10-K 1 xrx-123117x10xk.htm 10-K Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________ 
FORM 10-K
_________________________________________________  
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2017
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
_________________________________________________  

xrxlogoa08.jpg
XEROX CORPORATION
(Exact Name of Registrant as specified in its charter)
_________________________________________________  
New York
 
16-0468020
(State of incorporation)
 
(IRS Employer Identification No.)
P.O. Box 4505, 201 Merritt 7
Norwalk, Connecticut 06851-1056
 
(203) 968-3000
(Address of principal executive offices)
 
(Registrants telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, $1 par value
 
New York Stock Exchange
 
 
Chicago Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
____________________________  
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
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 Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T 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 check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
o
Non-accelerated filer
(Do not check if smaller reporting company)
o
Smaller reporting company
o
Emerging growth company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x
The aggregate market value of the voting stock of the registrant held by non-affiliates as of June 30, 2017 was $7,302,297,923.
Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date:
Class
 
Outstanding at January 31, 2018
Common Stock, $1 par value
 
254,673,473

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the following document are incorporated herein by reference:
Document
 
Part of Form 10-K in which Incorporated
Xerox Corporation Notice of 2018 Annual Meeting of Shareholders and Proxy Statement (to be filed no later than 120 days after the close of the fiscal year covered by this report on Form 10-K)
 
III





Cautionary Statement Regarding Forward-Looking Statements
This document, and other written or oral statements made from time to time by management 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: our ability to address our business challenges in order to reverse revenue declines, reduce costs and increase productivity so that we can invest in and grow our business; changes in economic and political conditions, trade protection measures, licensing requirements and tax laws 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 partners, subcontractors and software vendors will not perform in a timely, quality manner; 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; 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; reliance on third parties, including subcontractors, for manufacturing of products and provision of services; our ability to manage changes in the printing environment and expand equipment placements; interest rates, cost of borrowing and access to credit markets; funding requirements associated with our employee pension and retiree health benefit plans; the risk that our operations and products may not comply with applicable worldwide regulatory requirements, particularly environmental regulations and directives and anti-corruption laws; the outcome of litigation and regulatory proceedings to which we may be a party; the risk that we do not realize all of the expected strategic and financial benefits from the separation and spin-off of our Business Process Outsourcing business; the effects on our business resulting from actions of activist shareholders; 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 Annual Report on Form 10-K, as well as in our Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K filed with the SEC. Furthermore, the actual results of the Transactions could vary materially as a result of a number of factors, including, but not limited to: (i) the risk that the transactions may not be completed in a timely manner or at all, which may adversely affect Xerox’s business and the price of Xerox’s common stock, (ii) the failure to satisfy the conditions to the consummation of the transactions, including the receipt of certain approvals from Xerox’s shareholders and certain governmental and regulatory approvals, (iii) the parties may be unable to achieve expected synergies and operating efficiencies in the transactions within the expected time frames or at all, (iv) the transactions may not result in the accretion to Xerox’s earnings or other benefits, (v) the occurrence of any event, change or other circumstance that could give rise to the termination of the transaction agreements, (vi) the effect of the announcement or pendency of the transactions on Xerox’s and/or Fujifilm business relationships, operating results, and business generally, risks related to the proposed transactions disrupting Xerox’s current plans and operations and potential difficulties in Xerox’s employee retention as a result of the transactions, (vii) risks related to diverting management’s attention from Xerox’s ongoing business operations, (viii) the outcome of any legal proceedings that may be instituted against Xerox, its officers or directors related to the transaction agreements or the transactions and (ix) the possibility that competing offers or acquisition proposals for Xerox will be made. 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.
Fuji Xerox Co., Ltd. (“Fuji Xerox”) is a joint venture between Xerox Corporation and Fujifilm in which Xerox holds a noncontrolling 25% equity interest and Fujifilm holds the remaining equity interest. In April 2017, Fujifilm formed an independent investigation committee (“IIC”) to primarily conduct a review of the appropriateness of the accounting practices at Fuji Xerox’s New Zealand subsidiary and at other subsidiaries. The IIC completed its review during the second quarter 2017 and identified aggregate adjustments to Fuji Xerox’s financial statements of approximately JPY 40 billion (approximately $360 million) primarily related to misstatements at Fuji Xerox’s New Zealand and Australian subsidiaries. We determined that our share of the total adjustments identified as part of the investigation was approximately $90 million and impacted our fiscal years 2009 through 2017. We concluded that we should revise our previously issued annual and interim consolidated financial statements for 2014, 2015 and 2016 and the first quarter of 2017 the next time they are filed. Our review of this matter has been completed. However, Fujifilm and Fuji Xerox continue to review Fujifilm’s oversight and governance of Fuji Xerox as well as Fuji Xerox’s oversight and governance over its businesses in light of the findings of the IIC. At this time, we can provide no assurance re




lative to the outcome of any potential governmental investigations or any consequences thereof that may happen as a result of this matter.




Xerox Corporation
Form 10-K
December 31, 2017
Table of Contents
 
Page
 
 
 
 
.





Part I
Item 1. Business
Transaction to Combine Xerox and Fuji Xerox
On January 31, 2018, Xerox entered into a Redemption Agreement with FUJIFILM Holdings Corporation, a Japanese company (“Fujifilm”), and Fuji Xerox Co., Ltd, a Japanese company in which Xerox indirectly holds a 25 percent equity interest and Fujifilm holds the remaining 75 percent equity interest (“Fuji Xerox”) (the “Redemption Agreement”), pursuant to which, among other things, (i) Fuji Xerox shall redeem for cash most or all of Fujifilm’s 75 percent equity interest in Fuji Xerox and (ii) Fuji Xerox shall become an indirect majority or wholly owned subsidiary of Xerox (the “Redemption”). The combined company resulting from the Fujifilm Transactions (as defined below) shall hereinafter be referred to as “New Fuji Xerox”.
Concurrently with the execution and delivery of the Redemption Agreement, Xerox entered into a Share Subscription Agreement with Fujifilm (the “Subscription Agreement” and together with the Redemption Agreement, the “Fujifilm Transaction Agreements”), pursuant to which, among other things, (i) Fujifilm shall subscribe for and purchase from Xerox, and Xerox shall issue to Fujifilm, a number of shares of common capital stock of Xerox (and after Closing, of New Fuji Xerox, “Common Stock”) representing 50.1 percent of (i) the aggregate number of issued and outstanding shares of Common Stock (excluding any performance shares issued under the Company’s existing employee incentive plans) plus (ii) such additional shares of Common Stock that would be issued and outstanding assuming the exercise of in-the-money options as of 5:00 p.m. New York time two business days prior to closing of the Fujifilm Transactions (as defined below) (the “Closing”) plus (iii) any shares of Common Stock reserved for issue relating to restricted stock units outstanding as of the Closing that are fully vested as of 5:00 p.m. New York time two business days prior to the Closing (collectively, the “Fully Diluted Capital Stock”) of Xerox in exchange for (A) cash and (B) all of the issued and outstanding equity interests of Fuji Xerox not held by Xerox or its wholly owned subsidiaries and (ii) Xerox shall become a direct, majority owned subsidiary of Fujifilm (the “Issuance” and together with the Redemption, the “Fujifilm Transactions”). In addition, pursuant to the terms of the Subscription Agreement, at Closing, an aggregate number of shares equal to the “True-Up Shares” (as defined in the Subscription Agreement) shall be held in escrow and released to Fujifilm as and if necessary for Fujifilm to maintain its ownership percentage.
In connection with the Fujifilm Transactions, Xerox expects to pay a special pro rata cash dividend to its shareholders in an amount equal to $2.5 billion in the aggregate (the “Special Dividend”), which is expected to be financed through the issuance of debt that will be incurred by New Fuji Xerox. Fujifilm will not be a shareholder of Xerox as of the record date for the Special Dividend and therefore will not receive any payment in respect thereof.
As noted above, immediately following the Closing, Fujifilm is expected to own approximately 50.1 percent of the Fully Diluted Capital Stock of New Fuji Xerox and Xerox shareholders are expected to own approximately 49.9 percent. Further, pursuant to that certain Shareholders Agreement, to be entered into by Xerox and Fujifilm at Closing (the “Shareholders Agreement”), the Board of Directors of New Fuji Xerox will have twelve directors, which will initially be composed of seven individuals designated by Fujifilm and five individuals from among the members of the Board of Directors of the Company immediately prior to Closing designated by Xerox in consultation with and subject to reasonable approved by Fujifilm. Accordingly, the Fujifilm Transactions are expected to be accounted for as a reverse acquisition.
Xerox must pay to Fujifilm a $183 million termination fee in the event that the Subscription Agreement is terminated (i) by either party because the applicable shareholder approvals are not obtained if an alternative acquisition proposal is publicly announced prior to the Xerox shareholder meeting duly called for the purpose of obtaining the applicable shareholder approvals and Xerox enters into a definitive agreement with respect to, or otherwise consummates, an alternative acquisition proposal within 12 months after the termination of the Subscription Agreement; (ii) by Fujifilm (A) in connection with a material and intentional breach by Xerox of its non-solicitation obligations resulting in a third party making an alternate acquisition proposal that is reasonably likely to materially interfere with the Fujifilm Transactions or (B) following a change in the recommendation by the Board of Directors of Xerox; or (iii) by Xerox in order to enter into a definitive agreement with a third party with respect to a superior proposal, in each case as set forth in, and subject to the conditions of, the Fujifilm Transaction Agreements.
We expect the Fujifilm Transactions, which require Xerox shareholder approval, to close in the second half of 2018 subject to customary regulatory approvals, filings with the U.S. Securities and Exchange Commission, tax considerations, and securing any necessary financing. Until the combination is complete, each of Xerox, Fuji Xerox and Fujifilm will continue to be separate, independent organizations and will operate as usual.

Xerox 2017 Annual Report 1



Company Separation
On December 31, 2016, Xerox Corporation completed the Separation of its Business Process Outsourcing (BPO) business from its Document Technology and Document Outsourcing (DT/DO) business (the “Separation”). The Separation was accomplished through the transfer of the BPO business into a new legal entity, Conduent Incorporated (“Conduent”), and then distributing one hundred percent (100%) of the outstanding common stock of Conduent to Xerox Corporation stockholders (the “Distribution”).
As a result of the Separation and Distribution, the BPO business is presented as discontinued operations and, as such, has been excluded from continuing operations for all periods presented. Accordingly, continuing operations represents the ongoing DT/DO business. Refer to Note 5 - Divestitures for additional information regarding discontinued operations.
Our Business
Xerox is a print technology and intelligent work solutions leader focused on helping people communicate and work better. We apply our expertise in imaging and printing, data analytics, and the development of secure and automated solutions to help our customers improve productivity and increase client satisfaction.
We operate in a market estimated at approximately $85 billion(1). Our primary offerings span three main areas: Managed Document Services, Workplace Solutions and Graphic Communications. Our Managed Document Services offerings help customers, ranging from small businesses to global enterprises, optimize their printing and related document workflow and business processes. Xerox led the establishment of this expanding market and continues as the industry leader. Our Workplace Solutions and Graphic Communications products and solutions support the work processes of our customers by providing them with efficient and cost effective printing and workflow solutions.
 _____________
(1) Market estimates are derived from third-party forecasts produced by firms such as International Data Corporation (IDC).
Our Strategy and Business Model
Our strategy is to increase our participation in the growth areas of our industry while maintaining leadership in the more mature areas through innovation in digital print technology and services. Our Strategic Transformation program (see: Accelerate Productivity and Cost Initiatives through Strategic Transformation section below) is intended to enable us to make investments to improve our revenue trajectory while expanding our margins. Our post-sale business model enables us to deliver sustainable cash flows. We believe the combination of an improving revenue trajectory along with expanding operating margins and strong cash flow will enable us to deliver positive shareholder returns over time. To accomplish this, we focus on the following areas:
Maintain Leadership and Focus on Strategic Growth Areas
We are a leader in our industry and have a strong and valuable global brand. We systematically evaluate our competition and the needs of our customers and partners to maintain our leadership position and make the portfolio and distribution investments to further penetrate growth areas of the market.
We expect to focus on the following:
Expand leadership in Managed Document Services by leveraging our strength in large enterprises and broadening our SMB (small to mid-sized business) offerings.
Increase SMB coverage through resellers and partners (including multi-brand dealers) and continued distribution acquisitions.
Gain share in the A4 product segment of the market, where historically we have been underrepresented, by strengthening our product portfolio and increasing our distribution capacity.
Extend leadership in digital color production through continued innovation and growth in new markets.
Geographically, our footprint spans approximately 160 countries and allows us to deliver our technology and solutions to customers of all sizes, regardless of complexity or number of customer locations.
Innovate to Differentiate Our Offerings
We direct our research and development (R&D) investments to areas such as workflow automation, color printing and customized communication, as well as improving the quality and reducing the environmental impact of digital printing. We believe that a critical role of our research is to identify new competency areas for the future. Accordingly, we are investing in new and novel printing technology applications that could offer attractive opportunities in adjacent markets. We expect this will deliver incremental value for our customers and drive profitable revenue growth for our business.

Xerox 2017 Annual Report 2



Accelerate Productivity and Cost Initiatives through Strategic Transformation
We have a proven track record of maintaining strong margins through ongoing cost and productivity initiatives. As markets shift, we undertake restructuring to optimize our workforce and facilities to best align our resources with the growth areas of our business, and to maximize profitability and cash flow in businesses that are declining. In 2016, we initiated a three-year Strategic Transformation program to simplify and create a significantly more effective organization that delivers productivity and cost reduction beyond our historical range of $300 to $350 million of annual savings. The program targets areas such as delivery, remote connectivity, sales productivity, pricing optimization, design efficiency and supply chain optimization. We believe that the program will enable us to reinvest in our business to improve the revenue trajectory and margin expansion. During the first two years, the program delivered over $1.2 billion in gross productivity gains and cost savings and we expect it to provide approximately $475 million of additional cost reductions in 2018. Our goal is to achieve approximately $1.7 billion in savings over the three-year period, outperforming our initial $1.5 billion target.
Engage, Develop and Support Our People
Our offerings are supported by a global workforce focused on delivering value to our customers. We continue to develop our employees by investing in the processes and systems that enable them to perform their jobs more effectively. We had approximately 35,300 employees worldwide at December 31, 2017.
Post-Sale Driven Business Model and Shareholder-Centered Capital Allocation
Our business is based on a post-sale, or annuity, model that provides significant recurring revenue and cash generation. In 2017, over 75% of our total revenue was related to post-sale revenue streams including document services, equipment maintenance, consumable supplies and financing, among other elements. The remainder of our revenue was from equipment sales, either from lease agreements that qualify as sales for accounting purposes or outright cash sales.
Our post-sale model supports ongoing strong cash flows, and we have a balanced capital allocation approach with the following objectives:
Maintaining an investment grade credit profile,
Selectively pursue acquisitions in targeted growth areas, and
Return capital to shareholders, targeting to deliver over 50% of free cash flow back to shareholders through dividends and share repurchases over time.
Acquisitions and Divestitures
As part of our strategy, we are focused on increasing our Small and Mid-sized (SMB) coverage through resellers and partners (including multi-brand dealers) and continued distribution acquisitions.
Details about our acquisitions and divestitures in 2017 can be found in Note 4 - Acquisitions and Note 5 - Divestitures, in the Consolidated Financial Statements.
Innovation and Research
Xerox has a rich heritage of innovation, which continues to be a core strength of the company as well as a competitive differentiator. Our aim is to create value for our customers, our shareholders and our employees by driving innovation in key areas. Our investments in innovation align with our growth opportunities in areas like workflow automation, color printing, customized communication and new and novel applications of printing technology.
Our research efforts can be categorized under four themes:
Digital Printing - Improve the cost and capability of digital printing for documents and beyond
Advances in digital printing are enabling mass customization at a run cost approaching the cost of analog printing. We are continuously investing in research to reduce the cost of digital printing consumables while maintaining the high print quality that our customers expect. Our research is also focused on developing new printing technologies that enable us to print digitally on a broader range of media and substrates such as foils, cartons, and directly on end-use products, which will open up new growth markets such as digital packaging. Printing with functional inks will also allow us to add intelligence to packaging, such as sensors, memory, and interactive features, which will enable new analytic-based services, higher security and new consumer experiences. As a responsible corporate citizen, we are also investing in research to lower the environmental impact of our products and consumables.

Xerox 2017 Annual Report 3



Personalization at Scale - Enhance value by providing secure, real-time, context-aware personalized products, solutions and services
Whether business correspondence, personal communication, manufactured items or information services, personalization increases the value of communication. Our research leads to technologies that improve the efficiency, economics, relevance and security of our customers' products and services. We help customers improve the impact of their communications by leveraging vast information resources available from private databases or public sources including social media and delivering personalized messages, products and services. Examples of innovation focus areas include creating new capabilities in imaging, multi-media marketing campaign management, workflow automation and augmented reality to deliver personalization at scale.
Agile Enterprise - Create simple, automated and touch-less business workflows resulting in lower cost, higher quality and increased agility
Enterprises of all sizes require agility in order to quickly respond to market changes and new requirements. To enable greater business process agility, our research goals are to simplify, automate and enable business processes on the cloud via flexible platforms that run on robust and scalable infrastructures. We continue to invest in new capabilities to help people better leverage and integrate paper and digital workflows. And we go beyond that to develop innovations for the automation of business workflows. These capabilities leverage our research in image, video and natural language processing, as well as machine learning. Application of these methods to business workflows enables technology automate tasks, thus allowing workers to focus on higher value activities.
Usable Analytics - Transform big data into useful information resulting in better business decisions
Competitive advantage can be achieved by better utilizing available and real-time information. Today, information resides in an ever-increasing universe of servers, repositories and formats. The vast majority of information is unstructured, including text, images, voice and videos. One of our key research areas is making sense of unstructured information using natural language processing and semantic analysis. A second major research area focuses on developing proprietary methods for prescriptive analytics applied to business processes. Here, we seek to better manage very large data systems in order to extract business insights and use those insights to provide our clients with actionable recommendations. Tailoring these methods to various vertical applications leads to new customer value propositions.
Our innovation goals are supported by cross disciplinary research programs in our different research centers. PARC, the most prominent of these centers, is a wholly-owned subsidiary of Xerox located in Silicon Valley, California. It provides Xerox commercial and government clients with R&D and open innovation services. PARC scientists have deep technological expertise in areas that we consider fundamental to bring high-impact innovations to our customers and the world; such areas include big data analytics, intelligent sensing, computer vision, networking, printed electronics, energy, and digital design and manufacturing.
Investment in R&D is critical for competitiveness in our fast-paced markets. One of the ways that we maintain our market leadership is through coordination of our R&D with Fuji Xerox (an equity investment in which we maintain a 25% ownership interest).
Our total research, development and engineering expenses (RD&E), which include sustaining engineering expenses for hardware engineering and software development after we launch a product, totaled $446 million in 2017, $476 million in 2016 and $511 million in 2015. Fuji Xerox R&D expenses were $536 million in 2017, $628 million in 2016 and $569 million in 2015.
Segment Information
Following the separation of the BPO business, we realigned our operations to better manage the business and serve our customers and the markets in which we operate. In 2017, we transitioned to a geographic focus and are primarily organized from a sales perspective on the basis of “go-to-market” sales channels. These sales channels are structured to serve a range of customers for our products and services. As a result of this transition and change in structure, we concluded that we have one operating and reportable segment - the design, development and sale of printing technology and related solutions.
Accordingly, the section below primarily discusses the business based on our primary offerings (Managed Document Services, Workplace Solutions and Graphic Communications) that are brought to the market through these geographic-based sales channels.

Xerox 2017 Annual Report 4



Revenues
We have a broad and diverse base of customers by both geography and industry, ranging from SMBs to graphic communications companies, governmental entities, educational institutions and Fortune 1000 corporations. Our business does not depend upon a single customer, or a few customers, the loss of which would have a material adverse effect on our business. Our business spans three primary offering areas: Managed Document Services (MDS), Workplace Solutions and Graphic Communications. In addition, a smaller portion of our revenues comes from non-core streams including paper sales in our developing market countries, wide-format systems, licensing revenue and Global Imaging Systems network integration solutions.
Our Managed Document Services includes a continuum of solutions and services that helps our customers optimize their print and communications infrastructure, ensure the highest levels of security & productivity, and enable their digital business objectives. Our primary offerings within Managed Document Services are Managed Print Services (MPS), Multi-Channel Communication Services and a range of Digital Solutions including Workflow Automation Services, Content Management and Digitization Services. MDS excludes legacy printing sourcing contracts that transferred to us upon the spin-off of the BPO business. 
In our MPS business, we help companies assess and optimize their print infrastructure, secure and integrate their environment and automate and simplify their business processes. We provide the most comprehensive portfolio of MPS services in the industry and are recognized as an industry leader by major analyst firms including Gartner, IDC, Quocirca, InfoTrends and Forrester. Our MPS offering targets clients ranging from large, global enterprises to governmental entities and to small and medium-sized businesses, including those served via our channel partners. Our Next Generation Xerox Partner Print Services is a comprehensive suite of services that allows channel partners to support their SMB customers with some of our best-in-class tools, processes, and workflow solutions developed by Xerox for large enterprises.
In our Multi-Channel Communications Services business, we help large enterprise and global clients drive effective communications across a range of digital and physical touch points. We offer a range of platform-enabled digital services that deliver relevant and timely communications focused on customer acquisition, onboarding or retention. Our portfolio includes Collateral Management Services, Demand Generation Services, Product Information Management Services and Centralized Print Production Services.
Our Digital Solutions portfolio features our Workflow Automation solutions, Content Management solutions and Digitization Services. Our Xerox Workflow Automation Services help our customers assess, optimize and automate their workflow in a secure and integrated IT environment. By eliminating ineffective processes, we bring our clients operational excellence in routine workflows as well as industry-specific processes. These offerings are enhanced and complemented by our proprietary content management software solutions including DocuShare 7 and our cloud-based DocuShare Flex platform. In addition, we operate a network of centers that digitize and automate paper & digital workflows enabling our customers to operate cost-efficiently in a fully-digitized environment with speed, quality and 24x7 availability.
Our Workplace Solutions area is made up of two strategic product groups, Entry and Mid-Range, which share common technology, manufacturing and product platforms. Workplace Solutions revenues include the sale of products and supplies, as well as the associated technical service and financing of those products.
Entry comprises desktop monochrome and color printers and multifunction printers (MFPs) ranging from small personal devices to workgroup printers and MFPs that serve the needs of office workgroups. Entry products are sold to customers in all segments from SMB to enterprise, principally through a global network of reseller partners and service providers, as well as through our direct sales force.
Mid-Range are larger devices that have more features and can handle higher print volumes and larger paper sizes than Entry devices. These products are sold through dedicated partners, our direct sales force, multi-branded channel partners and resellers worldwide. We are a leader in this area of the market and offer a wide range of MFPs, copiers, digital printing presses and light production devices, and solutions that deliver flexibility and advanced features.
Our Graphic Communications Solutions are designed for customers in the graphic communications, in-plant and production print environments with high-volume printing requirements. These solutions enable full-color, on-demand printing of a wide range of applications, including variable data for personalized content and one-to-one marketing. Graphic Communications Solutions revenues include the sale of products, software and supplies, as well as the associated technical service and financing of those products.
Our cut-sheet presses provide graphic communications and commercial printers with high speed, high-volume printing. They are ideal for publishing, transaction printing, print on demand and one-to-one marketing, offering

Xerox 2017 Annual Report 5



the best in high speed, productivity and resolution and color. We are the worldwide leader in the cut-sheet color and monochrome production industry.
Our inkjet presses offer a broad range of roll fed, continuous feed printing technologies, including waterless inkjet and aqueous inkjet for vivid color, and toner-based flash fusing for black and white. Our portfolio spans a variety of print speeds, image quality, feeding, finishing and media options. We continue to develop and integrate our production inkjet business to bring the high-end capabilities of toner-based presses such as speed and inline color correction to the more price sensitive market of inkjet.
Our FreeFlow portfolio of software offerings brings intelligent automation and integration to the processing of print jobs, from file preparation to final production, for a touchless workflow. It helps customers of all sizes address a wide range of business opportunities including automation, personalization and even electronic publishing. In 2017, we sold our FreeFlow Print Server (FFPS) DFE business to Electronics for Imaging (EFI). Under the terms of the deal, we established a strategic partnership that will bring to market a next generation digital front end (DFE) solution with more efficiencies, performance and quality to meet the most demanding production requirements. Additionally, EFI will continue to supply and support the current range of FFPS. It should be noted that the sale agreement comprises only the small FFPS business and does not impact our FreeFlow portfolio of software solutions which remains a key plank for our customers’ workflow strategy.
Geographic Information
Overall, approximately 40% of our revenue is generated by customers outside the U.S. Additional details can be found in Note 3 - Segment and Geographic Area Reporting.
Patents, Trademarks and Licenses
In 2017, Xerox and its subsidiaries were awarded 544 U.S. utility patents. Including our research partner Fuji Xerox, we were awarded 1,116 U.S. utility patents during the period. Our patent portfolio evolves as new patents are awarded to us and as older patents expire. As of December 31, 2017, Xerox held approximately 11,470 U.S. design and utility patents. These patents expire at various dates up to 20 years or more from their original filing dates. While we believe that our portfolio of patents and applications has value, in general no single patent is essential to our business. In addition, any of our proprietary rights could be challenged, invalidated or circumvented, or may not provide significant competitive advantages.
In 2017, we were party to numerous patent-licensing agreements and, in a majority of them, we licensed or assigned our patents to others in return for revenue and/or access to their patents or to further our business goals. Most patent licenses expire concurrently with the expiration of the last patent identified in the license. We were also party to a number of cross-licensing agreements with companies that also hold substantial patent portfolios. These agreements vary in subject matter, scope, compensation, significance and duration.
In the U.S., we own about 210 U.S. trademarks, either registered or applied for. These trademarks have a perpetual life, subject to renewal every 10 years. We vigorously enforce and protect our trademarks.
Marketing and Distribution
We go to market with a services-led approach and sell our products and services directly to customers through our worldwide sales force and through independent agents, dealers, value-added resellers, systems integrators and the Web. In addition, our wholly-owned subsidiary, Global Imaging Systems (GIS), an office technology dealer comprised of regional core companies in the U.S., sells document management and network integration systems and services. We continued to broaden our distribution to small and mid-sized businesses in 2017 through expanding our network of resellers and partners (including multi-brand dealers) as well as GIS's acquisition of three equipment and document services dealer companies.
In Europe, Africa, the Middle East and parts of Asia, we distribute our products through Xerox Limited, a company established under the laws of England, as well as through related non-U.S. companies. Xerox Limited enters into distribution agreements with unaffiliated third parties to distribute our products in many of the countries located in these regions, and previously entered into agreements with unaffiliated third parties who distribute our products in Sudan. Sudan, among others, has been designated as a state sponsor of terrorism by the U.S. Department of State and is subject to U.S. economic sanctions. We maintain an export and sanctions compliance program, and believe that we have been, and are in compliance with, U.S. laws and government regulations for Sudan. We have no assets, liabilities or operations in Sudan other than liabilities under the distribution agreements. After observing required prior notice periods, Xerox Limited terminated its distribution agreements with distributors servicing Sudan in August 2006. Now, Xerox has only legacy obligations to third parties, such as providing spare parts and supplies to these third parties. In 2017, total Xerox revenues of $10.3 billion included approximately $11 thousand attributable to Sudan.

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Competition
Although we encounter competition in all areas of our business, we are the leader - or among the leaders - in each of our primary offering areas. We compete on the basis of technology, performance, price, quality, reliability, brand, distribution and customer service and support.
Our larger competitors include Canon, Hewlett-Packard Inc., Konica Minolta and Ricoh. Our brand recognition, reputation for document management expertise, innovative technology and service delivery excellence are our competitive advantages. These advantages, combined with our breadth of product offerings, global distribution channels and customer relationships, position us as a strong competitor going forward.
Customer Financing
We finance a large portion of our direct channel customer purchases of Xerox equipment through bundled lease agreements. We also provide lease financing to end-user customers who purchased Xerox equipment through our indirect channels. We compete with other third-party leasing companies with respect to the lease financing provide to these end-user customers. In both instances, financing facilitates customer acquisition of Xerox technology and enhances our value proposition, while providing Xerox a reasonable return on our investment in this business. Additionally, because we primarily finance our own products and have a long history of providing financing to our customers, we are able to minimize much of the risk normally associated with a finance business.
Because our lease contracts allow customers to pay for equipment over time rather than upfront upon installation, we maintain a certain level of debt to support our investment in these lease contracts. We fund our customer financing activity through a combination of cash generated from operations, cash on hand and proceeds from capital market offerings. At December 31, 2017, we had approximately $3.7 billion of finance receivables and $0.5 billion of equipment on operating leases, or Total Finance assets of $4.2 billion. We maintain an assumed 7:1 leverage ratio of debt to equity as compared to our Finance assets, which results in approximately $3.7 billion of our $5.5 billion of debt being allocated to our financing business.
Refer to "Debt and Customer Financing Activities" in the Capital Resources and Liquidity section of Management's Discussion and Analysis, included in Item 7 of this 2017 Form 10-K, for additional information.
Manufacturing and Supply
Our manufacturing and distribution facilities are located around the world. Our largest manufacturing site is in Webster, N.Y., where we produce the Xerox iGen, Nuvera, Brenva and Direct to Object Inkjet Printer systems, components, EA Toner, consumables, fusers and other products. Our other primary manufacturing operations are located in Dundalk, Ireland, for our High-End production products and consumables; Wilsonville, OR, for solid ink consumable supplies and components; and Aubagne, France, for Impika aqueous ink-jet production systems. We also have a facility in Venray, Netherlands, that manufactures supplies and provides supply chain management for our international operations.
We have arrangements with Fuji Xerox under which we purchase and sell products, some of which are the result of mutual research and development agreements. Refer to Note 10 - Investments in Affiliates, at Equity in the Consolidated Financial Statements for additional information regarding our relationship with Fuji Xerox.
We maintain a long-standing relationship of over 15 years with FLEX LTD (Flex) (formerly Flextronics), a global electronics manufacturing services company, for our mid-range and entry businesses. Our master supply agreement with Flex renews on an annual basis.
We also acquire products from various third parties in order to increase the breadth of our product portfolio and meet channel requirements.
Fuji Xerox
Fuji Xerox is an unconsolidated entity in which we own a 25% interest and FUJIFILM Holdings Corporation (Fujifilm) owns a 75% interest. Fuji Xerox develops, manufactures and distributes document processing products in Japan, China, Hong Kong, other areas of the Pacific Rim, Australia and New Zealand. We retain significant rights as a minority shareholder. Our technology licensing agreements with Fuji Xerox ensure that the two companies retain uninterrupted access to each other's portfolio of patents, technology and products. Refer to Note 10 - Investment in Affiliates, at Equity in the Consolidated Financial Statements for additional information regarding our investment in Fuji Xerox.

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International Operations
The financial measures by geographical area for 2017, 2016 and 2015 that are included in Note 3 - Segment and Geographic Area Reporting in the Consolidated Financial Statements for additional information. See also the risk factor entitled “Our business, results of operations and financial condition may be negatively impacted by conditions abroad, including local economic and political environments, fluctuating foreign currencies and shifting regulatory schemes” in Part I, Item 1A included herein.
Backlog
Backlog, or the value of unfilled equipment orders, is not a meaningful indicator of future business prospects because a significant proportion of our revenue is fulfilled from existing inventories or within a short period of order signing.
Seasonality
Our revenues are affected by such factors as the introduction of new products, the length of sales cycles and the seasonality of technology purchases and printing volumes. These factors have historically resulted in lower revenues, operating profits and operating cash flows in the first and third quarter.
Other Information
Xerox is a New York corporation, organized in 1906 and our principal executive offices are located at 201 Merritt 7, P.O. Box 4505, Norwalk, Connecticut 06856-4505. Our telephone number is (203) 968-3000.
In the Investor Information section of our Internet website, you will find our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to these reports. We make these documents available as soon as we can after we have filed them with, or furnished them to, the U.S. Securities and Exchange Commission.
Our Internet address is www.xerox.com.
Item 1A. Risk Factors
If we are unsuccessful at addressing our business challenges, our business and results of operations may be adversely affected and our ability to invest in and grow our business could be limited.
We are in the process of addressing many challenges facing our business. One set of challenges relates to dynamic and accelerating market trends, such as the declines in installations and printed pages, fewer devices per location and an increase in electronic documentation. A second set of challenges relates to changes in the competitive landscape. Our primary competitors are exerting increased competitive pressure in targeted areas and are entering new markets; our emerging competitors are introducing new technologies and business models. These market and competitive trends make it difficult to reverse the current declines in revenue over the past several years. A third set of challenges relates to our continued efforts to reduce costs and increase productivity in light of declining revenues. In addition, we are vulnerable to increased risks associated with our efforts to address these challenges given the markets in which we compete, as well as, the broad range of geographic regions in which we and our customers and partners operate. If we do not succeed in these efforts, or if these efforts are more costly or time-consuming than expected, our business and results of operations may be adversely affected, which could limit our ability to invest in and grow our business.
Our business, results of operations and financial condition may be negatively impacted by conditions abroad, including local economic and political environments, fluctuating foreign currencies and shifting regulatory schemes.
A significant portion of our revenue is generated from operations, and we manufacture or acquire many of our products and/or their components, outside the United States. Our future revenues, costs and results of operations could be significantly affected by changes in foreign currency exchange rates - particularly the Japanese yen, the euro and the British pound - as well as by a number of other factors, including changes in local economic and political conditions, trade protection measures, licensing requirements, local tax regulations and other related legal matters. We use currency derivative contracts to hedge foreign currency denominated assets, liabilities and anticipated transactions. This practice is intended to mitigate or reduce volatility in the results of our foreign operations, but does not completely eliminate it. We do not hedge the translation effect of international revenues and expenses that are denominated in currencies other than the U.S. dollar. If our future revenues, costs and results of operations are significantly affected by economic or political conditions abroad and we are unable to effectively hedge these risks, they could materially adversely affect our results of operations and financial condition.

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We operate globally and changes in tax laws could adversely affect our results.
We operate globally and changes in tax laws could adversely affect our results. We operate in approximately 160 countries and generate substantial revenues and profits in foreign jurisdictions. The international tax environment continues to change as a result of both coordinated actions by governments and unilateral measures designed by individual countries, both intended to tackle concerns over base erosion and profit shifting and perceived international tax avoidance techniques. The recommendations of the BEPS Project led by the Organization for Economic Cooperation and Development (OECD) are involved in much of the coordinated activity, although the timing and methods of implementation vary.  Additionally, the U.S. government recently enacted comprehensive tax reform in December of 2017 through the passage and signing of the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act significantly revised the U.S. corporate income tax system. The exact ramifications of the legislation is subject to interpretation and could have a material impact on our financial position and/or results of operations.
Although our 2017 results of operations reflect our best estimate of the impact of the new tax law, future regulatory direction associated with the new tax law as well as new legislative developments could adversely affect our future effective tax rate and results.
If we fail to successfully develop new products, technologies and service offerings and protect our intellectual property rights, we may be unable to retain current customers and gain new customers and our revenues would decline.
The process of developing new products and solutions is inherently complex and uncertain. It requires accurate anticipation of customers' changing needs and emerging technological trends. We must work with our supply partners and commit resources before knowing whether these initiatives will result in products that are commercially successful and generate the revenues required to provide desired returns. In developing these new technologies and products, we rely upon patent, copyright, trademark and trade secret laws in the United States and similar laws in other countries, and agreements with our employees, customers, suppliers and other parties, to establish and maintain our intellectual property rights in technology and products used in our operations. It is possible that our intellectual property rights could be challenged, invalidated or circumvented, allowing others to use our intellectual property to our competitive detriment. Also, the laws of certain countries may not protect our proprietary rights to the same extent as the laws of the United States and we may be unable to protect our proprietary technology adequately against unauthorized third-party copying or use, which could adversely affect our competitive position. In addition, some of our products rely on technologies developed by third parties. We may not be able to obtain or to continue to obtain licenses and technologies from these third parties at all or on reasonable terms, or such third parties may demand cross-licenses to our intellectual property. If we fail to accurately anticipate and meet our customers' needs through the development of new products, technologies and service offerings or if we fail to adequately protect our intellectual property rights, we could lose market share and customers to our competitors and that could materially adversely affect our results of operations and financial condition.
Our government contracts are subject to termination rights, audits and investigations, which, if exercised, could negatively impact our reputation and reduce our ability to compete for new contracts.
A significant portion of our revenues is derived from contracts with U.S. federal, state and local governments and their agencies, as well as international governments and their agencies. Government entities typically finance projects through appropriated funds. While these projects are often planned and executed as multi-year projects, government entities usually reserve the right to change the scope of or terminate these projects for lack of approved funding and/or at their convenience. Changes in government or political developments, including budget deficits, shortfalls or uncertainties, government spending reductions (e.g., Congressional sequestration of funds under the Budget Control Act of 2011) or other debt or funding constraints, could result in lower governmental sales and in our projects being reduced in price or scope or terminated altogether, which also could limit our recovery of incurred costs, reimbursable expenses and profits on work completed prior to the termination.
Additionally, government agencies routinely audit government contracts. If the government finds that we inappropriately charged costs to a contract, the costs will be non-reimbursable or, to the extent reimbursed, refunded to the government. If the government discovers improper or illegal activities or contractual non-compliance in the course of audits or investigations, we may be subject to various civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines and suspensions or debarment from doing business with the government. Any resulting penalties or sanctions could have a material adverse effect on our business, financial condition, results of operations and cash flows. Further, the negative publicity that arises from findings in such audits or, investigations could have an adverse effect on our reputation and reduce our ability to compete for new contracts and could also have a material adverse effect on our business, financial condition, results of operations and cash flow.

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We face significant competition and our failure to compete successfully could adversely affect our results of operations and financial condition.
We operate in an environment of significant competition, driven by rapid technological developments, changes in industry standards, and demands of customers to become more efficient. Our competitors include large international companies some of which have significant financial resources and compete with us globally to provide document processing products and services in each of the markets we serve. We compete primarily on the basis of technology, performance, price, quality, reliability, brand, distribution and customer service and support. Our future success is largely dependent upon our ability to compete in the markets we currently serve, to promptly and effectively react to changing technologies and customer expectations and to expand into additional market segments. To remain competitive, we must develop services, applications and new products; periodically enhance our existing offerings; remain cost efficient; and attract and retain key personnel and management. If we are unable to compete successfully, we could lose market share and important customers to our competitors and such loss could materially adversely affect our results of operations and financial condition.
Our profitability is dependent upon our ability to obtain adequate pricing for our products and services and to improve our cost structure.
Our success depends on our ability to obtain adequate pricing for our products and services that will provide a reasonable return to our shareholders. Depending on competitive market factors, future prices we obtain for our products and services may decline from current levels. In addition, pricing actions to offset the effect of currency devaluations may not prove sufficient to offset further devaluations or may not hold in the face of customer resistance and/or competition. If we are unable to obtain adequate pricing for our products and services, it could materially adversely affect our results of operations and financial condition.
We continually review our operations with a view towards reducing our cost structure, including reducing our employee base, exiting certain businesses, improving process and system efficiencies and outsourcing some internal functions. We engage in restructuring actions to reduce our cost structure. If we are unable to continue to maintain our cost base at or below the current level and maintain process and systems changes resulting from prior restructuring actions, it could materially adversely affect our results of operations and financial condition.
Our ability to sustain and improve profit margins is dependent on a number of factors, including our ability to continue to improve the cost efficiency of our operations through such programs as the Strategic Transformation program, the level of pricing pressures on our products and services, the proportion of high-end as opposed to low-end equipment sales (product mix), the trend in our post-sale revenue growth and our ability to successfully complete information technology initiatives. If any of these factors adversely materialize or if we are unable to achieve and maintain productivity improvements through design efficiency, supplier and manufacturing cost improvements and information technology initiatives, our ability to offset labor cost inflation, potential materials cost increases and competitive price pressures would be impaired, all of which could materially adversely affect our results of operations and financial condition.
We are subject to laws of the United States and foreign jurisdictions relating to individually identifiable information, and failure to comply with those laws could subject us to legal actions and negatively impact our operations.
We receive, process, transmit and store information relating to identifiable individuals, both in our role as a technology provider and as an employer. As a result, we are subject to numerous United States (both federal and state) and foreign jurisdiction laws and regulations designed to protect individually identifiable information. These laws have been subject to frequent changes, and new legislation in this area may be enacted at any time. For example, the General Data Protection Regulation will come into force in the European Union in May 2018. Changes to existing laws, introduction of new laws in this area, or failure to comply with existing laws that are applicable to us may subject us to, among other things, additional costs or changes to our business practices, liability for monetary damages, fines and/or criminal prosecution, unfavorable publicity, restrictions on our ability to obtain and process information and allegations by our customers and clients that we have not performed our contractual obligations, any of which may have a material adverse effect on our profitability and cash flow.
We are subject to breaches of our security systems, cyber attacks and service interruptions which could expose us to liability, litigation, and regulatory action and damage our reputation.
We have implemented security systems with the intent of maintaining and protecting our own, and our customers', clients' and suppliers' confidential information, including information related to identifiable individuals, against unauthorized access or disclosure. Despite such efforts, we may be subject to breaches of our security systems resulting in unauthorized access to our facilities or information systems and the information we are trying to protect.

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Moreover, the risk of such attacks includes attempted breeches not only of our systems, but also those of our customers, clients and suppliers. The techniques used to obtain unauthorized access are constantly changing, are becoming increasingly more sophisticated and often are not recognized until after an exploitation of information has occurred. Therefore, we may be unable to anticipate these techniques or implement sufficient preventative measures. Unauthorized access to our facilities or information systems, or those of our suppliers, or accidental loss or disclosure of proprietary or confidential information about us, our clients or our customers could result in, among other things, a total shutdown of our systems that would disrupt our ability to conduct business or pay vendors and employees. In the event of such actions, we could be exposed to unfavorable publicity, governmental inquiry and oversight, litigation by affected parties and possible financial obligations for damages related to the theft or misuse of such information, any of which could have a material adverse effect on our profitability and cash flow. While from time to time attempts are made to access our systems, these attempts have not resulted in any material release of information, degradation or disruption to our systems. We may also find it necessary to make significant further investments to protect this information and our infrastructure.
We have outsourced a significant portion of our manufacturing operations and increasingly rely on third-party manufacturers, subcontractors and suppliers.
We have outsourced a significant portion of our manufacturing operations to third parties. We face the risk that those manufacturers may not be able to develop manufacturing methods appropriate for our products, quickly respond to changes in customer demand, and obtain supplies and materials necessary for the manufacturing process. In addition, they may experience labor shortages and/or disruptions, manufacturing costs could be higher than planned and the reliability of our products could decline. If any of these risks were to be realized, and similar third-party manufacturing relationships could not be established, we could experience interruptions in supply or increases in costs that might result in our being unable to meet customer demand for our products, damage our relationships with our customers and reduce our market share, all of which could materially adversely affect our results of operations and financial condition.
In addition, in our services business we may partner with other parties, including software and hardware vendors, to provide the complex solutions required by our customers. Therefore, our ability to deliver the solutions and provide the services required by our customers is dependent on our and our partners' ability to meet our customers' requirements and schedules. If we or our partners fail to deliver services or products as required and on time, our ability to complete the contract may be adversely affected, which may have an adverse impact on our revenue and profits.
We need to successfully manage changes in the printing environment and market because our operating results may be negatively impacted by lower equipment placements and usage trends.
The printing market and environment is changing as a result of new technologies, shifts in customer preferences in office printing and the expansion of new printing markets. Examples include mobile printing, color printing, packaging, print on objects, continuous feed inkjet printing and the expansion of the market for entry products (A4 printers) and high-end products. A significant part of our strategy and ultimate success in this changing market is our ability to develop and market technology that produces products and services that meet these changes. Our future success in executing on this strategy depends on our ability to make the investments and commit the necessary resources in this highly competitive market. If we are unable to develop and market advanced and competitive technologies, it may negatively impact expansion of our worldwide equipment placements, as well as sales of services and supplies occurring after the initial equipment placement (post sale revenue) in the key growth markets of digital printing, color and multifunction systems. We expect that revenue growth can be improved through our document management and consulting services in the areas of personalized and product life cycle communications, enterprise managed print services and document content and imaging. The ability to achieve growth in our equipment placements is subject to the successful implementation of our initiatives to provide advanced systems, industry-oriented global solutions and services for major customers, improve direct and indirect sales efficiency and expand and successfully manage our indirect distribution channels in the face of global competition and pricing pressures. Our ability to preserve our post sale revenue streams is largely dependent on our ability to increase the volume of pages printed, the mix and price of color pages, equipment utilization and color adoption, as well as our ability to retain a high level of supplies sales in unbundled contracts. There will be a lag between the increase in equipment placements and an increase in post-sale revenues. In addition, with respect to our indirect distribution channels, many of our partners sell competing products, further increasing the need to successfully manage our relationships with our partners to ensure they meet our specific sale and distribution requirements for equipment placements and post sale revenues. If we are unable to maintain a consistent level of revenue, it could materially adversely affect our results of operations and financial condition.

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Our ability to fund our customer financing activities at economically competitive levels depends on our ability to borrow and the cost of borrowing in the credit markets.
The long-term viability and profitability of our customer financing activities is dependent, in part, on our ability to borrow and the cost of borrowing in the credit markets. This ability and cost, in turn, is dependent on our credit rating, which is currently investment grade, and is subject to credit market volatility. We primarily fund our customer financing activity through a combination of cash generated from operations, cash on hand, capital market offerings, sales and securitizations of finance receivables and commercial paper borrowings. Our ability to continue to offer customer financing and be successful in the placement of equipment with customers is largely dependent on our ability to obtain funding at a reasonable cost. If we are unable to continue to offer customer financing, it could materially adversely affect our results of operations and financial condition.
Our significant debt could adversely affect our financial health and pose challenges for conducting our business.
Our ability to provide customer financing is a significant competitive advantage. We have and will continue to have a significant amount of debt and other obligations, the majority of which support our customer financing activities. Our substantial debt and other obligations could have important consequences. For example, it could (i) increase our vulnerability to general adverse economic and industry conditions; (ii) limit our ability to obtain additional financing for future working capital, capital expenditures, acquisitions and other general corporate requirements; (iii) increase our vulnerability to interest rate fluctuations because a portion of our debt has variable interest rates; (iv) require us to dedicate a substantial portion of our cash flows from operations to service debt and other obligations thereby reducing the availability of our cash flows from operations for other purposes; (v) limit our flexibility in planning for, or reacting to, changes in our businesses and the industries in which we operate; (vi) place us at a competitive disadvantage compared to our competitors that have less debt; and (vii) become due and payable upon a change in control. If new debt is added to our current debt levels, these related risks could increase.
Our financial condition and results of operations could be adversely affected by employee benefit-related funding requirements.
We sponsor several defined benefit pension and retiree-health benefit plans throughout the world. We are required to make contributions to these plans to comply with minimum funding requirements imposed by laws governing these employee benefit plans. Although most of our major defined benefit plans have been amended to freeze current benefits and eliminate benefit accruals for future service, the projected benefit obligations under these benefit plans is measured annually and at December 31, 2017 exceeded the value of the assets of those plans by approximately $1.4 billion. The current underfunded status of these plans is a significant factor in determining the ongoing future contributions we will be required to make to these plans. Accordingly, we expect to have additional funding requirements in future years and we may make additional, voluntary contributions to the plans. Depending on our cash position at the time, any such funding or contributions to our defined benefit plans could impact our operating flexibility and financial position, including adversely affecting our cash flow for the quarter in which such funding or contributions are made. Weak economic conditions and related under-performance of asset markets could also lead to increases in our funding requirements.
We need to maintain adequate liquidity in order to meet our operating cash flow requirements, repay maturing debt and meet other financial obligations, such as payment of dividends to the extent declared by our Board of Directors. If we fail to comply with the covenants contained in our various borrowing agreements, it may adversely affect our liquidity, results of operations and financial condition.
Our liquidity is a function of our ability to successfully generate cash flows from a combination of efficient operations and continuing operating improvements, access to capital markets and funding from third parties. We believe our liquidity (including operating and other cash flows that we expect to generate) will be sufficient to meet operating requirements as they occur; however, our ability to maintain sufficient liquidity going forward subject to the general liquidity of and on-going changes in the credit markets as well as general economic, financial, competitive, legislative, regulatory and other market factors that are beyond our control.
Our $1.8 billion credit facility (the "Credit Facility") contains financial maintenance covenants, including maximum leverage (debt for borrowed money divided by consolidated EBITDA, as defined) and a minimum interest coverage ratio (consolidated EBITDA divided by consolidated interest expense, as defined). At December 31, 2017, we were in full compliance with the covenants and other provisions of the Credit Facility. Failure to comply with material provisions or covenants in the Credit Facility could have a material adverse effect on our liquidity, results of operations and financial condition.

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Our business, results of operations and financial condition may be negatively impacted by legal and regulatory matters.
We have various contingent liabilities that are not reflected on our balance sheet, including those arising as a result of being involved in a variety of claims, lawsuits, investigations and proceedings concerning: securities law; governmental entity contracting, servicing and procurement laws; intellectual property law; environmental law; employment law; the Employee Retirement Income Security Act (ERISA); and other laws and regulations, as discussed in the “Contingencies” note in the Consolidated Financial Statements. 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 materially increase an existing accrual, or should any of these matters result in a final adverse judgment or be settled for significant amounts above any existing accruals, it 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.
Due to the international scope of our operations, we are subject to a complex system of commercial and trade regulations around the world. Recent years have seen an increase in the development and enforcement of laws regarding trade compliance and anti-corruption, such as the U.S. Foreign Corrupt Practices Act and similar laws from other countries. Our numerous foreign subsidiaries, affiliates and joint venture partners are governed by laws, rules and business practices that differ from those of the U.S. The activities of these entities may not comply with U.S. laws or business practices or our Code of Business Conduct. Violations of these laws may result in severe criminal or civil sanctions, could disrupt our business, and result in an adverse effect on our reputation, business and results of operations or financial condition. We cannot predict the nature, scope or effect of future regulatory requirements to which our operations might be subject or the manner in which existing laws might be administered or interpreted.
Our operations and our products are subject to environmental regulations in each of the jurisdictions in which we conduct our business and sell our products. Some of our manufacturing operations use, and some of our products contain, substances that are regulated in various jurisdictions. For example, various countries and jurisdictions have adopted, or are expected to adopt, restrictions on the types and amounts of chemicals that may be present in electronic equipment or other items that we use or sell. Recently, a number of studies have been published by third parties regarding chemicals utilized in our industry, as well as potential health/safety impacts of machine emissions. Additional studies are planned, and depending on the results of such studies, regulatory initiatives could follow. We are monitoring these developments. If we do not comply with applicable rules and regulations in connection with the use of such substances and the sale of products containing such substances, then we could be subject to liability and could be prohibited from selling our products in their existing forms, which could have a material adverse effect on our results of operations and financial condition. Further, various countries and jurisdictions have adopted or are expected to adopt, programs that make producers of electrical goods, including computers and printers, responsible for certain labeling, collection, recycling, treatment and disposal of these recovered products. If we are unable to collect, recycle, treat and dispose of our products in a cost-effective manner and in accordance with applicable requirements, it could materially adversely affect our results of operations and financial condition.
Other potentially relevant initiatives throughout the world include proposals for more extensive chemical registration requirements and/or possible bans on the use of certain chemicals, various efforts to limit energy use in products and other environmentally related-programs impacting products and operations, such as those associated with climate change accords, agreements and regulations. For example, the European Union's Energy-Related Products Directive (ERP) has led to the adoption of “implementing measures” or "voluntary agreements" that require certain classes of products to achieve certain design and/or performance standards, in connection with energy use and potentially other environmental parameters and impacts. A number of our products are already required to comply with ERP requirements and further regulations are being developed by the EU authorities. Another example is the European Union “REACH” Regulation (Registration, Evaluation, Authorization and Restriction of Chemicals), a broad initiative that requires parties throughout the supply chain to register, assess and disclose information regarding many chemicals in their products. Depending on the types, applications, forms and uses of chemical substances in various products, REACH and similar regulatory programs in other jurisdictions could lead to restrictions and/or bans on certain chemical usage. In the United States, the Toxics Substances Control Act (“TSCA”) is undergoing a major overhaul with similar potential for regulatory challenges. Xerox continues its efforts toward monitoring and evaluating the applicability of these and numerous other regulatory initiatives in an effort to develop compliance strategies. As these and similar initiatives and programs become regulatory requirements throughout the world and/or are adopted as public or private procurement requirements, we must comply or potentially face market access limitations that could have a material adverse effect on our operations and financial condition. Similarly, environmentally driven procurement requirements voluntarily adopted by customers in the

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marketplace (e.g., U.S. EPA EnergyStar, EPEAT) are constantly evolving and becoming more stringent, presenting further market access challenges if our products fail to comply. Concern over climate change, including global warming, has led to legislative and regulatory initiatives directed at limiting greenhouse gas emissions. For example, proposals that would impose mandatory requirements on greenhouse gas emissions continue to be considered by policy makers in the countries, states and territories in which we operate. Enacted laws and/or regulatory actions to address concerns about climate change and greenhouse gas emissions could negatively impact our business, including the availability of our products or the cost to obtain or sell those products.
The separation of our Business Process Outsourcing (“BPO”) business from our Document Technology and Document Outsourcing business into two independent, publicly-traded companies may not yield the expected benefits.
The separation of our BPO business from our Document Technology and Document Outsourcing business into two independent, publicly-traded companies was completed on December 31, 2016. The Company may not be able to achieve the full strategic and financial benefits expected to result from the separation, or such benefits may be delayed or not occur at all. The expected increased focus of management exclusively on the Company’s own business and its distinct needs, may not yield expected long-term growth and profitability. In addition, the separation has resulted in the Company becoming a smaller, less diversified enterprise with a narrower market focus, which could make it more vulnerable to changing market conditions and other adverse events. Further, although we have received an opinion from outside counsel as to the tax-free nature of the Separation, there can be no assurance that the United States Internal Revenue Service will not challenge this position or that a court would not sustain such a challenge. The potential negative impact of these events could have a material adverse impact on our business, financial condition, results of operations and prospects.
Our business and reputation could be negatively affected as a result of activist shareholders.
Certain of our shareholders have expressed views with respect to the operation of our business, our business strategy, corporate governance considerations or other matters that may not be fully aligned with our own. Responding to actions by activist shareholders can be costly and time-consuming, disrupt our operations and divert the attention of management and our employees. Perceived uncertainties as to our future direction may result in the loss of potential business opportunities, damage to our reputation and may make it more difficult to attract and retain qualified directors, personnel and business partners. These actions could also cause our stock price to experience periods of volatility.
Risk Factors Related to the Fujifilm Transactions
Our expectations regarding our business may be impacted by the following risk factors related to the pending Fujifilm Transactions:
The pendency of the Fujifilm Transactions could adversely affect our business.
In connection with the Fujifilm Transactions, some of our suppliers and customers may delay or defer sales and purchasing decisions, which could negatively impact revenues, earnings and cash flows regardless of whether the Fujifilm Transactions are completed. We have agreed in the Fujifilm Transaction Agreements to refrain from taking certain actions with respect to our business and financial affairs during the pendency of the Fujifilm Transactions, which restrictions could be in place for an extended period of time if completion of the Fujifilm Transactions is delayed and could adversely impact our financial condition, results of operations or cash flows. These restrictions may prevent us from pursuing otherwise attractive business opportunities and making other changes to our business before completion of the Fujifilm Transactions or termination of the Fujifilm Transaction Agreements. The process of seeking to accomplish the Fujifilm Transactions could also divert the focus of our management from pursuing other opportunities that could be beneficial to us.
The pursuit of the Fujifilm Transactions and the preparation for the integration of Xerox and Fuji Xerox have placed, and will continue to place, a significant burden on our management and internal resources. There is a significant degree of difficulty and management distraction inherent in the process of seeking to close the Fujifilm Transactions and integrate Xerox and Fuji Xerox, which could cause an interruption of, or loss of momentum in, the activities of our existing business, regardless of whether the Fujifilm Transactions are eventually completed. Our management team will be required to devote considerable amounts of time to this integration process, which will decrease the time they will have to manage our existing businesses, service existing customers, attract new customers and develop new products, services or strategies. One potential consequence of such distractions could be the failure of management to realize other strategic opportunities that could be beneficial to us. If our senior management is not able to effectively manage the process leading up to and immediately following Closing, or if any significant business activities are interrupted as a result of the integration process, then our business could suffer.

Xerox 2017 Annual Report 14



We may be unable to attract and retain key employees during the pendency of the Fujifilm Transactions.
In connection with the Fujifilm Transactions, current and prospective employees of Xerox may experience uncertainty about their future roles with New Fuji Xerox following the Fujifilm Transactions, which may materially adversely affect our ability to attract and retain key personnel during the pendency of the Fujifilm Transactions. Key employees may depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with New Fuji Xerox following the Fujifilm Transactions. The departure of existing key employees or the failure of potential key employees to accept employment with New Fuji Xerox, despite our recruiting efforts, could have a material adverse impact on our business, financial condition and operating results, regardless of whether the Fujifilm Transactions are eventually completed.
The Fujifilm Transactions may not be completed on the terms or timeline currently contemplated, or at all, and failure to complete the Fujifilm Transactions may result in material adverse consequences to our business and operations.
The Fujifilm Transactions are subject to several closing conditions, including (i) the absence of any law or order issued or enacted by any governmental authority of competent jurisdiction in which any of Xerox, Fuji Xerox or their respective subsidiaries has material operations, which enjoins or otherwise prohibits the consummation of the Fujifilm Transactions; (ii) the approval by our shareholders of (A) the Issuance; (B) the issuance of certain true-up shares to Fujifilm pursuant to the terms set forth in the Subscription Agreement; and (C) the Certificate of Amendment to our Certificate of Incorporation (collectively, the “Applicable Shareholder Approvals”), (iii) expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and under any other applicable antitrust, competition, trade regulation or merger control law, (iv) the filing of notices and receipt of applicable national security approvals, including with respect to the Committee on Foreign Investment in the United States, the U.S. Department of Defense’s Defense Security Service, the Department of Energy and the U.S. State Department Directorate of Defense Trade Controls pursuant to the International Traffic in Arms Regulations and (v) Xerox’s declaration of the Special Dividend. The closing conditions also include the delivery to us of the audited financial statements and interim financial statements of Fuji Xerox for the fiscal years ended March 31, 2016, March 31, 2017 and March 31, 2018 that (x) are GAAP compliant, (y) fairly present in all material respects the consolidated financial position of Fuji Xerox and its consolidated subsidiaries as of the dates thereof and the interim financial statements of Fuji Xerox and (z) do not deviate, in any material respect, from the unaudited financial statements of Fuji Xerox and its subsidiaries provided to us prior to the date of the Fujifilm Transaction Agreements. If any one of these conditions is not satisfied or waived, the Fujifilm Transactions may not be completed. There is no assurance that the Fujifilm Transactions will be completed on the terms or timeline currently contemplated, or at all.
The parties have not yet obtained all regulatory clearances, consents and approvals required to complete the Fujifilm Transactions. Governmental or regulatory agencies could still seek to block or challenge the Fujifilm Transactions or could impose restrictions they deem necessary or desirable in the public interest as a condition to approving the Fujifilm Transactions. These restrictions could include a requirement to sell or hold separate certain specified businesses to obtain such regulatory approvals. If these approvals are not received, then neither we nor Fujifilm will be obligated to complete the Fujifilm Transactions.
If the Applicable Shareholder Approvals are not obtained or if the Fujifilm Transactions are not completed for any other reason, we would be subject to a number of risks, including the following:
we and our shareholders would not realize the anticipated benefits of the Fujifilm Transactions, including payment of the Special Dividend to holders of our Common Stock as of the applicable record date and any expected synergies and operating efficiencies from the Fujifilm Transactions;
the attention of our management may have been diverted to the Fujifilm Transactions instead of on our ongoing business operations and pursuit of other opportunities that may have been beneficial to us;
resulting negative reactions from our customers, regulators and employees;
we may be required to pay a termination fee of $183 million (the “Termination Fee”) if the Fujifilm Transaction Agreements are terminated in the case of certain events described in the Fujifilm Transaction Agreements, including due to an adverse change in our Board of Directors’ recommendation to our shareholders to approve the Fujifilm Transactions;

Xerox 2017 Annual Report 15



we have incurred, and will continue to incur, significant costs, expenses and fees for professional services and other transaction costs in connection with the proposed Fujifilm Transactions, for which we will have received little or no benefit if the Fujifilm Transactions are not completed. Many of these fees and costs will be payable by us even if the Fujifilm Transactions are not completed and may relate to activities that we would not have undertaken other than to complete the Fujifilm Transactions;
resulting negative reactions from the financial markets, including a decline in our stock price (which may reflect a market assumption that the Fujifilm Transactions will be completed); or
Xerox could be subject to litigation from shareholders related to the Fujifilm Transaction Agreements.
The occurrence of any of these events individually or in combination could have a material adverse effect on our results of operations or the trading price of our Common Stock.
Even if the Fujifilm Transactions close, the integration of Xerox and Fuji Xerox following the Closing will present significant challenges that may result in a decline in the anticipated benefits of the Fujifilm Transactions.
Historically, Xerox and Fuji Xerox have operated as independent companies, and they will continue to do so until the completion of the Fujifilm Transactions. There can be no assurance that their businesses can be integrated successfully. New Fuji Xerox will be required to devote management attention and resources to integrating its business practices and operations, and prior to the Fujifilm Transactions, management attention and resources will be required to plan for such integration. Specifically, the following issues, among others, must be addressed in integrating the operations of Xerox and Fuji Xerox in order to realize the anticipated benefits of the Fujifilm Transactions:
the potential inability (i) to successfully integrate the two businesses, including operations, technologies, products, customer services and offerings and corporate functions and/or (ii) to identify and eliminate redundant and underperforming functions and assets, in a manner that permits New Fuji Xerox to achieve the synergies and operating efficiencies expected to result from the Fujifilm Transactions, which could result in the expected benefits of the Fujifilm Transactions not being realized partly or wholly in the time frame currently anticipated or at all;
consolidating and rationalizing the companies’ information technology platforms and administrative infrastructures as well as accounting systems;
integrating the companies’ financial reporting and internal control systems, including compliance by New Fuji Xerox with Section 404 of the Sarbanes-Oxley Act of 2002, as amended, and the rules promulgated thereunder by the U.S. Securities and Exchange Commission;
coordinating geographically separated organizations, systems and facilities;
integrating personnel with diverse business backgrounds, business cultures and management philosophies, while maintaining focus on providing consistent, high-quality products and services;
maintaining existing agreements with customers, distributors, providers and vendors and avoiding delays in entering into new agreements with prospective customers, distributors, providers and vendors;
coordinating distribution and marketing efforts;
lost sales and customers as a result of certain customers of either or both of the two businesses deciding not to do business with New Fuji Xerox, or deciding to decrease their amount of business in order to reduce their reliance on a single company;
preserving important relationships of both Xerox and Fuji Xerox and resolving potential conflicts that may arise;
performance shortfalls at one or both of Xerox and Fuji Xerox as a result of the diversion of management’s attention caused by completing the Fujifilm Transactions and integrating the two businesses’ operations;
potential unknown liabilities and unforeseen increased expenses, delays or regulatory conditions associated with the Fujifilm Transactions; and
effecting actions that may be required in connection with obtaining regulatory approvals.

Xerox 2017 Annual Report 16



Combining the businesses of Xerox and Fuji Xerox may be more difficult, costly or time-consuming than expected, which may adversely affect New Fuji Xerox’s results and negatively affect the value of its Common Stock following the Fujifilm Transactions.
Xerox and Fuji Xerox have entered into the Fujifilm Transaction Agreements because each believes that the Fujifilm Transactions will be beneficial to its respective companies and shareholders and that combining the businesses of Xerox and Fuji Xerox will produce benefits and cost savings. If New Fuji Xerox is not able to successfully combine the businesses of Xerox and Fuji Xerox in an efficient and effective manner, the anticipated benefits and cost savings of the Fujifilm Transactions may not be realized fully, or at all, or may take longer to realize than expected, and the value of New Fuji Xerox Common Stock may be affected adversely.
An inability to realize the full extent of the anticipated benefits of the Fujifilm Transactions and the other transactions contemplated by the Fujifilm Transaction Agreements, as well as any delays encountered in the integration process, could have an adverse effect upon the revenues, level of expenses and operating results of New Fuji Xerox, which may adversely affect the value of New Fuji Xerox Common Stock following the Fujifilm Transactions.
In addition, the actual integration may result in additional and unforeseen expenses, and the anticipated benefits of the integration plan may not be realized. Actual growth and cost savings, if achieved, may be lower than what New Fuji Xerox expects and may take longer to achieve than anticipated. If New Fuji Xerox is not able to adequately address integration challenges, it may be unable to successfully integrate Xerox’s and Fuji Xerox’s operations or to realize the anticipated benefits of the integration of the two companies.
We may not realize the anticipated synergies, net cost reductions and growth opportunities from the Fujifilm Transactions.
The benefits that we expect to achieve as a result of the Fujifilm Transactions will depend, in part, on the ability of New Fuji Xerox to realize anticipated growth opportunities, net cost reductions and synergies. Our success in realizing these growth opportunities, net cost reductions and synergies, and the timing of this realization, depends on the successful integration of our historical business and operations and the historical business and operations of Fuji Xerox. Even if we are able to integrate the businesses and operations of Xerox and Fuji Xerox successfully, this integration may not result in the realization of the full benefits of the growth opportunities, net cost reductions and synergies that we currently expect from this integration within the anticipated time frame or at all. For example, we may be unable to eliminate duplicative costs. Moreover, we may incur substantial expenses in connection with the integration of our business and Fuji Xerox’s business. While we anticipate that certain expenses will be incurred, such expenses are difficult to estimate accurately and may exceed current estimates. Accordingly, the benefits from the Transactions may be offset by costs or delays incurred in integrating the businesses.
In connection with the Fujifilm Transactions, we are acquiring entities that may have potential liabilities, including entities that have previously undergone a financial audit.
In connection with the Fujifilm Transactions, we are acquiring entities that may have potential liabilities relating to their businesses, including entities for which audited financial statements have not yet been provided. In addition, as previously disclosed, Fujifilm previously formed an independent investigation committee to conduct a review of the accounting practices at Fuji Xerox’s New Zealand subsidiary and at other subsidiaries that identified aggregate adjustments to Fuji Xerox’s financial statements of approximately JPY 40 billion, which primarily related to misstatements at Fuji Xerox’s New Zealand and Australian subsidiaries as well as certain other adjustments. While Fujifilm and Fuji Xerox continue to review Fujifilm’s oversight and governance of Fuji Xerox as well as Fuji Xerox’s oversight and governance over its businesses in light of the findings of the independent investigation committee, there may be governmental investigations and additional consequences related thereto. To the extent we have not identified such liabilities or miscalculated their potential financial impact, these liabilities could have a material adverse effect on our business, prospects, results of operations, financial condition and/or cash flows.
Following the completion of the Fujifilm Transactions, New Fuji Xerox will be controlled by Fujifilm. The interests of Fujifilm may differ from the interests of other shareholders.
Immediately following Closing, Fujifilm is expected to own approximately 50.1 percent of the Fully Diluted Capital Stock of New Fuji Xerox and Xerox shareholders are expected to own approximately 49.9 percent.
Pursuant to the Shareholders Agreement, the Board of Directors of New Fuji Xerox will have twelve directors, which will initially be composed of seven individuals designated by Fujifilm and five individuals from among the members of the Board of Directors of Xerox immediately prior to Closing designated by Xerox in consultation with and subject to reasonable approved by Fujifilm. As a result of Fujifilm’s ownership of a majority of the voting power of Common Stock, New Fuji Xerox will be a “controlled company” as defined in NYSE listing rules and will, therefore, not be subject to NYSE requirements that would otherwise require New Fuji Xerox to have (i) a majority of independent

Xerox 2017 Annual Report 17



directors, (ii) a nominating committee composed solely of independent directors, (iii) a compensation committee composed solely of independent directors, and (iv) director nominees selected, or recommended to the Board of Directors by a nominating committee composed solely of independent directors.
Fujifilm may have different interests than other holders of Common Stock and may make decisions adverse to your interests. Subject to the terms and restrictions set forth in the Shareholders Agreement, Fujifilm would have control over matters submitted to the shareholders that require the affirmative vote of a majority or more of the outstanding shares of New Fuji Xerox. This concentrated control could discourage a potential investor from seeking to acquire Common Stock and, as a result, might harm the market price of that Common Stock. Given Fujifilm’s ownership of the majority of the Common Stock of New Fuji Xerox and the interactions that will take place between New Fuji Xerox and Fujifilm, the success of New Fuji Xerox will depend in part on the reputation and success of Fujifilm.
The Fujifilm Transaction Agreements contain provisions that may discourage other companies from trying to acquire us.
The Fujifilm Transaction Agreements contain provisions that may discourage third parties from submitting business combination proposals to us that might result in greater value to our shareholders than the Fujifilm Transactions. The Fujifilm Transaction Agreements generally prohibit us from soliciting, initiating and facilitating or encouraging any inquiries regarding, or the making of any proposal or offer that constitutes, or that could reasonably be expected to lead to, an alternative acquisition proposal from any third party. This provision prevents us from seeking offers from other possible acquirers that may be superior to the Fujifilm Transactions. In addition, if the Fujifilm Transaction Agreements are terminated by us or Fujifilm in circumstances that obligate us to pay a Termination Fee, our financial condition may be adversely affected as a result of the payment of the Termination Fee, which might deter third parties from proposing alternative business combination proposals.
Item 1B. Unresolved Staff Comments
None

Item 2. Properties
We own several manufacturing, engineering and research facilities and lease other facilities. Our principal manufacturing and engineering facilities are located in New York, California, Oklahoma, Oregon, Canada, the U.K., Ireland, and the Netherlands. Our principal research facilities are located in California, New York, and Canada. Our Corporate Headquarters is a leased facility located in Norwalk, Connecticut.
As a result of implementing our restructuring programs (refer to Note 12 - Restructuring and Asset Impairment Charges in the Consolidated Financial Statements) as well as various productivity initiatives, several leased and owned properties became surplus. We are obligated to maintain our leased surplus properties through required contractual periods. We have disposed or subleased certain of these properties and are actively pursuing the successful disposition of remaining surplus properties.
In 2017, we owned or leased numerous facilities globally, which house general offices, sales offices, service locations, data centers, call centers and distribution centers. The size of our property portfolio at December 31, 2017 was approximately 14 million square feet and comprised of 687 leased properties and 108 owned properties (of which 73 are located on our Webster, New York campus). It is our opinion that our properties have been well maintained, are in sound operating condition and contain all the necessary equipment and facilities to perform their functions. We believe that our current facilities are suitable and adequate for our current businesses.
Item 3. Legal Proceedings
Refer to the information set forth under Note 19 "Contingencies and Litigation" in the Consolidated Financial Statements.
Item 4. Mine Safety Disclosures
Not applicable.

Xerox 2017 Annual Report 18



Part II

ITEM 5.
Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Corporate Information
Stock Exchange Information
Xerox common stock (XRX) is listed on the New York Stock Exchange and the Chicago Stock Exchange.
Xerox Common Stock Prices and Dividends
New York Stock Exchange composite prices * 
 
First
Quarter(1)
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
2017
 
 
 
 
 
 
 
 
High
 
$
30.16

 
$
29.29

 
$
33.95

 
$
33.46

Low
 
27.56

 
27.52

 
28.35

 
28.08

Dividends declared per share
 
0.25

 
0.25

 
0.25

 
0.25

 
 
 
 
 
 
 
 
 
2016(1)
 
 

 
 

 
 

 
 

High
 
$
44.64

 
$
45.00

 
$
41.20

 
$
40.48

Low
 
34.76

 
35.84

 
36.96

 
34.88

Dividends declared per share
 
0.31

 
0.31

 
0.31

 
0.31

 _____________
* Price as of close of business.
(1)
Reflects our one-for-four reverse stock split that became effective on June 14, 2017. Stock prices for 2016 and prior are on a pre-separation basis. Refer to Note 1 - Basis of Presentation and Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements for further information.
Common Shareholders of Record
See Item 6 - Selected Financial Data, Five Years in Review, Common Shareholders of Record at Year-End, for additional information.

Xerox 2017 Annual Report 19



Performance Graph
 
chart-fd6d608a2cf2523fb5c.jpg

Total Return To Shareholders
 
 
Year Ended December 31,
(Includes reinvestment of dividends)
 
2012
 
2013
 
2014
 
2015
 
2016
 
2017
Xerox Corporation
 
$
100.00

 
$
184.83

 
$
216.99

 
$
173.02

 
$
149.04

 
$
195.21

S&P 500 Index
 
100.00

 
132.39

 
150.51

 
152.59

 
170.84

 
208.14

S&P 500 Information Technology Index
 
100.00

 
128.43

 
154.26

 
163.40

 
186.03

 
258.28

_____________
Source: Standard & Poor's Investment Services
Notes: Graph assumes $100 invested on December 31, 2012 in Xerox, the S&P 500 Index and the S&P 500 Information Technology Index, respectively, and assumes dividends are reinvested.


Xerox 2017 Annual Report 20



Sales Of Unregistered Securities During The Quarter Ended December 31, 2017
During the quarter ended December 31, 2017, Registrant issued the following securities in transactions that were not registered under the Securities Act of 1933, as amended (the “Act”).
Dividend Equivalent
(a)
Securities issued on October 31, 2017: Registrant issued 2,457 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: Gregory Q. Brown, Jonathan Christodoro, Joseph J. Echevarria, Richard J. Harrington, William Curt Hunter, Robert J. Keegan, Cheryl Gordon Krongard, Charles Prince, Ann N. Reese, Stephen H. Rusckowski and Sara Martinez Tucker.
(c)
The DSUs were issued at a deemed purchase price of $33.555 per DSU (aggregate price $82,445), 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.
Issuer Purchases of Equity Securities During the Quarter Ended December 31, 2017
Board Authorized Share Repurchase Program
Repurchases of Xerox Common Stock, par value $1 per share include the following:
 
Total Number of
Shares
Purchased
 
Average Price Paid per Share(1)
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(2)
 
Maximum Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs(2)
October 1 through 31

 
$

 

 
$
244,710,381

November 1 through 30

 

 

 
244,710,381

December 1 through 31

 

 

 
244,710,381

Total

 
 
 

 
 
_____________
(1)
Exclusive of fees and costs.
(2)
Of the cumulative $8.0 billion of share repurchase authority granted by our Board of Directors, exclusive of fees and expenses, approximately $7.8 billion has been used through December 31, 2017. Repurchases may be made on the open market, or through derivative or negotiated transactions. Open-market repurchases will be made in compliance with the Securities and Exchange Commission’s Rule 10b-18, and are subject to market conditions, as well as applicable legal and other considerations.
 
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
October 1 through 31
2,686

 
$
33.29

 
n/a
 
n/a
November 1 through 30

 

 
n/a
 
n/a
December 1 through 31

 

 
n/a
 
n/a
Total
2,686

 
 
 
 
 
 
 _____________
(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 2017 Annual Report 21



Item 6. Selected Financial Data
Five Years in Review
 (in millions, except per-share data)
 
2017
 
2016(1)
 
2015(1)
 
2014(1)
 
2013(1)
Per-Share Data
 
 
 
 
 
 
 
 
 
 
Income from continuing operations
 
 
 
 
 
 
 
 
 
 
Basic
 
$
0.70

 
$
2.36

 
$
3.00

 
$
3.42

 
$
2.99

Diluted
 
0.70

 
2.33

 
2.97

 
3.37

 
2.94

Net Income (Loss) Attributable to Xerox
 
 
 
 
 
 
 
 
 
 
Basic
 
0.71

 
(1.95
)
 
1.59

 
3.37

 
3.63

Diluted
 
0.71

 
(1.93
)
 
1.58

 
3.32

 
3.57

Common stock dividends declared
 
1.00

 
1.24

 
1.12

 
1.00

 
0.92

Operations
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
10,265

 
$
10,771

 
$
11,465

 
$
12,679

 
$
13,194

Sales
 
4,073

 
4,319

 
4,674

 
5,214

 
5,496

Services, maintenance and rentals
 
5,898

 
6,127

 
6,445

 
7,078

 
7,215

Financing
 
294

 
325

 
346

 
387

 
483

Income from continuing operations
 
204

 
633

 
840

 
1,034

 
959

Income from continuing operations - Xerox
 
192

 
622

 
822

 
1,011

 
939

Net income (loss)
 
207

 
(460
)
 
466

 
1,018

 
1,155

Net income (loss) - Xerox
 
195

 
(471
)
 
448

 
995

 
1,135

Financial Position(2)
 
 

 
 

 
 

 
 

 
 

Working capital
 
$
2,489

 
$
2,338

 
$
1,431

 
$
2,798

 
$
2,825

Total Assets
 
15,946

 
18,051

 
25,442

 
27,576

 
28,966

Consolidated Capitalization(2)
 
 

 
 

 
 

 
 

 
 

Short-term debt and current portion of long-term debt
 
$
282

 
$
1,011

 
$
985

 
$
1,427

 
$
1,117

Long-term debt
 
5,235

 
5,305

 
6,382

 
6,314

 
6,904

Total Debt(3)
 
5,517

 
6,316

 
7,367

 
7,741

 
8,021

Convertible preferred stock
 
214

 
214

 
349

 
349

 
349

Xerox shareholders' equity
 
5,256

 
4,709

 
8,975

 
10,596

 
12,230

Noncontrolling interests
 
37

 
38

 
43

 
75

 
119

Total Consolidated Capitalization
 
$
11,024

 
$
11,277

 
$
16,734

 
$
18,761

 
$
20,719

Selected Data and Ratios
 
 

 
 

 
 

 
 

 
 

Common shareholders of record at year-end
 
28,752

 
31,803

 
33,843

 
35,307

 
37,552

Book value per common share(4)
 
$
20.64

 
$
18.57

 
$
35.45

 
$
37.95

 
$
41.17

Year-end common stock market price(4)
 
$
29.15

 
$
34.92

 
$
42.52

 
$
55.44

 
$
48.68

_____________
(1)
Reflects the revisions related to the Fuji Xerox misstatement disclosed in Note 2 - Correction of Fuji Xerox Misstatement in Prior Period Financial Statements in our Consolidated Financial Statements.
(2)
Balance sheet amounts at December 31, 2016 exclude Conduent Incorporated (Conduent) balances as a result of the Separation and Distribution while balance sheet amounts prior to December 31, 2016 include amounts for Conduent. Refer to Note 5 - Divestitures in our Consolidated Financial Statements for additional information.
(3)
Includes capital lease obligations.
(4)
Per-share computations reflect the impact of our one-for-four reverse stock split effective June 14, 2017. Stock prices for 2016 and prior are on a pre-separation basis. Refer to Note 1 - Basis of Presentation and Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements for further information.

Xerox 2017 Annual Report 22



Item 7. 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 Consolidated Financial Statements and the accompanying notes. Throughout the MD&A, we refer to various notes to our Consolidated Financial Statements which appear in Item 8 of this 2017 Form 10-K, and the information contained in such notes is incorporated by reference into the MD&A in the places where such references are made.
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.
Executive Overview
With annual revenues of $10.3 billion we are a leading global provider of digital print technology and related solutions; we operate in a market estimated at approximately $85 billion. Our primary offerings span three main areas: Managed Document Services, Workplace Solutions and Graphic Communications. Our Managed Document Services offerings help customers, ranging from small businesses to global enterprises, optimize their printing and related document workflow and business processes. Our Workplace Solutions and Graphic Communications products and solutions support the work processes of our customers by providing them with an efficient, cost effective printing and communications infrastructure.
Headquartered in Norwalk, Connecticut, with 35,300 employees, Xerox serves customers in approximately 160 countries providing advanced document technology, services, software and genuine Xerox supplies for a range of customers including small and mid-size businesses ("SMB"), large enterprises, governments and graphic communications providers, and for our partners who serve them. In 2017, approximately 40% of our revenue was generated outside the United States.
Market and Business Strategy
Our strategy is to apply innovation in digital print technology and services in order to increase our participation in the growth areas of our market while maintaining leadership in the more mature areas. To accomplish this, we focus on the following areas:
Maintain Market Leadership and Focus on Strategic Growth Areas - i) Expand leadership in Managed Document Services; ii) Increase SMB coverage through resellers and partners; iii) Gain share in the entry A4 product segment of the market; and iv) Extend leadership in digital color production.
Innovate to Differentiate Our Offerings - Make investments in areas such as workflow automation and color printing, as well as improving the quality and reducing the environmental impact of digital printing.
Accelerate Productivity and Cost Initiatives through Strategic Transformation - As markets shift, we need to undertake restructuring to optimize our workforce and facilities to best align our resources with the growth areas of our business and to maximize profitability and cash flow in businesses that are declining.
Post-sale Based Business Model
In 2017, 78% of our total revenue was post-sale based, which includes document services, equipment maintenance services, consumable supplies and financing, among other elements. These revenue streams generally follow equipment placements and provide some stability to our revenue. Some of the key indicators of future post sale revenue include:
Installations of printers and multifunction devices as well as the number of machines in the field (MIF) and the page volume and mix of pages printed on color devices, where available.
Managed Document Services - i) signings, which reflects the estimated future revenues from contracts, mostly from Enterprise deals, signed during the period, i.e., Total Contract Value (TCV) and; ii) renewal rate, which is defined as the annual recurring revenue (ARR) on contracts that are renewed during the period, calculated as a percentage of ARR on all contracts where a renewal decision was made during the period.



Xerox 2017 Annual Report 23



Transaction to Combine Xerox and Fuji Xerox
On January 31, 2018, Xerox entered into a Redemption Agreement with FUJIFILM Holdings Corporation, a Japanese company (“Fujifilm”), and Fuji Xerox Co., Ltd, a Japanese company in which Xerox indirectly holds a 25 percent equity interest and Fujifilm holds the remaining 75 percent equity interest (“Fuji Xerox”) (the “Redemption Agreement”), pursuant to which, among other things, (i) Fuji Xerox shall redeem for cash most or all of Fujifilm’s 75 percent equity interest in Fuji Xerox and (ii) Fuji Xerox shall become an indirect majority or wholly owned subsidiary of Xerox (the “Redemption”). The combined company resulting from the Fujifilm Transactions (as defined below) shall hereinafter be referred to as “New Fuji Xerox”.
Concurrently with the execution and delivery of the Redemption Agreement, Xerox entered into a Share Subscription Agreement with Fujifilm (the “Subscription Agreement” and together with the Redemption Agreement, the “Fujifilm Transaction Agreements”), pursuant to which, among other things, (i) Fujifilm shall subscribe for and purchase from Xerox, and Xerox shall issue to Fujifilm, a number of shares of common capital stock of Xerox (and after Closing, of New Fuji Xerox, “Common Stock”) representing 50.1 percent of (i) the aggregate number of issued and outstanding shares of Common Stock (excluding any performance shares issued under the Company’s existing employee incentive plans) plus (ii) such additional shares of Common Stock that would be issued and outstanding assuming the exercise of in-the-money options as of 5:00 p.m. New York time two business days prior to closing of the Fujifilm Transactions (as defined below) (the “Closing”) plus (iii) any shares of Common Stock reserved for issue relating to restricted stock units outstanding as of the Closing that are fully vested as of 5:00 p.m. New York time two business days prior to the Closing (collectively, the “Fully Diluted Capital Stock”) of Xerox in exchange for (A) cash and (B) all of the issued and outstanding equity interests of Fuji Xerox not held by Xerox or its wholly owned subsidiaries and (ii) Xerox shall become a direct, majority owned subsidiary of Fujifilm (the “Issuance” and together with the Redemption, the “Fujifilm Transactions”). In addition, pursuant to the terms of the Subscription Agreement, at Closing, an aggregate number of shares equal to the “True-Up Shares” (as defined in the Subscription Agreement) shall be held in escrow and released to Fujifilm as and if necessary for Fujifilm to maintain its ownership percentage.
In connection with the Fujifilm Transactions, Xerox expects to pay a special pro rata cash dividend to its shareholders in an amount equal to $2.5 billion in the aggregate (the “Special Dividend”), which is expected to be financed through the issuance of debt that will be incurred by New Fuji Xerox. Fujifilm will not be a shareholder of Xerox as of the record date for the Special Dividend and therefore will not receive any payment in respect thereof.
As noted above, immediately following the Closing, Fujifilm is expected to own approximately 50.1 percent of the Fully Diluted Capital Stock of New Fuji Xerox and Xerox shareholders are expected to own approximately 49.9 percent. Further, pursuant to that certain Shareholders Agreement, to be entered into by Xerox and Fujifilm at Closing (the “Shareholders Agreement”), the Board of Directors ofNew Fuji Xerox will have twelve directors, which will initially be composed of seven individuals designated by Fujifilm and five individuals from among the members of the Board of Directors of the Company immediately prior to Closing designated by Xerox in consultation with and subject to reasonable approved by Fujifilm. Accordingly, the Fujifilm Transactions are expected to be accounted for as a reverse acquisition.
Xerox must pay to Fujifilm a $183 million termination fee (the “Termination Fee”) in the event that the Subscription Agreement is terminated (i) by either party because the applicable shareholder approvals are not obtained if an alternative acquisition proposal is publicly announced prior to the Xerox shareholder meeting duly called for the purpose of obtaining the applicable shareholder approvals and Xerox enters into a definitive agreement with respect to, or otherwise consummates, an alternative acquisition proposal within 12 months after the termination of the Subscription Agreement; (ii) by Fujifilm (A) in connection with a material and intentional breach by Xerox of its non-solicitation obligations resulting in a third party making an alternate acquisition proposal that is reasonably likely to materially interfere with the Fujifilm Transactions or (B) following a change in the recommendation by the Board of Directors of Xerox; or (iii) by Xerox in order to enter into a definitive agreement with a third party with respect to a superior proposal, in each case as set forth in, and subject to the conditions of, the Fujifilm Transaction Agreements.
We expect the Fujifilm Transactions, which require Xerox shareholder approval, to close in the second half of 2018 subject to customary regulatory approvals, filings with the U.S. Securities and Exchange Commission, tax considerations, and securing any necessary financing. Until the combination is complete, each of Xerox, Fuji Xerox and Fujifilm will continue to be separate, independent organizations and will operate as usual.



Xerox 2017 Annual Report 24



Strategic Transformation Program
Despite the decline in revenues, we have maintained our margins primarily through ongoing cost and productivity initiatives. In 2016, we initiated a three-year Strategic Transformation program to accelerate cost productivity beyond our historical range of $300 to $350 million of annual savings. The program is expected to deliver gross productivity improvements and cost savings of at least $1.7 billion over the three-year period, which include our historical savings of approximately $900 to $1,050 million. The program targets areas such as delivery, remote connectivity, sales productivity, pricing optimization, design efficiency and supply chain optimization. During the first two years, the program delivered over $1.2 billion of gross productivity improvements and cost savings, and we expect it to provide approximately $475 million of additional improvements and cost savings in 2018.
Tax Cuts and Jobs Act (the “Tax Act”)
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted in the U.S. The Tax Act significantly revises the U.S. corporate income tax system by, among other things, lowering the U.S. statutory corporate income tax rate from 35% to 21% and implementing a territorial tax system that includes a transition tax on deemed repatriated earnings of foreign subsidiaries.
During the fourth quarter 2017, we recorded an estimated non-cash provisional charge of $400 million reflecting the impact associated with the provisions of the Tax Act based on currently available information. Refer to Income Taxes section of the MD&A and Note 18 - Income and Other Taxes in the Consolidated Financial Statements for additional information.
Correction of Fuji Xerox Misstatement in Prior Period Financial Statements
In April 2017, Fujifilm publicly announced it had formed an independent investigation committee (IIC) to conduct a review of the appropriateness of the accounting practices at Fuji Xerox’s New Zealand subsidiary related to the recovery of receivables associated with certain bundled leasing transactions that occurred in, or prior to, Fuji Xerox’s fiscal year ending March 31, 2016. The IIC’s review, completed during the second quarter 2017, identified total aggregate adjustments to Fuji Xerox’s prior period financial statements of approximately JPY 40 billion (approximately $360 million based on the Yen/U.S. Dollar spot exchange rate at March 31, 2017 of 111.89). The adjustments identified by the IIC primarily related to misstatements at Fuji Xerox’s New Zealand subsidiary as well as their Australian subsidiary and certain other adjustments. We determined that our cumulative share of the total adjustments identified as part of the IIC's investigation was approximately $90 million and impacted our fiscal years 2009 through 2017.
In the second quarter 2017, we determined that the misstatements to our equity income in prior years and in first quarter 2017 resulting from the IIC’s review were immaterial to our previously issued financial statements. However, we concluded that the cumulative correction of these misstatements would have had a material effect on our current year consolidated financial statements. Accordingly, we have revised our previously issued annual and interim consolidated financial statements for 2015 and 2016 and the first quarter of 2017. Certain of the corrections discussed above affected periods prior to fiscal year 2015, and this effect was reflected as a cumulative, net of tax adjustment to reduce retained earnings as of January 1, 2015 by $87 million. Amounts throughout this filing have been adjusted to incorporate the revised amounts, where applicable.
Refer to Note 2 - Correction of Fuji Xerox Misstatement in Prior Period Financial Statements in the Consolidated Financial Statements for additional information regarding this correction.
Reverse Stock Split
On May 23, 2017, the Board of Directors authorized and shareholders approved a reverse stock split of outstanding Xerox common stock at a ratio of one-for-four shares, together with the proportionate reduction in the authorized shares of its common stock from 1,750,000,000 shares to 437,500,000 shares. The reverse stock split became effective on June 14, 2017.
Refer to Note 1 - Basis of Presentation and Summary of Significant Accounting Policies in the Consolidated Financial Statements for additional information regarding the reverse stock split.

Xerox 2017 Annual Report 25



Segment Changes
Following the separation of the BPO business, we realigned our operations to better manage the business and serve our customers and the markets in which we operate. In 2017 we transitioned to a geographic focus and are primarily organized from a sales perspective on the basis of “go-to-market” sales channels. These sales channels are structured to serve a range of customers for our products and services. As a result of this transition and change in structure, we concluded that we have one operating and reportable segment - the design, development and sale of document management systems and solutions. Our chief executive officer was identified as the chief operating decision maker (“CODM”). All of the company’s activities are interrelated, and each activity is dependent upon and supportive of the other, including product development, supply chain and back-office support services. In addition, all significant operating decisions, by management and the Board, are largely based upon an analysis of Xerox on a total Company basis, including assessments related to the company’s incentive compensation plans.
Refer to Note 3 - Segment and Geographic Area Reporting in the Consolidated Financial Statements for additional information.
Separation Update
On December 31, 2016, Xerox Corporation completed the separation of its BPO business from its Document Technology and Document Outsourcing (DT/DO) business (the “Separation”). The Separation was accomplished through the transfer of the BPO business into a new legal entity, Conduent Incorporated ("Conduent"), and then distributing one hundred percent (100%) of the outstanding common stock of Conduent to Xerox Corporation stockholders (the “Distribution”). As a result of the Separation and Distribution, the BPO business is presented as a discontinued operation and, as such, has been excluded from continuing operations for all periods presented.
Refer to Note 5 - Divestitures in the Consolidated Financial Statements for additional information regarding the Separation.
Financial Overview
During 2017 the Company focused on delivering on its commitments established post-separation.
Revenue - Successful launch of 29 new workplace devices and 65 new dealer partners signed. Improvements in identified strategic growth areas of the business.
Cost Transformation - Second year Strategic Transformation savings of $680 million exceeded full-year target and enabled investment in the business to offset revenue declines.
Capital Structure - Reduced debt by $800 million; contributed $836 million to our defined benefit pension plans, significantly reducing our net underfunded obligation; and eliminated our accounts receivable sales programs for cost savings and simplification.
Total revenue of $10.3 billion in 2017 declined 4.7% from the prior year, with no impact from currency. The revenue decline reflects a 6.9% decline in equipment sales, with a 0.3-percentage point positive impact from currency and a 4.0% decline in post sale revenue with a 0.1-percentage point negative impact from currency. While equipment revenues improved in the fourth quarter 2017, the full-year decline was primarily driven by the impact of transitioning to our ConnectKey portfolio and ongoing black-and-white revenue declines that reflected overall market trends and unfavorable mix. The decline in post sale revenue was largely due to lower maintenance service revenues, supply sales and financing revenues, reflecting lower print volumes and lower equipment sales in prior periods.
2017 Net Income from continuing operations attributable to Xerox was $192 million and included after-tax costs of $723 million related to the amortization of intangible assets, restructuring and related costs, non-service retirement-related costs, and other discrete adjustments including the $400 million impact of implementing the Tax Act resulting in adjusted1 net income from continuing operations of $915 million. Net income from continuing operations attributable to Xerox for 2016 was $622 million and included after-tax costs of $305 million related to the amortization of intangible assets, restructuring and related costs and non-service retirement-related costs, resulting in adjusted1 net income of $927 million. The decrease in net income from continuing operations attributable to Xerox was primarily due to the $400 million impact from the Tax Act. Both net income amounts in 2017 - reported and adjusted1 - as compared to 2016 were also impacted by lower revenues, which were offset by cost savings from our Strategic Transformation program and lower interest expense, and a higher tax expense in 2017 before the impacts of the Tax Act.

Xerox 2017 Annual Report 26



Operating cash flow from continuing operations was $122 million in 2017 as compared to $1,018 million in 2016. The decrease is primarily due to higher pension contributions of $658 million, which reflect an incremental $500 million contribution to our U.S. defined benefit pension plans that was funded through a $1.0 billion Senior Note offering and an additional contribution of approximately $105 million (GBP 80 million) to our U.K. Pension Plan for salaried employees. The U.K. contribution was funded through the cash received from an investment associated with our 1997 sale of The Resolution Group (TRG), a discontinued insurance business, and reported in investing cash flows. The decrease is also due to the one-time impact of approximately $350 million from the termination of certain accounts receivable sales programs in the fourth quarter of 2017. Cash used in investing activities of continuing operations of $31 million decreased $115 million as compared to 2016 primarily due to the cash receipt of $127 million from the TRG investment previously noted. Cash used in financing activities was $985 million in 2017 as compared to cash provided by financing activities of $584 million in 2016. The increase in the use of cash primarily reflects payments of $1.5 billion on Senior Notes, net payments of $326 million on the tender and exchange of certain Senior Notes and dividend payments of $291 million, partially offset by proceeds from the issuance of $1.0 billion of Senior Notes and $161 million from the final cash adjustment with Conduent.
2018 Outlook
We expect total revenues to decline in 2018 in the 2% to 4% range, excluding the impact of currency. At January 2018 exchange rates, we expect translation currency to have about a 1.4-percentage point positive impact on total revenues in 2018, reflecting the weakening of the U.S. dollar against our major foreign currencies as compared to prior year. Reported earnings should improve in 2018 due to the inclusion of the $400 million charge in 2017 related to the enactment of the Tax Act. In addition, both reported and adjusted1 earnings are expected to reflect the continued benefits of cost savings and productivity improvements from our Strategic Transformation program, which are expected to offset the projected decline in revenues.
We expect 2018 operating cash flows from continuing operations to be between $900 and $1,100 million and capital expenditures to be approximately $150 million.
Our capital allocation plan for 2018 includes the following:
Debt – committed to maintaining our investment grade rating and we expect to repay approximately $265 million of maturing debt.
Dividends - expect dividend payments to be approximately $260 million, which reflects the current annualized dividend of $1.00 per share.
Acquisitions – we expect to invest about $150 to $200 million, focusing on acquiring companies that will expand our portfolio mix and distribution channels.
The 2018 outlook discussed above does not include any impacts associated with the proposed transaction to combine Xerox and Fuji Xerox.
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. 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.
Approximately 40% of our consolidated revenues are derived from operations outside of the United States where the U.S. Dollar is normally not the functional currency. As a result, the foreign currency translation had no impact on revenue in 2017 and 1.8-percentage point negative impact on revenue in 2016.

Xerox 2017 Annual Report 27



Application of Critical Accounting Policies
In preparing our Consolidated Financial Statements and accounting for the underlying transactions and balances, we apply various accounting policies. Senior management has discussed the development and selection of the critical accounting policies, estimates and related disclosures included herein with the Audit Committee of the Board of Directors. We consider the policies discussed below as critical to understanding our Consolidated Financial Statements, as their application places the most significant demands on management's judgment, since financial reporting results rely on estimates of the effects of matters that are inherently uncertain. In instances where different estimates could have reasonably been used, we disclosed the impact of these different estimates on our operations. In certain instances, such as revenue recognition for leases, the accounting rules are prescriptive; therefore, it would not have been possible to reasonably use different estimates. Changes in assumptions and estimates are reflected in the period in which they occur. The impact of such changes could be material to our results of operations and financial condition in any quarterly or annual period.
Specific risks associated with these critical accounting policies are discussed throughout the MD&A, where such policies affect our reported and expected financial results. For a detailed discussion of the application of these and other accounting policies, refer to Note 1 - Basis of Presentation and Summary of Significant Accounting Policies in the Consolidated Financial Statements.
Revenue Recognition
Application of the various accounting principles in GAAP related to the measurement and recognition of revenue requires us to make judgments and estimates. Complex arrangements with nonstandard terms and conditions may require significant contract interpretation to determine the appropriate accounting. Refer to Note 1 - Basis of Presentation and Summary of Significant Accounting Policies - Revenue Recognition, in the Consolidated Financial Statements for additional information regarding our revenue recognition policies. Specifically, the revenue related to the following areas involves significant judgments and estimates:
Bundled Lease Arrangements: We sell our equipment under bundled lease arrangements, which typically include the equipment, service, supplies and a financing component for which the customer pays a single negotiated monthly fixed price for all elements over the contractual lease term. Sales made under bundled lease arrangements comprise approximately 41% of our equipment sales revenue. Recognizing revenues under these arrangements requires us to allocate the total consideration received to the lease and non-lease deliverables included in the bundled arrangement, based upon the estimated fair values of each element.
Sales to Distributors and Resellers: We utilize distributors and resellers to sell many of our technology products, supplies and services to end-user customers. Sales to distributors and resellers are generally recognized as revenue when products are sold to such distributors and resellers. Distributors and resellers participate in various rebate, price-protection, cooperative marketing and other programs, and we record provisions and allowances for these programs as a reduction to revenue when the sales occur. Similarly, we also record estimates for sales returns and other discounts and allowances when the sales occur. We consider various factors, including a review of specific transactions and programs, historical experience and market and economic conditions when calculating these provisions and allowances. Approximately 17% of our total revenues are sales of equipment and supplies to distributors and resellers, and provisions and allowances recorded on these sales are approximately 22% of the associated gross revenues.
Allowance for Doubtful Accounts and Credit Losses
We continuously monitor collections and payments from our customers and maintain a provision for estimated credit losses based upon our historical experience adjusted for current conditions. We recorded bad debt provisions of $33 million, $37 million and $49 million in Selling, Administrative and General Expenses (SAG) expenses in our Consolidated Statements of Income (Loss) for the years ended December 31, 2017, 2016 and 2015, respectively.
Bad debt provisions declined in 2017 primarily as a result of lower revenues as well as continued strong credit policies. Reserves, as a percentage of trade and finance receivables, were 3.2% at December 31, 2017, as compared to 3.6% and 3.7% at December 31, 2016 and 2015, respectively. We continue to assess our receivable portfolio in light of the current economic environment and its impact on our estimation of the adequacy of the allowance for doubtful accounts.
As discussed above, we estimated our provision for doubtful accounts based on historical experience and customer-specific collection issues. This methodology was consistently applied for all periods presented. During the three year period ended December 31, 2017, our reserve for doubtful accounts ranged from 3.2% to 3.7% of gross

Xerox 2017 Annual Report 28



receivables. Holding all assumptions constant, a 0.5-percentage point increase or decrease in the reserve from the December 31, 2017 rate of 3.2% would change the 2017 provision by approximately $26 million.
Refer to Note 6 - Accounts Receivables, Net and Note 7 - Finance Receivables, Net in the Consolidated Financial Statements for additional information regarding our allowance for doubtful accounts.
Pension Plan Assumptions
We sponsor defined benefit pension plans in various forms in several countries covering employees who meet eligibility requirements. Over the past several years, where legally possible, we have amended our major defined benefit pension plans to freeze current benefits and eliminate benefits accruals for future service, including our primary U.S. defined benefit plan for salaried employees, the Canadian Salary Pension Plan and the U.K. Final Salary Pension Plan. The freeze of current benefits is the primary driver of the reduction in pension service costs since 2012. In certain Non-U.S. plans we are required to continue to consider salary increases and inflation in determining the benefit obligation related to prior service. The Netherlands defined benefit pension plan has also been amended to reflect the Company's ability to reduce the indexation of future pension benefits within the plan in scenarios when the returns on plan assets are insufficient to cover that indexation.
Several statistical and other factors that attempt to anticipate future events are used in calculating the expense, liability and asset values related to our defined benefit pension plans. These factors include assumptions we make about the expected return on plan assets, discount rate, lump-sum settlement rates, the rate of future compensation increases and mortality. Differences between these assumptions and actual experiences are reported as net actuarial gains and losses and are subject to amortization to net periodic benefit cost over future periods.
Cumulative net actuarial losses for our defined benefit pension plans of $2.7 billion as of December 31, 2017 decreased by $95 million from December 31, 2016, primarily due to actual plan asset returns being more than expected returns in 2017, as well as the recognition of actuarial losses through amortization and U.S. settlement losses. These impacts were partially offset by currency and lower discount rates in 2017 as compared to 2016. The total actuarial loss at December 31, 2017 is subject to offsetting gains or losses in the future due to changes in actuarial assumptions and will be recognized in future periods through amortization or settlement losses.
We used a consolidated weighted average expected rate of return on plan assets of 5.0% for 2017, 5.8% for 2016 and 6.0% for 2015, on a worldwide basis. During 2017, the actual return on plan assets was $834 million as compared to an expected return of $448 million, with the difference largely due to positive returns in the equity markets in 2017. When estimating the 2018 expected rate of return, in addition to assessing recent performance, we considered the historical returns earned on plan assets, the rates of return expected in the future, particularly in light of current economic conditions, and our investment strategy and asset mix with respect to the plans' funds. The weighted average expected rate of return on plan assets we will use in 2018 is 4.5%. The decline in the 2018 rate primarily reflects an increased investment allocation to fixed income securities as we reposition our investment portfolios in light of the improved funding status and the freeze of plan benefits for our major qualified plans. As the qualified pension plans reach set funded status milestones, the assets will be continue to be rebalanced to shift more assets from equity to fixed income securities.
Another significant assumption affecting our defined benefit pension obligations and the net periodic benefit cost is the rate that we use to discount our future anticipated benefit obligations. In the U.S. and the U.K., which comprise approximately 75% of our projected benefit obligation, we consider the Moody's Aa Corporate Bond Index and the International Index Company's iBoxx Sterling Corporate AA Cash Bond Index, respectively, in the determination of the appropriate discount rate assumptions. The consolidated weighted average discount rate we used to measure our pension obligations as of December 31, 2017 and to calculate our 2018 expense was 2.8%; the rate used to calculate our obligations as of December 31, 2016 and our 2017 expense was 3.1%. The weighted average discount rate we used to measure our retiree health obligation as of December 31, 2017 and to calculate our 2018 expense was 3.5%; the rate used to calculate our obligation at December 31, 2016 and our 2017 expense was 3.9%.
Holding all other assumptions constant, the following table summarizes the estimated impacts of a 0.25% change in the discount rate and a 0.25% change in the expected return on plan assets:
 
 
Discount Rate
 
Expected Return
(in millions)
 
0.25% Increase
 
0.25% Decrease
 
0.25% Increase
 
0.25% Decrease
Increase/(Decrease)
 
 
 
 
 
 
 
 
2018 Projected net periodic pension cost
 
$
(30
)
 
$
35

 
$
(20
)
 
$
20

Projected benefit obligation as of December 31, 2017
 
(440
)
 
490

 
N/A

 
N/A


Xerox 2017 Annual Report 29



One of the most significant and volatile elements of our net periodic defined benefit pension plan expense is settlement losses. Our primary domestic plans allow participants the option of settling their vested benefits through the receipt of a lump-sum payment. We recognize the losses associated with these settlements immediately upon the settlement of the vested benefits. Settlement accounting requires us to recognize a pro rata portion of the aggregate unamortized net actuarial losses upon settlement. As noted above, cumulative unamortized net actuarial losses were $2.7 billion at December 31, 2017, of which the U.S. primary domestic plans, with a lump-sum feature, represented approximately $1,035 million. The pro rata factor is computed as the percentage reduction in the projected benefit obligation due to the settlement of a participant's vested benefit. Settlement accounting is only applied when the event of settlement occurs - i.e. the lump-sum payment is made. Since settlement is dependent on an employee's decision and election, the level of settlements and the associated losses can fluctuate significantly from period to period. During the three years ended December 31, 2017, U.S. plan settlements were $550 million, $229 million and $340 million, respectively, and the associated settlement losses on those plan settlements were $133 million, $65 million and $88 million, respectively. In 2018, on average, we estimate that approximately $100 million of plan settlements will result in settlement losses of approximately $25 million.
The following is a summary of our benefit plan costs for the three years ended December 31, 2017 as well as estimated amounts for 2018:
 
 
Estimated
 
Actual
(in millions)
 
2018
 
2017
 
2016
 
2015
Defined benefit pension plans(1)
 
$
13

 
$
61

 
$
62

 
$
53

U.S. settlement losses
 
127

 
133

 
65

 
88

Defined contribution plans
 
54

 
54

 
61

 
66

Retiree health benefit plans(2)
 
26

 
30

 
35

 
24

U.S. Retiree health curtailment gain
 

 

 

 
(22
)
Total Benefit Plan Expense
 
$
220

 
$
278

 
$
223

 
$
209

_____________
(1)
Excludes U.S. settlement losses.
(2)
Excludes U.S. retiree health curtailment gain in 2015.
Our estimated 2018 defined benefit pension plan cost is expected to be approximately $55 million lower than 2017, primarily driven by lower projected expense for our U.K. Final Salary Pension Plan, which is largely due to actuarial gains in 2017 as well as an improved funding status.
The following is a summary of our expected benefit plan funding for the three years ended December 31, 2017 as well as estimated amounts for 2018:
 
 
Estimated
 
Actual
(in millions)
 
2018
 
2017
 
2016
 
2015
U.S. Defined benefit pension plans
 
$
76

 
$
675

 
$
24

 
$
173

Non-U.S. Defined benefit pension plans
 
116

 
161

 
154

 
128

Defined contribution plans
 
54

 
54

 
61

 
66

Retiree health benefit plans
 
62

 
64

 
61

 
63

Total Benefit Plan Funding
 
$
308

 
$
954

 
$
300

 
$
430

 
The increase in contributions to our U.S. defined benefit plans in 2017 was largely due to $650 million of contributions to our domestic tax-qualified defined benefit plans, comprised of $15 million required to meet minimum funding requirements and $635 million of additional voluntary contributions. The original estimate of 2017 voluntary contributions of $135 million was increased by $500 million as a result of funding provided from a Senior Note offering in 2017.
Refer to Note 17 - Employee Benefit Plans in the Consolidated Financial Statements for additional information regarding defined benefit pension plan assumptions, expense and funding.
Income Taxes
We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgments are required in determining the consolidated provision for income taxes. Our provision is based on nonrecurring events as well as recurring factors, including the taxation of foreign income. In addition, our provision will change based on discrete or other nonrecurring events such as audit settlements, tax law changes, changes in valuation allowances, etc., that may not be predictable.

Xerox 2017 Annual Report 30



We record the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported in our Consolidated Balance Sheets, as well as operating loss and tax credit carryforwards. We follow very specific and detailed guidelines in each tax jurisdiction regarding the recoverability of any tax assets recorded in our Consolidated Balance Sheets and provide valuation allowances as required. We regularly review our deferred tax assets for recoverability considering historical profitability, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. Increases (decreases) to our valuation allowance, through income tax expense, were $6 million, $(8) million and $(15) million for the years ended December 31, 2017, 2016 and 2015, respectively. There were other increases (decreases) to our valuation allowance, including the effects of currency, of $13 million, $41 million and $(110) million for the years ended December 31, 2017, 2016 and 2015, respectively. These did not affect income tax expense in total as there was a corresponding adjustment to deferred tax assets or other comprehensive income.
The following is a summary of gross deferred tax assets and the related valuation allowances for the three years ended December 31, 2017:
 
 
Year Ended December 31,
(in millions)
 
2017
 
2016
 
2015
Gross deferred tax assets
 
$
2,051

 
$
2,730

 
$
2,743

Valuation allowance
 
(435
)
 
(416
)
 
(383
)
Net deferred tax assets
 
$
1,616

 
$
2,314

 
$
2,360

We are subject to ongoing tax examinations and assessments in various jurisdictions. Accordingly, we may incur additional tax expense based upon our assessment of the more-likely-than-not outcomes of such matters. In addition, when applicable, we adjust the previously recorded tax expense to reflect examination results. Our ongoing assessments of the more-likely-than-not outcomes of the examinations and related tax positions require judgment and can materially increase or decrease our effective tax rate, as well as impact our operating results. Unrecognized tax benefits were $125 million, $165 million and $222 million at December 31, 2017, 2016 and 2015, respectively.
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted in the U.S. The Tax Act significantly revises the U.S. corporate income tax system by, among other things, lowering the U.S. statutory corporate income tax rate from 35% to 21% and implementing a territorial tax system that includes a transition tax on deemed repatriated earnings of foreign subsidiaries. During the fourth quarter 2017, we recorded an estimated non-cash provisional charge of $400 million reflecting the impact associated with the provisions of the Tax Act based on currently available information.
Refer to Note 18 - Income and Other Taxes in the Consolidated Financial Statements for additional information regarding deferred income taxes, unrecognized tax benefits and the estimated impacts of the Tax Act.
Business Combinations and Goodwill
We allocate the fair value of purchase consideration to tangible assets, liabilities assumed, and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is allocated to goodwill. The allocation of the purchase consideration requires management to make significant estimates and assumptions, especially with respect to intangible assets. These estimates can include, but are not limited to, future expected cash flows of acquired customers, acquired technology, and trade names from a market participant perspective, and estimates of useful lives, and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable and when appropriate, include assistance from independent third-party valuation firms. During the measurement period, which is up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings. Refer to Note 4 - Acquisitions in the Consolidated Financial Statements for additional information regarding the allocation of the purchase price consideration for our acquisitions.
Our goodwill balance was $3.9 billion at December 31, 2017. We assess goodwill for impairment at least annually during the fourth quarter and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Events or circumstances that might indicate an interim evaluation is warranted include, among other things, unexpected adverse business conditions, macro and company specific economic factors, supply costs, unanticipated competitive activities and acts by governments and courts. Application of the annual goodwill impairment test requires judgment regarding the identification of reporting units. Consistent with the determination that we had one operating segment, we determined that there is one reporting unit and tested goodwill for

Xerox 2017 Annual Report 31



impairment at the entity level. Consistent with prior years, we elected to utilize a quantitative assessment of the recoverability of our goodwill balance.
In our quantitative test, we estimate the fair value of the entity by weighting the results from the income approach (discounted cash flow methodology) and market approach. These valuation approaches require significant judgment and consider a number of factors that include, but are not limited to, expected future cash flows, growth rates and discount rates, and comparable multiples from publicly traded companies in our industry. In addition, these approaches require us to make certain assumptions and estimates regarding the current economic environment, industry factors and the future profitability of our businesses. When performing our discounted cash flow analysis, we incorporate the use of projected financial information and a discount rate that is developed using market participant-based assumptions. The cash flow projections are based on three-year financial forecasts developed by management that include revenue and expense projections, capital spending trends and investment in working capital to support anticipated revenue growth or other changes in the business and which are consistent with expected guidance for the Company. The selected discount rate considers the risk and nature of the entity's cash flows and an appropriate capital structure and rates of return that market participants would require to invest their capital.
We believe these assumptions are appropriate and reflect our current expectations as well as our forecasted long-term business model, giving appropriate consideration to our historical results as well as the current economic environment and markets that we serve. The discount rate applied to our projected cash flows was approximately 8.0%, which we considered reasonable based on the estimated capital costs of applicable market participants and an appropriate company-specific risk premium. Although our estimate of the fair value of the entity was in excess of our market capitalization, we believe the difference is reasonable when a market-based control premium is taken into consideration. However, even in the case no market-based control premium was considered, no impairment would be indicated.
Our impairment assessment methodology includes the use of outside valuation experts and the inclusion of factors and assumptions related to third-party market participants. When performing our market approach, we rely specifically on the guideline public company method. Our guideline public company method incorporates revenues and earnings multiples from publicly traded companies with operations and other characteristics similar to our entity. The selected multiples consider entity's relative growth, profitability, size and risk relative to the selected publicly traded companies.
After completing our annual impairment review in the fourth quarter of 2017, we concluded that goodwill was not impaired and we had an excess of fair value over carrying value of significantly more than 20%. Subsequent to our fourth quarter impairment test, we did not identify any indicators of potential impairment that required an update to the annual impairment test.
Refer to Note 11 - Goodwill and Intangible Assets, Net in the Consolidated Financial Statements for additional information regarding goodwill.

Xerox 2017 Annual Report 32



Revenue Results Summary
Total Revenue
Revenue for the three years ended December 31, 2017 was as follows:
 
Revenue
 
% Change
 
CC % Change
 
% of Total Revenue
(in millions)
2017
 
2016
 
2015
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
 
2015
Equipment sales
$
2,251

 
$
2,419

 
$
2,689

 
(6.9
)%
 
(10.0
)%
 
(7.2
)%
 
(8.7
)%
 
22
%
 
22
%
 
23
%
Post sale revenue
8,014

 
8,352

 
8,776

 
(4.0
)%
 
(4.8
)%
 
(3.9
)%
 
(2.9
)%
 
78
%
 
78
%
 
77
%
Total Revenue
$
10,265

 
$
10,771

 
$
11,465

 
(4.7
)%
 
(6.1
)%
 
(4.7
)%
 
(4.3
)%
 
100
%
 
100
%
 
100
%
Reconciliation to Consolidated Statements of Income (Loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales
$
4,073

 
$
4,319

 
$
4,674

 
(5.7
)%
 
(7.6
)%
 
(5.7
)%
 
(5.9
)%
 
 
 
 
 
 
Less: Supplies, paper and other sales
(1,822
)
 
(1,900
)
 
(1,985
)
 
(4.1
)%
 
(4.3
)%
 
(3.8
)%
 
(2.1
)%
 
 
 
 
 
 
Equipment sales(1)
$
2,251

 
$
2,419

 
$
2,689

 
(6.9
)%
 
(10.0
)%
 
(7.2
)%
 
(8.7
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Services, maintenance and rentals
$
5,898

 
$
6,127

 
$
6,445

 
(3.7
)%
 
(4.9
)%
 
(3.7
)%
 
(3.1
)%
 
 
 
 
 
 
Add: Supplies, paper and other sales
1,822

 
1,900

 
1,985

 
(4.1
)%
 
(4.3
)%
 
(3.8
)%
 
(2.1
)%
 
 
 
 
 
 
Add: Financing
294

 
325

 
346

 
(9.5
)%
 
(6.1
)%
 
(9.5
)%
 
(4.6
)%
 
 
 
 
 
 
Post sale revenue(1)
$
8,014

 
$
8,352

 
$
8,776

 
(4.0
)%
 
(4.8
)%
 
(3.9
)%
 
(2.9
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
North America
$
6,122

 
$
6,420

 
$
6,701

 
(4.6
)%
 
(4.2
)%
 
(4.9
)%
 
(4.2
)%
 
60
%
 
60
%
 
58
%
International
3,601

 
3,736

 
3,848

 
(3.6
)%
 
(2.9
)%
 
(3.1
)%
 
(2.9
)%
 
35
%
 
34
%
 
34
%
Other
542

 
615

 
916

 
(11.9
)%
 
(32.9
)%
 
(11.9
)%
 
(33.0
)%
 
5
%
 
6
%
 
8
%
Total Revenue(2)
$
10,265

 
$
10,771

 
$
11,465

 
(4.7
)%
 
(6.1
)%
 
(4.7
)%
 
(6.1
)%
 
100
%
 
100
%
 
100
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Memo:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Managed Document Services(3)
$
3,419

 
$
3,441

 
$
3,429

 
(0.6
)%
 
0.3
 %
 
(0.4
)%
 
2.6
 %
 
33
%
 
32
%
 
30
%
_____________
CC - See "Currency Impact" section for description of Constant Currency.
(1)
Equipment sales revenue in 2016 and 2015 has been revised to reclassify certain Global Imaging Systems IT-related equipment sales to other sales, which are included in Post sale revenue.
(2)
Refer to the "Geographic Sales Channels and Product and Offerings Definitions" section.
(3)
Excluding equipment revenue, Managed Document Services (MDS) was $2,962 million and $2,942 million for the years ended December 31, 2017 and December 31, 2016, respectively. The change represented an increase of 0.7% for the year ended December 31, 2017 including a 0.2-percentage point negative impact from currency.
Revenue
Total revenue decreased 4.7% for the year ended December 31, 2017 compared to the prior year with no impact from currency as adverse translation currency in the first half of the year was offset by a favorable impact in the second half.
Total revenue decreased 6.1% for the year ended December 31, 2016 with a 1.8-percentage point negative impact from currency. On a revenue-weighted basis, our major European currencies and the Canadian Dollar were approximately 3.2% weaker against the U.S. dollar, as compared to prior year. Revenues from these major foreign currencies comprise approximately 30% of our total consolidated revenues and were the primary driver of the currency impact on revenues in 2016. Total revenues included the following:
Post sale revenue 2017
Post sale revenue decreased 4.0% for the year ended December 31, 2017 compared to the prior year with a 0.1-percentage point negative impact from currency. Post sale revenue is comprised of the following:
Services, maintenance and rentals revenue includes rental and maintenance revenue (including bundled supplies) as well as the post sale component of the document services revenue from our Managed Document Services (MDS) offerings, and revenues from our Communication and Marketing Solutions (CMS) offerings that transferred to Xerox from the BPO business upon Separation. These revenues declined 3.7%, with no impact from currency. The decline at constant currency1 reflected lower signings and install from prior periods and the continuing decline in page volumes. These declines were partially mitigated by $20 million of higher revenues associated with a licensing agreement as well as growth in MDS, developing markets and acquisitions within our Global Imaging business.

Xerox 2017 Annual Report 33



Supplies, paper and other sales includes unbundled supplies and other sales. These revenues declined 4.1%, with a 0.3-percentage point negative impact from currency. The decline was driven by lower network integration solutions sales from our Global Imaging business, reduced original equipment manufacturer (OEM) supplies and lower supplies demand (both in U.S. and European channels) consistent with declining equipment sales in prior periods. The decline was partly offset by higher supplies sales from our Global Imaging business and our developing markets.
Financing revenue is generated from financed equipment sale transactions. The 9.5% decline in these revenues reflected a declining finance receivables balance due to lower equipment sales in prior periods, with no impact from currency. Refer to the discussion on Sales of Finance Receivable in the Capital Resources and Liquidity section as well as Note 7 - Finance Receivables, Net in the Consolidated Financial Statements for additional information.
Post sale revenue 2016
Post sale revenue decreased 4.8% for the year ended December 31, 2016 compared to the prior year with a 1.9-percentage point negative impact from currency. Post sale revenue is comprised of the following:
Services, maintenance and rentals revenue includes rental and maintenance revenue (including bundled supplies) as well as the post sale component of the document services revenue from our Managed Document Services (MDS) offerings, and revenues from our Communication and Marketing Solutions (CMS) offerings that transferred to Xerox from the BPO business upon Separation. These revenues declined 4.9%, including a 1.8-percentage point negative impact from currency. The decline at constant currency1 reflected lower equipment sales in prior periods resulting in ongoing page declines, partially offset by growth from our partner print services offerings.
Supplies, paper and other sales includes unbundled supplies and other sales. These revenues declined 4.3% with a 2.2-percentage point negative impact from currency. The decline at constant currency1 was largely driven by lower supplies sales, as we experienced lower demand consistent with lower equipment sales in prior periods, and OEM supplies below prior year levels.
Financing revenue is generated from financed equipment sale transactions. The 6.1% decline in these revenues reflected a declining finance receivables balance due to lower equipment sales in prior periods and included a 1.5-percentage point negative impact from currency. Refer to the discussion on Sales of Finance Receivable in the Capital Resources and Liquidity section as well as Note 7 - Finance Receivables, Net in the Consolidated Financial Statements for additional information.
Equipment sales revenue
Equipment revenue for the three years ended December 31, 2017 was as follows:
 
 
Revenue
 
% Change
 
CC % Change
 
% of Equipment Revenue
(in millions)
 
2017
 
2016
 
2015
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
 
2015
Entry
 
$
366

 
$
388

 
$
444

 
(5.7)%
 
(12.6)%
 
(5.8)%
 
(11.0)%
 
16%
 
16%
 
16%
Mid-range
 
1,403

 
1,525

 
1,685

 
(8.0)%
 
(9.5)%
 
(8.1)%
 
(8.5)%
 
63%
 
63%
 
63%
High-end
 
457

 
483

 
538

 
(5.4)%
 
(10.2)%
 
(5.8)%
 
(8.2)%
 
20%
 
20%
 
20%
Other
 
25

 
23

 
22

 
NM
 
NM
 
NM
 
NM
 
1%
 
1%
 
1%
Equipment sales(1)
 
$
2,251

 
$
2,419

 
$
2,689

 
(6.9)%
 
(10.0)%
 
(7.2)%
 
(8.7)%
 
100%
 
100%
 
100%
_____________
CC - See "Currency Impact" section for description of Constant Currency.
(1)
Equipment sales revenue in 2016 and 2015 has been revised to reclassify certain Global Imaging Systems IT-related equipment sales to other sales, which are included in Post sale revenue.
Equipment sales revenue 2017
Equipment sales revenue decreased 6.9% for the year ended December 31, 2017 compared to the prior year, including a 0.3-percentage point positive impact from currency. Revenue declined across all product groups and was impacted by price declines of approximately 5% (which were in line with our historic declines). Although equipment sales revenue improved in the fourth quarter, reflecting the higher install activity associated with new products as well as net benefits from the planned expansion of our U.S. channels, equipment sales revenue for the full year was lower. The decrease was primarily driven by declines in mid-range sales reflecting in part, the mid-year transition to our new product portfolio and was further impacted by the longer sales cycles in certain areas of the business, as well as lower revenue from color devices and black-and-white systems reflecting market trends. These declines were offset by higher revenues from our developing markets. The decline in high-end sales primarily reflected lower revenues from our black-and-white systems, consistent with market trends, along with the impact of

Xerox 2017 Annual Report 34



higher sales of iGen and Color Press in the prior year associated with the drupa trade show; these declines were only partially mitigated by higher sales of our continuous feed inkjet color systems and the recently launched Versant products. High-end color sales also included lower digital front-end (DFE) sales to Fuji Xerox. The decline in entry sales reflected lower OEM activity and an unfavorable mix caused by higher install activity from lower-end and monochrome devices in our developing markets as well as the timing of our new ConnectKey products.
Equipment sales revenue 2016
Equipment sales revenue decreased 10.0% for the year ended December 31, 2016 compared to the prior year, including a 1.3-percentage point negative impact from currency. Revenue decline was impacted by price declines of approximately 5% (which were in line with our historic impact). The decline was driven primarily by lower entry and mid-range sales, which partially reflected timing of product launches. The decline was also due to lower OEM sales, lower sales in the developing markets, lower revenues from our high-end products, reflecting unfavorable mix and lower sales to Fuji Xerox.
_____________
(1) - See "Non-GAAP Financial Measures" for an explanation of this non-GAAP financial measure.
Revenue Metrics
Total Installs
Install activity includes Managed Document Services and Xerox-branded products shipped to Global Imaging Systems. Detail by product group (see Geographic Sales Channels and Product and Offerings Definitions) is shown below:
Installs for the year ended December 31, 2017 were:
Entry(1) 
24% increase in color multifunction devices, reflecting demand for recently launched products as well as the migration from printers to multifunction devices, consistent with market trends.
18% increase in black-and-white multifunction devices, driven largely by higher activity for low-end printers in developing markets.
Mid-Range(2) 
Mid-range color installs were flat, reflecting demand for recently launched products including strong activity in developing markets and U.S. Channels, offset by longer large account sales cycles that were affected by the timing of our product roll out.
12% decrease in mid-range black-and-white, reflecting overall market decline as well as the impact of transitioning to the new product portfolio, partly offset by growth in developing markets.
High-End(2) 
8% decrease in high-end color systems, as growth from continuous feed color and the recently launched Versant products was more than offset by higher iGen and Color Press installs in the prior year, following the drupa trade show.
25% decrease in high-end black-and-white systems reflects overall market decline and trends.
Installs for the year ended December 31, 2016 were:
Entry(1) 
1% decrease in color multifunction devices due to weakness in Europe that was only partly mitigated by higher installs in other territories.
12% decrease in black-and-white multifunction devices reflecting overall market declines as well as a lower level of large deals in the developing markets.
Mid-Range(2) 
3% increase in mid-range color installs, reflecting growth in U.S. and developing markets, partly offset by weakness in Europe.
16% decrease in mid-range black-and-white consistent with market declines, reflecting a transition to color devices and fewer large account sales.
High-End(2) 
16% increase in high-end color systems due to favorable impact from the drupa printing trade show and significant growth in Versant 80 and 180 color presses.
13% decrease in high-end black-and-white systems, consistent with overall market decline.
Note: Descriptions of “Entry”, “Mid-Range” and “High-End” are defined below in the Geographic Sales Channels and Product and Offerings Definitions discussion.

Xerox 2017 Annual Report 35



Signings
Signings are defined as estimated future revenues from contracts signed during the period, including renewals of existing contracts. Our reported signings mostly represent those from our Enterprise deals, as we do not currently include signings from our growing partner print services offerings or those from our Global Imaging Systems channel.
Total Contract Value (TCV) is the estimated contractual revenue related to signed contracts; our signings expressed in TCV were as follows:
 
 
Year Ended December 31,
 
% Change
 
CC % Change
(in millions)
 
2017
 
2016
 
2015
 
2017
 
2016
 
2017
 
2016
Signings
 
$
2,714

 
$
2,734

 
$
3,081

 
(0.7)%
 
(11.3)%
 
1.0%
 
(4.7)%
_____________
CC - See "Currency Impact" section for description of Constant Currency.
Signings for the year ended December 31, 2017 decreased 0.7% compared to the prior year, with a 1.7-percentage point unfavorable impact from currency primarily reflecting a lower contribution from new business, partially offset by higher contributions from renewals. Signings for the year ended December 31, 2016 decreased 11.3% compared to the prior year, with a 6.6-percentage point unfavorable impact from currency primarily reflecting a lower contribution from new business, partially offset by higher contributions from renewals.
New business signings declined 12.6% for the year ended December 31, 2017, with a 2.0-percentage point unfavorable impact from currency. The full year performance reflects ongoing competitive pressure in the market, as well as the timing of new products amplified by the longer sales cycles in this area of the business.
Renewal Rate
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 contract renewal rate for the year ended December 31, 2017 was 84%, compared to the renewal rate of 82% for the year ended December 31, 2016.
Geographic Sales Channels and Product and Offerings Definitions
Our business is aligned to a geographic focus and is primarily organized on the basis of go-to-market sales channels, which are structured to serve a range of customers for our products and services:
North America, which includes our sales channels in the U.S. and Canada.
International, which includes our sales channels in Europe, Eurasia, Latin America, Middle East, Africa and India.
Other, primarily includes our OEM business, as well as sales to and royalties from Fuji Xerox, and our licensing revenue.
Our products and offerings include:
“Entry”, which includes A4 devices and desktop printers. Prices in this product group can range from approximately $150 to $3,000.
“Mid-Range”, which includes A3 Office and Light Production devices that generally serve workgroup environments in mid to large enterprises. Prices in this product group can range from approximately $2,000 to $75,000+.
“High-End”, which includes production printing and publishing systems that generally serve the graphic communications marketplace and large enterprises. Prices for these systems can range from approximately $30,000 to $1,000,000+.
Managed Document Services (MDS) revenue, which includes solutions and services that span from managing print to automating processes to managing content. Our primary offerings within MDS are Managed Print Services (including from Global Imaging Systems), as well as workflow automation services, and Centralized Print Services and Solutions (CPS). MDS excludes Communications and Marketing Solutions (CMS).
___________
(1)
Entry installations exclude OEM sales; including OEM sales, Entry color multifunction devices decreased 2% and increased 34% for the years ended December 31, 2017 and 2016, respectively. Entry black-and-white multifunction devices increased 10% and 6% for the years ended December 31, 2017 and 2016, respectively.
(2)
Mid-range and High-end color installations exclude Fuji Xerox digital front-end sales; including Fuji Xerox digital front-end sales, Mid-range color devices were flat for the year ended December 31, 2017 and increased 3% for the year ended December 31, 2016, respectively, while High-end color systems decreased 14% and 4% for the years ended December 31, 2017 and 2016, respectively.

Xerox 2017 Annual Report 36



Costs, Expenses and Other Income
Summary of Key Financial Ratios
The following is a summary of our key financial ratios used to assess our performance:
 
Year Ended December 31,
 
Reported
 
Adjusted(1)
(in millions)
2017
 
2016
 
2015
 
2017 B/(W)
 
2016 B/(W)
 
2017
 
2016
 
2015
 
2017 B/(W)
 
2016 B/(W)
Gross Profit
$
4,061

 
$
4,261

 
$
4,582

 
$
(200
)
 
$
(321
)
 
$
4,136

 
$
4,310

 
$
4,625

 
$
(174
)
 
$
(315
)
RD&E
446

 
476

 
511

 
30

 
35

 
421

 
451

 
492

 
30

 
41

SAG
2,631

 
2,695

 
2,865

 
64

 
170

 
2,524

 
2,638

 
2,811

 
114

 
173

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equipment Gross Margin
28.8
%
 
30.9
%
 
28.9
%
 
(2.1) pts.

 
2.0 pts.

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

Post sale Gross Margin
42.6
%
 
42.1
%
 
43.3
%
 
0.5 pts.

 
(1.2) pts.
 
43.5
%
 
42.6
%
 
43.8
%
 
0.9 pts.

 
(1.2) pts.
Total Gross Margin
39.6
%
 
39.6
%
 
40.0
%
 

 
(0.4) pts.

 
40.3
%
 
40.0
%
 
40.3
%
 
0.3 pts.

 
(0.3) pts.

RD&E as a % of Revenue
4.3
%
 
4.4
%
 
4.5
%
 
0.1 pts

 
0.1 pts

 
4.1
%
 
4.2
%
 
4.3
%
 
0.1 pts.

 
0.1 pts.

SAG as a % of Revenue
25.6
%
 
25.0
%
 
25.0
%
 
(0.6) pts.

 

 
24.6
%
 
24.5
%
 
24.5
%
 
(0.1) pts.

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pre-tax Income
$
570

 
$
568

 
$
924

 
$
2

 
$
(356
)
 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

Pre-tax Income Margin
5.6
%
 
5.3
%
 
8.1
%
 
0.3 pts.

 
(2.8) pts.
 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

Adjusted(1) Operating Profit
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
$
1,316

 
$
1,351

 
$
1,435

 
$
(35
)
 
$
(84
)
Adjusted(1) Operating Margin
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
12.8
%
 
12.5
%
 
12.5
%
 
0.3 pts.

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Memo:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-service retirement-related costs
$
198

 
$
131

 
$
116

 
$
(67
)
 
$
(15
)
 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

_____________
(1) Refer to Key Financial Ratios reconciliation table in the "Non-GAAP Financial Measures" section. In 2016, we began to include Equity in net income of unconsolidated affiliates in the calculation of adjusted operating income and margin. Prior periods have been restated accordingly to conform to current year presentation.
Pre-tax Income Margin
Pre-tax income margin for the year ended December 31, 2017 of 5.6% increased 0.3-percentage points compared to 2016. This increase was primarily driven by cost productivity and savings from strategic transformation, lower restructuring and related costs and lower Other expenses, net, largely reflecting lower interest expense. These improvements more than offset the pace of revenue declines, higher non-service retirement-related costs and adverse transaction currency of 0.7-percentage points.
Pre-tax income margin for the year ended December 31, 2016 of 5.3% decreased 2.8-percentage points compared to 2015. This decrease was primarily driven by higher restructuring and related costs and non-service retirement-related costs due to a $22 million curtailment gain recorded in 2015 as well as overall lower revenue. In addition, the decrease also reflects adverse transaction currency of 0.5-percentage points, as well as higher compensation expense resulting from a favorable prior-year compensation benefit adjustments, which more than offset benefits from the strategic transformation cost saving and productivity initiatives.
Pre-tax income margin includes the Amortization of intangible assets, Restructuring and related 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 and other discrete items. Adjusted1 Operating margin, discussed below, excludes all of these items and includes Equity in net income of unconsolidated affiliates before restructuring.
Adjusted1 Operating Margin
Adjusted1 operating margin for the year ended December 31, 2017 of 12.8% increased 0.3-percentage points compared to 2016, reflecting productivity and savings from strategic transformation as well as higher licensing revenue, which more than offset the pace of revenue declines and the impact of revenue generating and SAG investments along with adverse transaction currency of 0.8-percentage points. Adjusted1 operating margin was also unfavorably impacted by higher compensation and benefit expense as well as lower equity income from our Fuji Xerox joint venture.

Xerox 2017 Annual Report 37



Adjusted1 operating margin for the year ended December 31, 2016 of 12.5% was flat compared to 2015. Benefits from strategic transformation cost saving and productivity initiatives and higher equity income from our Fuji Xerox joint venture were offset by higher compensation expense as a result of a favorable prior-year compensation benefit adjustment, negative transaction currency of 0.6-percentage points and an overall decline in total company revenue.
 _____________
(1)
Refer to Operating Income/Margin reconciliation table in the "Non-GAAP Financial Measures" section.
Gross Margin
Total gross margin for the year ended December 31, 2017 of 39.6% was flat compared to 2016. On an adjusted1 basis, gross margin of 40.3% increased by 0.3-percentage points compared to 2016. The increase reflects cost productivity and savings from strategic transformation, as well as improvement in the rate of revenue decline that more than offset adverse transaction currency of 0.7-percentage points. The 0.3-percentage point decrease from adjusted1 to reported gross margin is due to higher non-service retirement-related costs in 2017 as compared to 2016.
Total gross margin for year ended December 31, 2016 of 39.6% decreased 0.4-percentage points compared to 2015. On an adjusted1 basis, gross margin of 40.0% decreased by 0.3-percentage points compared to 2015 as price declines and unfavorable currency were only partially offset by the benefits from cost savings and productivity improvements from strategic transformation that increased during the second half of the year. The 0.1-percentage point differential in the decrease from adjusted1 to reported gross margin is due to higher non-service retirement-related costs primarily due to a $22 million curtailment gain recorded in 2015.
Equipment gross margin for the year ended December 31, 2017 of 28.8% decreased 2.1-percentage points compared to 2016, as product cost productivity was more than offset by adverse transaction currency and price declines.
Equipment gross margin for the year ended December 31, 2016 of 30.9% increased 2.0-percentage points compared to 2015, as product cost productivity improvements and positive mix more than offset price declines and adverse transaction currency.
Post sale gross margin for the year ended December 31, 2017 of 42.6% increased 0.5-percentage points compared to 2016. On an adjusted1 basis, post sale gross margin of 43.5% increased 0.9-percentage points compared to 2016. The improvement in both measures reflect cost savings and productivity improvements from strategic transformation and higher licensing revenue, which more than offset the pace of revenue declines. The 0.4-percentage point decrease from adjusted1 to reported post sale gross margin is due to higher non-service retirement-related costs in 2017 as compared to 2016.
Post sale gross margin for the year ended December 31, 2016 of 42.1% decreased 1.2-percentage points compared to 2015. On an adjusted1 basis, post sales gross margin of 42.6% decreased 1.2-percentage points compared to 2015, reflecting restructuring savings, that were more than offset by adverse transaction currency and revenue declines.
 _____________
(1)
Refer to the Key Financial Ratios reconciliation table in the "Non-GAAP Financial Measures" section.
Research, Development and Engineering Expenses (RD&E)
 
Year Ended December 31,
 
Change
(in millions)
2017
 
2016
 
2015
 
2017
 
2016
R&D
$
356

 
$
381

 
$
385

 
$
(25
)

$
(4
)
Sustaining engineering
90

 
95

 
126

 
(5
)

(31
)
Total RD&E Expenses
$
446

 
$
476

 
$
511

 
$
(30
)
 
$
(35
)
R&D Investment by Fuji Xerox(1)
$
536

 
$
628

 
$
569

 
$
(92
)
 
$
59

_____________
(1)
Fluctuation in Fuji Xerox R&D was primarily due to changes in foreign exchange rates.
RD&E as a percent of revenue for the year ended December 31, 2017 of 4.3% improved 0.1-percentage points compared to 2016. On an adjusted1 basis, RD&E was 4.1% of revenue and improved 0.1-percentage points compared to 2016, as the decrease in RD&E expense outpaced the rate of revenue decline.

Xerox 2017 Annual Report 38



RD&E of $446 million for the year ended December 31, 2017, decreased $30 million from 2016. On an adjusted1 basis, RD&E of $421 million decreased by $30 million due to savings from strategic transformation including restructuring savings and lower expenses as a result of the transfer of resources to Electronics for Imaging (EFI), a third party high-end print server supplier, and the sale of our Xerox Research Centre Europe in Grenoble, France, which was mainly dedicated to supporting the discontinued BPO business. We coordinate our R&D investments with Fuji Xerox.
RD&E as a percent of revenue for the year ended December 31, 2016 of 4.4% improved 0.1-percentage points. On an adjusted1 basis, RD&E was 4.2% of revenue and improved 0.1-percentage points. RD&E of $476 million for the year ended December 31, 2016 was $35 million lower than 2015. Both improvements were driven by cost productivity and restructuring savings.
Selling, Administrative and General Expenses (SAG)
SAG as a percent of revenue of 25.6% increased 0.6-percentage points for the year ended December 31, 2017 as compared to the prior year ended December 31, 2016 primarily as a result of higher non-service retirement-related benefit costs. On an adjusted1 basis, SAG as a percentage of revenue of 24.6% increased 0.1-percentage points, reflecting the impact of lower revenues that were partly mitigated by productivity and cost savings from strategic transformation, including restructuring savings.
SAG expenses of $2,631 million for the year ended December 31, 2017 were $64 million lower than the prior year period. On an adjusted1 basis, SAG of $2,524 million decreased $114 million, including an approximate $9 million favorable impact from currency. The reduction in both measures primarily reflected costs savings, including savings from restructuring, as well as a decrease in selling expenses related to lower incentives and marketing expenses consistent with lower revenues. These savings were partly offset by higher compensation and benefit expenses, as well as expenses from our Global Imaging acquisitions. Bad debt expense for the year ended December 31, 2017 was $33 million and was $4 million lower than the year ended December 31, 2016 and remained at less than one percent of receivables.
SAG as a percent of revenue of 25.0% for the year ended December 31, 2016 was flat as compared to the prior year ended December 31, 2015. On an adjusted1 basis, SAG as a percentage of revenue was 24.5% and was also flat as compared to 2015. Higher compensation expense as well as the decline in total company revenue were offset by benefits from strategic transformation cost saving and productivity initiatives, which include restructuring savings.
SAG expenses of $2,695 million for the year ended December 31, 2016 were $170 million lower than the prior year period. On an adjusted1 basis, SAG of $2,638 million decreased $173 million, including an approximate $58 million favorable impact from currency; the reduction primarily reflected a decrease in selling expenses driven by productivity savings, as well as a decrease in general and administrative expenses driven by productivity savings, that offset higher compensation expense. Bad debt expense for the year ended December 31, 2016 was $37 million and was $12 million lower than the year ended December 31, 2015 and remained at less than one percent of receivables.
_____________
(1) - See "Non-GAAP Financial Measures" for an explanation of the non-GAAP financial measure.
Non-Service Retirement-Related Costs
Non-service retirement-related costs of $198 million in 2017 increased $67 million as compared to the prior year, primarily due to losses from U.S. pension settlements of $133 million, a $68 million increase compared to the prior year. The higher level of settlements was primarily due to an expected increase in interest rates. Non-service retirement-related costs of $131 million in 2016 increased $15 million compared to the prior year primarily due to a one-time curtailment gain of $22 million in 2015.

Xerox 2017 Annual Report 39



Restructuring and Related Costs
Restructuring and related costs of $220 million include restructuring and asset impairment charges of $201 million and $19 million of additional costs, primarily related to professional support services associated with the implementation of the Strategic Transformation program.
During the year ended December 31, 2017, we recorded net restructuring and asset impairment charges of $201 million. These charges included the following:
$225 million of severance costs related to headcount reductions of approximately 2,600 employees globally. The actions impacted multiple functional areas, with approximately 30% of the costs focused on gross margin improvements and 70% on SAG improvements.
$4 million for lease termination costs primarily reflecting continued optimization of our worldwide operating locations.
$7 million of asset impairment losses related to the closure of a manufacturing site in Latin America.
The above charges were partially offset by $35 million of net reversals for changes in estimated reserves from prior period initiatives, primarily reflecting unanticipated attrition and other job changes prior to completion of the restructuring initiatives, as well as a $5 million favorable adjustment on the early termination of the lease for our corporate airplane.
We expect 2018 pre-tax savings of approximately $110 million from our 2017 restructuring actions, with the amount partially mitigated by timing our 2017 actions in the earlier part of the year, which enabled us to realize a portion of the savings in 2017.
During the year ended December 31, 2016, we recorded restructuring and related costs of $264 million, which included restructuring and asset impairment charges of $230 million and $34 million of additional costs primarily related to professional support services associated with the implementation of the Strategic Transformation program.
The net restructuring and asset impairment charges of $230 million included the following:
$224 million of severance costs related to headcount reductions of approximately 3,250 employees globally. The actions impacted multiple functional areas, with approximately 30% of the costs focused on gross margin improvements, 60% on SAG and 10% on the optimization of RD&E investments.
$28 million for lease termination costs primarily related to the early termination of the lease for our corporate airplane in connection with the elimination of our corporate aviation department.
The above charges were partially offset by $22 million of net reversals for changes in estimated reserves from prior period initiatives, as well as a gain of $5 million from the sale of real estate impaired in prior periods.
Restructuring Summary
The restructuring reserve balance as of December 31, 2017 for all programs was $109 million, of which approximately $106 million is expected to be spent over the next twelve months. During 2018, we expect to incur additional restructuring charges of approximately $200 million for actions and initiatives that have not yet been finalized. Approximately $40 million of the full year charges are expected to be recognized in the first quarter of the year.
Refer to Note 12 - Restructuring and Asset Impairment Charges in the Consolidated Financial Statements for additional information regarding our restructuring programs.
Amortization of Intangible Assets
Amortization of intangible assets for the year ended December 31, 2017 of $53 million was $5 million lower than 2016. Amortization of intangible assets for the year ended December 31, 2016 of $58 million was $2 million lower than 2015. The decrease in both 2017 and 2016 amortization expense reflected a lower level of acquisitions in prior years.
Refer to Note 11 - Goodwill and Intangible Assets, Net in the Consolidated Financial Statements for additional information regarding our intangible assets.
Worldwide Employment
Worldwide employment was approximately 35,300 as of December 31, 2017 and decreased by approximately 2,300 from December 31, 2016. The reduction was primarily due to the impact of restructuring and productivity-related reductions, partially offset by an increase of approximately 370 from acquisitions.

Xerox 2017 Annual Report 40



Other Expenses, Net
 
Year Ended December 31,
(in millions)
2017
 
2016
 
2015
Non-financing interest expense
$
119

 
$
181

 
$
216

Interest income
(8
)
 
(5
)
 
(6
)
Net Gain on sales of businesses and assets
(15
)
 
(22
)
 
(44
)
Currency losses, net
4

 
13

 
2

Loss on sales of accounts receivables
10

 
16

 
13

Loss on early extinguishment of debt
20

 

 

All other expenses, net
11

 
17

 
14

Other Expenses, Net
$
141

 
$
200

 
$
195

Non-financing interest expense
Non-financing interest expense for the year ended December 31, 2017 of $119 million was $62 million lower than 2016. When non-financing interest expense is combined with financing interest expense (Cost of financing), total interest expense declined by $57 million from the prior year. The decrease is primarily due to a lower debt balance reflecting the repayment of approximately $1.8 billion of debt in 2017 and $1.0 billion in 2016. These decreases were partially offset by the issuance of approximately $1.0 billion of new debt in 2017, of which $500 million of the proceeds were used for a voluntary contribution to our U.S. defined benefit pension plans.
Non-financing interest expense for the year ended December 31, 2016 of $181 million was $35 million lower than 2015. When non-financing interest expense is combined with financing interest expense (Cost of financing), total interest expense declined by $37 million from the prior year. The decline is primarily due to a lower average cost of debt as well as the reclassification of $18 million of interest expense to discontinued operations associated with the $1.0 billion Term Loan Facility that was required to be repaid upon completion of the Separation. Proceeds from the Term Loan Facility had been used to pay off maturing debt in 2016 of approximately $1.0 billion.
Refer to Note 5 - Divestitures in the Consolidated Financial Statements for additional information on separation-related debt. Refer to Note 14 - Debt in the Consolidated Financial Statements for additional information regarding our debt activity as well as information regarding the allocation of interest expense.
Net gain on sales of businesses and assets
The 2017 net gain on sales of businesses and assets of $15 million declined $7 million from 2016 and include a gain of $13 million from the sale of a research facility in Grenoble, France.
The 2016 net gain on sales of businesses and assets of $22 million declined $22 million from 2015 and included gains on the sale of surplus technology assets of $17 million.
The 2015 net gain on sales of businesses and assets of $44 million reflected a gain of approximately $25 million on the sale of surplus real estate in Latin America and gains of approximately $20 million for surplus technology assets.
Currency losses, net
Currency losses and gains primarily result from the re-measurement of foreign currency-denominated assets and liabilities, the cost of hedging foreign currency-denominated assets and liabilities and the mark-to-market of foreign exchange contracts utilized to hedge those foreign currency-denominated assets and liabilities. The increase in 2016 currency losses, net, was largely due to the significant movement in exchange rates during 2016.
Loss on sales of accounts receivable
Represents the loss incurred on our sales of accounts receivable. Refer to Sales of Accounts Receivables section below and Note 6 - Accounts Receivables, Net in the Consolidated Financial Statements for additional information regarding our sales of receivables.
Loss on early extinguishment of debt
During 2017, we recorded a $7 million net loss associated with the repayment of $475 million in Senior Notes in fourth quarter 2017, as well as a $13 million loss associated with the tender and exchange of certain Senior Notes in first quarter 2017. Refer to Note 14 - Debt in the Consolidated Financial Statements for additional information.

Xerox 2017 Annual Report 41



Income Taxes
The 2017 effective tax rate was 84.4% and includes our current estimated impact of $400 million related to the 2017 Tax Act which is discussed below. On an adjusted1 basis, the 2017 effective tax rate was 25.0%. This rate was lower than the U.S. statutory tax rate primarily due to foreign tax credits, the redetermination of certain unrecognized tax positions upon conclusion of several audits and the geographical mix of profits. The adjusted1 effective tax rate excludes the tax impacts associated with the following charges: restructuring and related costs, amortization of intangible assets, non-service retirement related costs and other discrete items including the impact of the Tax Act.
The 2016 effective tax rate was 10.9% and on an adjusted1 basis, the 2016 effective tax rate was 20.9%. 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 adjusted1 effective tax rate excludes the tax impacts associated with the following charges: restructuring and related costs, amortization of intangible assets and non-service retirement related costs. The increase from reported to adjusted was much higher in 2016 as compared to 2015 due to a higher level of these charges.
The 2015 effective tax rate was 20.9% and on an adjusted1 basis, the 2015 effective tax rate was 24.0%. 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 retroactive impact of the Protecting Americans from Tax Hikes Act as well as the geographical mix of profits. The adjusted1 effective tax rate excludes the tax impacts associated with the following charges: restructuring and related costs, amortization of intangible assets and non-service retirement related costs.
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 in determining our overall effective tax rate. Certain foreign income is subject to U.S. tax net of any available foreign tax credits. Our full year effective tax rate for 2017 includes a benefit of 15.2-percentage points from these non-U.S. operations. The decrease in the percentage point benefit, as compared to the prior period benefit of approximately 22.6%, is primarily due to the decrease in foreign tax credit benefits. Refer to Note 18 - Income and Other Taxes, in the Consolidated Financial Statements for additional information regarding the geographic mix of income before taxes and the related impacts on our effective tax rate.
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 and other discrete items, we anticipate that our adjusted1 effective tax rate will be approximately 24% to 27% for full year 2018.
 _____________
(1)
See the "Non-GAAP Financial Measures" section for an explanation of the adjusted effective tax rate non-GAAP financial measure.
Tax Cuts and Jobs Act (the “Tax Act”)
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted in the U.S. The Tax Act significantly revises the U.S. corporate income tax system by, among other things, lowering the U.S. statutory corporate income tax rate from 35% to 21% and implementing a territorial tax system that includes a transition tax on deemed repatriated earnings of foreign subsidiaries.
During the fourth quarter 2017, we recorded an estimated non-cash provisional charge of $400 million reflecting the impact associated with the provisions of the Tax Act based on currently available information. Approximately $165 million of the charge is related to the deemed repatriation tax, $135 million from the re-measurement of U.S. deferred tax assets and liabilities to the lower enacted statutory tax rate and the remainder associated with other tax liabilities resulting from anticipated distributions of our net accumulated foreign earnings and profits. As a consequence of the Tax Act, we now anticipate the distribution of these foreign earnings and no longer consider them indefinitely reinvested. Additionally, we expect to utilize our existing foreign tax credit carryforward to settle the estimated deemed repatriation tax.
Our estimated charge incorporates assumptions made based on our current interpretation of the Tax Act as well as currently available information and may change, possibly materially, as we complete our analysis and receive additional clarification and implementation guidance. Changes in interpretations and assumptions as well as actions we may take as a result of the Tax Act may also impact this estimated charge.
Refer to Note 18 - Income and Other Taxes in the Consolidated Financial Statements for additional information regarding the estimated impacts of Tax Act.

Xerox 2017 Annual Report 42



Equity in Net Income of Unconsolidated Affiliates
 
Year Ended December 31,
(in millions)
2017
 
2016
 
2015
Total equity in net income of unconsolidated affiliates
$
115

 
$
127

 
$
109

Fuji Xerox after-tax restructuring and other costs included in equity income
10

 
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 $12 million in 2017 primarily reflects lower Fuji Xerox net income including approximately $6 million of costs related to audit and other fees associated with the independent investigation of Fuji Xerox's accounting practices. The increase in equity income of $18 million in 2016 primarily reflects higher Fuji Xerox net income in 2016.
Fuji Xerox is undertaking a restructuring initiative that is targeted to generate approximately $450 million of cost savings on an annualized basis. The details and timing of this initiative as well as the related costs are expected to be further developed during 2018.
We have revised Equity in net income of unconsolidated affiliates for all applicable prior periods presented throughout this document. Refer to Note 2 - Correction of Fuji Xerox Misstatement in Prior Period Financial Statements in the Consolidated Financial Statements, for additional information on this revision. Refer to Note 10 - Investment in Affiliates, at Equity, in the Consolidated Financial Statements for additional information regarding our investment in Fuji Xerox.
Net Income from Continuing Operations
Net income from continuing operations attributable to Xerox for the year ended December 31, 2017 was $192 million, or $0.70 per diluted share and includes an estimated non-cash charge of $400 million or $1.55 per diluted share impact for the provisions associated with the Tax Act. Refer to the Tax Cuts and Jobs Act (the “Tax Act”) section above, as well as Note 18 - Income and Other Taxes in the Consolidated Financial Statements for additional information.
On an adjusted1 basis, net income from continuing operations attributable to Xerox was $915 million, or $3.48 per diluted share, and reflects adjustments for the amortization of intangible assets, restructuring and related costs, and non-service retirement-related costs as well as other discrete, unusual or infrequent items, including the impact from the Tax Act.
Net income from continuing operations attributable to Xerox for the year ended December 31, 2016 was $622 million, or $2.33 per diluted share. On an adjusted1 basis, net income from continuing operations attributable to Xerox was $927 million, or $3.53 per diluted share, and reflects adjustments for the amortization of intangible assets, restructuring and related costs, and non-service retirement-related costs.
Net income from continuing operations attributable to Xerox for the year ended December 31, 2015 was $822 million, or $2.97 per diluted share. On an adjusted1 basis, net income from continuing operations attributable to Xerox was $952 million, or $3.45 per diluted share, and reflects adjustments for the amortization of intangible assets, restructuring and related costs, and non-service retirement-related costs.
Refer to our Non-GAAP Financial Measures section for additional information on adjustments to net income and the calculation of adjusted EPS.
_____________
(1)
See the "Non-GAAP Financial Measures" section for a reconciliation of reported net income from continuing operations to adjusted net income.
Discontinued Operations
Discontinued operations primarily relate to our Business Process Outsourcing (BPO) business, which was separated effective December 31, 2016, and the Information Technology Outsourcing (ITO) business, which was sold on June 30, 2015.
Refer to Note 5 - Divestitures in the Consolidated Financial Statements for additional information regarding discontinued operations.

Xerox 2017 Annual Report 43



Other Comprehensive Income (Loss)
The historical Consolidated Statements of Comprehensive Income (Loss) for 2016 and 2015 have not been revised to reflect the Separation. Accordingly, all reported amounts reflect movements in Accumulated Other Comprehensive Loss for both Continuing Operations and Discontinued Operations. Refer to Note 5 - Divestitures for additional information regarding the Separation.
Other comprehensive income attributable to Xerox was $589 million in 2017 as compared to a loss of $233 million in 2016. The increase of $822 million was primarily due to the $830 million increase in gains from the translation of our foreign currency denominated net assets. Translation gains in 2017 reflect the strengthening of the Euro, Pound Sterling and Canadian Dollar as compared to the U.S. Dollar, partially offset by the weakening of the Brazilian Real.
Other comprehensive loss attributable to Xerox was