Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-Q
_______________
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2017
OR
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
  xrxlogoaa02a01a01a01a10.jpg
XEROX CORPORATION
(Exact Name of Registrant as specified in its charter)
New York
 
16-0468020
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
P.O. Box 4505, 201 Merritt 7
Norwalk, Connecticut
 
06851-1056
(Address of principal executive offices)
 
(Zip Code)
(203) 968-3000
(Registrant’s telephone number, including area code)
45 Glover Avenue, Norwalk, CT 06856-4505
(Former Address of principal executive offices)
_________________________________________________  
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by 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 the 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 a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x
Class
 
Outstanding at March 31, 2017
Common Stock, $1 par value
 
1,016,584,429 shares



FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q and any exhibits to this Report may contain "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “will,” “should” and similar expressions, as they relate to us, are intended to identify forward-looking statements. These statements reflect Management's current beliefs, assumptions and expectations and are subject to a number of factors that may cause actual results to differ materially. Such factors include, but are not limited to: 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 conditions, 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 markets 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 (BPO) business; and other factors that are set forth in the “Risk Factors” section, the “Legal Proceedings” section, the “Management's Discussion and Analysis of Financial Condition and Results of Operations” section and other sections of this Quarterly Report on Form 10-Q and our 2016 Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC). Xerox assumes no obligation to update any forward-looking statements as a result of new information or future events or developments, except as required by law.

Fuji Xerox Co., Ltd. (“Fuji Xerox”) is a joint venture between Xerox Corporation and Fujifilm Holdings Corporation (“Fujifilm”) in which Xerox holds a 25% equity interest and Fujifilm holds the remaining equity interest. On April 20, 2017, Fujifilm publicly announced it formed an independent investigation committee 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 sales leasing transactions that occurred in, or prior to, Fuji Xerox’s fiscal year ending March 31, 2016. In first quarter 2017, we recognized a charge of approximately $30 million, which represents our share of the current Fujifilm total adjustments from this review, as publicly disclosed by Fujifilm. Fujifilm has publicly stated that it expects the investigation will be completed in May 2017, and that it intends to disclose the results shortly thereafter. Given our status as a minority investor, we have limited contractual and other rights to information and rely on Fuji Xerox and Fujifilm to provide information to us and are not involved in the investigation, including its scope and timing of completion. Although we have no reason not to rely on Fujifilm’s current adjustment and we are not aware of any additional amounts related to this matter that would have a material effect on our financial statements including the related Xerox disclosures, this investigation is ongoing and our future results may include additional adjustments that are materially different from the amount of the charge that we have already recognized in connection with this matter and the period(s) to which the charge relates, and we can provide no assurances relative to the outcome of any governmental investigations or any consequences thereof. In addition, the summarized financial data we have reported for Fuji Xerox may change based on the results of the investigation.

 

Xerox 2017 Form 10-Q
1



XEROX CORPORATION
FORM 10-Q
March 31, 2017
TABLE OF CONTENTS
 
 
Page
 
Item 1.
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
Item 4.
 
 
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 6.
For additional information about Xerox Corporation and access to our Annual Reports to Shareholders and SEC filings, free of charge, please visit our website at www.xerox.com/investor. Any information on or linked from the website is not incorporated by reference into this Form 10-Q.
 

Xerox 2017 Form 10-Q
2


PART I — FINANCIAL INFORMATION
ITEM 1 — FINANCIAL STATEMENTS

XEROX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 
 
Three Months Ended
March 31,
(in millions, except per-share data)
 
2017
 
2016
Revenues
 
 
 
 
Sales
 
$
936

 
$
1,003

Services, maintenance and rentals
 
1,442

 
1,529

Financing
 
76

 
83

Total Revenues
 
2,454

 
2,615

Costs and Expenses
 
 
 
 
Cost of sales
 
567

 
614

Cost of services, maintenance and rentals
 
900

 
950

Cost of financing
 
33

 
33

Research, development and engineering expenses
 
118

 
126

Selling, administrative and general expenses
 
664

 
701

Restructuring and related costs
 
120

 
100

Amortization of intangible assets
 
14

 
14

Other expenses, net
 
54

 
45

Total Costs and Expenses
 
2,470

 
2,583

(Loss) Income before Income Taxes and Equity Income
 
(16
)
 
32

Income tax benefit
 
(24
)
 
(2
)
Equity in net income of unconsolidated affiliates
 
16

 
37

Income from Continuing Operations
 
24

 
71

Loss from discontinued operations, net of tax
 
(6
)
 
(35
)
Net Income
 
18

 
36

Less: Net income attributable to noncontrolling interests
 
2

 
2

Net Income Attributable to Xerox
 
$
16

 
$
34

 
 
 
 
 
Amounts Attributable to Xerox:
 
 
 
 
Net income from continuing operations
 
$
22

 
$
69

Net loss from discontinued operations
 
(6
)
 
(35
)
Net Income Attributable to Xerox
 
$
16

 
$
34

 
 
 
 
 
Basic Earnings (Loss) per Share:
 
 
 
 
Continuing operations
 
$
0.02

 
$
0.06

Discontinued operations
 
(0.01
)
 
(0.03
)
Total Basic Earnings per Share
 
$
0.01

 
$
0.03

Diluted Earnings (Loss) per Share:
 
 
 
 
Continuing operations
 
$
0.02

 
$
0.06

Discontinued operations
 
(0.01
)
 
(0.03
)
Total Diluted Earnings per Share
 
$
0.01

 
$
0.03


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


Xerox 2017 Form 10-Q
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XEROX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 
 
Three Months Ended
March 31,
(in millions)
 
2017
 
2016
Net income
 
$
18

 
$
36

Less: Net income attributable to noncontrolling interests
 
2

 
2

Net Income Attributable to Xerox
 
16

 
34

 
 
 
 
 
Other Comprehensive Income (Loss), Net(1):
 

 

Translation adjustments, net
 
136

 
191

Unrealized gains, net
 
8

 
9

Changes in defined benefit plans, net
 
26

 
(112
)
Other Comprehensive Income, Net
 
170

 
88

Less: Other comprehensive income, net attributable to noncontrolling interests
 
1

 
—

Other Comprehensive Income, Net Attributable to Xerox
 
169

 
88

 
 
 
 
 
Comprehensive Income, Net
 
188

 
124

Less: Comprehensive income, net attributable to noncontrolling interests
 
3

 
2

Comprehensive Income, Net Attributable to Xerox
 
$
185

 
$
122

__________________________

(1) Refer to Note 14 - Other Comprehensive Income for gross components of Other Comprehensive Income, reclassification adjustments out of Accumulated Other Comprehensive Loss and related tax effects.


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


Xerox 2017 Form 10-Q
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XEROX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in millions, except share data in thousands)
 
March 31,
2017
 
December 31,
2016
Assets
 
 
 
 
Cash and cash equivalents
 
$
1,045

 
$
2,223

Accounts receivable, net
 
985

 
961

Billed portion of finance receivables, net
 
100

 
90

Finance receivables, net
 
1,261

 
1,256

Inventories
 
898

 
841

Assets of discontinued operations
 
—

 
1,002

Other current assets
 
426

 
619

Total current assets
 
4,715

 
6,992

Finance receivables due after one year, net
 
2,345

 
2,398

Equipment on operating leases, net
 
472

 
475

Land, buildings and equipment, net
 
641

 
660

Investments in affiliates, at equity
 
1,477

 
1,388

Intangible assets, net
 
280

 
290

Goodwill
 
3,808

 
3,787

Deferred tax assets, long-term
 
1,489

 
1,472

Other long-term assets
 
689

 
683

Total Assets
 
$
15,916

 
$
18,145

Liabilities and Equity
 
 
 
 
Short-term debt and current portion of long-term debt
 
$
13

 
$
1,011

Accounts payable
 
1,148

 
1,126

Accrued compensation and benefits costs
 
409

 
420

Unearned income
 
176

 
187

Liabilities of discontinued operations
 
—

 
1,002

Other current liabilities
 
878

 
908

Total current liabilities
 
2,624

 
4,654

Long-term debt
 
4,988

 
5,305

Pension and other benefit liabilities
 
2,239

 
2,240

Post-retirement medical benefits
 
694

 
698

Other long-term liabilities
 
191

 
193

Total Liabilities
 
10,736

 
13,090

 
 
 
 
 
Commitments and Contingencies (See Note 16)
 


 


Convertible Preferred Stock
 
214

 
214

 
 
 
 
 
Common stock
 
1,017

 
1,014

Additional paid-in capital
 
3,101

 
3,098

Retained earnings
 
4,987

 
5,039

Accumulated other comprehensive loss
 
(4,179
)
 
(4,348
)
Xerox shareholders’ equity
 
4,926

 
4,803

Noncontrolling interests
 
40

 
38

Total Equity
 
4,966

 
4,841

Total Liabilities and Equity
 
$
15,916

 
$
18,145

 
 
 
 
 
Shares of common stock issued and outstanding
 
1,016,584

 
1,014,375


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

Xerox 2017 Form 10-Q
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XEROX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
 
Three Months Ended March 31,
(in millions)
 
2017
 
2016
Cash Flows from Operating Activities:
 
 
 
 
Net income
 
$
18

 
$
36

Loss from discontinued operations, net of tax
 
6

 
35

Income from continuing operations
 
24

 
71

Adjustments required to reconcile net income to cash flows from operating activities:
 
 
 
 
Depreciation and amortization
 
133

 
142

Provision for receivables
 
13

 
13

Provision for inventory
 
5

 
9

Net gain on sales of businesses and assets
 
—

 
(20
)
Undistributed equity in net income of unconsolidated affiliates
 
(16
)
 
(37
)
Stock-based compensation
 
13

 
10

Restructuring and asset impairment charges
 
110

 
98

Payments for restructurings
 
(60
)
 
(21
)
Defined benefit pension cost
 
62

 
43

Contributions to defined benefit pension plans
 
(23
)
 
(34
)
Increase in accounts receivable and billed portion of finance receivables
 
(77
)
 
(49
)
Collections of deferred proceeds from sales of receivables
 
48

 
59

Increase in inventories
 
(58
)
 
(99
)
Increase in equipment on operating leases
 
(52
)
 
(62
)
Decrease in finance receivables
 
65

 
64

Collections on beneficial interest from sales of finance receivables
 
6

 
8

Increase in other current and long-term assets
 
(57
)
 
(37
)
Increase (decrease) in accounts payable and accrued compensation
 
21

 
(76
)
Increase (decrease) in other current and long-term liabilities
 
3

 
(64
)
Net change in income tax assets and liabilities
 
(41
)
 
(32
)
Net change in derivative assets and liabilities
 
55

 
17

Other operating, net
 
16

 
84

Net cash provided by operating activities of continuing operations
 
190

 
87

Net cash used in operating activities of discontinued operations
 
(80
)
 
(112
)
Net cash provided by (used in) operating activities
 
110

 
(25
)
Cash Flows from Investing Activities:
 
 
 
 
Cost of additions to land, buildings and equipment
 
(17
)
 
(19
)
Proceeds from sales of land, buildings and equipment
 
1

 
19

Cost of additions to internal use software
 
(9
)
 
(13
)
Acquisitions, net of cash acquired
 
(11
)
 
(18
)
Other investing, net
 
1

 
1

Net cash used in investing activities of continuing operations
 
(35
)
 
(30
)
Net cash used in investing activities of discontinued operations
 
—

 
(95
)
Net cash used in investing activities
 
(35
)
 
(125
)
Cash Flows from Financing Activities:
 
 
 
 
Net proceeds on short-term debt
 
1

 
749

Proceeds from issuance of long-term debt
 
3

 
4

Payments on long-term debt
 
(1,328
)
 
(708
)
Common stock dividends
 
(81
)
 
(71
)
Preferred stock dividends
 
(6
)
 
(6
)
Proceeds from issuances of common stock
 
—

 
1

Repurchases related to stock-based compensation
 
(7
)
 
—

Distributions to noncontrolling interests
 
(1
)
 
(11
)
Proceeds from Conduent
 
161

 
—

Net cash used in financing activities
 
(1,258
)
 
(42
)
Effect of exchange rate changes on cash and cash equivalents
 
5

 
12

Increase in cash of discontinued operations
 
—

 
(2
)
Decrease in cash and cash equivalents
 
(1,178
)
 
(182
)
Cash and cash equivalents at beginning of period
 
2,223

 
1,228

Cash and Cash Equivalents at End of Period
 
$
1,045

 
$
1,046

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

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XEROX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in millions, except per-share data and where otherwise noted)

Note 1 – Basis of Presentation
References herein to “we,” “us,” “our,” the “Company” and “Xerox” refer to Xerox Corporation and its consolidated subsidiaries unless the context suggests otherwise.
We have prepared the accompanying unaudited Condensed Consolidated Financial Statements in accordance with the accounting policies described in our 2016 Annual Report on Form 10-K (2016 Annual Report), and the interim reporting requirements of Form 10-Q. Accordingly, certain information and note disclosures normally included in our annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. You should read these Condensed Consolidated Financial Statements in conjunction with the Consolidated Financial Statements included in our 2016 Annual Report.
In our opinion, all adjustments which are necessary for a fair statement of financial position, operating results and cash flows for the interim periods presented have been made. These adjustments consist of normal recurring items. Interim results of operations are not necessarily indicative of the results of the full year.
For convenience and ease of reference, we refer to the financial statement caption “(Loss) Income before Income Taxes and Equity Income” as “pre-tax (loss) income.”
Overview
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”). The Separation and Distribution were structured to be tax-free for Xerox Corporation stockholders for federal income tax purposes. Conduent is now an independent public company trading on the New York Stock Exchange (“NYSE”) under the symbol “CNDT”. After the Separation, Xerox retained the DT/DO businesses and Xerox does not beneficially own any shares of Conduent common stock.
As a result of the Separation and Distribution, the financial position and results of operations of the BPO business are presented as discontinued operations and, as such, have been excluded from continuing operations for all periods presented. The accompanying Notes to the Condensed Consolidated Financial Statements have all been revised to reflect the effect of the Separation and Distribution and all prior year balances have been revised accordingly to reflect continuing operations only. The historical statements of Comprehensive Income (Loss) and Shareholders' Equity have not been revised to reflect the Separation and instead reflect the Separation and Distribution as a final adjustment to the balances at December 31, 2016. Refer to Note 3 - Divestitures for additional information regarding discontinued operations.
In connection with the Separation, Xerox entered into several agreements with Conduent to (1) effect the legal and structural separation of Xerox and Conduent, (2) govern the relationship between Xerox and Conduent up to and after the completion of the Separation and (3) allocate between Xerox and Conduent various assets, liabilities and obligations, including, among other things, employee benefits and tax-related assets and liabilities. The agreements entered into included a separation and distribution agreement, a transition service agreement, a tax matters agreement, an employee matters agreement, an intellectual property agreement and a trademark license agreement.
Segment Discussion
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

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addition, all significant operating decisions are largely based upon an analysis of Xerox at the consolidated level, including assessments related to the Company’s incentive compensation plan, as well as operating decisions at the Board level.

Note 2 – Recent Accounting Pronouncements
Revenue Recognition
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), to supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing U.S. GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 is effective for our fiscal year beginning January 1, 2018. Subsequent to the issuance of ASU 2014-09, the FASB issued the following ASU’s which amend or provide additional guidance on topics addressed in ASU 2014-09. In March 2016, the FASB issued ASU 2016-08, Revenue Recognition - Principal versus Agent (reporting revenue gross versus net). In April 2016, the FASB issued ASU 2016-10, Revenue Recognition - Identifying Performance Obligations and Licenses. In May 2016, the FASB issued ASU 2016-12, Revenue Recognition - Narrow Scope Improvements and Practical Expedients. We will adopt this standard beginning January 1, 2018 and expect to use the permitted modified retrospective method. Under current revenue recognition guidance, a significant majority of our revenue is recorded when we invoice customers, as that is normally the point at which all the revenue recognition criteria are met. Under ASU 2014-09, we expect the unit of accounting, that is, the identification of performance obligations, will be consistent with current revenue guidance. Additionally, based on the nature of our contracts we expect to continue to recognize revenue upon invoicing the customer for the large majority of our revenue when we adopt ASU 2014-09. Accordingly, the adoption of this standard is not expected to have a material impact for the large majority of our revenues. Additionally, a significant portion of our equipment sales are either recorded as sales-type leases or through direct sales to distributors and resellers and these sales are not expected to be impacted by the adoption of ASU 2014-09. We are continuing to evaluate certain contracts, which are more complex or where revenue recognition criteria are not currently met when invoicing occurs, to determine their treatment under ASU 2014-09. Although at this time we don’t expect a material change in our revenue recognition, in 2017 we expect to continue to evaluate the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements. Additionally, we are also assessing the impacts of the disclosures and cost deferral guidance required by ASU 2014-09. ASU 2014-09 requires additional disclosures. Our deferral of costs are minimal under our current practice and therefore the new guidance is expected to require more cost deferrals upon adoption. We are currently assessing the types and amounts of costs that may be eligible for deferral under the new standard.
Leases
In February 2016, the FASB issued ASU 2016-02, Leases. This update requires the recognition of leased assets and lease obligations by lessees for those leases currently classified as operating leases under existing lease guidance. Short term leases with a term of 12 months or less are not required to be recognized. The update also requires disclosure of key information about leasing arrangements to increase transparency and comparability among organizations. The accounting for lessors does not fundamentally change except for changes to conform and align guidance to the lessee guidance as well as to the new revenue recognition guidance in ASU 2014-09. This update is effective for our fiscal year beginning January 1, 2019. We are currently evaluating the impact of the adoption of ASU 2016-02 on our consolidated financial statements. The aggregate undiscounted value of our operating lease commitments at December 31, 2016 was approximately $450.
Cash Flows
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments. This update provides specific guidance on eight cash flow classification issues where current GAAP is either unclear or does not include specific guidance. This update is effective for our fiscal year beginning January 1, 2018. This update includes specific guidance which requires cash collected on beneficial interests received in a sale of receivables be classified as inflows from investing activities. Currently, those collections are reported in operating cash flows. We reported $270 and $305 of collections on beneficial interests as operating cash inflows on the Statement of Cash Flows for the years ended December 31, 2016 and 2015, respectively. The other seven issues noted in this update are not expected to have a material impact on our financial condition, results of operations or cash flows.

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Additionally, in November 2016 the FASB issued ASU 2016-18, Statement of Cash Flows - Restricted Cash. The update requires that amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. We held $149 and $179 of restricted cash, currently reported in other current or long-term assets at March 31, 2017 and December 31, 2016, respectively. This update is effective for our fiscal year beginning January 1, 2018. We are currently evaluating the impact, if any, that the adoption of ASU 2016-18 may have on our statements of cash flows in future reporting periods.
Stock Compensation
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation, Improvements to Employee Share-Based Payment Accounting (Topic 718). This update includes provisions to simplify certain aspects related to the accounting for share-based awards and the related financial statement presentation. The update also requires that excess tax benefits and deficiencies be recorded in the income statement when the awards vest or are settled as compared to equity as allowed under certain conditions by current US GAAP. This change is required to be adopted prospectively in the period of adoption. In addition, the ASU modifies the classification of certain share-based payment activities within the statements of cash flows and these changes are required to be applied retrospectively to all periods presented. We adopted ASU 2016-09 effective for our fiscal year beginning January 1, 2017. The adoption of ASU No. 2016-09 is not expected to have a material impact on our financial condition, results of operations or cash flows. However, the impacts may vary and may add volatility to our income tax expense in future periods depending upon, among other things, the level of tax expense and the price of the Company's common stock at the date of vesting for share-based awards. For the three months ended March 31, 2017, we recognized $2 of additional tax expense related to the application of this update.
Income Taxes
In October 2016, the FASB issued ASU 2016-16, Income Taxes - Intra-Entity Transfers of Assets Other than Inventory. This update requires recognition of the income-tax consequences of an intra-entity transfer of assets other than inventory when the transfer occurs. Under current GAAP, recognition of the income tax consequences for asset transfers other than inventory could not be recognized until the asset was sold to a third party. This update is effective for our fiscal year beginning January 1, 2018 and should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. We are currently evaluating the impact of the adoption of ASU 2016-16 on our consolidated financial statements.
Financial Instruments - Credit Losses
In June 2016, the FASB issued ASU 2016-13, Financial Instruments Credit Losses - Measurement of Credit Losses on Financial Instruments, which requires measurement and recognition of expected credit losses for financial assets. The update impacts financial assets and net investment in leases that are not accounted for at fair value through net income. This update is effective for our fiscal year beginning January 1, 2020, with early adoption permitted as of January 1, 2019. We are currently evaluating the impact of the adoption of ASU 2016-13 on our consolidated financial statements.

Retirement Benefits
In March 2017, the FASB issued ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This update changes how employers that sponsor defined benefit pension plans and other postretirement plans present the net periodic benefit cost in the income statement. An employer is required to report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. Other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. The amendment also allows only the service cost component to be eligible for capitalization, when applicable. This update is effective for us beginning January 1, 2018. Although early adoption is permitted, we do not expect to early adopt. The amendment will be applied retrospectively for the presentation requirements and prospectively for the capitalization of the service cost component requirements. The adoption of this update is not expected to have a material impact on our financial condition, results of operations or cash flows.
Other Updates
In 2017, 2016 and 2015, the FASB also issued the following Accounting Standards Updates which did not have or are not expected to have a material impact on our financial condition, results of operations or cash flows upon adoption. Those updates are as follows:


Xerox 2017 Form 10-Q
9


•
Business Combinations: ASU 2017-01, Business Combinations (Topic 805) Clarifying the Definition of a Business. This update is effective for our fiscal year beginning January 1, 2020.

•
Equity Method Accounting: ASU 2016-07, Equity Method and Joint Venture Accounting (Topic 353), Simplifying the Transition to the Equity Method of Accounting. This update was effective for our fiscal year beginning January 1, 2017.

•
Intangibles - Goodwill and Other: ASU 2017-04, Simplifying the Goodwill Impairment Test. This update is effective for our fiscal year beginning January 1, 2020, with early adoption permitted.

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

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

Note 3 – Divestitures
Business Process Outsourcing (BPO)
As previously disclosed, on December 31, 2016, Xerox completed the Separation of its BPO business through the Distribution of all of the issued and outstanding stock of Conduent to Xerox Corporation stockholders. As a result of the Separation and Distribution, the financial position and results of operations of the BPO Business are presented as discontinued operations and, as such, have been excluded from continuing operations for all periods presented.
Separation costs were $8 for the three months ended March 31, 2017 and 2016 and are included in Loss from discontinued operations, net of tax, in the accompanying Condensed Consolidated Statements of Income. Separation costs are primarily for third-party investment banking, accounting, legal, consulting and other similar types of services related to the Separation transaction as well as costs associated with the operational separation of the two companies, such as those related to human resources, brand management, real estate and information management to the extent they were not capitalized. Separation costs also include the costs associated with bonuses and restricted stock grants awarded to employees for retention through the Separation.
Summarized financial information for our Discontinued Operations is as follows:
 
 
Three Months Ended
March 31,
 
 
2017
 
2016
Revenues
 
$
—

 
$
1,671

 
 
 
 
 
Cost of services
 
—

 
1,409

Other expenses(1)
 
8

 
311

Total costs and expenses
 
8

 
1,720

 
 
 
 
 
Net loss before income taxes
 
(8
)
 
(49
)
Income tax benefit
 
2

 
14

Loss from discontinued operations, net of tax
 
$
(6
)
 
$
(35
)
_____________
(1) In addition to the $8 of Separation related costs, 2016 includes $1 of interest on the $1.0 billion Senior Unsecured Term Facility, which was required to be repaid upon completion of the Separation and therefore was also reported in the Loss from discontinued operations.
Refer to Note 9 - Debt for additional information regarding the Separation Debt Activity.
In January 2017, as provided for in the Separation Agreement, we received a distribution from Conduent of $161 representing the final adjustment required to set Conduent's cash balance at $225 as of the Separation. This amount was recorded as a receivable from Conduent included in Other Current Assets at December 31, 2016. The cash receipt was reported in Cash Flows from Financing Activities in the Condensed Consolidated Statement of Cash Flows as it represented an adjustment to our Distribution of Conduent.

Xerox 2017 Form 10-Q
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Note 4 – Accounts Receivable, Net
Accounts receivable, net were as follows:
 
 
March 31, 2017
 
December 31, 2016
Invoiced
 
$
661

 
$
651

Accrued
 
380

 
374

Allowance for doubtful accounts
 
(56
)
 
(64
)
Accounts Receivable, Net
 
$
985

 
$
961


We perform ongoing credit evaluations of our customers and adjust credit limits based upon customer payment history and current creditworthiness. The allowance for uncollectible accounts receivables is determined principally on the basis of past collection experience as well as consideration of current economic conditions and changes in our customer collection trends.
Accounts Receivable Sales Arrangements
Accounts receivable sales arrangements are utilized in the normal course of business as part of our cash and liquidity management. We have facilities in the U.S., Canada and several countries in Europe that enable us to sell certain accounts receivable, without recourse, to third-parties. The accounts receivables sold are generally short-term trade receivables with payment due dates of less than 60 days.
All of our arrangements involve the sale of our entire interest in groups of accounts receivable for cash. In most instances a portion of the sales proceeds are held back by the purchaser and payment is deferred until collection of the related receivables sold. Such holdbacks are not considered legal securities nor are they certificated. We report collections on such receivables as operating cash flows in the Condensed Consolidated Statements of Cash Flows because such receivables are the result of an operating activity and the associated interest rate risk is de minimis due to their short-term nature. Our risk of loss following the sales of accounts receivable is limited to the outstanding deferred purchase price receivable. These receivables are included in Other current assets in the accompanying Consolidated Balance Sheets and were $53 and $48 at March 31, 2017 and December 31, 2016, respectively.
Under most of the arrangements, we continue to service the sold accounts receivable. When applicable, a servicing liability is recorded for the estimated fair value of the servicing. The amounts associated with the servicing liability were not material.
Of the accounts receivable sold and derecognized from our balance sheet, $473 and $531 remained uncollected as of March 31, 2017 and December 31, 2016, respectively.
Accounts receivable sales were as follows:
 
Three Months Ended
March 31,
 
2017
 
2016
Accounts receivable sales
$
511

 
$
592

Deferred proceeds
52

 
71

Loss on sales of accounts receivable
3

 
4

Estimated (decrease) increase to operating cash flows(1)
(65
)
 
26

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


Xerox 2017 Form 10-Q
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Note 5 - Finance Receivables, Net
Finance Receivables – Allowance for Credit Losses and Credit Quality
Finance receivables include sales-type leases, direct financing leases and installment loans arising from the marketing of our equipment. Our finance receivable portfolios are primarily in the U.S., Canada and Europe. We generally establish customer credit limits and estimate the allowance for credit losses on a country or geographic basis. Our policy and methodology used to establish our allowance for doubtful accounts has been consistently applied over all periods presented.
 
The following table is a rollforward of the allowance for doubtful finance receivables as well as the related investment in finance receivables:
Allowance for Credit Losses:
 
United States
 
Canada
 
Europe
 
Other(2)
 
Total
Balance at December 31, 2016
 
$
55

 
$
16

 
$
37

 
$
2

 
$
110

Provision
 
4

 
—

 
5

 
—

 
9

Charge-offs
 
(6
)
 
(2
)
 
(2
)
 
—

 
(10
)
Recoveries and other(3)
 
—

 
2

 
—

 
—

 
2

Balance at March 31, 2017
 
$
53

 
$
16

 
$
40

 
$
2

 
$
111

Finance receivables as of March 31, 2017 collectively evaluated for impairment (4)
 
$
2,108

 
$
382

 
$
1,276

 
$
51

 
$
3,817

 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2015(1)
 
$
54

 
$
17

 
$
45

 
$
2

 
$
118

Provision
 
4

 
1

 
5

 
—

 
10

Charge-offs
 
(2
)
 
(2
)
 
(2
)
 
—

 
(6
)
Recoveries and other(3)
 
1

 
2

 
1

 
—

 
4

Balance at March 31, 2016
 
$
57

 
$
18

 
$
49

 
$
2

 
$
126

Finance receivables as of March 31, 2016 collectively evaluated for impairment(4)
 
$
2,157

 
$
387

 
$
1,491

 
$
63

 
$
4,098

 __________________
(1)
In the first quarter 2016, as a result of an internal reorganization, a U.S. leasing unit previously classified in Other was reclassified to the U.S. Prior year amounts have been revised to conform to current year presentation.
(2)
Includes developing market countries and smaller units.
(3)
Includes the impacts of foreign currency translation and adjustments to reserves necessary to reflect events of non-payment such as customer accommodations and contract terminations.
(4)
Total Finance receivables exclude the allowance for credit losses of $111 and $126 at March 31, 2017 and 2016, respectively.
We evaluate our customers based on the following credit quality indicators:
•
Investment grade: This rating includes accounts with excellent to good business credit, asset quality and capacity to meet financial obligations. These customers are less susceptible to adverse effects due to shifts in economic conditions or changes in circumstance. The rating generally equates to a Standard & Poor's (S&P) rating of BBB- or better. Loss rates in this category are normally less than 1%.
•
Non-investment grade: This rating includes accounts with average credit risk that are more susceptible to loss in the event of adverse business or economic conditions. This rating generally equates to a BB S&P rating. Although we experience higher loss rates associated with this customer class, we believe the risk is somewhat mitigated by the fact that our leases are fairly well dispersed across a large and diverse customer base. In addition, the higher loss rates are largely offset by the higher rates of return we obtain with such leases. Loss rates in this category are generally in the range of 2% to 4%.
•
Substandard: This rating includes accounts that have marginal credit risk such that the customer’s ability to make repayment is impaired or may likely become impaired. We use numerous strategies to mitigate risk including higher rates of interest, prepayments, personal guarantees, etc. Accounts in this category include customers who were downgraded during the term of the lease from investment and non-investment grade evaluation when the lease was originated. Accordingly there is a distinct possibility for a loss of principal and interest or customer default. The loss rates in this category are approximately 10%.

Xerox 2017 Form 10-Q
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Credit quality indicators are updated at least annually and the credit quality of any given customer can change during the life of the portfolio. Details about our finance receivables portfolio based on industry and credit quality indicators are as follows:
 
March 31, 2017
 
December 31, 2016
 
Investment
Grade
 
Non-investment
Grade
 
Substandard
 
Total
Finance
Receivables
 
Investment
Grade
 
Non-investment
Grade
 
Substandard
 
Total
Finance
Receivables
Finance and other services
$
173

 
$
347

 
$
95

 
$
615

 
$
181

 
$
342

 
$
95

 
$
618

Government and education
520

 
63

 
7

 
590

 
543

 
57

 
8

 
608

Graphic arts
132

 
118

 
97

 
347

 
138

 
102

 
107

 
347

Industrial
81

 
77

 
24

 
182

 
82

 
78

 
24

 
184

Healthcare
81

 
49

 
17

 
147

 
79

 
47

 
17

 
143

Other
73

 
101

 
53

 
227

 
82

 
103

 
53

 
238

Total United States
1,060

 
755

 
293

 
2,108

 
1,105

 
729

 
304

 
2,138

Finance and other services
54

 
45

 
18

 
117

 
54

 
43

 
15

 
112

Government and education
50

 
5

 
3

 
58

 
52

 
6

 
2

 
60

Graphic arts
37

 
35

 
25

 
97

 
39

 
37

 
24

 
100

Industrial
21

 
13

 
8

 
42

 
21

 
13

 
6

 
40

Other
33

 
26

 
9

 
68

 
33

 
25

 
8

 
66

Total Canada
195

 
124

 
63

 
382

 
199

 
124

 
55

 
378

France
180

 
221

 
49

 
450

 
181

 
222

 
51

 
454

U.K./Ireland(4)
92

 
149

 
11

 
252

 
95

 
148

 
10

 
253

Central(1)
179

 
142

 
18

 
339

 
182

 
148

 
19

 
349

Southern(2)
35

 
138

 
13

 
186

 
36

 
131

 
14

 
181

Nordics(3)
26

 
22

 
1

 
49

 
26

 
22

 
1

 
49

Total Europe
512

 
672

 
92

 
1,276

 
520

 
671

 
95

 
1,286

Other
34

 
15

 
2

 
51

 
35

 
15

 
2

 
52

Total
$
1,801

 
$
1,566

 
$
450

 
$
3,817

 
$
1,859

 
$
1,539

 
$
456

 
$
3,854

_____________________________
(1)
Switzerland, Germany, Austria, Belgium and Holland.
(2)
Italy, Greece, Spain and Portugal.
(3)
Sweden, Norway, Denmark and Finland.
(4)
The December 31, 2016 amounts have been revised to conform to 2017 presentation.

Xerox 2017 Form 10-Q
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The aging of our billed finance receivables is based upon the number of days an invoice is past due and is as follows:
 
March 31, 2017
 
Current
 
31-90
Days
Past Due
 
>90 Days
Past Due
 
Total Billed
 
Unbilled
 
Total
Finance
Receivables
 
>90 Days
and
Accruing
Finance and other services
$
15

 
$
2

 
$
2

 
$
19

 
$
596

 
$
615

 
$
12

Government and education
16

 
1

 
3

 
20

 
570

 
590

 
25

Graphic arts
13

 
1

 
—

 
14

 
333

 
347

 
4

Industrial
5

 
1

 
1

 
7

 
175

 
182

 
6

Healthcare
4

 
1

 
1

 
6

 
141

 
147

 
6

Other
11

 
2

 
2

 
15

 
212

 
227

 
4

Total United States
64

 
8

 
9

 
81

 
2,027

 
2,108

 
57

Canada
3

 
—

 
—

 
3

 
379

 
382

 
10

France
3

 
—

 
—

 
3

 
447

 
450

 
21

U.K./Ireland
2

 
—

 
—

 
2

 
250

 
252

 
—

Central(1)
3

 
1

 
—

 
4

 
335

 
339

 
6

Southern(2)
4

 
1

 
2

 
7

 
179

 
186

 
6

Nordics(3)
1

 
—

 
—

 
1

 
48

 
49

 
—

Total Europe
13

 
2

 
2

 
17

 
1,259

 
1,276

 
33

Other
2

 
—

 
—

 
2

 
49

 
51

 
—

Total
$
82

 
$
10

 
$
11

 
$
103

 
$
3,714

 
$
3,817

 
$
100

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
Current
 
31-90
Days
Past Due
 
>90 Days
Past Due
 
Total Billed
 
Unbilled
 
Total
Finance
Receivables
 
>90 Days
and
Accruing
Finance and other services
$
13

 
$
3

 
$
1

 
$
17

 
$
601

 
$
618

 
$
11

Government and education
10

 
4

 
3

 
17

 
591

 
608

 
25

Graphic arts
13

 
1

 
—

 
14

 
333

 
347

 
5

Industrial
4

 
1

 
1

 
6

 
178

 
184

 
5

Healthcare
3

 
1

 
1

 
5

 
138

 
143

 
5

Other
9

 
2

 
1

 
12

 
226

 
238

 
5

Total United States
52

 
12

 
7

 
71

 
2,067

 
2,138

 
56

Canada
3

 
—

 
—

 
3

 
375

 
378

 
8

France
3

 
—

 
—

 
3

 
451

 
454

 
20

U.K./Ireland
2

 
1

 
—

 
3

 
250

 
253

 
1

Central(1)
2

 
1

 
—

 
3

 
346

 
349

 
5

Southern(2)
5

 
1

 
1

 
7

 
174

 
181

 
6

Nordics(3)
1

 
—

 
—

 
1

 
48

 
49

 
1

Total Europe
13

 
3

 
1

 
17

 
1,269

 
1,286

 
33

Other
3

 
—

 
—

 
3

 
49

 
52

 
—

Total
$
71

 
$
15

 
$
8

 
$
94

 
$
3,760

 
$
3,854

 
$
97

 _____________________________
(1)
Switzerland, Germany, Austria, Belgium and Holland.
(2)
Italy, Greece, Spain and Portugal.
(3)
Sweden, Norway, Denmark and Finland.


Xerox 2017 Form 10-Q
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Note 6 – Inventories
The following is a summary of Inventories by major category:
 
March 31, 2017
 
December 31, 2016
Finished goods
$
740

 
$
713

Work-in-process
61

 
47

Raw materials
97

 
81

Total Inventories
$
898

 
$
841


Note 7 – Investment in Affiliates, at Equity
Our Equity in net income of unconsolidated affiliates was as follows:
 
Three Months Ended
March 31,
 
2017
 
2016
Fuji Xerox
$
13

 
$
33

Other investments
3

 
4

Total Equity in Net Income of Unconsolidated Affiliates
$
16

 
$
37

Fuji Xerox
Equity in net income of Fuji Xerox is affected by certain adjustments required to reflect the deferral of profit associated with intercompany sales. These adjustments may result in recorded equity income that is different from that implied by our 25% ownership interest.
In the first quarter 2017, our Fuji Xerox equity earnings included an out-of-period adjustment of receivables. The receivables adjustment was the result of a review of accounting practices at Fuji Xerox’s New Zealand subsidiary (FXNZ) 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. Fuji Xerox’s parent, Fujifilm Holdings Corporation, is in the process of completing its investigation. Our equity earnings in the first quarter include a charge of approximately $30, which represents our share of the current Fujifilm adjustments from this review. The impact of this adjustment was not considered to be material to any of our individual prior quarters or years and is not considered to be material to Xerox's anticipated full year 2017 results. While the investigation is ongoing, we are not currently aware of any additional adjustments related to this matter that would have a material effect on our financial statements.
Summarized financial data of Fuji Xerox, which includes a portion of the current Fujifilm receivables adjustment, was as follows:
 
Three Months Ended
March 31(2),
 
2017
 
2016
Summary of Operations:
 
 
 
Revenues
$
2,533

 
$
2,678

Costs and expenses
2,316

 
2,464

Income before income taxes
217

 
214

Income tax expense
65

 
65

Net Income
152

 
149

Less: Net income – noncontrolling interests
2

 
2

Net Income – Fuji Xerox
$
150

 
$
147

Weighted Average Exchange Rate(1)
113.56

 
115.08

_____________________________
(1)
Represents Yen/U.S. Dollar exchange rate used to translate.
(2)
Until the investigation by Fujifilm is completed, the periods in which the current receivables adjustment may be recorded by FXNZ are subject to change, including the final amount of any adjustments for each of the three months ended March 31 in this table. In the first quarter 2017, one of the primary differences between the equity income we recorded for Fuji Xerox and our implied 25% share of Fuji Xerox’s first quarter 2017 net income in the summarized financial data is an additional amount recorded for the FXNZ adjustment.


Xerox 2017 Form 10-Q
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Note 8 – Restructuring Programs
During the three months ended March 31, 2017, we recorded net restructuring and asset impairment charges of $110, which included approximately $110 of severance costs related to headcount reductions of approximately 1,000 employees worldwide and $2 of lease cancellation costs. These costs were offset by $2 of net reversals, primarily resulting from changes in estimated reserves from prior period initiatives.
We also recorded $10 of costs during the three months ended March 31, 2017, primarily related to professional support services associated with the implementation of the Strategic Transformation program.
Information related to restructuring program activity during the three months ended March 31, 2017 is outlined below:
 
Severance and
Related Costs
 
Lease Cancellation
and Other Costs
 
Asset Impairments(2)
 
Total
Balance at December 31, 2016
$
104

 
$
23

 
$
—

 
$
127

Provision
110

 
2

 
—

 
112

Reversals
(2
)
 
—

 
—

 
(2
)
Net Current Period Charges(1)
108

 
2

 
—

 
110

Charges against reserve and currency
(58
)
 
(1
)
 
—

 
(59
)
Balance at March 31, 2017
$
154

 
$
24

 
$
—

 
$
178

 _____________________________
(1)
Represents net amount recognized within the Condensed Consolidated Statements of Income for the period shown for restructuring and asset impairments charges.
(2)
Charges associated with asset impairments represent the write-down of the related assets to their new cost basis and are recorded concurrently with the recognition of the provision.
The following table summarizes the reconciliation to the Condensed Consolidated Statements of Cash Flows:
 
Three Months Ended
March 31,
 
2017
 
2016
Charges against reserve and currency
$
(59
)
 
$
(19
)
Asset impairments
—

 
—

Effects of foreign currency and other non-cash items
(1
)
 
(2
)
Restructuring Cash Payments
$
(60
)
 
$
(21
)

 
Note 9 – Debt

Debt Exchange
In March 2017, we completed a private offering to exchange portions of certain outstanding Senior Notes due 2018 through 2020 (collectively, the old notes), listed below, for $300 of new Senior Notes due 2022 and $322 in cash consideration, which includes a $22 exchange premium.
The following principal amounts of each series of old notes were validly tendered and subsequently cancelled:
Maturity Date
 
Coupon
 
Principal Amount Exchanged
 
4.07% Senior Notes Due March 2022
 
Cash Consideration
Senior Notes due May 15, 2018
 
6.350
%
 
$
260

 
130

 
143

Senior Notes due March 15, 2019
 
2.750
%
 
94

 
47

 
48

Senior Notes due December 15, 2019
 
5.625
%
 
96

 
48

 
56

Senior Notes due May 15, 2020
 
2.800
%
 
87

 
44

 
43

Senior Notes due August 20, 2020
 
3.500
%
 
38

 
19

 
20

Senior Notes due September 1, 2020
 
2.750
%
 
25

 
12

 
12

Total
 
 
 
$
600

 
$
300

 
$
322


Xerox 2017 Form 10-Q
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The new Senior Notes bear a fixed coupon rate of 4.07% and are due in March 2022. There were no other significant changes to the terms between the old and new Senior Notes. We recorded a loss of approximately $9 for the exchange premium and other carrying value adjustments related to the portion of the old notes exchanged for cash. However, the old notes exchanged for the new Senior Notes were accounted for as a debt modification and therefore approximately $9 related to the exchange premium and other carrying value adjustments for that portion was carried over as an adjustment to the carrying value of new Senior Notes and is expected to be accreted over the term of the new Senior Notes. Transaction costs incurred on the exchange and paid to third parties of $4 were expensed as part of the loss.
Separation Debt Activity
In connection with the Separation, Conduent made a cash distribution of approximately $1.8 billion to Xerox in the fourth quarter 2016. Xerox used a portion of the cash distribution proceeds to repay its $1.0 billion Senior Unsecured Term Facility in January 2017, which was required to be repaid upon completion of the Separation. This $1.0 billion of cash and debt was excluded from the Cash and cash equivalents and Total Debt at December 31, 2016, respectively, and was reported in Current Assets and Current Liabilities of discontinued operations at December 31, 2016, respectively. In addition, due to the segregation of this cash at year-end, the payment was treated as a non-cash activity for the quarter ended March 31, 2017. Interest expense associated with this borrowing incurred during 2016 was included in Loss from discontinued operations, net of tax. Xerox used the balance of the proceeds received as well as cash on hand to repay its $500 6.75% Senior Notes and $500 2.95% Senior Notes that came due in first quarter 2017.

Interest Expense and Income
Interest expense and interest income were as follows:
 
Three Months Ended
March 31,
 
2017
 
2016
Interest expense(1)
$
69

 
$
87

Interest income(2)
78

 
84

____________
(1)
Includes Cost of financing as well as non-financing interest expense that is included in Other expenses, net in the Condensed Consolidated Statements of Income.
(2)
Includes Finance income as well as other interest income that is included in Other expenses, net in the Condensed Consolidated Statements of Income.


Note 10 – Financial Instruments
Interest Rate Risk Management
We use interest rate swap agreements to manage our interest rate exposure and to achieve a desired proportion of variable and fixed rate debt. These derivatives may be designated as fair value hedges or cash flow hedges depending on the nature of the risk being hedged.
Fair Value Hedges
As of March 31, 2017, pay variable/receive fixed interest rate swaps with notional amounts of $300 and net asset fair value of $3 were designated and accounted for as fair value hedges. The swaps were structured to hedge the fair value of related debt by converting them from fixed rate instruments to variable rate instruments.
The following is a summary of our fair value hedges at March 31, 2017:
Debt Instrument
 
Year First Designated
 
Notional Amount
 
Net Fair Value
 
Weighted Average Interest Rate Paid
 
Interest Rate Received
 
Basis
 
Maturity
Senior Note 2021
 
2014
 
$
300

 
$
3

 
2.65
%
 
4.5
%
 
Libor
 
2021

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17


Foreign Exchange Risk Management
We are a global company that is exposed to foreign currency exchange rate fluctuations in the normal course of our business. As a part of our foreign exchange risk management strategy, we use derivative instruments, primarily forward contracts and purchased option contracts, to hedge the following foreign currency exposures, thereby reducing volatility of earnings or protecting fair values of assets and liabilities:
 
•
Foreign currency-denominated assets and liabilities
•
Forecasted purchases and sales in foreign currency
At March 31, 2017 and December 31, 2016, we had outstanding forward exchange and purchased option contracts with gross notional values of $3,125 and $3,149 respectively, with terms of less than 12 months. The associated currency exposures being hedged at March 31, 2017 were materially consistent with our year-end currency exposures, with the exception of our Euro/U.K. Pound Sterling exposure, which decreased by approximately $340, and our U.K. Pound Sterling/Euro exposure, which increased by approximately $290 (currencies hedged - buy/sell). There has not been any material change in our hedging strategy.
Foreign Currency Cash Flow Hedges
We designate a portion of our foreign currency derivative contracts as cash flow hedges of our foreign currency-denominated expenses. The net liability fair value of these contracts were $8 and $20 as of March 31, 2017 and December 31, 2016, respectively.

Summary of Derivative Instruments Fair Value
The following table provides a summary of the fair value amounts of our derivative instruments:
Designation of Derivatives
 
Balance Sheet Location
 
March 31, 2017
 
December 31, 2016
Derivatives Designated as Hedging Instruments
 
 
 
 
Foreign exchange contracts - forwards
 
Other current assets
 
$
5

 
$
6

 
 
Other current liabilities
 
(13
)
 
(26
)
Foreign currency options
 
Other current assets
 
—

 
—

 
 
Other current liabilities
 
—

 
—

Interest rate swaps
 
Other long-term assets
 
3

 
4

 
 
Other long-term liabilities
 
—

 
—

 
 
Net Designated Derivative Liability
 
$
(5
)
 
$
(16
)
 
 
 
 
 
 
 
Derivatives NOT Designated as Hedging Instruments
 
 
 
 
Foreign exchange contracts – forwards
 
Other current assets
 
$
27

 
$
82

 
 
Other current liabilities
 
(11
)
 
(13
)
 
 
Net Undesignated Derivative Asset
 
$
16

 
$
69

 
 
 
 
 
 
 
Summary of Derivatives
 
Total Derivative Assets
 
$
35

 
$
92

 
 
Total Derivative Liabilities
 
(24
)
 
(39
)
 
 
Net Derivative Asset
 
$
11

 
$
53


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18


Summary of Derivative Instruments Gains (Losses)
Derivative gains (losses) affect the income statement based on whether such derivatives are designated as hedges of underlying exposures. The following is a summary of derivative gains (losses).
Designated Derivative Instruments Gains (Losses)
The following table provides a summary of gains (losses) on derivative instruments:
 
 
Three Months Ended
March 31,
Gain (Loss) on Derivative Instruments
 
2017
 
2016
Fair Value Hedges - Interest rate contracts
 
 
 
 
Derivative (loss) gain recognized in interest expense
 
$
(1
)
 
$
8

Hedged item gain (loss) recognized in interest expense
 
1

 
(8
)
 
 
 
 
 
Cash Flow Hedges - Foreign exchange forward contracts and options
 
 
 
 
Derivative gain recognized in OCI (effective portion)
 
$
9

 
$
16

Derivative loss reclassified from AOCL to income - Cost of sales (effective portion)
 
(4
)
 
(1
)
During the three months ended March 31, 2017 and 2016 no amount of ineffectiveness was recorded in earnings for these designated cash flow hedges and all components of each derivative’s gain (loss) was included in the assessment of hedge effectiveness. In addition, no amount was recorded for an underlying exposure that did not occur or was not expected to occur.
At March 31, 2017, a net after-tax loss of $5 was recorded in accumulated other comprehensive loss associated with our cash flow hedging activity. The entire balance is expected to be reclassified into net income within the next 12 months, providing an offsetting economic impact against the underlying anticipated transactions.
Non-Designated Derivative Instruments Gains (Losses)
Non-designated derivative instruments are primarily instruments used to hedge foreign currency-denominated assets and liabilities. They are not designated as hedges since there is a natural offset for the re-measurement of the underlying foreign currency-denominated asset or liability.
The following table provides a summary of gains on non-designated derivative instruments:
Derivatives NOT Designated as Hedging Instruments
 
 
 
Three Months Ended
March 31,
Location of Derivative Gain
 
2017
 
2016
Foreign exchange contracts – forwards
 
Other expense – Currency gains, net
 
$
4

 
$
71

Net currency gains and losses are included in Other expenses, net and include the mark-to-market adjustments of the derivatives not designated as hedging instruments and the related cost of those derivatives as well as the re-measurement of foreign currency-denominated assets and liabilities. For the three months ended March 31, 2017 and 2016, currency losses, net were $3 and $4, respectively.
 

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Note 11 – Fair Value of Financial Assets and Liabilities
The following table represents assets and liabilities measured at fair value on a recurring basis. The basis for the measurement at fair value in all cases is Level 2 – Significant Other Observable Inputs. 
 
March 31, 2017
 
December 31, 2016
Assets:
 
 
 
Foreign exchange contracts - forwards
$
32

 
$
88

Interest rate swaps
3

 
4

Deferred compensation investments in mutual funds
16

 
15

Total
$
51

 
$
107

Liabilities:
 
 
 
Foreign exchange contracts - forwards
$
24

 
$
39

Deferred compensation plan liabilities
18

 
17

Total
$
42

 
$
56

We utilize the income approach to measure the fair value for our derivative assets and liabilities. The income approach uses pricing models that rely on market observable inputs such as yield curves, currency exchange rates and forward prices, and therefore are classified as Level 2.
Fair value for our deferred compensation plan investments in mutual funds is based on quoted market prices for those funds. Fair value for deferred compensation plan liabilities is based on the fair value of investments corresponding to employees’ investment selections.
Summary of Other Financial Assets and Liabilities
The estimated fair values of our other financial assets and liabilities were as follows:
 
March 31, 2017
 
December 31, 2016
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Cash and cash equivalents
$
1,045

 
$
1,045

 
$
2,223

 
$
2,223

Accounts receivable, net
985

 
985

 
961

 
961

Short-term debt
13

 
13

 
1,011

 
1,015

Long-term debt
4,988

 
5,151

 
5,305

 
5,438

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


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Note 12 – Employee Benefit Plans
The components of Net periodic benefit cost and other changes in plan assets and benefit obligations were as follows:
 
Three Months Ended March 31,
 
Pension Benefits
 
 
 
 
 
U.S. Plans
 
Non-U.S. Plans
 
Retiree Health
Components of Net Periodic Benefit Costs:
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Service cost
$
1

 
$
1

 
$
7

 
$
6

 
$
1

 
$
1

Interest cost
34

 
37

 
39

 
50

 
7

 
8

Expected return on plan assets
(31
)
 
(39
)
 
(53
)
 
(62
)
 
—

 
—

Recognized net actuarial loss
5

 
5

 
19

 
17

 
—

 
1

Amortization of prior service credit
—

 
—

 
(1
)
 
(1
)
 
(1
)
 
(1
)
Recognized settlement loss
42

 
29

 
—

 
—

 
—

 
—

Defined Benefit Plans
51

 
33

 
11

 
10

 
7

 
9

Defined contribution plans
6

 
7

 
7

 
9

 
n/a
 
n/a
Net Periodic Benefit Cost
57

 
40

 
18

 
19

 
7

 
9

 
 
 
 
 
 
 
 
 
 
 
 
Other changes in plan assets and benefit obligations recognized in Other Comprehensive Income:
 
 
 
 
 
 
 
 
 
 
 
Net actuarial loss(1)
8

 
123

 
—

 
—

 
—

 
—

Amortization of prior service credit
—

 
—

 
1

 
1

 
1

 
1

Amortization of net actuarial loss
(47
)
 
(34
)
 
(19
)
 
(17
)
 
—

 
(1
)
Total Recognized in Other Comprehensive Income(2)
(39
)
 
89

 
(18
)
 
(16
)
 
1

 
—

Total Recognized in Net Periodic Benefit Cost and Other Comprehensive Income
$
18

 
$
129

 
$
—

 
$
3

 
$
8

 
$
9

___________
(1)
The net actuarial loss for U.S. Plans primarily reflects the remeasurement of our primary U.S. pension plans as a result of the payment of periodic settlements.
(2)
Amounts represent the pre-tax effect included within Other comprehensive income. Refer to Note 14 - Other Comprehensive Income for related tax effects and the after-tax amounts.
Contributions
The following table s