diluted share. On an adjusted¹ basis, net income from continuing operations attributable to Xerox was $289 million, or $0.27 per diluted share. Third quarter 2015 adjustments to net income include the amortization of intangible assets, restructuring and related costs, the HE charge and non-service retirement-related costs.

Net income from continuing operations attributable to Xerox for the nine months ended September 30, 2016 was $370 million or $0.34 per diluted share. On an adjusted¹ basis, net income from continuing operations attributable to Xerox was $828 million, or $0.79 per diluted share, and reflects the adjustments for the amortization of intangible assets, restructuring and related costs, non-service retirement-related costs, and separation costs.

Net income from continuing operations attributable to Xerox for the nine months ended September 30, 2015 was $267 million, or $0.23 per diluted share. On an adjusted¹ basis, net income from continuing operations attributable to Xerox was $831 million, or $0.74 per diluted share, and reflects the adjustments for the amortization of intangible assets, restructuring and related costs, the HE charge and non-service retirement-related costs.

Refer to Note 16 - Earnings per Share, in the Condensed Consolidated Financial Statements, for additional information regarding the calculation of basic and diluted earnings per share.


(1)	Refer to the Net Income (Loss) and EPS reconciliation table in the "Non-GAAP Financial Measures" section.

Discontinued Operations

Information Technology Outsourcing (ITO):

In fourth quarter 2014, we announced an agreement to sell the ITO business to Atos and began reporting it as a Discontinued Operation. All prior periods were accordingly revised to conform to this presentation. The sale was completed on June 30, 2015. There were no Discontinued Operations for the three and nine months ended September 30, 2016.

Refer to Note 4 - Divestitures, in the Condensed Consolidated Financial Statements for additional information regarding discontinued operations.

Net Income (Loss)

Third quarter 2016 net income attributable to Xerox was $181 million, or $0.17 per diluted share. Third quarter 2015 net loss attributable to Xerox was $34 million, or $0.04 per diluted share.

Net income attributable to Xerox for the nine months ended September 30, 2016 was $370 million, or $0.34 per diluted share. Net income attributable to Xerox for the nine months ended September 30, 2015 was $203 million, or $0.17 per diluted share.

Xerox 2016 Form 10-Q

Other Comprehensive Income (Loss)

Third quarter 2016 Other comprehensive loss attributable to Xerox was $46 million as compared to a loss of $100 million in the third quarter 2015. The decreased loss is primarily due to a $184 million reduction in losses from the translation of our foreign currency denominated net assets. The third quarter 2016 reflects translation losses of $22 as compared to translation losses of $206 million in the third quarter 2015. The third quarter 2015 loss primarily reflected the weakening of the Pound Sterling and Brazilian Real against the U.S. dollar. Partially offsetting the reduction in translation losses was a $112 million increased loss from changes in defined benefit plans from a gain of $97 million in the third quarter 2015 to a loss of $15 million in the third quarter 2016. The third quarter 2016 change in benefit plans was primarily due to a decrease in discount rates partially offset by currency adjustments on accumulated defined benefit plan losses.

Other Comprehensive income attributable to Xerox for the nine months ended September 30, 2016 was $10 million as compared to a loss of $240 million in the prior year period. The change of $250 million, is primarily due to a $613 million change from the translation of our foreign currency denominated net assets. The nine months ended September 30, 2016 reflects translation gains of $92 million primarily as a result of the strengthening of the Brazilian Real, Japanese Yen, Euro and Canadian Dollar as compared to the U.S. Dollar as the Pound Sterling weakened year-to-date 2016. The nine months ended September 30, 2015 reflects translation losses of $521 million primarily due to a significant weakening across all foreign currencies against the U.S. dollar. Offsetting the change in translation were net losses from changes in defined benefit plans of $107 million in the nine months ended September 30, 2016 as compared to net gains of $262 million in the nine months ended September 30, 2015. The benefit plan losses in the nine months ended September 30, 2016 were primarily due to a decrease in discount rates.

Refer to Note 11 - Financial Instruments, in the Condensed Consolidated Financial Statements, for additional information regarding foreign currency derivatives, and Note 13 - Employee Benefit Plans, in the Condensed Consolidated Financial Statements, for additional information regarding net changes in our defined benefit plans and related losses and gains.

Segment Review

In first quarter 2016, we revised our segment reporting to reflect the following changes:


•	The transfer of the Education/Student Loan business from the Services segment to Other as a result of the expected continued run-off of this business. The business does not meet the threshold for separate segment reporting.


•	The exclusion of the non-service elements of our defined-benefit pension and retiree-health plan costs from Segment profit.

Prior year amounts were revised accordingly to reflect these changes.



	Three Months Ended September 30,
(in millions)	Equipment Sales Revenue		Annuity Revenue		Total Revenue		% of Total Revenue		Segment Profit (Loss)			Segment Margin
2016
Services	$	116	$	2,282	$	2,398	57	%	$	226		9.4	%
Document Technology	453		1,173		1,626		39	%	213			13.1	%
Other	44		144		188		4	%	(65		)	(34.6	)%
Total	$	613	$	3,599	$	4,212	100	%	$	374		8.9	%

2015
Services	$	117	$	2,250	$	2,367	55	%	$	(196	)	(8.3	)%
Document Technology	525		1,253		1,778		41	%	248			13.9	%
Other	26		162		188		4	%	(55		)	(29.3	)%
Total	$	668	$	3,665	$	4,333	100	%	$	(3	)	(0.1	)%

Adjusted:⁽¹⁾
Services	$	117	$	2,366	$	2,483	56	%	$	193		7.8	%
Total	$	668	$	3,781	$	4,449	N/A		$	386		8.7	%

Xerox 2016 Form 10-Q



	Nine Months Ended September 30,
(in millions)	Equipment Sales Revenue		Annuity Revenue		Total Revenue		% of Total Revenue		Segment Profit (Loss)			Segment Margin
2016
Services	$	358	$	6,992	$	7,350	57	%	$	652		8.9	%
Document Technology	1,397		3,620		5,017		39	%	601			12.0	%
Other	93		418		511		4	%	(211		)	(41.3	)%
Total	$	1,848	$	11,030	$	12,878	100	%	$	1,042		8.1	%

2015
Services	$	348	$	7,012	$	7,360	55	%	$	172		2.3	%
Document Technology	1,584		3,904		5,488		41	%	715			13.0	%
Other	79		465		544		4	%	(164		)	(30.1	)%
Total	$	2,011	$	11,381	$	13,392	100	%	$	723		5.4	%

Adjusted:⁽¹⁾
Services	$	348	$	7,128	$	7,476	55	%	$	561		7.5	%
Total	$	2,011	$	11,497	$	13,508	N/A		$	1,112		8.2	%

______________


(1)	Refer to the Services Segment reconciliation tables in the "Non-GAAP Financial Measures" section.

Services

Our Services segment comprises two service offerings: Business Process Outsourcing (BPO) and Document Outsourcing (DO).

Revenue



	Three Months Ended September 30,								Nine Months Ended September 30,
(in millions)	2016		2015		% Change		CC % Change		2016		2015		% Change		CC % Change
Business Process Outsourcing	$	1,607	$	1,566	3	%	4	%	$	4,927	$	4,946	—	%	—	%
Document Outsourcing	791		801		(1	)%	1	%	2,423		2,414		—	%	3	%
Total Services Revenue	$	2,398	$	2,367	1	%	3	%	$	7,350	$	7,360	—	%	1	%

Adjusted:⁽¹⁾
Business Process Outsourcing	$	1,607	$	1,682	(4	)%	(4	)%	$	4,927	$	5,062	(3	)%	(2	)%
Total Services Revenue	$	2,398	$	2,483	(3	)%	(2	)%	$	7,350	$	7,476	(2	)%	—	%

_______________

Note: The above table excludes intercompany revenue.

CC - See "Non-GAAP Financial Measures" section for description of Constant Currency.

(1) Refer to the Services Segment reconciliation tables in the "Non-GAAP Financial Measures" section.

Third quarter 2016 Services revenue of $2,398 million was 57% of total revenue and increased 1% from third quarter

2015. On an adjusted¹basis, Services revenue decreased 3%, with a 1-percentage point negative impact from currency.

•

BPO revenue increased 3% from third quarter 2015 and represented 67% of total Services revenue. On an adjusted¹basis, BPO revenue decreased 4% with minimal currency impact. The decline was driven by lower volumes and lost business, as well as overall price declines that were consistent with prior periods. These areas of decline were partially offset by ramping new contracts and modest growth from acquisitions.


◦	In third quarter 2016, BPO revenue mix across the major business areas was as follows: Commercial Industries (excluding healthcare) - 44%; Healthcare - 24%; Public Sector - 28%; and all other (including our HE Medicaid platform implementations) - 4%.


•	DO revenue decreased 1%, with a 2-percentage point negative impact from currency, and represented 33% of Services revenue. Growth at constant currency was driven primarily from our partner print services offerings, which more than offset the impact of lower new business signings and price declines on renewals.

Services revenue for the nine months ended September 30, 2016 of $7,350 million was 57% of total revenue and

Xerox 2016 Form 10-Q

relatively flat from the prior year period. On an adjusted¹ basis, Services revenue decreased 2%, with a 2-percentage point negative impact from currency.

•

BPO revenue was relatively flat as compared to the prior year period and represented 67% of total Services revenue. On an adjusted¹ basis, BPO revenue decreased 3% with a 1-percentage point negative impact from currency. The decline was driven by lower volumes and lost business, as well as overall price declines that were consistent with prior periods. These areas of decline were partially offset by ramping new contracts and modest growth from acquisitions, particularly in Healthcare.


◦	BPO revenue mix for the nine months ended September 30, 2016 across the major business areas was as follows: Commercial Industries (excluding healthcare) - 44%; Healthcare - 26%; Public Sector - 26%; and all other (including our HE Medicaid platform implementations) - 4%.


•	DO revenue was relatively flat, with a 3-percentage point negative impact from currency, and represented 33% of Services revenue. Growth at constant currency was driven primarily from our partner print services offerings and equipment sales, which more than offset the impact of lower new business signings and price declines on renewals.

Segment Margin

Third quarter 2016 Services segment margin of 9.4% increased by 17.7-percentage points, or 1.6-percentage points on an adjusted¹ basis, from third quarter 2015, including a 0.9-percentage point increase in gross margin. The increase reflected restructuring and productivity improvements, particularly in BPO, which more than offset price declines, as well as anticipated year-over-year benefits from lower expenses associated with our HE platform implementations and a higher proportion of DO revenue (which historically has higher segment margin). These benefits were partially offset by continuing margin pressures in our customer care offering as well as higher compensation and benefit expense.

Services segment margin for the nine months ended September 30, 2016 of 8.9% increased by 6.6-percentage points, or 1.4 points on an adjusted¹ basis, from the prior year period, including a 0.9-percentage point increase in gross margin. The increase reflected restructuring and productivity improvements, particularly in BPO, which more than offset price declines, as well as anticipated year-over-year benefits from lower expenses associated with our HE platform implementations and a higher proportion of DO revenue (which historically has higher segment margin). These benefits were partially offset by continuing margin pressures in our customer care offering as well as higher compensation and benefit expense.

BPO margin does not reflect the impact of our student loan business, which is included in Other.

As disclosed in our 2015 Annual Report, the fair value of the Commercial Services reporting unit (which has approximately $2.0 billion of goodwill) exceeded its carrying value by approximately 17%. During the nine-month period ended September 30, 2016, revenues and operating profits for our Commercial Services reporting unit decreased by 7% and 3%, respectively, as compared to the prior year. Although we continue to focus on profitable revenue growth and cost improvements in this business; depending on the duration of this trend and our ability to manage through it, there is a possibility that certain assumptions and estimates, including cash flow projections, used for the upcoming fourth quarter 2016 annual goodwill impairment analysis for this reporting unit could be unfavorably impacted. The Company intends to complete its goodwill impairment analysis for all reporting units during the fourth quarter 2016.

(1) Refer to the Services Segment reconciliation tables in the "Non-GAAP Financial Measures" section.

Government Healthcare

Our HE platform is performing to contractual standards in the states where it has been fully implemented, which

include New Hampshire, Alaska and North Dakota. New Hampshire was certified by the Center for Medicare and

Medicaid Services in June 2015, and we are currently in the process of getting our Alaska HE implementation

certified and in the planning phase of North Dakota certification. We continue to strengthen and improve our

platform development and systems integration capabilities with additional resources and enhanced program

management and quality control practices.

Due to a number of factors, development work to implement the HE platform in New York has been elongated

beyond the current contractual schedule resulting in, among other things, increased delivery costs, which we have

considered in our estimates of revenues and costs under the percentage-of-completion accounting methodology.

We continue to work with New York to address new regulatory requirements, policy changes and enhanced security

protocols, which are expected to further lengthen the schedule and may result in material increases in future costs

Xerox 2016 Form 10-Q

to complete. We are seeking to mitigate these impacts through a combination of operational actions as well as by

working with New York to pursue an amendment to the contract that will revise the project schedule and increase

the reimbursement we receive.

Metrics

Signings: Signings are defined as estimated future revenues from contracts signed during the period, including renewals of existing contracts. Third quarter 2016 Services signings were $2.2 billion in Total Contract Value (TCV).

Signings were as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
(in billions)	2016		2015		2016		2015
BPO	$	1.5	$	1.3	$	5.3	$	5.5
DO	0.7		0.6		1.9		2.0
Total Signings	$	2.2	$	1.9	$	7.2	$	7.5

Signings increased 15% from third quarter 2015, with a 2-percentage point negative impact from currency, primarily reflecting higher contribution from renewals. On a trailing twelve month (TTM) basis, signings increased 6% at constant currency from the comparable prior year period. New business TCV at constant currency decreased 15% from third quarter 2015 and decreased 9% on a TTM basis; these declines reflect, in part, our decision to not pursue opportunities with lower margin and return profiles. DO signings do not include signings from our growing partner print services offerings.

Note: TCV is the estimated total contractual revenue related to signed contracts.

Renewal Rate (Total Services): Renewal rate is defined as the annual recurring revenue (ARR) on contracts that are renewed during the period as a percentage of ARR on all contracts for which a renewal decision was made during the period. The combined third quarter 2016 contract renewal rate for BPO and DO contracts was 86%, within our target range of 85%-90%. The year-to-date renewal rate was 85%.

Document Technology

Our Document Technology segment includes the sale of products and supplies, as well as the associated maintenance and financing of those products.

Revenue



	Three Months Ended September 30,				% Change		CC % Change		Nine Months Ended September 30,				% Change		CC % Change
(in millions)	2016		2015		% Change		CC % Change		2016		2015		% Change		CC % Change
Equipment sales	$	453	$	525	(14	)%	(13	)%	$	1,397	$	1,584	(12	)%	(11	)%
Annuity revenue	1,173		1,253		(6	)%	(5	)%	3,620		3,904		(7	)%	(6	)%
Total Revenue	$	1,626	$	1,778	(9	)%	(7	)%	$	5,017	$	5,488	(9	)%	(7	)%

_______________

CC - See "Non-GAAP Financial Measures" section for description of Constant Currency

Third quarter 2016 Document Technology revenue of $1,626 million decreased 9% from third quarter 2015, with a 2-percentage point negative impact from currency. Document Technology revenues exclude Document Outsourcing. Inclusive of Document Outsourcing, third quarter 2016 aggregate document-related revenue decreased 6% from third quarter 2015, with a 1-percentage point negative impact from currency. Document Technology segment revenue results included the following:

•

Equipment sales revenue declined 14% from third quarter 2015, with a 1-percentage point negative impact from currency. The decline was driven by fewer large-account sales in North America, lower OEM sales and continued migration of customers to our partner print services offering (included in our Services segment) as well as overall price declines that continue to be within our historical range of 5 to 10%. These declines were partially offset by moderate benefits from improved sales in our high-end color category following the drupa trade show.

Xerox 2016 Form 10-Q


•	Annuity revenue decreased by 6% from third quarter 2015, with a 1-percentage point negative impact from currency. The annuity revenue reduction reflects lower equipment sales in prior periods, ongoing page declines and lower supplies demand, as well as the continued migration of customers to our partner print services offering (included in our Services segment).

Document Technology revenue mix was 57% mid-range, 24% high-end and 19% entry, consistent with recent quarters.

Document Technology revenue of $5,017 million for the nine months ended September 30, 2016 decreased 9% from the prior year period, with a 2-percentage point negative impact from currency. Document Technology revenues exclude Document Outsourcing. Inclusive of Document Outsourcing, aggregate document-related revenue for the nine months ended September 30, 2016 decreased 6% from the prior year period, with a 2-percentage point negative impact from currency. Document Technology segment revenue results included the following:

•

Equipment sales revenue declined 12% from the prior year period, with a 1-percentage point negative impact from currency. The decline was driven by continued weakness in developing markets, fewer large account sales in North America, continued migration of customers to our partner print services offering (included in our Services segment) and overall price declines that continue to be within our historical range of 5 to 10%. These declines were partially offset by moderate benefits from recent product launches primarily in our mid-range category and from improved sales in our high-end color category following the drupa trade show.

•

Annuity revenue decreased by 7% from the prior year period, with a 1-percentage point negative impact from currency. The annuity revenue reduction reflects lower equipment sales in prior periods, ongoing page declines and lower supplies demand, as well as the continued migration of customers to our partner print services offering (included in our Services segment). These areas of decline were partially offset by annuity growth in our high-end color product group.

Document Technology revenue mix was 57% mid-range, 24% high-end and 19% entry, consistent with recent quarters.

Total revenue in the Document Technology segment is expected to continue to decline over the next three years as we continue to migrate the business to more services-based offerings. These services-based offerings are reported within our Services segment as part of our Document Outsourcing business. This segment also continues to be impacted by lower equipment placements and price declines as well as related supplies and page declines. We expect to continue to mitigate these declines through our focus on productivity and cost improvements, as well as investments in growth areas of the market.

Segment Margin

Third quarter 2016 Document Technology segment margin of 13.1% declined 0.8-percentage points from third quarter 2015, but included a 0.9-percentage point improvement in gross margin. The gross margin increase reflects restructuring and productivity improvements only partially offset by price declines. SAG increased as a percent of revenue primarily due to prior-year compensation and benefit expense adjustments and a decline in segment revenues.

Document Technology segment margin for the nine months ended September 30, 2016 of 12.0% declined 1.0-percentage points from the prior year period, including a 0.1-percentage point improvement in gross margin. The gross margin increase reflects restructuring and productivity improvements only partially offset by unfavorable currency impacts and price declines. SAG increased as a percent of revenue, primarily due to prior-year compensation and benefit expense adjustments as well as a decline in segment revenue which was only partially matched by productivity improvements.

Total Installs (Document Technology and Document Outsourcing¹)

Install activity includes Document Outsourcing and Xerox-branded products shipped to Global Imaging Systems. Details by product groups is shown below:

Xerox 2016 Form 10-Q

Installs for the third quarter 2016:

Entry⁽²⁾:


•	16% increase in color multifunction devices due to the benefit of recent product launches and improvements in developing markets.


•	12% decrease in black-and-white multifunction devices.

Mid-Range:


•	7% increase in mid-range color installs including the benefit of recent product launches.


•	25% decrease in mid-range black-and-white reflecting, in part, fewer large-account installs.

High-End:


•	6% increase in high-end color systems, excluding Fuji Xerox digital front-end sales, due to favorable impact from the drupa printing trade show.


•	1% decrease in high-end black-and-white systems.

Installs for the nine months ended September 30, 2016:

Entry⁽²⁾:


•	2% increase in color multifunction due to the benefit of recent product launches.


•	9% decrease in black-and-white multifunction devices.

Mid-Range:


•	5% increase in mid-range color installs, including the benefit of recent product launches.


•	18% decrease in mid-range black-and-white reflecting a transition to color devices and, in part, fewer large-account installs.

High-End:


•	22% increase in high-end color systems, excluding Fuji Xerox digital front-end sales, due to favorable impact from the drupa printing trade show and growth in Color Press 800 and 1000 products as well as Versant Color Press 80 products, partially offset by declines in other production color products, reflecting product launch timing.


•	11% decrease in high-end black-and-white systems consistent with overall market declines.

Note: Descriptions of “Entry”, “Mid-range” and “High-end” are defined in Note 3 - Segment Reporting, in the Condensed Consolidated Financial Statements.

____________________


(1)	Revenue from Document Outsourcing installations is reported in our Services segment.


(2)	Entry installations exclude OEM sales; including OEM sales, Entry color multifunction devices increased 4% and 53% for the three and nine months ended September 30, 2016, respectively, while Entry black-and-white multifunction devices increased 6% and 15% for the three and nine months ended September 30, 2016, respectively.

Other

Revenue

Third quarter 2016 Other revenue of $188 million was flat from third quarter 2015, with a 1-percentage point negative impact from currency. The anticipated run-off of the Student Loan business, now reported in Other, and

lower wide-format revenues were offset by higher paper and network integration-related solution sales. Total paper

revenue (all within developing markets) and the Student Loan business combined comprise nearly half of Other

revenue.

Other revenue for the nine months ended September 30, 2016 of $511 million decreased 6% from the prior year period, with a 2-percentage point negative impact from currency. The anticipated run-off of the Student Loan business, now reported in Other, and lower wide-format revenues, were offset by higher paper and network integration-related solution sales. Total paper revenue (all within developing markets) and the Student Loan business combined comprise approximately half of Other revenue.

Other Loss

Xerox 2016 Form 10-Q

Third quarter 2016 Other loss of $65 million increased $10 million from third quarter 2015. Other expenses, net (excluding Deferred compensation investment gains) are reported within Other and were $58 million in third quarter 2016 as compared to $68 million in third quarter 2015. The $10 million reduction was primarily due to a decline in non-financing interest expense. Remaining Other loss of $7 million in third quarter 2016 increased $20 million from third quarter 2015 income of $13 million, primarily related to lower profitability in the Student Loan business.

Other loss for the nine months ended September 30, 2016 of $211 million increased $47 million from the prior year period. Other expenses, net (excluding Deferred compensation investment gains) are reported within Other and were $173 million for the nine months ended September 30, 2016 as compared to $186 million for the nine months ended September 30, 2015. The $13 million reduction was primarily due to a decline in non-financing interest expense. Remaining Other loss of $38 million for the nine months ended September 30, 2016 increased $60 million from the nine months ended September 30, 2015 income of $22, primarily related to lower profitability in the Student Loan business.

Capital Resources and Liquidity

As of September 30, 2016 and December 31, 2015, total cash and cash equivalents were $1,423 million and $1,368 million, respectively. There were no borrowings under our Commercial Paper Program, or letters of credit under our $2 billion Credit Facility at September 30, 2016 or December 31, 2015, respectively.

We continue to expect cash flows from operations will be between $950 million and $1.2 billion in 2016.

Cash Flow Analysis

The following table summarizes our cash and cash equivalents:



	Nine Months Ended September 30,						Change
(in millions)	2016			2015			Change
Net cash provided by operating activities	$	522		$	733		$	(211	)
Net cash (used in) provided by investing activities	(261		)	527			(788		)
Net cash used in financing activities	(213		)	(1,796		)	1,583
Effect of exchange rate changes on cash and cash equivalents	7			(71		)	78
Increase (decrease) in cash and cash equivalents	55			(607		)	662
Cash and cash equivalents at beginning of period	1,368			1,411			(43		)
Cash and Cash Equivalents at End of Period	$	1,423		$	804		$	619

Cash Flows from Operating Activities

Net cash provided by operating activities was $522 million for the nine months ended September 30, 2016. The $211 million decrease in operating cash from the prior year period was primarily due to the following:


•	$105 million decrease in pre-tax income before depreciation and amortization, gains on sales of businesses and assets, stock-based compensation, restructuring and related costs, curtailment gain, separation-related costs and the prior year HE charge.


•	$211 million decrease in accounts payable and accrued compensation primarily related to a reduction in days payable outstanding and higher foreign currency denominated payments.


•	$115 million decrease reflecting settlement payments associated with our third quarter 2015 decision to not fully complete the HE implementations in California and Montana.


•	$67 million decrease from accounts receivable primarily due to the timing of collections.


•	$54 million decrease from higher restructuring and related payments.


•	$39 million decrease due to the prior year source of cash in the discontinued ITO business.


•	$32 million decrease due to payments for separation-related costs.


•	$150 million increase primarily due to lower inventory requirements as well as lower levels of in transit inventory.


•	$73 million increase from finance receivables primarily related to a higher level of run-off due to lower originations and to a reduced impact from 2012 and 2013 finance receivables sales.


•	$63 million increase from the settlements of foreign currency derivative contracts. This increase primarily offsets the negative currency impacts on our Yen-denominated inventory purchases as well as other foreign currency denominated payments recorded in inventory and accounts payable.


•	$42 million increase due to lower pension contributions.


•	$17 million increase due to lower income tax payments.

Xerox 2016 Form 10-Q


•	$14 million increase from lower spending for product software and up-front costs.

Cash Flows from Investing Activities

Net cash used in investing activities was $261 million for the nine months ended September 30, 2016. The $788 million decrease in cash from the prior year period was primarily due to the following:


•	$992 million decrease primarily due to a $52 million payment to Atos in 2016, reflecting final working capital adjustments associated with the 2015 ITO divestiture, compared to $930 million of net proceeds from the sale of the ITO business in 2015.


•	$183 million increase from acquisitions. 2015 reflects the acquisition of RSA Medical LLC for $141 million and Intellinex LLC for $28 million.


•	$44 million increase due to lower capital expenditures (including internal use software) primarily due to the sale of the ITO business.

Cash Flows from Financing Activities

Net cash used in financing activities was $213 million for the nine months ended September 30, 2016. The $1,583 million increase in cash from the prior year period was primarily due to the following:


•	$1,302 million increase, as there were no share repurchases in 2016.


•	$212 million increase from net debt activity. 2016 reflects net proceeds of $1 billion from a Senior Unsecured Term Facility offset by payments of $700 million on Senior Notes and $250 million on Notes. 2015 reflects payment of $1,250 million on Senior Notes offset by net proceeds of $1,045 million from the issuance of Senior Notes and an increase of $50 million in Commercial Paper.


•	$44 million increase from lower distributions to noncontrolling interests.


•	$33 million increase due to the absence of a stock-based award vesting in 2016.

Customer Financing Activities and Debt

The following represents our total finance assets, net associated with our lease and finance operations:



(in millions)	September 30, 2016		December 31, 2015
Total finance receivables, net⁽¹⁾	$	3,835	$	3,988
Equipment on operating leases, net	488		495
Total Finance Assets, net⁽²⁾	$	4,323	$	4,483

___________________________


(1)	Includes (i) billed portion of finance receivables, net, (ii) finance receivables, net and (iii) finance receivables due after one year, net as included in our Condensed Consolidated Balance Sheets.


(2)	The change from December 31, 2015 includes an increase of $16 million due to currency across all Finance Assets.

The following summarizes our debt:



(in millions)	September 30, 2016			December 31, 2015
Principal debt balance⁽¹⁾	$	7,400		$	7,365
Net unamortized discount	(45		)	(52		)
Debt issuance cost⁽²⁾	(23		)	(28		)
Fair value adjustments⁽³⁾
- terminated swaps	32			47
- current swaps	15			7
Total Debt	$	7,379		$	7,339

____________________________


(1)	Includes Notes Payable of $5 million and $3 million as of September 30, 2016 and December 31, 2015, respectively.


(2)	Reflects the adoption of ASU 2015-03, Interest - Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs effective January 1, 2016, which requires debt issuance costs to be presented as a direct deduction from the carrying amount of the corresponding debt liability. Prior year amounts were revised to reflect the new presentation.

(3)

Fair value adjustments include the following - (i) fair value adjustments to debt associated with terminated interest rate swaps, which are being amortized to interest expense over the remaining term of the related notes; and (ii) changes in fair value of hedged debt obligations attributable to movements in benchmark interest rates. Hedge accounting requires hedged debt instruments to be reported inclusive of any fair value adjustment.

Xerox 2016 Form 10-Q

Refer to Note 10 - Debt, in the Condensed Consolidated Financial Statements for additional information.

Our lease contracts permit customers to pay for equipment over time rather than at the date of installation; therefore, we maintain a certain level of debt (that we refer to as financing debt) to support our investment in these lease contracts, which are reflected in total finance assets, net. For this financing aspect of our business, we maintain an assumed 7:1 leverage ratio of debt to equity as compared to our finance assets.

Based on this leverage, the following represents the breakdown of total debt between financing debt and core debt:



(in millions)	September 30, 2016		December 31, 2015
Financing debt⁽¹⁾	$	3,783	$	3,923
Core debt	3,596		3,416
Total Debt	$	7,379	$	7,339

____________________________


(1)	Financing debt includes $3,356 million and $3,490 million as of September 30, 2016 and December 31, 2015, respectively, of debt associated with total finance receivables, net and is the basis for our calculation of “Equipment financing interest” expense. The remainder of the financing debt is associated with Equipment on operating leases.

Sales of Accounts Receivable

Refer to Note 5 - Accounts Receivable, Net, in the Condensed Consolidated Financial Statements for additional information.

Sales of Finance Receivables

Refer to Note 6 - Finance Receivables, Net, in the Condensed Consolidated Financial Statements for additional information.

Liquidity and Financial Flexibility

We manage our worldwide liquidity using internal cash management practices, which are subject to (1) the statutes, regulations and practices of each of the local jurisdictions in which we operate, (2) the legal requirements of the agreements to which we are a party and (3) the policies and cooperation of the financial institutions we utilize to maintain and provide cash management services.

Our principal debt maturities are in line with historical and projected cash flows and are spread over the next ten years as follows:



(in millions)	Amount
2016 Q4	$	1,013
2017	1,029
2018	1,021
2019	1,162
2020	1,208
2021	1,067
2022	—
2023	—
2024	300
2025 and thereafter	600
Total	$	7,400

Treasury Stock

There were no share repurchases in 2016 through the date of our filing on November 3, 2016.

Xerox 2016 Form 10-Q

Financial Risk Management

We are exposed to market risk from changes in 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 to reduce earnings and cash flow volatility resulting from shifts in market rates. We enter into limited types of derivative contracts, including interest rate swap agreements, foreign currency spot, forward and swap contracts and net purchased foreign currency options to manage interest rate and foreign currency exposures. Our primary foreign currency market exposures include the Yen, Euro and Pound Sterling. The fair market values of all our derivative contracts change with fluctuations in interest rates and/or currency rates and are designed so that any changes in their values are offset by changes in the values of the underlying exposures. Derivative financial instruments are held solely as risk management tools and not for trading or speculative purposes.

We are required to recognize all derivative instruments as either assets or liabilities at fair value in the balance sheet. As permitted, certain of these derivative contracts have been designated for hedge accounting treatment. Certain of our derivatives that do not qualify for hedge accounting are effective as economic hedges. These derivative contracts are likewise required to be recognized each period at fair value and therefore do result in some level of volatility. The level of volatility will vary with the type and amount of derivative hedges outstanding, as well as fluctuations in the currency and interest rate markets during the period. The related cash flow impacts of all of our derivative activities are reflected as cash flows from operating activities.

By their nature, all derivative instruments involve, to varying degrees, elements of market and credit risk. The market risk associated with these instruments resulting from currency exchange and interest rate movements is expected to offset the market risk of the underlying transactions, assets and liabilities being hedged. We do not believe there is significant risk of loss in the event of non-performance by the counterparties associated with these instruments because these transactions are executed with a diversified group of major financial institutions. Further, our policy is to deal with counterparties having a minimum investment grade or better credit rating. Credit risk is managed through the continuous monitoring of exposures to such counterparties.

The current 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 11 – Financial Instruments, in the Condensed Consolidated Financial Statements for further discussion and information on our financial risk management strategies.

Non-GAAP Financial Measures

We have reported our financial results in accordance with generally accepted accounting principles (GAAP). In addition, we have discussed our financial results using the non-GAAP measures described below. We believe these non-GAAP measures allow investors to better understand the trends in our business and to better understand and compare our results. Accordingly, we believe it is necessary to adjust several reported amounts, determined in accordance with GAAP, to exclude the effects of certain items as well as their related income tax effects.

These non-GAAP financial measures should be viewed in addition to, and not as a substitute for, the Company’s reported results prepared in accordance with GAAP.

A reconciliation of these non-GAAP financial measures and the most directly comparable measures calculated and presented in accordance with U.S. GAAP are set forth on the following tables. These reconciliations also include the income tax effects for our non-GAAP performance measures in total, to the extent applicable. The income tax effects are calculated under the same accounting principles as applied to our reported pre-tax performance measures under ASC 740, which employs an annual effective tax rate method. The noted income tax effect for our non-GAAP performance measures is effectively the difference in income taxes for reported and adjusted pre-tax income calculated under the annual effective tax rate method.

NOTE: In 2016 we revised our calculation of Adjusted Earnings Measures to exclude the following items in addition

to the amortization of intangibles:


•	Restructuring and related costs including those related to Fuji Xerox.


•	The non-service related elements of our defined benefit pension and retiree health plan costs (retirement-related).


•	Separation costs

Xerox 2016 Form 10-Q

Prior year amounts were revised accordingly to reflect these changes.

Adjusted Revenue, Costs and Expenses, and Margin

As previously discussed, during third quarter 2015 we recorded a pre-tax charge (HE charge) of $389 million, which included a $116 million reduction to revenues. (See Services within the "Segment Review" section for additional details). As a result of the significant impact of the HE charge on our reported revenues, costs and expenses as well as key metrics for the prior year period, we also discussed our results using non-GAAP measures which exclude the impact of the HE charge. In addition to the magnitude of the charge and its impact on our prior-year reported results, we excluded the HE charge due to the fact that it was primarily a unique charge associated with the conclusion, reached after a series of discussions, that fully completing our HE platform implementations in California and Montana was no longer considered probable. This adjustment was in addition to the adjustments noted below.

Adjusted Earnings Measures


•	Net income and Earnings per share (EPS)


•	Effective tax rate


•	Gross margin, RD&E and SAG (adjusted for non-service retirement-related costs only)

The above measures were adjusted for the following items:

Amortization of intangible assets:

The amortization of intangible assets is driven by our acquisition activity which can vary in size, nature and timing as compared to other companies within our industry and from period to period. The use of intangible assets contributed to our revenues earned during the periods presented and will contribute to our future period revenues as well. Amortization of intangible assets will recur in future periods.

Restructuring and related costs:

Restructuring and related costs include restructuring and asset impairment charges as well as costs associated with our Strategic Transformation program beyond those normally included in restructuring and asset impairment charges. Restructuring consists of costs primarily related to severance and benefits paid to employees pursuant to formal restructuring and workforce reduction plans. Asset impairment includes costs incurred for those assets sold, abandoned or made obsolete as a result of our restructuring actions, exiting from a business or other strategic business changes. Additional costs for our Strategic Transformation program are primarily related to the implementation of strategic actions and initiatives and include third-party professional service costs as well as one-time incremental costs. All of these costs can vary significantly in terms of amount and frequency based on the nature of the actions as well as the changing needs of the business. Accordingly, due to that significant variability, we will exclude these charges since we do not believe they provide meaningful insight into our current or past operating performance nor do we believe they are reflective of our expected future operating expenses as such charges are expected to yield future benefits and savings with respect to our operational performance.

Non-service retirement-related costs:

Our defined benefit pension and retiree health costs include several elements impacted by changes in plan assets and obligations that are primarily driven by changes in the debt and equity markets as well as those that are predominantly legacy in nature and related to employees who are no longer providing current service to the Company (e.g. retirees and ex-employees). These elements include (i) interest cost, (ii) expected return on plan assets, (iii) amortized actuarial gains/losses and (iv) the impacts of any plan settlements/curtailments. Accordingly, we consider these elements of our periodic retirement plan costs to be outside the operational performance of the business or legacy costs and not necessarily indicative of current or future cash flow requirements. Adjusted earnings will continue to include the elements of our retirement costs related to current employee service (service cost and amortization of prior service cost) as well as the cost of our defined contribution plans.

Separation costs:

Separation costs are expenses incurred in connection with Xerox's planned separation into two independent, publicly traded companies. Separation costs are primarily for third-party investment banking, accounting, legal, consulting and other similar types of services related to the separation transaction as well as costs associated with the operational separation of the two companies, such as those related to human resources, brand management, real estate and information management to the extent not capitalized. Separation costs also include the costs associated with bonuses and restricted stock grants awarded to employees for retention through the separation as well as incremental income tax expense related to the reorganization of legal entities and operations in order to effect the

Xerox 2016 Form 10-Q

legal separation of the Company. These costs are incremental to normal operating charges and are being incurred solely as a result of the separation transaction. Accordingly, we are excluding these expenses from our Adjusted Earnings Measures in order to evaluate our performance on a comparable basis.

Operating Income and Margin

We also calculate and utilize operating income and margin earnings measures by adjusting our pre-tax income and margin amounts to exclude certain items. In addition to the costs noted for our Adjusted Earnings measures, operating income and margin also exclude other expenses, net. Other expenses, net is primarily comprised of non-financing interest expense and also includes certain other non-operating costs and expenses. We exclude these amounts in order to evaluate our current and past operating performance and to better understand the expected future trends in our business.

Constant Currency (CC)

Refer to "Currency Impact" for a discussion of this measure and its use in our analysis of revenue growth.

Summary

Management believes that all of these non-GAAP financial measures provide an additional means of analyzing the current periods’ results against the corresponding prior periods’ results. However, the following non-GAAP financial measures should be viewed in addition to, and not as a substitute for, the Company’s reported results prepared in accordance with GAAP. Our non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP measures and should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP. Our management regularly uses our supplemental non-GAAP financial measures internally to understand, manage and evaluate our business and make operating decisions. These non-GAAP measures are among the primary factors management uses in planning for and forecasting future periods. Compensation of our executives is based in part on the performance of our business based on these non-GAAP measures.

A reconciliation of these non-GAAP financial measures and the most directly comparable measures calculated and presented in accordance with GAAP are set forth on the following tables:

Net Income (Loss) and EPS reconciliation:



	Three Months Ended September 30,											Nine Months Ended September 30,
	2016					2015						2016					2015
(in millions; except per share amounts)	Net Income			EPS		Net (Loss) Income			EPS			Net Income			EPS		Net Income			EPS
Reported⁽¹⁾	$	181		$	0.17	$	(31	)	$	(0.04	)	$	370		$	0.34	$	267		$	0.23
Adjustments:
Amortization of intangible assets	77					77						244					233
HE Charge (2015 only)	—					389						—					389
Restructuring and related costs - Xerox	32					20						229					191
Non-service retirement-related costs	34					30						112					82
Separation costs	39					—						75					—
Income tax adjustments⁽²⁾	(77		)			(198		)				(229		)			(335		)
Tax related separation costs⁽²⁾	(2		)			—						24					—
Restructuring charges - Fuji Xerox	2					2						3					4
Adjusted	$	286		$	0.27	$	289		$	0.27		$	828		$	0.79	$	831		$	0.74
Weighted average shares for adjusted EPS⁽³⁾				1,052					1,078						1,049					1,120
Fully diluted shares at end of period⁽⁴⁾				1,052

____________________________


(1)	Net Income (Loss) and EPS from continuing operations.


(2)	Refer to Effective Tax Rate reconciliation.


(3)	Average shares for the calculations of adjusted EPS include 27 million shares associated with our Series A convertible preferred stock and therefore the related quarterly dividend of $6 million was excluded.


(4)	Represents common shares outstanding at September 30, 2016, as well as shares associated with our Series A convertible preferred stock plus potential dilutive common shares used for the calculation of diluted earnings per share for the third quarter 2016.

Xerox 2016 Form 10-Q

Effective Tax Rate reconciliation:



	Three Months Ended September 30,														Nine Months Ended September 30,
	2016						2015								2016							2015
(in millions)	Pre-Tax Income		Income Tax Expense		Effective Tax Rate		Pre-Tax (Loss) Income			Income Tax (Benefit) Expense			Effective Tax Rate		Pre-Tax Income		Income Tax (Benefit) Expense			Effective Tax Rate		Pre-Tax Income		Income Tax (Benefit) Expense			Effective Tax Rate
Reported⁽¹⁾	$	150	$	5	3.3	%	$	(173	)	$	(105	)	60.7	%	$	279	$	(1	)	(0.4	)%	$	102	$	(75	)	(73.5	)%
Non-GAAP Adjustments⁽²⁾	182		77				516			198					660		229					895		335
Tax related separation costs	—		2				—			—					—		(24		)			—		—
Adjusted - revised⁽³⁾	$	332	$	84	25.3	%	$	343		$	93		27.1	%	$	939	$	204		21.7	%	$	997	$	260		26.1	%

____________________________


(1)	Pre-Tax Income (Loss) and Income Tax Expense (Benefit) from continuing operations.


(2)	Refer to Net Income (Loss) and EPS reconciliation for details. Amounts exclude Fuji Xerox restructuring as these amounts are net of tax.


(3)	The tax impact on Adjusted Pre-Tax Income from continuing operations is calculated under the same accounting principles applied to the As Reported Pre-Tax Income under ASC 740, which employs an annual effective tax rate method to the results.

Operating Income / Margin reconciliation:



	Three Months Ended September 30,													Nine Months Ended September 30,
	2016						2015							2016						2015
(in millions)	Profit		Revenue		Margin		(Loss)Profit			Revenue		Margin		Profit		Revenue		Margin		Profit		Revenue		Margin
Reported Pre-tax Income (Loss)⁽¹⁾	$	150	$	4,212	3.6	%	$	(173	)	$	4,333	(4.0	)%	$	279	$	12,878	2.2	%	$	102	$	13,392	0.8	%
Adjustments:
Amortization of intangible assets	77						77							244						233
Restructuring and related costs - Xerox	32						20							229						191
HE charge (2015 only)	—						389			116				—						389		116
Non-service retirement-related costs	34						30							112						82
Separation costs	39						—							75						—
Other expenses, net	56						73							168						187
Adjusted Operating Income/Margin	$	388	$	4,212	9.2	%	$	416		$	4,449	9.4	%	$	1,107	$	12,878	8.6	%	$	1,184	$	13,508	8.8	%

____________________________


(1)	Profit (Loss) and revenue from continuing operations.

Xerox 2016 Form 10-Q

Revenue / Segment reconciliation:



	Three Months Ended September 30, 2015
(in millions)	Total Revenue		Annuity Revenue		Outsourcing, Maintenance and Rentals Revenue		Total Segment (Loss) Profit⁽²⁾			Total Segment Margin⁽²⁾
Reported⁽¹⁾	$	4,333	$	3,665	$	3,098	$	(3	)	(0.1	)%
Adjustment:
HE Charge	116		116		116		389
Adjusted	$	4,449	$	3,781	$	3,214	$	386		8.7	%



	Nine Months Ended September 30, 2015
(in millions)	Total Revenue		Annuity Revenue		Outsourcing, Maintenance and Rentals Revenue		Total Segment Profit ⁽²⁾		Total Segment Margin⁽²⁾
Reported⁽¹⁾	$	13,392	$	11,381	$	9,630	$	723	5.4	%
Adjustment:
HE Charge	116		116		116		389
Adjusted	$	13,508	$	11,497	$	9,746	$	1,112	8.2	%

____________________________


(1)	Revenue from continuing operations.


(2)	Revised to exclude non-service retirement-related costs.

Services Segment reconciliation:



	Three Months Ended September 30, 2015⁽¹⁾
(in millions)	Annuity Revenue		BPO Revenue		Segment Revenue		% of Total Revenue		Segment (Loss) Profit⁽³⁾			Segment Margin⁽³⁾
Reported⁽²⁾	$	2,250	$	1,566	$	2,367	55	%	$	(196	)	(8.3	)%
Adjustment:
HE Charge	116		116		116				389
Adjusted	$	2,366	$	1,682	$	2,483	56	%	$	193		7.8	%



	Nine Months Ended September 30, 2015⁽¹⁾
(in millions)	Annuity Revenue		BPO Revenue		Segment Revenue		% of Total Revenue		Segment Profit⁽³⁾		Segment Margin⁽³⁾
Reported⁽²⁾	$	7,012	$	4,946	$	7,360	55	%	$	172	2.3	%
Adjustment:
HE Charge	116		116		116				389
Adjusted	$	7,128	$	5,062	$	7,476	55	%	$	561	7.5	%

____________________________


(1)	Revised to reflect the transfer of the Education/Student Loan business from the Services segment to Other.


(2)	Revenue from continuing operations.


(3)	Revised to exclude non-service retirement-related costs.

Xerox 2016 Form 10-Q

Key Financial Ratios reconciliation:



	Three Months Ended September 30,
	2016									2015
(in millions)	As Reported⁽¹⁾			Non-service retirement-related costs			Adjusted			As Reported ⁽¹⁾			HE Charge		Non-service retirement-related costs			Adjusted
Revenue	$	4,212		$	—		$	4,212		$	4,333		$	116	$	—		$	4,449
Gross Profit	1,307			13			1,320			987			389		10			1,386
RD&E	126			(7		)	119			135					(6		)	129
SAG	827			(14		)	813			855					(14		)	841

Gross Margin	31.0		%				31.3		%	22.8		%						31.2		%
RD&E as a % of Revenue	3.0		%				2.8		%	3.1		%						2.9		%
SAG as a % of Revenue	19.6		%				19.3		%	19.7		%						18.9		%



	Nine Months Ended September 30,
	2016									2015
(in millions)	As Reported⁽¹⁾			Non-service retirement-related costs			Adjusted			As Reported⁽¹⁾			HE Charge		Non-service retirement-related costs			Adjusted
Revenue	$	12,878		$	—		$	12,878		$	13,392		$	116	$	—		$	13,508
Gross Profit	3,954			42			3,996			3,807			389		30			4,226
RD&E	388			(21		)	367			418					(14		)	404
SAG	2,571			(49		)	2,522			2,676					(38		)	2,638

Gross Margin	30.7		%				31.0		%	28.4		%						31.3		%
RD&E as a % of Revenue	3.0		%				2.8		%	3.1		%						3.0		%
SAG as a % of Revenue	20.0		%				19.6		%	20.0		%						19.5		%

__________________________


(1)	Revenue and costs from continuing operations.

ITEM 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information set forth under the “Financial Risk Management” section of this Quarterly Report on Form 10-Q is hereby incorporated by reference in answer to this Item.

ITEM 4 — CONTROLS AND PROCEDURES

(a)Evaluation of Disclosure Controls and Procedures

The Company’s management evaluated, with the participation of our principal executive officer and principal financial officer, or persons performing similar functions, the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and principal financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure that information we are required to disclose in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms relating to Xerox Corporation, including our consolidated subsidiaries, and was accumulated and communicated to the Company’s management, including the principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

(b)Changes in Internal Controls

In connection with the evaluation required by paragraph (d) of Rule 13a-15 under the Exchange Act, there was no change identified in our internal control over financial reporting that occurred during the last fiscal quarter

Xerox 2016 Form 10-Q

that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1 — LEGAL PROCEEDINGS

The information set forth under Note 17 – Contingencies and Litigation in the Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q is incorporated by reference in answer to this Item.

ITEM 1A — RISK FACTORS

Reference is made to the Risk Factors set forth in Part I, Item 1A of our 2015 Annual Report. The Risk Factors remain applicable from our 2015 Annual Report.

ITEM 2 — UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS


(a)	Sales of Unregistered Securities during the Quarter ended September 30, 2016

During the quarter ended September 30, 2016, Registrant issued the following securities in transactions that were not registered under the Securities Act of 1933, as amended (the “Act”).

Semi-Annual Director Fees:


a.	Securities issued on July 15, 2016: Registrant issued 53,920 deferred stock units (DSUs), representing the right to receive shares of Common stock, par value $1 per share, at a future date.


b.	No underwriters participated. The shares were issued to each of the non-employee Directors of Registrant: Jonathan Christodoro, Richard J. Harrington, William Curt Hunter, Robert J. Keegan, Charles Prince, Ann N. Reese, Stephen H. Rusckowski and Sara Martinez Tucker.


c.	The DSUs were issued at a deemed purchase price of $9.645 per DSU (aggregate price $520,058), based upon the market value on the date of issuance, in payment of the semi-annual Director's fees pursuant to Registrant's 2004 Equity Compensation Plan for Non-Employee Directors.


d.	Exemption from registration under the Act was claimed based upon Section 4(2) as a sale by an issuer not involving a public offering.

Dividend Equivalent:


a.	Securities issued on July 31, 2016: Registrant issued 6,852 DSUs, representing the right to receive shares of Common stock, par value $1 per share, at a future date.


b.	No underwriters participated. The shares were issued to each of the non-employee Directors of Registrant: Richard J. Harrington, William Curt Hunter, Robert J. Keegan, Charles Prince, Ann N. Reese, Stephen H. Rusckowski, Sara Martinez Tucker and Mary Agnes Wilderotter.


c.	The DSUs were issued at a deemed purchase price of $9.33 per DSU (aggregate price $63,929), based upon the market value on the date of record, in payment of the dividend equivalents due to DSU holders pursuant to Registrant’s 2004 Equity Compensation Plan for Non-Employee Directors.


d.	Exemption from registration under the Act was claimed based upon Section 4(2) as a sale by an issuer not involving a public offering.


(b)	Issuer Purchases of Equity Securities during the Quarter ended September 30, 2016

Board Authorized Share Repurchases Programs:

There were no repurchases of Xerox Common Stock pursuant to Board authorized share repurchase programs during the third quarter 2016 or through the date of our filing on November 3, 2016.

Xerox 2016 Form 10-Q

Repurchases Related to Stock Compensation Programs⁽¹⁾:



	Total Number of Shares Purchased	Average Price Paid per Share⁽²⁾		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum That May Be Purchased under the Plans or Programs
July 1 through 31	6,252	$	9.35	n/a	n/a
August 1 through 31	—	—		n/a	n/a
September 1 through 30	—	—		n/a	n/a
Total	6,252

____________________________


(1)	These repurchases are made under a provision in our restricted stock compensation programs for the indirect repurchase of shares through a net-settlement feature upon the vesting of shares in order to satisfy minimum statutory tax-withholding requirements.

(2)Exclusive of fees and costs.

Xerox 2016 Form 10-Q

ITEM 6 — EXHIBITS



3(a)(1)		Restated Certificate of Incorporation of Registrant filed with the Department of State of New York on February 21, 2013.
		Incorporated by reference to Exhibit 3(a) to Registrant’s Annual Report on Form 10-K dated for the fiscal year ended December 31, 2012.
3(b)		By-Laws of Registrant, as amended through August 15, 2016.
12		Computation of Ratio of Earnings to Fixed Charges.
31(a)		Certification of CEO pursuant to Rule 13a-14(a) or Rule 15d-14(a).
31(b)		Certification of CFO pursuant to Rule 13a-14(a) or Rule 15d-14(a).
32		Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.CAL		XBRL Taxonomy Extension Calculation Linkbase.
101.DEF		XBRL Taxonomy Extension Definition Linkbase.
101.INS		XBRL Instance Document.
101.LAB		XBRL Taxonomy Extension Label Linkbase.
101.PRE		XBRL Taxonomy Extension Presentation Linkbase.
101.SCH		XBRL Taxonomy Extension Schema Linkbase.

Xerox 2016 Form 10-Q

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



XEROX CORPORATION (Registrant)

By:	/S/ JOSEPH H. MANCINI, JR.
	Joseph H. Mancini, Jr. Vice President and Chief Accounting Officer (Principal Accounting Officer)

Date: November 3, 2016

Xerox 2016 Form 10-Q

EXHIBIT INDEX



3(a)(1)		Restated Certificate of Incorporation of Registrant filed with the Department of State of New York on February 21, 2013.
		Incorporated by reference to Exhibit 3(a) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2012.
3(b)		By-Laws of Registrant, as amended through August 15, 2016.
12		Computation of Ratio of Earnings to Fixed Charges.
31(a)		Certification of CEO pursuant to Rule 13a-14(a) or Rule 15d-14(a).
31(b)		Certification of CFO pursuant to Rule 13a-14(a) or Rule 15d-14(a).
32		Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.CAL		XBRL Taxonomy Extension Calculation Linkbase.
101.DEF		XBRL Taxonomy Extension Definition Linkbase.
101.INS		XBRL Instance Document.
101.LAB		XBRL Taxonomy Extension Label Linkbase.
101.PRE		XBRL Taxonomy Extension Presentation Linkbase.
101.SCH		XBRL Taxonomy Extension Schema Linkbase.

Xerox 2016 Form 10-Q

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	8th grade Avg



		Page
Part I — Financial Information
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Statements of Income (Loss)	3
	Condensed Consolidated Statements of Comprehensive Income (Loss)	4
	Condensed Consolidated Balance Sheets	5
	Condensed Consolidated Statements of Cash Flows	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
	Capital Resources and Liquidity	47
	Financial Risk Management	50
	Non-GAAP Financial Measures	50
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	55
Item 4.	Controls and Procedures	55

Part II — Other Information

Item 1.	Legal Proceedings	56
Item 1A.	Risk Factors	56
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	56
Item 6.	Exhibits	58
Signatures		59
Exhibit Index		60

Xerox 10-Q2016 Q3 Quarterly report

Content analysis