Document

Table of Contents                                      

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: June 30, 2018
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
  xrxlogoaa02a01a01a01a14.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)
_________________________________________________  
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 June 30, 2018
Common Stock, $1 par value
 
255,101,733 shares


Table of Contents                                      

FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q and any exhibits to this Report 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 outcome of our process to evaluate all strategic alternatives to maximize shareholder value, including terminating or restructuring Xerox's relationship with FUJIFILM Holdings Corporation ("Fujifilm"); and other factors that are set forth in the “Risk Factors” section, the “Legal Proceedings” section, the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and other sections of this Quarterly Report on Form 10-Q, our quarterly report on Form 10-Q for the quarter ended March 31, 2018 and our 2017 Annual Report on Form 10-K, as well as our Current Reports on Form 8-K filed with the Securities and Exchange Commission (SEC).
Fuji Xerox Co., Ltd. (“Fuji Xerox”) is a joint venture between Xerox and Fujifilm in which Xerox holds a noncontrolling 25% equity interest and Fujifilm holds the remaining equity interest. Given our status as a minority investor, we have limited contractual and other rights to information with respect to Fuji Xerox matters. In April 2017, Fujifilm formed an independent investigation committee (the “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 revised our previously issued annual and interim consolidated financial statements for 2014, 2015 and 2016 and the first quarter of 2017. 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. 
In 2018, in connection with the completion of audits of Fuji Xerox’s fiscal year-end financial statements as of and for the years ended March 31, 2016 and 2017, as well as the review of Fuji Xerox’s unaudited interim financial statements as of and for the nine months ended December 31, 2017 and 2016, additional adjustments and misstatements were identified. These additional adjustments and misstatements were to the Net income of Fuji Xerox for the period from 2010 through 2017 previously revised for the items identified by the IIC noted above. At this time, we can provide no assurances relative to the outcome of any potential governmental investigations or any consequences thereof that may happen as a result of this matter.

Xerox 2018 Form 10-Q
1

Table of Contents                                      

XEROX CORPORATION
FORM 10-Q
June 30, 2018
TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
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 2018 Form 10-Q
2

Table of Contents                                      

PART I — FINANCIAL INFORMATION
ITEM 1 — FINANCIAL STATEMENTS

XEROX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(in millions, except per-share data)
 
2018
 
2017
 
2018
 
2017
Revenues
 
 
 
 
 
 
 
 
Sales
 
$
1,017

 
$
1,010

 
$
1,950

 
$
1,946

Services, maintenance and rentals
 
1,425

 
1,483

 
2,856

 
2,925

Financing
 
68

 
74

 
139

 
150

Total Revenues
 
2,510

 
2,567

 
4,945

 
5,021

Costs and Expenses
 
 
 
 
 
 
 
 
Cost of sales
 
622

 
619

 
1,185

 
1,184

Cost of services, maintenance and rentals
 
854

 
872

 
1,722

 
1,753

Cost of financing
 
33

 
33

 
67

 
66

Research, development and engineering expenses
 
101

 
102

 
201

 
213

Selling, administrative and general expenses
 
624

 
626

 
1,252

 
1,260

Restructuring and related costs
 
34

 
39

 
62

 
157

Amortization of intangible assets
 
12

 
15

 
24

 
29

Transaction and related costs, net
 
58

 
—

 
96

 
—

Other expenses, net
 
39

 
68

 
69

 
182

Total Costs and Expenses
 
2,377

 
2,374

 
4,678

 
4,844

Income before Income Taxes and Equity Income
 
133

 
193

 
267

 
177

Income tax expense
 
38

 
43

 
78

 
19

Equity in net income (loss) of unconsolidated affiliates
 
19

 
20

 
(49
)
 
60

Income from Continuing Operations
 
114

 
170

 
140

 
218

Loss from discontinued operations, net of tax
 
—

 
—

 
—

 
(6
)
Net Income
 
114

 
170

 
140

 
212

Less: Net income attributable to noncontrolling interests
 
2

 
4

 
5

 
6

Net Income Attributable to Xerox
 
$
112

 
$
166

 
$
135

 
$
206

 
 
 
 
 
 
 
 
 
Amounts Attributable to Xerox
 
 
 
 
 
 
 
 
Net income from continuing operations
 
$
112

 
$
166

 
$
135

 
$
212

Net loss from discontinued operations
 
—

 
—

 
—

 
(6
)
Net Income Attributable to Xerox
 
$
112

 
$
166

 
$
135

 
$
206

 
 
 
 
 
 
 
 
 
Basic Earnings (Loss) per Share
 
 
 
 
 
 
 
 
Continuing operations
 
$
0.42

 
$
0.64

 
$
0.50

 
$
0.81

Discontinued operations
 
—

 
—

 
—

 
(0.03
)
Total Basic Earnings per Share
 
$
0.42

 
$
0.64

 
$
0.50

 
$
0.78

Diluted Earnings (Loss) per Share
 
 
 
 
 
 
 
 
Continuing operations
 
$
0.42

 
$
0.63

 
$
0.50

 
$
0.80

Discontinued operations
 
—

 
—

 
—

 
(0.02
)
Total Diluted Earnings per Share
 
$
0.42

 
$
0.63

 
$
0.50

 
$
0.78





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


Xerox 2018 Form 10-Q
3

Table of Contents                                      

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

 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(in millions)
 
2018
 
2017
 
2018
 
2017
Net Income
 
$
114

 
$
170

 
$
140

 
$
212

Less: Net income attributable to noncontrolling interests
 
2

 
4

 
5

 
6

Net Income Attributable to Xerox
 
112

 
166

 
135

 
206

 
 
 
 
 
 
 
 
 
Other Comprehensive (Loss) Income, Net(1)
 

 

 

 

Translation adjustments, net
 
(322
)
 
204

 
(146
)
 
337

Unrealized (losses) gains, net
 
(3
)
 
(14
)
 
14

 
(6
)
Changes in defined benefit plans, net
 
90

 
(29
)
 
108

 
(3
)
Other Comprehensive (Loss) Income, Net
 
(235
)
 
161

 
(24
)
 
328

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

 
—

 
—

 
1

Other Comprehensive (Loss) Income, Net Attributable to Xerox
 
(235
)
 
161

 
(24
)
 
327

 
 
 
 
 
 
 
 
 
Comprehensive (Loss) Income, Net
 
(121
)
 
331

 
116

 
540

Less: Comprehensive income, net attributable to noncontrolling interests
 
2

 
4

 
5

 
7

Comprehensive (Loss) Income, Net Attributable to Xerox
 
$
(123
)
 
$
327

 
$
111

 
$
533

__________________________

(1) Refer to Note 16 - Other Comprehensive (Loss) Income for gross components of Other Comprehensive (Loss) Income, reclassification adjustments out of Accumulated Other Comprehensive Loss and related tax effects.


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


Xerox 2018 Form 10-Q
4

Table of Contents                                      

XEROX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in millions, except share data in thousands)
 
June 30,
2018
 
December 31,
2017
Assets
 
 
 
 
Cash and cash equivalents
 
$
1,263

 
$
1,293

Accounts receivable, net
 
1,297

 
1,357

Billed portion of finance receivables, net
 
100

 
112

Finance receivables, net
 
1,240

 
1,317

Inventories
 
947

 
915

Other current assets
 
233

 
236

Total current assets
 
5,080

 
5,230

Finance receivables due after one year, net
 
2,183

 
2,323

Equipment on operating leases, net
 
438

 
454

Land, buildings and equipment, net
 
564

 
629

Investments in affiliates, at equity
 
1,344

 
1,404

Intangible assets, net
 
244

 
268

Goodwill
 
3,897

 
3,930

Deferred tax assets
 
917

 
1,026

Other long-term assets
 
889

 
682

Total Assets
 
$
15,556

 
$
15,946

Liabilities and Equity
 
 
 
 
Short-term debt and current portion of long-term debt
 
$
412

 
$
282

Accounts payable
 
1,153

 
1,108

Accrued compensation and benefits costs
 
357

 
444

Accrued expenses and other current liabilities
 
832

 
907

Total current liabilities
 
2,754

 
2,741

Long-term debt
 
4,813

 
5,235

Pension and other benefit liabilities
 
1,502

 
1,595

Post-retirement medical benefits
 
650

 
662

Other long-term liabilities
 
215

 
206

Total Liabilities
 
9,934

 
10,439

 
 
 
 
 
Commitments and Contingencies (See Note 18)
 


 


Convertible Preferred Stock
 
214

 
214

 
 
 
 
 
Common stock
 
255

 
255

Additional paid-in capital
 
3,920

 
3,893

Retained earnings
 
4,974

 
4,856

Accumulated other comprehensive loss
 
(3,772
)
 
(3,748
)
Xerox shareholders’ equity
 
5,377

 
5,256

Noncontrolling interests
 
31

 
37

Total Equity
 
5,408

 
5,293

Total Liabilities and Equity
 
$
15,556

 
$
15,946

 
 
 
 
 
Shares of common stock issued and outstanding
 
255,102

 
254,613




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

Xerox 2018 Form 10-Q
5

Table of Contents                                      

XEROX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(in millions)
 
2018
 
2017
 
2018
 
2017
Cash Flows from Operating Activities
 
 
 
 
 
 
 
 
Net income
 
$
114

 
$
170

 
$
140

 
$
212

Loss from discontinued operations, net of tax
 
—

 
—

 
—

 
6

Income from continuing operations
 
114

 
170

 
140

 
218

Adjustments required to reconcile Net income to Cash flows from operating activities
 
 
 
 
 
 
 
 
Depreciation and amortization
 
139

 
135

 
278

 
268

Provisions
 
23

 
17

 
40

 
35

Net gain on sales of businesses and assets
 
(16
)
 
(1
)
 
(32
)
 
(1
)
Undistributed equity in net income of unconsolidated affiliates
 
(16
)
 
10

 
52

 
(30
)
Stock-based compensation
 
13

 
12

 
29

 
25

Restructuring and asset impairment charges
 
34

 
32

 
62

 
140

Payments for restructurings
 
(37
)
 
(66
)
 
(91
)
 
(124
)
Defined benefit pension cost
 
26

 
37

 
53

 
99

Contributions to defined benefit pension plans
 
(37
)
 
(23
)
 
(75
)
 
(46
)
(Increase) decrease in accounts receivable and billed portion of finance receivables
 
(10
)
 
(63
)
 
36

 
(140
)
Decrease (increase) in inventories
 
16

 
(30
)
 
(71
)
 
(88
)
Increase in equipment on operating leases
 
(63
)
 
(50
)
 
(119
)
 
(102
)
Decrease in finance receivables
 
57

 
69

 
142

 
134

Decrease (increase) in other current and long-term assets
 
37

 
14

 
19

 
(43
)
Decrease in accounts payable and accrued compensation
 
(70
)
 
(21
)
 
(58
)
 
—

Decrease in other current and long-term liabilities
 
(5
)
 
(6
)
 
(4
)
 
(7
)
Net change in income tax assets and liabilities
 
28

 
5

 
41

 
(36
)
Net change in derivative assets and liabilities
 
(17
)
 
44

 
(23
)
 
99

Other operating, net
 
19

 
(4
)
 
32

 
12

Net cash provided by operating activities of continuing operations
 
235

 
281

 
451

 
413

Net cash used in operating activities of discontinued operations
 
—

 
(15
)
 
—

 
(95
)
Net cash provided by operating activities
 
235

 
266

 
451

 
318

Cash Flows from Investing Activities
 
 
 
 
 
 
 
 
Cost of additions to land, buildings, equipment and software
 
(32
)
 
(21
)
 
(50
)
 
(47
)
Proceeds from sales of land, buildings and equipment
 
16

 
—

 
32

 
1

Acquisitions, net of cash acquired
 
—

 
(65
)
 
—

 
(76
)
Collections of deferred proceeds from sales of receivables
 
—

 
51

 
—

 
99

Collections on beneficial interest from sales of finance receivables
 
—

 
5

 
—

 
11

Other investing, net
 
1

 
—

 
1

 
(29
)
Net cash used in investing activities
 
(15
)
 
(30
)
 
(17
)
 
(41
)
Cash Flows from Financing Activities
 
 
 
 
 
 
 
 
Net (payments) proceeds on short-term debt
 
—

 
—

 
(1
)
 
1

Proceeds from issuance of long-term debt
 
3

 
2

 
5

 
5

Payments on long-term debt
 
(272
)
 
(2
)
 
(310
)
 
(1,330
)
Dividends
 
(68
)
 
(68
)
 
(135
)
 
(155
)
Other financing, net
 
(2
)
 
(12
)
 
(15
)
 
141

Net cash used in financing activities
 
(339
)
 
(80
)
 
(456
)
 
(1,338
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
 
(28
)
 
27

 
(19
)
 
36

(Decrease) increase in cash, cash equivalents and restricted cash
 
(147
)
 
183

 
(41
)
 
(1,025
)
Cash, cash equivalents and restricted cash at beginning of period
 
1,474

 
1,194

 
1,368

 
2,402

Cash, Cash Equivalents and Restricted Cash at End of Period
 
$
1,327

 
$
1,377

 
$
1,327

 
$
1,377

Note: Certain reclassifications and caption combinations have been made for presentation purposes. See Note 5 - Supplementary Financial Information for further details.
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

Xerox 2018 Form 10-Q
6

Table of Contents                                      

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 2017 Annual Report on Form 10-K ("2017 Annual Report") except as noted herein, 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 2017 Annual Report.
In our opinion, all adjustments, which are necessary for a fair statement of financial position, operating results and cash flows for the interim periods presented, have been made. These adjustments consist of normal recurring items. Interim results of operations are not necessarily indicative of the results of the full year.
For convenience and ease of reference, we refer to the financial statement caption “Income before Income Taxes and Equity Income” as “pre-tax income.”
Note 2 – Adoption of New Revenue Recognition Standard
Adoption Summary:
On January 1, 2018, we adopted ASU 2014-09, Revenue from Contracts with Customers (ASC Topic 606), which superseded nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASC Topic 606 is to recognize revenue 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. ASC Topic 606 defines a five-step process to recognize revenue and requires more judgment and estimates within the revenue recognition process than required under previous 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.
We adopted this standard using the modified retrospective method of adoption. Under ASC Topic 606, based on the nature of our contracts and consistent with prior practice, we recognize revenue upon invoicing the customer for the large majority of our revenue. Additionally, the unit of accounting, that is, the identification of performance obligations, is consistent with prior revenue recognition practice. Accordingly, the adoption of this standard did not have a material impact for the large majority of our revenues. Lastly, a significant portion of our Equipment sales are either recorded as sales-type leases or through direct sales to distributors and resellers and these revenue streams are not impacted by the adoption of ASC Topic 606. The only change of significance identified in our adoption involves a change in the classification of certain revenues that were previously reported in Services revenues. These revenues, which are approximately $50 annually, relate to certain analyst services performed in connection with the installation of equipment that are being considered part of the equipment sale performance obligation in 2018. Accordingly, in 2018 these revenues are now reported as part of Sales. As a result of this change, $9 and $20 of revenue was recorded, for the three and six months ended June 30, 2018, respectively, as Sales, which would have been previously recorded as Services revenue in prior periods.
Another change identified upon adoption was with respect to deferred contract costs, which include incremental costs of obtaining a contract and costs to fulfill a contract. Deferred contract costs had been minimal under our prior practices as most costs to obtain a contract and fulfill a contract were expensed as incurred. However, as a result of the contract cost guidance included in ASC Topic 606 and ASC Topic 340-40 "Contracts with Customers", upon adoption, we recorded a transition asset of $153, and a net of tax increase of $117 to Retained earnings, related to the incremental cost to obtain contracts. Substantially all of this adjustment is related to the deferral of sales commissions paid to sales people and agents in connection with the placement of equipment with post sale service arrangements.

Xerox 2018 Form 10-Q
7

Table of Contents                                      

The impacts of adopting ASC Topic 606 on our Condensed Consolidated Balance Sheets were as follows:
 
 
As of June 30, 2018
 
 
Superseded Revenue Guidance(1)
 
Adjustments
 
As Reported
Deferred tax assets
 
$
950

 
$
(33
)
 
$
917

Other long-term assets
 
747

 
142

 
889

Retained earnings
 
4,865

 
109

 
4,974

____________
(1)
Reflects balance of account under revenue recognition guidance superseded by ASC Topic 606.
Revenue Recognition Summary:
We generate revenue through the sale of equipment, supplies and maintenance and printing services. Revenue is measured based on consideration specified in a contract with a customer and is recognized when we satisfy a performance obligation by transferring control of a product to a customer or in the period the customer benefits from the service. With the exception of our sales-type lease arrangements, our invoices to the customer, which normally have short-term payment terms, are typically aligned to the transfer of goods or as services are rendered to our customers and therefore in most cases we recognize revenue based on our right to invoice customers. As a result of the application of this practical expedient for the substantial portion of our revenue, the disclosure of the value of unsatisfied performance obligations for our services is not required.
Significant judgments primarily include the identification of performance obligations in our Document management services arrangements as well the pattern of delivery for those services.
More specifically, revenue related to our products and services is generally recognized as follows:
Equipment: Revenues from the sale of equipment directly to end customers, including those from sales-type leases (see below), are recognized when obligations under the terms of a contract with our customer are satisfied and control has been transferred to the customer. For equipment placements that require us to install the product at the customer location, revenue is normally recognized when the equipment has been delivered and installed at the customer location. Sales of customer installable products are recognized upon shipment or receipt by the customer according to the customer's shipping terms. Revenue from the equipment performance obligation also includes certain analyst training services performed in connection with the installation or delivery of the equipment.
Maintenance services: We provide maintenance agreements on our equipment that include service and supplies for which the customer may pay a base minimum plus a price-per-page charge for usage. In arrangements that include minimums, those minimums are normally set below the customer’s estimated page volumes and are not considered substantive. These agreements are sold as part of a bundled lease arrangement or through distributors and resellers. We normally account for these maintenance agreements as a single performance obligation for printing services being delivered in a series with delivery being measured by usage as billed to the customer. Accordingly, revenue on these agreements are normally recognized as billed to the customer over the term of the agreements based on page volumes. A substantial portion of our products are sold with full service maintenance agreements, accordingly, other than the product warranty obligations associated with certain of our entry level products, we do not have any significant warranty obligations, including any obligations under customer satisfaction programs.
Document management services: Revenues associated with our document management services are generally recognized as printing services are rendered, which is generally on the basis of the number of images produced. Revenues on unit-price contracts are recognized at the contractual selling prices as work is completed by the customer. We account for these arrangements as a single performance obligation for printing services being delivered in a series with delivery being measured by usage as billed to the customer.
Our services contracts may also include the sale or lease of equipment and software. In these instances, we follow the policies noted for Equipment or Software Revenues and separately report the revenue associated with these performance obligations. Certain document management services arrangements may also include an embedded lease of equipment. In these instances, the revenues associated with the lease are recognized in accordance with the requirements for lease accounting.
Sales to distributors and resellers: We utilize distributors and resellers to sell our equipment, supplies and maintenance services to end-user customers. We refer to our distributor and reseller network as our two-tier distribution model. Revenues on sales to distributors and resellers are generally recognized when products are shipped to such distributors and resellers. However, revenue is only recognized when the distributor or reseller has economic substance apart from the Company such that collectability is probable and we have no further obligations related to bringing about the resale, delivery or installation of the product that would impact transfer of control. Revenues associated with

Xerox 2018 Form 10-Q
8

Table of Contents                                      

maintenance agreements sold through distributors and resellers to end customers are recognized in a consistent manner to maintenance services. Revenue that may be subject to a reversal of revenue due to contractual terms or uncertainties is not recorded as revenue until the contractual provisions lapse or the uncertainties are resolved.
Distributors and resellers participate in various rebate, price-protection, cooperative marketing and other programs, and we estimate the variable consideration associated with these programs and record those amounts as a reduction to revenue when the sales occur. Similarly, we account for our estimates of sales returns and other allowances when the sales occur based on our historical experience.
In certain instances, we may provide lease financing to end-user customers who purchased equipment we sold to distributors or resellers. We are not obligated to provide financing and we compete with other third-party leasing companies with respect to the lease financing provided to these end-user customers.
Bundled Lease Arrangements: A significant portion of our direct sales of equipment to end customers are made through bundled lease arrangements, which typically include equipment, maintenance and financing components for which the customer pays a single negotiated fixed minimum monthly payment for all elements over the contractual lease term. These arrangements also typically include an incremental, variable component for page volumes in excess of contractual page volume minimums, which are often expressed in terms of price-per-page. The fixed minimum monthly payments are multiplied by the number of months in the contract term to arrive at the total fixed minimum payments that the customer is obligated to make (fixed payments) over the lease term. In applying our lease accounting methodology, we only consider the fixed payments for purposes of allocating to the relative fair value elements of the contract.
Revenues under bundled arrangements are allocated considering the relative standalone selling prices of the lease and non-lease deliverables included in the bundled arrangement. Lease deliverables include the equipment, financing, maintenance and other executory costs, while non-lease deliverables generally consist of the supplies and non-maintenance services. The allocation for the lease deliverables begins by allocating revenues to the maintenance and other executory costs plus a profit thereon. These elements are generally recognized over the term of the lease as service revenue. The remaining amounts are allocated to the equipment and financing elements, which are subjected to the accounting estimates noted below under “Leases”.
Leases: The two primary lease accounting provisions we assess for the classification of transactions as sales-type or operating leases are: (1) a review of the lease term to determine if it is equal to or greater than 75% of the economic life of the equipment and (2) a review of the present value of the minimum lease payments to determine if they are equal to or greater than 90% of the fair market value of the equipment at the inception of the lease. Equipment placements included in arrangements meeting these conditions are accounted for as sales-type leases and revenue is recognized as noted above for Equipment. Equipment placements included in arrangements that do not meet these conditions are accounted for as operating leases and revenue is recognized over the term of the lease.
We consider the economic life of most of our products to be five years, since this represents the most frequent contractual lease term for our principal products and only a small percentage of our leases are for original terms longer than five years. There is no significant after-market for our used equipment. We believe five years is representative of the period during which the equipment is expected to be economically usable, with normal service, for the purpose for which it is intended. Residual values are not significant.
With respect to fair value, we perform an analysis of equipment fair value based on cash selling prices during the applicable period. The cash selling prices are compared to the range of values determined for our leases. The range of cash selling prices must be reasonably consistent with the lease selling prices in order for us to determine that such lease prices are indicative of fair value.
Our lease pricing interest rates, which are used in determining customer payments in a bundled lease arrangement, are developed based upon a variety of factors including local prevailing rates in the marketplace and the customer’s credit history, industry and credit class. We reassess our pricing interest rates quarterly based on changes in the local prevailing rates in the marketplace. These interest rates have generally been adjusted if the rates vary by 25 basis points or more, cumulatively, from the rate last in effect. The pricing interest rates generally equal the implicit rates within the leases, as corroborated by our comparisons of cash to lease selling prices.
Software: Most of our equipment has both software and non-software components that function together to deliver the equipment's essential functionality and therefore they are accounted for together as part of Equipment sales revenues. Software accessories sold in connection with our Equipment sales, as well as free-standing software sales are accounted for as separate performance obligations if determined to be material in relation to the overall arrangement. Revenue from software is not a significant component of our Total revenues.

Xerox 2018 Form 10-Q
9

Table of Contents                                      

Supplies: Supplies revenue is recognized upon transfer of control to the customer, generally upon utilization or shipment to the customer in accordance with the sales contract terms.
Financing: Finance income attributable to sales-type leases, direct financing leases and installment loans is recognized on the accrual basis using the effective interest method.
Revenues disaggregated by primary geographic markets, major product lines, and sales channels are as follows:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2018
 
2017
 
2018
 
2017
Primary geographical markets(1):
 
 
 
 
 
 
 
 
United States
 
$
1,479

 
$
1,533

 
$
2,893

 
$
3,002

Europe
 
660

 
674

 
1,336

 
1,314

Canada
 
147

 
150

 
291

 
295

Other
 
224

 
210

 
425

 
410

Total Revenues
 
$
2,510

 
$
2,567

 
$
4,945

 
$
5,021

 
 
 
 
 
 
 
 
 
Major product and services lines:
 
 
 
 
 
 
 
 
Equipment(2)
 
$
561

 
$
547

 
$
1,060

 
$
1,049

Supplies, paper and other sales
 
456

 
463

 
890

 
897

Maintenance agreements(3)
 
634

 
662

 
1,267

 
1,301

Service arrangements(4)
 
614

 
634

 
1,237

 
1,258

Rental and other
 
177

 
187

 
352

 
366

Financing
 
68

 
74

 
139

 
150

Total Revenues
 
$
2,510

 
$
2,567

 
$
4,945

 
$
5,021

 
 
 
 
 
 
 
 
 
Sales channels:
 
 
 
 
 
 
 
 
Direct equipment lease(5)
 
$
172

 
$
163

 
$
332

 
$
323

Distributors & resellers(6)
 
370

 
372

 
701

 
693

Customer direct
 
475

 
475

 
917

 
930

Total Sales
 
$
1,017

 
$
1,010

 
$
1,950

 
$
1,946

_____________
(1)
Geographic area data is based upon the location of the subsidiary reporting the revenue.
(2)
For the three and six months ended June 30, 2017, Equipment sale revenues exclude $9 and $20, respectively, of equipment-related training revenue, which was classified as Services under previous revenue guidance - see "Adoption Summary" above.
(3)
Includes revenues from maintenance agreements on sold equipment as well as revenues associated with service agreements sold in our small and mid-sized business (SMB) focused channels and through our channel partners as Xerox Partner Print Services (XPPS).
(4)
Primarily includes revenues from our Managed Document Services (MDS) offerings. Also includes revenues from embedded operating leases, which were not significant.
(5)
Primarily reflects direct sales through bundled lease arrangements.
(6)
Primarily reflects sales through our two-tier distribution channels.
Other Revenue Recognition Policies
Contract assets and liabilities: We normally do not have contract assets, which are primarily unbilled accounts receivable that are conditional on something other than the passage of time. Our contract liabilities, which represent billings in excess of revenue recognized, are primarily related to advanced billings for maintenance and other services to be performed and were approximately $107 and $91 at June 30, 2018 and January 1, 2018, respectively. The majority of the balance at June 30, 2018 will be amortized to revenue over approximately the next 30 months.
Contract Costs: Incremental direct costs of obtaining a contract primarily include sales commissions paid to sales people and agents in connection with the placement of equipment with associated post sale services arrangements. These costs are deferred and amortized on the straight-line basis over the estimated contract term, which is currently estimated to be approximately four years. We pay commensurate sales commissions upon customer renewals, therefore our amortization period is aligned to our initial contract term.
For the three and six months ended June 30, 2018, the incremental direct costs of obtaining a contract of $23 and $40, respectively, were deferred and the related amortization was $24 and $48, respectively. The balance of deferred incremental direct costs net of accumulated amortization at June 30, 2018 was $176. This amount is expected to be amortized over its estimated period of benefit, which we currently estimate to be approximately four years.
We may also incur costs associated with our services arrangements to generate or enhance resources and assets that will be used to satisfy our future performance obligations included in these arrangements. These costs are considered contract fulfillment costs. These costs are amortized over the contractual service period of the arrangement

Xerox 2018 Form 10-Q
10

Table of Contents                                      

to cost of services. In addition, we also provide inducements to certain customers in various forms, including contractual credits, which are capitalized and amortized as a reduction of revenue over the term of the contract. Amounts deferred associated with contract fulfillment costs and inducements were $10 at June 30, 2018.
Equipment and software used in the fulfillment of service arrangements and where the Company retains control are capitalized and depreciated over the shorter of their useful life or the term of the contract if an asset is contract specific.
Revenue-based Taxes: Revenue-based taxes assessed by governmental authorities that are both imposed on and concurrent with specific revenue-producing transactions, and that are collected by the Company from a customer, are excluded from revenue. The primary revenue-based taxes are sales tax and value-added tax (VAT).
Shipping and Handling: Shipping and handling costs are accounted for as a fulfillment cost and are included in Cost of sales in the Condensed Consolidated Statements of Income.
Note 3 – Recent Accounting Pronouncements
Leases
In February 2016, the FASB issued ASU 2016-02, Leases, with additional amendments being issued in 2018. This update requires the recognition of right-to-use assets and lease obligations by lessees for those leases currently classified as operating leases under existing lease guidance. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition. Short term leases with a term of 12 months or less are not required to be recognized. The update also requires qualitative and quantitative disclosure of key information regarding the amount, timing and uncertainty of cash flows arising from leasing arrangements to increase transparency and comparability among companies.
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. Some of these conforming changes such as those related to the definition of minimum lease payments, may potentially result in certain lease arrangements, which are currently accounted for as operating leases, being classified and accounted for as sales-type leases with a corresponding up-front recognition of equipment sales revenue.
This update is effective for our fiscal year beginning January 1, 2019. There are certain practical expedients that can be elected. On the Lessee side, a cross-functional implementation team has been established which is evaluating the lease portfolio, system, process and policy change requirements. The Company has made progress in gathering the necessary data elements for the lease population and a system provider has been selected, with system configuration and implementation underway. The company is currently evaluating the impact of the new guidance on its consolidated financial results and expects it will have a material impact on the Consolidated Statement of Financial Position. The Company is currently planning to elect the package of practical expedients to not reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs and is evaluating the other practical expedients available under the guidance. On the Lessor side, the Company continues to assess the potential impacts of the guidance on its lease agreements with customers, including potential changes in contracting terms, and we also expect to elect the package of practical expedients.
The aggregate undiscounted value of our operating lease commitments at December 31, 2017 was approximately $450 and was primarily related to leases of facilities.
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.
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 guidance is either unclear or does not include specific requirements. We adopted ASU 2016-15 effective for our fiscal year beginning January 1, 2018. This update includes specific guidance, that requires cash collected on beneficial interests received in a sale of receivables be classified as inflows from investing activities. Formerly, those collections were reported in operating cash flows. We reported $56 and $110 of collections on beneficial interests as operating cash inflows on the Statement of Cash Flows for the three and six months ended June 30, 2017, respectively. Accordingly, since the update must be applied retrospectively, our reported 2017 operating and investing cash flows

Xerox 2018 Form 10-Q
11

Table of Contents                                      

were revised in 2018 to report this amount as investing cash flows. There is no expected impact to our 2018 cash flows from this reporting change, due to the termination of all accounts receivable sales arrangements in North America and most arrangements in Europe and the final repurchase of previously sold finance receivables during the fourth quarter of 2017. 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.
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 adopted ASU 2016-18 effective for our fiscal year beginning January 1, 2018 and applied it retrospectively through a revision of previously reported amounts. We held $64 and $75 of restricted cash, currently reported in Other current or long-term assets at June 30, 2018 and December 31, 2017, respectively. The changes in our restricted cash balances were primarily related to our accounts receivable sales programs, which were terminated during the fourth quarter of 2017. Accordingly, this update is not expected to have a material impact on our financial condition, results of operations or cash flows. Refer to Note 5 - Supplementary Financial Information for additional information.
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 net periodic benefit costs 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 affected employees during the period. Other components of net retirement 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. We elected to report these costs as a separate item within Other expenses, net. The update also allows only the service cost component to be eligible for capitalization, when applicable. We adopted ASU 2017-07 effective for us beginning January 1, 2018. The presentation requirements of this update were required to be applied retrospectively through a revision of previously reported amounts. The requirement to limit capitalization to the service cost component was required to be applied prospectively. The adoption of this update is not expected to have a material impact on our financial condition, results of operations or cash flows. Refer to Note 14 - Employee Benefit Plans for the service cost component and other components of net retirement benefit cost.
The following table reflects the adjustment of selected lines from our Condensed Consolidated Statements of Income to the recasted amounts as a result of the adoption of this update:
 
 
Three Months Ended June 30, 2017
 
 
As Reported
 
Adjustment
 
As Recasted
Cost of sales
 
$
619

 
$
—

 
$
619

Cost of services, maintenance and rentals
 
884

 
(12
)
 
872

Research, development and engineering expenses
 
106

 
(4
)
 
102

Selling, administrative and general expenses
 
643

 
(17
)
 
626

Restructuring and related costs
 
40

 
(1
)
 
39

Other expenses, net
 
34

 
34

 
68

 
 
Six Months Ended June 30, 2017
 
 
As Reported
 
Adjustment
 
As Recasted
Cost of sales
 
$
1,186

 
$
(2
)
 
$
1,184

Cost of services, maintenance and rentals
 
1,784

 
(31
)
 
1,753

Research, development and engineering expenses
 
224

 
(11
)
 
213

Selling, administrative and general expenses
 
1,307

 
(47
)
 
1,260

Restructuring and related costs
 
160

 
(3
)
 
157

Other expenses, net
 
88

 
94

 
182


Xerox 2018 Form 10-Q
12

Table of Contents                                      

Business Combinations
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. We adopted ASU 2017-01 effective for our fiscal year beginning January 1, 2018, and the adoption did not have nor is it expected to have a material impact on our financial condition, results of operations or cash flows.
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. We adopted ASU 2016-16 effective for our fiscal year beginning January 1, 2018 and the adoption did not have nor is it expected to have a material impact on our financial condition, results of operations or cash flows.
In February 2018, the FASB issued ASU No, 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The update allows the reclassification from Accumulated other comprehensive income to Retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act ("Tax Act") enacted in December 2017. Consequently, the update eliminates the stranded tax effects resulting from the Tax Act and will improve the usefulness of information reported to financial statement users. However, because the update only relates to the reclassification of the income tax effects of the Tax Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in Income from continuing operations is not affected. The update also requires certain disclosures about stranded tax effects. The update is effective for our fiscal year beginning January 1, 2019. Early adoption of this update is permitted, including adoption in any interim period. The update should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The Company is currently evaluating the impact of adopting this new guidance.
In December 2017, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 118 (as further clarified by the FASB's ASU 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118) to provide guidance for companies that may not have completed their accounting for the income tax effects of the Tax Act. SAB No. 118 provides for a provisional one year measurement period for entities to finalize their accounting for certain income tax effects related to the Tax Act. SAB No. 118 provides guidance where: (i) the accounting for the income tax effect of the Tax Act is complete and reported in the Tax Act's enactment period, (ii) the accounting for the income tax effect of the Tax Act is incomplete and reported as provisional amounts based on reasonable estimates (to the extent determinable) subject to adjustments during a limited measurement period until complete, and (iii) accounting for the income tax effect of the Tax Act is not reasonably estimable (no related provisional amounts are reported in the enactment period) and entities would continue to apply accounting based on tax law provisions in effect prior to the Tax Act enactment until provisional amounts are reasonably estimable. SAB No. 118 requires disclosure of the reasons for incomplete accounting additional information or analysis needed, among other relevant information. During the fourth quarter 2017, we recorded an estimated non-cash provisional charge of $400 reflecting the impact associated with the provisions of the Tax Act based on currently available information. No further adjustment of that estimated provisional charge was made in the first quarter 2018, however we continue to evaluate impacts from the Tax Act and likely will do so through the expected filing of our 2017 U.S. Tax Return in the third quarter 2018. Any adjustments to these provisional amounts will be reported as a component of Income tax expense in the reporting period in which any such adjustments are determined.
Derivatives
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The amendments in this update expand and refine hedge accounting for both financial and non-financial risk components, aligns the recognition and presentation of the effects of hedging instruments with the same income statement line item that the hedged item is reported and includes certain targeted improvements to ease the application of current guidance related to the assessment of hedge effectiveness. This update is effective for our fiscal year beginning January 1, 2019, with early adoption permitted at any interim period. We are currently evaluating the impact of the adoption of ASU 2017-12 on our consolidated financial statements.

Xerox 2018 Form 10-Q
13

Table of Contents                                      

Other Updates
In 2018, 2017 and 2016, 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:
•
Investments - Debt Securities and Regulated Operations: ASU 2018-04, (Topics 320 and 980) Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 117 and SEC Release No. 33-9273 (SEC Update).
•
Service Concession Arrangements: ASU 2017-10, (Topic 853) Determining the Customer of the Operation Services (a consensus of the FASB Emerging Issues Task Force). This update is effective for our fiscal year beginning January 1, 2018.
•
Compensation - Stock Compensation: ASU 2017-09, (Topic 718) Scope of Modification Accounting. This update is effective for our fiscal year beginning January 1, 2018.
•
Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets: ASU 2017-05, (Subtopic 610-20) Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. This update is effective for our fiscal year beginning January 1, 2018.
•
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.
Note 4 – Divestitures
Business Process Outsourcing (BPO)
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. The loss from operations for the six months ended June 30, 2017 primarily reflected changes in estimates of separation-related costs.
Summarized financial information for our Discontinued operations is as follows:
 
 
Six Months Ended June 30, 2017
Loss from operations
 
$
8

Loss on disposal
 
—

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

Loss from discontinued operations, net of tax
 
$
(6
)

Xerox 2018 Form 10-Q
14

Table of Contents                                      

Note 5 – Supplementary Financial Information
Cash, Cash Equivalents and Restricted Cash
Cash, cash equivalents and restricted cash amounts were as follows:
 
 
June 30, 2018
 
December 31, 2017
Cash and cash equivalents
 
$
1,263

 
$
1,293

Restricted cash
 
 
 
 
    Tax and labor litigation deposits in Brazil
 
62

 
72

    Other restricted cash
 
2

 
3

    Total Restricted cash
 
64

 
75

Cash, cash equivalents and restricted cash
 
$
1,327

 
$
1,368

Restricted cash primarily relates to escrow cash deposits made in Brazil associated with tax and labor litigation. As more fully discussed in Note 18 - Contingencies and Litigation, various litigation matters in Brazil require us to make cash deposits to escrow as a condition of continuing the litigation. Restricted cash amounts are classified in our Condensed Consolidated Balance Sheets based on when the cash is expected to be contractually or judicially released.
Restricted cash was reported in the Condensed Consolidated Balance Sheets as follows:
 
 
June 30, 2018
 
December 31, 2017
Other current assets
 
$
1

 
$
1

Other long-term assets
 
63

 
74

Total Restricted cash
 
$
64

 
$
75

Supplemental Cash Flow Information
Summarized cash flow information is as follows:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2018
 
2017
 
2018
 
2017
Provision for receivables
 
$
13

 
$
10

 
$
26

 
$
23

Provision for inventory
 
10

 
7

 
14

 
12

Provision for product warranty
 
3

 
3

 
7

 
7

Depreciation of buildings and equipment
 
44

 
34

 
88

 
68

Depreciation and obsolescence of equipment on operating leases
 
63

 
68

 
127

 
135

Amortization of internal use software
 
19

 
16

 
37

 
31

Amortization of product software
 
—

 
1

 
—

 
3

Amortization of acquired intangible assets
 
12

 
15

 
24

 
29

Amortization of customer contract costs(1)
 
25

 
1

 
50

 
2

Cost of additions to land, buildings and equipment
 
17

 
13

 
26

 
30

Cost of additions to internal use software
 
15

 
8

 
24

 
17

Common stock dividends
 
64

 
64

 
128

 
145

Preferred stock dividends
 
4

 
4

 
7

 
10

Payments to noncontrolling interests
 
1

 
11

 
13

 
12

__________________________
(1)
Amortization of $24 and $48 for the three and six months ended June 30, 2018, respectively, is related to the cost of obtaining a contract and is reported in Decrease (increase) in other current and long-term assets. Refer to Note 2 - Adoption of New Revenue Recognition Standard - Contract Costs for additional information.

Xerox 2018 Form 10-Q
15

Table of Contents                                      

Note 6 – Accounts Receivable, Net
Accounts receivable, net were as follows:
 
 
June 30, 2018
 
December 31, 2017
Invoiced
 
$
1,001

 
$
1,048

Accrued
 
353

 
368

Allowance for doubtful accounts
 
(57
)
 
(59
)
Accounts receivable, net
 
$
1,297

 
$
1,357

Amounts to be invoiced in the subsequent quarter for current services provided are included in amounts accrued.
We perform ongoing credit evaluations of our customers and adjust credit limits based upon customer payment history and current creditworthiness. The allowance for uncollectible accounts receivable is determined principally on the basis of past collection experience as well as consideration of current economic conditions and changes in our customer collection trends.
Accounts Receivable Sales Arrangements
Accounts receivable sales arrangements are utilized in the normal course of business as part of our cash and liquidity management. The accounts receivable sold are generally short-term trade receivables with payment due dates of less than 60 days. During the fourth quarter 2017, we terminated all accounts receivable sales arrangements in North America and all but one arrangement in Europe. The remaining facility in Europe enables us to sell accounts receivable associated with our distributor network on an ongoing basis, without recourse. Under this arrangement, we sell our entire interest in the related accounts receivable for cash and no portion of the payment is held back or deferred by the purchaser.
Of the accounts receivable sold and derecognized from our balance sheet, $131 and $161 remained uncollected as of June 30, 2018 and December 31, 2017, respectively.
Accounts receivable sales were as follows:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Accounts receivable sales(1)
$
128

 
$
567

 
$
231

 
$
1,078

Deferred proceeds
—

 
56

 
—

 
108

Loss on sales of accounts receivable
—

 
3

 
1

 
6

Estimated increase (decrease) to operating cash flows(2)
26

 
54

 
(25
)
 
(11
)
__________________________
(1)
Customers may also enter into structured-payable arrangements that require us to sell our receivables from that customer to a third-party financial institution, which then makes payments to us to settle the customer's receivable. In these instances, we ensure the sale of the receivables are bankruptcy remote and the payment made to us is without recourse. The activity associated with these arrangements is not reflected in this disclosure as payments under these arrangements have not been material and these are customer directed arrangements.
(2)
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 2018 Form 10-Q
16

Table of Contents                                      

Note 7 - 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(1)
 
Total
Balance at December 31, 2017
 
$
56

 
$
15

 
$
35

 
$
2

 
$
108

Provision
 
5

 
—

 
4

 
—

 
9

Charge-offs
 
(5
)
 
(1
)
 
(4
)
 
—

 
(10
)
Recoveries and other(2)
 
—

 
—

 
1

 
—

 
1

Balance at March 31, 2018
 
$
56

 
$
14

 
$
36

 
$
2

 
$
108

Provision
 
4

 
1

 
4

 
—

 
9

Charge-offs
 
(4
)
 
(1
)
 
(3
)
 
—

 
(8
)
Recoveries and other(2)
 
—

 
—

 
(2
)
 
—

 
(2
)
Balance at June 30, 2018
 
$
56

 
$
14

 
$
35

 
$
2

 
$
107

Finance receivables as of June 30, 2018 collectively evaluated for impairment (3)
 
$
1,962

 
$
356

 
$
1,256

 
$
56

 
$
3,630

 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2016
 
$
55

 
$
16

 
$
37

 
$
2

 
$
110

Provision
 
4

 
—

 
5

 
—

 
9

Charge-offs
 
(6
)
 
(2
)
 
(2
)
 
—

 
(10
)
Recoveries and other(2)
 
—

 
2

 
—

 
—

 
2

Balance at March 31, 2017
 
$
53

 
$
16

 
$
40

 
$
2

 
$
111

Provision
 
4

 
1

 
1

 
—

 
6

Charge-offs
 
(10
)
 
(1
)
 
(3
)
 
—

 
(14
)
Recoveries and other(2)
 
1

 
—

 
4

 
—

 
5

Balance at June 30, 2017
 
$
48

 
$
16

 
$
42

 
$
2

 
$
108

Finance receivables as of June 30, 2017 collectively evaluated for impairment(3)
 
$
2,028

 
$
383

 
$
1,336

 
$
64

 
$
3,811

 __________________
(1)
Includes developing market countries and smaller units.
(2)
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.
(3)
Total Finance receivables exclude the allowance for credit losses of $107 and $108 at June 30, 2018 and 2017, 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 5%.
•
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 generally in the range of 7% to 10%.

Xerox 2018 Form 10-Q
17

Table of Contents                                      


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:
 
June 30, 2018
 
December 31, 2017
 
Investment
Grade
 
Non-investment
Grade
 
Substandard
 
Total
Finance
Receivables
 
Investment
Grade
 
Non-investment
Grade
 
Substandard
 
Total
Finance
Receivables
Finance and other services
$
184

 
$
331

 
$
85

 
$
600

 
$
199

 
$
345

 
$
75

 
$
619

Government and education
459

 
65

 
7

 
531

 
490

 
61

 
6

 
557

Graphic arts
86

 
133

 
96

 
315

 
84

 
97

 
141

 
322

Industrial
80

 
81

 
16

 
177

 
82

 
84

 
14

 
180

Healthcare
82

 
51

 
9

 
142

 
88

 
48

 
9

 
145

Other
61

 
93

 
43

 
197

 
68

 
98

 
40

 
206

Total United States
952

 
754

 
256

 
1,962

 
1,011

 
733

 
285

 
2,029

Finance and other services
51

 
37

 
24

 
112

 
54

 
42

 
27

 
123

Government and education
42

 
4

 
4

 
50

 
48

 
5

 
5

 
58

Graphic arts
28

 
30

 
27

 
85

 
34

 
35

 
27

 
96

Industrial
18

 
11

 
10

 
39

 
20

 
12

 
11

 
43

Other
33

 
23

 
14

 
70

 
36

 
25

 
16

 
77

Total Canada
172

 
105

 
79

 
356

 
192

 
119

 
86

 
397

France
227

 
193

 
21

 
441

 
234

 
226

 
22

 
482

U.K./Ireland
101

 
127

 
11

 
239

 
106

 
150

 
10

 
266

Central(1)
187

 
128

 
13

 
328

 
189

 
149

 
16

 
354

Southern(2)
46

 
144

 
13

 
203

 
52

 
144

 
13

 
209

Nordics(3)
26

 
18

 
1

 
45

 
29

 
21

 
1

 
51

Total Europe
587

 
610

 
59

 
1,256

 
610

 
690

 
62

 
1,362

Other
34

 
20

 
2

 
56

 
38

 
28

 
6

 
72

Total
$
1,745

 
$
1,489

 
$
396

 
$
3,630

 
$
1,851

 
$
1,570

 
$
439

 
$
3,860

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

Xerox 2018 Form 10-Q
18

Table of Contents                                      

The aging of our billed finance receivables is based upon the number of days an invoice is past due and is as follows:
 
June 30, 2018
 
Current
 
31-90
Days
Past Due
 
>90 Days
Past Due
 
Total Billed
 
Unbilled
 
Total
Finance
Receivables
 
>90 Days
and
Accruing
Finance and other services
$
14

 
$
3

 
$
2

 
$
19

 
$
581

 
$
600

 
$
10

Government and education
16

 
3

 
2

 
21

 
510

 
531

 
22

Graphic arts
11

 
1

 
—

 
12

 
303

 
315

 
4

Industrial
5

 
1

 
1

 
7

 
170

 
177

 
4

Healthcare
4

 
1

 
1

 
6

 
136

 
142

 
5

Other
6

 
1

 
1

 
8

 
189

 
197

 
5

Total United States
56

 
10

 
7

 
73

 
1,889

 
1,962

 
50

Canada
7

 
2

 
1

 
10

 
346

 
356

 
20

France
7

 
—

 
—

 
7

 
434

 
441

 
17

U.K./Ireland
1

 
1

 
—

 
2

 
237

 
239

 
—

Central(1)
1

 
1

 
1

 
3

 
325

 
328

 
8

Southern(2)
3

 
1

 
1

 
5

 
198

 
203

 
6

Nordics(3)
—

 
—

 
—

 
—

 
45

 
45

 
—

Total Europe
12

 
3

 
2

 
17

 
1,239

 
1,256

 
31

Other
3

 
—

 
—

 
3

 
53

 
56

 
—

Total
$
78

 
$
15

 
$
10

 
$
103

 
$
3,527

 
$
3,630

 
$
101

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 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
$
18

 
$
3

 
$
1

 
$
22

 
$
597

 
$
619

 
$
12

Government and education
18