Xerox
Annual Report 2015

Plain-text annual report

2015 Annual Report 2 6 7 8 Letter to Shareholders Financial Measures Non-GAAP Measures A New Path Forward 10 Board of Directors 11 Officers 12 FYI Financial Highlights (in millions, except EPS) Total revenue Adjusted total revenue* Equipment sales Annuity revenue 2015 Form 10-K Insert Adjusted annuity revenue* Net income from continuing operations – Xerox Adjusted net income* – Xerox Diluted earnings per share from continuing operations Adjusted earnings per share* Net cash provided by operating activities Adjusted operating margin* 2015 2014 $18,045 $19,540 18,161 2,781 15,264 15,380 552 1,076 0.49 0.98 1,611 8.4% 19,540 3,104 16,436 16,436 1,128 1,280 0.94 1.07 2,063 9.6% * See Non-GAAP Measures on Page 7 for the reconciliation of the difference between this financial measure that is not in compliance with Generally Accepted Accounting Principles (GAAP) and the most directly comparable financial measure calculated in accordance with GAAP. At Xerox, we engineer the flow of work. We apply our expertise in business process, imaging, analytics, automation and user-centric insights to help clients become more productive, efficient, secure and precise across a wide range of domains and industries. Xerox 2015 Annual Report 1 1 Fellow Shareholders: “… One of the most pivotal decisions we made, in early 2016, one that we believe will deliver the highest value- creating opportunity for shareholders, was our move to separate Xerox into two independent companies. This decision followed a comprehensive review of our structural options and provides us with increased strategic focus, financial flexibility and agility. We have created a new path forward.” 2 2015 was a year of transition for Xerox. Our financial results were mixed in an increasingly challenging market environment, but we remained committed to delivering value through our focus on targeted growth segments, our solid financial position and team of great people. The many important decisions we made reflect the way we keep our key stakeholders, especially our shareholders, at the center of everything we do. One of the most pivotal decisions we made, in early 2016, one that we believe will deliver the highest value-creating opportunity for shareholders, was our move to separate Xerox into two independent companies. This decision followed a comprehensive review of our structural options and provides us with increased strategic focus, financial flexibility and agility. We have created a new path forward. Before I share more about our future, I’ll review our 2015 results. Year in Review In 2015, we delivered strong capital returns despite pressures stemming from global economic uncertainty, weakened currencies, and the effect of lower revenues and operating margins from challenges in several of our businesses. Here’s a summary of how we performed: • We delivered adjusted1 earnings per share of $0.98; GAAP earnings per share from continuing operations of $0.49. • Total revenue for 2015 was $18 billion, down 8 percent or 4 percent in constant currency from 2014. • We generated solid operating cash flow of $1.6 billion. • Operating margin1 for the year was 8.4 percent, down 1.2 points over the previous year. • We continued to deliver value to our shareholders. We returned $1.6 billion to you through $1.3 billion of share repurchases and over $300 million in dividends. As of January 2016, we increased our annual dividend by 11 percent to $0.31 per share, the highest level since 2000. Differentiating and Delivering in Targeted Markets We operate in an environment defined by rapidly shifting trends both in the broader economy and in the industry sectors we serve. Within this context, a core element of our strategy has been to identify growth markets where we can differentiate or disrupt through our innovation and expertise in improving the flow of work. In those spaces, we not only address critical client needs, we also support business processes that touch the lives of millions of people: drivers, patients, shoppers, employees and benefit recipients, just to name a few. Below are some examples of what I mean: • The State of Florida selected Xerox to implement a state-of-the-art customer service system for processing toll transactions. Building on our existing relationship with the state, we will process more than a billion toll transactions and manage over five million individual accounts annually. The new service system will consolidate Florida’s multiple toll- way operations into a single back-office system that will reduce costs, improve operational efficiency, and enhance the driver and customer experience. • We remain the innovation leader in managed print services, a category that we pioneered almost two decades ago. In 2015, we introduced new tools that further automate business processes, boost employee productivity, and drive security, mobility and sustainability. In 2015, Xerox received leadership awards from Quocirca, IDC and Gartner’s Magic Quadrant for managed print and content services. • We are partnering with the State of New York to update its Medicaid claims processing system to our next-generation technology solution, Health Enterprise. Our flexible Medicaid Management Information System helps New York and other states manage all aspects of today’s Medicaid programs, including managed care and other areas that are needed to comply with the U.S. Affordable Care Act, as well as prevent fraud and abuse. Xerox 2015 Annual Report 3 Xerox 2015 Annual Report 3 • We are redefining the future of print technology through innovations like printed electronic labeling that improves product security and enables data collection throughout the supply chain. We are seeing high interest in this technology from segments such as pharmaceuticals where product authenticity is a growing problem. Optimizing Our Portfolio 2015 also was a year that was distinguished by a number of key actions we took to optimize and position our portfolio for the future. These decisions were made to create more focus in markets where Xerox can differentiate its offerings and exceed client expectations, all in service of improving operating performance and increasing shareholder value. Here are some examples: • We sold our Information Technology Outsourcing (ITO) business to Atos, an international leader in IT services. The transaction resulted in a greater focus on our Business Process Outsourcing and Document Outsourcing businesses. It also enabled us to partner with Atos on developing solutions for our customers that leverage Atos’ world-class ITO capabilities. • We restructured our government healthcare business to increase our focus on higher margin, growing segments like medical and pharmacy benefits management, and fraud and abuse detection. We also reduced our participation in certain Medicaid platform implementations that were presenting unattractive levels of risk and exposure. • Our Document Technology business successfully refreshed its product portfolio by introducing nine new products. Notable among them was the Xerox Rialto® 900 Inkjet production color press. It sets a new standard in production volume and efficiency while offering the smallest footprint of any inkjet press on the market. • Selective acquisitions remained a key lever for short- and long-term growth. An example is our acquisition of Healthy Communities Institute that strengthened our leadership in healthcare analytics. Its leading cloud platform puts socioeconomic and community health information at the fingertips of hospitals, public health agencies and community coalitions. A New Path Forward On January 29, 2016, we announced our plans to separate into two independent companies: one comprising our Document Technology and Document Outsourcing businesses, and the other our Business Process Outsourcing business. Both will be significant Fortune 500-scale companies and leaders in their markets: • The Document Technology company will continue to be the global leader in a $90 billion market with a presence in approximately 180 countries. It will include our Document Technology and Document Outsourcing businesses. Together, they generated $11 billion in revenue in 2015. This business is the equipment share leader, and its managed print services offerings are widely recognized as best-of-breed by industry analysts. • The Business Process Outsourcing (BPO) company will continue to be a leading enterprise for the next generation of BPO. In 2015, this business generated $7 billion in revenue. It has the second-largest market share in an industry that is rapidly expanding, with notable growth opportunities in healthcare, transportation, the public sector and a range of other industries. We are confident this is the best way forward for our shareholders, clients and employees. With increased strategic focus and financial flexibility, we can capitalize on the unique strengths of our Document Technology and BPO businesses and capture the value-creation opportunities that we see in each of them. For customers and partners, each company will maintain its leading service delivery and innovation excellence. But we will be able to more quickly respond to market forces and client needs through simplification, greater focus and agility. Our employees will benefit from working for industry leaders with leaner structures, faster decision making and improved growth opportunities. Investors will benefit from two distinct investment opportunities, each with an enhanced focus on long-term growth and profitability. We expect the separation to be completed by the end of 2016. 4 Strategic Transformation Program In conjunction with the separation announcement, we also launched a strategic transformation program targeting incremental savings of $600 million over three years. This brings our total cumulative savings target to $2.4 billion during this period, which includes our ongoing productivity initiatives. This plan is company-wide and will include a thorough review of how we work and how we operate. Bottom line, we’re not only optimizing our portfolio and capital structure, we also are driving a strategic transformation. This will competitively position both companies and set them up for success during the separation process and beyond. The Year Ahead 2016 will be a defining year for Xerox. We are dedicated to delivering on our commitments to our shareholders, clients and employees while successfully executing the separation and implementing the first phase of our three-year strategic transformation program. On behalf of the Xerox Board of Directors, I am confident that the plan to separate into two strong, independent companies is the right path forward to improve the value we deliver to customers and partners, increase returns for shareholders, and become the employer of choice in the document technology and BPO industries. I hope you share our excitement about our company’s new path forward. Our efforts to transform Xerox are under way, and we appreciate your continued support during this journey. Ursula M. Burns Chairman and Chief Executive Officer ¹ We have discussed our results using non-GAAP measures. Management believes that these non-GAAP financial measures provide an additional means of analyzing the current periods’ results against the corresponding prior periods’ results. However, these non-GAAP financial measures should be viewed in addition to, and not as a substitute for, the company’s reported results prepared in accordance with GAAP. Our non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP measures and should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP. Our management regularly uses our supplemental non-GAAP financial measures internally to understand, manage and evaluate our business and make operating decisions. These non-GAAP measures are among the primary factors management uses in planning for and forecasting future periods. A reconciliation of these non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP are set forth on Page 7. Ursula M. Burns “… I hope you share our excitement about our company’s new path forward. Our efforts to transform Xerox are under way, and we appreciate your continued support during this journey.” Xerox 2015 Annual Report 5 Financial Measures Net Income from Continuing Operations – Xerox (in millions) 1,470* 1,219 1,338* 1,328* 1,280* 1,152 1,139 1,128 1,076* 552 Total Revenue (in millions) 20,638 20,421 20,006 19,540 18,161* 18,045 Total Services Segment Revenue (in millions – percent of total revenue) 10,271 50% 10,479 52% 10,584 54% 9,652 47% 10,253* 56% 10,137 56% 11 12 13 14 15 11 12 13 14 15 11 12 13 14 15 Annuity Revenue (in millions – percent of total revenue) 16,782 81% 16,945 83% 16,648 83% 16,436 84% Net Cash from Operating Activities (in millions) Adjusted Operating Margin* 15,380* 85% 15,264 85% 2,580 2,375 1,961 2,063 10.0% 9.7% 9.6% 9.0% 8.4% 1,611 11 12 13 14 15 11 12 13 14 15 11 12 13 14 15 * See Non-GAAP Measures on Page 7 for the reconciliation of the difference between this financial measure that is not in compliance with Generally Accepted Accounting Principles (GAAP) and the most directly comparable financial measure calculated in accordance with GAAP. 6 Non-GAAP Measures Adjusted Earnings Per Share (EPS) Year Ended December 31, (in millions, except per share amounts) As Reported(1) Adjustments: Amortization of intangible assets Software impairment Health Enterprise charge Deferred tax liability adjustment Loss on early extinguishment of debt 2015 2014 2013 2012 2011 Net Income EPS Net Income EPS Net Income $ 552 $ 0.49 $ 1,128 $ 0.94 $ 1,139 Net Income $ 1,152 Net Income $ 1,219 193 90 241 – – 0.18 0.08 0.23 – – 196 – – (44) – 0.17 – – (0.04) – 189 – – – – 186 – – – – 231 – – – 20 Adjusted $ 1,076 $ 0.98 $ 1,280 $ 1.07 $ 1,328 $ 1,338 $ 1,470 Weighted average shares for adjusted EPS(2) 1,103 1,199 (1) Net income and EPS from continuing operations. (2) Average shares for the calculation of adjusted EPS include 27 million shares associated with the Series A convertible preferred stock. Operating Margin (in millions) Year Ended December 31, Total Revenues Pre-tax Income Adjustments: Amortization of intangible assets Restructuring and asset impairment charges Health Enterprise charge Curtailment gain Other expenses, net Adjusted Operating Income Pre-tax Income Margin Adjusted Operating Margin (1) See table below for 2015 adjusted revenue. Revenue/Segment (in millions) Total Revenue Total Services Segment Revenue Annuity Revenue 2015(1) 2014 2013 2012 2011 $ 18,161 $ 19,540 $ 20,006 $ 20,421 $ 20,638 $ 412 $ 1,206 $ 1,243 $ 1,284 $ 1,450 310 186 389 – 233 315 128 – – 232 305 115 – – 146 301 149 – – 257 371 31 – (107) 320 $ 1,530 $ 1,881 $ 1,809 $ 1,991 $ 2,065 2.3% 8.4% 6.2% 9.6% 6.2% 9.0% 6.3% 7.0% 9.7% 10.0% Year Ended December 31, Health Enterprise Charge $ 116 116 116 2015 Adjusted $ 18,161 10,253 15,380 Reported $ 18,045 10,137 15,264 Xerox 2015 Annual Report 7 A New Path Forward One of the most important decisions we made in 2015 was to conduct a comprehensive review of structural options for the company’s business portfolio and capital allocation, with the goal of enhancing shareholder value. This resulted in our decision in early 2016 to separate Xerox into two independent companies, creating a new path forward. The work we have done to improve our core businesses enables us to take this next step. Document Technology Global leader in document management and document outsourcing with superior technology, solutions and innovation capabilities. 70% Annuity-driven revenue $11B Revenue 180 Countries $7B Revenue $275B Estimated market opportunity $90B Estimated market opportunity #2 BPO market share 40K Employees 90% Recurring revenues with high renewal rates #1 Market share in equipment revenues for 24 consecutive quarters 5% Annual BPO market growth 104K Employees 8 Since the acquisition of Affiliated Computer Services six years ago, markets have shifted significantly, and the success criteria for these businesses have become more distinct. The structural review process underscored how much the operating models and capital structures of the two businesses differ due to the different growth drivers and client needs in their respective markets. As a result, we concluded that the benefits each will see as an independent company outweigh those of keeping the businesses together. When separated, these new companies will be able to pursue their own strategic agendas and will have the operational simplicity and agility to respond to shifting market demands, allowing them to improve on the already world-class services we provide our clients. $11B Revenue 180 Countries $7B Revenue $275B Estimated market opportunity 70% Annuity-driven revenue $90B Estimated market opportunity #2 BPO market share 40K Employees 90% Recurring revenues with high renewal rates #1 Market share in equipment revenues for 24 consecutive quarters 5% Annual BPO market growth 104K Employees Business Process Outsourcing An industry leader with a combination of deep industry expertise, market- leading automation solutions and global delivery excellence. Xerox 2015 Annual Report 9 Board of Directors Ursula M. Burns Chairman and Chief Executive Officer Xerox Corporation Norwalk, CT Richard J. Harrington A William Curt Hunter A, D Retired President and Chief Executive Officer The Thomson Corporation Stamford, CT Dean Emeritus, Tippie College of Business University of Iowa Iowa City, IA Robert J. Keegan A, B Charles Prince B, C Ann N. Reese C, D, E Retired Chairman, CEO and President The Goodyear Tire & Rubber Company Akron, OH Retired Chairman and Chief Executive Officer Citigroup Inc. New York, NY Executive Director Center for Adoption Policy Rye, NY Stephen H. Rusckowski B Sara Martinez Tucker C, D President and Chief Executive Officer Quest Diagnostics Inc. Madison, NJ Retired Chief Executive Officer National Math and Science Initiative Dallas, TX 10 A: Member of the Audit Committee B: Member of the Compensation Committee C: Member of the Corporate Governance Committee D: Member of the Finance Committee E: Lead Independent Director Officers Ursula M. Burns Chairman and Chief Executive Officer James A. Firestone Executive Vice President President, Corporate Strategy and Asia Operations Jeffrey Jacobson Executive Vice President President, Xerox Technology Don H. Liu Executive Vice President General Counsel and Secretary Robert K. Zapfel Executive Vice President President, Xerox Services Darrell L. Ford Senior Vice President Chief Human Resources Officer Hervé Tessler Senior Vice President President, Corporate Operations Leslie F. Varon Vice President Interim Chief Financial Officer Vice President, Investor Relations David Amoriell Vice President Chief Operating Officer, Public Sector Business Group Xerox Services Andrew Copley Vice President President, Global Graphic Communications Operations Xerox Technology John Corley Vice President President, Channel Partners Operations Xerox Technology Richard M. Dastin Vice President Chief Development Engineer Xerox Services Kathleen S. Fanning Vice President Vice President, Worldwide Tax Interim President, Corporate Mergers and Acquisitions Michael D. Feldman Vice President President, Large Enterprise Operations Xerox Services Michael R. Festa Vice President Special Projects Grant Fitz Vice President Chief Financial Officer Xerox Technology John L. Kennedy Vice President Chief Marketing Officer Stephen Little Vice President Chief Information Officer Yehia Maaty Vice President President, Developing Markets Operations Xerox Technology Joseph H. Mancini Jr. Vice President Chief Accounting Officer Ivy Thomas McKinney Vice President Deputy General Counsel and Chief Ethics Officer Russell M. Peacock Vice President President, Global Technology and Delivery Group Xerox Technology Rohit Philip Vice President Treasurer Sophie V. Vandebroek Vice President Chief Technology Officer and President, Xerox Innovation Group Kevin M. Warren Vice President President, Commercial Business Group Xerox Services Jacques H. Guers Vice President Vice President, Global Accounts Operations and Global Growth Initiatives Susan A. Watts Vice President Chief Operating Officer, Global Capabilities Xerox Services Douglas H. Marshall Assistant Secretary Carol A. McFate Chief Investment Officer Connie Harvey Vice President Chief Operating Officer, Healthcare Business Group Xerox Services Xavier Heiss Vice President Vice President, Financial Planning and Analysis and Global Finance Shared Services Xerox 2015 Annual Report 11 FYI Shareholder Information How to Reach Us Additional Information Xerox Corporation www.xerox.com 45 Glover Avenue Norwalk, CT 06856-4505 United States 203.968.3000 Xerox Europe Oxford Road Uxbridge United Kingdom UB8 1HS +44.1895.251133 Fuji Xerox Co., Ltd. Tokyo Midtown West 9-7-3, Akasaka Minato-ku Tokyo, Japan 107-0052 +81.3.6271.5111 Products and Services www.xerox.com or by phone: 800.ASK.XEROX (800.275.9376) For investor information, including comprehensive earnings releases: www.xerox.com/investor or call 888.979.8378. For shareholder services, call 800.828.6396 (TDD: 800.368.0328) or 781.575.3222; or write to Computershare Trust Company, N.A., P.O. Box 30170, College Station, TX 77842-3170; or use email available at www.computershare.com. Annual Meeting Friday, May 20, 2016, 9 a.m. EDT Xerox Corporate Headquarters 45 Glover Avenue Norwalk, CT 06856-4505 Proxy material mailed on April 4, 2016 to shareholders of record March 22, 2016. Investor Contacts Jennifer Horsley jennifer.horsley@xerox.com Sean Cornett sean.cornett@xerox.com This annual report also is available online at www.xerox.com/investor. Electronic Delivery Enrollment Xerox offers shareholders the convenience of electronic delivery, including: • Immediate receipt of the Proxy Statement and Annual Report • Online proxy voting Registered Shareholders, visit: http://www.eTree.com/xerox You are a registered shareholder if you have your stock certificate in your possession or if the shares are being held by our transfer agent, Computershare. Beneficial Shareholders, visit: http://enroll.icsdelivery.com/xrx You are a beneficial shareholder if you maintain your position in Xerox within a brokerage account. 12 The Xerox Foundation www.xerox.com/foundation Mark Conlin, President 203.849.2453 mark.conlin@xerox.com Global Diversity and Inclusion Programs and EE0-1 Reports www.xerox.com/diversity Damika Arnold, Global Diversity and Inclusion Leader 585.423.3150 damika.arnold@xerox.com Minority and Women-Owned Business Suppliers www.xerox.com/supplierdiversity Ethics Helpline North America: 866.XRX.0001 International numbers and online submission tool: www.xerox.com/ethics Environment, Health, Safety and Sustainability www.xerox.com/environment Global Citizenship www.xerox.com/citizenship Governance www.xerox.com/governance Students and Educators View openings/internships and apply: www.xerox.com/careers Request classroom donations: www.xerox.com/foundation All other questions: StudentTeacherRequests@xerox.com Xerox Innovation www.xerox.com/innovation Independent Auditors PricewaterhouseCoopers LLP 300 Atlantic Street Stamford, CT 06901 203.539.3000 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: December 31, 2015 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from: ______ to: _______ Commission File Number 001-04471 XEROX CORPORATION (Exact Name of Registrant as specified in its charter) New York (State of incorporation) P.O. Box 4505, 45 Glover Avenue, Norwalk, Connecticut 06856-4505 (Address of principal executive offices) 16-0468020 (IRS Employer Identification No.) (203) 968-3000 (Registrants telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Common Stock, $1 par value Name of each exchange on which registered New York Stock Exchange Chicago Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No 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 No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Indicate by a check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No The aggregate market value of the voting stock of the registrant held by non-affiliates as of June 30, 2015 was $11,371,974,991. Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date: Class Common Stock, $1 par value Outstanding at January 31, 2016 1,012,898,377 DOCUMENTS INCORPORATED BY REFERENCE Portions of the following document are incorporated herein by reference: Document Part of Form 10-K in which Incorporated Xerox Corporation Notice of 2016 Annual Meeting of Shareholders and Proxy Statement (to be filed no later than 120 days after the close of the fiscal year covered by this report on Form 10-K) III FORWARD-LOOKING STATEMENTS From time to time, we and our representatives may provide information, whether orally or in writing, including certain statements in this Annual Report on Form 10-K, which are deemed to be "forward-looking" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Litigation Reform Act"). These forward-looking statements and other information are based on our beliefs as well as assumptions made by us using information currently available. 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 our current views with respect to future events and are subject to certain risks, uncertainties and assumptions, including with respect to the proposed separation of the Business Process Outsourcing (BPO) business from the Document Technology and Document Outsourcing business, the expected timetable for completing the separation, the future financial and operating performance of each business, the strategic and competitive advantages of each business, future opportunities for each business and the expected amount of cost reductions that may be realized in the cost transformation program, and are subject to a number of factors that may cause actual results to differ materially. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended or using other similar expressions. We do not intend to update these forward-looking statements, except as required by law. In accordance with the provisions of the Litigation Reform Act, we are making investors aware that such forward- looking statements, because they relate to future events, are by their very nature subject to many important factors that could cause actual results to differ materially from those contemplated by the forward-looking statements contained in this Annual Report on Form 10-K, any exhibits to this Form 10-K and other public statements we make. Such factors include, but are not limited to: changes in economic conditions, political conditions, trade protection measures, licensing requirements and tax matters in the United States and in the foreign countries in which we do business; changes in foreign currency exchange rates; our ability to successfully develop new products, technologies and service offerings and to protect our intellectual property rights; the risk that multi-year contracts with governmental entities could be terminated prior to the end of the contract term and that civil or criminal penalties and administrative sanctions could be imposed on us if we fail to comply with the terms of such contacts and applicable law; the risk that our bids do not accurately estimate the resources and costs required to implement and service very complex, multi-year governmental and commercial contracts, often in advance of the final determination of the full scope and design of such contracts or as a result of the scope of such contracts being changed during the life of such contracts; the risk that subcontractors, software vendors and utility and network providers will not perform in a timely, quality manner; service interruptions; actions of competitors and our ability to promptly and effectively react to changing technologies and customer expectations; our ability to obtain adequate pricing for our products and services and to maintain and improve cost efficiency of operations, including savings from restructuring actions and the relocation of our service delivery centers; the risk that individually identifiable information of customers, clients and employees could be inadvertently disclosed or disclosed as a result of a breach of our security systems; the risk in the hiring and retention of qualified personnel; the risk that unexpected costs will be incurred; our ability to recover capital investments; the risk that our Services business could be adversely affected if we are unsuccessful in managing the start-up of new contracts; the collectibility of our receivables for unbilled services associated with very large, multi-year contracts; reliance on third parties, including subcontractors, for manufacturing of products and provision of services; our ability to expand equipment placements; interest rates, cost of borrowing and access to credit markets; the risk that our products may not comply with applicable worldwide regulatory requirements, particularly environmental regulations and directives; the outcome of litigation and regulatory proceedings to which we may be a party; the possibility that the proposed separation of the BPO business from the Document Technology and Document Outsourcing business will not be consummated within the anticipated time period or at all, including as the result of regulatory, market or other factors; the potential for disruption to our business in connection with the proposed separation; the potential that BPO and Document Technology and Document Outsourcing do not realize all of the expected benefits of the separation, and other factors that are set forth in the “Risk Factors” section, the “Legal Proceedings” section, the “Management's Discussion and Analysis of Financial Condition and Results of Operations” section and other sections of this Annual Report on Form 10-K, as well as in our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. XEROX CORPORATION FORM 10-K DECEMBER 31, 2015 TABLE OF CONTENTS Part I Item 1. Item 1A. Item 1B. Item 2. Item 3. Item 4. Part II Item 5. Item 6. Item 7. Item 7A. Item 8. Item 9. Item 9A. Item 9B. Part III Item 10. Item 11. Item 12. Item 13. Item 14. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Market for the Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Directors, Executive Officers and Corporate Governance. . . . . . . . . . . . . . . . . . . . . . . Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Certain Relationships, Related Transactions and Director Independence . . . . . . . . . . Principal Auditor Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Part IV Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Signatures .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Schedule II Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Index of Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 1 13 20 20 21 21 22 25 26 61 62 129 129 129 130 131 131 131 131 132 133 134 135 PART I ITEM 1. BUSINESS Planned Company Separation On January 29, 2016, we announced that our Board of Directors approved management’s plan to separate the Company's Business Process Outsourcing business from its Document Technology and Document Outsourcing business. Each of the businesses will operate as an independent, publicly-traded company. Leadership and names of the two companies will be determined as the process progresses. The transaction is intended to be tax-free for Xerox shareholders for federal income tax purposes. In conjunction with the separation, we also announced a three- year strategic transformation program targeting savings across all segments. Xerox will begin the process to separate while we finalize the transaction structure. Our objective is to complete the separation by year-end 2016, subject to customary regulatory approvals, the effectiveness of a Form 10 filing with the U.S. Securities and Exchange Commission, tax considerations, securing any necessary financing, and final approval of the Xerox Board of Directors. Until the separation is complete, we will continue to operate and report as a single company, and it will continue to be business as usual for our customers and employees. Accordingly, the overview of our business provided here is based on our 2015 reporting basis. Our Business Xerox is helping change the way the world works. By applying our expertise in imaging, business process, analytics, automation and user-centric insights, we engineer the flow of work to provide greater productivity, efficiency and personalization. We are a leader across large, diverse and growing markets estimated at nearly $365 billion(1). The global business process outsourcing market is very broad, encompassing multi-industry business processes as well as industry- specific business processes, and our addressable market is estimated at almost $275 billion(1). The document management market is estimated at roughly $90 billion(1) and is comprised of the document systems, software, solutions and services that our customers have relied upon for years to help run their businesses and reduce their costs. Xerox led the establishment of the managed print services market, and continues today as the industry leader in this expanding market segment. (1) Market estimates are derived from third-party forecasts produced by firms such as Gartner and Nelson Hall, and include our internal assumptions. The following are some additional insights into these business areas: Business Process Outsourcing (BPO): We are a leading enterprise for business process outsourcing, with expertise in managing transaction-intensive processes. Our BPO business includes services that support enterprises through multi-industry offerings such as customer care, transaction processing, finance and accounting, and human resources, as well as industry-focused offerings in areas such as healthcare, transportation, financial services, retail and telecommunications. Document Technology (DT) and Document Outsourcing (DO): Our document technology products and solutions support the work processes of our customers by providing them with an efficient, cost effective printing and communications infrastructure. Our DO service offerings help customers ranging from small businesses to global enterprises optimize their printing and their related document workflow and business processes. Our Strategy and Business Model Our strategy is to apply technology and innovation to help change the way the world works, and to create sustained shareholder value through growth in business services and continued leadership in document technology. We also create value through expanding margins and profits as well as a balanced capital allocation strategy that returns cash to shareholders, while investing for growth and competitive advantage. To accomplish this, (beginning in 2014) we established the following strategic priorities: 1 Leverage Brand Strength and Market Position We have a strong and valuable brand that continues to be ranked in the top percentile of the most valuable global brands. By applying our expertise in imaging, business process, analytics, automation and user-centric insights, we engineer the flow of work to provide greater productivity, efficiency and personalization. Well-recognized and respected, our brand is associated worldwide with delivering innovative solutions, and industry-leading business process and document management services and technology. Xerox has a broad, diverse set of offerings in Services and a strong, well-positioned product portfolio in Document Technology. We are strengthening our market positions by constantly evaluating our businesses and focusing our investments in areas where we have an advantage, and where the greatest market opportunities exist. We expect to accomplish this by narrowing our focus, targeting acquisitions and investing in businesses that will enhance our Services offerings and capabilities, capitalize on our deep industry expertise and expand services globally, while maintaining our Document Technology leadership in attractive market segments. Geographically, our footprint spans more than 180 countries and allows us to deliver superior technology and services to customers of all sizes, regardless of complexity or number of customer locations. Profitably Grow Services in Attractive Markets Over half of our revenue was derived from business services in 2015. The business services markets have attractive market growth rates generally in the mid-single digits, and we believe we can accelerate our Services revenue over time through both organic and inorganic growth. Across our business, we serve industry verticals where we have deep expertise resulting from years of experience, strong customer relationships, global scale and renowned innovation. Capitalizing on the opportunities that these strengths provide will continue to be key to our growth. Lead in Document Technology We are focused on maintaining our leadership position in the Document Technology market and continuing to innovate around our software, hardware and services offerings. In 2015, we updated our product portfolio by introducing nine new devices and also launched nineteen new workflow and software solutions. These include products and solutions in the growing graphic communications market, and expanding upon our investments in the production inkjet market and further building upon our 2013 Impika acquisition. Continuing to bring innovative new products and solutions to market, while also enhancing existing products and solutions, will enable us to sustain our Document Technology market leadership. Innovate to Differentiate Our Offerings Differentiating our offerings is key to our strategy. A critical role of our research is to envision the future and define new research and competency areas for that future. We direct our research and development (R&D) investments to areas such as data analytics, business process automation, and improving the quality and reducing the environmental impact of digital printing. The proportion of our annual U.S. patent filings related to software, solutions and analytics oriented capabilities has increased each of the last five years and they represented more than 40 percent of our filings in 2015. We are investing in attractive markets, such as healthcare and transportation, to create differentiation. In addition, our acquisitions target companies providing new capabilities and offering access to adjacent services, solutions and technologies. We expect this will deliver incremental value for our customers and drive profitable revenue growth for our business. Drive Operational Excellence Across Our Businesses Our operational excellence model leverages our global delivery capabilities, production model, incentive-based compensation process, proprietary systems and financial discipline to deliver increased productivity and lower costs for our customers and for our own business. Margin expansion is a key priority within Services and an overall opportunity for Xerox that we will achieve through specific initiatives aimed at improving our cost structure and portfolio mix. As markets shift, we undertake restructuring to optimize our workforce and facilities to best align our resources with the growth areas of our business, and to maximize profitability and cash flow in businesses that are declining. In Services, we realigned our delivery resources into global capability organizations in order to maximize our global scale and ensure service delivery excellence across our BPO offerings. We also have initiatives underway to continue improving our software platform implementation capability, particularly within our Government Healthcare business where we have narrowed the focus of our platform development initiatives. With our ongoing efforts and targeted initiatives in both Services and Document Technology, we expect over time to maintain or increase our profitability and overall competitive positioning. Xerox 2015 Annual Report 2 Engage, Develop and Support Our People Our Services and Document Technology offerings and know-how are a powerful combination, and are supported by a talented global workforce focused on delivering value to our customers. We continue to develop our employees by investing in processes and systems to equip them with modern tools that enable them to perform their jobs more effectively and by providing opportunities for career growth. Annuity-Based Business Model and Shareholder-Centered Capital Allocation Our business is based on an annuity model that provides significant recurring revenue and cash generation. In 2015, 85 percent of our total revenue was annuity-based; this includes contracted services, equipment maintenance, consumable supplies and financing, among other elements. The remaining 15 percent of our revenue comes from equipment sales, either from lease agreements that qualify as sales for accounting purposes or outright cash sales. We remain committed to using our solid cash flow to deliver shareholder returns now and in the future through a balanced capital allocation strategy that includes share repurchase, acquisitions and dividends. Acquisitions and Divestitures The following is a summary of our acquisitions and divestitures in 2015. Additional details can be found in Note 3 - Acquisitions and Note 4 - Divestitures, in the Consolidated Financial Statements. In the Services segment, consistent with our strategy to expand our offerings and geographic reach through acquisitions and to actively manage our product portfolio, we acquired the following companies: • The learning services unit of Seattle-based Intrepid Learning Solutions (announced in 2014, closed January 2015). • Healthy Communities Institute, a California-based company that helps hospitals and other health organizations manage population health. • RSA Medical, an Illinois-based provider of health assessment and risk management for members interacting with health and life insurance companies. • inVentiv Patient Access Solutions (iPAS), an inVentiv Health company that helps pharmaceutical companies drive product adoption and supports patients in minimizing or eliminating financial and reimbursement hurdles. Additionally, we completed the sale of our Information Technology Outsourcing (ITO) business on June 30, 2015 to Atos SE. The sale enables Xerox to increase its focus and resources on expanding its BPO and DO businesses, areas where the company has competitive advantage. We continue to have a relationship with Atos in which Atos continues to provide IT services to us internally as well as to our current BPO customers. In the Document Technology segment, consistent with our strategy to expand distribution in under-penetrated markets, we acquired Lancaster, PA based Conestoga Business Solutions and Fort Collins, Colorado based Capital Business Systems. Innovation and Research Xerox has a rich heritage of innovation, and innovation continues to be a core strength of the Company as well as a competitive differentiator. Our aim is to create value for our customers, our shareholders, and our people by driving innovation in key areas. Our investments in innovation align with our growth opportunities in areas like business process services, color printing and customized communication. Our research efforts can be categorized under four themes: 1. Usable Analytics - Transform big data into useful information resulting in better business decisions: Competitive advantage can be achieved by better utilizing available and real-time information. Today, information resides in an ever increasing universe of servers, repositories and formats. The vast majority of information is unstructured, including text, images, voice and videos. One key research area is making sense of unstructured information using natural language processing and semantic analysis. A second major research area focuses on developing proprietary methods for prescriptive analytics applied to business processes. Here, we seek to better manage very large data systems in order to extract business insights and use those insights 3 to provide our clients with actionable recommendations. Tailoring these methods to various vertical applications leads to new customer value propositions. 2. Agile Enterprise - Create simple, automated and touch-less business processes resulting in lower cost, higher quality and increased agility: Businesses require agility in order to quickly respond to market changes and new business requirements. To enable greater business process agility, our research goals are to simplify, automate and enable business processes on the cloud via flexible platforms that run on robust and scalable infrastructures. Automation of business processes benefits from our research on image, video and natural language processing, as well as machine learning. Application of these methods to business processes enables technology to perform tasks that today are performed manually, thus allowing workers to focus on higher level tasks. 3. Personalization @ Scale - Augment humans by providing secure, real-time, context-aware personalized products, solutions and services: Whether business correspondence, personal communication, manufactured items or an information service, personalization increases the value to the recipient. Our research leads to technologies that improve the efficiency, economics and relevance of business services, such as customer care, benefits and educational services. Our proprietary printing technologies give us a strong platform to research and develop methods that create affordable, ubiquitous color printing. We also research how to expand the application of digital printing to cover new applications such as packaging and printing directly on end-use products. 4. Sustainable Enterprise and Society - Enhance the environmental and societal benefits of our offerings: Global demand for energy, and the environmental consequences of products used by enterprises and consumers, have elevated customer interest in sustainable solutions. Our research develops technologies that minimize the environmental impact of document systems and business processes. We seek opportunities to utilize processes and components that minimize life-cycle footprint and waste, and create zero bioaccumulation. We also actively seek to incorporate bio-based materials into our printing consumables. To help our customers optimize their operations, research is creating new enterprise-wide energy optimization tools, and user sustainability feedback systems. Global Research Centers We have four global research centers, each with a unique area of focus, where creativity and entrepreneurship are truly valued. Our leadership has empowered researchers to deliver high-impact innovations that make a difference to our clients and the world. Our research centers are: • Palo Alto Research Center (PARC): A wholly-owned subsidiary of Xerox located in Silicon Valley and Webster NY, PARC provides Xerox commercial and government clients with R&D and open innovation services. PARC scientists have deep technological expertise in big data analytics, intelligent sensing, computer vision, networking, printed electronics, energy, and digital design and manufacturing. • Xerox Research Centre of Canada (XRCC): Located in Mississauga, Ontario, Canada, XRCC brings materials to market through advances in organic materials chemistry, polymer processing, formulation design, prototyping and scale-up. Advanced materials, sustainable materials, printed electronics, additive manufacturing and continuous processes are among the current areas of exploration for XRCC researchers as they develop new competencies to meet the future needs of customers. • Xerox Research Centre Europe (XRCE): Located in Grenoble, France, XRCE research aims to differentiate Xerox business process service offerings by simplifying them and making them more automated, intelligent and agile. The centre combines its world-class expertise in imaging, text and data analytics, with insights from its ethnographic studies to create and design innovative and disruptive technology. • Xerox Research Centre India (XRCI): Located in Bangalore, India, XRCI explores, develops and incubates innovative solutions and services for our global customers, with a special focus on emerging markets. Investment in R&D is critical for competitiveness in our fast-paced markets. We have aligned our R&D investment portfolio with our growth initiatives, including enhancing customer value by building on our business process services leadership and accelerating our color leadership. One of the ways that we maintain our market leadership is through strategic coordination of our R&D with Fuji Xerox (an equity investment in which we maintain a 25 percent ownership interest). Our total research, development and engineering expenses (RD&E), which includes sustaining engineering expenses for hardware engineering and software development after we launch a product, totaled $563 million in Xerox 2015 Annual Report 4 2015, $577 million in 2014 and $603 million in 2013. Fuji Xerox R&D expenses were $569 million in 2015, $654 million in 2014 and $724 million in 2013. Segment Information Our reportable segments are Services, Document Technology and Other. We present operating segment financial information in Note 2 - Segment Reporting in the Consolidated Financial Statements, which we incorporate by reference here. We have a broad and diverse base of customers by both geography and industry, ranging from small and midsize businesses (SMBs) to graphic communications companies, governmental entities, educational institutions and Fortune 1000 corporate accounts. None of our business segments depends upon a single customer, or a few customers, the loss of which would have a material adverse effect on our business. Revenues by Business Segment Our Services segment is the largest segment, with $10,137 million in revenue in 2015, representing 56 percent of total revenue. The Document Technology segment contributed $7,365 million in revenue, representing 41 percent of total revenue. The Other segment contributed $543 million in revenue, representing 3 percent of total revenue. Services Segment We provide business services in global markets across major industries and to government agencies. These services help our clients improve the flow of work, providing them more time and resources to allocate to their core operations and enabling them to respond rapidly to changing technologies and to reduce expenses associated with their business processes. Our Services segment currently comprises two types of service offerings: Business Process Outsourcing and Document Outsourcing. Business Process Outsourcing BPO represented 68 percent of our total Services segment revenue in 2015. We are a leading enterprise for business process outsourcing, with expertise in managing transaction-intensive processes. We provide multi- industry offerings such as customer care, transaction processing, finance and accounting, and human resources, as well as industry focused offerings in areas such as healthcare, transportation, financial services, retail and telecommunications. We bring our BPO solutions to market through Industry Business Groups and we deliver our solutions to our customers through Global Capability Organizations. Industry Business Groups To enable deep client engagement and to optimize cross-selling of our broad portfolio of services solutions, we have organized our go-to-market resources into global industry business groups. The industry groups have primary responsibility for client relationships and sales, developing industry thought leadership and industry specific solutions, and ensuring service delivery meets client requirements. The industry business groups in 2015 were as follows: • Commercial Healthcare: We have innovative solutions and subject matter expertise across the healthcare ecosystem including providers, payers, employers and government agencies. We help these customers focus on delivering better, more accessible and more affordable healthcare, which leads to better health and wellness for their constituencies. In the commercial segment of the market, we primarily serve the following constituencies: Healthcare Payer and Pharma: We deliver administrative efficiencies to our healthcare payer and pharmaceutical clients through scalable and flexible transactional business solutions, which encompass our global delivery model and domestic payer service centers. We support nearly all of the top 20 U.S. commercial health plans, touching nearly two-thirds of the insured population in the U.S. Healthcare Provider Solutions: We serve hospitals, doctors and other care providers, including every large health system in the U.S., with contracts in 49 of the 50 states. Our services help our clients improve access to patient data, achieve tighter regulatory compliance, realize greater operational efficiencies, reduce administrative costs and provide better health outcomes. • Commercial Industries - High Tech and Communications, Financial Services, and Industrial, Retail and Hospitality: We have deep expertise, targeted business process solutions, and a large, diverse client base in a broad range of commercial industries including communications and media, high tech and software, banking and capital markets, insurance, manufacturing, automotive, travel and leisure, food and beverage, transportation and logistics and others. 5 • Public Sector: We provide services to many constituencies across the public sector space. This includes services uniquely focused on transportation-related entities as well as our broad portfolio of BPO solutions to all governmental entities. Transportation Services: We provide revenue-generating solutions for our government clients in over 35 countries. Our services include public transit and fare collection, electronic toll collection, parking management, photo enforcement and commercial vehicle operations. We create simple and reliable processes for operators and government agencies, and we are differentiated by the breadth of our offerings and innovative technology. State, Local and Federal Government Services: We support our government clients with services targeting key agencies within federal, state, county and municipal governments including Health and Human Services, Veterans Administration, Treasury, Safety and Justice, and Government Administration. Our depth of agency- specific expertise and scale required to deliver and manage programs at all levels of government gives us an advantaged market position. Our services span benefits collection and disbursement and electronic payment cards, tax and revenue systems, eligibility systems and services, unclaimed property services and a broad range of other business process services. • Government Healthcare: We provide administrative and care management solutions to state Medicaid programs and federally-funded U.S. government healthcare programs. We provide a broad range of innovative solutions to 32 states and the District of Columbia. Our services include processing Medicaid claims, pharmacy benefits management, clinical program management, supporting health information exchanges, eligibility application processing and determination, management of long-term care programs, delivering public and private health insurance exchange services and care and quality management. Global Capability Organizations To leverage our global scale and ensure service delivery excellence across our BPO offerings, we have organized our delivery resources into global capability groups. The capability organizations have primary responsibility for implementing new client contracts and delivering service to existing clients, identifying best practices to improve cost competitiveness and innovating and implementing our next generation offerings. The 2015 global capability groups were as follows: • Customer Care: Our teams across the globe provide expertise in customer service, technical support, sales, collections and other services via multiple channels including phone, SMS, chat, interactive voice response, social networks and email. • Transaction Processing: We have a broad array of transaction processing capabilities across many different client types. These capabilities include data entry, scanning, image processing, enrollment processing, claims processing, high volume offsite print and mail services, file indexing and others. • Human Resources Services: Our capabilities cover a wide range of HR outsourcing services including health, pension and retirement administration and outsourcing, private healthcare exchanges, employee service centers, learning solutions and welfare services, global mobility and relocation, payroll and others. • Finance and Accounting: We serve clients in many industries by managing their critical finance, accounting and procurement processes. Our services span corporate finance and decision support, prepaid cards, payment processing, loan and banking process support and student loan servicing. • Communication and Marketing Services: We provide end-to-end outsourcing for content design, creation, marketing, fulfillment and distribution services that help clients communicate with their customers and employees more effectively. We deliver communications through print and multimedia channels, including SMS, web, email and mobile media. • Consulting and Analytics Services: Our consulting services help clients identify and capture strategic opportunities in their businesses often in conjunction with the deployment of BPO services such as those discussed above. Our analytics capabilities provide clients with deep business insights on an ongoing basis, as an add-on or embedded service offering in conjunction with BPO contracts. In 2015, we continued to focus our portfolio and differentiate our offerings. Significant actions in 2015 included the following: • New Operating Model: We completed the transition to our new operating model based on industry business groups and global capabilities, including investment in management and sales resources and training. Xerox 2015 Annual Report 6 • Focus in Government Healthcare: We narrowed our focus in Government Healthcare by limiting the scope of development and deployment of new platforms, including our Health Enterprise Medicaid information system. • Automation: We continued to successfully deploy our automation solutions, which use software to perform rules-based, repeatable tasks freeing up people for higher-value activities, to differentiate our offerings, in areas such as toll processing within Transportation Services, claims processing in Commercial Healthcare and virtual agents in Customer Care. • Key Signings: We signed large-scale deals, including one with the state of New York to implement a new Medicaid information system based on our federally certified solution in New Hampshire and one with the state of Florida to build a consolidated customer service system for processing highway toll transactions. • Customer Retention: We increased our renewal rate by 3-percentage points in 2015 to a rate of 84%. Document Outsourcing We are the industry leader in document outsourcing services. We help companies assess and optimize their print infrastructure, secure and integrate their environment and automate and simplify their business processes so that they can grow revenue, reduce costs and operate more efficiently. DO represented 32 percent of our total Services segment revenue in 2015. Our two primary offerings within DO are Managed Print Services (MPS), including Workflow Automation and Centralized Print Services (CPS). The MPS offering targets clients ranging from large, global enterprises to mid-size and small businesses, including via our partner print services channels, and governmental entities. The CPS offering targets the on-demand, production printing, multi-channel publishing and mailroom operations needs of governments, large enterprises and mid-size businesses. We provide the most comprehensive portfolio of MPS services in the industry and are recognized as an industry leader by several major analyst firms, including Gartner, IDC, Quocirca, Info Trends and Forrester. As the market leader in MPS, Xerox helps clients cut costs, increase productivity and meet their environmental sustainability goals while supporting their mobile and security needs. Xerox® MPS complements and provides opportunities to expand existing BPO services. Within BPO and other accounts, Xerox® MPS helps to automate workflow and enhance employee productivity. Our Next Generation MPS and CPS offerings are built upon a three stage approach: Assess and Optimize: We use best-in-class tools and processes to create a baseline of our client’s current spend, enabling us to design a solution that reduces our client's costs by up to 30 percent while supporting our client's sustainability goals. Secure and Integrate: Print devices are connected in a secure and compliant way to the IT environment. In addition, mobile print solutions are activated, security is enhanced and print server and print queue management streamline the IT environment - all backed by Xerox help desk support. Automate and Simplify: With the right technology securely integrated within our client’s IT environment, we are able to automate and digitize paper-based processes, improving employee productivity. By eliminating ineffective processes that perpetuate inefficiency and increase costs, our clients can achieve greater productivity and digital transformation. Analytics guide strategies to bring operational excellence to routine workflows as well as industry- specific processes. In 2015 we continued to innovate and expand upon the solutions within the three stage approach with an increased emphasis on Workflow Automation Services. Significant new enhancements launched in 2015 include the following: • Xerox Secure Print Manager Suite: services to help integrate advanced print security, control, reporting and analytics capabilities. • Xerox Digital Alternatives: enables individuals and workgroups to complete multiple workflows within a single application without the need for paper. 7 • Xerox DocuShare 7.0: an on-premise or in the cloud enterprise content management (ECM) and process automation solution. • Xerox Workflow Automation Solutions for Supply Chain Optimization: a service based solution that improves the processes between a retailer’s head office, stores and back office operations. • Xerox Workflow Automation Solutions for Loan Application Processing: an automation of loan application review process using document capture, e-forms, e-signature, content management and workflow technologies. • Xerox Workflow Automation Solutions for Health Records Information Management: a solution that aggregates, manages and presents clinical healthcare data from diverse sources into a unified, configurable, easily accessed view: the Patient Window. • Xerox Workflow Automation Solutions for Insurance: workflow solutions for New Business Processing and Claims Processing. • Xerox Workflow Automation Solutions for Human Resources: three workflow solutions including HR Onboarding, Employee File Management and Policy and Procedure Administration that provide HR personnel the information they need to better streamline their HR processes. • Xerox Workflow Automation Solutions for Finance & Accounting: workflow solutions for Accounts Payable and Accounts Receivable. • Next Generation Xerox Partner Print Services: enabling Channel Partner expansion opportunities with Digital Alternatives, DocuShare 7.0, Client MPS Maturity Assessment and Demand Generation tools and solutions. Document Technology Segment Document Technology includes the sale of products and supplies, as well as the associated technical service and financing of those products (which are not related to document outsourcing contracts). Our Document Technology business is made up of strategic product groups that share common technology, manufacturing and product platforms. The strategic product groups are: Entry, Mid-Range and High-End. In 2015, we announced a number of new Xerox products and solutions that bring our customers new ways to print, share and protect documents while working from anywhere. The development of these and future solutions solidifies our commitment at Xerox to maintaining our leadership in Document Technology. Entry Entry comprises desktop monochrome and color printers and multifunction printers ranging from small personal devices to workgroup printers and multifunction printers (MFPs) that serve the needs of office workgroups. Entry products represented 19 percent of our total Document Technology segment revenue in 2015 and are sold to customers in all segments from SMB to enterprise, principally through a global network of reseller partners and service providers, as well as through our direct sales force. In 2015, we launched new Xerox devices that simplified printing from smartphones, tablets and laptops: • The Xerox Phaser 6022 and WorkCentre 6027 (available worldwide) and the Phaser 6020 and WorkCentre 6025 (available in developing markets and Europe) represent a refresh of our personal class color portfolio. These products deliver good value to single users or small work teams through small footprints, mobility features, fast print speeds and high quality output. • Adding wireless and mobile printing capabilities to any Ethernet-compatible printer or MFP, the Xerox Wireless Print Solutions Adapter enables legacy devices compatibility with modern workflows. This pocket-sized adapter sits next to the device and integrates with Google Cloud Print, Wi-Fi Direct, NFC tap-to-pair and Apple AirPrint. • The Xerox ColorQube 8580 and ColorQube 8880 solid ink printers continue to offer our customers a unique solid ink value with productive, waste-conscious printing solutions that deliver exceptional print quality. Additionally they offer EnergyStar 2.0 certification and EPEAT Silver ratings. Xerox 2015 Annual Report 8 Mid-Range Mid-Range comprises products for enterprises of all sizes. These products are sold through dedicated Xerox branded partners, our direct sales force, indirect multi-branded channel partners and resellers worldwide. Our Mid- Range products represented 57 percent of our total Document Technology segment revenue in 2015. We are a leader in this product segment and offer a wide range of multifunction printers, copiers, digital printing presses and light production devices, and solutions that deliver flexibility and advanced features. In 2015, we continued to innovate with a focus on expanding our security, workflow and software application capabilities through the following solutions: • A free app, the Xerox Print Service Plug-in for Android offers Android users a simple printing workflow, much like Apple® AirPrint™ does for iOS® users. • The Xerox® Mobile Link App allows workers that utilize both Android and iOS platforms to create personalized, one-touch workflows to automatically transmit documents to the cloud, fax, email or other destinations. One touch workflows are created once and saved as icons allowing users to easily repeat desired workflows. • Building on an existing Xerox solution - and a Buyer’s Lab Outstanding Mobile Solution for 2015 Pick - Xerox® Mobile Print Cloud 3.0 was updated with Print from Email capability and enables direct connection to cloud printing without the need for additional infrastructure. Additionally, Xerox is focused on providing secure mobile printing by offering the Xerox PrintSafe Software solution that provides authentication security for MFPs through most industry standard card readers. This affordable solution runs on both Xerox and non-Xerox devices and has the added ability to print anywhere at any time to any MFP in a customer network. We also launched in the U.S. the Xerox® Adaptable Accessibility Solution, a Section 508 compliant accessibility solution that operates on a standard tablet and features talk-back audio - empowering the blind, visually impaired and people with all abilities to easily access technology that enables work independence. High-End Our High-End digital color and monochrome solutions are designed for customers in the graphic communications industry and large enterprises with high-volume printing requirements. Our High-End products comprised 24 percent of our total Document Technology segment revenue in 2015. Our High-End solutions enable full-color, on- demand printing of a wide range of applications, including variable data for personalized content and 1:1 marketing. During 2015, Xerox continued development and growth of our portfolio of Free Flow workflow software offerings in the High-End segment. Workflow automation is essential to our customers’ success, and our workflow platforms are an outstanding complement to our world-class hardware offerings. We launched cloud solutions for FreeFlow® Core and FreeFlow® Digital Publisher, these offerings expand the reach and accessibility via a SaaS model. Additionally we launched the latest version of FreeFlow® Variable Information Suite. Within the High-End hardware portfolio, in 2015, we continued to integrate and grow our production inkjet business, led by the Impika inkjet platforms as well as the Xerox® CiPress Production Inkjet Systems. Our newest production inkjet offering is the Xerox Rialto 900 Inkjet Press, the first fully integrated, roll-to-cut sheet press in the industry. The Rialto 900 earned several industry awards in 2015, including being named “Best in Category” among all digital presses at Graph Expo 2015. The Rialto 900 joins the Xerox Impika® eVolution, Xerox Impika® Compact and Xerox Impika® Reference in our aqueous inkjet portfolio, producing a wide range of commercial and industrial print applications for our customers. The CiPress platform is based on Xerox solid ink technology, and provides unique value as the industry’s only waterless production inkjet printing system. Additionally, we remain the worldwide leader in the cut-sheet production color and monochrome industry segments. In 2015, our most significant new product was the Xerox® iGen® 5. The iGen 5 has an optional fifth color housing that increases the ability to match a larger range of Pantone colors without hindering productivity and delivering speeds up to 150 pages per minute with outstanding print quality. A variety of color matching, job setup and quality control automation tools are also available. 9 We also launched the Xerox® Versant™ 80 Press, which enables full color printing at speeds up to 80 pages per minute, with outstanding Ultra HD Resolution print quality and is built with the same compact belt fuser and set of automation tools as the Versant 2100 introduced in 2014. In 2015, we delivered a number of feature enhancements across our entire cut sheet line which includes the Xerox iGen™, Xerox Color Presses, Xerox Nuvera™, DocuTech™ and DocuPrint™ series, and Xerox® Wide Format IJP 2000. Other Segment The Other segment includes paper sales in our developing market countries, wide-format systems, licensing revenue, Global Imaging Systems network integration solutions and non-allocated corporate items, including Other expenses, net. Paper sales comprised nearly 40% of the revenues in the Other segment in 2015, which is roughly the same as in 2014. Geographic Information Our global presence is one of our core strengths. Overall, 30 percent of our revenue is generated by customers outside the U.S. In 2015, our revenues by geography were as follows: U.S. - $12,557 million (70 percent of total revenue), Europe - $3,783 million (21 percent of total revenue), and Other areas - $1,705 million (9 percent of total revenue). Revenues by geography are based on the location of the unit reporting the revenue and include export sales. Patents, Trademarks and Licenses Xerox and its subsidiaries were awarded 938 U.S. utility patents in 2015. On that basis, we rank 37th on the list of companies that were awarded the most U.S. patents during the year. Including our research partner Fuji Xerox, we were awarded about 1,550 U.S. utility patents in 2015. Our patent portfolio evolves as new patents are awarded to us and as older patents expire. As of December 31, 2015, we held over 12,500 U.S. design and utility patents. These patents expire at various dates up to 20 years or more from their original filing dates. While we believe that our portfolio of patents and applications has value, in general no single patent is essential to our business or any individual segment. In addition, any of our proprietary rights could be challenged, invalidated or circumvented, or may not provide significant competitive advantages. In the U.S., we are party to numerous patent-licensing agreements and, in a majority of them, we license or assign our patents to others in return for revenue and/or access to their patents. Most patent licenses expire concurrently with the expiration of the last patent identified in the license. In 2015, we added 11 new agreements to our portfolio of patent-licensing and sale agreements, and Xerox and its subsidiaries were licensor or seller in 7 of the agreements. We are also a party to a number of cross-licensing agreements with companies that hold substantial patent portfolios, including Canon, Microsoft, IBM, Hewlett-Packard Inc, Oce, Sharp, Samsung, Seiko Epson, Toshiba TEC and R.R. Donnelley. These agreements vary in subject matter, scope, compensation, significance and time. In the U.S., we own more than 440 U.S. trademarks, either registered or applied for. These trademarks have a perpetual life, subject to renewal every 10 years. We vigorously enforce and protect our trademarks. Marketing and Distribution We operate in over 180 countries, providing the industry's broadest portfolio of document technology, services and software, and the most diverse array of business process outsourcing solutions, through a variety of distribution channels around the world. We manage our business based on the principal segments described earlier. We have organized the marketing, selling and distribution of our products and services by geography, channel type and line of business. We go to market with a services-led approach and sell our products and services directly to customers through our world-wide sales force and through a network of independent agents, dealers, value-added resellers, systems integrators and the Web. In addition, our wholly-owned subsidiary, Global Imaging Systems (GIS), an office technology dealer which is comprised of regional core companies in the U.S., sells document management and network integration systems and services. We continued to expand our distribution to small and mid-size businesses in 2015 through GIS's acquisition of two companies. Xerox 2015 Annual Report 10 Our brand is a valuable resource and continues to be ranked in the top percentile of the most valuable global brands. In Europe, Africa, the Middle East and parts of Asia, we distribute our products through Xerox Limited, a company established under the laws of England, as well as through related non-U.S. companies. Xerox Limited enters into distribution agreements with unaffiliated third parties to distribute our products in many of the countries located in these regions, and previously entered into agreements with unaffiliated third parties who distribute our products in Sudan. Sudan, among others, has been designated as a state sponsor of terrorism by the U.S. Department of State and is subject to U.S. economic sanctions. We maintain an export and sanctions compliance program, and believe that we have been and are in compliance with U.S. laws and government regulations for Sudan. We have no assets, liabilities or operations in Sudan other than liabilities under the distribution agreements. After observing required prior notice periods, Xerox Limited terminated its distribution agreements with distributors servicing Sudan in August 2006. Now, Xerox has only legacy obligations to third parties, such as providing spare parts and supplies to these third parties. In 2015, total Xerox revenues of $18.0 billion included less than $10 thousand attributable to Sudan. Competition Although we encounter competition in all areas of our business, we are the leader - or among the leaders - in each of our principal business segments. We compete on the basis of technology, performance, price, quality, reliability, brand, distribution and customer service and support. In the Services business, our larger competitors include Accenture, Aon, Computer Sciences Corporation, Convergys, Genpact, Hewlett-Packard Enterprise, IBM and Teletech. In addition, we compete with in-house departments that perform the functions that could be outsourced to us. In the Document Technology business, our larger competitors include Canon, Hewlett-Packard Inc., Konica Minolta, Lexmark and Ricoh. Our brand recognition, positive reputation for business process and document management expertise, innovative technology and service delivery excellence are our competitive advantages. These advantages, combined with our breadth of product offerings, global distribution channels and customer relationships, position us as a strong competitor going forward. Global Employment Globally, we have approximately 143,600 direct employees. BPO employees comprise roughly 72 percent of our total. The combination of Document Technology and Document Outsourcing, which share much of their infrastructure, makes up 25 percent of employees, while an additional 3 percent of our employees are in corporate or other areas. Customer Financing We finance a large portion of our direct channel customer purchases of Xerox equipment through bundled lease agreements. Financing facilitates customer acquisition of Xerox technology and enhances our value proposition, while providing Xerox an attractive gross margin and a reasonable return on our investment in this business. Additionally, because we primarily finance our own products and have a long history of providing financing to our customers, we are able to minimize much of the risk normally associated with a finance business. Because our lease contracts permit customers to pay for equipment over time rather than at the date of installation, we maintain a certain level of debt to support our investment in these lease contracts. We fund our customer financing activity through a combination of cash generated from operations, cash on hand and proceeds from capital market offerings. At December 31, 2015, we had $4.0 billion of finance receivables and $0.5 billion of equipment on operating leases, or Total Finance assets of $4.5 billion. We maintain an assumed 7:1 leverage ratio of debt to equity as compared to our Finance assets, which results in the majority of our $7.4 billion of debt being allocated to our financing business. Refer to "Customer Financing Activities and Debt" in the Capital Resources and Liquidity section of Management's Discussion and Analysis included in Item 7 of this 2015 Form 10-K, which is incorporated here by reference, for additional information. 11 Manufacturing and Supply Our manufacturing and distribution facilities are located around the world. The Company's largest manufacturing site is in Webster, N.Y., where we produce the Xerox® iGen and Nuvera systems, components, EA Toner, consumables, fusers, photoreceptors and other products. Our other primary manufacturing operations are located in Dundalk, Ireland, for our High-End production products and consumables; Wilsonville, OR, for solid ink consumable supplies and components for our mid-range and entry products; and Aubagne, France, for Impika aqueous-ink production ink-jet systems. We also have a facility in Venray, Netherlands, that provides supplies manufacturing and supply chain management for the Eastern Hemisphere. Our master supply agreement with Flex, a global electronics manufacturing services company, to outsource portions of manufacturing for our mid-range and entry businesses, continues through December 2016 (exclusive of extension rights). We also acquire products from various third parties in order to increase the breadth of our product portfolio and meet channel requirements. We have arrangements with Fuji Xerox under which we purchase and sell products, some of which are the result of mutual research and development agreements. Refer to Note 9 - Investments in Affiliates, at Equity in the Consolidated Financial Statements, which is incorporated here by reference, for additional information regarding our relationship with Fuji Xerox. Services Global Production Model Our global services production model is one of our key competitive advantages. We have approximately 130 Strategic Delivery Centers located around the world, including India, Philippines, Jamaica, Mexico, Guatemala, Colombia, Brazil, Argentina, Spain, Poland and Romania. These locations are comprised of Customer Care Centers, Finance and Accounting Centers, Human Resource Centers and Document Process Centers. Our global production model is enabled by the use of proprietary technology, which allows us to securely distribute client transactions within data privacy limits across a global workforce. This global production model allows us to make the most of lower-cost production locations, consistent methodology and processes, time zone advantages and business continuity. Fuji Xerox Fuji Xerox is an unconsolidated entity in which we own a 25 percent interest, and FUJIFILM Holdings Corporation (FujiFilm) owns a 75 percent interest. Fuji Xerox develops, manufactures and distributes document processing products in Japan, China, Hong Kong, other areas of the Pacific Rim, Australia and New Zealand. We retain significant rights as a minority shareholder. Our technology licensing agreements with Fuji Xerox ensure that the two companies retain uninterrupted access to each other's portfolio of patents, technology and products. International Operations The financial measures by geographical area for 2015, 2014 and 2013 that are included in Note 2 - Segment Reporting in the Consolidated Financial Statements, are incorporated here by reference. See also the risk factor entitled “Our business, results of operations and financial condition may be negatively impacted by economic conditions abroad, including local economies, political environments, fluctuating foreign currencies and shifting regulatory schemes” in Part I, Item 1A included herein. Backlog Backlog, or the value of unfilled orders, is not a meaningful indicator of future business prospects because of the significant proportion of our revenue that follows contract signing and/or equipment installation, the large volume of products we deliver from shelf inventories and the shortening of product life cycles. Seasonality Our revenues are affected by such factors as the introduction of new products, the length of sales cycles and the seasonality of technology purchases and services unit volumes. These factors have historically resulted in lower revenues, operating profits and operating cash flows in the first quarter and the third quarter. Xerox 2015 Annual Report 12 Other Information Xerox is a New York corporation, organized in 1906, and our principal executive offices are located at 45 Glover Avenue, P.O. Box 4505, Norwalk, Connecticut 06856-4505. Our telephone number is (203) 968-3000. In the Investor Information section of our Internet website, you will find our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to these reports. We make these documents available as soon as we can after we have filed them with, or furnished them to, the U.S. Securities and Exchange Commission. Our Internet address is www.xerox.com. ITEM 1A. RISK FACTORS Our business, results of operations and financial condition may be negatively impacted by conditions abroad, including local economics, political environments, fluctuating foreign currencies and shifting regulatory schemes. A significant portion of our revenue is generated from operations outside the United States. In addition, we maintain significant operations and acquire or manufacture many of our products and/or their components outside the United States. Our future revenues, costs and results of operations could be significantly affected by changes in foreign currency exchange rates - particularly the Japanese Yen to U.S. Dollar and Japanese Yen to Euro exchange rates, as well as by a number of other factors, including changes in economic conditions from country to country, changes in a country's political conditions, trade protection measures, licensing requirements, local tax issues, capitalization and other related legal matters. We generally hedge foreign currency denominated assets, liabilities and anticipated transactions primarily through the use of currency derivative contracts. The use of derivative contracts is intended to mitigate or reduce transactional level volatility in the results of foreign operations, but does not completely eliminate volatility. We do not hedge the translation effect of international revenues and expenses, which are denominated in currencies other than our U.S. parent functional currency, within our consolidated financial statements. If our future revenues, costs and results of operations are significantly affected by economic conditions abroad and we are unable to effectively hedge these risks, they could materially adversely affect our results of operations and financial condition. If we fail to successfully develop new products, technologies and service offerings and protect our intellectual property rights, we may be unable to retain current customers and gain new customers and our revenues would decline. The process of developing new high technology products and solutions is inherently complex and uncertain. It requires accurate anticipation of customers' changing needs and emerging technological trends. We must make long-term investments and commit significant resources before knowing whether these investments will eventually result in products that achieve customer acceptance and generate the revenues required to provide desired returns. In developing these new technologies and products, we rely upon patent, copyright, trademark and trade secret laws in the United States and similar laws in other countries, and agreements with our employees, customers, suppliers and other parties, to establish and maintain our intellectual property rights in technology and products used in our operations. However, the laws of certain countries may not protect our proprietary rights to the same extent as the laws of the United States and we may be unable to protect our proprietary technology adequately against unauthorized third-party copying or use, which could adversely affect our competitive position. In addition, some of our products rely on technologies developed by third parties. We may not be able to obtain or to continue to obtain licenses and technologies from these third parties at all or on reasonable terms, or such third parties may demand cross-licenses to our intellectual property. It is also possible that our intellectual property rights could be challenged, invalidated or circumvented, allowing others to use our intellectual property to our competitive detriment. We also must ensure that all of our products comply with existing and newly enacted regulatory requirements in the countries in which they are sold, particularly European Union environmental directives. If we fail to accurately anticipate and meet our customers' needs through the development of new products, technologies and service offerings or if we fail to adequately protect our intellectual property rights or if our new products are not widely accepted or if our current or future products fail to meet applicable worldwide regulatory requirements, we could lose market share and customers to our competitors and that could materially adversely affect our results of operations and financial condition. 13 Our government contracts are subject to termination rights, audits and investigations, which, if exercised, could negatively impact our reputation and reduce our ability to compete for new contracts. A significant portion of our revenues is derived from contracts with U.S. federal, state and local governments and their agencies, as well as international governments and their agencies. Government entities typically finance projects through appropriated funds. While these projects are often planned and executed as multi-year projects, government entities usually reserve the right to change the scope of or terminate these projects for lack of approved funding and/or at their convenience. Changes in government or political developments, including budget deficits, shortfalls or uncertainties, government spending reductions (e.g., Congressional sequestration of funds under the Budget Control Act of 2011) or other debt or funding constraints, such as those recently experienced in the United States and Europe, could result in lower governmental sales and in our projects being reduced in price or scope or terminated altogether, which also could limit our recovery of incurred costs, reimbursable expenses and profits on work completed prior to the termination. Additionally, government contracts are generally subject to audits and investigations by government agencies. If the government finds that we inappropriately charged any costs to a contract, the costs are not reimbursable or, if already reimbursed, the cost must be refunded to the government. If the government discovers improper or illegal activities or contractual non-compliance in the course of audits or investigations, we may be subject to various civil and criminal penalties and administrative sanctions, which may include termination of contracts, forfeiture of profits, suspension of payments, fines and suspensions or debarment from doing business with the government. Any resulting penalties or sanctions could have a material adverse effect on our business, financial condition, results of operations and cash flows. Further, the negative publicity that arises from findings in such audits, investigations or the penalties or sanctions therefore could have an adverse effect on our reputation in the industry and reduce our ability to compete for new contracts and may also have a material adverse effect on our business, financial condition, results of operations and cash flow. The planned separation of our Business Process Outsourcing (“BPO”) business from our Document Technology and Document Outsourcing business into two independent, publicly-traded companies is subject to various risks and uncertainties and may not be completed in accordance with the expected plans or anticipated timeline, or at all, and will involve significant time and expense, which could disrupt or adversely affect our business. On January 29, 2016 we announced that our Board of Directors approved management’s plan to separate our BPO business from our Document Technology and Document Outsourcing business. Each of the businesses will operate as an independent, publicly-traded company. Our objective is to complete the separation by year-end 2016. The separation is subject to customary regulatory approvals, effectiveness of a Form 10 Registration Statement filing with the U.S. Securities and Exchange Commission, tax considerations, securing any necessary financing and final approval of our Board of Directors. The transaction is intended to be tax-free for our shareholders for U.S. federal income tax purposes. We also announced a three-year strategic cost transformation project targeting incremental savings of $600 million for a cumulative cost reduction of $2.4 billion when combined with savings from on-going programs. There are numerous risks associated with the proposed separation, including, but not limited to, the risk that the proposed separation of the BPO business from the Document Technology and Document Outsourcing business will not be consummated within the anticipated time period or at all, including as the result of regulatory, market or other factors? the risk of significant additional costs being incurred if the separation is delayed or does not occur at all; the risk of disruption to our business in connection with the proposed separation and that we could lose customers and/ or business partners as a result of such disruption? the risk that the proposed separation will require significantly more time and attention from our senior management and employees than we currently anticipate, which could distract management from the operation of our business; the risk that we may find it more difficult to attract, retain and motivate employees during the pendency of the separation and following its completion; the risk that the BPO business and Document Technology and Document Outsourcing business do not realize all of the expected benefits of the separation; the risk that, as smaller, independent companies, the BPO business and Document Technology and Document Outsourcing business will be less diversified companies with a narrower business focus and may be more vulnerable to changing market conditions and well as the risk of takeover by third parties; the risk that the yet- to-be determined credit ratings for the two publicly-traded companies may result in higher funding costs for one or both of the companies; the risk that the separation will not be tax-free for U.S. federal income tax purposes; the risk that the combined value of the common stock of the two publicly-traded companies will not be equal to or greater than what the value of Xerox common stock would have been had the separation not occurred; and the risk that the expected amount of cost reductions under the cost transformation program will not be realized. Xerox 2015 Annual Report 14 The potential negative impact of the events described above could have a material adverse effect on our business, financial condition, results of operations and prospects, whether we are constituted as two independent publicly- traded companies after the proposed separation is completed or as one company as currently constituted. We derive significant revenue and profit from commercial and federal government contracts awarded through competitive bidding processes, including renewals, which can impose substantial costs on us, and we will not achieve revenue and profit objectives if we fail to accurately and effectively bid on such projects. Many of these contracts are extremely complex and require the investment of significant resources in order to prepare accurate bids and proposals. Competitive bidding imposes substantial costs and presents a number of risks, including: (i) the substantial cost and managerial time and effort that we spend to prepare bids and proposals for contracts that may or may not be awarded to us; (ii) the need to estimate accurately the resources and costs that will be required to implement and service any contracts we are awarded, sometimes in advance of the final determination of their full scope and design; (iii) the expense and delay that may arise if our competitors protest or challenge awards made to us pursuant to competitive bidding, and the risk that such protests or challenges could result in the requirement to resubmit bids, and in the termination, reduction, or modification of the awarded contracts; and (iv) the opportunity cost of not bidding on and winning other contracts we might otherwise pursue. Adverse events or developments in any of these bidding risks and uncertainties could materially and negatively impact our business, financial condition, results of operations and cash flow. For our services contracts, we rely to a significant extent on third-party providers, such as subcontractors, a relatively small number of primary software vendors, utility providers and network providers; if they cannot deliver or perform as expected or if our relationships with them are terminated or otherwise change, our business, results of operations and financial condition could be materially adversely affected. Our ability to service our customers and clients and deliver and implement solutions depends to a large extent on third-party providers such as subcontractors, a relatively small number of primary software vendors and utility providers and network providers meeting their obligations to us and our expectations in a timely, quality manner. Our business, revenues, profitability and cash flows could be materially and adversely affected and we might incur significant additional liabilities if these third-party providers do not meet these obligations or our or our clients' expectations or if they terminate or refuse to renew their relationships with us or were to offer their products to us with less advantageous prices and other terms than we previously had. In addition, a number of our facilities are located in jurisdictions outside of the United States where the provision of utility services, including electricity and water, may not be consistently reliable and, while there are backup systems in many of our operating facilities, an extended outage of utility or network services could have a material adverse effect on our operations, revenues, cash flow and profitability. We face significant competition and our failure to compete successfully could adversely affect our results of operations and financial condition. We operate in an environment of significant competition, driven by rapid technological developments, changes in industry standards, and demands of customers to become more efficient. Our competitors range from large international companies to relatively small firms. Some of the large international companies have significant financial resources and compete with us globally to provide document processing products and services and/or business process services in each of the markets we serve. We compete primarily on the basis of technology, performance, price, quality, reliability, brand, distribution and customer service and support. Our success in future performance is largely dependent upon our ability to compete successfully in the markets we currently serve, to promptly and effectively react to changing technologies and customer expectations and to expand into additional market segments. To remain competitive, we must develop services, applications and new products; periodically enhance our existing offerings; remain cost efficient; and attract and retain key personnel and management. If we are unable to compete successfully, we could lose market share and important customers to our competitors and that could materially adversely affect our results of operations and financial condition. Our profitability is dependent upon our ability to obtain adequate pricing for our products and services and to improve our cost structure. Our success depends on our ability to obtain adequate pricing for our services and products and that will provide a reasonable return to our shareholders. Depending on competitive market factors, future prices we obtain for our services and products may decline from previous levels. In addition, pricing actions to offset the effect of currency devaluations may not prove sufficient to offset further devaluations or may not hold in the face of customer 15 resistance and/or competition. If we are unable to obtain adequate pricing for our services and products, it could materially adversely affect our results of operations and financial condition. In addition, our services contracts are increasingly requiring tighter timelines for implementation as well as more stringent service level metrics. This makes the bidding process for new contracts much more difficult and requires us to adequately consider these requirements in the pricing of our services. We continually review our operations with a view towards reducing our cost structure, including reducing our employee base, exiting certain businesses, improving process and system efficiencies and outsourcing some internal functions. We from time to time engage in restructuring actions to reduce our cost structure. If we are unable to continue to maintain our cost base at or below the current level and maintain process and systems changes resulting from prior restructuring actions, it could materially adversely affect our results of operations and financial condition. In addition, in order to continually meet the service requirements of our customers, which often includes 24/7 service, and to optimize our employee cost base including our back-office support, we often locate our delivery service and back-office support centers in lower-cost locations, including several developing countries. Concentrating our centers in these locations presents a number of operational risks, many of which are beyond our control, including the risks of political instability, natural disasters, safety and security risks, labor disruptions; excessive employee turnover and rising labor rates. These risks could impair our ability to effectively provide services to our customers and keep our costs aligned to our associated revenues and market requirements. Our ability to sustain and improve profit margins is dependent on a number of factors, including our ability to continue to improve the cost efficiency of our operations through such programs as Lean Six Sigma, the level of pricing pressures on our services and products, the proportion of high-end as opposed to low-end equipment sales (product mix), the trend in our post-sale revenue growth and our ability to successfully complete information technology initiatives. If any of these factors adversely materialize or if we are unable to achieve and maintain productivity improvements through design efficiency, supplier and manufacturing cost improvements and information technology initiatives, our ability to offset labor cost inflation, potential materials cost increases and competitive price pressures would be impaired, all of which could materially adversely affect our results of operations and financial condition. We are subject to laws of the United States and foreign jurisdictions relating to individually identifiable information, and failure to comply with those laws, whether or not inadvertent, could subject us to legal actions and negatively impact our operations. We receive, process, transmit and store information relating to identifiable individuals, both in our role as a service and technology provider and as an employer. As a result, we are subject to numerous United States (both federal and state) and foreign jurisdiction laws and regulations designed to protect individually identifiable information, including the Health Insurance Portability and Accountability Act of 1996 (HIPAA) and the HIPAA regulations governing, among other things, the privacy, security and electronic transmission of individually identifiable health information, and the European Union Directive on Data Protection (Directive 95/46/EC). Other United States (both federal and state) and foreign jurisdiction laws apply to our processing of individually identifiable information and these laws have been subject to frequent changes, and new legislation in this area may be enacted at any time. For example, the recent invalidation of the U.S.-EU Safe Harbor regime will require us to implement alternative mechanisms in order for some of our data flows from Europe to the United States to comply with applicable law. Changes to existing laws, introduction of new laws in this area, or failure to comply with existing laws that are applicable to us may subject us to, among other things, additional costs or changes to our business practices, liability for monetary damages, fines and/or criminal prosecution, unfavorable publicity, restrictions on our ability to obtain and process information and allegations by our customers and clients that we have not performed our contractual obligations, any of which may have a material adverse effect on our profitability and cash flow. We are subject to breaches of our security systems and service interruptions which could expose us to liability, impair our reputation or temporarily render us unable to fulfill our service obligations under our contracts. We have implemented security systems with the intent of maintaining the physical security of our facilities and protecting our customers', clients' and suppliers' confidential information and information related to identifiable individuals against unauthorized access through our information systems or by other electronic transmission or through the misdirection, theft or loss of physical media. These include, for example, the appropriate encryption of information. Despite such efforts, we are subject to breach of security systems which may result in unauthorized access to our facilities and/or the information we are trying to protect. Because the techniques used to obtain Xerox 2015 Annual Report 16 unauthorized access are constantly changing and becoming increasingly more sophisticated and often are not recognized until launched against a target, we may be unable to anticipate these techniques or implement sufficient preventative measures. If unauthorized parties gain physical access to one of our facilities or electronic access to our information systems or such information is misdirected, lost or stolen during transmission or transport, any theft or misuse of such information could result in, among other things, unfavorable publicity, governmental inquiry and oversight, difficulty in marketing our services, allegations by our customers and clients that we have not performed our contractual obligations, litigation by affected parties and possible financial obligations for damages related to the theft or misuse of such information, any of which could have a material adverse effect on our profitability and cash flow. We also maintain various systems and data centers for our customers. Often these systems and data centers must be maintained worldwide and on a 24/7 basis. Although we endeavor to ensure that there is adequate back- up and maintenance of these systems and centers, we could experience service interruptions that could result in curtailed operations and loss of customers, which would reduce our revenue and profits in addition to impairing our reputation. Our ability to recover capital investments in connection with our contracts is subject to risk. In order to attract and retain large outsourcing contracts, we sometimes make significant capital investments to enable us to perform our services under the contracts, such as purchases of information technology equipment and costs incurred to develop and implement software. The net book value of such assets recorded, including a portion of our intangible assets, could be impaired, and our earnings and cash flow could be materially adversely affected in the event of the early termination of all or a part of such a contract or a reduction in volumes and services thereunder for reasons such as a customer's or client's merger or acquisition, divestiture of assets or businesses, business failure or deterioration, or a customer's or client's exercise of contract termination rights. Our services business could be adversely affected if we are unsuccessful in managing the start-up of new contracts. In order for our services business to continue its growth, we must successfully manage the start-up of services related to new contracts. If a client is not satisfied with the quality of work performed by us or a subcontractor, or with the type of services or solutions delivered, then we could incur additional costs to address the situation, the profitability of that work might be impaired and the client's dissatisfaction with our services could damage our ability to obtain additional work from that client or obtain new work from other potential clients. In particular, clients who are not satisfied might seek to terminate existing contracts prior to their scheduled expiration date, which may result in our inability to fully recover our up-front investments. In addition, clients could direct future business to our competitors. We could also trigger contractual credits to clients or a contractual default. Failure to properly transition new clients to our systems, properly budget transition costs or accurately estimate new contract operational costs could result in delays in our contract performance, trigger service level penalties, impair fixed or intangible assets or result in contract profit margins that do not meet our expectations or our historical profit margins. In addition, we incur significant expenditures for the development and construction of system software platforms needed to support our clients' needs. Our failure to fully understand client requirements or implement the appropriate operating systems or databases or solutions which enable the use of other supporting software may delay the project and result in cost overruns or potential impairment of the related software platforms. If we are unable to collect our receivables for unbilled services, our results of operations, financial condition and cash flows could be adversely affected. The profitability of certain of our large services contracts depends on our ability to successfully obtain payment from our clients of the amounts they owe us for work performed. Actual losses on client balances could differ from current estimates and, as a result, may require adjustment of our receivables for unbilled services. Our receivables include long-term contracts and over the course of a long-term contract, our customers' financial condition may change such that their ability to pay their obligations, and our ability to collect our fees for services rendered, is adversely affected. Additionally, we may perform work for the federal, state and local governments, with respect to which we must file requests for equitable adjustment or claims with the proper agency to seek recovery in whole or in part, for out-of-scope work directed or caused by the government customer in support of its project, and the amounts of such recoveries may not meet our expectations or cover our costs. Macroeconomic conditions could result in financial difficulties, including limited access to the credit markets, insolvency or bankruptcy, for our clients and, as a result, could cause clients to delay payments to us, request modifications to their payment arrangements that could increase our receivables balance, or default on their payment obligations to us. Timely collection of client balances also depends on our ability to complete our contractual commitments (for example, achieve specified milestones in percentage-of-completion contracts) and bill and collect our contracted revenues. If we are unable to meet our 17 contractual requirements, we might experience delays in collection of and/or be unable to collect our client balances, and if this occurs, our results of operations and cash flows could be adversely affected. In addition, if we experience an increase in the time to bill and collect for our services, our cash flows could be adversely affected. We have outsourced a significant portion of our overall worldwide manufacturing operations and increasingly are relying on third-party manufacturers, subcontractors and external suppliers. We have outsourced a significant portion of our overall worldwide manufacturing operations to third parties and various service providers. To the extent that we rely on third-party manufacturing relationships, we face the risk that those manufacturers may not be able to develop manufacturing methods appropriate for our products, they may not be able to quickly respond to changes in customer demand for our products, they may not be able to obtain supplies and materials necessary for the manufacturing process, they may experience labor shortages and/or disruptions, manufacturing costs could be higher than planned and the reliability of our products could decline. If any of these risks were to be realized, and assuming similar third-party manufacturing relationships could not be established, we could experience interruptions in supply or increases in costs that might result in our being unable to meet customer demand for our products, damage our relationships with our customers and reduce our market share, all of which could materially adversely affect our results of operations and financial condition. In addition, in our services business we may partner with other parties, including software and hardware vendors, to provide the complex solutions required by our customers. Therefore, our ability to deliver the solutions and provide the services required by our customers is dependent on our and our partners' ability to meet our customers' requirements and schedules. If we or our partners fail to deliver services or products as required and on time, our ability to complete the contract may be adversely affected, which may have an adverse impact on our revenue and profits. We need to successfully manage changes in the printing environment and market because our operating results may be negatively impacted by lower equipment placements and usage trends. The printing market and environment is changing significantly as a result of new technologies, shifts in customer preferences in office printing and the expansion of new printing markets. Examples include mobile printing, color printing, continuous feed inkjet printing and the expansion of the market for entry products (A4 printers) and high- end products (B1/B2 printers). A significant part of our strategy and ultimate success in this changing market is our ability to develop and market technology that produces products and services that meet these changes. Our future success in executing on this strategy depends on our ability to make the investments and commit the necessary resources in this highly competitive market. If we are unable to develop and market advanced and competitive technologies, it may negatively impact expansion of our worldwide equipment placements, as well as sales of services and supplies occurring after the initial equipment placement (post sale revenue) in the key growth markets of digital printing, color and multifunction systems. We expect that revenue growth can be further enhanced through our document management and consulting services in the areas of personalized and product life cycle communications, enterprise managed print services and document content and imaging. The ability to achieve growth in our equipment placements is subject to the successful implementation of our initiatives to provide advanced systems, industry-oriented global solutions and services for major customers, improve direct and indirect sales productivity and expand and successfully manage our indirect distribution channels in the face of global competition and pricing pressures. Our ability to increase post sale revenue is largely dependent on our ability to increase the volume of pages printed, the mix and price of color pages, equipment utilization and color adoption, as well as our ability to retain a high level of supplies sales in unbundled contracts. Equipment placements typically occur through leases with original terms of three to five years. There will be a lag between the increase in equipment placements and an increase in post sale revenues. In addition, with respect to our indirect distribution channels, many of our partners may sell competing products, further increasing the need to successfully manage our relationships with our partners to ensure they meet our specific sale and distribution requirements for equipment placements and post sale revenues. If we are unable to maintain a consistent trend of revenue growth, it could materially adversely affect our results of operations and financial condition. Our ability to fund our customer financing activities at economically competitive levels depends on our ability to borrow and the cost of borrowing in the credit markets. The long-term viability and profitability of our customer financing activities is dependent, in part, on our ability to borrow and the cost of borrowing in the credit markets. This ability and cost, in turn, is dependent on our credit ratings and is subject to credit market volatility. We primarily fund our customer financing activity through a combination of cash generated from operations, cash on hand, capital market offerings, sales and securitizations of Xerox 2015 Annual Report 18 finance receivables and commercial paper borrowings. Our ability to continue to offer customer financing and be successful in the placement of equipment with customers is largely dependent on our ability to obtain funding at a reasonable cost. If we are unable to continue to offer customer financing, it could materially adversely affect our results of operations and financial condition. Our ability to deliver services could be impaired if we are unable to hire or retain qualified personnel in certain areas of our business, which could result in decreased revenues or additional costs. At times, we have experienced difficulties in hiring personnel with the desired levels of training or experience. In regard to the labor-intensive business of the Company, quality service and adequate internal controls depend on our ability to retain employees and manage personnel turnover. An increase in the employee turnover rate or our inability to recruit and retain qualified personnel could increase recruiting and training costs and potentially decrease revenues or decrease our operating effectiveness and productivity. We may not be able to continue to hire, train and retain a sufficient number of qualified personnel to adequately staff new client projects. Additionally, we need to identify managerial personnel in emerging markets and lower-cost locations where the depth of skilled employees is often limited and competition for these resources is intense. If we are unable to develop and retain these managerial employees with leadership capabilities our ability to successfully manage our business units could be impaired. Our significant debt could adversely affect our financial health and pose challenges for conducting our business. We have and will continue to have a significant amount of debt and other obligations, the majority of which support our customer financing activities. Our substantial debt and other obligations could have important consequences. For example, it could (i) increase our vulnerability to general adverse economic and industry conditions; (ii) limit our ability to obtain additional financing for future working capital, capital expenditures, acquisitions and other general corporate requirements; (iii) increase our vulnerability to interest rate fluctuations because a portion of our debt has variable interest rates; (iv) require us to dedicate a substantial portion of our cash flows from operations to service debt and other obligations thereby reducing the availability of our cash flows from operations for other purposes; (v) limit our flexibility in planning for, or reacting to, changes in our businesses and the industries in which we operate; (vi) place us at a competitive disadvantage compared to our competitors that have less debt; and (vii) become due and payable upon a change in control. If new debt is added to our current debt levels, these related risks could increase. We need to maintain adequate liquidity in order to meet our operating cash flow requirements, repay maturing debt and meet other financial obligations, such as payment of dividends to the extent declared by our Board of Directors. If we fail to comply with the covenants contained in our various borrowing agreements, it may adversely affect our liquidity, results of operations and financial condition. Our liquidity is a function of our ability to successfully generate cash flows from a combination of efficient operations and continuing operating improvements, access to capital markets and funding from third parties. We believe our liquidity (including operating and other cash flows that we expect to generate) will be sufficient to meet operating requirements as they occur; however, our ability to maintain sufficient liquidity going forward depends on our ability to generate cash from operations and access to the capital markets and funding from third parties, all of which are subject to the general liquidity of and on-going changes in the credit markets as well as general economic, financial, competitive, legislative, regulatory and other market factors that are beyond our control. The Credit Facility contains financial maintenance covenants, including maximum leverage (debt for borrowed money divided by consolidated EBITDA, as defined) and a minimum interest coverage ratio (consolidated EBITDA divided by consolidated interest expense, as defined). At December 31, 2015, we were in full compliance with the covenants and other provisions of the Credit Facility. Failure to comply with material provisions or covenants in the Credit Facility could have a material adverse effect on our liquidity, results of operations and financial condition. Our business, results of operations and financial condition may be negatively impacted by legal and regulatory matters. We have various contingent liabilities that are not reflected on our balance sheet, including those arising as a result of being involved in a variety of claims, lawsuits, investigations and proceedings concerning: securities law; governmental entity contracting, servicing and procurement laws; intellectual property law; environmental law; employment law; the Employee Retirement Income Security Act (ERISA); and other laws and regulations, as discussed in the “Contingencies” note in the Consolidated Financial Statements. Should developments in any of these matters cause a change in our determination as to an unfavorable outcome and result in the need to 19 recognize a material accrual or materially increase an existing accrual, or should any of these matters result in a final adverse judgment or be settled for significant amounts above any existing accruals, it could have a material adverse effect on our results of operations, cash flows and financial position in the period or periods in which such change in determination, judgment or settlement occurs. Our operations and our products are subject to environmental regulations in each of the jurisdictions in which we conduct our business and sell our products. Some of our manufacturing operations use, and some of our products contain, substances that are regulated in various jurisdictions. For example, various countries and jurisdictions have adopted or are expected to adopt restrictions on the types and amounts of chemicals that may be present in electronic equipment or other items that we use or sell. If we do not comply with applicable rules and regulations in connection with the use of such substances and the sale of products containing such substances, then we could be subject to liability and could be prohibited from selling our products in their existing forms, which could have a material adverse effect on our results of operations and financial condition. Further, various countries and jurisdictions have adopted or are expected to adopt, programs that make producers of electrical goods, including computers and printers, responsible for certain labeling, collection, recycling, treatment and disposal of these recovered products. If we are unable to collect, recycle, treat and dispose of our products in a cost-effective manner and in accordance with applicable requirements, it could materially adversely affect our results of operations and financial condition. Other potentially relevant initiatives throughout the world include proposals for more extensive chemical registration requirements and/or possible bans on the use of certain chemicals, various efforts to limit energy use in products and other environmentally related programs impacting products and operations, such as those associated with climate change accords, agreements and regulations. For example, the European Union's Energy-Related Products Directive (ERP) has led to the adoption of “implementing measures” or "voluntary agreements" that require certain classes of products to achieve certain design and/or performance standards, in connection with energy use and potentially other environmental parameters and impacts. A number of our products are already required to comply with ERP requirements and further regulations are being developed by the EU authorities. Another example is the European Union “REACH” Regulation (Registration, Evaluation, Authorization and Restriction of Chemicals), a broad initiative that requires parties throughout the supply chain to register, assess and disclose information regarding many chemicals in their products. Depending on the types, applications, forms and uses of chemical substances in various products, REACH could lead to restrictions and/or bans on certain chemical usage. Xerox continues its efforts toward monitoring and evaluating the applicability of these and numerous other regulatory initiatives in an effort to develop compliance strategies. As these and similar initiatives and programs become regulatory requirements throughout the world and/or are adopted as public or private procurement requirements, we must comply or potentially face market access limitations that could have a material adverse effect on our operations and financial condition. Similarly, environmentally driven procurement requirements voluntarily adopted by customers in the marketplace (e.g., U.S. EPA EnergyStar, EPEAT) are constantly evolving and becoming more stringent, presenting further market access challenges if our products fail to comply. ITEM 1B. UNRESOLVED STAFF COMMENTS None ITEM 2. PROPERTIES We own several manufacturing, engineering and research facilities and lease other facilities. Our principal manufacturing and engineering facilities, located in New York, California, Oklahoma, Oregon, Canada, U.K., Ireland and the Netherlands, are used primarily by the Document Technology segment. Our principal research facilities are located in California, New York, Canada, France and India. The research activities in our principal research centers benefit all of our operating segments. We lease and own several facilities worldwide to support our Services segment with larger concentrations of space in Kentucky, New Jersey, California, Mexico, Guatemala, Philippines, Jamaica, Romania and India. Our Corporate Headquarters is a leased facility located in Norwalk, Connecticut. As a result of implementing our restructuring programs (refer to Note 11 - Restructuring and Asset Impairment Charges in the Consolidated Financial Statements, which is incorporated here by reference) as well as various productivity initiatives, several leased and owned properties became surplus. We are obligated to maintain our leased surplus properties through required contractual periods. We have disposed or subleased certain of these properties and are actively pursuing the successful disposition of remaining surplus properties. Xerox 2015 Annual Report 20 In June 2015 we completed the sale of our ITO business to Atos. The sale resulted in the transfer of 57 leases and 4 owned buildings to Atos and reduced our property portfolio by 1.3 million square feet and our operating costs by $31 million per year. We also own or lease numerous facilities globally, which house general offices, sales offices, service locations, data centers, call centers and distribution centers. The size of our property portfolio at December 31, 2015 was approximately 30 million square feet at an annual operating cost of approximately $520 million and was comprised of 1,505 leased properties and 131 owned properties (of which 74 are located on our Webster, New York campus). It is our opinion that our properties have been well maintained, are in sound operating condition and contain all the necessary equipment and facilities to perform their functions. We believe that our current facilities are suitable and adequate for our current businesses. ITEM 3. LEGAL PROCEEDINGS The information set forth under Note 18 "Contingencies and Litigation" in the Consolidated Financial Statements is incorporated here by reference. ITEM 4. MINE SAFETY DISCLOSURES Not applicable. 21 Part II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Stock Exchange Information Xerox common stock (XRX) is listed on the New York Stock Exchange and the Chicago Stock Exchange. Xerox Common Stock Prices and Dividends New York Stock Exchange composite prices * First Quarter Second Quarter Third Quarter Fourth Quarter 2015 High Low Dividends declared per share 2014 High Low Dividends declared per share _____________ * Price as of close of business. $ $ 14.00 $ 13.26 $ 11.37 $ 12.59 0.07 10.64 0.07 9.49 0.07 12.44 $ 12.92 $ 14.05 $ 10.30 0.0625 11.06 0.0625 12.20 0.0625 10.88 9.29 0.07 14.32 12.21 0.0625 In January 2016, the Board of Directors approved an increase in the Company's quarterly cash dividend from 7.00 cents per share to 7.75 cents per share, beginning with the dividend payable on April 29, 2016. Common Shareholders of Record See Item 6 - Selected Financial Data, Five Years in Review, Common Shareholders of Record at Year-End, which is incorporated here by reference. PERFORMANCE GRAPH Xerox 2015 Annual Report 22 Total Return To Shareholders (Includes reinvestment of dividends) 2010 2011 2012 2013 2014 2015 Xerox Corporation S&P 500 Index S&P 500 Information Technology Index $ 100.00 $ 70.46 $ 61.75 $ 112.78 $ 131.00 $ 100.00 100.00 102.11 102.41 118.45 117.59 156.82 151.03 178.29 181.40 103.09 180.75 192.15 Year Ended December 31, Source: Standard & Poor's Investment Services Notes: Graph assumes $100 invested on December 31, 2010 in Xerox, the S&P 500 Index and the S&P 500 Information Technology Index, respectively, and assumes dividends are reinvested. SALES OF UNREGISTERED SECURITIES DURING THE QUARTER ENDED DECEMBER 31, 2015 During the quarter ended December 31, 2015, Registrant issued the following securities in transactions that were not registered under the Securities Act of 1933, as amended (the “Act”). Dividend Equivalent (a) Securities issued on October 31, 2015: Registrant issued 5,522 deferred stock units (DSUs), representing the right to receive shares of Common stock, par value $1 per share, at a future date. (b) No underwriters participated. The shares were issued to each of the non-employee Directors of Registrant: Richard J. Harrington, William Curt Hunter, Robert J. Keegan, Charles Prince, Ann N. Reese, Stephen Rusckowski, Sara Martinez Tucker, and Mary Agnes Wilderotter. The DSUs were issued at a deemed purchase price of $9.635 per DSU (aggregate price $53,204), based upon the market value of our Common Stock on the date of record, in payment of the dividend equivalents due to DSU holders pursuant to Registrant’s 2004 Equity Compensation Plan for Non-Employee Directors. (d) Exemption from registration under the Act was claimed based upon Section 4(2) as a sale by an issuer not (c) involving a public offering. Issuer Purchases of Equity Securities During the Quarter Ended December 31, 2015 Repurchases of Xerox Common Stock, par value $1 per share include the following: Board Authorized Share Repurchase Program: October 1 through 31 November 1 through 30 December 1 through 31 Total _____________ Total Number of Shares Purchased Average Price Paid per Share(1) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(2) Maximum Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs(2) — $ — — — — — — — $ — — — 244,710,381 244,710,381 244,710,381 (1) Exclusive of fees and costs. (2) Of the cumulative $8.0 billion of share repurchase authority granted by our Board of Directors, exclusive of fees and expenses, approximately $7.8 billion has been used through December 31, 2015. Repurchases may be made on the open market, or through derivative or negotiated transactions. Open-market repurchases will be made in compliance with the Securities and Exchange Commission’s Rule 10b-18, and are subject to market conditions, as well as applicable legal and other considerations. 23 Repurchases Related to Stock Compensation Programs(1): Total Number of Shares Purchased Average Price Paid per Share(2) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number (or Approximate Dollar Value) of Shares That May Yet Be Purchased under the Plans or Programs 107,619 $ 201 1,175 108,995 9.64 9.75 10.88 n/a n/a n/a n/a n/a n/a October 1 through 31 November 1 through 30 December 1 through 31 Total ______________ (1) These repurchases are made under a provision in our stock-based compensation programs and represent the indirect repurchase of shares through a net-settlement feature upon the vesting of shares in order to satisfy minimum statutory tax-withholding requirements. (2) Exclusive of fees and costs. Xerox 2015 Annual Report 24 ITEM 6. SELECTED FINANCIAL DATA FIVE YEARS IN REVIEW (in millions, except per-share data) Per-Share Data Income from continuing operations Basic Diluted Net Income Attributable to Xerox Basic Diluted Common stock dividends declared Operations Revenues Sales Outsourcing, maintenance and rentals Financing Income from continuing operations Income from continuing operations - Xerox Net income Net income - Xerox Financial Position Working capital Total Assets Consolidated Capitalization Short-term debt and current portion of long-term debt Long-term debt Total Debt(2) Series A convertible preferred stock Xerox shareholders' equity Noncontrolling interests 2015 2014 (1) 2013 2012 2011 $ $ 0.50 0.49 0.42 0.42 0.28 $ 0.96 0.94 0.86 0.85 0.25 $ 0.91 0.89 0.93 0.91 0.23 $ 0.87 0.85 0.90 0.88 0.17 0.86 0.84 0.92 0.90 0.17 $ 18,045 $ 19,540 $ 20,006 $ 20,421 $ 20,638 4,748 12,951 346 570 552 492 474 5,288 13,865 387 1,151 1,128 1,036 1,013 5,582 13,941 483 1,159 1,139 1,179 1,159 5,827 13,997 597 1,180 1,152 1,223 1,195 6,265 13,741 632 1,252 1,219 1,328 1,295 $ $ 1,431 $ 2,798 $ 2,825 $ 2,363 $ 1,531 24,817 27,658 29,036 30,015 30,116 985 $ 1,427 $ 1,117 $ 1,042 $ 6,382 7,367 349 9,074 43 6,314 7,741 349 10,678 75 6,904 8,021 349 12,300 119 7,447 8,489 349 11,521 143 1,545 7,088 8,633 349 11,876 149 Total Consolidated Capitalization $ 16,833 $ 18,843 $ 20,789 $ 20,502 $ 21,007 Selected Data and Ratios Common shareholders of record at year-end Book value per common share Year-end common stock market price ___________ 33,843 8.96 10.63 35,307 9.56 13.86 $ $ 37,552 10.35 12.17 $ $ $ $ 39,397 41,982 $ $ 9.41 6.82 $ $ 8.88 7.96 (1) 2014 was revised for a deferred tax liability adjustment related to a change in tax law. Refer to Note 1 - Basis of Presentation and Summary of Significant Accounting Policies in our Consolidated Financial Statements, which is incorporated here by reference, for additional information. (2) Includes capital lease obligations. 25 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management’s Discussion and Analysis (MD&A) is intended to help the reader understand the results of operations and financial condition of Xerox Corporation. MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and the accompanying notes. Throughout the MD&A, we refer to various notes to our Consolidated Financial Statements which appear in Item 8 of this 2015 Form 10-K, and the information contained in such notes is incorporated by reference into the MD&A in the places where such references are made. Throughout this document, references to “we,” “our,” the “Company,” and “Xerox” refer to Xerox Corporation and its subsidiaries. References to “Xerox Corporation” refer to the stand-alone parent company and do not include its subsidiaries. Executive Overview With revenues of $18.0 billion we are a leader across large, diverse and growing markets estimated at nearly $365 billion. The global business process outsourcing market is very broad, encompassing multi-industry business processes as well as industry-specific business processes, and our addressable market is estimated at almost $275 billion. The document management market is estimated at about $90 billion and is comprised of the document systems, software, solutions and services that our customers have relied upon for years to help run their businesses and reduce their costs. Xerox led the establishment of the managed print services market, and continues today as the industry leader in this expanding market segment. Headquartered in Norwalk, Connecticut, the 143,600 people of Xerox serve customers in more than 180 countries providing business services, printing equipment and software for commercial and government organizations. In 2015, 30% of our revenue was generated outside the U.S. We organize our business around two main reportable segments: Services and Document Technology. • Our Services segment is comprised of business process outsourcing (BPO) and document outsourcing (DO) services. • Our Document Technology segment is comprised of our document technology and related supplies, technical service and equipment financing (excluding contracts related to document outsourcing). Our product groups within this segment include Entry, Mid-Range and High-End products. Annuity-Based Business Model In 2015, 85% of our total revenue was annuity-based, which includes contracted outsourcing services, equipment maintenance services, consumable supplies and financing, among other elements. Our annuity revenue significantly benefits from growth in Services. Some of the key indicators of annuity revenue growth include: • Services signings, which reflects the estimated future revenues from contracts signed during the period, i.e., Total Contract Value (TCV). • Services renewal rate, which is defined as the annual recurring revenue (ARR) on contracts that are renewed during the period, calculated as a percentage of ARR on all contracts where a renewal decision was made during the period. • Services pipeline growth, which measures the increase in new business opportunities. • Installations of printers and multifunction devices as well as the number of machines in the field (MIF) and the page volume and mix of pages printed on color devices, where available. Xerox 2015 Annual Report 26 Planned Company Separation On January 29, 2016, we announced that our Board of Directors had approved management’s plan to separate the Company's Business Process Outsourcing business from its Document Technology and Document Outsourcing businesses. Each of the businesses will operate as an independent, publicly-traded company. Leadership and the names of the two companies will be determined as the process progresses. The transaction is intended to be tax-free for Xerox shareholders for federal income tax purposes. Xerox will begin the process to separate while we finalize the transaction structure. Our objective is to complete the separation by year-end 2016, subject to customary regulatory approvals, the effectiveness of a Form 10 filing with the U.S. Securities and Exchange Commission, tax considerations, securing any necessary financing and final approval of the Xerox Board of Directors. Until the separation is complete, we will continue to operate and report as a single company, and it will continue to be business as usual for our customers and employees. As part of the planned separation, Xerox also announced that we will implement a three-year strategic transformation program targeting incremental savings of $600 million across all segments for a cumulative cost reduction of $2.4 billion over the three years when combined with savings from on-going programs. Acquisitions and Divestitures Consistent with our strategy to enhance our Services offerings and global presence and to expand our distribution capabilities in Document Technology, we completed several acquisitions during 2015. Refer to Acquisitions and Divestitures section in Item 1. Business in this Form 10-K as well as Note 3 - Acquisitions in our Consolidated Financial Statements for additional information regarding our 2015 acquisitions. In December 2014, we announced an agreement to sell our Information Technology Outsourcing (ITO) business to Atos and began reporting it as a Discontinued Operation. The sale was completed on June 30, 2015. Refer to Note 4 - Divestitures in our Consolidated Financial Statements for additional information. Significant 2015 Charges During 2015, we announced several changes regarding the strategic direction of our Government Healthcare Solutions (GHS) business, specifically with respect to the implementation of our Health Enterprise (HE) Medicaid platform. In October 2015, we determined that we would not fully complete the implementation of the platform in California and Montana. This determination resulted in recording a pre-tax charge (HE charge) of $389 million ($241 million after-tax) in the third quarter 2015. $116 million of the charge was recorded as a reduction to revenues and the remaining $273 million was recorded to Cost of outsourcing, maintenance and rentals. This development followed the GHS strategy change announced in July 2015, regarding our decision to focus our future HE implementations on current Medicaid customers and to discontinue investment in and sales of the Xerox Integrated Eligibility System. This change in strategy resulted in pre-tax non-cash software platform impairment charges of $146 million in the second quarter 2015. Refer to the "Government Healthcare Strategy Change" section of the "Services Segment" review for further details of these decisions and charges. As a result of the significant impact of the HE charge and the software impairment charges on our reported revenues, earnings and key metrics for the period, we are also discussing our results excluding the impact of these charges. These adjusted results are noted as “adjusted1” in the discussion below. Refer to the "Non-GAAP Financial Measures" section for an explanation of these non-GAAP financial measures. Financial Overview Total revenue of $18.0 billion in 2015 declined 8% from the prior year, with a 4-percentage point negative impact from currency. On an adjusted1 basis, excluding the HE charge, total revenues decreased 7%, with a 4-percentage point negative impact from currency. Services segment revenues decreased 4%, with a 3-percentage point negative impact from currency. On an adjusted1 basis Services segment revenues decreased 3%, with a 3-percentage point negative impact from currency, reflecting a 1% constant currency decrease in BPO revenues offset by a 3% increase in DO revenues. Services segment margin of 4.4% decreased 4.6-percentage points. On an adjusted1 basis segment margin was 8.1% and decreased 0.9-percentage points primarily due to targeted resource and other investments and increased expenses associated with our GHS HE platform implementations prior to the change in strategy. Document Technology segment revenues declined 12%, with a 4-percentage point negative impact from currency reflecting lower sales of entry products particularly in developing markets and to OEM customers and 27 lower supplies demand as well as continued price and page declines. Document Technology segment margin of 11.9% decreased 1.8-percentage points from 2014, reflecting unfavorable product mix and price declines, within our historical range, and an increase in pension expense partially offset by restructuring and productivity benefits. 2015 Net income from continuing operations attributable to Xerox was $552 million and included the $241 million after-tax HE charge and $90 million after-tax GHS software impairment charges as well as $193 million of after-tax amortization of intangible assets. Net income from continuing operations attributable to Xerox for 2014 was $1,128 million and included $196 million of after-tax amortization of intangible assets. The decrease in net income, after consideration of the noted charges, is primarily due to the profit decline in both the Services and Document Technology segments. Cash flow from operations was $1.6 billion in 2015 as compared to $2.1 billion in 2014. The decrease in operating cash flow was primarily due to lower earnings and the elimination of cash flows from the divested ITO business. Cash provided by investing activities of $508 million primarily reflects net proceeds from the sale of the ITO business of approximately $930 million partially offset by capital expenditures of $342 million and acquisitions of $210 million. Cash used in financing activities was $2.1 billion, reflecting $1.3 billion for share repurchases, $370 million of net payments on debt and $326 million for dividends. 2016 Outlook We expect total revenues to decline 2 to 4% in 2016, excluding the impact of currency. At mid January 2016 exchange rates, we expect currency to have about a 1 to 2 percentage point negative impact on total revenues in 2016, reflecting the continued weakening of our major foreign currencies against the U.S. dollar as compared to prior year. Earnings in 2016 are expected to reflect margin improvements in the Services segment and a Document Technology margin generally consistent with 2015. Refer to the "2016 Segment Reporting Change" section for a discussion of planned changes in the measurement of segment revenues and profits in 2016. The discussion below reflects those changes and the "2016 Segment Reporting Change" section includes a summary of revised segment results for 2015 on the new basis for comparison purposes. In our Services business, we expect flat to 3% revenue growth, excluding the impact of currency, with revenue growth improving through the year driven by continued growth in signings. Services margins are expected to improve and be in the range of 8 to 9.5% in 2016 as we continue to focus on productivity and cost improvements, capturing additional efficiencies, including streamlining and automating more of our service delivery capabilities, and continued improvements to our business mix with a greater proportion of revenue from higher value offerings. In our Document Technology business, we expect revenue to decline 5 to 7%, excluding the impact of currency, as we continue to face secular declines in these markets. We expect to offset these expected declines through continued cost management as well as the benefits from productivity and restructuring actions. 2016 margins in Document Technology are expected to be in the range of 12 to 14%, in line with 2015. We expect 2016 cash flows from operations to be between $1.3 and $1.5 billion in 2016 and capital expenditures to be approximately $300 million. Our capital allocation plan for 2016 includes the following: • Share repurchase and dividends – we plan to spend more than 50% of free cash flow (cash flow from operations less capital expenditures) on dividends and share repurchases. We recently announced an 11% increase in the quarterly dividend to 7.75 cents per share, beginning with the dividend payable on April 29, 2016. This will result in common dividends of approximately $300 million in 2016, which is in line with prior year as share repurchases effectively self-fund the increase. • Debt – we will manage our debt to maintain our investment grade rating. • Acquisitions – we expect to invest between $100 and $400 million, focusing on acquiring companies that will expand our capabilities in attractive markets of our Services and Document Technology segments. We will maintain the disciplined approach we have established for evaluating and completing acquisitions. Xerox 2015 Annual Report 28 Currency Impact To understand the trends in our business, we believe that it is helpful to analyze the impact of changes in the translation of foreign currencies into U.S. Dollars on revenue and expenses. We refer to this analysis as “currency impact” or “the impact from currency” or "constant currency". In 2015 and 2014, this impact is calculated by translating current period activity in local currency using the comparable prior year period's currency translation rate. This impact is calculated for all countries where the functional currency is the local country currency. Our calculation of this impact currently excludes the exchange impact from our developing market countries (Latin America, Brazil, the Middle East, India, Eurasia and Central-Eastern Europe). Revenues and expenses for these countries are analyzed at actual exchange rates for all periods presented, since these countries generally had unpredictable currency and inflationary environments, and our operations in these countries have historically been able to implement pricing actions to recover the impact of inflation and devaluation. Approximately 30% of our consolidated revenues are derived from operations outside of the United States where the U.S. Dollar is normally not the functional currency. When compared with the average of the major European currencies and Canadian Dollar on a revenue-weighted basis, the U.S. Dollar was 16% stronger in 2015 and flat in 2014, each compared to the prior year. As a result, the foreign currency translation had a 4-percentage point negative impact on revenue in 2015 and no impact on revenue in 2014. We do not hedge the translation effect of revenues or expenses denominated in currencies where the local currency is the functional currency. The weakness of our major currencies against the U.S. Dollar is expected to remain an unfavorable revenue impact in 2016. At mid January 2016 exchange rates, we expect currency to have about a 1 to 2 percentage point negative impact on full-year 2016 revenues with a higher impact in the first half of the year than the second half. In 2016 we plan to revise our calculation of the currency impact on revenue growth to include the currency impacts from the developing market countries (Latin America, Brazil, Middle East, India, Eurasia and Central-Eastern Europe), which, as noted above, are currently excluded from the calculation. Over the past few years, the exchange markets for the currencies of all countries - developed countries and developing market countries - have experienced significant volatility and unpredictability. Additionally, due to the changing nature of the global economy and the increased economic dependencies among all countries, the currency exchange markets in the developing market countries are no longer materially different from those in the developed countries. As a result of these market dynamics and economic changes, we currently manage our exchange risk in our developing market countries in a similar manner to the exchange risk in our developed market countries; therefore, the exclusion of the developing market countries from the calculation of the currency effect is no longer warranted. Applying this revised methodology in 2015 would have increased the negative impact from currency by about 1% for both the Total Company and the Document Technology segment revenues. The impact of this change was not material for 2014. Application of Critical Accounting Policies In preparing our Consolidated Financial Statements and accounting for the underlying transactions and balances, we apply various accounting policies. Senior management has discussed the development and selection of the critical accounting policies, estimates and related disclosures included herein with the Audit Committee of the Board of Directors. We consider the policies discussed below as critical to understanding our Consolidated Financial Statements, as their application places the most significant demands on management's judgment, since financial reporting results rely on estimates of the effects of matters that are inherently uncertain. In instances where different estimates could have reasonably been used, we disclosed the impact of these different estimates on our operations. In certain instances, like revenue recognition for leases, the accounting rules are prescriptive; therefore, it would not have been possible to reasonably use different estimates. Changes in assumptions and estimates are reflected in the period in which they occur. The impact of such changes could be material to our results of operations and financial condition in any quarterly or annual period. Specific risks associated with these critical accounting policies are discussed throughout the MD&A, where such policies affect our reported and expected financial results. For a detailed discussion of the application of these and other accounting policies, refer to Note 1 - Basis of Presentation and Summary of Significant Accounting Policies in the Consolidated Financial Statements. 29 Revenue Recognition Application of the various accounting principles in GAAP related to the measurement and recognition of revenue requires us to make judgments and estimates. Complex arrangements with nonstandard terms and conditions may require significant contract interpretation to determine the appropriate accounting. Refer to Note 1 - Basis of Presentation and Summary of Significant Accounting Policies - Revenue Recognition in the Consolidated Financial Statements for additional information regarding our revenue recognition policies. Specifically, the revenue related to the following areas involves significant judgments and estimates: • Bundled Lease Arrangements, • Sales to Distributors and Resellers and • Services - Percentage-of-Completion Bundled Lease Arrangements: We sell our equipment under bundled lease arrangements, which typically include the equipment, service, supplies and a financing component for which the customer pays a single negotiated monthly fixed price for all elements over the contractual lease term. Approximately 38% of our equipment sales revenue is related to sales made under bundled lease arrangements. Recognizing revenues under these arrangements requires us to allocate the total consideration received to the lease and non-lease deliverables included in the bundled arrangement, based upon the estimated fair values of each element. Sales to Distributors and Resellers: We utilize distributors and resellers to sell many of our technology products, supplies and services to end-user customers. Sales to distributors and resellers are generally recognized as revenue when products are sold to such distributors and resellers. Distributors and resellers participate in various rebate, price-protection, cooperative marketing and other programs, and we record provisions and allowances for these programs as a reduction to revenue when the sales occur. Similarly, we also record estimates for sales returns and other discounts and allowances when the sales occur. We consider various factors, including a review of specific transactions and programs, historical experience and market and economic conditions when calculating these provisions and allowances. Approximately 11% of our revenues includes sales to distributors and resellers, and provisions and allowances recorded on these sales are approximately 23% of the associated gross revenues. Revenue Recognition for Services - Percentage-of-Completion: A portion of our Services revenue is recognized using the percentage-of-completion (POC) accounting method. This method requires the use of estimates and judgment. Approximately 2% of our Services revenues were recognized using the POC accounting method. Although not significant to total Services revenue, the POC methodology is normally applied to certain of our larger and longer term outsourcing contracts involving system development and implementation services, primarily in government healthcare and certain government transportation contracts. In addition, we had unbilled receivables totaling $229 million and $360 million at December 31, 2015 and 2014, respectively, representing revenues recognized but not yet billable under the terms of our POC contracts. The decrease in unbilled revenues in 2015 is primarily due to developments in certain implementations of our Health Enterprise (HE) Medicaid platform - see below. The POC accounting methodology involves recognizing probable and reasonably estimable revenue using the percentage of services completed based on a current cumulative cost incurred to estimated total cost basis and a reasonably consistent profit margin over the period. Due to the long-term nature of these arrangements, developing the estimates of cost often requires significant judgment. Factors that must be considered in estimating the progress of work completed and ultimate cost of the projects include, but are not limited to, the availability of labor and labor productivity, the nature and complexity of the work to be performed and the impact of delayed performance. If changes occur in delivery, productivity or other factors used in developing the estimates of costs or revenues, we revise our cost and revenue estimates, which may result in increases or decreases in revenues and costs. Such revisions are reflected in income in the period in which the facts that give rise to that revision become known. We perform ongoing profitability analysis of our POC services contracts in order to determine whether the latest estimates require updating. Key factors reviewed by the company to estimate the future costs to complete each contract are future labor costs, future product costs, expected productivity efficiencies, achievement of contracted milestones and performance goals as well as potential penalties for milestone and system implementation delays. If at any time our estimates indicate the POC contract will be unprofitable, the entire estimated loss for the remainder of the contract is recorded immediately in cost of services and results in the contract being recorded at a zero profit margin with recognition of an equal amount of revenues and costs. Xerox 2015 Annual Report 30 As noted previously, we apply the POC accounting method for arrangements in our government healthcare business. This includes the implementation of our HE Medicaid platform for various states in the U.S. Changes in the healthcare market, including evolving regulations, have continued to impact our development work and project scope for these arrangements including the development work required by our clients and their providers. This has contributed to delays in meeting client delivery dates as well as increased delivery costs for these contracts. In addition, the POC estimation process is particularly complex and challenging for these arrangements due to their significant scope and duration and the highly technical nature of the implementations. As a result, throughout the respective development and implementation periods, there is the potential for additional changes in contract costs, productivity, performance penalties and other factors, all of which may result in material increases or decreases in future revenues and costs. As an example, during 2015 it was determined that we would not fully complete the HE Medicaid platform implementation projects in California and Montana. Revenues associated with these implementations were being recognized using the POC accounting method. As a result of the determination that we will not fully complete these implementations, we recorded a $116 million write-off of unbilled POC receivables associated with these projects and additional charges of $273 million. Based on the significance of these projects, we continually monitor the progress on our remaining HE Medicaid platform implementations and consider the potential for increased costs as well as risks and uncertainties in our estimates of revenues and costs under the POC accounting methodology. To the extent possible, we attempt to mitigate these risks through operational changes, project oversight and process improvements. Total unbilled receivables associated with our current HE Medicaid implementation projects were $51 million at December 31, 2015. Allowance for Doubtful Accounts and Credit Losses We continuously monitor collections and payments from our customers and maintain a provision for estimated credit losses based upon our historical experience adjusted for current conditions. We recorded bad debt provisions of $53 million, $53 million and $120 million in Selling, Administrative and General Expenses (SAG) expenses in our Consolidated Statements of Income for the years ended December 31, 2015, 2014 and 2013, respectively. Bad debt provisions remained fairly flat in 2015 reflecting a consistent trend in write-offs throughout the year as well as a continued disciplined credit process. Reserves, as a percentage of trade and finance receivables, were 3.0% at December 31, 2015, as compared to 3.1% and 3.4% at December 31, 2014 and 2013. We continue to assess our receivable portfolio in light of the current economic environment and its impact on our estimation of the adequacy of the allowance for doubtful accounts. As discussed above, we estimated our provision for doubtful accounts based on historical experience and customer-specific collection issues. This methodology was consistently applied for all periods presented. During the five year period ended December 31, 2015, our reserve for doubtful accounts ranged from 3.0% to 3.4% of gross receivables. Holding all assumptions constant, a 0.5-percentage point increase or decrease in the reserve from the December 31, 2015 rate of 3.0% would change the 2015 provision by approximately $33 million. Refer to Note 5 - Accounts Receivables, Net and Note 6 - Finance Receivables, Net in the Consolidated Financial Statements for additional information regarding our allowance for doubtful accounts. Pension Plan Assumptions We sponsor defined benefit pension plans in various forms in several countries covering employees who meet eligibility requirements. Several statistical and other factors that attempt to anticipate future events are used in calculating the expense, liability and asset values related to our defined benefit pension plans. These factors include assumptions we make about the expected return on plan assets, discount rate, lump-sum settlement rates, the rate of future compensation increases and mortality. Differences between these assumptions and actual experiences are reported as net actuarial gains and losses and are subject to amortization to net periodic benefit cost over future periods. Over the past several years, we have amended several of our major defined benefit pension plans to freeze current benefits and eliminate benefit accruals for future service. The freeze of current benefits is the primary driver of the reduction in pension service costs since 2013. In certain plans we are required by law or statute to continue to reflect salary increases and inflation in determining the benefit obligation related to prior service. Cumulative net actuarial losses for our defined benefit pension plans of $3.1 billion as of December 31, 2015 decreased by $223 million from December 31, 2014, reflecting the decrease in our benefit obligations as a result of higher discount rates and the recognition of actuarial losses through amortization and U.S. settlement losses. These impacts were partially offset by losses as a result of actual plan asset returns being less than expected returns in 31 2015. The total actuarial loss at December 31, 2015 is subject to offsetting gains or losses in the future due to changes in actuarial assumptions and will be recognized in future periods through amortization or settlement losses. We used a consolidated weighted average expected rate of return on plan assets of 6.0% for 2015, 6.7% for 2014 and 6.7% for 2013, on a worldwide basis. During 2015, the actual return on plan assets was $(89) million as compared to an expected return of $376 million, with the difference largely due to negative returns in the equity markets in 2015. When estimating the 2016 expected rate of return, in addition to assessing recent performance, we considered the historical returns earned on plan assets, the rates of return expected in the future, particularly in light of current economic conditions, and our investment strategy and asset mix with respect to the plans' funds. The weighted average expected rate of return on plan assets we will use in 2016 is 5.8%. The decline in the 2016 rate primarily reflects the increased investment in fixed income securities as we reposition our investment portfolios in light of the freeze of plan benefits. Another significant assumption affecting our defined benefit pension obligations and the net periodic benefit cost is the rate that we use to discount our future anticipated benefit obligations. In the U.S. and the U.K., which comprise approximately 77% of our projected benefit obligation, we consider the Moody's Aa Corporate Bond Index and the International Index Company's iBoxx Sterling Corporate AA Cash Bond Index, respectively, in the determination of the appropriate discount rate assumptions. The consolidated weighted average discount rate we used to measure our pension obligations as of December 31, 2015 and to calculate our 2016 expense was 3.7%; the rate used to calculate our obligations as of December 31, 2014 and our 2015 expense was 3.4%. The weighted average discount rate we used to measure our retiree health obligation as of December 31, 2015 and to calculate our 2016 expense was 4.1%; the rate used to calculate our obligation at December 31, 2014 and our 2015 expense was 3.8%. Holding all other assumptions constant, a 0.25% increase or decrease in the discount rate would change the 2016 projected net periodic pension cost by approximately $30 million. Likewise, a 0.25% increase or decrease in the expected return on plan assets would change the 2016 projected net periodic pension cost by $19 million. One of the most significant and volatile elements of our net periodic defined benefit pension plan expense is settlement losses. Our primary domestic plans allow participants the option of settling their vested benefits through the receipt of a lump-sum payment. We recognize the losses associated with these settlements immediately upon the settlement of the vested benefits. Settlement accounting requires us to recognize a pro rata portion of the aggregate unamortized net actuarial losses upon settlement. As noted above, cumulative unamortized net actuarial losses were $3.1 billion at December 31, 2015, of which the U.S. primary domestic plans represented approximately $1,101 million. The pro rata factor is computed as the percentage reduction in the projected benefit obligation due to the settlement of a participant's vested benefit. Settlement accounting is only applied when the event of settlement occurs - i.e. the lump-sum payment is made. Since settlement is dependent on an employee's decision and election, the level of settlements and the associated losses can fluctuate significantly from period to period. During the three years ended December 31, 2015, U.S. plan settlements were $340 million, $250 million and $838 million, respectively, and the associated settlement losses on those plan settlements were $88 million, $51 million and $162 million, respectively. In 2016, on average, approximately $100 million of plan settlements will result in settlement losses of approximately $25 million. The following is a summary of our benefit plan costs for the three years ended December 31, 2015 as well as estimated amounts for 2016: (in millions) Defined benefit pension plans(1) U.S. settlement losses Defined contribution plans Retiree health benefit plans(2) U.S. Retiree health curtailment gain Total Benefit Plan Expense ___________ (1) Excludes U.S. settlement losses. (2) Excludes U.S. retiree health curtailment gain. Estimated 2016 2015 56 $ 124 106 37 — 2013 $ Actual 2014 31 51 102 3 — $ 54 88 100 24 (22) 323 $ 244 $ 187 $ $ $ 105 162 89 1 — 357 Our estimated 2016 defined benefit pension plan cost is expected to be approximately $38 million higher than 2015, primarily driven by higher projected U.S. settlement losses. The increase in expense associated with Retiree health Xerox 2015 Annual Report 32 benefit plans is primarily due to lower prior service credits as a result of a curtailment of our U.S. Retiree health benefit plan during 2015. Benefit plan costs are included in several income statement components based on the related underlying employee costs. The following is a summary of our benefit plan funding for the three years ended December 31, 2015 as well as estimated amounts for 2016: (in millions) Defined benefit pension plans: Defined contribution plans Retiree health benefit plans Total Benefit Plan Funding Estimated 2016 2015 Actual 2014 2013 $ $ $ 140 106 70 $ 309 100 63 $ 284 102 70 316 $ 472 $ 456 $ 230 89 77 396 The decrease in contributions to our worldwide defined benefit pension plans in 2016 is largely due to not including any planned contribution for our domestic tax-qualified defined benefit plans because none are required to meet the minimum funding requirements. However, once the January 1, 2016 actuarial valuations and projected results as of the end of the 2016 measurement year are available, the desirability of additional contributions will be reassessed. Based on these results, we may voluntarily decide to contribute to these plans. Refer to Note 16 - Employee Benefit Plans in the Consolidated Financial Statements for additional information regarding defined benefit pension plan assumptions, expense and funding. Income Taxes We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgments are required in determining the consolidated provision for income taxes. Our provision is based on nonrecurring events as well as recurring factors, including the taxation of foreign income. In addition, our provision will change based on discrete or other nonrecurring events such as audit settlements, tax law changes, changes in valuation allowances, etc., that may not be predictable. We record the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported in our Consolidated Balance Sheets, as well as operating loss and tax credit carryforwards. We follow very specific and detailed guidelines in each tax jurisdiction regarding the recoverability of any tax assets recorded in our Consolidated Balance Sheets and provide valuation allowances as required. We regularly review our deferred tax assets for recoverability considering historical profitability, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. Adjustments to our valuation allowance, through (credits)/charges to income tax expense, were $(3) million, $(20) million and $2 million for the years ended December 31, 2015, 2014 and 2013, respectively. There were other decreases to our valuation allowance, including the effects of currency, of $125 million, $56 million and $42 million for the years ended December 31, 2015, 2014 and 2013, respectively. These did not affect income tax expense in total as there was a corresponding adjustment to deferred tax assets or other comprehensive income. Gross deferred tax assets of $3.1 billion and $3.4 billion had valuation allowances of $410 million and $538 million at December 31, 2015 and 2014, respectively. We are subject to ongoing tax examinations and assessments in various jurisdictions. Accordingly, we may incur additional tax expense based upon our assessment of the more-likely-than-not outcomes of such matters. In addition, when applicable, we adjust the previously recorded tax expense to reflect examination results. Our ongoing assessments of the more-likely-than-not outcomes of the examinations and related tax positions require judgment and can materially increase or decrease our effective tax rate, as well as impact our operating results. Unrecognized tax benefits were $247 million, $240 million and $267 million at December 31, 2015, 2014 and 2013, respectively. Refer to Note 17 - Income and Other Taxes in the Consolidated Financial Statements for additional information regarding deferred income taxes and unrecognized tax benefits. 33 Business Combinations and Goodwill The accounting for business combinations requires the use of significant estimates and assumptions in the determination of the fair value of assets acquired and liabilities assumed in order to properly allocate purchase price consideration between assets that are depreciated and amortized from goodwill. Our estimates of the fair values of assets and liabilities acquired are based upon assumptions believed to be reasonable, and when appropriate, include assistance from independent third-party valuation firms. Refer to Note 3 - Acquisitions in the Consolidated Financial Statements for additional information regarding the allocation of the purchase price consideration for our acquisitions. As a result of our acquisition of Affiliated Computer Services, Inc. (ACS) in 2010, as well as other acquisitions including GIS, we have a significant amount of goodwill. Goodwill at December 31, 2015 was $8.8 billion. Goodwill is not amortized but rather is tested for impairment annually or more frequently if an event or circumstance indicates that an impairment may have been incurred. Events or circumstances that might indicate an interim evaluation is warranted include, among other things, unexpected adverse business conditions, macro and reporting unit specific economic factors, supply costs, unanticipated competitive activities and acts by governments and courts. Application of the annual goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units and the assessment- qualitatively or quantitatively - of the fair value of each reporting unit against its carrying value. At December 31, 2015, $6.5 billion and $2.3 billion of goodwill was allocated to reporting units within our Services and Document Technology segments, respectively. Our Services segment is comprised of five reporting units while our Document Technology segment is comprised of one reporting unit for a total of six reporting units with goodwill balances. Our annual impairment test of goodwill was performed in the fourth quarter of 2015. Consistent with 2014, we elected to utilize a quantitative assessment of the recoverability of our goodwill balances for each of our reporting units. In our quantitative test, we estimate the fair value of each reporting unit by weighting the results from the income approach (discounted cash flow methodology) and market approach. These valuation approaches require significant judgment and consider a number of factors that include, but are not limited to, expected future cash flows, growth rates and discount rates, and comparable multiples from publicly traded companies in our industry and require us to make certain assumptions and estimates regarding the current economic environment, industry factors and the future profitability of our businesses. When performing our discounted cash flow analysis for each reporting unit, we incorporate the use of projected financial information and discount rates that are developed using market participant-based assumptions. The cash- flow projections are based on three-year financial forecasts developed by management that include revenue and expense projections, capital spending trends and investment in working capital to support anticipated revenue growth or other changes in the business. The selected discount rates consider the risk and nature of the respective reporting units' cash flows and an appropriate capital structure and rates of return that market participants would require to invest their capital in our reporting units. In performing our 2015 impairment test, the following were the 3-year compounded assumptions for Document Technology and the five reporting units within our Services segment with respect to revenue, operating income and margins, which formed the basis for estimating future cash flows used in the discounted cash flow model: • Document Technology - Continued revenue declines with a flattening over the long-term. Operating income - flat and operating margin - 9% to 11% - as we continue to manage costs to match expected decline in revenues. • Services - Revenues flat to single digit growth over the long-term, as we look to expand in key segments of the outsourcing services market. Operating income growth - 11% to 12% - and operating margin - 9% to 10% - as we benefit from revenue growth while improving the mix of services and our cost structure through restructuring and productivity improvements. We believe these assumptions are appropriate and reflect our forecasted long-term business model, giving appropriate consideration to our historical results as well as the current economic environment and markets that we serve. The average discount rate applied to our projected cash flows was approximately 9.0%, which we considered reasonable based on the estimated capital costs of applicable market participants. Although the sum of the fair values of our reporting units was in excess of our market capitalization, we believe the difference is reasonable when market-based control premiums and other factors are taken into consideration, including the evolution of our Xerox 2015 Annual Report 34 business to be predominantly services-based. Our impairment assessment methodology includes the use of outside valuation experts and the inclusion of factors and assumptions related to third-party market participants. When performing our market approach for each reporting unit, we rely specifically on the guideline public company method. Our guideline public company method incorporates revenues and earnings multiples from publicly traded companies with operations and other characteristics similar to each reporting unit. The selected multiples consider each reporting unit’s relative growth, profitability, size and risk relative to the selected publicly traded companies. After completing our annual impairment reviews for each reporting unit in the fourth quarter of 2015 and 2014, we concluded that goodwill was not impaired in either of these years. Although we experienced a decline in the fair values of our reporting units in 2015 as compared to 2014, with the exception of the Commercial Services and the Commercial Healthcare Services reporting units, no reporting unit had an excess of fair value over carrying value of less than 20%. The excess of reporting unit fair values over carrying values for our Commercial Services reporting unit (which has approximately $2.0 billion of goodwill) was significantly less than in prior years with an excess of fair value over carrying value of approximately 17%. Although we experienced a similar 2015 decline in fair value in our Commercial Healthcare Services reporting unit (which has approximately $900 million of goodwill), that decline is expected to be mitigated by synergies and operational improvements resulting from the combination of this reporting unit with the Government Healthcare Services reporting unit in 2016. We will continue to monitor the impact of economic, market and industry factors impacting these reporting units in 2016. The decrease in fair values for these reporting units was largely due to the mix of services and pricing pressures not being matched with cost reductions from productivity and restructuring actions. However, both of these reporting units operate in key growth segments of the business process outsourcing market, and the 2016 expectation is that through an increased focus on revenue and cost management both businesses will reflect improved performance and a corresponding increase in fair value. Subsequent to our fourth quarter impairment test, we did not identify any indicators of potential impairment that required an update to the annual impairment test. Refer to Note 10 - Goodwill and Intangible Assets, Net in the Consolidated Financial Statements for additional information regarding goodwill by reportable segment. 35 Revenue Results Summary Total Revenue Revenue for the three years ended December 31, 2015 was as follows: Revenues % Change CC % Change Percent of Total Revenue (in millions) Equipment sales Annuity revenue Total Revenue 2015 2014 2013 2015 2014 2015 2014 2015 2014 2013 $ 2,781 $ 3,104 $ 3,358 (10)% 15,264 16,436 16,648 $18,045 $19,540 $ 20,006 (7)% (8)% (8)% (1)% (2)% (6)% (4)% (4)% (7)% (1)% (2)% 15% 85% 16% 84% 17% 83% 100% 100% 100% Reconciliation to Consolidated Statements of Income: Sales $ 4,748 $ 5,288 $ 5,582 Less: Supplies, paper and other sales (1,967) (2,184) (2,224) Equipment Sales $ 2,781 $ 3,104 $ 3,358 (10)% (8)% (6)% (7)% 15% 16% 17% Outsourcing, maintenance and rentals $12,951 $13,865 $ 13,941 (7)% Add: Supplies, paper and other sales 1,967 2,184 2,224 (10)% (1)% (2)% Add: Financing Annuity Revenue Adjusted: (1) 346 387 483 (11)% (20)% $15,264 $16,436 $ 16,648 (7)% (1)% Outsourcing, maintenance and rentals $13,067 $13,865 $ 13,941 Annuity revenue Total Revenue _______________ $15,380 $16,436 $ 16,648 $18,161 $19,540 $ 20,006 (6)% (6)% (7)% (3)% (8)% (4)% (4)% (2)% (3)% (3)% CC - See "Non-GAAP Financial Measures" section for description of Constant Currency (1) Refer to the Revenue/Segment reconciliation table in the "Non-GAAP Financial Measures" section. — % (2)% (20)% (1)% 72% 11% 2% 85% 71% 11% 2% 84% 70% 11% 2% 83% Revenue 2015 Total revenues decreased 8% compared to the prior year with a 4-percentage point negative impact from currency. On an adjusted1 basis, excluding the HE charge, total revenues decreased 7%, with a 4-percentage point negative impact from currency. The negative impact from currency reflects the significant weakening of our major foreign currencies against the U.S. dollar as compared to prior year. On a revenue-weighted basis, our major European currencies and the Canadian dollar were approximately 16% weaker against the U.S. dollar as compared to prior year. Revenues from these major foreign currencies comprise approximately 25% of our total consolidated revenues, while overall non-U.S. revenues represent approximately one third of the total. Total revenues included the following: • Annuity revenue decreased 7% compared to the prior year with a 3-percentage point negative impact from currency. On an adjusted1 basis, annuity revenue decreased 6%, with a 3-percentage point negative impact from currency. Annuity revenue is comprised of the following: Outsourcing, maintenance and rentals revenue includes outsourcing revenue within our Services segment and maintenance revenue (including bundled supplies) and rental revenue, both primarily within our Document Technology segment. Revenues of $12,951 million decreased 7%, or 6% on an adjusted1 basis, including a 4-percentage point negative impact from currency and was primarily due to a decline in the Document Technology segment. Supplies, paper and other sales includes unbundled supplies and other sales, primarily within our Document Technology segment. Revenues of $1,967 million decreased 10% from the prior year including a 2-percentage point negative impact from currency, reduced supplies demand reflecting lower equipment sales in prior periods and continued weakness in developing markets and lower OEM supplies sales. Financing revenue is generated from financed equipment sale transactions primarily within our Document Technology segment. Financing revenues decreased 11% from the prior year including a 7-percentage point negative impact from currency and a declining finance receivables balance due to lower prior period equipment sales. Refer to the discussion on Sales of Finance Receivable in the Capital Resources and Xerox 2015 Annual Report 36 Liquidity section as well as Note 6 - Finance Receivables, Net in the Consolidated Financial Statements for additional information. • Equipment sales revenue is reported primarily within our Document Technology segment and the Document Outsourcing business within our Services segment. Equipment sales revenue decreased 10% from the prior year, including a 4-percentage point negative impact from currency. The constant currency decline was driven by developing markets with the remainder reflecting lower high-end and OEM sales as well as overall price declines that continue to be within our historical range of 5% to 10%.These areas of decline were partially offset by DO equipment sales growth. Revenue 2014 Total revenues decreased 2% compared to the prior year with no impact from currency. Total revenues included the following: • Annuity revenue decreased 1% compared to the prior year with no impact from currency. Annuity revenue is comprised of the following: Outsourcing, maintenance and rentals revenue includes outsourcing revenue within our Services segment and maintenance revenue (including bundled supplies) and rental revenue, both primarily within our Document Technology segment. Revenues of $13,865 million decreased 1% from the prior year with a 1- percentage point negative impact from currency. The decrease was due to a decline in the Document Technology segment partially offset by growth in outsourcing revenue within our Services segment. Supplies, paper and other sales includes unbundled supplies and other sales, primarily within our Document Technology segment. Revenues of $2,184 million decreased 2% from the prior year with no impact from currency. The decrease was primarily driven by moderately lower supplies demand and a decline in other sales revenue. Financing revenue is generated from financed sale transactions primarily within our Document Technology segment. Financing revenues decreased 20% from the prior year due primarily to $40 million in pre-tax gains on finance receivable sales in 2013 as well as a lower finance receivable balance mostly as a result of prior period sales of finance receivables and lower originations due to decreased equipment sales. Refer to the discussion on Sales of Finance Receivable in the "Capital Resources and Liquidity" section as well as Note 6 - Finance Receivables, Net in the Consolidated Financial Statements for additional information. • Equipment sales revenue is reported primarily within our Document Technology segment and the Document Outsourcing business within our Services segment. Equipment sales revenue decreased 8% from the prior year, including a 1-percentage point negative impact from currency. Lower installs across the majority of our product groupings, lower sales in entry products due to product launch timing and overall price declines that were at the low-end of our historical 5% to 10% range contributed to the decline. Equipment sales were also impacted by lower sales in developing markets, and particularly lower sales in Russia due to economic instability. An analysis of the change in revenue for each business segment is included in the “Operations Review of Segment Revenue and Profit” section. Costs, Expenses and Other Income Summary of Key Financial Ratios Year Ended December 31, Change 2015 2014 2013 2015 B/(W) 2014 B/(W) 29.2% 3.1% 19.7% NM 2.3% 32.0% 3.0% 19.4% 9.6% 6.2% 32.4% 3.0% 20.4% 9.0% 6.2% (2.8) pts (0.1) pts (0.3) pts NM (3.9) pts (0.4) pts — pts 1.0 pts 0.6 pts — pts 2015 Adjusted(1) 2015 Adjusted(1) B/(W) 2014 31.1% 3.1% 19.6% 8.4% N/A (0.9) pts (0.1) pts (0.2) pts (1.2) pts N/A Total Gross Margin RD&E as a % of Revenue SAG as a % of Revenue Operating Margin(1) Pre-tax Income Margin _______________ (1) Refer to Key Financial Ratios reconciliation table in the "Non-GAAP Financial Measures" section. 37 Operating Margin Operating margin1 for the year ended December 31, 2015 of 8.4% decreased 1.2-percentage points as compared to 2014. On an adjusted1 basis, this decline was driven by a 0.9-percentage point decrease in gross margin and a 0.3- percentage point increase in operating expenses as a percent of revenue. The operating margin decline includes lower Services margin driven by targeted resource and other investments as well as higher costs associated with our GHS HE platform implementations prior to the announced changes in strategy. Document Technology margin was also lower as compared to the prior year due to lower gross margin, higher year-over-year pension expense and unfavorable currency. These negative impacts were partially offset in both segments by restructuring savings and productivity improvements as well as lower compensation and a $22 million curtailment gain in the U.S.(3) Operating margin1 for the year ended December 31, 2014 of 9.6% increased 0.6-percentage points as compared to 2013. The increase was driven primarily by a 1.0-percentage point improvement in SAG as a percent of revenue partially offset by a decline in gross margin of 0.4-percentage points. The operating margin improvement reflects restructuring savings and productivity improvements, continued benefits from currency on yen based purchases and lower bad debt expense. As anticipated, operating margin also benefited from lower year-over-year pension expense and settlement losses (collectively referred to as "pension expense"). Services margins decreased in 2014 due to higher government healthcare platform expenses, including net non-cash impairment charges, as well as platform and resource investments across the Services segment and the continued run-off of the student loan business. _____________ (1) Refer to Operating Income/Margin reconciliation table and the Key Financial Ratios reconciliation table in the "Non-GAAP Financial Measures" section. (2) Refer to Note 1 - Basis of Presentation and Summary of Significant Accounting policies for additional information. (3) Refer to Note 16 - Employee Benefit Plans for additional information. Gross Margins Total Gross Margin Total gross margin for the year ended December 31, 2015 of 29.2% decreased 2.8-percentage points as compared to 2014. On an adjusted1 basis, gross margin of 31.1% decreased by 0.9-percentage points as compared to 2014. Declines in gross margins for both segments as well as a higher proportion of our revenue from Services (which historically has a lower gross margin) resulted in a reduction in overall gross margin. Total gross margin for year ended December 31, 2014 of 32.0% decreased 0.4-percentage points as compared to 2013. The decrease was driven by margin declines within the Services segment as well as the impact of a higher proportion of our revenue from Services (which historically has a lower gross margin than Document Technology) partially offset by a higher gross margin within the Document Technology segment. Services Gross Margin Services gross margin for the year ended December 31, 2015 decreased 3.6-percentage points, and remained flat on an adjusted1 basis, as compared to 2014. Targeted resource and other investments, impacts from unfavorable line-of-business mix, increased expenses associated with our GHS HE platform implementations and price declines were offset by productivity improvements and restructuring benefits. Services gross margin for the year ended December 31, 2014 decreased 1.1-percentage points as compared to 2013. The decrease is primarily due to higher expenses associated with our public sector and government healthcare businesses, including costs for the Medicaid and Health Insurance Exchange (HIX) platforms, the anticipated run-off of our student loan business and price declines that were consistent with prior periods. These impacts were only partially offset by productivity improvements and restructuring benefits. Document Technology Gross Margin Document Technology gross margin for the year ended December 31, 2015 decreased by 0.7-percentage points as compared to 2014. The decrease reflects unfavorable product mix, price declines and an increase in pension expense, partially offset by the retiree health curtailment gain, lower compensation and benefit expenses and restructuring and productivity benefits. Document Technology gross margin for the year ended December 31, 2014 increased by 1.5-percentage points as compared to 2013. The increase, driven by cost productivity and restructuring savings, favorable transaction currency on our Yen-based purchases, lower pension expense and favorable revenue mix, was partially offset by moderate price declines and the impact of the prior year finance receivable gain. Xerox 2015 Annual Report 38  Research, Development and Engineering Expenses (RD&E) (in millions) R&D Sustaining engineering Total RD&E Expenses R&D Investment by Fuji Xerox(1) ______________ Year Ended December 31, Change 2015 2014 2013 2015 2014 $ $ $ 437 $ 445 $ 481 $ 126 563 569 $ $ 132 577 654 $ $ 122 603 724 $ $ (8) $ (6) (14) $ (85) $ (36) 10 (26) (70) (1) Fluctuation in Fuji Xerox R&D was primarily due to changes in foreign exchange rates. RD&E as a percent of revenue for the year ended December 31, 2015 of 3.1% increased 0.1-percentage points on an actual and adjusted1 basis, as the total company revenue decline was only partially offset by modest RD&E expense reductions and the benefits from the higher mix of Services revenue (which historically has a lower RD&E as a percentage of revenue) and modest restructuring and productivity improvements. RD&E of $563 million for the year ended December 31, 2015, was $14 million lower than 2014 reflecting the impact of restructuring and productivity improvements. Innovation is one of our core strengths and we continue to invest at levels to maintain and improve our competitiveness, particularly in services, color and software. During 2015 we managed our investments in R&D to align with growth opportunities in areas like business services, color printing and customized communication. Our R&D is also strategically coordinated with Fuji Xerox. RD&E as a percent of revenue for the year ended December 31, 2014 of 3.0% remained flat, reflecting the impact of restructuring and productivity improvements and a higher mix of Services revenue (which historically has a lower RD&E as a percentage of revenue), offset by increased investments in Services RD&E and the overall total company revenue decline. RD&E of $577 million for the year ended December 31, 2014, was $26 million lower than 2013 reflecting the impact of restructuring and productivity improvements. Selling, Administrative and General Expenses (SAG) SAG as a percent of revenue of 19.7% increased 0.3-percentage points for the year ended December 31, 2015. On an adjusted1 basis, SAG as a percentage of revenue of 19.6% increased 0.2-percentage points from 2014. The increase was driven by a total company revenue decline only partially matched by expense reductions, as restructuring and productivity improvements, lower compensation expense (including the favorable impact from the curtailment gain), and a higher mix of Services revenue (which historically has lower SAG as a percentage of revenue) were partly offset by Services investments. SAG expenses of $3,559 million for the year ended December 31, 2015 were $229 million lower than the prior year period. The decrease in SAG expense reflects the following: $137 million decrease in selling expenses. $92 million decrease in general and administrative expenses. • • • Bad debt expense of $53 million was flat as compared to the prior year and less than one percent of receivables. SAG as a percent of revenue of 19.4% decreased 1.0-percentage point for the year ended December 31, 2014. The decrease was driven by the higher mix of Services revenue (which historically has lower SAG as a percentage of revenue), restructuring and productivity improvements, and lower pension and bad debt expense. The net reduction in SAG spending exceeded the overall revenue decline on a percentage basis. SAG expenses of $3,788 million for the year ended December 31, 2014 were $285 million lower than the prior year period. The decrease in SAG expense reflects the following: $125 million decrease in selling expenses. $93 million decrease in general and administrative expenses. $67 million decrease in bad debt expense to $53 million, reflecting the favorable trend in write-offs and recoveries experienced throughout the year. Full year 2014 bad debt expense remained less than one percent of receivables. • • • 39 Restructuring and Asset Impairment Charges During the year ended December 31, 2015, we recorded net restructuring and asset impairment charges of $186 million ($118 million after-tax). Approximately 88% of the charges were related to our Services segment, 8% to our Document Technology segment, and 4% to our Other segment and included the following: • • • $54 million of severance costs related to headcount reductions of approximately 1,700 employees globally. The actions impacted several functional areas, with approximately 53% of the costs focused on gross margin improvements, 42% on SAG and 5% on the optimization of RD&E investments. $4 million for lease termination costs primarily reflecting continued optimization of our worldwide operating locations. $153 million of asset impairment charges, including $146 million recorded in second quarter 2015 associated with software asset impairments resulting from a change in our Government Healthcare Solutions strategy in the Services segment as well as $7 million of charges incurred in the third quarter 2015. The above charges were partially offset by $25 million of net reversals for changes in estimated reserves from prior period initiatives. We expect 2016 pre-tax savings of approximately $50 million from our 2015 restructuring actions. During the year ended December 31, 2014, we recorded net restructuring and asset impairment charges of $128 million ($91 million after-tax). Approximately 30% of the charges were related to our Services segment, 59% to our Document Technology segment, and 11% to our Other segment and included the following: • • • $143 million of severance costs related to headcount reductions of approximately 4,000 employees globally. The actions impacted several functional areas, with approximately 53% of the costs focused on gross margin improvements, 42% on SAG and 5% on the optimization of RD&E investments. $5 million for lease termination costs primarily reflecting continued optimization of our worldwide operating locations. $7 million of asset impairment losses. The above charges were partially offset by $27 million of net reversals for changes in estimated reserves from prior period initiatives. Restructuring Summary The restructuring reserve balance as of December 31, 2015 for all programs was $24 million, of which approximately $23 million is expected to be spent over the next twelve months. In the first quarter 2016, we expect to incur additional restructuring charges of approximately $100 million pre-tax. Refer to Note 11 - Restructuring and Asset Impairment Charges in the Consolidated Financial Statements for additional information regarding our restructuring programs. Amortization of Intangible Assets During the year ended December 31, 2015, we recorded $310 million of expense related to the amortization of intangible assets, which is $5 million lower than the prior year primarily due to currency and the run-off of amortization associated with acquired technology assets. During the year ended December 31, 2014, we recorded $315 million of expense related to the amortization of intangible assets, which is $10 million higher than the prior year reflecting the increase in acquisitions in 2014. Refer to Note 10 - Goodwill and Intangible assets, Net in the Consolidated Financial Statements for additional information regarding our intangible assets. Worldwide Employment Worldwide employment of approximately 143,600 as of December 31, 2015 increased by approximately 5,700 from December 31, 2014, due primarily to the impact of ramping new business and acquisitions partially offset by restructuring reductions and productivity improvements. Worldwide employment was approximately 137,900 and 133,300 at December 2014 and 2013, respectively (NOTE: prior year employment amounts are adjusted to exclude employees associated with the divested ITO business). Xerox 2015 Annual Report 40 Other Expenses, Net (in millions) Non-financing interest expense Interest income Gains on sales of businesses and assets(1) Currency losses (gains), net Litigation matters Loss on sales of accounts receivables Deferred compensation investment losses (gains) All other expenses, net Total Other Expenses, Net _______________ Year Ended December 31, 2015 2014 2013 223 $ 237 $ (8) (44) 6 16 13 1 26 (10) (50) 5 11 15 (7) 31 233 $ 232 $ 240 (11) (64) (7) (34) 17 (15) 20 146 $ $ (1) Excludes the loss on sale of the ITO business reported in discontinued operations. Refer to Note 4 - Divestitures for additional information. Note: Total Other Expenses, Net with the exception of Deferred compensation investment losses (gains) are included in the Other segment. Deferred compensation investment losses (gains) are included in the Services segment together with the related deferred compensation expense/income. Non-Financing Interest Expense: Non-financing interest expense for the year ended December 31, 2015 of $223 million was $14 million lower than prior year primarily due to the benefit of lower borrowing costs achieved as a result of refinancing existing debt. When non-financing interest expense is combined with financing interest expense (cost of financing), total company interest expense declined by $24 million from the prior year, primarily driven by a lower total average debt balance and lower average cost of debt. Non-financing interest expense for the year ended December 31, 2014 of $237 million was $3 million lower than prior year primarily due to the benefit of lower borrowing costs achieved as a result of refinancing existing debt. When non-financing interest expense is combined with financing interest expense (cost of financing), total company interest expense declined by $26 million from the prior year, primarily driven by a lower total average debt balance and lower average cost of debt. Refer to Note 13 - Debt in the Consolidated Financial Statements for additional information regarding our allocation of interest expense. Gains on Sales of Businesses and Assets: The 2015 net gain on sales of businesses and assets of $44 million reflected a gain of approximately $25 million on the sale of surplus real estate in Latin America and gains of approximately $20 million for surplus technology assets. The 2014 gains on sales of businesses and assets was primarily related to the sales of surplus properties with $39 million related to sales in Latin America and $8 million related to a sale in the U.S. The 2013 gains on sales of businesses and assets include the following transactions: • A $29 million gain on the $32.5 million cash sale of a portion of our Wilsonville, Oregon product design, engineering and chemistry group and related assets that were surplus to our needs. • A $23 million gain on the sale of a surplus facility in the U.S. • An $8 million gain on the sale of a surplus facility in Latin America. Currency Losses (Gains), Net: Currency losses (gains) primarily result from the re-measurement of foreign currency-denominated assets and liabilities, the cost of hedging foreign currency-denominated assets and liabilities and the mark-to-market of foreign exchange contracts utilized to hedge those foreign currency-denominated assets and liabilities. Litigation Matters: Litigation matters in 2015 reflect probable losses and reserves for various legal matters. Litigation matters in 2014 reflect probable losses and reserves for various legal matters partially offset by the favorable resolution of our securities litigation matter. Litigation matters for 2013 primarily reflect the benefit resulting from a reserve reduction associated with litigation developments. 41 Refer to Note 18 - Contingencies and Litigation, in the Consolidated Financial Statements for additional information regarding litigation against the Company. Loss on Sales of Accounts Receivables: Represents the loss incurred on our sales of accounts receivables. Refer to Sales of Accounts Receivables section below and Note 5 - Accounts Receivables, Net in the Consolidated Financial Statements for additional information regarding our sales of receivables. Deferred Compensation Investment Losses (Gains): Represents losses (gains) on investments supporting certain of our deferred compensation arrangements. These gains or losses are offset by an increase or decrease, respectively, in compensation expense recorded in SAG in our Services segment as a result of the increase or decrease in the liability associated with these arrangements. Income Taxes The 2015 effective tax rate was (5.6)% and was negative primarily due to the discrete tax benefit associated with the third quarter 2015 HE charge and the second quarter 2015 software impairment charges. On an adjusted1 basis, the 2015 effective tax rate was 23.7%, which was lower than the U.S. statutory tax rate primarily due to foreign tax credits resulting from anticipated dividends from our foreign subsidiaries as well as the retroactive impact of the Protecting Americans from Tax Hikes Act of 2015 and the geographical mix of profits. The 2014 effective tax rate was 17.8% and reflects the $44 million benefit for a deferred tax liability adjustment associated with a tax law change2. On an adjusted1 basis, the 2014 effective tax rate was 24.9%, which was lower than the U.S. statutory tax rate primarily due to a net benefit of approximately 2.4% resulting from the redetermination of certain unrecognized tax positions upon conclusion of several audits, 2.5% from foreign tax credits resulting from actual and anticipated dividends from our foreign subsidiaries, 1.1% from the retroactive impact from the U.S. Tax Increase Prevention Act of 2014, and 1.0% from the reversal of a valuation allowance on deferred tax assets associated with capital losses as well as the geographical mix of profits. The 2013 effective tax rate was 20.4% or 23.8% on an adjusted1 basis. The adjusted tax rate for 2013 was lower than the U.S. statutory tax rate primarily due to foreign tax credits resulting from actual and anticipated dividends from our foreign subsidiaries, the geographical mix of income and the retroactive tax benefits from the American Taxpayer Relief Act of 2012 tax law change of approximately $19 million. These benefits were partially offset by the discrete impact of $12 million for the U.K. corporate income tax rate reduction and the corresponding adjustment to our U.K. deferred tax assets. Xerox operations are widely dispersed. The statutory tax rate in most non-U.S. jurisdictions is lower than the combined U.S. and state tax rate. The amount of income subject to these lower foreign rates relative to the amount of U.S. income will impact our effective tax rate. However, no one country outside of the U.S. is a significant factor to our overall effective tax rate. Certain foreign income is subject to U.S. tax net of any available foreign tax credits. Our full year effective tax rate for 2015 includes a benefit of 37.6-percentage points from these non-U.S. operations. The significant increase in the percentage point benefit, as compared to the prior period benefit of approximately 10%, is primarily due to a lower U.S. pre-tax income in 2015 as a result of the significant charges in 2015 being U.S. based. Refer to Note 17 - Income and Other Taxes, in the Consolidated Financial Statements for additional information regarding the geographic mix of income before taxes and the related impacts on our effective tax rate. Our effective tax rate is based on nonrecurring events as well as recurring factors, including the taxation of foreign income. In addition, our effective tax rate will change based on discrete or other nonrecurring events (e.g. audit settlements, tax law changes, changes in valuation allowances, etc.) that may not be predictable. Excluding the effects of intangibles amortization, restructuring and retirement-related costs, and other discrete items, we anticipate that our adjusted effective tax rate will be approximately 26% to 28% for the first quarter and full year 2016. _____________ (1) See the "Non-GAAP Financial Measures" section for an explanation of the adjusted effective tax rate non-GAAP financial measure. (2) Refer to Note 1 - Basis of Presentation and Summary of Significant Accounting policies for additional information. Xerox 2015 Annual Report 42 Equity in Net Income of Unconsolidated Affiliates (in millions) Year Ended December 31, 2015 2014 2013 Total equity in net income of unconsolidated affiliates $ Fuji Xerox after-tax restructuring costs 135 $ 4 160 $ 3 169 9 Equity in net income of unconsolidated affiliates primarily reflects our 25% share of Fuji Xerox. 2015 equity income of $135 million decreased $25 million as compared to prior year reflecting the weaker Yen as compared to the U.S. dollar in 2015 as well as lower Fuji Xerox net income. Refer to Note 9 - Investment in Affiliates, at Equity, in the Consolidated Financial Statements for additional information regarding our investment in Fuji Xerox. Net Income From Continuing Operations Net income from continuing operations attributable to Xerox for the year ended December 31, 2015 was $552 million, or $0.49 per diluted share. On an adjusted1 basis, net income attributable to Xerox was $1,076 million, or $0.98 per diluted share, and reflects the adjustments for the amortization of intangible assets as well as the software impairment charges and the HE charge. Adjusted earnings per diluted share reflected the impact of a lower average share count as a result of share repurchases over the last three years. Net income from continuing operations attributable to Xerox for the year ended December 31, 2014 was $1,128 million, or $0.94 per diluted share. On an adjusted1 basis, net income attributable to Xerox was $1,280 million, or $1.07 per diluted share, and included adjustments for the amortization of intangible assets as well as the deferred tax liability adjustment in the fourth quarter 2014. The increase in earnings per diluted share reflects a lower average share count as a result of share repurchases over the last three years. Net income from continuing operations attributable to Xerox for the year ended December 31, 2013 was $1,139 million, or $0.89 per diluted share. On an adjusted1 basis, net income attributable to Xerox was $1,328 million, or $1.04 per diluted share, and included adjustments for the amortization of intangible assets. _____________ (1) See the "Non-GAAP Financial Measures" section for a reconciliation of reported net income from continuing operations to adjusted net income. Discontinued Operations Discontinued operations are primarily related to our sale of the ITO business. As previously noted, in the fourth quarter 2014, we announced an agreement to sell the ITO business to Atos and began reporting it as a Discontinued Operation. The sale was completed on June 30, 2015. Refer to Note 4 - Divestitures in the Consolidated Financial Statements for additional information regarding Discontinued Operations. Other Comprehensive (Loss) Income Other comprehensive loss attributable to Xerox was $483 million in 2015 as compared to a loss of $1,380 million in 2014. The reduction of $897 million was primarily due to net gains from changes in defined benefit plans of $153 million in 2015 as compared to losses of $662 million in 2014. The gains in 2015 are largely the result of the reclassification of actuarial losses to net income and the currency impacts on deferred actuarial losses. The remainder of the reduction in other comprehensive loss is related to the $74 million decrease in losses from the translation of our foreign currency denominated net assets. Both 2015 and 2014 reflect translation losses as a result of the significant weakening of our major foreign currencies as compared to the U.S. Dollar in both years. Other comprehensive loss attributable to Xerox was $1,380 million in 2014 as compared to income of $448 million in 2013. The decrease of $1,828 million from 2013 is primarily the result of losses of $662 million from changes in our defined benefit plans in 2014 as compared to gains of $632 million in 2013. The benefit plan losses in 2014 are primarily due to a decrease in the discount rates used to measure our benefit obligations in 2014 as compared to an increase in rates in 2013. The remainder of the year-over-year decrease in other comprehensive income is related to the $549 million increase in losses from the translation of our foreign currency denominated net assets as a result of the increased weakening in 2014 of our major foreign currencies as compared to the U.S. Dollar. 43 Refer to our discussion of Pension Plan Assumptions in the "Application of Critical Accounting Policies" section of the MD&A as well as Note 16 - Employee Benefit Plans in the Consolidated Financial Statements for additional information. Recent Accounting Pronouncements Refer to Note 1 - Basis of Presentation and Summary of Significant Accounting Policies in the Consolidated Financial Statements for a description of recent accounting pronouncements including the respective dates of adoption and the effects on results of operations and financial conditions. Operations Review of Segment Revenue and Profit Our reportable segments are consistent with how we manage the business and view the markets we serve. Our reportable segments are Services, Document Technology and Other. Revenues by segment for the three years ended December 31, 2015 were as follows: (in millions) 2015 Services Document Technology Other Total Adjusted:(1) Services Total 2014 Services Document Technology Other Total 2013 Services Document Technology Other Total _______________ Equipment Sales Revenue Annuity Revenue Total Revenue % of Total Revenue Segment Profit (Loss) Segment Margin 493 $ 9,644 $ 10,137 56% $ 2,179 109 5,186 434 7,365 543 41% 3% 2,781 $ 15,264 $ 18,045 100% $ 446 879 (267) 1,058 4.4 % 11.9 % (49.2)% 5.9 % 493 2,781 $ $ 9,760 15,380 $ $ 10,253 18,161 56% $ $ 835 1,447 8.1 % 8.0 % 499 $ 10,085 $ 2,482 123 5,876 475 10,584 8,358 598 54% $ 43% 3% 3,104 $ 16,436 $ 19,540 100% $ 956 1,149 (272) 1,833 503 $ 9,976 $ 10,479 52% $ 1,055 2,727 128 6,181 491 8,908 619 45% 3% 964 (217) 3,358 $ 16,648 $ 20,006 100% $ 1,802 9.0 % 13.7 % (45.5)% 9.4 % 10.1 % 10.8 % (35.1)% 9.0 % $ $ $ $ $ $ $ $ (1) Refer to the Services Segment reconciliations table in the "Non-GAAP Financial Measures" section. Xerox 2015 Annual Report 44 Services Segment Our Services segment is comprised of two service offerings: Business Process Outsourcing (BPO) and Document Outsourcing (DO). Services segment revenues for the three years ended December 31, 2015 were as follows: (in millions) Business process outsourcing Document outsourcing Total Revenue Adjusted:(1) Business process outsourcing Total Revenue _______________ Revenue % Change CC % Change 2015 2014 2013 2015 2014 2015 2014 $ 6,872 $ 7,218 $ 7,161 3,265 3,366 3,318 $ 10,137 $ 10,584 $ 10,479 $ 6,988 $ 7,218 $ 7,161 $ 10,253 $ 10,584 $ 10,479 1% 2% 1% (5)% (3)% (4)% (3)% (3)% 1% 1% 1% 1% 1% (3)% 3 % (1)% (1)% — % (1) Refer to the Services Segment reconciliation table in the "Non-GAAP Financial Measures" section. CC - See "Non-GAAP Financial Measures" section for description of Constant Currency Note: The above table excludes intercompany revenue. Revenue 2015 Services revenue of $10,137 million was 56% of total revenue and decreased 4% with a 3-percentage point negative impact from currency. On an adjusted1 basis, Services revenue of $10,253 million was 56% of total revenue and decreased 3% compared to 2014, with a 3-percentage point negative impact from currency. • BPO revenue decreased 5% and represented 68% of total Services revenue. On an adjusted1 basis, BPO revenue decreased 3%, with a 2-percentage point negative impact from currency, and represented 68% of total Services revenue. The decline was primarily driven by the anticipated run-off of the student loan business, the Texas Medicaid contract and the impact of our third quarter 2015 decision to not fully complete the Health Enterprise implementations in California and Montana, which combined had a 4.6-percentage point negative impact on BPO revenue growth and a 3.1-percentage point negative impact on total Services revenue growth. Partially offsetting this decline was moderate acquisition contribution and organic growth in several lines of business net of the impacts from lost business and lower pricing that were consistent with prior trends. In 2015, BPO revenue mix, on an adjusted1 basis, across the major business areas was as follows: Commercial Business Groups (excluding Healthcare) - 45%; Public Sector - 27%; Commercial Healthcare - 15%; and Government Healthcare - 13%. • DO revenue decreased 3%, with a 6-percentage point negative impact from currency, and represented 32% of adjusted1 Services revenue. Growth from our partner print services offerings, reflected in both equipment and annuity revenue, and from increased equipment sales due to higher signings, was partially offset by continued declines in developing markets. Segment Margin 2015 Services segment margin was 4.4%. On an adjusted1 basis, Services segment margin of 8.1% decreased by 0.9- percentage points from the prior year primarily due to targeted resource and other investments, impacts from unfavorable line-of-business mix, increased expenses associated with our GHS HE platform implementations prior to the change in strategy and price declines which more than offset productivity improvements and restructuring benefits. 2014 Services segment margin included a 0.2-percentage point negative impact from a net non-cash impairment charge as a result of the cancellation of a state health insurance exchange contract in our GHS business. Government Healthcare Strategy Change Late in third quarter 2015, discussions took place with our Medicaid clients in California and Montana regarding the status and scope of our current HE platform projects in those states. Based on those discussions, we determined that we would not fully complete the implementation of the platform in these states. However, we would continue to process Medicaid claims using existing legacy systems in these states, thus providing uninterrupted service for the 45 states’ healthcare providers and constituents. As a result of the determination that we would not complete these platform implementations, we recorded a pre-tax charge of $389 million ($241 million after-tax) reflecting write-offs and estimated settlement costs as well as other impacts from this determination. The charge included $116 million for the write-off of contract receivables (primarily non-current), $34 million related to the non-cash impairment of the Enterprise software and deferred contract set- up and transition costs and $14 million for other related assets and liabilities. The remainder of the charge is primarily related to settlement costs including payments to subcontractors and is expected to be cash outflows in future quarters. Although our negotiations with Montana have been finalized, we continue to negotiate with California on a final settlement. We believe we have recorded our best estimate of the required liability for a settlement in California, however, this estimate is subject to change when negotiations are finalized. The above noted developments followed the change in our GHS strategy announced in July 2015, regarding our decision to focus our future HE implementations on current Medicaid customers and to discontinue investment in and sales of the Xerox Integrated Eligibility System (IES). This change in strategy resulted in a pre-tax non-cash software impairment charge of $146 million ($90 million after-tax) in second quarter 2015 associated with our Enterprise and IES software platforms. We remain committed to the implementation and ongoing operation of the Health Enterprise platform for our four other state clients, including our largest state client, New York. In addition, GHS is a significant and important business for the Company, and we are committed to the business over the longer-term. We have a diverse portfolio of healthcare solutions and will focus on the more profitable market segments from which we derive over two thirds of GHS's revenues. We will continue to assess and modify our GHS strategy as the marketplace and business conditions evolve. Metrics Signings Signings are defined as estimated future revenues from contracts signed during the period, including renewals of existing contracts. Signings were as follows: Signings were as follows: (in billions) BPO DO Total Signings Year Ended December 31, 2015 2014 2013 $ $ $ 8.4 3.1 $ 7.6 3.0 11.5 $ 10.6 $ 8.9 3.3 12.2 Services signings were an estimated $11.5 billion in Total Contract Value (TCV) for 2015 and increased 8% as compared to the prior year. Signings in 2015 included large contracts such as the Florida Tolling and NY MMIS contracts, which were partially offset by a modest decline in new business signings and a lower level of renewal decision opportunities. New business annual recurring revenue (ARR) and non-recurring revenue (NRR) decreased 1% compared to the prior year. Services signings were an estimated $10.6 billion in TCV for 2014 and decreased 13% compared to the prior year. The decrease was driven by a lower level of renewal decision opportunities and lower new business signings which were partially impacted by customer decision delays and a decrease in the average contract length. New business ARR and NRR decreased 13% compared to the prior year. Note: The above DO signings amount represents Enterprise signings only and does not include signings from our partner print services offerings, which is driving the revenue growth in DO. TCV is the estimated total contractual revenue related to future contracts in the pipeline or signed contracts, as applicable. Renewal Rate (Total Services) Renewal rate is defined as the ARR on contracts that are renewed during the period as a percentage of ARR on all contracts for which a renewal decision was made during the period. Our 2015 renewal rate of 84% was just below our target range of 85%-90% but 3-percentage points higher than 2014. Xerox 2015 Annual Report 46 Pipeline The sales pipeline includes the Total Contract Value (TCV) of new business opportunities that potentially could be contracted within the next six months and excludes new business opportunities with estimated annual recurring revenue in excess of $100 million. Our total Services sales pipeline at December 31, 2015 declined 15% compared to 2014, reflecting increased TCV signings in 2015, including larger deals, and our second quarter 2015 strategic decision to narrow the focus in our Government Healthcare Solutions business. Revenue 2014 Services revenue of $10,584 million increased 1% with no impact from currency. • BPO revenue increased 1% and represented 68% of total Services revenue. Growth from acquisitions along with organic growth in commercial healthcare and litigation services as well as growth internationally were partially offset by declines in portions of customer care. In addition, the anticipated declines in the student loan business and the Texas Medicaid contract termination had a combined 2.6-percentage point negative impact on BPO revenue growth and a 1.8-percentage point negative impact on total Services revenue. In 2014, BPO revenue mix across the major business areas was as follows: Commercial - 45%; Government and Transportation - 25%; Commercial Healthcare - 18%; and Government Healthcare - 12%. • DO revenue increased 1% and represented 32% of total Services revenue. The increase in DO revenue was primarily driven by growth in our partner print services offerings offset by declines in Europe and other markets due to contract run-off and new contract ramp timing. Segment Margin 2014 Services segment margin of 9.0% decreased 1.1-percentage points from the prior year primarily due primarily to a 1.1-percentage point decline in gross margin, as margin improvements in DO, commercial healthcare, human resources and commercial European businesses were more than offset by decreased margin in government healthcare and government and transportation. Productivity improvements and restructuring benefits were insufficient to offset higher expenses associated with our government healthcare Medicaid and Health Insurance Exchange (HIX) platforms, net non-cash impairment charges for the HIX platform, higher compensation expenses, the anticipated run-off of the student loan business and price declines consistent with prior years. The gross margin decline was partially offset by improvements in SAG reflecting restructuring benefits. Document Technology Segment Our Document Technology segment includes the sale of products and supplies, as well as the associated maintenance and financing of those products. Document Technology segment revenues for the three years ended December 31, 2015 were as follows: (in millions) Equipment sales Annuity revenue Total Revenue Revenue 2015 2015 Revenue 2014 % Change CC % Change 2013 2015 2014 2015 2014 $ $ 2,179 $ 2,482 $ 5,186 5,876 7,365 $ 8,358 $ 2,727 6,181 8,908 (12)% (12)% (12)% (9)% (5)% (6)% (9)% (8)% (8)% (9)% (5)% (6)% Document Technology revenue of $7,365 million decreased 12%, with a 4-percentage point negative impact from currency. Total revenues include the following: • Equipment sales revenue decreased 12% with a 3-percentage point negative impact from currency. The decline was across all product groups and was driven by weakness in developing markets, lower OEM sales, lower sales of production products due to product launch timing, continued migration of customers to our partner print services offering (included in our Services segment), and overall price declines that continue to be within our historical range of 5% to 10%. 47 • Annuity revenue decreased by 12%, with a 4-percentage point negative impact from currency. The annuity revenue decrease reflects lower equipment sales in prior periods, resulting in ongoing page declines and lower supplies demand, as well as supplies channel inventory dynamics and reduced financing revenue. Annuity revenue in Document Technology also reflects continued migration of customers to our partner print services offering (included in our Services segment). Total revenue in the Document Technology segment is expected to continue to decline over the next three years as we continue to migrate the business to more services-based offerings. These services-based offerings are reported within our Services segment. This segment also continues to be impacted by lower equipment placements and price declines as well as related supplies and page declines. We expect to continue to mitigate these declines through focus on productivity and cost improvements, as well as investments in growth areas of the market. Document Technology revenue mix was 19% entry, 57% mid-range and 24% high-end. Segment Margin 2015 Document Technology segment margin of 11.9% decreased 1.8-percentage points from prior year, including a 0.7- percentage point decrease in gross margin as well as higher RD&E and SAG as a percent of revenue. The gross margin decrease reflects unfavorable revenue-stream mix, price declines and an increase in pension expense, partially offset by the retiree health curtailment gain, lower compensation and benefit expenses and benefits from restructuring and productivity actions. SAG increased as a percent of revenue due to the impact of overall lower revenues and higher pension expense that more than offset benefits from restructuring and productivity improvements, lower compensation and benefit expenses and the curtailment gain. Installs 2015 Entry Install activity percentages include installations for Document Outsourcing and the Xerox-branded product shipments to GIS. Descriptions of “Entry”, “Mid-Range” and “High-End” are defined in Note 2 - Segment Reporting, in the Consolidated Financial Statements. • • • 28% decrease in color printers reflecting lower OEM sales due in part to a transition to color multifunction devices. 28% increase in color multifunction devices driven by higher demand for new products and OEM sales. 11% decrease in black-and-white multifunction devices reflecting continued declines in developing markets including Eurasia. Mid-Range • • 1% increase in mid-range color including demand for new products. 7% decrease in mid-range black-and-white reflecting higher declines in developing markets including Eurasia. High-End • 2% increase in high-end color systems driven primarily by the new Color Press 800, 1000 and Versant products offset by declines in other production color products partially reflecting product launch timing. Excluding Fuji Xerox digital front-end sales, high-end color installs decreased 4%. 10% decrease in high-end black-and-white systems consistent with overall market declines. • Revenue 2014 Document Technology revenue of $8,358 million decreased 6%, with no impact from currency. Document Technology revenues exclude Document Outsourcing. Inclusive of Document Outsourcing, 2014 aggregate document-related revenue decreased 4% from 2013, with no impact from currency. Total revenues include the following: Total revenues include the following: • Equipment sales revenue decreased 9% with no impact from currency. The decrease in equipment sales reflects weakness in entry products due to product launch timing, the continued migration of customers to our growing partner print services offering (included in our Services segment), weakness in developing markets Xerox 2015 Annual Report 48 due to economic instability and, price declines of approximately 5%. 2013 benefited from the ConnectKey mid- range product launch, and the refresh cycle for several large accounts. Equipment sales in 2014 were negatively impacted by lower sales in Russia due to economic instability. • Annuity revenue decreased by 5%, with no impact from currency. The decrease reflects a modest decline in total pages, weakness in developing markets and entry products due to product launch timing, a continued decline in financing revenue as a result of prior period sales of finance receivables and lower receivables balance due to lower originations. The overall decrease in Financing revenue from prior year contributed 1- percentage point to the Annuity revenue decline and 1-percentage point impact to the overall Document Technology revenue decline. Annuity revenue was also impacted by the continued migration of customers to our partner print services offerings (included in our Services segment). Total digital page volumes declined 4% despite a 2% increase in digital MIF. Segment Margin 2014 Document Technology segment margin of 13.7% increased 2.9-percentage points from prior year. The increase was primarily driven by a 1.5-percentage point increase in gross margin as the benefits from restructuring and productivity, lower pension expense, and favorable currency on Yen-based purchases and revenue mix more than offset moderate price declines and the impact of lower financing revenues. SAG decreased as a percent of revenue as lower pension and bad debt expense as well as benefits from restructuring and productivity improvements more than offset the impact of overall lower revenues. Installs 2014 7% decrease in color multifunction devices. Entry • • Entry color printers flat. • 23% decrease in entry black-and-white multifunction devices driven by declines in all geographies. Mid-Range • High-End • • • 1% increase in installs of mid-range color devices reflects benefits from the newly launched WorkCentre 7970 and entry production devices partially offset by timing of large account sales. 13% decrease in installs of mid-range black-and-white devices is consistent with overall market declines. 7% decrease in installs of high-end color systems. Excluding Fuji Xerox growth in digital front-end (DFE) sales, high-end color installs increased 6% with growth in iGen and the new Versant product. 13% decrease in installs of high-end black-and-white systems, reflecting continued declines in the overall market. Other Revenue 2015 Other segment revenue of $543 million decreased 9%, with no impact from currency, due primarily to lower wide format revenues, paper sales as well as networking hardware and integration services revenues. Total paper revenue (all within developing markets) comprised nearly 40% of the Other segment revenue. Other Loss 2015 Non-financing interest expense as well as all Other expenses, net (excluding deferred compensation investment losses (gains)) are reported within the Other segment and were $232 million in 2015 as compared to $239 million in 2014. The $7 million decrease from the prior year was primarily due to lower non-financing interest expense. Other segment loss of $35 million before Other expenses, increased $2 million from the prior year. 49 Revenue 2014 Other segment revenue of $598 million decreased 3%, with no impact from currency, due to lower licensing and patent sale revenues as well as lower wide format systems revenue. Total paper revenue (all within developing markets) comprised approximately one-third of the Other segment revenue. Other Loss 2014 Non-financing interest expense as well as all Other expenses, net (excluding deferred compensation investment losses (gains)) are reported within the Other segment and were $239 million in 2014 as compared to $198 million in 2013 (which excludes the $37 favorable resolution of securities litigation matter). The $41 million increase was primarily driven by lower gains from the sale of surplus properties, currency losses and legal reserves. Other segment loss of $33 million before Other expenses, increased $14 million from the prior year primarily due to lower revenues from licensing and patents. 2016 Segment Reporting Change Revised 2015 Segments - New Reporting Basis In the first quarter of 2016, we will be revising our segment reporting to reflect the following changes: • The transfer of the Education/Student Loan business from the Services segment to Other as a result of the expected continued run-off of this business. The business does not meet the threshold for separate segment reporting. • The exclusion of the non-service elements of our defined-benefit pension and retiree-health plan costs from Segment Profit. Although no other changes have been approved, additional segment changes may be considered in 2016 as a result of the Company's plan to separate the Business Processing Outsourcing business from its Document Technology and Document Outsourcing businesses. Below are revised results by reportable segment as a result of the reporting changes discussed above. (in millions) Revenues Services Revised Revised 2015 Adj. for HE charge Full Year 2014 Q1 Q2 Q3 Q4 Full Year 2015 Q3 Full Year 2015 $ 10,338 $ 2,467 $ 2,526 $ 2,367 $ 2,602 $ 9,962 $ 2,483 $ 10,078 Document Technology Other 8,358 844 1,830 172 1,880 184 1,778 188 1,877 174 7,365 718 1,778 188 7,365 718 Total Revenues $ 19,540 $ 4,469 $ 4,590 $ 4,333 $ 4,653 $ 18,045 $ 4,449 $ 18,161 Segment Profit (Loss) Services $ 893 $ Document Technology Other 1,204 (185) $ 187 232 (47) 181 235 (62) $ (196) $ 248 (55) (3) 252 245 (46) $ 424 960 (210) $ 193 248 (55) 386 $ 813 960 (210) $ 1,563 Total Segment Profit (Loss) $ 1,912 $ 372 $ 354 $ $ 451 $ 1,174 $ Segment Margin Services Document Technology Other Total Segment Margin 8.6 % 14.4 % (21.9)% 9.8 % 7.6 % 12.7 % (27.3)% 8.3 % 7.2 % 12.5 % (33.7)% 7.7 % (8.3)% 13.9 % (29.3)% (0.1)% 9.7 % 13.1 % (26.4)% 9.7 % 4.3 % 13.0 % (29.2)% 6.5 % 7.8 % 13.9 % 8.1 % 13.0 % (29.3)% (29.2)% 8.7 % 8.6 % Xerox 2015 Annual Report 50 Capital Resources and Liquidity Our liquidity is primarily dependent on our ability to continue to generate strong cash flows from operations. Additional liquidity is also provided through access to the financial capital markets, including the Commercial Paper market, as well as a committed global credit facility. The following is a summary of our liquidity position: • As of December 31, 2015 and 2014, total cash and cash equivalents were $1,368 million and $1,411 million, respectively. There were no borrowings under our Commercial Paper Program at December 31, 2015 versus $150 million of borrowings at December 31, 2014. There were no borrowings or letters of credit under our $2 billion Credit Facility at either year end. • Over the past three years we have consistently delivered strong cash flows from operations driven by the strength of our annuity-based revenue model. Cash flows from operations was $1,611 million, $2,063 million and $2,375 million for the three years ended December 31, 2015, respectively. The decrease in 2015 cash flow from operations was primarily due to lower earnings and the elimination of cash flows from the disposed ITO business. Cash flows from operations for all periods reflect the cash impacts from the sales of finance receivables - refer to Sales of Finance Receivables within this section. • We expect cash flows from operations to be between $1.3 and $1.5 billion in 2016, which reflects expected cash outflows for the HE settlement charge and higher restructuring payments. Cash Flow Analysis The following summarizes our cash flows for the three years ended December 31, 2015, as reported in our Consolidated Statements of Cash Flows in the accompanying Consolidated Financial Statements: (in millions) Year Ended December 31, Change 2015 2014 2013 2015 2014 Net cash provided by operating activities $ 1,611 $ 2,063 $ 2,375 $ (452) $ Net cash provided by (used in) investing activities Net cash used in financing activities Effect of exchange rate changes on cash and cash equivalents (Decrease) increase in cash and cash equivalents Cash and cash equivalents at beginning of year 508 (2,074) (88) (43) 1,411 (703) (1,624) (89) (353) 1,764 (452) (1,402) (3) 518 1,246 1,211 (450) 1 310 (353) Cash and Cash Equivalents at End of Year $ 1,368 $ 1,411 $ 1,764 $ (43) $ (312) (251) (222) (86) (871) 518 (353) Cash Flows from Operating Activities Net cash provided by operating activities was $1,611 million for the year ended December 31, 2015. The $452 million decrease in operating cash from 2014 was primarily due to the following: • $503 million decrease in pre-tax income before depreciation and amortization, gain on sales of businesses and assets, stock-based compensation and restructuring charges as well as the HE charge. $105 million decrease due to the expected loss of cash flow associated with the ITO business, post-divestiture. $79 million decrease primarily due to higher levels of inventory following lower equipment and supplies demand. $31 million decrease from finance receivables primarily related to a lower net run-off as a result of an increase in originations. This was partially offset by a lower impact from the prior year sales of receivables. Refer to Note 6 - Finance Receivables, Net in the Consolidated Financial Statements for additional information regarding the sale of finance receivables. $25 million decrease primarily due to higher discretionary pension contributions in the U.S. offset by lower contributions in the international plans. $90 million decrease in accounts payable and accrued compensation primarily related to the timing of payments and an increase in days payable outstanding as well as lower compensation accruals. $256 million increase from accounts receivable primarily due to additional sales of accounts receivable under existing programs. In addition, the increase reflects improved collections, select use of prompt pay discounts and lower revenues. $35 million increase from lower restructuring payments due to lower activity. $29 million increase from lower spending for up-front costs for outsourcing service contracts. • • • • • • • • Cash flow from operations in 2015 and 2014 include approximately $40 million and $145 million, respectively, of cash flows from our ITO business, which was held for sale and reported as a discontinued operation through its sale on June 30, 2015. Refer to Note 4 - Divestitures in the Consolidated Financial Statements for additional information. 51 Net cash provided by operating activities was $2,063 million for the year ended December 31, 2014. The $312 million decrease in operating cash from 2013 was primarily due to the following: • $598 million decrease from finance receivables primarily related to the impact from prior period sales of receivables partially offset by higher net run-off due to lower lease originations. Refer to Note 6 - Finance Receivables, Net in the Consolidated Financial Statements for additional information regarding the sale of finance receivables. $54 million decrease due to higher contributions to our defined benefit pension plans. $157 million increase due to higher accounts payable and accrued compensation primarily related to the timing of accounts payable payments and improved payment terms with key suppliers. $92 million increase from accounts receivable primarily due to the timing of collections and improved collections partially offset by the impact from quarterly revenue changes. $42 million increase from lower spending for product software and up-front costs for outsourcing service contracts. $34 million increase due to lower net income tax payments primarily due to refunds in 2014 of prior years. $20 million increase from lower installs of equipment on operating leases. • • • • • • Cash flow from operations in 2014 and 2013 include approximately $145 million and $130 million, respectively, of cash flows from our ITO business, which was reported as a discontinued operation through its sale June 30, 2015. Refer to Note 4 - Divestitures in the Consolidated Financial Statements for additional information. Cash Flows from Investing Activities Net cash provided by investing activities was $508 million for the year ended December 31, 2015. The $1,211 million increase in cash from 2014 was primarily due to the following: • $936 million of net proceeds from the sale of the ITO business. Refer to Note - 4 Divestitures, in the Consolidated Financial Statements for additional information. $130 million change from acquisitions. 2015 acquisitions include RSA medical for $141 million, Intrepid Learning Solutions, Inc. for $28 million and $41 million for other acquisitions. 2014 acquisitions include ISG Holdings, Inc. for $225 million, Invoco Holding GmbH for $54 million, Consilience Software, Inc. for $25 million and $36 million for other acquisitions. $110 million due to lower capital expenditures (including internal use software) partly due to the sale of the ITO business. $39 million of higher proceeds primarily from the sale of surplus property and assets in the U.S. and Latin America. • • • Capital expenditures (including internal use software) in 2015 and 2014 include approximately $40 million and $100 million, respectively, for our ITO business, which was held for sale and reported as a discontinued operation through June 30, 2015. Refer to Note 4 - Divestitures in the Consolidated Financial Statements for additional information. Net cash used in investing activities was $703 million for the year ended December 31, 2014. The $251 million increase in the use of cash from 2013 was primarily due to the following: • $185 million increase in acquisitions. 2014 acquisitions include ISG Holdings, Inc. for $225 million, Invoco Holding GmbH for $54 million, Consilience Software, Inc. for $25 million and three smaller acquisitions for $36 million. 2013 acquisitions include Zeno Office Solutions, Inc. for $59 million, Impika for $53 million and four smaller acquisitions totaling $43 million. $32 million increase primarily due to lower proceeds from the sale of assets. 2014 includes proceeds from the sale of surplus facilities in Latin America of $42 million. 2013 includes proceeds from the sale of a U.S. facility of $38 million and the sale of portions of our Wilsonville, Oregon operation and related assets of $33 million. $25 million increase due to higher capital expenditures (including internal use software). • • Capital expenditures (including internal use software) in 2014 and 2013 include approximately $100 million in each year associated with our ITO business, which was held for sale and reported as a discontinued operation through its sale on June 30, 2015. Refer to Note 4 - Divestitures in the Consolidated Financial Statements for additional information. Cash Flows from Financing Activities Net cash used in financing activities was $2,074 million for the year ended December 31, 2015. The $450 million increase in the use of cash from 2014 was primarily due to the following: Xerox 2015 Annual Report 52 • • • • $231 million increase in share repurchases. $195 million increase from net debt activity. 2015 reflects payment of $1,250 million on Senior Notes and a decrease of $150 million in Commercial Paper offset by net proceeds of $1,045 million from the issuance of Senior Notes. 2014 reflects payments of $1,050 million on Senior Notes offset by net proceeds of $700 million from the issuance of Senior Notes and an increase of $150 million in Commercial Paper. $36 million increase due to lower proceeds from the issuance of common stock under our incentive stock plans. $25 million decrease due to lower distributions to noncontrolling interests. Net cash used in financing activities was $1,624 million for the year ended December 31, 2014. The $222 million increase in the use of cash from 2013 was primarily due to the following: • • • $375 million increase in share repurchases. $69 million increase due to lower proceeds from the issuance of common stock under our incentive stock plans. $48 million increase due to higher common stock dividends of $17 million as well as distributions to noncontrolling interests of $31 million. $259 million decrease from net debt activity. 2014 reflects payments of $1,050 million on Senior Notes offset by net proceeds of $700 million from the issuance of Senior Notes and an increase of $150 million in Commercial Paper. 2013 reflects payments of $1 billion of Senior Notes offset by net proceeds of $500 million from the issuance of Senior Notes and $39 million from the sale and capital leaseback of a building in the U.S. • Customer Financing Activities and Debt We provide lease equipment financing to our customers, primarily in our Document Technology segment. Our lease contracts permit customers to pay for equipment over time rather than at the date of installation. Our investment in these contracts is reflected in Total finance assets, net. We primarily fund our customer financing activity through cash generated from operations, cash on hand, commercial paper borrowings, sales and securitizations of finance receivables and proceeds from capital markets offerings. We have arrangements in certain international countries and domestically with our small and mid-sized customers, where third-party financial institutions independently provide lease financing directly to our customers, on a non- recourse basis to Xerox. In these arrangements, we sell and transfer title of the equipment to these financial institutions. Generally, we have no continuing ownership rights in the equipment subsequent to its sale; therefore, the unrelated third-party finance receivable and debt are not included in our Consolidated Financial Statements. The following represents our Total finance assets, net associated with our lease and finance operations: (in millions) Total Finance receivables, net(1) Equipment on operating leases, net Total Finance Assets, Net (2) _________ December 31, 2015 2014 $ $ 3,988 $ 495 4,483 $ 4,254 525 4,779 (1) Includes (i) billed portion of finance receivables, net, (ii) finance receivables, net and (iii) finance receivables due after one year, net as included in our Consolidated Balance Sheets. (2) The change from December 31, 2014 includes a decrease of $247 million due to currency across all Finance Assets. We maintain a certain level of debt, referred to as financing debt, to support our investment in these lease contracts or Total finance assets, net. We maintain this financing debt at an assumed 7:1 leverage ratio of debt to equity as compared to our Total finance assets, net for this financing aspect of our business. Based on this leverage, the following represents the allocation of our total debt at December 31, 2015 and 2014 between financing debt and core debt: (in millions) Financing debt(1) Core debt Total Debt _________ 53 December 31, 2015 2014 $ $ 3,923 $ 3,444 7,367 $ 4,182 3,559 7,741 (1) Financing debt includes $3,490 million and $3,722 million as of December 31, 2015 and December 31, 2014, respectively, of debt associated with Total finance receivables, net and is the basis for our calculation of “Equipment financing interest” expense. The remainder of the financing debt is associated with Equipment on operating leases. In 2015, we expect to continue the leveraging of our finance assets at an assumed 7:1 ratio of debt to equity. The following summarizes our total debt at December 31, 2015 and 2014: (in millions) Principal debt balance(1) Net unamortized discount Fair value adjustments(2) - terminated swaps - current swaps Total Debt _________ December 31, 2015 2014 7,365 $ (52) 7,722 (54) 47 7 68 5 7,367 $ 7,741 $ $ (1) Balance at December 31, 2015 and 2014 includes $3 million and $1 million of Notes Payable and $0 million and $150 of Commercial Paper, respectively. (2) Fair value adjustments include the following: (i) fair value adjustments to debt associated with terminated interest rate swaps, which are being amortized to interest expense over the remaining term of the related notes; and (ii) changes in fair value of hedged debt obligations attributable to movements in benchmark interest rates. Hedge accounting requires hedged debt instruments to be reported inclusive of any fair value adjustment. Sales of Accounts Receivable Accounts receivable sales arrangements are utilized in the normal course of business as part of our cash and liquidity management. We have financial facilities in the U.S., Canada and several countries in Europe that enable us to sell certain accounts receivables without recourse to third-parties. The accounts receivables sold are generally short-term trade receivables with payment due dates of less than 60 days. Refer to Note 5 - Accounts Receivable, Net in the Consolidated Financial Statements for additional information. Sales of Finance Receivables In 2013 and 2012, we transferred our entire interest in certain groups of lease finance receivables to third-party entities. The transfers were accounted for as sales and resulted in the de-recognition of lease receivables with a net carrying value of $676 million in 2013 and $682 million in 2012, and associated pre-tax gains of $40 million and $44 million, respectively. There have been no sales since 2013. We continue to service the sold receivables and record servicing fee income over the expected life of the associated receivables. Refer to Note 6 - Finance Receivables, Net in the Consolidated Financial Statements for additional information. Capital Market Activity Refer to Note 13 - Debt in the Consolidated Financial Statements for additional information. Financial Instruments Refer to Note 14 - Financial Instruments in the Consolidated Financial Statements for additional information. Share Repurchase Programs - Treasury Stock During 2015, we repurchased 115.2 million shares of our common stock for an aggregate cost of $1.3 billion, including fees. Refer to Note 20 - Shareholders’ Equity – Treasury Stock in the Consolidated Financial Statements for additional information regarding our share repurchase programs. Dividends The Board of Directors declared aggregate dividends of $299 million, $293 million and $287 million on common stock in 2015, 2014 and 2013, respectively. The increase in 2015 as compared to prior years is primarily due to the Xerox 2015 Annual Report 54 increase in the quarterly dividend to 7.00 cents per share in 2015 partially offset by a lower level of outstanding shares as a result of the repurchase of shares under our share repurchase programs. The Board of Directors declared aggregate dividends of $24 million on the Series A Convertible Preferred Stock in each year for the three years ended December 31, 2015. The preferred shares were issued in 2010 in connection with the acquisition of ACS. In January 2016, the Board of Directors approved an increase in the Company's quarterly cash dividend from 7.00 cents per share to 7.75 cents per share, beginning with the dividend payable on April 29, 2016. Liquidity and Financial Flexibility We manage our worldwide liquidity using internal cash management practices, which are subject to (1) the statutes, regulations and practices of each of the local jurisdictions in which we operate, (2) the legal requirements of the agreements to which we are a party and (3) the policies and cooperation of the financial institutions we utilize to maintain and provide cash management services. Our principal debt maturities are in line with historical and projected cash flows and are spread over the next ten years as follows (in millions): Year 2016(1) 2017 2018 2019 2020 2021 2022 2023 2024 2025 and thereafter Total ______________ (1) Includes $3 million of Notes Payable. Amount $ 983 1,027 1,020 1,161 1,207 1,067 — — 300 600 $ 7,365 Foreign Cash At December 31, 2015, we had $1.4 billion of cash and cash equivalents on a consolidated basis. Of that amount, approximately $500 million was held outside the U.S. by our foreign subsidiaries to fund future working capital, investment and financing needs of our foreign subsidiaries. Accordingly, we have asserted that such funds are indefinitely reinvested outside the U.S. We believe we have sufficient levels of cash and cash flows to support our domestic requirements. However, if the cash held by our foreign subsidiaries was needed to fund our U.S. requirements, there would not be a significant tax liability associated with the repatriation, as any U.S. liability would be reduced by the foreign tax credits associated with the repatriated earnings. However, our determination above is based on the assumption that only the cash held outside the U.S. would be repatriated as a result of an unanticipated or unique domestic need. It does not assume repatriation of the entire amount of indefinitely reinvested earnings of our foreign subsidiaries. As disclosed in Note 17- Income and Other Taxes in our Consolidated Financial Statements, we have not estimated the potential tax consequences associated with the repatriation of the entire amount of our foreign earnings indefinitely reinvested outside the U.S. We do not believe it is practical to calculate the potential tax impact, as there is a significant amount of uncertainty with respect to determining the amount of foreign tax credits as well as any additional local withholding tax and other indirect tax consequences that may arise from the distribution of these earnings. In addition, because such earnings have been indefinitely reinvested in our foreign operations, repatriation would require liquidation of those investments or a recapitalization of our foreign subsidiaries, the impacts and effects of which are not readily determinable. 55 Loan Covenants and Compliance At December 31, 2015, we were in full compliance with the covenants and other provisions of our Credit Facility and Senior Notes. We have the right to terminate the Credit Facility without penalty. Failure to comply with material provisions or covenants of the Credit Facility and Senior Notes could have a material adverse effect on our liquidity and operations and our ability to continue to fund our customers' purchase of Xerox equipment. Refer to Note 13 - Debt in the Consolidated Financial Statements for additional information regarding debt arrangements. Contractual Cash Obligations and Other Commercial Commitments and Contingencies At December 31, 2015, we had the following contractual cash obligations and other commercial commitments and contingencies: (in millions) Total debt, including capital lease obligations(1) Interest on debt(1) Minimum operating lease commitments(2) Defined benefit pension plans Retiree health payments Estimated Purchase Commitments: Fuji Xerox(3) Flextronics(4) Other(5) Total _______________ 2016 2017 2018 2019 2020 Thereafter $ 983 307 378 140 70 1,728 413 226 $ 1,027 $ 1,020 $ 1,161 $ 1,207 $ 1,967 251 271 — 68 — — 163 205 178 — 67 — — 125 169 122 — 66 — — 102 116 78 — 64 — — 29 675 139 — 296 — — 153 $ 4,245 $ 1,780 $ 1,595 $ 1,620 $ 1,494 $ 3,230 (1) Total debt for 2016 includes $3 million of Notes Payable. Refer to Note 13 - Debt in the Consolidated Financial Statements for additional information regarding debt and interest on debt. (2) Refer to Note 8 - Land, Buildings, Equipment and Software, Net in the Consolidated Financial Statements for additional information related to minimum operating lease commitments. (3) Fuji Xerox: The amount included in the table reflects our estimate of purchases over the next year and is not a contractual commitment. Refer to 9 - Investments in Affiliates, at Equity in the Consolidated Financial Statements for additional information related to transactions with Fuji- Xerox. (4) Flextronics: We outsource certain manufacturing activities to Flextronics. The amount included in the table reflects our estimate of purchases over the next year and is not a contractual commitment. In the past two years, actual purchases from Flextronics averaged approximately $465 million per year. (5) Other purchase commitments: We enter into other purchase commitments with vendors in the ordinary course of business. Our policy with respect to all purchase commitments is to record losses, if any, when they are probable and reasonably estimable. We currently do not have, nor do we anticipate, material loss contracts. Pension and Other Post-retirement Benefit Plans We sponsor defined benefit pension plans and retiree health plans that require periodic cash contributions. Our 2015 cash contributions for these plans were $309 million for our defined benefit pension plans and $63 million for our retiree health plans. In 2016, based on current actuarial calculations, we expect to make contributions of approximately $140 million to our worldwide defined benefit pension plans and approximately $70 million to our retiree health benefit plans. Contributions to our defined benefit pension plans in subsequent years will depend on a number of factors, including the investment performance of plan assets and discount rates as well as potential legislative and plan changes. At December 31, 2015, the unfunded and underfunded balances of our U.S. and Non-U.S. defined benefit pension plans were $1,347 million and $962 million, respectively, or $2,309 million in the aggregate. Our retiree health benefit plans are non-funded and are almost entirely related to domestic operations. The unfunded balance of our retiree health plans was $855 million at December 31, 2015. Cash contributions are made each year to cover medical claims costs incurred during the year. The amounts reported in the above table as retiree health payments represent our estimate of future benefit payments. Refer to Note 16 - Employee Benefit Plans in the Consolidated Financial Statements for additional information regarding contributions to our defined benefit pension and post-retirement plans. Xerox 2015 Annual Report 56 Fuji Xerox We purchased products, including parts and supplies, from Fuji Xerox totaling $1.7 billion, $1.8 billion and $1.9 billion in 2015, 2014 and 2013, respectively. Our purchase commitments with Fuji Xerox are entered into in the normal course of business and typically have a lead time of three months. Related party transactions with Fuji Xerox are discussed in Note 9 - Investments in Affiliates, at Equity in the Consolidated Financial Statements. Brazil Tax and Labor Contingencies Our Brazilian operations are involved in various litigation matters and have received or been the subject of numerous governmental assessments related to indirect and other taxes, as well as disputes associated with former employees and contract labor. The tax matters, which comprise a significant portion of the total contingencies, principally relate to claims for taxes on the internal transfer of inventory, municipal service taxes on rentals and gross revenue taxes. We are disputing these tax matters and intend to vigorously defend our positions. Based on the opinion of legal counsel and current reserves for those matters deemed probable of loss, we do not believe that the ultimate resolution of these matters will materially impact our results of operations, financial position or cash flows. The labor matters principally relate to claims made by former employees and contract labor for the equivalent payment of all social security and other related labor benefits, as well as consequential tax claims, as if they were regular employees. As of December 31, 2015, the total amounts related to the unreserved portion of the tax and labor contingencies, inclusive of related interest, amounted to approximately $577 million, with the decrease from December 31, 2014 balance of approximately $817 million, primarily related to currency and closed cases partially offset by interest. With respect to the unreserved balance of $577 million, the majority has been assessed by management as being remote as to the likelihood of ultimately resulting in a loss to the Company. In connection with the above proceedings, customary local regulations may require us to make escrow cash deposits or post other security of up to half of the total amount in dispute. As of December 31, 2015, we had $71 million of escrow cash deposits for matters we are disputing, and there are liens on certain Brazilian assets with a net book value of $14 million and additional letters of credit and surety bonds of approximately $129 million and $80 million, respectively, which include associated indexation. Generally, any escrowed amounts would be refundable and any liens would be removed to the extent the matters are resolved in our favor. We routinely assess all these matters as to the probability of ultimately incurring a liability against our Brazilian operations and record our best estimate of the ultimate loss in situations where we assess the likelihood of an ultimate loss as probable. Other Contingencies and Commitments As more fully discussed in Note 18 - Contingencies and Litigation in the Consolidated Financial Statements, we are involved in a variety of claims, lawsuits, investigations and proceedings concerning: securities law; governmental entity contracting, servicing and procurement law; intellectual property law; environmental law; employment law; the Employee Retirement Income Security Act (ERISA); and other laws and regulations. In addition, guarantees, indemnifications and claims may arise during the ordinary course of business from relationships with suppliers, customers and non-consolidated affiliates. Nonperformance under a contract including a guarantee, indemnification or claim could trigger an obligation of the Company. We determine whether an estimated loss from a contingency should be accrued by assessing whether a loss is deemed probable and can be reasonably estimated. Should developments in any of these areas cause a change in our determination as to an unfavorable outcome and result in the need to recognize a material accrual, or should any of these matters result in a final adverse judgment or be settled for significant amounts, they could have a material adverse effect on our results of operations, cash flows and financial position in the period or periods in which such change in determination, judgment or settlement occurs. Unrecognized Tax Benefits As of December 31, 2015, we had $247 million of unrecognized tax benefits. This represents the tax benefits associated with various tax positions taken, or expected to be taken, on domestic and foreign tax returns that have not been recognized in our financial statements due to uncertainty regarding their resolution. The resolution or settlement of these tax positions with the taxing authorities is at various stages and, therefore, we are unable to make a reliable estimate of the eventual cash flows by period that may be required to settle these matters. In addition, certain of these matters may not require cash settlement due to the existence of credit and net operating loss carryforwards, as well as other offsets, including the indirect benefit from other taxing jurisdictions that may be available. Refer to Note 17 - Income and Other Taxes in the Consolidated Financial Statements for additional information regarding unrecognized tax benefits. 57 Off-Balance Sheet Arrangements We may occasionally utilize off-balance sheet arrangements in our operations (as defined by the SEC Financial Reporting Release 67 (FRR-67), “Disclosure in Management’s Discussion and Analysis about Off-Balance Sheet Arrangements and Aggregate Contractual Obligations”). We enter into the following arrangements that have off- balance sheet elements: • Operating leases in the normal course of business. The nature of these lease arrangements is discussed in Note 8 - Land, Buildings, Equipment and Software, Net in the Consolidated Financial Statements. • We have facilities, primarily in the U.S., Canada and several countries in Europe that enable us to sell to third- parties certain accounts receivable without recourse. In most instances, a portion of the sales proceeds are held back by the purchaser and payment is deferred until collection of the related sold receivables. Refer to Note 5 - Accounts Receivables, Net in the Consolidated Financial Statements for further information regarding these facilities. • During 2013 and 2012, we entered into arrangements to transfer and sell our entire interest in certain groups of finance receivables where we received cash and beneficial interests from the third-party purchaser. Refer to Note 6 - Finance Receivables, Net in the Consolidated Financial Statements for further information regarding these sales. There were no sales of Finance Receivables since the year ended December 31, 2013. As of December 31, 2015, we do not believe we have any off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future effect on financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. In addition, see the preceding table for the Company's contractual cash obligations and other commercial commitments and Note 18 - Contingencies and Litigation in the Consolidated Financial Statements for additional information regarding contingencies, guarantees, indemnifications and warranty liabilities. Non-GAAP Financial Measures We have reported our financial results in accordance with generally accepted accounting principles (GAAP). In addition, we have discussed our results using non-GAAP measures. Management believes that these non-GAAP financial measures provide an additional means of analyzing the current periods’ results against the corresponding prior periods’ results. However, these non-GAAP financial measures should be viewed in addition to, and not as a substitute for, the Company’s reported results prepared in accordance with GAAP. Our non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP measures and should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP. Our management regularly uses our supplemental non-GAAP financial measures internally to understand, manage and evaluate our business and make operating decisions. These non- GAAP measures are among the primary factors management uses in planning for and forecasting future periods. Compensation of our executives is based in part on the performance of our business based on these non-GAAP measures. A reconciliation of these non-GAAP financial measures and the most directly comparable measures calculated and presented in accordance with GAAP are set forth on the following tables. Adjusted Revenue, Costs and Expenses, and Margin As previously discussed, during third quarter 2015, we recorded a pre-tax charge, the Health Enterprise (HE) charge, of $389 million ($241 million after-tax or 23 cents per share), which included a $116 million reduction to revenues. (See Services Segment within the "Operations Review of Segment Revenue and Profit" section for additional details). As a result of the significant impact of the HE charge on our reported revenues, costs and expenses as well as key metrics for the period, we also discussed our results using non-GAAP measures which excluded the impact of the HE charge. In addition to the magnitude of the charge and its impact on our reported results, we excluded the HE charge due to the fact that it was primarily a unique charge associated with the determination, reached after a series of discussions, that fully completing our HE platform implementations in California and Montana was no longer considered probable. Xerox 2015 Annual Report 58 Adjusted Earnings Measures • Net income and Earnings per share (EPS) • Effective tax rate In addition to the exclusion of the HE charge, the above measures were also adjusted for the following items: Amortization of intangible assets: The amortization of intangible assets is driven by our acquisition activity which can vary in size, nature and timing as compared to other companies within our industry and from period to period. The use of intangible assets contributed to our revenues earned during the periods presented and will contribute to our future period revenues as well. Amortization of intangible assets will recur in future periods. Software impairment charge: The software impairment charge is excluded due to its non-cash impact and the unique nature of the item both in terms of the amount and the fact that it was the result of a specific management action involving a change in strategy in our Government Healthcare Solutions business. See Services Segment within the "Operations Review of Segment Revenue and Profit" section for further discussion. Deferred tax liability adjustment: The deferred tax liability adjustment was excluded due its non-cash impact and the unusual nature of the item both in terms of amount and the fact that it was the result of an infrequent change in a tax treaty impacting future distributions from Fuji Xerox. Refer to Note 1 - Basis of Presentation and Summary of Significant Accounting Policies, in the Consolidated Financial Statements for additional information. Operating Income and Margin We also calculate and utilize operating income and margin earnings measures by adjusting our pre-tax income and margin amounts to exclude certain items. In addition to the exclusion of the HE Charge as well as the amortization of intangible assets, operating income and margin also excludes Other expenses, net as well as Restructuring and asset impairment charges. Other expenses, net is primarily comprised of non-financing interest expense and also includes certain other non-operating costs and expenses. Restructuring charges consist of costs primarily related to severance and benefits paid to employees pursuant to formal restructuring and workforce reduction plans. Asset impairment charges include costs incurred for those assets sold, abandoned or made obsolete as a result of our restructuring actions, exiting from a business or other strategic business changes. Such charges are expected to yield future benefits and savings with respect to our operational performance. We exclude these amounts in order to evaluate our current and past operating performance and to better understand the expected future trends in our business. Net Income and EPS reconciliation: (in millions; except per share amounts) Reported(1) Adjustments: Amortization of intangible assets Software Impairment HE Charge Deferred tax liability adjustment Adjusted Weighted average shares for adjusted EPS(2) Fully diluted shares at December 31, 2015(3) ___________ Year Ended December 31, 2015 2014 2013 Net Income EPS Net Income EPS Net Income EPS $ 552 $ 0.49 $ 1,128 $ 0.94 $ 1,139 $ 0.89 193 90 241 — 0.18 0.08 0.23 — 196 — — (44) 0.17 — — (0.04) 189 — — — 0.15 — — — $ 1,076 $ 0.98 $ 1,280 $ 1.07 $ 1,328 $ 1.04 1,103 1,046 1,199 1,274 (1) Net income and EPS from continuing operations. (2) Average shares for the calculation of adjusted EPS include 27 million shares associated with our Series A convertible preferred stock. (3) Represents common shares outstanding at December 31, 2015 as well as shares associated with our Series A convertible preferred stock plus potential dilutive common shares used for the calculation of diluted earnings per share for the year ended 2015. 59 Effective Tax reconciliation: (in millions) Reported(1) Adjustments: Year Ended December 31, 2015 Year Ended December 31, 2014 Year Ended December 31, 2013 Pre-Tax Income Income Tax (Benefit) Expense Effective Tax Rate Pre-Tax Income Income Tax Expense Effective Tax Rate Pre-Tax Income Income Tax Expense Effective Tax Rate $ 412 $ (23) (5.6)% $ 1,206 $ 215 17.8% $ 1,243 $ 253 20.4% Amortization of intangible assets Software Impairment HE Charge Deferred tax liability adjustment 310 146 389 — Adjusted __________ $ 1,257 $ 117 56 148 — 298 315 — — — 119 — — 44 305 — — — 116 — — — 23.7 % $ 1,521 $ 378 24.9% $ 1,548 $ 369 23.8% (1) Pre-tax income and income tax (benefit) expense from continuing operations. Operating Income / Margin reconciliation: (in millions) Reported Pre-tax Income(1) Adjustments: Amortization of intangible assets Restructuring and asset impairment charges HE Charge Other expenses, net Year Ended December 31, 2015 Year Ended December 31, 2014 Year Ended December 31, 2013 Profit Revenue Margin Profit Revenue Margin Profit Revenue Margin $ 412 $ 18,045 2.3% $ 1,206 $ 19,540 6.2% $ 1,243 $ 20,006 6.2% 310 186 389 233 116 315 128 — 232 — 305 115 — 146 — Adjusted Operating Income / Margin $ 1,530 $ 18,161 8.4% $ 1,881 $ 19,540 9.6% $ 1,809 $ 20,006 9.0% ____________ (1) Profit and revenue from continuing operations. The following non-GAAP reconciliation tables adjust for the third quarter 2015 HE charge, which does not impact the years ended December 31, 2014 or 2013. Revenue / Segment reconciliation: (in millions) Total Revenue Annuity Revenue Outsourcing, Maintenance and Rentals Revenue Total Segment Profit Total Segment Margin __________________________ (1) Revenue from continuing operations. Year Ended December 31, 2015 Reported(1) HE Charge Adjusted $ 18,045 $ 15,264 12,951 1,058 5.9% 116 116 116 389 $ 18,161 15,380 13,067 1,447 8.0% Xerox 2015 Annual Report 60 Services Segment reconciliation: (in millions) Annuity Revenue BPO Revenue Segment Revenue % of Total Revenue Segment Profit Segment Margin __________________________ (1) Revenue from continuing operations. Key Financial Ratios reconciliation: (in millions) Reported(1) Adjustment: HE Charge Adjusted __________________________ (1) Revenue from continuing operations. Year Ended December 31, 2015 Reported(1) HE Charge Adjusted $ 9,644 $ 6,872 10,137 56% 446 4.4% 116 116 116 — 389 $ 9,760 6,988 10,253 56% 835 8.1% Year Ended December 31, 2015 Gross Margin RD&E as % of Revenue SAG as % of Revenue 29.2% 3.1% 19.7% 1.9 31.1% — 3.1% (0.1) 19.6% ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Financial Risk Management We are exposed to market risk from foreign currency exchange rates and interest rates, which could affect operating results, financial position and cash flows. We manage our exposure to these market risks through our regular operating and financing activities and, when appropriate, through the use of derivative financial instruments. We utilized derivative financial instruments to hedge economic exposures, as well as reduce earnings and cash flow volatility resulting from shifts in market rates. Recent market events have not caused us to materially modify or change our financial risk management strategies with respect to our exposures to interest rate and foreign currency risk. Refer to Note 14 - Financial Instruments in the Consolidated Financial Statements for additional discussion on our financial risk management. Foreign Exchange Risk Management Assuming a 10% appreciation or depreciation in foreign currency exchange rates from the quoted foreign currency exchange rates at December 31, 2015, the potential change in the fair value of foreign currency-denominated assets and liabilities in each entity would not be significant because all material currency asset and liability exposures were economically hedged as of December 31, 2015. A 10% appreciation or depreciation of the U.S. Dollar against all currencies from the quoted foreign currency exchange rates at December 31, 2015 would have an impact on our cumulative translation adjustment portion of equity of approximately $557 million. The net amount invested in foreign subsidiaries and affiliates, primarily Xerox Limited, Fuji Xerox and Xerox Canada Inc. and translated into U.S. Dollars using the year-end exchange rates, was approximately $5.6 billion at December 31, 2015. 61 Interest Rate Risk Management The consolidated weighted-average interest rates related to our total debt for 2015, 2014 and 2013 approximated 4.7%, 4.8%, and 5.0%, respectively. Interest expense includes the impact of our interest rate derivatives. Virtually all customer-financing assets earn fixed rates of interest. The interest rates on a significant portion of the Company's term debt are fixed. As of December 31, 2015, $338 million of our total debt of $7.4 billion carried variable interest rates, including the effect of pay variable interest rate swaps, if any, we may use to reduce the effective interest rate on our fixed coupon debt. The fair market values of our fixed-rate financial instruments are sensitive to changes in interest rates. At December 31, 2015, a 10% change in market interest rates would change the fair values of such financial instruments by approximately $115 million. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Xerox 2015 Annual Report 62 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Xerox Corporation: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, comprehensive income (loss), cash flows and shareholders’ equity present fairly, in all material respects, the financial position of Xerox Corporation and its subsidiaries at December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in Item 15(a)(1) of this Form 10-K presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. As disclosed in Note 1 to the consolidated financial statements, the Company changed the presentation and classification of deferred income taxes in 2015 in accordance with the adoption of the new accounting standard. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ PRICEWATERHOUSECOOPERS LLP PricewaterhouseCoopers LLP Stamford, Connecticut February 19, 2016 63 REPORTS OF MANAGEMENT Management's Responsibility for Financial Statements Our management is responsible for the integrity and objectivity of all information presented in this annual report. The consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States of America and include amounts based on management's best estimates and judgments. Management believes the consolidated financial statements fairly reflect the form and substance of transactions and that the financial statements fairly represent the Company's financial position and results of operations. The Audit Committee of the Board of Directors, which is composed solely of independent directors, meets regularly with the independent auditors, PricewaterhouseCoopers LLP, the internal auditors and representatives of management to review accounting, financial reporting, internal control and audit matters, as well as the nature and extent of the audit effort. The Audit Committee is responsible for the engagement of the independent auditors. The independent auditors and internal auditors have free access to the Audit Committee. Management's Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the rules promulgated under the Securities Exchange Act of 1934. Under the supervision and with the participation of our management, including our principal executive, financial and accounting officers, we have conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in “Internal Control - Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the above evaluation, management has concluded that our internal control over financial reporting was effective as of December 31, 2015. /s/ URSULA M. BURNS /s/ LESLIE F. VARON /s/ JOSEPH H. MANCINI, JR. Chief Executive Officer Interim Chief Financial Officer Chief Accounting Officer Xerox 2015 Annual Report 64 XEROX CORPORATION CONSOLIDATED STATEMENTS OF INCOME (in millions, except per-share data) Revenues Sales Outsourcing, maintenance and rentals Financing Total Revenues Costs and Expenses Cost of sales Cost of outsourcing, maintenance and rentals Cost of financing Research, development and engineering expenses Selling, administrative and general expenses Restructuring and asset impairment charges Amortization of intangible assets Other expenses, net Total Costs and Expenses Income Before Income Taxes and Equity Income Income tax (benefit) expense Equity in net income of unconsolidated affiliates Income from Continuing Operations (Loss) income from discontinued operations, net of tax Net Income Less: Net income attributable to noncontrolling interests Net Income Attributable to Xerox Amounts attributable to Xerox: Net income from continuing operations (Loss) income from discontinued operations, net of tax Net Income Attributable to Xerox Basic Earnings per Share: Continuing operations Discontinued operations Total Basic Earnings per Share Diluted Earnings per Share: Continuing operations Discontinued operations Total Diluted Earnings per Share Year Ended December 31, 2015 2014 2013 $ 4,748 $ 5,288 $ 12,951 346 18,045 2,961 9,691 130 563 3,559 186 310 233 17,633 412 (23) 135 570 (78) 492 18 13,865 387 19,540 3,269 9,885 140 577 3,788 128 315 232 18,334 1,206 215 160 1,151 (115) 1,036 23 $ $ $ $ $ $ $ 474 $ 1,013 $ 552 $ (78) 474 $ 0.50 $ (0.08) 0.42 $ 0.49 $ (0.07) 0.42 $ 1,128 $ (115) 1,013 $ 0.96 $ (0.10) 0.86 $ 0.94 $ (0.09) 0.85 $ 5,582 13,941 483 20,006 3,550 9,808 163 603 4,073 115 305 146 18,763 1,243 253 169 1,159 20 1,179 20 1,159 1,139 20 1,159 0.91 0.02 0.93 0.89 0.02 0.91 The accompanying notes are an integral part of these Consolidated Financial Statements. 65 XEROX CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (in millions) Net Income Less: Net income attributable to noncontrolling interests Net Income Attributable to Xerox Other Comprehensive (Loss) Income, Net(1): Translation adjustments, net Unrealized gains, net Changes in defined benefit plans, net Other Comprehensive (Loss) Income, Net Less: Other comprehensive loss, net attributable to noncontrolling interests Other Comprehensive (Loss) Income, Net Attributable to Xerox Comprehensive Income (Loss), Net Less: Comprehensive income, net attributable to noncontrolling interests Comprehensive (Loss) Income, Net Attributable to Xerox __________ $ $ $ $ $ $ Year Ended December 31, 2015 2014 2013 492 $ 18 474 $ 1,036 $ 23 1,013 $ (660) $ (734) $ 23 153 (484) (1) (483) $ 8 $ 17 (9) $ 15 (662) (1,381) (1) (1,380) $ (345) $ 22 (367) $ 1,179 20 1,159 (185) — 632 447 (1) 448 1,626 19 1,607 (1) Refer to Note 21 - 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 Consolidated Financial Statements. Xerox 2015 Annual Report 66 XEROX CORPORATION CONSOLIDATED BALANCE SHEETS (in millions, except share data in thousands) Assets Cash and cash equivalents Accounts receivable, net Billed portion of finance receivables, net Finance receivables, net Inventories Assets of discontinued operations Other current assets Total current assets Finance receivables due after one year, net Equipment on operating leases, net Land, buildings and equipment, net Investments in affiliates, at equity Intangible assets, net Goodwill Other long-term assets Total Assets Liabilities and Equity Short-term debt and current portion of long-term debt Accounts payable Accrued compensation and benefits costs Unearned income Liabilities of discontinued operations Other current liabilities Total current liabilities Long-term debt Pension and other benefit liabilities Post-retirement medical benefits Other long-term liabilities Total Liabilities Commitments and Contingencies (See Note 18) Series A Convertible Preferred Stock Common stock Additional paid-in capital Treasury stock, at cost Retained earnings Accumulated other comprehensive loss Xerox shareholders’ equity Noncontrolling interests Total Equity Total Liabilities and Equity Shares of common stock issued Treasury stock Shares of common stock outstanding December 31, 2015 2014 $ 1,368 $ 2,319 97 1,315 942 — 644 6,685 2,576 495 996 1,389 1,765 8,823 2,088 1,411 2,652 110 1,425 934 1,260 1,082 8,874 2,719 525 1,123 1,338 2,031 8,805 2,243 $ $ 24,817 $ 27,658 985 $ 1,614 651 428 — 1,576 5,254 6,382 2,513 785 417 1,427 1,584 754 431 371 1,509 6,076 6,314 2,847 865 454 15,351 16,556 349 349 1,013 3,017 — 9,686 (4,642) 9,074 43 9,117 $ 24,817 $ 1,124 4,283 (105) 9,535 (4,159) 10,678 75 10,753 27,658 1,012,836 1,124,354 — (7,609) 1,012,836 1,116,745 The accompanying notes are an integral part of these Consolidated Financial Statements. 67 XEROX CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in millions) Cash Flows from Operating Activities: Net income Adjustments required to reconcile net income to cash flows from operating activities: Depreciation and amortization Provision for receivables Provision for inventory Deferred tax expense Net loss (gain) on sales of businesses and assets Undistributed equity in net income of unconsolidated affiliates Stock-based compensation Restructuring and asset impairment charges Payments for restructurings Contributions to defined benefit pension plans Decrease (increase) in accounts receivable and billed portion of finance receivables Collections of deferred proceeds from sales of receivables Increase in inventories Increase in equipment on operating leases (Increase) decrease in finance receivables Collections on beneficial interest from sales of finance receivables Increase in other current and long-term assets Increase (decrease) in accounts payable and accrued compensation Increase (decrease) in other current and long-term liabilities Other operating, net Net cash provided by operating activities Cash Flows from Investing Activities: Cost of additions to land, buildings and equipment Proceeds from sales of land, buildings and equipment Cost of additions to internal use software Proceeds from sale of businesses Acquisitions, net of cash acquired Other investing, net Net cash provided by (used in) investing activities Cash Flows from Financing Activities: Net (payments) proceeds on short-term debt Proceeds from issuance of long-term debt Payments on long-term debt Common stock dividends Preferred stock dividends Proceeds from issuances of common stock Excess tax benefits from stock-based compensation Payments to acquire treasury stock, including fees Repurchases related to stock-based compensation Distributions to noncontrolling interests Other financing Net cash used in financing activities Effect of exchange rate changes on cash and cash equivalents (Decrease) increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and Cash Equivalents at End of Year Year Ended December 31, 2015 2014 2013 $ 492 $ 1,036 $ 1,190 1,426 58 30 32 57 (79) 46 186 (98) (309) 111 259 (101) (291) (8) 46 (71) 38 183 (160) 1,611 (251) 93 (91) 939 (210) 28 508 (147) 1,079 (1,302) (302) (24) 19 19 (1,302) (51) (62) (1) (2,074) (88) (43) $ 1,411 1,368 $ 53 26 69 134 (91) 91 130 (133) (284) (436) 434 (22) (283) (10) 79 (159) 128 (64) (61) 2,063 (368) 54 (84) 26 (340) 9 (703) 145 808 (1,128) (289) (24) 55 18 (1,071) (41) (87) (10) (1,624) (89) (353) 1,764 1,411 $ 1,179 1,358 123 35 117 (45) (92) 90 116 (136) (230) (576) 482 (38) (303) 609 58 (145) (29) (50) (148) 2,375 (346) 86 (81) 26 (155) 18 (452) 5 617 (1,056) (272) (24) 124 16 (696) (57) (56) (3) (1,402) (3) 518 1,246 1,764 The accompanying notes are an integral part of these Consolidated Financial Statements. Xerox 2015 Annual Report 68 XEROX CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in millions) Common Stock Additional Paid-in Capital Treasury Stock Retained Earnings AOCL(3) Xerox Shareholders’ Equity Non- controlling Interests Total Equity Balance at December 31, 2012 $ 1,239 $ 5,622 $ (104) $ 7,991 $ (3,227) $ 11,521 $ 143 $ 11,664 Comprehensive income, net Cash dividends declared-common(1) Cash dividends declared-preferred(2) Conversion of notes to common stock Stock option and incentive plans, net Payments to acquire treasury stock, including fees Cancellation of treasury stock Distributions to noncontrolling interests — — — 1 28 — (58) — — — — 8 142 — (490) — — — — — — (696) 548 — 1,159 448 1,607 (287) (24) — — — — — — — — — — — — (287) (24) 9 170 (696) — — 19 — — — — — — (43) 1,626 (287) (24) 9 170 (696) — (43) Balance at December 31, 2013 $ 1,210 $ 5,282 $ (252) $ 8,839 $ (2,779) $ 12,300 $ 119 $ 12,419 Comprehensive income (loss), net Cash dividends declared-common(1) Cash dividends declared-preferred(2) Conversion of notes to common stock Stock option and incentive plans, net Payments to acquire treasury stock, including fees — — — 1 14 — — — — 8 110 — Cancellation of treasury stock (101) (1,117) Distributions to noncontrolling interests — — — — — — — (1,071) 1,218 — 1,013 (1,380) (293) (24) — — — — — — — — — — — — (367) (293) (24) 9 124 (1,071) — — Balance at December 31, 2014 $ 1,124 $ 4,283 $ (105) $ 9,535 $ (4,159) $ 10,678 $ Comprehensive income (loss), net Cash dividends declared-common(1) Cash dividends declared-preferred(2) Stock option and incentive plans, net Payments to acquire treasury stock, including fees — — — 11 — — — — 19 — Cancellation of treasury stock (122) (1,285) Distributions to noncontrolling interests — — — — — — (1,302) 1,407 — 474 (299) (24) — — — — (483) — — — — — — (9) (299) (24) 30 (1,302) — — 22 — — — — — — (66) 75 17 — — — — — (49) (345) (293) (24) 9 124 (1,071) — (66) $ 10,753 8 (299) (24) 30 (1,302) — (49) Balance at December 31, 2015 $ 1,013 $ 3,017 $ — $ 9,686 $ (4,642) $ 9,074 $ 43 $ 9,117 __________ (1) Cash dividends declared on common stock of $0.0700 in each quarter of 2015, $0.0625 in each quarter of 2014 and $0.0575 in each quarter of 2013. (2) Cash dividends declared on preferred stock of $20 per share in each quarter of 2015, 2014 and 2013. (3) AOCL - Accumulated other comprehensive loss. The accompanying notes are an integral part of these Consolidated Financial Statements. 69 XEROX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in millions, except per-share data and where otherwise noted) Note 1 – Basis of Presentation and Summary of Significant Accounting Policies References herein to “we,” “us,” “our,” the “Company” and “Xerox” refer to Xerox Corporation and its consolidated subsidiaries unless the context suggests otherwise. Description of Business and Basis of Presentation Xerox is an $18.0 billion global enterprise for business process and document management solutions. We are one of the largest diversified business process outsourcing companies worldwide, with an expertise in managing transaction-intensive processes. This includes services that support enterprises through multi-industry offerings such as customer care, transaction processing, finance and accounting, and human resources, as well as industry focused offerings in areas such as healthcare, transportation, financial services, retail and telecommunications. We also provide extensive leading-edge document technology, services, software and genuine Xerox supplies for graphic communication and office printing environments of any size. Basis of Consolidation The Consolidated Financial Statements include the accounts of Xerox Corporation and all of our controlled subsidiary companies. All significant intercompany accounts and transactions have been eliminated. Investments in business entities in which we do not have control, but we have the ability to exercise significant influence over operating and financial policies (generally 20% to 50% ownership) are accounted for using the equity method of accounting. Operating results of acquired businesses are included in the Consolidated Statements of Income from the date of acquisition. We consolidate variable interest entities if we are deemed to be the primary beneficiary of the entity. Operating results for variable interest entities in which we are determined to be the primary beneficiary are included in the Consolidated Statements of Income from the date such determination is made. For convenience and ease of reference, we refer to the financial statement caption “Income before Income Taxes and Equity Income” as “pre-tax income” throughout the Notes to the Consolidated Financial Statements. Discontinued Operations In 2014, we announced an agreement to sell our Information Technology Outsourcing (ITO) business to Atos SE (Atos). As a result of this agreement and having met applicable accounting requirements, we reported the ITO business as held for sale and a discontinued operation up through its date of sale, which was completed on June 30, 2015. In 2014 we also completed the disposal of two smaller businesses - Xerox Audio Visual Solutions, Inc. (XAV) and Truckload Management Services (TMS) - that were also reported as discontinued operations. In 2013 we completed the sale of our U.S. and Canadian (North American or N.A.) and Western European (European) Paper businesses. Results from these businesses are reported as Discontinued Operations and all prior period results have been reclassified to conform to this presentation. Refer to Note 4 - Divestitures for additional information regarding discontinued operations. Prior Period Adjustments During third quarter 2015, we recorded a $16 out-of-period adjustment associated with the over-accrual of an employee benefit liability account. The impact of this adjustment was not material to any individual prior quarter or year and is not material to our 2015 results. During second quarter 2015, in connection with Fuji Xerox’s (FX) payment of its semi-annual dividend, we determined that the dividends were no longer subject to an additional tax as a result of a change in the U.K. - Japan Tax Treaty in December 2014. As of December 31, 2014, we had a deferred tax liability of $44 associated with this additional tax on the undistributed earnings of FX through that date. This deferred tax liability was no longer required as a result of the change in the Tax Treaty and, therefore, should have been reversed in December 2014. There was no impact on operating cash flows from this adjustment. We assessed the materiality of this error on our 2014 financial statements and concluded that it was not material to the fourth quarter or annual period. However, due to Xerox 2015 Annual Report 70 the impact of this adjustment on the current year consolidated financial statements, the accompanying Consolidated Financial Statements for 2014 have been revised as summarized below: The following table presents the effect of this correction on our Consolidated Statements of Income for all periods affected: Income tax expense Income from Continuing Operations Net Income Net Income Attributable to Xerox Net Income Attributable to Xerox - continuing operations Basic Earnings per Share: Continuing Operations Total Basic Earnings per Share Diluted Earnings per Share: Continuing Operations Total Diluted Earnings per Share Three Months Ended December 31, 2014 Year Ended December 31, 2014 As Reported (Unaudited) As Revised (Unaudited) As Reported As Revised $ 78 $ 34 $ 259 $ 311 162 156 305 0.26 0.13 0.26 0.13 $ $ 355 206 200 349 0.30 $ 0.17 0.30 $ 0.17 1,107 992 969 1,084 $ $ 0.92 0.82 0.90 0.81 $ $ 215 1,151 1,036 1,013 1,128 0.96 0.86 0.94 0.85 The following table presents the effect this correction had on our Consolidated Balance Sheet at December 31, 2014: Other long-term liabilities Total Liabilities Retained earnings Xerox shareholders' equity Total Equity December 31, 2014 As Reported As Revised $ 498 $ 454 16,600 9,491 10,634 10,709 16,556 9,535 10,678 10,753 The correction did not have an effect on the Company’s operating cash flows. The following table presents the effect on the individual line items within operating cash flows of our Consolidated Statement of Cash Flows for the year ended December 31, 2014: Net income Net change in income tax assets and liabilities Use of Estimates Year Ended December 31, 2014 As Reported As Revised $ 992 $ 1,036 29 (15) The preparation of our Consolidated Financial Statements requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities, as well as the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Future events and their effects cannot be predicted with certainty; accordingly, our accounting estimates require the exercise of judgment. The accounting estimates used in the preparation of our Consolidated Financial Statements will change as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes. Our estimates are based on management's best knowledge of current events, historical experience, actions that the company may undertake in the future and on various other assumptions that are believed to be reasonable under the circumstances. As a result, actual results may be different from these estimates. 71 The following table summarizes certain recurring type costs and expenses that require management estimates for the three years ended December 31, 2015: Expense/(Income) Year Ended December 31, 2015 2014 2013 Provisions for restructuring and asset impairments - continuing operations $ 186 $ 128 $ Provisions for restructuring and asset impairments - discontinued operations Provision for receivables Provisions for litigation and regulatory matters Provisions for obsolete and excess inventory Provision for product warranty liability Depreciation and obsolescence of equipment on operating leases Depreciation of buildings and equipment (1) Amortization of internal use software (1) Amortization of product software Amortization of acquired intangible assets (1) Amortization of customer contract costs (1) Defined pension benefits - net periodic benefit cost Retiree health benefits - net periodic benefit cost Income tax (benefit) expense - continuing operations Income tax expense - discontinued operations __________________ — 58 16 30 22 286 277 135 69 310 113 142 2 (23) 81 2 53 11 26 25 297 324 139 62 315 128 82 3 215 6 115 7 123 (34) 35 28 283 332 137 43 305 100 267 1 253 27 (1) Excludes amounts related to our ITO business, which was reported as a discontinued operation through its date of sale on June 30, 2015. Refer to Note 4 - Divestitures for additional information regarding this sale. Changes in Estimates In the ordinary course of accounting for the items discussed above, we make changes in estimates as appropriate and as we become aware of new or revised circumstances surrounding those estimates. Such changes and refinements in estimation methodologies are reflected in reported results of operations in the period in which the changes are made and, if material, their effects are disclosed in the Notes to the Consolidated Financial Statements and in Management's Discussion and Analysis of Financial Condition and Results of Operations. New Accounting Standards and Accounting Changes Except for the Accounting Standard Updates (ASU's) discussed below, the new ASU's issued by the FASB during the last two years did not have any significant impact on the Company. Revenue Recognition In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), to supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing U.S. GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 is effective for our fiscal year beginning January 1, 2018, with early adoption permitted for fiscal years beginning January 1, 2017. The standard will be adopted using either of two methods: (i) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-09; or (ii) retrospective with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures as defined per ASU 2014-09. We have concluded that we will adopt this standard beginning January 1, 2018, and we will use the retrospective method with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application (i.e., the "modified retrospective approach"). We continue to evaluate the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements. Xerox 2015 Annual Report 72 Financial Instruments - Classification and Measurement In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Recognition and Measurement of Financial Instruments and Financial Liabilities. This update requires that equity investment (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) be measured at fair value with changes in fair value recognized in net income. The amendments in this update also simplify the impairment assessment of equity investments without readily determinable fair values. In addition, the amendments in this update require disclosure of fair value for financial instruments held at amortized cost. The amendments also require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables). This update is effective for our fiscal year beginning January 1, 2018. The provisions within the update relate to instrument-specific credit risk when the fair value option is elected maybe early adopted. We are currently evaluating the impact of our pending adoption of ASU 2016-01 on our consolidated financial statements. Accounting for Income Taxes: Balance Sheet Presentation of Deferred Taxes In November 2015, the FASB issued ASU 2015-17, Income Taxes: Balance Sheet Classification of Deferred Taxes. This update, which simplifies the presentation of deferred income taxes, requires that deferred tax liabilities and assets be classified as non-current in a classified statement of financial position. As allowed by the update, we early adopted ASU 2015-17 effective December 31, 2015 on a prospective basis. Adoption of this update resulted in a reclassification of our net current deferred tax asset and liabilities to the net non-current deferred tax asset and liabilities in our Consolidated Balance Sheet as of December 31, 2015. Prior periods were not retrospectively adjusted. The current requirement that deferred tax liabilities and assets of a tax-paying component (jurisdiction) of an entity be offset and presented as a single amount is not affected by this update. Interest In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. This update requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. In August 2015, the FASB issued ASU 2015-15, which indicated that the SEC staff would not object to an entity deferring and presenting debt issuance costs associated with a line-of-credit arrangement as an asset and subsequently amortizing those costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings. All of our debt issuance costs are currently reported as deferred charges in Other long-term assets and were $32 at December 31, 2015, $4 of which is related to our credit agreement. This update was effective for our fiscal year beginning January 1, 2016. Upon adoption of this update, we will reclassify approximately $28 of debt issuance costs to long-term debt. Prior periods will be retroactively revised. The costs associated with our credit agreement will continue to be reported as a deferred charge in Other long-term assets. The adoption of this standard is not expected to have a material effect on our financial condition, results of operations or cash flows. Discontinued Operations In April 2014, the FASB issued ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The update changes the requirements for reporting discontinued operations in Subtopic 205-20. A discontinued operation may include a component of an entity or a group of components of an entity, or a business. A disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. Examples include a disposal of a major geographic area, a major line of business or a major equity method investment. Additionally, the update requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income and expenses of discontinued operations. This update was effective prospectively for our fiscal year beginning January 1, 2015. The standard primarily involves presentation and disclosure and, therefore, is not expected to have a material impact on our financial condition, results of operations or cash flows. Service Concession Arrangements In January 2014, the FASB issued ASU 2014-05, Service Concession Arrangements (Topic 853). This update specifies that an entity should not account for a service concession arrangement within the scope of this update as a lease in accordance with Topic 840, Leases. The update was effective for our fiscal year beginning January 1, 2015. The adoption of this standard did not have a material effect on our financial condition, results of operation or cash flows. 73 Other Updates In 2015 and 2014, the FASB also issued the following Accounting Standards Updates which are not expected to have a material impact on our financial condition, results of operations or cash flows when adopted in future periods. Those updates are as follows: • Business Combinations: ASU 2015-16, Accounting for Measurement Period Adjustments in a Business • Combination, which is effective for our fiscal year beginning January 1, 2016. Inventory: ASU 2015-11, Simplifying the Subsequent Measurement of Inventory, which is effective for our fiscal year beginning January 1, 2017. • Fair Value Measurements: ASU 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or its Equivalent), which is effective for our fiscal year beginning January 1, 2016. Intangibles - Goodwill and Other - Internal Use Software: ASU 2015-05, Intangibles-Goodwill and Other- Internal Use Software - Customer's Accounting for Fees Paid in a Cloud Computing Arrangement, which is effective for our fiscal year beginning January 1, 2016. • • Consolidation: ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. This update is effective for our fiscal year beginning January 1, 2016 with early adoption permitted, and is applied on a modified retrospective basis. Income Statement: ASU 2015-01, Income Statement - Extraordinary and Unusual Items (Subtopic 225-20) - Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. The standard primarily involves presentation and disclosure. • • Derivatives and Hedging: ASU 2014-16, Derivatives and Hedging (Topic 815) - Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity, which is effective for our fiscal year beginning January 1, 2016. • Disclosures of Going Concern Uncertainties: ASU 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40); Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which is effective for our fiscal year beginning January 1, 2016. • Stock Compensation: ASU 2014-12, Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide that a Performance Target Could be Achieved after the Requisite Service Period, which is effective for our fiscal year beginning January 1, 2016. Summary of Accounting Policies Revenue Recognition We generate revenue through services, the sale and rental of equipment, supplies and income associated with the financing of our equipment sales. Revenue is recognized when it is realized or realizable and earned. We consider revenue realized or realizable and earned when we have persuasive evidence of an arrangement, delivery has occurred, the sales price is fixed or determinable and collectibility is reasonably assured. Delivery does not occur until equipment has been shipped or services have been provided to the customer, risk of loss has transferred to the customer, and either customer acceptance has been obtained, customer acceptance provisions have lapsed, or the company has objective evidence that the criteria specified in the customer acceptance provisions have been satisfied. The sales price is not considered to be fixed or determinable until all contingencies related to the sale have been resolved. More specifically, revenue related to services and sales of our products is recognized as follows: Equipment-Related Revenues Equipment: Revenues from the sale of equipment, including those from sales-type leases, are recognized at the time of sale or at the inception of the lease, as appropriate. For equipment sales that require us to install the product at the customer location, revenue is 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. Revenues from equipment under other leases and similar arrangements are accounted for by the operating lease method and are recognized as earned over the lease term, which is generally on a straight-line basis. Technical Services: Technical service revenues are derived primarily from maintenance contracts on the equipment sold to our customers and are recognized over the term of the contracts. A substantial portion of our products are sold with full service maintenance agreements for which the customer typically pays a base service fee plus a variable amount based on usage. As a consequence, other than the product warranty obligations associated with Xerox 2015 Annual Report 74 certain of our low end products, we do not have any significant product warranty obligations, including any obligations under customer satisfaction programs. Bundled Lease Arrangements: We sell our products and services under bundled lease arrangements, which typically include equipment, service, supplies 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. The payments associated with page volumes in excess of the minimums are contingent on whether or not such minimums are exceeded (contingent payments). 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. Contingent payments, if any, are recognized as revenue in the period when the customer exceeds the minimum copy volumes specified in the contract. Revenues under bundled arrangements are allocated considering the relative 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.” Our 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. Sales to distributors and resellers: We utilize distributors and resellers to sell many of our technology products, supplies and services to end-user customers. We refer to our distributor and reseller network as our two-tier distribution model. Sales to distributors and resellers are generally recognized as revenue when products are sold to such distributors and resellers. However, revenue is only recognized when the distributor or reseller has economic substance apart from the company, the sales price is not contingent upon resale or payment by the end user customer and we have no further obligations related to bringing about the resale, delivery or installation of the product. Distributors and resellers participate in various rebate, price-protection, cooperative marketing and other programs, and we record provisions for these programs 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 compete with other third-party leasing companies with respect to the lease financing provided to these end-user customers. Supplies: Supplies revenue generally is recognized upon shipment or utilization by customers in accordance with the sales contract terms. 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 deliverables or elements. In most cases, these software products are sold as part of multiple element arrangements and include software maintenance agreements for the delivery of technical service, as well as unspecified upgrades or enhancements on a when-and-if-available basis. In those software accessory and free-standing software arrangements that include more than one element, we allocate the revenue among the elements based on vendor-specific objective evidence (VSOE) of fair value. Revenue allocated to software is normally recognized upon delivery while revenue allocated to the software maintenance element is recognized ratably over the term of the arrangement. Leases: As noted above, equipment may be placed with customers under bundled lease arrangements. The two primary accounting provisions which we use to classify 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 75 (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. 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. 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. Services-Related Revenue Outsourcing: Revenues associated with outsourcing services are generally recognized as services are rendered, which is generally on the basis of the number of accounts or transactions processed. In service arrangements where final acceptance of a system or solution by the customer is required, revenue is deferred until all acceptance criteria have been met. Revenues on cost reimbursable contracts are recognized by applying an estimated factor to costs as incurred, determined by the contract provisions and prior experience. Revenues on unit-price contracts are recognized at the contractual selling prices as work is completed and accepted by the customer. Revenues on time and material contracts are recognized at the contractual rates as the labor hours and direct expenses are incurred. Revenues on certain fixed price contracts where we provide system development and implementation services are recognized over the contract term based on the percentage of development and implementation services that are provided during the period compared with the total estimated development and implementation services to be provided over the entire contract using the percentage-of-completion accounting methodology. These services require that we perform significant, extensive and complex design, development, modification or implementation of our customers' systems. Performance will often extend over long periods, and our right to receive future payment depends on our future performance in accordance with the agreement. The percentage-of-completion methodology involves recognizing probable and reasonably estimable revenue using the percentage of services completed, on a current cumulative cost to estimated total cost basis, using a reasonably consistent profit margin over the period. Revenues earned in excess of related billings are accrued, whereas billings in excess of revenues earned are deferred until the related services are provided. We recognize revenues for non-refundable, upfront implementation fees on a straight-line basis over the period between the initiation of the ongoing services through the end of the contract term. In connection with our services arrangements, we incur and capitalize costs to originate these long-term contracts and to perform the migration, transition and setup activities necessary to enable us to perform under the terms of the arrangement. Certain initial direct costs of an arrangement are capitalized and amortized over the contractual service period of the arrangement to cost of services. From time to time, we also provide inducements to customers in various forms, including contractual credits, which are capitalized and amortized as a reduction of revenue over the term of the contract. Spending associated with customer-related deferred set-up/transition and inducement costs for the three years ended December 31, 2015 were as follows: Set-up/transition and inducement expenditures $ 77 $ 80 $ 107 Year Ended December 31, 2015 2014 2013 Xerox 2015 Annual Report 76 The capitalized amount of customer contract costs at December 31, 2015 and 2014 were as follows: Capitalized customer contract costs (1) __________ Year Ended December 31, 2015 2014 180 227 (1) The balance at December 31, 2015 of $180 is expected to be amortized over a weighted average period of approximately 8 years, and amortization expense in 2016 is expected to be approximately $76. Long-lived assets used in the fulfillment of the arrangements are capitalized and depreciated over the shorter of their useful life or the term of the contract if an asset is contract specific. Our outsourcing services contracts may also include the sale of equipment and software. In these instances we follow the policies noted above under Equipment-Related Revenues. Other Revenue Recognition Policies Multiple Element Arrangements: As described above, we enter into the following revenue arrangements that may consist of multiple deliverables: • Bundled lease arrangements, which typically include both lease deliverables and non-lease deliverables as described above. • Contracts for multiple types of outsourcing services, as well as professional and value-added services. For instance, we may contract for an implementation or development project and also provide services to operate the system over a period of time; or we may contract to scan, manage and store customer documents. In substantially all of our multiple element arrangements, we are able to separate the deliverables since we normally will meet both of the following criteria: • • The delivered item(s) has value to the customer on a stand-alone basis; and If the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in our control. Consideration in a multiple-element arrangement is allocated at the inception of the arrangement to all deliverables on the basis of the relative selling price. When applying the relative selling price method, the selling price for each deliverable is primarily determined based on VSOE or third-party evidence (TPE) of the selling price. The above noted revenue policies are then applied to each separated deliverable, as applicable. Revenue-based Taxes: We report revenue net of any revenue-based taxes assessed by governmental authorities that are imposed on and concurrent with specific revenue-producing transactions. The primary revenue-based taxes are sales tax and value-added tax (VAT). Other Significant Accounting Policies Shipping and Handling Costs related to shipping and handling are recognized as incurred and included in Cost of sales in the Consolidated Statements of Income. Research, Development and Engineering (RD&E) Research, development and engineering costs are expensed as incurred. Sustaining engineering costs are incurred with respect to on-going product improvements or environmental compliance after initial product launch. Sustaining engineering costs were $126, $132 and $122 in 2015, 2014 and 2013, respectively. Cash and Cash Equivalents Cash and cash equivalents consist of cash on hand, including money market funds, and investments with original maturities of three months or less. 77 Receivable Sales We regularly transfer certain portions of our receivable portfolios and normally account for those transfers as sales based on meeting the criteria for derecognition in accordance with ASC Topic 860 "Transfer and Servicing" of Financial Assets. Gains or losses on the sale of receivables depend, in part, on both (a) the cash proceeds and (b) the net non-cash proceeds received or paid. When we sell receivables, we normally receive beneficial interests in the transferred receivables from the purchasers as part of the proceeds. We may refer to these beneficial interests as a deferred purchase price. The beneficial interests obtained are initially measured at their fair value. We generally estimate fair value based on the present value of expected future cash flows, which are calculated using management's best estimates of the key assumptions including credit losses, prepayment rate and discount rates commensurate with the risks involved. Refer to Note 5 - Accounts Receivable, Net and Note 6 - Finance Receivables, Net for more details on our receivable sales. Inventories Inventories are carried at the lower of average cost or market. Inventories also include equipment that is returned at the end of the lease term. Returned equipment is recorded at the lower of remaining net book value or salvage value, which normally are not significant. We regularly review inventory quantities and record a provision for excess and/or obsolete inventory based primarily on our estimated forecast of product demand, production requirements and servicing commitments. Several factors may influence the realizability of our inventories, including our decision to exit a product line, technological changes and new product development. The provision for excess and/or obsolete raw materials and equipment inventories is based primarily on near term forecasts of product demand and include consideration of new product introductions, as well as changes in remanufacturing strategies. The provision for excess and/or obsolete service parts inventory is based primarily on projected servicing requirements over the life of the related equipment populations. Land, Buildings and Equipment and Equipment on Operating Leases Land, buildings and equipment are recorded at cost. Buildings and equipment are depreciated over their estimated useful lives. Leasehold improvements are depreciated over the shorter of the lease term or the estimated useful life. Equipment on operating leases is depreciated to estimated salvage value over the lease term. Depreciation is computed using the straight-line method. Significant improvements are capitalized and maintenance and repairs are expensed. Refer to Note 7 - Inventories and Equipment on Operating Leases, Net and Note 8 - Land, Buildings, Equipment and Software, Net for further discussion. Software - Internal Use and Product We capitalize direct costs associated with developing, purchasing or otherwise acquiring software for internal use and amortize these costs on a straight-line basis over the expected useful life of the software, beginning when the software is implemented (Internal Use Software). Costs incurred for upgrades and enhancements that will not result in additional functionality are expensed as incurred. Amounts expended for Internal Use Software are included in Cash Flows from Investing. We also capitalize certain costs related to the development of software solutions to be sold to our customers upon reaching technological feasibility (Product Software). These costs are amortized on a straight-line basis over the estimated economic life of the software. Amounts expended for Product Software are included in Cash Flows from Operations. We perform periodic reviews to ensure that unamortized Product Software costs remain recoverable from estimated future operating profits (net realizable value or NRV). Costs to support or service licensed software are charged to Costs of services as incurred. Refer to Note 8 - Land, Buildings, Equipment and Software, Net for further information. Goodwill and Other Intangible Assets Goodwill represents the excess of the purchase price over the fair value of acquired net assets in a business combination, including the amount assigned to identifiable intangible assets. The primary drivers that generate goodwill are the value of synergies between the acquired entities and the company and the acquired assembled workforce, neither of which qualifies as an identifiable intangible asset. Goodwill is not amortized but rather is tested for impairment annually or more frequently if an event or circumstance indicates that an impairment loss may have been incurred. Xerox 2015 Annual Report 78 Impairment testing for goodwill is done at the reporting unit level. A reporting unit is an operating segment or one level below an operating segment (a "component") if the component constitutes a business for which discrete financial information is available, and segment management regularly reviews the operating results of that component. When testing goodwill for impairment, we may assess qualitative factors for some or all of our reporting units to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount, including goodwill. Alternatively, we may bypass this qualitative assessment for some or all of our reporting units and perform a detailed quantitative test of impairment (Step 1). If we perform the detailed quantitative impairment test and the carrying amount of the reporting unit exceeds its fair value, we would perform an analysis (Step 2) to measure such impairment. In 2015, we elected to proceed to the quantitative assessment of the recoverability of our goodwill balances for each of our reporting units in performing our annual impairment test. Based on our quantitative assessments, we concluded that the fair values of each of our reporting units in 2015 exceeded their carrying values and no impairments were identified. Other intangible assets primarily consist of assets obtained in connection with business acquisitions, including installed customer base and distribution network relationships, patents on existing technology and trademarks. We apply an impairment evaluation whenever events or changes in business circumstances indicate that the carrying value of our intangible assets may not be recoverable. Other intangible assets are amortized on a straight-line basis over their estimated economic lives. We believe that the straight-line method of amortization reflects an appropriate allocation of the cost of the intangible assets to earnings in proportion to the amount of economic benefits obtained annually by the Company. Refer to Note 10 - Goodwill and Intangible Assets, Net for further information. Impairment of Long-Lived Assets We review the recoverability of our long-lived assets, including buildings, equipment, internal use software and other intangible assets, when events or changes in circumstances occur that indicate that the carrying value of the asset may not be recoverable. The assessment of possible impairment is based on our ability to recover the carrying value of the asset from the expected future pre-tax cash flows (undiscounted and without interest charges) of the related operations. If these cash flows are less than the carrying value of such asset, an impairment loss is recognized for the difference between estimated fair value and carrying value. Our primary measure of fair value is based on discounted cash flows. Pension and Post-Retirement Benefit Obligations We sponsor various forms of defined benefit pension plans in several countries covering employees who meet eligibility requirements. Retiree health benefit plans cover U.S. and Canadian employees for retiree medical costs. We employ a delayed recognition feature in measuring the costs of pension and post-retirement benefit plans. This requires changes in the benefit obligations and changes in the value of assets set aside to meet those obligations to be recognized not as they occur, but systematically and gradually over subsequent periods. All changes are ultimately recognized as components of net periodic benefit cost, except to the extent they may be offset by subsequent changes. At any point, changes that have been identified and quantified but not recognized as components of net periodic benefit cost, are recognized in Accumulated Other Comprehensive Loss, net of tax. Several statistical and other factors that attempt to anticipate future events are used in calculating the expense, liability and asset values related to our pension and retiree health benefit plans. These factors include assumptions we make about the discount rate, expected return on plan assets, rate of increase in healthcare costs, the rate of future compensation increases and mortality. Actual returns on plan assets are not immediately recognized in our income statement due to the delayed recognition requirement. In calculating the expected return on the plan asset component of our net periodic pension cost, we apply our estimate of the long-term rate of return on the plan assets that support our pension obligations, after deducting assets that are specifically allocated to Transitional Retirement Accounts (which are accounted for based on specific plan terms). 79 For purposes of determining the expected return on plan assets, we utilize a market-related value approach in determining the value of the pension plan assets, rather than a fair market value approach. The primary difference between the two methods relates to systematic recognition of changes in fair value over time (generally two years) versus immediate recognition of changes in fair value. Our expected rate of return on plan assets is applied to the market-related asset value to determine the amount of the expected return on plan assets to be used in the determination of the net periodic pension cost. The market-related value approach reduces the volatility in net periodic pension cost that would result from using the fair market value approach. The discount rate is used to present value our future anticipated benefit obligations. The discount rate reflects the current rate at which benefit liabilities could be effectively settled considering the timing of expected payments for plan participants. In estimating our discount rate, we consider rates of return on high-quality fixed-income investments adjusted to eliminate the effects of call provisions, as well as the expected timing of pension and other benefit payments. Each year, the difference between the actual return on plan assets and the expected return on plan assets, as well as increases or decreases in the benefit obligation as a result of changes in the discount rate and other actuarial assumptions, are added to or subtracted from any cumulative actuarial gain or loss from prior years. This amount is the net actuarial gain or loss recognized in Accumulated other comprehensive loss. We amortize net actuarial gains and losses as a component of net pension cost for a year if, as of the beginning of the year, that net gain or loss (excluding asset gains or losses that have not been recognized in market-related value) exceeds 10% of the greater of the projected benefit obligation or the market-related value of plan assets (the "corridor" method). This determination is made on a plan-by-plan basis. If amortization is required for a particular plan, we amortize the applicable net gain or loss in excess of the 10% threshold on a straight-line basis in net periodic pension cost over the remaining service period of the employees participating in that pension plan. In plans where substantially all participants are inactive, the amortization period for the excess is the average remaining life expectancy of the plan participants. Our primary domestic plans allow participants the option of settling their vested benefits through the receipt of a lump-sum payment. The participant's vested benefit is considered fully settled upon payment of the lump-sum. We have elected to apply settlement accounting and therefore we recognize the losses associated with settlements in this plan immediately upon the settlement of the vested benefits. Settlement accounting requires us to recognize a pro rata portion of the aggregate unamortized net actuarial losses upon settlement. The pro rata factor is computed as the percentage reduction in the projected benefit obligation due to the settlement of the participant's vested benefit. Refer to Note 16 - Employee Benefit Plans for further information regarding our Pension and Post-Retirement Benefit Obligations. Foreign Currency Translation and Re-measurement The functional currency for most foreign operations is the local currency. Net assets are translated at current rates of exchange and income, expense and cash flow items are translated at average exchange rates for the applicable period. The translation adjustments are recorded in Accumulated other comprehensive loss. The U.S. Dollar is used as the functional currency for certain foreign subsidiaries that conduct their business in U.S. Dollars. A combination of current and historical exchange rates is used in re-measuring the local currency transactions of these subsidiaries and the resulting exchange adjustments are recorded in Currency (gains) and losses within Other expenses, net together with other foreign currency remeasurments. Xerox 2015 Annual Report 80 Note 2 – Segment Reporting Our reportable segments are aligned with how we manage the business and view the markets we serve. We report our financial performance based on the following two primary reportable segments – Services and Document Technology. Our Services segment operations involve the delivery of business process and document outsourcing services for a broad range of customers from small businesses to large global enterprises. Our Document Technology segment includes the sale and support of a broad range of document systems from entry level to high- end. The Services segment is comprised of two outsourcing service offerings: • Business Process Outsourcing (BPO) • Document Outsourcing (which includes Managed Print Services) (DO) Business process outsourcing services include service arrangements where we manage a customer's business activity or process. We provide multi-industry offerings such as customer care, transaction processing, finance and accounting, and human resources, as well as industry focused offerings in areas such as healthcare, transportation, financial services, retail and telecommunications. Document outsourcing services include service arrangements that allow customers to streamline, simplify and digitize their document-intensive business processes through automation and deployment of software applications and tools and the management of their printing needs. Document outsourcing also includes revenues from our partner print services offerings. • • Our Document Technology segment includes the sale of document systems and supplies, provision of technical service and financing of products. Our product groupings range from: “Entry,” which includes A4 devices and desktop printers; to “Mid-range,” which includes A3 devices that generally serve workgroup environments in mid to large enterprises and includes products that fall into the following market categories: Color 41+ ppm priced at less than $100K and Light Production 91+ ppm priced at less than $100K; to “High-end,” which includes production printing and publishing systems that generally serve the graphic communications marketplace and large enterprises. • Customers range from small and mid-sized businesses to large enterprises. Customers also include graphic communication enterprises as well as channel partners including distributors and resellers. Segment revenues reflect the sale of document systems and supplies, technical services and product financing. Other includes several units, none of which meet the thresholds for separate segment reporting. This group includes paper sales in our developing market countries, Wide Format Systems, licensing revenues, GIS network integration solutions and electronic presentation systems and non-allocated corporate items including non-financing interest, as well as other items included in Other expenses, net. 81 Selected financial information for our reportable segments was as follows: 2015 (1) Revenue Finance income Total Segment Revenue Depreciation and amortization(3) Interest expense Segment profit (loss) Equity in net income of unconsolidated affiliates 2014 (1) Revenue Finance income Total Segment Revenue Depreciation and amortization(3) Interest expense Segment profit (loss) Equity in net income of unconsolidated affiliates 2013 (1) Revenue Finance income Total Segment Revenue Depreciation and amortization(3) Interest expense Segment profit (loss) Equity in net income of unconsolidated affiliates ____________________________ Year Ended December 31, Services(2) Document Technology Other Total $ $ $ $ $ $ $ $ $ 10,065 $ 7,098 $ 536 $ $ $ 72 10,137 571 20 446 27 $ $ 267 7,365 297 108 879 108 $ $ 7 543 12 225 (267) — 10,519 $ 8,044 $ 590 $ $ $ 65 10,584 602 18 956 32 $ $ 314 8,358 334 121 1,149 128 $ $ 8 598 14 238 (272) — 10,412 $ 8,500 $ 611 $ $ $ 67 10,479 536 19 1,055 34 $ $ 408 8,908 345 140 964 135 $ $ 8 619 14 244 (217) — 17,699 346 18,045 880 353 1,058 135 19,153 387 19,540 950 377 1,833 160 19,523 483 20,006 895 403 1,802 169 (1) Asset information on a segment basis is not disclosed as this information is not separately identified and internally reported to our Chief Operating Decision Maker (CODM). (2) Services segment results for 2015 include a charge of $389 related to our Health Enterprise platform implementations in California and Montana. $116 of the charge was recorded as a reduction to revenues and the remainder of $273 was recorded to Cost of outsourcing, maintenance and rentals. (3) Depreciation and amortization excludes amortization of intangible assets - see reconciliation below. The following is a reconciliation of segment profit to pre-tax income: Segment Profit Reconciliation to Pre-tax Income 2015 2014 2013 Year Ended December 31, Total Segment Profit Reconciling items: Amortization of intangible assets Equity in net income of unconsolidated affiliates Restructuring and related costs(1) Restructuring charges of Fuji Xerox Litigation matters Other Pre-tax Income ____________________________ $ 1,058 $ 1,833 $ 1,802 (310) (135) (196) (4) — (1) (315) (160) (149) (3) — — (305) (169) (115) (9) 37 2 $ 412 $ 1,206 $ 1,243 (1) Restructuring and asset impairment charges were $186, $128, and $115 for the three years ended December 31, 2015, 2014 and 2013, respectively, and Business transformation costs were $10, $21 and $0, respectively. Business transformation costs represent incremental costs incurred directly in support of our business transformation and restructuring initiatives such as compensation costs for overlapping staff, consulting costs and training costs. Business transformation costs were not applicable in 2013. Xerox 2015 Annual Report 82 Geographic area data is based upon the location of the subsidiary reporting the revenue or long-lived assets and is as follows for the three years ended December 31: United States Europe Other areas Total Revenues and Long-Lived Assets ________________ Revenues Long-Lived Assets (1) 2015 2014 2013 2015 2014 2013 $ $ 12,557 $ 13,041 $ 13,272 $ 1,279 $ 1,758 $ 1,870 3,783 1,705 4,428 2,071 4,414 2,320 476 234 632 240 761 243 18,045 $ 19,540 $ 20,006 $ 1,989 $ 2,630 $ 2,874 (1) Long-lived assets are comprised of (i) Land, buildings and equipment, net, (ii) Equipment on operating leases, net, (iii) Internal use software, net and (iv) Product software, net. Note 3 – Acquisitions 2015 Acquisitions In September 2015 we acquired RSA Medical LLC (RSA Medical) for approximately $141 in cash. RSA Medical is a leading provider of health assessment and risk management for members interacting with health and life insurance companies. The acquisition of RSA Medical expands Xerox's portfolio of healthcare service offerings to payers and life insurers using predictive analytics to enhance member outreach services aimed at improving overall population health. RSA Medical is included in our Services segment. The purchase price adjustment for this acquisition has not been finalized. In January 2015 we acquired Intellinex LLC (Intellinex), formerly Intrepid Learning Solutions, Inc., a Seattle-based company, for $28 in cash. Intellinex provides outsourced learning services primarily in the aerospace manufacturing and technology industries. The acquisition of Intellinex solidifies the position of Xerox's Learning Services unit as a leading provider of end-to-end outsourced learning services, and adds key vertical market expertise in the aerospace industry. Intellinex is included in our Services segment. Additionally, during 2015, our Services segment acquired two additional business for approximately $28 in cash, and our Document Technology segment acquired two additional business for approximately $13 in cash. 2015 Summary All of our 2015 acquisitions resulted in 100% ownership of the acquired companies. The operating results of the acquisitions described above are not material to our financial statements and are included within our results from their respective acquisition dates. Our 2015 acquisitions contributed aggregate revenues of approximately $43 to our 2015 total revenues from their respective acquisition dates. The purchase prices for all acquisitions were primarily allocated to intangible assets and goodwill based on third-party valuations and management's estimates. The primary elements that generated the goodwill are the value of synergies and the acquired assembled workforce. Approximately 63% of the goodwill recorded in 2015 is expected to be deductible for tax purposes. Refer to Note 10 - Goodwill and Intangible Assets, Net for additional information. The following table summarizes the purchase price allocations for our 2015 acquisitions as of the acquisition dates: Accounts/finance receivables Intangible assets: Customer relationships Trademarks Non-compete agreements Software Goodwill Other assets Total Assets Acquired Liabilities assumed Total Purchase Price 83 Weighted- Average Life (Years) Total 2015 Acquisitions 9 12 4 4 $ $ 8 49 2 2 7 151 12 231 (21) 210 2014 and 2013 Acquisitions In September 2014, we acquired Consilience Software, Inc. (Consilience) for approximately $25 in cash. Consilience provides case management and workflow automation software solutions to the public sector. Consilience's proprietary Maven Case Management software system uses data and process analytics to help government agencies extract more value from their information. The intelligent case management system automates workflows for document- and labor-intensive processes and integrates previously siloed legacy systems for accelerated decision-making. In May 2014, we acquired ISG Holdings, Inc. (ISG) for approximately $225 in cash. The acquisition of ISG enhances our Services segment by providing a comprehensive workers' compensation suite of offerings to the property and casualty sector. In addition, the acquisition expands our services to property and casualty insurance carriers, third-party administrators, managed care services providers, governments and self-administered employers who require comprehensive reviews of medical bills and implementation of care management plans stemming from workers' compensation claims. In January 2014, we acquired Invoco Holding GmbH (Invoco), a German company, for approximately $54 (€40 million) in cash. The acquisition of Invoco expands our European customer care services and provides our global customers immediate access to German-language customer care services and provides Invoco's existing customers access to our broad business process outsourcing capabilities. In April 2013, we acquired Florida based Zeno Office Solutions, Inc. (Zeno), a provider of print and IT solutions to small and mid-sized businesses in the Southeast, for approximately $59 in cash. This acquisition furthers our coverage in Florida, building on our strategy of expanding our network of locally-based companies focused on customers' requirements to improve their performance through efficiencies. In February 2013, we acquired Impika, a leader in the design, manufacture and sale of production inkjet printing solutions used for industrial, commercial, security, label and package printing for approximately $53 in cash. Impika, which is based in Aubagne, France, offers a portfolio of aqueous (water-based) inkjet presses based on proprietary technology. Through the addition of Impika's aqueous technology to our offerings, we go to market with the industry's broadest range of digital presses, strengthening our leadership in digital color production printing. Our Services segment also acquired one additional business in 2014 and three in 2013 for $2 and $31, respectively, in cash, primarily related to customer care and software to support our BPO service offerings. Our Document Technology segment acquired two businesses in 2014 and one in 2013 for approximately $34 and $12 in cash, respectively, which expanded our distribution capability of products and services in North America. 2014 and 2013 Summary All of our 2014 and 2013 acquisitions resulted in 100% ownership of the acquired companies. The operating results of the 2014 and 2013 acquisitions described above were not material to our financial statements and were included within our results from the respective acquisition dates. The 2014 acquisitions noted above are included in our Services segment while the 2013 acquisition of Zeno and Impika were included within our Document Technology segment. The purchase prices for all acquisitions were primarily allocated to intangible assets and goodwill based on third-party valuations and management's estimates. Refer to Note 10 - Goodwill and Intangible Assets, Net for additional information. Our 2014 acquisitions contributed aggregate revenues from their respective acquisition dates of approximately $214 and $132 to our 2015 and 2014 total revenues, respectively. Our 2013 acquisitions contributed aggregate revenues from their respective acquisition dates of approximately $87, $84 and $56 to our 2015, 2014 and 2013 total revenues, respectively. Contingent Consideration In connection with certain acquisitions, we are obligated to make contingent payments if specified contractual performance targets are achieved. Contingent consideration obligations are recorded at their respective fair value. As of December 31, 2015, the maximum aggregate amount of outstanding contingent obligations to former owners of acquired entities was approximately $31, of which $25 was accrued representing the estimated fair value of this obligation. Xerox 2015 Annual Report 84 Note 4 – Divestitures Information Technology Outsourcing (ITO) In December 2014, we announced an agreement to sell our ITO business to Atos and began reporting it as a Discontinued Operation. All prior periods were accordingly revised to conform to this presentation. The sale was completed on June 30, 2015. The final sale price of approximately $940 ($930 net of cash sold) reflects closing adjustments, including an adjustment for changes in net asset values and additional proceeds for the condition of certain assets at the closing. Atos also assumed approximately $85 of capital lease obligations and pension liabilities. Net after-tax proceeds are estimated to be approximately $850, which reflects expected cash taxes as well as our transaction and transition costs associated with the disposal. The ITO business included approximately 9,600 employees in 42 countries, who were transferred to Atos upon closing. In 2014, we recorded a net pre-tax loss of $181 related to the pending sale, reflecting the write-down of the carrying value of the ITO disposal group, inclusive of goodwill, to its estimated fair value less costs to sell. In 2015, we recorded an additional net pre-tax loss of $77 primarily at closing related to an adjustment of the sales price and related expenses associated with the disposal, as well as reserves for certain obligations and indemnifications we retained as part of the final closing negotiations. In addition, we recorded additional tax expense of $52 primarily related to the difference between the book basis and tax basis of allocated goodwill, which could only be recorded upon final disposal of the business. In February 2016, we reached an agreement with Atos on the final adjustments to the closing balance of net assets sold as well as the settlement of certain indemnifications and recorded an additional pre-tax loss on the disposal in 2015 of $24 ($14 after-tax). The additional loss was recorded in 2015 as the financial statements had not yet been issued when the agreement was reached with Atos. We expect to make a payment in 2016 to Atos of approximately $52, representing a $28 adjustment to the final sales price as a result of this agreement and a payment of $24 due from closing. The payment will be reflected in Investing cash flows as an adjustment of the sales proceeds. Other Discontinued Operations During the third quarter 2014, we completed the closure of Xerox Audio Visual Solutions, Inc. (XAV), a small audio visual business within our Global Imaging Systems subsidiary, and recorded a net pre-tax loss on disposal of $1. XAV provided audio visual equipment and services to enterprise and government customers. In May 2014 we sold our Truckload Management Services, Inc. (TMS) business for $15 and recorded a net pre- tax loss on disposal of $1. TMS provided document capture and submission solutions as well as campaign management, media buying and digital marketing services to the long haul trucking and transportation industry. In 2013, in connection with our decision to exit from the Paper distribution business, we completed the sale of our North American and European Paper businesses. We recorded a net pre-tax loss on disposal of $25 in 2013 for the disposition of these businesses. Summarized financial information for our Discontinued Operations is as follows: Revenues Income (loss) from operations (1),(2) Loss on disposal Net income (loss) before income taxes Income tax expense (Loss) income from discontinued operations, net of tax $ $ $ $ Year Ended December 31, 2015 Other ITO Total ITO 2014 Other Total ITO 2013 Other Total 619 $ — $ 619 $ 1,320 $ 45 $ 1,365 $ 1,335 $ 497 $ 1,832 104 $ — $ 104 $ 74 $ (1) $ 73 $ (101) — (101) (181) (1) (182) 70 — $ 2 $ (25) 3 $ — $ 3 $ (107) $ (2) $ (109) $ 70 $ (23) $ (81) — (81) (5) (1) (6) (24) (3) 72 (25) 47 (27) (78) $ — $ (78) $ (112) $ (3) $ (115) $ 46 $ (26) $ 20 ITO income from operations for the year ended December 31, 2015, excludes approximately $80 of depreciation and amortization expense (including $14 for intangible amortization) since the business was held for sale. ITO Income from operations for the year ended December 31, 2014 includes approximately $161 of depreciation and amortization expense (including $27 for intangible amortization). (1) (2) 85 The following is a summary of the major categories of assets and liabilities of the ITO business held for sale at December 31, 2014: December 31, 2014 Accounts receivable, net Other current assets Land, buildings and equipment, net Intangible assets, net Goodwill Other long-term assets Total Assets of Discontinued Operations Current portion of long-term debt Accounts payable Accrued pension and benefit costs Unearned income Other current liabilities Long-term debt Pension and other benefit liabilities Other long-term liabilities Total Liabilities of Discontinued Operations $ $ $ $ The following is a summary of selected financial information of the ITO business for the three years ended December 31, 2015: Expenses: Depreciation of buildings and equipment(1) Amortization of internal use software(1) Amortization of acquired intangible assets(1) Amortization of customer contract costs(1) Operating lease rent expense Defined contribution plans Interest expense (2) Expenditures: Cost of additions to land, buildings and equipment Cost of additions to internal use software Customer-related deferred set-up/transition and inducement costs Year Ended December 31, 2015 2014 2013 — $ 98 $ — — — 130 4 2 41 $ 1 10 9 27 26 258 8 4 105 $ 2 26 $ $ 213 146 220 197 337 147 1,260 31 32 9 64 112 44 25 54 371 99 10 27 22 241 7 3 99 4 35 (1) ITO income from operations for the year ended December 31, 2015, excludes approximately $80 of depreciation and amortization expense (including $14 for intangible amortization) since the business was held for sale. (2) Interest expense is related to capital lease obligations, which were assumed by the purchaser of the ITO business. Note 5 – Accounts Receivable, Net Accounts receivable, net were as follows: Amounts billed or billable Unbilled amounts Allowance for doubtful accounts Accounts Receivable, Net December 31, 2015 2014 $ $ 2,110 $ 289 (80) 2,319 $ 2,421 318 (87) 2,652 Xerox 2015 Annual Report 86 Unbilled amounts include amounts associated with percentage-of-completion accounting and other earned revenues not currently billable due to contractual provisions. Amounts to be invoiced in the subsequent month for current services provided are included in amounts billable, and at December 31, 2015 and 2014 were approximately $849 and $945, respectively. We perform ongoing credit evaluations of our customers and adjust credit limits based upon customer payment history and current creditworthiness. The allowance for uncollectible accounts 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 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 the caption "Other current assets" in the accompanying Consolidated Balance Sheets and were $61 and $73 at December 31, 2015 and 2014, respectively. Under most of the agreements, 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 receivables sold and derecognized from our balance sheet, $660 and $580 remained uncollected as of December 31, 2015 and 2014, respectively. Accounts receivable sales were as follows: Accounts receivable sales Deferred proceeds Loss on sale of accounts receivable Estimated increase (decrease) to operating cash flows(1) __________ Year Ended December 31, 2015 2014 2013 $ 2,467 $ 2,906 $ 247 13 120 387 15 (68) 3,401 486 17 (55) (1) Represents the difference between current and prior year fourth quarter receivable sales adjusted for the effects of: (i) the deferred proceeds, (ii) collections prior to the end of the year and (iii) currency. Note 6 – Finance Receivables, Net Finance receivables include sales-type leases, direct financing leases and installment loans arising from the marketing of our equipment. These receivables are typically collateralized by a security interest in the underlying assets. Finance receivables, net were as follows: Gross receivables Unearned income Subtotal Residual values Allowance for doubtful accounts Finance Receivables, Net Less: Billed portion of finance receivables, net Less: Current portion of finance receivables not billed, net Finance Receivables Due After One Year, Net 87 December 31, 2015 2014 $ 4,683 $ (577) 4,106 — (118) 3,988 97 1,315 $ 2,576 $ 5,009 (624) 4,385 — (131) 4,254 110 1,425 2,719 Contractual maturities of our gross finance receivables as of December 31, 2015 were as follows (including those already billed of $102): 2016 2017 2018 2019 2020 Thereafter Total $ 1,717 $ 1,295 $ 922 $ 530 $ 201 $ 18 $ 4,683 Sale of Finance Receivables In 2013 and 2012, we transferred our entire interest in certain groups of lease finance receivables to third-party entities for cash proceeds and beneficial interests. The transfers were accounted for as sales with derecognition of the associated lease receivables. There have been no transfers or sales of finance receivables since 2013. We continue to service the sold receivables and record servicing fee income over the expected life of the associated receivables. The following is a summary of our prior sales activity: Net carrying value (NCV) sold Allowance included in NCV Cash proceeds received Beneficial interests received Year Ended December 31, 2013 2012 $ 676 $ 17 635 86 682 18 630 101 The principal value of the finance receivables derecognized from our balance sheet was $238 and $549 at December 31, 2015 and 2014, respectively (sales value of approximately $256 and $596, respectively). Summary Finance Receivable Sales The lease portfolios transferred and sold were all from our Document Technology segment and the gains on these sales were reported in Financing revenues within the Document Technology segment. The ultimate purchaser has no recourse to our other assets for the failure of customers to pay principal and interest when due beyond our beneficial interests which were $38 and $77 at December 31, 2015 and 2014, respectively, and are included in "Other current assets" and "Other long-term assets" in the accompanying Consolidated Balance Sheets. Beneficial interests of $30 and $64 at December 31, 2015 and 2014, respectively, are held by the bankruptcy-remote subsidiaries and therefore are not available to satisfy any of our creditor obligations. We report collections on the beneficial interests as operating cash flows in the Consolidated Statements of Cash Flows because such beneficial interests are the result of an operating activity and the associated interest rate risk is de minimis considering their weighted average lives of less than 2 years. The net impact from the sales of finance receivables on operating cash flows is summarized below: Net cash received for sales of finance receivables(1) Impact from prior sales of finance receivables(2) Collections on beneficial interests Estimated (Decrease) Increase to Operating Cash Flows ____________ 2015 2014 2013 2012 $ $ — $ — $ 631 $ (342) 56 (527) 94 (392) 58 (286) $ (433) $ 297 $ 625 (45) — 580 (1) Net of beneficial interest, fees and expenses. (2) Represents cash that would have been collected if we had not sold finance receivables. Finance Receivables - Allowance for Credit Losses and Credit Quality 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. Customer credit limits are based upon an initial evaluation of the customer's credit quality and we adjust that limit accordingly based upon ongoing credit assessments of the customer, including payment history and changes in credit quality. The allowance for doubtful accounts and provision for credit losses represents an estimate of the losses expected to be incurred from the Company's finance receivable portfolio. The level of the allowance is determined on a collective basis by applying projected loss rates to our different portfolios by country, which represent our portfolio segments. This is the level at which we develop and document our methodology to determine the allowance for credit losses. This loss rate is primarily based upon historical loss experience adjusted for judgments about the probable effects of relevant observable data including current economic conditions as well as delinquency trends, Xerox 2015 Annual Report 88 resolution rates, the aging of receivables, credit quality indicators and the financial health of specific customer classes or groups. The allowance for doubtful finance receivables is inherently more difficult to estimate than the allowance for trade accounts receivable because the underlying lease portfolio has an average maturity, at any time, of approximately two to three years and contains past due billed amounts, as well as unbilled amounts. We consider all available information in our quarterly assessments of the adequacy of the allowance for doubtful accounts. The identification of account-specific exposure is not a significant factor in establishing the allowance for doubtful finance receivables. Our policy and methodology used to establish our allowance for doubtful accounts has been consistently applied over all periods presented. Since our allowance for doubtful finance receivables is determined by country, the risk characteristics in our finance receivable portfolio segments will generally be consistent with the risk factors associated with the economies of those countries/regions. Loss rates declined in the U.S. reflecting the effects of improved collections during 2015 and 2014 as well as the lower balance of finance receivables primarily due to sales in 2013 and 2012. Since Europe is comprised of various countries and regional economies, the risk profile within our European portfolio segment is somewhat more diversified due to the varying economic conditions among and within the countries. Charge-offs in Europe were $17 in 2015 as compared to $29 in the prior year, reflecting a significant improvement from the credit issues that began back in 2011. Loss rates peaked in 2011 as a result of the European economic challenges particularly for countries in the southern region. 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: Balance at December 31, 2013 Provision Charge-offs Recoveries and other(1) Balance at December 31, 2014 Provision Charge-offs Recoveries and other(1) Balance at December 31, 2015 Finance Receivables Collectively Evaluated for Impairment: December 31, 2014(2) December 31, 2015(2) __________ United States Canada Europe Other(3) Total $ $ $ $ 45 — (5) 1 41 5 (5) 1 $ 22 $ 9 (14) 3 20 6 (10) 1 $ 81 15 (29) (9) 58 10 (17) (6) $ 6 9 (3) — 12 7 (4) (1) 42 $ 17 $ 45 $ 14 $ 154 33 (51) (5) 131 28 (36) (5) 118 1,728 1,731 $ $ 424 365 $ $ 1,835 1,509 $ $ 398 501 $ $ 4,385 4,106 (1) 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. (2) Total Finance receivables exclude the allowance for credit losses of $118 and $131 at December 31, 2015 and 2014, respectively. (3) Includes developing market countries and smaller units. In the U.S. and Canada, customers are further evaluated or segregated by class based on industry sector. The primary customer classes are Finance & Other Services, Government & Education; Graphic Arts; Industrial; Healthcare and Other. In Europe, customers are further grouped by class based on the country or region of the customer. The primary customer classes include the U.K./Ireland, France and the following European regions - Central, Nordic and Southern. These groupings or classes are used to understand the nature and extent of our exposure to credit risk arising from finance receivables. We evaluate our customers based on the following credit quality indicators: • Investment grade: This rating includes accounts with excellent to good business credit, asset quality and the capacity to meet financial obligations. These customers are less susceptible to adverse effects due to shifts in economic conditions or changes in circumstance. The rating generally equates to a Standard & Poors (S&P) rating of BBB- or better. Loss rates in this category are normally minimal at less than 1%. 89 • 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 around 10%. Credit quality indicators are updated at least annually, and the credit quality of any given customer can change during the life of the portfolio. Details about our finance receivables portfolio based on industry and credit quality indicators are as follows: December 31, 2015 December 31, 2014 Investment Grade Non- investment Grade Sub- standard Total Finance Receivables Investment Grade Non- investment Grade Sub- standard Total Finance Receivables $ 184 $ 58 $ Finance and other services $ Government and education Graphic arts Industrial Healthcare Other 191 536 145 84 83 52 13 86 44 24 48 Total United States 1,091 399 $ 433 553 350 146 120 129 195 589 148 92 84 55 $ 159 $ 55 $ 13 79 41 26 38 3 90 18 14 29 409 605 317 151 124 122 1,731 1,163 356 209 1,728 Finance and other services Government and education Graphic arts Industrial Other Total Canada(1) France U.K/Ireland Central(2) Southern(3) Nordic(4) Total Europe Other Total __________ 55 59 45 23 33 215 203 235 206 36 24 704 165 35 7 35 12 23 112 207 91 186 138 35 657 257 99 68 101 38 59 365 511 329 417 191 61 1,509 501 54 76 58 24 34 246 253 255 230 60 25 823 195 31 8 49 13 19 120 234 101 278 148 49 810 163 12 2 36 4 4 58 129 6 30 36 1 202 40 97 86 143 41 57 424 616 362 538 244 75 1,835 398 4,385 $ 2,175 $ 1,425 $ 506 $ 4,106 $ 2,427 $ 1,449 $ 509 $ (1) Historically, the Company had included certain Canadian customers with graphic arts activity in their industry sector. In 2014, these customers were reclassified to Graphic Arts to better reflect their primary business activity. (2) Switzerland, Germany, Austria, Belgium and Holland. (3) Italy, Greece, Spain and Portugal. (4) Sweden, Norway, Denmark and Finland. The aging of our receivables portfolio is based upon the number of days an invoice is past due. Receivables that are more than 90 days past due are considered delinquent. Receivable losses are charged against the allowance when management believes the uncollectibility of the receivable is confirmed and is generally based on individual credit evaluations, results of collection efforts and specific circumstances of the customer. Subsequent recoveries, if any, are credited to the allowance. Xerox 2015 Annual Report 90 4 119 18 13 29 241 9 2 21 3 3 38 101 3 25 17 2 148 79 We generally continue to maintain equipment on lease and provide services to customers that have invoices for finance receivables that are 90 days or more past due and, as a result of the bundled nature of billings, we also continue to accrue interest on those receivables. However, interest revenue for such billings is only recognized if collectability is deemed reasonably assured. The aging of our billed finance receivables is as follows: Current 31-90 Days Past Due >90 Days Past Due Total Billed Unbilled Total Finance Receivables >90 Days and Accruing December 31, 2015 Finance and other services $ 7 $ Government and education Graphic arts Industrial Healthcare Other Total United States Canada France U.K./Ireland Central(1) Southern(2) Nordic(3) Total Europe Other Total 11 12 4 3 2 39 3 — 1 3 8 1 13 19 74 $ $ 2 1 2 1 1 1 8 — — — 1 2 — 3 2 $ 2 4 1 1 1 1 10 — — — 1 3 — 4 1 11 16 15 6 5 4 57 3 — 1 5 13 1 20 22 $ $ 422 537 335 140 115 125 $ 433 553 350 146 120 129 1,674 1,731 362 511 328 412 178 60 1,489 479 365 511 329 417 191 61 1,509 501 14 37 8 7 9 7 82 9 25 1 7 10 4 47 — $ 13 $ 15 $ 102 $ 4,004 $ 4,106 $ 138 Current 31-90 Days Past Due >90 Days Past Due Total Billed Unbilled Total Finance Receivables >90 Days and Accruing December 31, 2014 $ 2 4 1 1 1 1 10 2 1 — 2 4 — 7 1 1 3 1 1 — — 6 1 2 — 1 4 — 7 — 14 $ 10 21 14 6 4 4 59 12 3 1 5 22 1 32 14 $ $ 399 584 303 145 120 118 $ 409 605 317 151 124 122 1,669 1,728 412 613 361 533 222 74 1,803 384 424 616 362 538 244 75 1,835 398 13 25 6 9 5 6 64 17 35 1 15 17 2 70 — $ 117 $ 4,268 $ 4,385 $ 151 $ 20 $ Finance and other services $ 7 $ Government and education Graphic arts Industrial Healthcare Other Total United States Canada France U.K./Ireland Central(1) Southern(2) Nordic(3) Total Europe Other Total ___________ 14 12 4 3 3 43 9 — 1 2 14 1 18 13 83 $ (1) Switzerland, Germany, Austria, Belgium and Holland. (2) Italy, Greece, Spain and Portugal. (3) Sweden, Norway, Denmark and Finland. 91 Note 7 – Inventories and Equipment on Operating Leases, Net The following is a summary of Inventories by major category: Finished goods Work-in-process Raw materials Total Inventories December 31, 2015 2014 $ $ 792 $ 51 99 942 $ 778 58 98 934 The transfer of equipment from our inventories to equipment subject to an operating lease is presented in our Consolidated Statements of Cash Flows in the operating activities section. Equipment on operating leases and similar arrangements consists of our equipment rented to customers and depreciated to estimated salvage value at the end of the lease term. Equipment on operating leases and the related accumulated depreciation were as follows: Equipment on operating leases Accumulated depreciation Equipment on Operating Leases, Net December 31, 2015 2014 $ $ 1,478 $ (983) 495 $ 1,531 (1,006) 525 Depreciable lives generally vary from three to four years consistent with our planned and historical usage of the equipment subject to operating leases. Our equipment operating lease terms vary, generally from one to three years. Scheduled minimum future rental revenues on operating leases with original terms of one year or longer are: 2016 2017 2018 2019 2020 Thereafter $ 331 $ 228 $ 144 $ 78 $ 30 $ 3 Total contingent rentals on operating leases, consisting principally of usage charges in excess of minimum contracted amounts, for the years ended December 31, 2015, 2014 and 2013 amounted to $139, $149 and $151, respectively. Note 8 - Land, Buildings, Equipment and Software, Net Land, buildings and equipment, net were as follows: December 31, 2015 2014 Land Building and building equipment Leasehold improvements Plant machinery Office furniture and equipment Other Construction in progress Subtotal Accumulated depreciation Estimated Useful Lives (Years) 25 to 50 Varies 5 to 12 3 to 15 4 to 20 $ 31 $ 947 452 1,274 1,389 65 54 4,212 (3,216) Land, Buildings and Equipment, Net $ 996 $ 42 996 466 1,375 1,384 78 73 4,414 (3,291) 1,123 Xerox 2015 Annual Report 92 Depreciation expense and operating lease rent expense were as follows: Depreciation expense Operating lease expense Year Ended December 31, 2015 2014 2013 $ $ 277 553 $ 324 560 332 513 We lease buildings and equipment, substantially all of which are accounted for as operating leases. Capital leased assets were approximately $98 and $105 at December 31, 2015 and 2014, respectively. Future minimum operating lease commitments that have initial or remaining non-cancelable lease terms in excess of one year at December 31, 2015 were as follows: 2016 2017 2018 2019 2020 Thereafter $ 378 $ 271 $ 178 $ 122 $ 78 $ 139 Internal Use and Product Software Additions to: Internal use software Product software Capitalized costs, net: Internal use software Product software Year Ended December 31, 2015 2014 2013 $ $ 91 23 $ 82 23 December 31, 2015 2014 $ $ 383 115 77 28 434 307 Useful lives of our internal use and product software generally vary from three to ten years. Included within product software at December 31, 2015 and 2014 is approximately $55 and $250, respectively, of capitalized costs associated with software system platforms developed for use in certain of our government services businesses. During 2015, as a result of our decision to discontinue certain future implementations of these software system platforms (Government Healthcare Strategy Change), we recorded impairment charges associated with these software platforms of approximately $160. Our impairment review of the remaining balance at December 31, 2015 indicated that the costs would be recoverable from estimated future operating profits; however, those future operating profits are dependent on our ability to successfully complete existing contracts as well as obtain future contracts. Note 9 – Investment in Affiliates, at Equity Investments in corporate joint ventures and other companies in which we generally have a 20% to 50% ownership interest were as follows: Fuji Xerox Other Investments in Affiliates, at Equity Our equity in net income of our unconsolidated affiliates was as follows: December 31, 2015 2014 $ $ 1,315 $ 74 1,389 $ Fuji Xerox Other Total Equity in Net Income of Unconsolidated Affiliates 93 Year Ended December 31, 2015 2014 2013 $ $ 117 $ 18 135 $ 147 $ 13 160 $ 1,275 63 1,338 156 13 169 Fuji Xerox Fuji Xerox is headquartered in Tokyo and operates in Japan, China, Australia, New Zealand, Vietnam and other areas of the Pacific Rim. Our investment in Fuji Xerox of $1,315 at December 31, 2015, differs from our implied 25% interest in the underlying net assets, or $1,399, due primarily to our deferral of gains resulting from sales of assets by us to Fuji Xerox. Equity in net income of Fuji Xerox is affected by certain adjustments 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. Summarized financial information for Fuji Xerox is as follows: Year Ended December 31, 2015 2014 2013 Summary of Operations Revenues Costs and expenses Income before income taxes Income tax expense Net Income Less: Net income - noncontrolling interests Net Income - Fuji Xerox Balance Sheet Assets: Current assets Long-term assets Total Assets Liabilities and Equity: Current liabilities Long-term debt Other long-term liabilities Noncontrolling interests Fuji Xerox shareholders' equity Total Liabilities and Equity $ 9,925 $ 11,112 $ 9,198 10,242 727 233 494 7 870 262 608 4 487 $ 604 $ $ $ $ $ 4,585 $ 4,801 $ 4,946 4,742 4,955 5,160 9,531 $ 9,543 $ 10,115 2,808 $ 2,982 $ 3,114 584 511 31 5,597 580 482 30 5,469 $ 9,531 $ 9,543 $ 11,415 10,479 936 276 660 5 655 978 680 28 5,315 10,115 2013 97.52 105.15 Yen/U.S. Dollar exchange rates used to translate are as follows: Financial Statement Exchange Basis Summary of Operations Weighted average rate Balance Sheet Year-end rate 2015 121.01 120.49 2014 105.58 119.46 Transactions with Fuji Xerox We receive dividends from Fuji Xerox, which are reflected as a reduction in our investment. Additionally, we have a Technology Agreement with Fuji Xerox whereby we receive royalty payments for their use of our Xerox brand trademark, as well as rights to access our patent portfolio in exchange for access to their patent portfolio. These payments are included in Outsourcing, maintenance and rental revenues in the Consolidated Statements of Income. We also have arrangements with Fuji Xerox whereby we purchase inventory from and sell inventory to Fuji Xerox. Pricing of the transactions under these arrangements is based upon terms the Company believes to be negotiated at arm's length. Our purchase commitments with Fuji Xerox are in the normal course of business and typically have a lead time of three months. In addition, we pay Fuji Xerox and they pay us for unique research and development costs. Xerox 2015 Annual Report 94 Transactions with Fuji Xerox were as follows: Dividends received from Fuji Xerox Royalty revenue earned Inventory purchases from Fuji Xerox Inventory sales to Fuji Xerox R&D payments received from Fuji Xerox R&D payments paid to Fuji Xerox Year Ended December 31, 2015 2014 2013 $ 51 $ 58 $ 102 1,728 108 1 7 115 1,831 120 1 17 As of December 31, 2015 and 2014, net amounts due to Fuji Xerox were $307 and $339, respectively. Note 10 - Goodwill and Intangible Assets, Net Goodwill The following table presents the changes in the carrying amount of goodwill, by reportable segment: Balance at December 31, 2013 Foreign currency translation Acquisitions: Invoco ISG Consilience Other Divestitures (1) Balance at December 31, 2014 Foreign currency translation Acquisitions: RSA Medical Intellinex Other Balance at December 31, 2015 ___________ Services Document Technology Total 6,815 $ (98) 2,390 $ (56) 39 166 23 2 (495) 6,452 $ (95) 107 19 19 — — — 19 — 2,353 $ (38) — — 6 6,502 $ 2,321 $ $ $ $ 60 118 1,903 145 2 21 9,205 (154) 39 166 23 21 (495) 8,805 (133) 107 19 25 8,823 (1) Primarily represents goodwill related to our ITO business ($487), which was held for sale and reported as a discontinued operation through its date of sale on June 30, 2015. Refer to Note 4 - Divestitures for additional information regarding this sale. Intangible Assets, Net Net intangible assets were $1,765 at December 31, 2015 of which $1,479 relate to our Services segment and $286 relate to our Document Technology segment. Intangible assets were comprised of the following: December 31, 2015 December 31, 2014 Weighted Average Amortization Gross Carrying Amount Accumulated Amortization Net Amount Gross Carrying Amount Accumulated Amortization Net Amount Customer relationships 12 years $ 3,435 $ 1,906 $ 1,529 $ 3,301 $ 1,532 $ 1,769 Distribution network Trademarks Technology, patents and non-compete Total Intangible Assets 25 years 20 years 9 years 123 270 32 79 98 12 44 172 20 123 274 40 74 87 14 $ 3,860 $ 2,095 $ 1,765 $ 3,738 $ 1,707 $ 49 187 26 2,031 Amortization expense related to intangible assets was $310, $315, and $305 for the years ended December 31, 2015, 2014 and 2013, respectively. Excluding the impact of additional acquisitions, amortization expense is expected to approximate $319 in 2016 and $315 in each of the years 2017 through 2020. 95 Note 11 – Restructuring and Asset Impairment Charges We continue to engage in a series of restructuring programs related to downsizing our employee base, exiting certain activities, outsourcing certain internal functions and engaging in other actions designed to reduce our cost structure and improve productivity. These initiatives primarily consist of severance actions and impact all major geographies and segments. Management continues to evaluate our business, therefore, in future years, there may be additional provisions for new plan initiatives as well as changes in previously recorded estimates, as payments are made or actions are completed. Asset impairment charges were also incurred in connection with these restructuring actions for those assets sold, abandoned or made obsolete as a result of these programs. Costs associated with restructuring, including employee severance and lease termination costs are generally recognized when it has been determined that a liability has been incurred, which is generally upon communication to the affected employees or exit from the leased facility, respectively. In those geographies where we have either a formal severance plan or a history of consistently providing severance benefits representing a substantive plan, we recognize employee severance costs when they are both probable and reasonably estimable. A summary of our restructuring program activity during the three years ended December 31, 2015 is as follows: Severance and Related Costs Lease Cancellation and Other Costs Asset Impairments(1) Total Balance at December 31, 2012 $ Restructuring provision Reversals of prior accruals Net current period charges - continuing operations(2) Discontinued operations(3) Total Net Current Period Charges Charges against reserve and currency Balance at December 31, 2013 Restructuring provision Reversals of prior accruals Net current period charges - continuing operations(2) Discontinued operations(3) Total Net Current Period Charges Charges against reserve and currency Balance at December 31, 2014 Restructuring provision Reversals of prior accruals Net current period charges - continuing operations(2) Charges against reserve and currency Balance at December 31, 2015 ________________ $ 123 141 (29) 112 7 119 (133) 109 143 (25) 118 2 120 (136) 93 54 (22) 32 $ (103) 22 $ 7 2 — 2 — 2 (2) 7 5 (2) 3 — 3 (6) 4 4 (3) 1 (3) $ — $ 1 — 1 — 1 (1) — 7 — 7 — 7 (7) — 153 — 153 (153) 2 $ — $ (1) 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. (2) Represents amount recognized within the Consolidated Statements of Income for the years shown. (3) Refer to Note 4 - Divestitures for additional information regarding discontinued operations. The following table summarizes the reconciliation to the Consolidated Statements of Cash Flows: Charges against reserve Asset impairments Effects of foreign currency and other non-cash items Restructuring Cash Payments Year Ended December 31, 2015 2014 2013 (259) $ (149) $ 153 8 7 9 (98) $ (133) $ $ $ The following table summarizes the total amount of costs incurred in connection with these restructuring programs by segment: Xerox 2015 Annual Report 96 130 144 (29) 115 7 122 (136) 116 155 (27) 128 2 130 (149) 97 211 (25) 186 (259) 24 (136) 1 (1) (136) Services Document Technology Other Total Net Restructuring Charges Year Ended December 31, 2015 2014 2013 $ $ 163 $ 15 8 $ 38 76 14 186 $ 128 $ 38 77 — 115 97 Note 12 - Supplementary Financial Information The components of Other assets and liabilities were as follows: Other Current Assets Deferred taxes(1) Income taxes receivable Royalties, license fees and software maintenance Restricted cash Prepaid expenses Derivative instruments Deferred purchase price from sales of accounts receivables Beneficial interests - sales of finance receivables Advances and deposits Other Total Other Current Assets Other Current Liabilities Deferred taxes(1) Income taxes payable Other taxes payable Interest payable Restructuring reserves Derivative instruments Product warranties Dividends payable Distributor and reseller rebates/commissions Servicer liabilities Due to Atos(2) Other Total Other Current Liabilities Other Long-term Assets Deferred taxes(1) Income taxes receivable Prepaid pension costs Net investment in TRG Internal use software, net Product software, net Restricted cash Debt issuance costs, net Customer contract costs, net Beneficial interest - sales of finance receivables Deferred compensation plan investments Other Total Other Long-term Assets Other Long-term Liabilities Deferred taxes (1) Income taxes payable Environmental reserves Unearned income Restructuring reserves Other Total Other Long-term Liabilities December 31, 2015 2014 $ — $ 14 75 100 103 55 61 8 32 196 644 $ — $ 36 97 73 23 13 8 85 106 93 52 990 382 43 61 113 122 22 73 35 29 202 1,082 61 58 125 78 92 58 11 88 120 107 — 711 1,576 $ 1,509 714 $ 8 31 142 383 115 72 32 180 30 125 256 346 17 17 158 434 307 139 31 227 42 125 400 2,088 $ 2,243 60 65 11 100 1 180 417 $ $ 34 64 9 116 3 228 454 Xerox 2015 Annual Report 98 $ $ $ $ $ $ $ __________ (1) As discussed in Note 1 - Basis of Presentation and Summary of Significant Accounting Policies, we early adopted ASU 2015-17, Income Taxes: Balance Sheet Classification of Deferred Taxes, which requires that deferred tax liabilities and assets be classified as non-current in a classified statement of financial position. Adoption of this update resulted in a reclassification of our net current deferred tax asset and liabilities to the net non-current deferred tax asset and liabilities in our Consolidated Balance Sheet as of December 31, 2015. Prior periods were not retrospectively adjusted. (2) Refer to Note 4 - Divestitures for additional information. Restricted Cash 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. In addition, as more fully discussed in Note 5 - Accounts Receivable, Net and Note 6 - Finance Receivables, Net, we continue to service the receivables sold under most of our receivable sale agreements. As servicer, we may collect cash related to sold receivables prior to year-end that will be remitted to the purchaser the following year. Since we are acting on behalf of the purchaser in our capacity as servicer, such cash collected is reported as restricted cash. Restricted cash amounts are classified in our Consolidated Balance Sheets based on when the cash will be contractually or judicially released. Restricted cash amounts were as follows: Tax and labor litigation deposits in Brazil Escrow and cash collections related to receivable sales Other restricted cash Total Restricted Cash December 31, 2015 2014 $ $ $ 71 93 8 172 $ 135 107 10 252 Net Investment in TRG At December 31, 2015, our net investment in The Resolution Group (TRG) primarily consisted of a $157 performance-based instrument relating to the 1997 sale of TRG, net of remaining liabilities associated with our discontinued operations of $15. The recovery of the performance-based instrument is dependent on the sufficiency of TRG's available cash flows, as guaranteed by TRG's ultimate parent, which are expected to be recovered in annual cash distributions through 2017. The performance-based instrument is pledged as security for our future funding obligations to our U.K. Pension Plan for salaried employees. Note 13 – Debt Short-term borrowings were as follows: Commercial paper Notes Payable Current maturities of long-term debt Total Short-term Debt December 31, 2015 2014 $ $ — $ 3 982 985 $ 150 1 1,276 1,427 We classify our debt based on the contractual maturity dates of the underlying debt instruments or as of the earliest put date available to the debt holders. We defer costs associated with debt issuance over the applicable term, or to the first put date in the case of convertible debt or debt with a put feature. These costs are amortized as interest expense in our Consolidated Statements of Income. 99 Long-term debt was as follows: Xerox Corporation Senior Notes due 2015 Senior Notes due 2016 Notes due 2016 Senior Notes due 2017 Senior Notes due 2017 Notes due 2018 Senior Notes due 2018 Senior Notes due 2019 Senior Notes due 2019 Senior Notes due 2020 Senior Notes due 2020 Senior Notes due 2020 Senior Notes due 2021 Senior Notes due 2024 Senior Notes due 2035 Senior Notes due 2039 Subtotal - Xerox Corporation Subsidiary Companies Senior Notes due 2015 Capital lease obligations Other Subtotal - Subsidiary Companies Principal debt balance Unamortized discount Fair value adjustments(1) Terminated swaps Current swaps Less: current maturities Total Long-term Debt ____________ Weighted Average Interest Rates at December 31, 2015(2) 2015 2014 December 31, 4.29% $ — $ 1,000 6.48% 7.20% 6.83% 2.98% 0.57% 6.37% 2.77% 5.66% 2.81% 3.70% 2.77% 5.39% 3.84% 4.84% 6.78% 4.25% 4.18% 0.19% $ $ $ 700 250 500 500 1 1,000 500 650 400 400 400 1,062 300 250 350 7,263 $ — 98 1 99 $ 7,362 (52) 47 7 (982) 6,382 $ 700 250 500 500 1 1,000 500 650 400 — — 1,062 300 — 350 7,213 250 105 3 358 7,571 (54) 68 5 (1,276) 6,314 (1) Fair value adjustments include the following: (i) fair value adjustments to debt associated with terminated interest rate swaps, which are being amortized to interest expense over the remaining term of the related notes; and (ii) changes in fair value of hedged debt obligations attributable to movements in benchmark interest rates. Hedge accounting requires hedged debt instruments to be reported inclusive of any fair value adjustment. (2) Represents weighted average effective interest rate which includes the effect of discounts and premiums on issued debt. Scheduled principal payments due on our long-term debt for the next five years and thereafter are as follows: 2016(1) (2) $ 980 $ _____________ 2017 1,027 $ 2018 1,020 $ 2019 1,161 $ 2020 Thereafter 1,207 $ 1,967 $ Total 7,362 (1) Quarterly long-term debt maturities from continuing operations for 2016 are $709, $257, $7 and $7 for the first, second, third and fourth quarters, respectively. (2) Excludes fair value adjustments of $2. Xerox 2015 Annual Report 100 Senior Notes We issued the following Senior Notes in 2015: • • In August 2015 we issued $400 of 3.50% Senior Notes due 2020 (the "2020 Senior Notes") at 99.113% of par, resulting in aggregate net proceeds of approximately $396. In March 2015, we issued $400 of 2.75% Senior Notes due 2020 (the "2020 Senior Notes") at 99.879% of par and $250 of 4.80% Senior Notes due 2035 (the "2035 Senior Notes") at 99.428% of par, resulting in aggregate net proceeds of approximately $648. Interest on these Senior Notes is payable semi-annually. Debt issuance costs of $9 were paid and deferred in connection with the issuances of these Senior Notes. The proceeds were used for general corporate purposes, which included repayment of a portion of our outstanding borrowings. In 2015 we also repaid the following Senior Notes due in 2015 - $1,000 of 4.29% Senior Notes and $250 of 4.25% Senior Notes. Commercial Paper We have a private placement commercial paper (CP) program in the U.S. under which we may issue CP up to a maximum amount of $2.0 billion outstanding at any time. Aggregate CP and Credit Facility borrowings may not exceed $2.0 billion outstanding at any time. The maturities of the CP Notes will vary, but may not exceed 390 days from the date of issue. The CP Notes are sold at a discount from par or, alternatively, sold at par and bear interest at market rates. CP outstanding at December 31, 2015 and 2014, was $0 and $150, respectively. Credit Facility We have a $2.0 billion unsecured revolving Credit Facility with a group of lenders, which matures in 2019. The Credit Facility contains a $300 letter of credit sub-facility, and also includes an accordion feature that would allow us to increase (from time to time, with willing lenders) the overall size of the facility up to an aggregate amount not to exceed $2.75 billion. The Credit Facility provides a backstop to our $2.0 billion CP program. Proceeds from any borrowings under the Credit Facility can be used to provide working capital for the Company and its subsidiaries and for general corporate purposes. At December 31, 2015 we had no outstanding borrowings or letters of credit under the Credit Facility. The Credit Facility is available, without sublimit, to certain of our qualifying subsidiaries. Our obligations under the Credit Facility are unsecured and are not currently guaranteed by any of our subsidiaries. Any domestic subsidiary that guarantees more than $100 of Xerox Corporation debt must also guaranty our obligations under the Credit Facility. In the event that any of our subsidiaries borrows under the Credit Facility, its borrowings thereunder would be guaranteed by us. Borrowings under the Credit Facility bear interest at our choice, at either (a) a Base Rate as defined in our Credit Facility agreement, plus a spread that varies between 0.00% and 0.45% depending on our credit rating at the time of borrowing, or (b) LIBOR plus an all-in spread that varies between 0.90% and 1.45% depending on our credit rating at the time of borrowing. Based on our credit rating as of December 31, 2015, the applicable all-in spreads for the Base Rate and LIBOR borrowing were 0.10% and 1.10%, respectively. An annual facility fee is payable to each lender in the Credit Facility at a rate that varies between 0.10% and 0.30% depending on our credit rating. Based on our credit rating as of December 31, 2015, the applicable rate is 0.15%. The Credit Facility contains various conditions to borrowing and affirmative, negative and financial maintenance covenants. Certain of the more significant covenants are summarized below: (a) Maximum leverage ratio (a quarterly test that is calculated as principal debt divided by consolidated EBITDA, as defined) of 3.75x. (b) Minimum interest coverage ratio (a quarterly test that is calculated as consolidated EBITDA divided by consolidated interest expense) may not be less than 3.00x. 101 (c) Limitations on (i) liens of Xerox and certain of our subsidiaries securing debt, (ii) certain fundamental changes to corporate structure, (iii) changes in nature of business and (iv) limitations on debt incurred by certain subsidiaries. The Credit Facility also contains various events of default, the occurrence of which could result in termination of the lenders' commitments to lend and the acceleration of all our obligations under the Credit Facility. These events of default include, without limitation: (i) payment defaults, (ii) breaches of covenants under the Credit Facility (certain of which breaches do not have any grace period), (iii) cross-defaults and acceleration to certain of our other obligations and (iv) a change of control of Xerox. Interest Interest paid on our short-term and long-term debt amounted to $365, $400 and $435 for the years ended December 31, 2015, 2014 and 2013, respectively. Interest expense and interest income was as follows: Interest expense(1) Interest income(2) ___________ Year Ended December 31, 2015 2014 2013 $ $ 353 354 $ 377 397 403 494 (1) (2) Includes Equipment financing interest expense, as well as non-financing interest expense included in Other expenses, net in the Consolidated Statements of Income. Includes Finance income, as well as other interest income that is included in Other expenses, net in the Consolidated Statements of Income. Equipment financing interest is determined based on an estimated cost of funds, applied against the estimated level of debt required to support our net finance receivables. In 2015 we revised the methodology for calculating the estimated cost of funds to be based on the interest cost associated with actual borrowings determined to be in support of the leasing business. Prior to 2015, the estimated cost of funds was based on our overall corporate cost of borrowing adjusted to reflect a rate that would be paid by a typical BBB rated leasing company. The impact of the change in methodology was not material to the current or prior periods. The estimated level of debt continues to be based on an assumed 7 to 1 leverage ratio of debt/equity as compared to our average finance receivable balance during the applicable period. Note 14 – Financial Instruments We are exposed to market risk from changes in foreign currency exchange rates and interest rates, which could affect operating results, financial position and cash flows. We manage our exposure to these market risks through our regular operating and financing activities and, when appropriate, through the use of derivative financial instruments. These derivative financial instruments are utilized to hedge economic exposures, as well as to reduce earnings and cash flow volatility resulting from shifts in market rates. We enter into limited types of derivative contracts, including interest rate swap agreements, foreign currency spot, forward and swap contracts and net purchased foreign currency options to manage interest rate and foreign currency exposures. Our primary foreign currency market exposures include the Japanese Yen, Euro and U.K. Pound Sterling. The fair market values of all our derivative contracts change with fluctuations in interest rates and/or currency exchange rates and are designed so that any changes in their values are offset by changes in the values of the underlying exposures. Derivative financial instruments are held solely as risk management tools and not for trading or speculative purposes. The related cash flow impacts of all of our derivative activities are reflected as cash flows from operating activities. We do not believe there is significant risk of loss in the event of non-performance by the counterparties associated with our derivative instruments because these transactions are executed with a diversified group of major financial institutions. Further, our policy is to deal only with counterparties having a minimum investment grade or better credit rating. Credit risk is managed through the continuous monitoring of exposures to such counterparties. 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. Xerox 2015 Annual Report 102 Terminated Swaps During the period from 2004 to 2011, we early terminated several interest rate swaps that were designated as fair value hedges of certain debt instruments. The associated net fair value adjustments to the debt instruments are being amortized to interest expense over the remaining term of the related notes. In 2015, 2014 and 2013, the amortization of these fair value adjustments reduced interest expense by $22, $31 and $42, respectively, and we expect to record a net decrease in interest expense of $46 in future years through 2018. Fair Value Hedges As of December 31, 2015 and 2014, pay variable/received fixed interest rate swaps with notional amounts of $300 and $300, respectively, and net asset fair value of $7 and $5, respectively, 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. No ineffective portion was recorded to earnings during 2015 or 2014. The following is a summary of our fair value hedges at December 31, 2015: Debt Instrument Senior Note 2021 Year First Designated Notional Amount Net Fair Value Weighted Average Interest Rate Paid Interest Rate Received Basis Maturity 2014 $ 300 $ 7 2.46% 4.50% Libor 2021 Foreign Exchange Risk Management As a global company, we are 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 Summary of Foreign Exchange Hedging Positions At December 31, 2015, we had outstanding forward exchange and purchased option contracts with gross notional values of $3,212, which is typical of the amounts that are normally outstanding at any point during the year. Approximately 70% of these contracts mature within three months, 23% in three to six months, 6% in six to twelve months, and less than 1% in greater than 12 months. The following is a summary of the primary hedging positions and corresponding fair values as of December 31, 2015: Currencies Hedged (Buy/Sell) Euro/U.K. Pound Sterling U.S. Dollar/U.K. Pound Sterling Japanese Yen/U.S. Dollar Japanese Yen/Euro U.S. Dollar/Euro U.K. Pound Sterling/Euro U.K. Pound Sterling/U.S. Dollar Swiss Franc/Euro Philippine Peso/U.S. Dollar Mexican Peso/U.S. Dollar Indian Rupee/U.S. Dollar Mexican Peso/Euro Euro/U.S. Dollar Swedish Kroner/Euro All Other Total Foreign Exchange Hedging ____________ Gross Notional Value Fair Value Asset (Liability)(1) $ $ 837 596 356 271 265 201 149 131 63 49 44 32 28 27 163 $ 3,212 $ 17 29 3 1 (1) (1) (2) — (1) (2) (1) (1) — — 1 42 (1) Represents the net receivable (payable) amount included in the Consolidated Balance Sheet at December 31, 2015. 103 Foreign Currency Cash Flow Hedges We designate a portion of our foreign currency derivative contracts as cash flow hedges of our foreign currency- denominated inventory purchases, sales and expenses. No amount of ineffectiveness was recorded in the Consolidated Statements of Income for these designated cash flow hedges and all components of each derivative’s gain or loss was included in the assessment of hedge effectiveness. The net liability fair value of these contracts were $1 and $30 as of December 31, 2015 and December 31, 2014, 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 December 31, 2015 2014 Derivatives Designated as Hedging Instruments Foreign exchange contracts – forwards Foreign currency options Interest rate swaps Other current assets Other current liabilities Other current assets Other current liabilities Other long-term assets Net Designated Derivative Asset (Liability) Derivatives NOT Designated as Hedging Instruments Foreign exchange contracts – forwards Summary of Derivatives Other current assets Other current liabilities Net Undesignated Derivative Asset (Liability) Total Derivative Assets Total Derivative Liabilities Net Derivative Asset (Liability) $ $ $ $ $ $ 4 $ (4) — (1) 7 6 $ 51 $ (8) 43 $ 62 $ (13) 49 $ 7 (39) 2 — 5 (25) 13 (19) (6) 27 (58) (31) Summary of Derivative Instruments Gains (Losses) Derivative gains and (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 and (losses). Designated Derivative Instruments Gains (Losses) The following tables provide a summary of gains (losses) on derivative instruments: Derivatives in Fair Value Relationships Location of Gain (Loss) Recognized in Income Year Ended December 31, Derivative Gain (Loss) Recognized in Income Hedged Item Gain (Loss) Recognized in Income 2015 2014 2013 2015 2014 2013 Interest rate contracts Interest expense $ 7 $ 5 $ — $ (7) $ (5) $ — Derivative Gain (Loss) Recognized in OCI (Effective Portion) 2015 2014 2013 Year Ended December 31, Location of Derivative Gain (Loss) Reclassified from AOCI into Income (Effective Portion) Gain (Loss) Reclassified from AOCI to Income (Effective Portion) 2015 2014 2013 $ 13 $ (20) $ (126) Cost of sales $ (28) $ (36) $ (123) Derivatives in Cash Flow Hedging Relationships Foreign exchange contracts – forwards/options No amount of ineffectiveness was recorded in the Consolidated Statements of Income for these designated cash flow hedges and all components of each derivative’s gain or (loss) were included in the assessment of hedge effectiveness. In addition, no amount was recorded for an underlying exposure that did not occur or was not expected to occur. Xerox 2015 Annual Report 104 As of December 31, 2015, net after-tax losses of $1 were 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 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 losses on non-designated derivative instruments: Derivatives NOT Designated as Hedging Instruments Location of Derivative Loss 2015 2014 2013 Foreign exchange contracts – forwards Other expense – Currency losses, net $ 14 $ (10) $ (86) Year Ended December 31, During the three years ended December 31, 2015, we recorded Currency (losses) gains, net of $(6), $(5) and $7, respectively. Currency (losses) gains, net includes 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. Note 15 – Fair Value of Financial Assets and Liabilities The following table represents assets and liabilities fair value measured on a recurring basis. The basis for the measurement at fair value in all cases is Level 2 – Significant Other Observable Inputs. Assets: Foreign exchange contracts - forwards Foreign currency options Interest rate swaps Deferred compensation investments in cash surrender life insurance Deferred compensation investments in mutual funds Total Liabilities: Foreign exchange contracts - forwards Foreign currency options Deferred compensation plan liabilities Total As of December 31, 2015 2014 $ $ $ $ $ 55 — 7 92 33 187 $ 12 $ 1 125 138 $ 20 2 5 94 32 153 58 — 135 193 We utilize the income approach to measure the fair value for our derivative assets and liabilities. The income approach uses pricing models that rely on market observable inputs such as yield curves, currency exchange rates and forward prices, and therefore are classified as Level 2. Fair value for our deferred compensation plan investments in Company-owned life insurance is reflected at cash surrender value. Fair value for our deferred compensation plan investments in mutual funds is based on quoted market prices for actively traded investments similar to those held by the plan. Fair value for deferred compensation plan liabilities is based on the fair value of investments corresponding to employees’ investment selections, based on quoted prices for similar assets in actively traded markets. 105 Summary of Other Financial Assets and Liabilities Fair Value Measured on a Nonrecurring Basis The estimated fair values of our other financial assets and liabilities fair value measured on a nonrecurring basis were as follows: Cash and cash equivalents Accounts receivable, net Short-term debt Long-term debt December 31, 2015 December 31, 2014 Carrying Amount Fair Value Carrying Amount Fair Value $ 1,368 $ 1,368 $ 1,411 $ 2,319 985 6,382 2,319 976 6,395 2,652 1,427 6,314 1,411 2,652 1,417 6,719 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. Xerox 2015 Annual Report 106 Note 16 – Employee Benefit Plans We sponsor numerous defined benefit and defined contribution pension and other post-retirement benefit plans, primarily retiree health care, in our domestic and international operations. December 31 is the measurement date for all of our post-retirement benefit plans. Change in Benefit Obligation: Benefit obligation, January 1 Service cost Interest cost Plan participants' contributions Actuarial (gain) loss Currency exchange rate changes Plan Amendments/Curtailments Divestitures(2) Benefits paid/settlements Other Benefit Obligation, December 31 Change in Plan Assets: Fair value of plan assets, January 1 Actual return on plan assets Employer contribution Plan participants' contributions Currency exchange rate changes Benefits paid/settlements Other Fair Value of Plan Assets, December 31 Net Funded Status at December 31(1) Amounts Recognized in the Consolidated Balance Sheets: Other long-term assets Accrued compensation and benefit costs Pension and other benefit liabilities Post-retirement medical benefits Net Amounts Recognized _______________ Pension Benefits U.S. Plans Non-U.S. Plans Retiree Health 2015 2014 2015 2014 2015 2014 $ 4,716 $ 3,893 $ 7,139 $ 6,664 $ 937 $ 856 4 83 — (225) — — — (378) — 9 281 — 813 — (7) — (273) — 32 212 4 (107) (538) (17) — (260) — 34 272 5 1,069 (594) — (27) (279) (5) 7 34 14 (4) (25) (31) — (77) — 4,200 $ 4,716 $ 6,465 $ 7,139 $ 855 $ 3,126 $ 2,876 $ 6,088 $ 5,789 $ — $ (72) 177 — — (378) — 398 124 — — (273) 1 (17) 132 4 (440) (260) (4) 899 160 5 (484) (279) (2) — 63 14 — (77) — 2,853 $ 3,126 $ 5,503 $ 6,088 $ — $ 9 36 16 119 (13) — — (86) — 937 — — 70 16 — (86) — — (1,347) $ (1,590) $ (962) $ (1,051) $ (855) $ (937) — $ — $ 31 $ 17 $ — $ (23) (1,324) — $ (1,347) $ (24) (1,566) — (1,590) $ (27) (966) — (28) (1,040) — (68) — (787) (962) $ (1,051) $ (855) $ — (72) — (865) (937) $ $ $ $ $ Includes under-funded and un-funded plans. (1) (2) Represents the net un-funded pension obligations related to our ITO business, which was reported as a discontinued operation through its date of sale on June 30, 2015. These obligations were assumed by the purchaser of the ITO business. The net pension cost associated with these plans is immaterial. Refer to Note 4 - Divestitures for additional information regarding this sale. Benefit plans pre-tax amounts recognized in AOCL at December 31: Pension Benefits U.S. Plans Non-U.S. Plans Retiree Health 2015 2014 2015 2014 2015 2014 1,119 $ 1,301 $ 1,995 $ 2,036 $ 112 $ (11) (13) (33) (20) (34) 1,108 $ 1,288 $ 1,962 $ 2,016 $ 78 $ 122 (42) 80 4,200 $ 4,716 $ 6,222 $ 6,883 $ $ $ Net actuarial loss Prior service credit Total Pre-tax Loss Accumulated Benefit Obligation 107 Aggregate information for pension plans with an Accumulated benefit obligation in excess of plan assets is presented below: Underfunded Plans: U.S. Non U.S. Unfunded Plans: U.S. Non U.S. Total Underfunded and Unfunded Plans: U.S. Non U.S. Total December 31, 2015 December 31, 2014 Projected benefit obligation Accumulated benefit obligation Fair value of plan assets Projected benefit obligation Accumulated benefit obligation Fair value of plan assets $ 3,855 $ 3,855 $ 2,853 $ 4,351 $ 4,351 $ 4,853 4,692 4,336 6,376 6,125 3,126 5,848 $ $ $ $ 345 423 $ 345 414 — $ — $ 365 567 $ 365 551 — — 4,200 $ 4,200 $ 2,853 $ 4,716 $ 4,716 $ 5,276 5,106 4,336 6,943 6,676 9,476 $ 9,306 $ 7,189 $ 11,659 $ 11,392 $ 3,126 5,848 8,974 Our pension plan assets and benefit obligations at December 31, 2015 were as follows: (in billions) U.S. funded U.S. unfunded Total U.S. U.K. Canada Other unfunded Total Fair Value of Pension Plan Assets Pension Benefit Obligations Net Funded Status $ $ $ 2.9 $ — 2.9 3.6 0.7 1.2 8.4 $ $ $ $ 3.9 0.3 4.2 4.0 0.7 1.8 10.7 $ (1.0) (0.3) (1.3) (0.4) — (0.6) (2.3) Prior to the freeze of current benefits (see below), most of our defined benefit pension plans generally provided employees a benefit, depending on eligibility, calculated under a highest average pay and years of service formula. Our primary domestic defined benefit pension plans provided a benefit at the greater of (i) the highest average pay and years of service formula, (ii) the benefit calculated under a formula that provides for the accumulation of salary and interest credits during an employee's work life or (iii) the individual account balance from the Company's prior defined contribution plan (Transitional Retirement Account or TRA). Xerox 2015 Annual Report 108 The components of Net periodic benefit cost and other changes in plan assets and benefit obligations were as follows: Year Ended December 31, Pension Benefits U.S. Plans Non-U.S. Plans Retiree Health 2015 2014 2013 2015 2014 2013 2015 2014 2013 Components of Net Periodic Benefit Costs: Service cost Interest cost(1) Expected return on plan assets(2) Recognized net actuarial loss Amortization of prior service credit Recognized settlement loss Recognized curtailment gain Defined Benefit Plans Defined contribution plans Net Periodic Benefit Cost Other changes in plan assets and benefit obligations recognized in Other Comprehensive Income: Net actuarial (gain) loss Prior service credit Amortization of net actuarial loss Amortization of net prior service credit Curtailment gain Total Recognized in Other Comprehensive Income Total Recognized in Net Periodic Benefit Cost and Other Comprehensive Income $ 4 $ 9 $ 10 $ 32 $ 34 $ 91 $ 7 $ 9 $ 212 (293) 272 (342) 83 (83) 24 (2) 88 — 114 61 175 (70) — (112) 2 — 281 (290) 17 (2) 51 — 66 58 124 697 — (68) 2 — 154 (179) 19 (2) 162 — 164 64 228 (403) — (181) 2 — (180) 631 (582) 72 4 1 — 28 39 67 195 (16) (73) (4) — 102 260 (317) 77 — — (8) 103 25 128 (224) (14) (77) — — 54 (1) — (1) 16 44 60 481 (6) (54) 1 2 424 (315) 34 — 1 (18) — (22) 2 n/a 2 (4) (32) (1) 18 22 3 36 — 1 (43) — — 3 n/a 3 119 — (1) 43 n/a 161 9 33 — 2 (43) — — 1 n/a 1 (88) — (2) 43 n/a (47) $ (5) $ 755 $ (354) $ 169 $ 484 $ (187) $ 5 $ 164 $ (46) _______________ (1) Interest cost includes interest expense on non-TRA obligations of $320, $371 and $349 and interest expense directly allocated to TRA participant accounts of $(25), $182 and $65 for the years ended December 31, 2015, 2014 and 2013, respectively. (2) Expected return on plan assets includes expected investment income on non-TRA assets of $401, $450 and $431 and actual investment income on TRA assets of $(25), $182 and $65 for the years ended December 31, 2015, 2014 and 2013, respectively. The net actuarial loss and prior service credit for the defined benefit pension plans that will be amortized from Accumulated other comprehensive income (loss) into net periodic benefit cost over the next fiscal year are $(89) and $5, respectively, excluding amounts that may be recognized through settlement losses. The net actuarial loss and prior service credit for the retiree health benefit plans that will be amortized from Accumulated other comprehensive income (loss) into net periodic benefit cost over the next fiscal year are $(3) and $5, respectively. Pension plan assets consist of both defined benefit plan assets and assets legally restricted to the TRA accounts. The combined investment results for these plans, along with the results for our other defined benefit plans, are shown above in the “actual return on plan assets” caption. To the extent that investment results relate to TRA, such results are charged directly to these accounts as a component of interest cost. Plan Amendments Pension Plan Freezes Over the past several years, we have amended several of our major defined benefit pension plans to freeze current benefits and eliminate benefits accruals for future service including our primary U.S. defined benefit plan for salaried employees, the Canadian Salary Pension Plan and the U.K. Final Salary Pension Plan. The freeze of current benefits is the primary driver of the reduction in pension service costs since 2012. In certain Non-U.S. plans we are required to continue to consider salary increases and inflation in determining the benefit obligation related to prior service. 109 Retiree-Health Plan In June 2015, we amended our U.S. Retiree Health Plan to eliminate future benefit accruals for active salaried employees effective December 31, 2015. There was no change in benefits for union employees or existing retirees or employees that retire before December 31, 2015. As a result of this plan amendment, we recognized a pre-tax curtailment gain of $22 in the second quarter 2015. The gain represents the recognition of deferred gains from other prior-year amendments (“prior service credits”) as a result of the discontinuation of the future benefit or service accrual period for active salaried employees. The amendment is not expected to materially impact future Retiree Health expense. Plan Assets Current Allocation As of the 2015 and 2014 measurement dates, the global pension plan assets were $8.4 billion and $9.2 billion, respectively. These assets were invested among several asset classes. The following tables presents the defined benefit plans assets measured at fair value and the basis for that measurement: Asset Class Level 1 Level 2 Level 3 Total % Level 1 Level 2 Level 3 Total % Cash and cash equivalents $ 174 $ — $ — $ 174 6 % $ 578 $ — $ — $ 578 10 % U.S. Plans Non-U.S. Plans December 31, 2015 Equity Securities: U.S. large cap U.S. mid cap U.S. small cap International developed Emerging markets Global Equity Total Equity Securities Fixed Income Securities: U.S. treasury securities Debt security issued by government agency Corporate bonds Asset backed securities Total Fixed Income Securities Derivatives: Interest rate contracts Foreign exchange contracts Equity contracts Other contracts Total Derivatives Real estate Private equity/venture capital Guaranteed insurance contracts Other(1) 289 61 45 170 119 — 684 — — — — — — — — — — 42 — — (103) — — 20 75 91 — 186 222 156 926 2 1,306 (8) — — — (8) 37 — — 17 — — — — — — — — — — — — — — — — — 19 499 — — 289 61 65 245 210 — 870 222 156 926 2 1,306 (8) — — — (8) 98 499 — (86) 10 % 2 % 2 % 9 % 7 % — % 30 % 8 % 5 % 32 % — % 45 % — % — % — % — % — % 3 % 18 % — % (2)% 170 5 25 800 217 4 1,221 — 3 3 — 6 — — — — — — — — 5 44 — — 139 58 — 241 48 1,623 741 1 2,413 90 (34) (51) 4 9 26 — — 50 — — — — — — — — — — — — — — — — — 280 550 124 — 214 5 25 939 275 4 1,462 4 % — % — % 17 % 5 % — % 26 % 48 1 % 1,626 744 1 2,419 90 (34) (51) 4 9 306 550 124 55 30 % 14 % — % 45 % 2 % (1)% (1)% — % — % 6 % 10 % 2 % 1 % Total Fair Value of Plan Assets $ 797 $ 1,538 $ 518 $ 2,853 100 % $ 1,810 $ 2,739 $ 954 $ 5,503 100 % _____________________________ (1) Other Level 1 assets include net non-financial assets of $(103) U.S. and $5 Non-U.S., such as due to/from broker, interest receivables and accrued expenses. In 2015, the US Plans' Other included plan liabilities of $116 related to unsettled transactions such as purchases or sales of US Treasury securities with settlement dates beyond fiscal year-end. Xerox 2015 Annual Report 110 Asset Class Level 1 Level 2 Level 3 Total % Level 1 Level 2 Level 3 Total % Cash and cash equivalents $ 52 $ — $ — $ 52 2% $ 608 $ — $ — $ 608 10% U.S. Plans Non-U.S. Plans December 31, 2014 Equity Securities: U.S. large cap U.S. mid cap U.S. small cap International developed Emerging markets Global Equity Total Equity Securities Fixed Income Securities: U.S. treasury securities Debt security issued by government agency Corporate bonds Asset backed securities Total Fixed Income Securities Derivatives: Interest rate contracts Foreign exchange contracts Equity contracts Other contracts Total Derivatives Real estate Private equity/venture capital Guaranteed insurance contracts Other(1) Total Fair Value of Plan Assets _____________________________ 332 73 52 195 140 2 794 — — — — — — — — — — 46 — — (1) 15 — 39 92 113 7 266 145 225 988 10 1,368 (1) 1 — — — 39 — — 40 — — — — — — — — — — — — — — — — — 25 497 — — 347 73 91 287 253 9 1,060 145 225 988 10 1,368 (1) 1 — — — 110 497 — 39 11% 2% 3% 9% 8% —% 33% 5% 7% 32% —% 44% —% —% —% —% —% 4% 16% —% 1% 253 10 28 1,065 276 4 1,636 7 25 23 — 55 — — — — — — — — 6 52 — — 162 69 6 289 26 1,536 850 1 2,413 128 (5) — 14 137 29 — — 8 — — — — — — — — — — — — — — — — — 279 499 129 — 305 10 28 1,227 345 10 1,925 33 1,561 873 1 2,468 128 (5) — 14 137 308 499 129 14 5% —% —% 20% 6% —% 31% 1% 26% 15% —% 42% 2% —% —% —% 2% 5% 8% 2% —% $ 891 $ 1,713 $ 522 $ 3,126 100% $ 2,305 $ 2,876 $ 907 $ 6,088 100% (1) Other Level 1 assets include net non-financial liabilities of $(1) U.S. and $6 Non-U.S., such as due to/from broker, interest receivables and accrued expenses. The following tables represents a roll-forward of the defined benefit plans assets measured using significant unobservable inputs (Level 3 assets): Fair Value Measurement Using Significant Unobservable Inputs (Level 3) U.S. Defined Benefit Plans Assets Non-U.S. Defined Benefit Plans Assets Private Equity/ Venture Capital Real Estate Total Real Estate Private Equity/ Venture Capital $ 451 $ 480 $ 269 $ 44 (59) 41 20 — 497 48 (67) 52 (31) — 45 (65) 34 28 — 522 48 (83) 53 (22) — 74 (64) 20 (1) (19) 279 10 (7) (1) 14 (15) 212 279 — — 38 (30) 499 56 — — 21 (26) Guaranteed Insurance Contracts $ 135 $ 22 (25) 15 — (18) 129 22 (21) 6 1 (13) Total 616 375 (89) 35 37 (67) 907 88 (28) 5 36 (54) 954 $ 499 $ 518 $ 280 $ 550 $ 124 $ Balance at December 31, 2013 Purchases Sales Realized (losses) gains Unrealized gains (losses) Currency translation Balance at December 31, 2014 Purchases Sales Realized gains (losses) Unrealized gains (losses) Currency translation Balance at December 31, 2015 111 $ $ 29 1 (6) (7) 8 — 25 — (16) 1 9 — 19 Valuation Method Our primary Level 3 assets are Real Estate and Private Equity/Venture Capital investments. The fair value of our real estate investment funds are based on the Net Asset Value (NAV) of our ownership interest in the funds. NAV information is received from the investment advisers and is primarily derived from third-party real estate appraisals for the properties owned. The fair value for our private equity/venture capital partnership investments are based on our share of the estimated fair values of the underlying investments held by these partnerships as reported (or expected to be reported) in their audited financial statements. The valuation techniques and inputs for our Level 3 assets have been consistently applied for all periods presented. Investment Strategy The target asset allocations for our worldwide defined benefit pension plans were: Equity investments Fixed income investments Real estate Private equity Other 2015 Non-U.S. 29% 47% 6% 10% 8% U.S. 34% 43% 6% 9% 8% 2014 Non-U.S. 34% 47% 9% 6% 4% U.S. 33% 43% 8% 9% 7% Total Investment Strategy 100% 100% 100% 100% We employ a total return investment approach whereby a mix of equities and fixed income investments are used to maximize the long-term return of plan assets for a prudent level of risk. The intent of this strategy is to minimize plan expenses by exceeding the interest growth in long-term plan liabilities. Risk tolerance is established through careful consideration of plan liabilities, plan funded status and corporate financial condition. This consideration involves the use of long-term measures that address both return and risk. The investment portfolio contains a diversified blend of equity and fixed income investments. Furthermore, equity investments are diversified across U.S. and non-U.S. stocks, as well as growth, value and small and large capitalizations, and may include Company stock. Other assets such as real estate, private equity, and hedge funds are used to improve portfolio diversification. Derivatives may be used to hedge market exposure in an efficient and timely manner; however, derivatives may not be used to leverage the portfolio beyond the market value of the underlying investments. Investment risks and returns are measured and monitored on an ongoing basis through annual liability measurements and quarterly investment portfolio reviews. Expected Long-term Rate of Return We employ a “building block” approach in determining the long-term rate of return for plan assets. Historical markets are studied and long-term relationships between equities and fixed income are assessed. Current market factors such as inflation and interest rates are evaluated before long-term capital market assumptions are determined. The long-term portfolio return is established giving consideration to investment diversification and rebalancing. Peer data and historical returns are reviewed periodically to assess reasonableness and appropriateness. Contributions In 2015, we made cash contributions of $309 ($177 U.S. and $132 Non-U.S.) and $63 to our defined benefit pension plans and retiree health benefit plans, respectively. In 2016, based on current actuarial calculations, we expect to make contributions of approximately $140 ($25 U.S. and $115 non-U.S.) to our defined benefit pension plans and approximately $70 to our retiree health benefit plans. The 2016 expected pension plan contributions do not include any planned contribution for our domestic tax- qualified defined benefit plans because none are required to meet the minimum funding requirements. However, once the January 1, 2016 actuarial valuations and projected results as of the end of the 2016 measurement year are available, the desirability of making additional contributions will be reassessed. Based on these results, we may voluntarily decide to contribute to these plans. Xerox 2015 Annual Report 112 Estimated Future Benefit Payments The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid during the following years: 2016 2017 2018 2019 2020 Years 2021-2024 Assumptions Pension Benefits U.S. Non-U.S. Total Retiree Health $ $ 436 392 340 319 311 $ 230 239 247 254 270 $ 666 631 587 573 581 1,469 1,411 2,880 70 68 67 66 64 296 Weighted-average assumptions used to determine benefit obligations at the plan measurement dates: Discount rate Rate of compensation increase Discount rate 2015 Pension Benefits 2014 2013 U.S. Non-U.S. U.S. Non-U.S. U.S. Non-U.S. 4.3% 0.2% 3.3% 2.6% 3.9% 0.2% 3.1% 2.6% 4.8% 0.2% 4.2% 2.7% Retiree Health 2015 2014 2013 4.09% 3.8% 4.5% Weighted-average assumptions used to determine net periodic benefit cost for years ended December 31: 2016 2015 2014 2013 U.S. Non-U.S. U.S. Non-U.S. U.S. Non-U.S. U.S. Non-U.S. Pension Benefits Discount rate Expected return on plan assets Rate of compensation increase 4.3% 7.5% 0.2% 3.3% 4.9% 2.6% 3.9% 7.5% 0.2% 3.1% 5.2% 2.6% 4.8% 7.8% 0.2% 4.2% 6.1% 2.7% 3.7% 7.8% 0.2% 4.0% 6.1% 2.6% Discount rate _____________________________ Retiree Health 2016 2015 2014 2013 4.09% 3.8% 4.5% 3.6% Note: Expected return on plan assets is not applicable to retiree health benefits as these plans are not funded. Rate of compensation increase is not applicable to retiree health benefits as compensation levels do not impact earned benefits. Assumed health care cost trend rates were as follows: Health care cost trend rate assumed for next year Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) Year that the rate reaches the ultimate trend rate December 31, 2015 2014 7.5% 4.9% 2026 7.0% 4.9% 2023 113 Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects: Effect on total service and interest cost components Effect on post-retirement benefit obligation Defined Contribution Plans 1% increase 1% decrease $ 4 $ 62 (4) (54) We have post-retirement savings and investment plans in several countries, including the U.S., U.K. and Canada. In many instances, employees from those defined benefit pension plans that have been amended to freeze future service accruals (see "Plan Amendments" for additional information) were transitioned to an enhanced defined contribution plan. In these plans employees are allowed to contribute a portion of their salaries and bonuses to the plans, and we match a portion of the employee contributions. We recorded charges related to our defined contribution plans of $100 in 2015, $102 in 2014 and $89 in 2013. Note 17 - Income and Other Taxes Income before income taxes (pre-tax income) was as follows: Domestic income Foreign income Income Before Income Taxes (Benefit) provision for income taxes were as follows: Federal Income Taxes Current Deferred Foreign Income Taxes Current Deferred State Income Taxes Current Deferred Total (Benefit) Provision Year Ended December 31, 2015 2014 2013 $ $ 5 $ 407 412 $ 675 $ 531 1,206 $ 905 338 1,243 Year Ended December 31, 2015 2014 2013 $ (155) $ 11 100 14 — 7 (3) $ 79 115 (16) 34 6 $ (23) $ 215 $ 17 66 82 36 37 15 253 Xerox 2015 Annual Report 114 A reconciliation of the U.S. federal statutory income tax rate to the consolidated effective income tax rate was as follows: U.S. federal statutory income tax rate Nondeductible expenses Effect of tax law changes Change in valuation allowance for deferred tax assets State taxes, net of federal benefit Audit and other tax return adjustments Tax-exempt income, credits and incentives Foreign rate differential adjusted for U.S. taxation of foreign profits(1) Other Effective Income Tax Rate ____________ Year Ended December 31, 2015 2014 2013 35.0 % 4.4 % (2.4)% (0.7)% 0.6 % 1.2 % (5.6)% (37.6)% (0.5)% (5.6)% 35.0 % 2.0 % (4.7)% (1.6)% 2.2 % (2.9)% (2.4)% (9.6)% (0.2)% 17.8 % 35.0 % 1.5 % (0.6)% 0.2 % 2.7 % (2.5)% (4.0)% (12.4)% 0.5 % 20.4 % (1) The “U.S. taxation of foreign profits” represents the U.S. tax, net of foreign tax credits, associated with actual and deemed repatriations of earnings from our non-U.S. subsidiaries. On a consolidated basis, we paid a total of $138, $121 and $155 in income taxes to federal, foreign and state jurisdictions during the three years ended December 31, 2015, respectively. Total income tax expense (benefit) was allocated as follows: Pre-tax income Discontinued operations(1) Common shareholders' equity: Changes in defined benefit plans Stock option and incentive plans, net Cash flow hedges Translation adjustments Total Income Tax Expense (Benefit) _____________ Year Ended December 31, 2015 2014 2013 (23) $ 81 215 $ 6 59 (18) 15 — (408) (18) — (2) 114 $ (207) $ 253 27 318 (13) — (9) 576 $ $ (1) Refer to Note 4 - Divestitures for additional information regarding discontinued operations. Unrecognized Tax Benefits and Audit Resolutions We recognize tax liabilities when, despite our belief that our tax return positions are supportable, we believe that certain positions may not be fully sustained upon review by tax authorities. Each period we assess uncertain tax positions for recognition, measurement and effective settlement. Benefits from uncertain tax positions are measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon settlement - the more likely than not recognition threshold. Where we have determined that our tax return filing position does not satisfy the more likely than not recognition threshold, we have recorded no tax benefits. We are also subject to ongoing tax examinations in numerous jurisdictions due to the extensive geographical scope of our operations. Our ongoing assessments of the more-likely-than-not outcomes of the examinations and related tax positions require judgment and can increase or decrease our effective tax rate, as well as impact our operating results. The specific timing of when the resolution of each tax position will be reached is uncertain. As of December 31, 2015, we do not believe that there are any positions for which it is reasonably possible that the total amount of unrecognized tax benefits will significantly increase or decrease within the next 12 months. 115 A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: Balance at January 1 Additions related to current year Additions related to prior years positions Reductions related to prior years positions Settlements with taxing authorities(1) Reductions related to lapse of statute of limitations Currency Balance at December 31 _______________ 2015 2014 2013 240 $ 267 $ 39 — (16) (5) (9) (2) 16 10 (35) (10) (6) (2) 247 $ 240 $ 201 60 39 (19) — (14) — 267 $ $ (1) Majority of settlements did not result in the utilization of cash. Included in the balances at December 31, 2015, 2014 and 2013 are $31, $39 and $36, respectively, of tax positions that are highly certain of realizability but for which there is uncertainty about the timing or that they may be reduced through an indirect benefit from other taxing jurisdictions. Because of the impact of deferred tax accounting, other than for the possible incurrence of interest and penalties, the disallowance of these positions would not affect the annual effective tax rate. We recognized interest and penalties accrued on unrecognized tax benefits, as well as interest received from favorable settlements within income tax expense. We had $15, $17 and $20 accrued for the payment of interest and penalties associated with unrecognized tax benefits at December 31, 2015, 2014 and 2013, respectively. In the U.S., with the exception of ACS, we are no longer subject to U.S. federal income tax examinations for years before 2009. ACS is no longer subject to such examinations for years before 2005. With respect to our major foreign jurisdictions, we are no longer subject to tax examinations by tax authorities for years before 2007. Deferred Income Taxes We have not provided deferred taxes on approximately $9.0 billion of undistributed earnings of foreign subsidiaries and other foreign investments carried at equity at December 31, 2015, as such undistributed earnings have been determined to be indefinitely reinvested and we currently do not plan to initiate any action that would precipitate a deferred tax impact. We do not believe it is practical to calculate the potential deferred tax impact, as there is a significant amount of uncertainty with respect to determining the amount of foreign tax credits as well as any additional local withholding tax and other indirect tax consequences that may arise from the distribution of these earnings. In addition, because such earnings have been indefinitely reinvested in our foreign operations, repatriation would require liquidation of those investments or a recapitalization of our foreign subsidiaries, the impacts and effects of which are not readily determinable. Xerox 2015 Annual Report 116 The tax effects of temporary differences that give rise to significant portions of the deferred taxes were as follows: Deferred Tax Assets Research and development Post-retirement medical benefits Net operating losses Operating reserves, accruals and deferrals Tax credit carryforwards Deferred compensation Pension Other Subtotal Valuation allowance Total Deferred Tax Liabilities Unearned income and installment sales Intangibles and goodwill Other Total Total Deferred Taxes, Net December 31, 2015 2014 $ 377 311 415 351 678 247 563 138 3,080 (410) 2,670 $ $ 928 972 116 2,016 $ 475 341 531 318 579 286 672 177 3,379 (538) 2,841 883 1,161 160 2,204 654 $ 637 $ $ $ $ $ As discussed in Note 1 - Basis of Presentation and Summary of Significant Accounting Policies, we early adopted ASU 2015-17, Income Taxes: Balance Sheet Classification of Deferred Taxes, which requires that deferred tax liabilities and assets be classified as non-current in a classified statement of financial position. Adoption of this update resulted in a reclassification of our net current deferred tax asset and liabilities to the net non-current deferred tax asset and liabilities in our Consolidated Balance Sheet as of December 31, 2015. Prior periods were not retrospectively adjusted. The deferred tax assets for the respective periods were assessed for recoverability and, where applicable, a valuation allowance was recorded to reduce the total deferred tax asset to an amount that will, more-likely-than-not, be realized in the future. The net change in the total valuation allowance for the years ended December 31, 2015 and 2014 was a decrease of $128 and $76, respectively. The valuation allowance relates primarily to certain net operating loss carryforwards, tax credit carryforwards and deductible temporary differences for which we have concluded it is more-likely-than-not that these items will not be realized in the ordinary course of operations. Although realization is not assured, we have concluded that it is more-likely-than-not that the deferred tax assets, for which a valuation allowance was determined to be unnecessary, will be realized in the ordinary course of operations based on the available positive and negative evidence, including scheduling of deferred tax liabilities and projected income from operating activities. The amount of the net deferred tax assets considered realizable, however, could be reduced in the near term if actual future income or income tax rates are lower than estimated, or if there are differences in the timing or amount of future reversals of existing taxable or deductible temporary differences. At December 31, 2015, we had tax credit carryforwards of $678 available to offset future income taxes, of which $97 are available to carryforward indefinitely while the remaining $581 will expire 2016 through 2036 if not utilized. We also had net operating loss carryforwards for income tax purposes of $1.1 billion that will expire 2016 through 2036, if not utilized, and $1.6 billion available to offset future taxable income indefinitely. 117 Note 18 – Contingencies and Litigation As more fully discussed below, we are involved in a variety of claims, lawsuits, investigations and proceedings concerning: securities law; governmental entity contracting, servicing and procurement law; intellectual property law; environmental law; employment law; the Employee Retirement Income Security Act (ERISA); and other laws and regulations. We determine whether an estimated loss from a contingency should be accrued by assessing whether a loss is deemed probable and can be reasonably estimated. We assess our potential liability by analyzing our litigation and regulatory matters using available information. We develop our views on estimated losses in consultation with outside counsel handling our defense in these matters, which involves an analysis of potential results, assuming a combination of litigation and settlement strategies. Should developments in any of these matters cause a change in our determination as to an unfavorable outcome and result in the need to recognize a material accrual, or should any of these matters result in a final adverse judgment or be settled for significant amounts, they could have a material adverse effect on our results of operations, cash flows and financial position in the period or periods in which such change in determination, judgment or settlement occurs. Additionally, guarantees, indemnifications and claims arise during the ordinary course of business from relationships with suppliers, customers and nonconsolidated affiliates when the Company undertakes an obligation to guarantee the performance of others if specified triggering events occur. Nonperformance under a contract could trigger an obligation of the Company. These potential claims include actions based upon alleged exposures to products, real estate, intellectual property such as patents, environmental matters, and other indemnifications. The ultimate effect on future financial results is not subject to reasonable estimation because considerable uncertainty exists as to the final outcome of these claims. However, while the ultimate liabilities resulting from such claims may be significant to results of operations in the period recognized, management does not anticipate they will have a material adverse effect on the Company's consolidated financial position or liquidity. As of December 31, 2015, we have accrued our estimate of liability incurred under our indemnification arrangements and guarantees. Brazil Tax and Labor Contingencies Our Brazilian operations are involved in various litigation matters and have received or been the subject of numerous governmental assessments related to indirect and other taxes, as well as disputes associated with former employees and contract labor. The tax matters, which comprise a significant portion of the total contingencies, principally relate to claims for taxes on the internal transfer of inventory, municipal service taxes on rentals and gross revenue taxes. We are disputing these tax matters and intend to vigorously defend our positions. Based on the opinion of legal counsel and current reserves for those matters deemed probable of loss, we do not believe that the ultimate resolution of these matters will materially impact our results of operations, financial position or cash flows. The labor matters principally relate to claims made by former employees and contract labor for the equivalent payment of all social security and other related labor benefits, as well as consequential tax claims, as if they were regular employees. As of December 31, 2015, the total amounts related to the unreserved portion of the tax and labor contingencies, inclusive of related interest, amounted to approximately $577 with the decrease from December 31, 2014 balance of approximately $817, primarily related to currency and closed cases partially offset by interest. With respect to the unreserved balance of $577, the majority has been assessed by management as being remote as to the likelihood of ultimately resulting in a loss to the Company. In connection with the above proceedings, customary local regulations may require us to make escrow cash deposits or post other security of up to half of the total amount in dispute. As of December 31, 2015 we had $71 of escrow cash deposits for matters we are disputing, and there are liens on certain Brazilian assets with a net book value of $14 and additional letters of credit and surety bonds of approximately $129 and $80,respectively, which include associated indexation. Generally, any escrowed amounts would be refundable and any liens would be removed to the extent the matters are resolved in our favor. We routinely assess all these matters as to probability of ultimately incurring a liability against our Brazilian operations and record our best estimate of the ultimate loss in situations where we assess the likelihood of an ultimate loss as probable. Litigation Against the Company State of Texas v. Xerox Corporation, Xerox State Healthcare, LLC, and ACS State Healthcare, LLC, a Xerox Corporation: On May 9, 2014, the State of Texas, via the Texas Office of Attorney General (the “State”), filed a lawsuit in the 53rd Judicial District Court of Travis County, Texas. The lawsuit alleges that Xerox Corporation, Xerox State Healthcare, LLC and ACS State Healthcare (collectively “Xerox” or the "Company”) violated the Texas Medicaid Fraud Prevention Act in the administration of its contract with the Texas Department of Health and Human Xerox 2015 Annual Report 118 Services (“HHSC”). The State alleges that the Company made false representations of material facts regarding the processes, procedures, implementation and results regarding the prior authorization of orthodontic claims. The State seeks recovery of actual damages, two times the amount of any overpayments made as a result of unlawful acts, civil penalties, pre- and post-judgment interest and all costs and attorneys’ fees. The State references the amount in controversy as exceeding hundreds of millions of dollars. Xerox filed its Answer in June, 2014 denying all allegations. Xerox will continue to vigorously defend itself in this matter. We do not believe it is probable that we will incur a material loss in excess of the amount accrued for this matter. In the course of litigation, we periodically engage in discussions with plaintiff’s counsel for possible resolution of the matter. Should developments cause a change in our determination as to an unfavorable outcome, or result in a final adverse judgment or settlement for a significant amount, there could be a material adverse effect on our results of operations, cash flows and financial position in the period in which such change in determination, judgment or settlement occurs. Other Matters: On January 5, 2016, the Consumer Financial Protection Bureau (CFPB) notified Xerox Education Services, Inc. (XES) that, in accordance with the CFPB’s discretionary Notice and Opportunity to Respond and Advise (NORA) process, the CFPB’s Office of Enforcement is considering recommending that the CFPB take legal action against XES, alleging that XES violated the Consumer Financial Protection Act’s prohibition of unfair practices. Should the CFPB commence an action, it may seek restitution, civil monetary penalties, injunctive relief, or other corrective action. The purpose of a NORA letter is to provide a party being investigated an opportunity to present its position to the CFPB before an enforcement action is recommended or commenced. This notice stems from an inquiry that commenced in 2014 when the Company, through XES, received and responded to a Civil Investigative Demand containing a broad request for information. During this process, XES self-disclosed to the Department of Education and the CFPB certain adjustments it had become aware that had not been timely made relating to its servicing of a small percentage of third-party student loans under outsourcing arrangements for various financial institutions. The CFPB and the Department of Education, as well as certain state’s attorney general offices and other regulatory agencies, began similar reviews. The Company has cooperated and continues to fully cooperate with all regulatory agencies, and XES has submitted its NORA response. The Company cannot provide assurance that the CFPB or another party will not ultimately commence a legal action against XES in this matter nor is the Company able to predict the likely outcome of the investigations into this matter. Guarantees, Indemnifications and Warranty Liabilities Indemnifications Provided as Part of Contracts and Agreements Acquisitions/Divestitures: We have indemnified, subject to certain deductibles and limits, the purchasers of businesses or divested assets for the occurrence of specified events under certain of our divestiture agreements. In addition, we customarily agree to hold the other party harmless against losses arising from a breach of representations and covenants, including such matters as adequate title to assets sold, intellectual property rights, specified environmental matters and certain income taxes arising prior to the date of acquisition. Where appropriate, an obligation for such indemnifications is recorded as a liability at the time of the acquisition or divestiture. Since the obligated amounts of these types of indemnifications are often not explicitly stated and/or are contingent on the occurrence of future events, the overall maximum amount of the obligation under such indemnifications cannot be reasonably estimated. Other than obligations recorded as liabilities at the time of divestiture, we have not historically made significant payments for these indemnifications. Additionally, under certain of our acquisition agreements, we have provided for additional consideration to be paid to the sellers if established financial targets are achieved post-closing. We have recognized liabilities for these contingent obligations based on an estimate of the fair value of these contingencies at the time of acquisition. Contingent obligations related to indemnifications arising from our divestitures and contingent consideration provided for by our acquisitions are not expected to be material to our financial position, results of operations or cash flows. Other Agreements: We are also party to the following types of agreements pursuant to which we may be obligated to indemnify the other party with respect to certain matters: • Guarantees on behalf of our subsidiaries with respect to real estate leases. These lease guarantees may remain in effect subsequent to the sale of the subsidiary. 119 • Agreements to indemnify various service providers, trustees and bank agents from any third-party claims related to their performance on our behalf, with the exception of claims that result from third-party's own willful misconduct or gross negligence. • Guarantees of our performance in certain sales and services contracts to our customers and indirectly the performance of third parties with whom we have subcontracted for their services. This includes indemnifications to customers for losses that may be sustained as a result of the use of our equipment at a customer's location. In each of these circumstances, our payment is conditioned on the other party making a claim pursuant to the procedures specified in the particular contract and such procedures also typically allow us to challenge the other party's claims. In the case of lease guarantees, we may contest the liabilities asserted under the lease. Further, our obligations under these agreements and guarantees may be limited in terms of time and/or amount, and in some instances, we may have recourse against third parties for certain payments we made. Patent Indemnifications In most sales transactions to resellers of our products, we indemnify against possible claims of patent infringement caused by our products or solutions. In addition, we indemnify certain software providers against claims that may arise as a result of our use or our subsidiaries', customers' or resellers' use of their software in our products and solutions. These indemnities usually do not include limits on the claims, provided the claim is made pursuant to the procedures required in the sales contract. Indemnification of Officers and Directors Our corporate by-laws require that, except to the extent expressly prohibited by law, we must indemnify Xerox Corporation's officers and directors against judgments, fines, penalties and amounts paid in settlement, including legal fees and all appeals, incurred in connection with civil or criminal action or proceedings, as it relates to their services to Xerox Corporation and our subsidiaries. Although the by-laws provide no limit on the amount of indemnification, we may have recourse against our insurance carriers for certain payments made by us. However, certain indemnification payments (such as those related to "clawback" provisions in certain compensation arrangements) may not be covered under our directors' and officers' insurance coverage. We also indemnify certain fiduciaries of our employee benefit plans for liabilities incurred in their service as fiduciary whether or not they are officers of the Company. Finally, in connection with our acquisition of businesses, we may become contractually obligated to indemnify certain former and current directors, officers and employees of those businesses in accordance with pre-acquisition by-laws and/or indemnification agreements and/or applicable state law. Product Warranty Liabilities In connection with our normal sales of equipment, including those under sales-type leases, we generally do not issue product warranties. Our arrangements typically involve a separate full service maintenance agreement with the customer. The agreements generally extend over a period equivalent to the lease term or the expected useful life of the equipment under a cash sale. The service agreements involve the payment of fees in return for our performance of repairs and maintenance. As a consequence, we do not have any significant product warranty obligations, including any obligations under customer satisfaction programs. In a few circumstances, particularly in certain cash sales, we may issue a limited product warranty if negotiated by the customer. We also issue warranties for certain of our entry level products, where full service maintenance agreements are not available. In these instances, we record warranty obligations at the time of the sale. Aggregate product warranty liability expenses for the three years ended December 31, 2015 were $22, $25 and $28, respectively. Total product warranty liabilities as of December 31, 2015 and 2014 were $9 and $11, respectively. Other Contingencies We have issued or provided the following guarantees as of December 31, 2015: • • $784 for letters of credit issued to i) guarantee our performance under certain services contracts; ii) support certain insurance programs; and iii) support our obligations related to the Brazil tax and labor contingencies. $362 for outstanding surety bonds. Certain contracts, primarily those involving public sector customers, require us to provide a surety bond as a guarantee of our performance of contractual obligations. In general, we would only be liable for the amount of these guarantees in the event of default in our performance of our obligations under each contract; the probability of which we believe is remote. We believe that our capacity in the surety markets as well as under various credit arrangements (including our Credit Facility) is sufficient to allow us to respond to future requests for proposals that require such credit support. Xerox 2015 Annual Report 120 We have service arrangements where we service third-party student loans in the Federal Family Education Loan program (FFEL) on behalf of various financial institutions. We service these loans for investors under outsourcing arrangements and do not acquire any servicing rights that are transferable by us to a third-party. At December 31, 2015, we serviced a FFEL portfolio of approximately 1.9 million loans with an outstanding principal balance of approximately $28.7 billion. Some servicing agreements contain provisions that, under certain circumstances, require us to purchase the loans from the investor if the loan guaranty has been permanently terminated as a result of a loan default caused by our servicing error. If defaults caused by us are cured during an initial period, any obligation we may have to purchase these loans expires. Loans that we purchase may be subsequently cured, the guaranty reinstated and the loans repackaged for sale to third parties. We evaluate our exposure under our purchase obligations on defaulted loans and establish a reserve for potential losses, or default liability reserve, through a charge to the provision for loss on defaulted loans purchased. The reserve is evaluated periodically and adjusted based upon management’s analysis of the historical performance of the defaulted loans. As of December 31, 2015, other current liabilities include reserves which we believe to be adequate. At December 31, 2015, other current liabilities include reserves of approximately $4 for losses on defaulted loans purchased. In addition to potential purchase obligations arising from servicing errors, various laws and regulations applicable to student loan borrowers could give rise to fines, penalties and other liabilities associated with loan servicing errors. Note 19 - Preferred Stock Series A Convertible Preferred Stock We have issued 300,000 shares of Series A convertible perpetual preferred stock with an aggregate liquidation preference of $300 and an initial fair value of $349. The convertible preferred stock pays quarterly cash dividends at a rate of 8% per year ($24 per year). Each share of convertible preferred stock is convertible at any time, at the option of the holder, into 89.8876 shares of common stock for a total of 26,966 thousand shares (reflecting an initial conversion price of approximately $11.125 per share of common stock), subject to customary anti-dilution adjustments. If the closing price of our common stock exceeds 130% of the then applicable conversion price (currently $11.125 per share of common stock) for 20 out of 30 trading days, we have the right to cause any or all of the convertible preferred stock to be converted into shares of common stock at the then applicable conversion rate. The convertible preferred stock is also convertible, at the option of the holder, upon a change in control, at the applicable conversion rate plus an additional number of shares determined by reference to the price paid for our common stock upon such change in control. In addition, upon the occurrence of certain fundamental change events, including a change in control or the delisting of Xerox's common stock, the holder of convertible preferred stock has the right to require us to redeem any or all of the convertible preferred stock in cash at a redemption price per share equal to the liquidation preference and any accrued and unpaid dividends to, but not including, the redemption date. The convertible preferred stock is classified as temporary equity (i.e., apart from permanent equity) as a result of the contingent redemption feature. Note 20 – Shareholders’ Equity Preferred Stock As of December 31, 2015, we had one class of preferred stock outstanding. See Note 19 - Preferred Stock for further information. We are authorized to issue approximately 22 million shares of cumulative preferred stock, $1.00 par value per share. Common Stock We have 1.75 billion authorized shares of common stock, $1.00 par value per share. At December 31, 2015, 102 million shares were reserved for issuance under our incentive compensation plans, 48 million shares were reserved for debt to equity exchanges and 27 million shares were reserved for conversion of the Series A convertible preferred stock. Treasury Stock We account for the repurchased common stock under the cost method and include such treasury stock as a component of our common shareholder's equity. Retirement of treasury stock is recorded as a reduction of Common stock and Additional paid-in capital at the time such retirement is approved by our Board of Directors. The following provides cumulative information relating to our share repurchase programs from their inception in October 2005 through December 31, 2015 (shares in thousands): 121 Authorized share repurchase programs Share repurchase cost Share repurchase fees Number of shares repurchased $ $ $ 8,000 7,755 12 695,230 Of the cumulative $8.0 billion of share repurchase authority previously granted by our Board of Directors, approximately $245 million of that authority remained available as of December 31, 2015. The following table reflects the changes in Common and Treasury stock shares (shares in thousands): Balance at December 31, 2012 Stock based compensation plans, net Acquisition of Treasury stock Cancellation of Treasury stock Conversion of 2014 9% Notes Balance at December 31, 2013 Stock based compensation plans, net Acquisition of Treasury stock Cancellation of Treasury stock Conversion of 2014 9% Notes Balance at December 31, 2014 Stock based compensation plans, net Acquisition of Treasury stock Cancellation of Treasury stock Balance at December 31, 2015 Stock-Based Compensation Common Stock Shares Treasury Stock Shares 1,238,696 28,731 — (58,102) 996 1,210,321 13,965 — (100,928) 996 1,124,354 11,292 — (122,810) 1,012,836 14,924 — 65,179 (58,102) — 22,001 — 86,536 (100,928) — 7,609 — 115,201 (122,810) — We have a long-term incentive plan whereby eligible employees may be granted restricted stock units (RSUs), performance shares (PSs) and non-qualified stock options. We grant stock-based awards in order to continue to attract and retain employees and to better align employees' interests with those of our shareholders. Each of these awards is subject to settlement with newly issued shares of our common stock. At December 31, 2015 and 2014, 43 million and 50 million shares, respectively, were available for grant of awards. Stock-based compensation expense was as follows: Stock-based compensation expense, pre-tax $ Income tax benefit recognized in earnings 2015 Year Ended December 31, 2014 2013 $ 46 17 $ 91 35 90 34 Restricted Stock Units: Compensation expense is based upon the grant date market price. The compensation expense is recorded over the vesting period, which is normally three years from the date of grant, based on management's estimate of the number of shares expected to vest. Performance Shares: Prior to 2014, we granted officers and selected executives PSs that vest contingent upon meeting pre-determined Revenue, Earnings per Share (EPS) and Cash Flow from Operations targets. If the annual actual results for Revenue exceed the stated targets and if the cumulative three-year actual results for EPS and Cash Flow from Operations exceed the stated targets, then the plan participants have the potential to earn additional shares of common stock. This overachievement cannot exceed 50% of the original grant. Xerox 2015 Annual Report 122 Commencing in 2014, we expanded the PS program to include those employees who had previously been awarded RSUs, and modified the program to remove the annual performance component. All PSs granted in 2014 will vest contingent upon meeting cumulative goals for Revenue, EPS and Cash Flow from Operations over a three-year performance period. As before, if actual results exceed the stated targets, then the participants have the potential to earn additional shares of common stock: a maximum overachievement of 50% of the original grant for officers and selected executives and a maximum of 25% of the original grant for all other participants. All PSs entitle the holder to one share of common stock, payable after a three-year service period and the attainment of the stated goals. In 2015, the maximum overachievement that can be earned was changed to 100% (from 50%) for officers and selected executives. All other terms of the awards remain unchanged. The fair value of PSs is based upon the market price of our stock on the date of the grant. Compensation expense is recognized over the vesting period, which is normally three years from the date of grant, based on management's estimate of the number of shares expected to vest. If the stated targets are not met, any recognized compensation cost would be reversed. Employee Stock Options: With the exception of the conversion of ACS options in connection with the ACS acquisition in 2010, we have not issued any new stock options associated with our employee long-term incentive plan since 2004. All stock options previously issued under our employee long-term incentive plan were fully exercised, cancelled or expired as of December 31, 2013. There were 3,119 thousand and 6,115 thousand ACS options outstanding at December 31, 2015 and 2014, respectively. The ACS options at December 31, 2015 generally expire within the next 2 years. Summary of Stock-based Compensation Activity (shares in thousands) Shares 2015 2014 2013 Weighted Average Grant Date Fair Value Shares Weighted Average Grant Date Fair Value Shares Weighted Average Grant Date Fair Value Restricted Stock Units Outstanding at January 1 Granted Vested Cancelled Outstanding at December 31 Performance Shares Outstanding at January 1 Granted Vested Cancelled Outstanding at December 31 12,197 $ 798 (10,191) (414) 2,390 20,721 $ 9,470 (3,268) (3,717) 23,206 Stock Options Outstanding at January 1 6,115 $ Granted Canceled/expired Exercised Outstanding at December 31 Exercisable at December 31 — (405) (2,591) 3,119 3,119 9.50 11.08 7.86 9.27 11.05 11.36 10.68 7.90 10.74 11.67 7.00 — 7.43 7.09 6.87 6.87 19,079 $ 926 (6,934) (874) 12,197 8,058 $ 16,967 (2,404) (1,900) 20,721 14,199 $ — (215) (7,869) 6,115 6,115 9.62 12.30 10.33 8.55 9.50 9.15 12.28 10.68 11.07 11.36 6.95 — 6.95 6.92 7.00 7.00 30,414 $ 610 (9,992) (1,953) 19,079 14,536 $ 1,839 (6,817) (1,500) 8,058 33,732 $ — (1,298) (18,235) 14,199 12,164 9.19 9.09 8.43 8.77 9.62 8.74 7.97 8.03 8.82 9.15 6.86 — 6.53 6.82 6.95 7.06 In 2013, we deferred the annual grant of RSUs and PSs from July 1, 2013 to January 1, 2014. RSUs granted in 2013 represent off-cycle awards while PSs granted in 2013 represent over-achievement shares associated with the 2010 PSs grant, which vested in 2013. On January 1, 2014, we granted 8,395 thousand PSs with a grant date fair value of $12.17 per share (the deferral of the 2013 annual grant) and on July 1, 2014, we granted 8,518 thousand PSs with a grant date fair value of $12.38 per share (the 2014 annual grant). 123 The total unrecognized compensation cost related to non-vested stock-based awards at December 31, 2015 was as follows: Awards Restricted Stock Units Performance Shares Total Unrecognized Compensation Remaining Weighted- Average Vesting Period (Years) $ $ 10 82 92 2.0 1.9 25 247 December 31, 2015 $ The aggregate intrinsic value of outstanding RSUs and PSs awards was as follows: Awards Restricted Stock Units Performance Shares Information related to stock options outstanding and exercisable at December 31, 2015 was as follows: Aggregate intrinsic value Weighted-average remaining contractual life (years) Options Outstanding Exercisable $ 12 $ 2.15 12 2.15 The total intrinsic value and actual tax benefit realized for vested and exercised stock-based awards was as follows: December 31, 2015 December 31, 2014 December 31, 2013 Awards Total Intrinsic Value Cash Received Tax Benefit Total Intrinsic Value Cash Received Tax Benefit Total Intrinsic Value Cash Received Tax Benefit Restricted Stock Units $ 109 $ — $ Performance Shares Stock Options 35 14 — 19 $ 33 12 5 85 30 42 $ — $ — 55 $ 26 10 15 91 62 51 $ — $ — 124 30 22 19 Xerox 2015 Annual Report 124 Note 21 – Other Comprehensive (Loss) Income Other Comprehensive (Loss) Income is comprised of the following: Translation Adjustments Losses $ (660) $ (660) $ (736) $ (734) $ (194) $ (185) Year Ended December 31, 2015 2014 2013 Pre-tax Net of Tax Pre-tax Net of Tax Pre-tax Net of Tax Unrealized Gains (Losses): Changes in fair value of cash flow hedges gains (losses) Changes in cash flow hedges reclassed to earnings(1) Other (losses) gains Net Unrealized Gains Defined Benefit Plans (Losses) Gains Net actuarial/prior service (losses) gains Prior service amortization/curtailment(2) Actuarial loss amortization/settlement(2) Fuji Xerox changes in defined benefit plans, net(3) Other gains (losses)(4) Changes in Defined Benefit Plans Gains (Losses) 13 28 (3) 38 (73) (38) 186 21 116 212 12 13 (2) 23 (86) (23) 126 21 115 153 (20) 36 (1) 15 (1,291) (46) 121 40 106 (10) 26 (1) 15 (861) (29) 83 40 105 (1,070) (662) Other Comprehensive (Loss) Income (410) (484) (1,791) (1,381) (126) (89) 123 3 — 729 (45) 260 23 (17) 950 756 (1) 86 3 — 483 (29) 172 23 (17) 632 447 (1) Less: Other comprehensive loss attributable to noncontrolling interests Other Comprehensive (Loss) Income Attributable to Xerox _____________________________ (1) (1) (1) (1) $ (409) $ (483) $ (1,790) $ (1,380) $ 757 $ 448 (1) Reclassified to Cost of sales - refer to Note 14 - Financial Instruments for additional information regarding our cash flow hedges. (2) Reclassified to Total Net Periodic Benefit Cost - refer to Note 16 - Employee Benefit Plans for additional information. (3) Represents our share of Fuji Xerox's benefit plan changes. (4) Primarily represents currency impact on cumulative amount of benefit plan net actuarial losses and prior service credits in AOCL. Accumulated Other Comprehensive Loss (AOCL) AOCL is comprised of the following: Cumulative translation adjustments Other unrealized gains (losses), net Benefit plans net actuarial losses and prior service credits(1) Total Accumulated Other Comprehensive Loss Attributable to Xerox _____________________________ (1) Includes our share of Fuji Xerox. December 31, 2015 2014 2013 $ $ (2,402) $ (1,743) $ 1 (2,241) (4,642) $ (22) (2,394) (4,159) $ (1,010) (37) (1,732) (2,779) 125 Note 22 – Earnings per Share The following table sets forth the computation of basic and diluted earnings per share of common stock (shares in thousands): Basic Earnings per Share: Net income from continuing operations attributable to Xerox Accrued dividends on preferred stock Net Income From Continuing Operations Available to Common Shareholders Net (loss) income from discontinued operations attributable to Xerox Adjusted Net Income Available to Common Shareholders Weighted-average common shares outstanding Basic Earnings (Loss) per Share: Continuing operations Discontinued operations Basic Earnings per Share Diluted Earnings per Share: Net income from continuing operations attributable to Xerox Accrued dividends on preferred stock Interest on Convertible Securities, net Adjusted Net Income From Continuing Operations Available to Common Shareholders Net (loss) income from discontinued operations attributable to Xerox Adjusted Net Income Available to Common Shareholders Weighted-average common shares outstanding Common shares issuable with respect to: Stock options Restricted stock and performance shares Convertible preferred stock Convertible securities Adjusted Weighted Average Common Shares Outstanding Diluted Earnings (Loss) per Share: Continuing operations Discontinued operations Diluted Earnings per Share Year Ended December 31, 2015 2014 2013 552 $ (24) 528 $ (78) 450 $ 1,128 $ (24) 1,104 $ (115) 989 $ 1,139 (24) 1,115 20 1,135 1,064,526 1,154,365 1,225,486 0.50 $ (0.08) 0.42 $ 0.96 $ (0.10) 0.86 $ 0.91 0.02 0.93 552 $ 1,128 $ 1,139 (24) — 528 $ (78) 450 $ — — 1,128 $ (115) 1,013 $ — 1 1,140 20 1,160 1,064,526 1,154,365 1,225,486 1,294 10,404 — — 2,976 14,256 26,966 — 5,401 13,931 26,966 1,743 1,076,224 1,198,563 1,273,527 0.49 $ (0.07) 0.42 $ 0.94 $ (0.09) 0.85 $ 0.89 0.02 0.91 $ $ $ $ $ $ $ $ $ $ The following securities were not included in the computation of diluted earnings per share as they were either contingently issuable shares or shares that if included would have been anti-dilutive (shares in thousands): Stock Options Restricted stock and performance shares Convertible preferred stock Total Securities 1,825 17,607 26,966 46,398 3,139 17,987 — 21,126 8,798 12,411 — 21,209 Dividends per Common Share $ 0.28 $ 0.25 $ 0.23 Xerox 2015 Annual Report 126 Note 23 – Subsequent Event Planned Company Separation On January 29, 2016, Xerox announced that its Board of Directors had approved management’s plan to separate the Company's Business Process Outsourcing business from its Document Technology and Document Outsourcing business. Each of the businesses will operate as an independent, publicly-traded company. Leadership and names of the two companies will be determined as the process progresses. The transaction is intended to be tax-free for Xerox shareholders for federal income tax purposes. Xerox will begin the process to separate while we finalize the transaction structure. Our objective is to complete the separation by year-end 2016, subject to customary regulatory approvals, the effectiveness of a Form 10 filing with the U.S. Securities and Exchange Commission, tax considerations, securing any necessary financing, and final approval of the Xerox Board of Directors. Until the separation is complete, we will continue to operate and report as a single company. 127 QUARTERLY RESULTS OF OPERATIONS (Unaudited) (in millions, except per-share data) 2015 Revenues Costs and Expenses Income (Loss) before Income Taxes and Equity Income Income tax expense (benefit) Equity in net income of unconsolidated affiliates Income (Loss) from Continuing Operations Income (loss) from discontinued operations, net of tax Net Income (Loss) Less: Net income - noncontrolling interests Net Income (Loss) Attributable to Xerox Basic Earnings (Loss) per Share(2): Continuing operations Discontinued operations Total Basic Earnings (Loss) per Share Diluted Earnings (Loss) per Share(2): Continuing operations Discontinued operations Total Diluted Earnings (Loss) per Share 2014 (1) Revenues Costs and Expenses Income before Income Taxes and Equity Income Income tax expense Equity in net income of unconsolidated affiliates Income from Continuing Operations Income (loss) from discontinued operations, net of tax Net Income Less: Net income - noncontrolling interests Net Income Attributable to Xerox Basic Earnings per Share(2): Continuing operations Discontinued operations Total Basic Earnings per Share: Diluted Earnings per Share(2): Continuing operations Discontinued operations Total Diluted Earnings per Share _________________ First Quarter Second Quarter Third Quarter Fourth Quarter Full Year $ 4,469 $ 4,590 $ 4,333 $ 4,653 $ 18,045 4,268 4,516 4,506 201 39 34 196 34 230 5 74 (9) 29 112 (95) 17 5 (173) (105) 40 (28) (3) (31) 3 4,343 310 52 32 290 (14) 276 5 225 $ 12 $ (34) $ 271 $ 0.17 $ 0.09 $ (0.04) $ 0.03 (0.08) — 0.28 (0.02) 0.20 $ 0.01 $ (0.04) $ 0.26 $ 0.16 $ 0.09 $ (0.04) $ 0.03 (0.08) — 0.27 (0.01) 0.19 $ 0.01 $ (0.04) $ 0.26 $ 17,633 412 (23) 135 570 (78) 492 18 474 0.50 (0.08) 0.42 0.49 (0.07) 0.42 4,771 $ 4,941 $ 4,795 $ 5,033 $ 19,540 4,500 271 42 42 271 15 286 5 4,640 301 73 33 261 11 272 6 4,509 286 66 44 264 8 272 6 4,685 348 34 41 355 (149) 206 6 18,334 1,206 215 160 1,151 (115) 1,036 23 281 $ 266 $ 266 $ 200 $ 1,013 0.22 $ 0.21 $ 0.22 $ 0.30 $ 0.01 0.01 0.01 (0.13) 0.23 $ 0.22 $ 0.23 $ 0.17 $ 0.22 $ 0.21 $ 0.21 $ 0.30 $ 0.01 0.01 0.01 (0.13) 0.23 $ 0.22 $ 0.22 $ 0.17 $ 0.96 (0.10) 0.86 0.94 (0.09) 0.85 $ $ $ $ $ $ $ $ $ $ $ (1) Fourth Quarter and Full Year 2014 were revised for a deferred tax liability adjustment related to a change in tax law. Refer to Note 1 - Basis of Presentation and Summary of Significant Accounting Policies in our Consolidated Financial Statements, which is incorporated here by reference, for additional information. (2) The sum of quarterly earnings per share may differ from the full-year amounts due to rounding, or in the case of diluted earnings per share, because securities that are anti-dilutive in certain quarters may not be anti-dilutive on a full-year basis. Xerox 2015 Annual Report 128 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None ITEM 9A. CONTROLS AND PROCEDURES Management's Responsibility for Financial Statements Our management is responsible for the integrity and objectivity of all information presented in this annual report. The consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States of America and include amounts based on management's best estimates and judgments. Management believes the consolidated financial statements fairly reflect the form and substance of transactions and that the financial statements fairly represent the Company's financial position and results of operations. The Audit Committee of the Board of Directors, which is composed solely of independent directors, meets regularly with the independent auditors, PricewaterhouseCoopers LLP, the internal auditors and representatives of management to review accounting, financial reporting, internal control and audit matters, as well as the nature and extent of the audit effort. The Audit Committee is responsible for the engagement of the independent auditors. The independent auditors and internal auditors have access to the Audit Committee. Disclosure Controls and Procedures The Company’s management evaluated, with the participation of our principal executive officer and principal financial officer, or persons performing similar functions, the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and principal financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure that information we are required to disclose in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms relating to Xerox Corporation, including our consolidated subsidiaries, and was accumulated and communicated to the Company’s management, including the principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Management's Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the rules promulgated under the Securities Exchange Act of 1934. Under the supervision and with the participation of our management, including our principal executive, financial and accounting officers, we have conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in “Internal Control - Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the above evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2015. The effectiveness of our internal control over financial reporting as of December 31, 2015 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears in Part II, Item 8 of this Form 10-K. Changes in Internal Control over Financial Reporting In connection with the evaluation required by paragraph (d) of Rule 13a-15 under the Exchange Act, there was no change identified in our internal control over financial reporting that occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. ITEM 9B. OTHER INFORMATION None 129 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information regarding directors is incorporated herein by reference to the section entitled “Proposal 1 - Election of Directors” in our definitive Proxy Statement (2016 Proxy Statement) to be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, for our Annual Meeting of Stockholders to be held on May 20, 2016. The Proxy Statement will be filed within 120 days after the end of our fiscal year ended December 31, 2015. The information regarding compliance with Section 16(a) of the Securities and Exchange Act of 1934 is incorporated herein by reference to the section entitled “Section 16(a) Beneficial Ownership Reporting Compliance” of our 2016 Proxy Statement. The information regarding the Audit Committee, its members and the Audit Committee financial experts is incorporated by reference herein from the subsection entitled “Committee Functions, Membership and Meetings” in the section entitled “Proposal 1 - Election of Directors” in our 2016 Proxy Statement. We have adopted a code of ethics applicable to our principal executive officer, principal financial officer and principal accounting officer. The Finance Code of Conduct can be found on our website at: http://www.xerox.com/ investor and then clicking on Corporate Governance. Information concerning our Finance Code of Conduct can be found under "Corporate Governance" in our 2016 definitive Proxy Statement and is incorporated here by reference. Executive Officers of Xerox The following is a list of the executive officers of Xerox, their current ages, their present positions and the year appointed to their present positions. Each officer is elected to hold office until the meeting of the Board of Directors held on the day of the next annual meeting of shareholders, subject to the provisions of the By-Laws. Name Ursula M. Burns* James A. Firestone Jeffrey Jacobson Leslie F. Varon Don H. Liu Robert K. Zapfel Darrell L. Ford Herve Tessler Joseph H. Mancini, Jr. Age 57 61 56 59 54 60 51 52 57 Present Position Chairman of the Board and Chief Executive Officer Executive Vice President; President, Corporate Strategy & Asia Operations Executive Vice President; President, Technology Business Vice President and Interim Chief Financial Officer Executive Vice President, General Counsel and Secretary Executive Vice President; President, Services Business Senior Vice President, Chief Human Resources Officer Senior Vice President, President, Corporate Operations Vice President and Chief Accounting Officer * Member of Xerox Board of Directors Year Appointed to Present Position 2010 2014 2014 2015 2007 2014 2015 2014 2013 Xerox Officer Since 1997 1998 2012 2001 2007 2014 2015 2010 2010 Each officer named above, with the exception of Jeffrey Jacobson, Robert Zapfel and Darrell L. Ford, has been an officer or an executive of Xerox or its subsidiaries for at least the past five years. Prior to joining Xerox in 2012, Mr. Jacobson was the Chairman, President and CEO of Presstek, Inc. from 2007 to 2012. Prior to that, he was a Corporate Vice President and the Chief Operating Officer - Graphic Communications Group, of the Eastman Kodak Company from 2005 to 2007 and before that held various senior leadership positions with Kodak Polychrome Graphics from 1998 to 2005. Xerox 2015 Annual Report 130 Prior to joining Xerox in 2014, Mr. Zapfel was General Manager, North America, Global Technology Services, at International Business Machines Corp. (IBM) from 2011 to 2013. Mr. Zapfel is a 35-year veteran of IBM who held a host of senior leadership positions in Services, including head of IBM’s Global Technology Services business for the Americas, head of its Global Delivery organization, and head of Strategy. He also ran the Travel and Transportation and Financial Services verticals, as well as the services operations in Latin America. In addition, he ran IBM’s global financing unit. Mr. Ford joined Xerox from Advanced Micro Devices (AMD), where he was Senior Vice President and Chief Human Resources Officer since 2012. Prior to joining AMD, Mr. Ford was Vice President, Human Resources for the Retail and Lubricants divisions at Shell Oil. He joined Shell in 2008 from Honeywell International, where he served as Vice President of Corporate Human Resources and led the Center for Organizational Effectiveness. Before Honeywell, Mr. Ford held various leadership positions at AT&T between1997 and 2002. ITEM 11. EXECUTIVE COMPENSATION The information included under the following captions under “Proposal 1-Election of Directors” in our 2016 definitive Proxy Statement is incorporated herein by reference: “Compensation Discussion and Analysis”, “Summary Compensation Table”, “Grants of Plan-Based Awards in 2015”, “Outstanding Equity Awards at 2015 Fiscal Year- End”, “Option Exercises and Stock Vested in 2015”, “Pension Benefits for the 2015 Fiscal Year”, “Nonqualified Deferred Compensation for the 2015 Fiscal Year”, “Potential Payments upon Termination or Change in Control”, “Summary of Director Annual Compensation, "Compensation Committee Interlocks and Insider Participation” and “Compensation Committee”. The information included under the heading “Compensation Committee Report” in our 2016 definitive Proxy Statement is incorporated herein by reference; however, this information shall not be deemed to be “soliciting material” or to be “filed” with the Commission or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Exchange Act of 1934, as amended. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Information regarding security ownership of certain beneficial owners and management and securities authorized for issuance under equity compensation plans is incorporated herein by reference to the subsections entitled “Ownership of Company Securities,” and “Equity Compensation Plan Information” under “Proposal 1- Election of Directors” in our 2016 definitive Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE Information regarding certain relationships and related transactions is incorporated herein by reference to the subsection entitled “Certain Relationships and Related Person Transactions” under “Proposal 1- Election of Directors” in our 2016 definitive Proxy Statement. The information regarding director independence is incorporated herein by reference to the subsections entitled “Corporate Governance” and “Director Independence” in the section entitled “Proposal 1 - Election of Directors” in our 2016 definitive Proxy Statement. ITEM 14. PRINCIPAL AUDITOR FEES AND SERVICES The information regarding principal auditor fees and services is incorporated herein by reference to the section entitled “Proposal 2 - Ratification of Election of Independent Registered Public Accounting Firm” in our 2016 definitive Proxy Statement. 131 PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) (1) Index to Financial Statements and Financial Statement Schedule, incorporated by reference or filed as part of this report: Report of Independent Registered Public Accounting Firm including Report on Financial Statement Schedule; Consolidated Statements of Income for each of the years in the three-year period ended December 31, 2015; Consolidated Statements of Comprehensive (Loss) Income for each of the years in the three-year period ended December 31, 2015; Consolidated Balance Sheets as of December 31, 2015 and 2014; Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2015; Consolidated Statements of Shareholders' Equity for each of the years in the three-year period ended December 31, 2015; Notes to the Consolidated Financial Statements; Schedule II - Valuation and Qualifying Accounts for the three years ended December 31, 2015; and All other schedules are omitted as they are not applicable, or the information required is included in the financial statements or notes thereto. (2) Supplementary Data: Quarterly Results of Operations (unaudited); and Five Years in Review. (3) The exhibits filed herewith or incorporated herein by reference are set forth in the Index of Exhibits included herein. (b) The management contracts or compensatory plans or arrangements listed in the “Index of Exhibits” that are applicable to the executive officers named in the Summary Compensation Table which appears in Registrant's 2016 Proxy Statement or to our directors are preceded by an asterisk (*). Xerox 2015 Annual Report 132 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. XEROX CORPORATION /s/ URSULA M. BURNS Ursula M. Burns Chairman of the Board and Chief Executive Officer February 19, 2016 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. February 19, 2016 Signature Title Chairman of the Board, Chief Executive Officer and Director Vice President and Interim Chief Financial Officer Vice President and Chief Accounting Officer Director Director Director Director Director Director Director Principal Executive Officer: /S/ URSULA M. BURNS Ursula M. Burns Principal Financial Officer: /S/ LESLIE F. VARON Leslie F. Varon Principal Accounting Officer: /S/ JOSEPH H. MANCINI, JR. Joseph H. Mancini, Jr. /S/ RICHARD J. HARRINGTON Richard J. Harrington /S/ WILLIAM CURT HUNTER William Curt Hunter /s/ ROBERT J. KEEGAN Robert J. Keegan /S/ CHARLES PRINCE Charles Prince /S/ ANN N. REESE Ann N. Reese /S/ STEPHEN RUSCKOWSKI Stephen Rusckowski /s/ SARA MARTINEZ TUCKER Sara Martinez Tucker 133 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS For the three years ended December 31, 2015 (in millions) 2015 Allowance for Losses: Accounts Receivable Finance Receivables 2014 Allowance for Losses: Accounts Receivable Finance Receivables 2013 Allowance for Losses: Accounts Receivable Finance Receivables $ $ $ $ $ $ Balance at beginning of period Additions charged to bad debt provision (1) Amounts (credited) charged to other income statement accounts (1) Deductions and other, net of recoveries (2) Balance at end of period 88 $ 131 219 112 154 266 108 170 278 $ $ $ $ $ $ $ $ $ $ 25 28 53 20 33 53 39 81 120 $ 5 — 5 $ $ (3) $ 3 — $ (2) $ 5 3 $ (38) $ (41) (79) $ (41) $ (59) (100) $ (33) $ (102) (135) $ 80 118 198 88 131 219 112 154 266 __________ (1) Bad debt provisions relate to estimated losses due to credit and similar collectibility issues. Other charges (credits) relate to adjustments to reserves necessary to reflect events of non-payment such as customer accommodations and contract terminations. (2) Deductions and other, net of recoveries primarily relates to receivable write-offs, but also includes the impact of foreign currency translation adjustments and recoveries of previously written off receivables. Xerox 2015 Annual Report 134 INDEX OF EXHIBITS Document and Location Restated Certificate of Incorporation of Registrant filed with the Department of State of the State of New York on February 21, 2013. Incorporated by reference to Exhibit 3(a) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2012. See SEC File Number 001-04471. By-Laws of Registrant as amended through December 4, 2015. Indenture dated as of December 1, 1991, between Registrant and Citibank, N.A., as trustee, relating to unlimited amounts of debt securities, which may be issued from time to time by Registrant when and as authorized by or pursuant to a resolution of Registrant's Board of Directors (the “December 1991 Indenture”). Incorporated by reference to Exhibit 4(a) to Registrant's Registration Statement Nos. 33-44597, 33-49177 and 33-54629. See SEC File Number 001-04471. Instrument of Resignation, Appointment and Acceptance dated as of February 1, 2001, among Registrant, Citibank, N.A., as resigning trustee, and Wilmington Trust Company, as successor trustee, relating to the December 1991 Indenture. Incorporated by reference to Exhibit 4(a)(2) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2000 filed on June 7, 2001. See SEC File Number 001-04471. Instrument of Resignation, Appointment and Acceptance dated as of July 30, 2008, among Registrant, Wilmington Trust Company, as prior trustee, Citibank,, N.A. as prior paying agent, registrar and issuing and paying agent, and The Bank of New York Mellon, as successor trustee, relating to the December 1991 Indenture. Incorporated by reference to Exhibit 4(a)(3) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2008. See SEC File Number 001-04471. Indenture, dated as of June 25, 2003, between Registrant and Wells Fargo, as trustee, relating to unlimited amounts of debt securities which may be issued from time to time by Registrant when and as authorized by or pursuant to a resolution of Registrant's Board of Directors (the “June 25, 2003 Indenture”). Incorporated by reference to Exhibit 4.1 to Registrant's Current Report on Form 8-K dated June 25, 2003. See SEC File Number 001-04471. Form of Third Supplemental Indenture, dated as of March 20, 2006, to the June 25, 2003 Indenture. Incorporated by reference to Exhibit 4(b)(6) to Registrant's Current Report on Form 8-K dated March 20, 2006. See SEC File Number 001-04471. Form of Fourth Supplemental Indenture, dated as of August 18, 2006, to the June 25, 2003 Indenture. Incorporated by reference to Exhibit 4(b)(7) to Registrant's Current Report on Form 8-K dated August 18, 2006. See SEC File Number 001-04471. Form of Sixth Supplemental Indenture, dated as of May 17, 2007 to the June 25, 2003 Indenture. Incorporated by reference to Exhibit 4(b)(2) to Registrant's Registration Statement No. 333-142900. See SEC File Number 001-04471. Form of Amended and Restated Credit Agreement dated as of March 18, 2014 between Registrant and the Initial Lenders named therein, Citibank, N.A., as Administrative Agent, and Citigroup Global Markets Inc., J.P. Morgan Securities Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and BNP Paribas Securities Corp. as Joint Lead Arrangers and Joint Bookrunners (the “Credit Agreement”). Incorporated by reference to Exhibit 4(c) to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2014. See SEC File Number 001-04471. Form of Indenture dated as of December 4, 2009 between Xerox Corporation and the Bank of New York Mellon, as trustee, relating to an unlimited amount of senior debt securities. Incorporated by reference to Exhibit 4(b)(5) to Post-Effective Amendment No. 1 to Registrant's Registration Statement No. 333-142900. See SEC File Number 001-04471. Incorporated by reference to Exhibit 4.1 to ACS's Current Report on Form 8-K, filed June 6, 2005. See SEC File Number 001-12665. Instruments with respect to long-term debt where the total amount of securities authorized thereunder does not exceed 10 percent of the total assets of Registrant and its subsidiaries on a consolidated basis have not been filed. Registrant agrees to furnish to the Commission a copy of each such instrument upon request. 3(a) 3(b) 4(a)(1) 4(a)(2) 4(a)(3) 4(b)(1) 4(b)(2) 4(b)(3) 4(b)(4) 4(c) 4(d) 4(e) 135 10 *10(a)(1) *10(a)(2) 10(b) 10(c) *10(d)(1) *10(d)(2) *10(d)(3) *10(d)(4) *10(e)(1) *10(e)(2) *10(e)(3) *10(e)(4) *10(e)(5) The management contracts or compensatory plans or arrangements listed below that are applicable to the executive officers named in the Summary Compensation Table which appears in Registrant's 2016 Proxy Statement or to our directors are preceded by an asterisk (*). Registrant's Form of Separation Agreement (with salary continuance) - February 2010. Incorporated by reference to Exhibit 10(a)(1) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2009. See SEC File Number 001-04471. Registrant's Form of Separation Agreement (without salary continuance) - February 2010. Incorporated by reference to Exhibit 10(a)(2) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2009. See SEC File Number 001-04471. [Reserved] [Reserved] Registrant's 2004 Equity Compensation Plan for Non-Employee Directors, as amended and restated as of May 21, 2013 (“2004 ECPNED”). Incorporated by reference to Exhibit 10(d)(1) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2013. See SEC File Number 001-04471. Form of Agreement under 2004 ECPNED. Incorporated by reference to Exhibit 10(d)(2) to Registrant's Quarterly Report on Form 10-Q for the Quarter ended March 31, 2005. See SEC File Number 001-04471. Form of Grant Summary under 2004 ECPNED. Incorporated by reference to Exhibit 10(d)(3) to Registrant's Quarterly Report on Form 10-Q for the Quarter ended March 31, 2005. See SEC File Number 001-04471. Form of DSU Deferral under 2004 ECPNED. Incorporated by reference to Exhibit 10(d)(4) to Registrant's Quarterly Report on Form 10-Q for the Quarter ended March 31, 2005. See SEC File Number 001-04471. Registrant's 2004 Performance Incentive Plan, as amended and restated as of May 24, 2012 ("2012 PIP"). Incorporated by reference to Exhibit 10(e)(26) to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2012. See SEC File Number 001-04471. Annual Performance Incentive Plan for 2013. Incorporated by reference to Exhibit 10(e)(17) to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013. See SEC File Number 001-04471. Performance Elements for 2013 Executive Long-Term Incentive Program ("2013 ELTIP"). Incorporated by reference to Exhibit 10(e)(24) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2012. See SEC File Number 001-04471. Form of Executive Long-Term Incentive Award under 2013 ELTIP (Performance Shares). Incorporated by reference to Exhibit 10(e)(25) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2012. See SEC File Number 001-04471. Form of Executive Long-Term Incentive Program Award Summary under 2013 ELTIP (Performance Shares). Incorporated by reference to Exhibit 10(e)(26) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2012. See SEC File Number 001-04471. *10(e)(6) Form of Executive Long-Term Incentive Program Restricted Stock Unit Retention Award Summary under 2013 ELTIP. Incorporated by reference to Exhibit 10(e)(24) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2011. See SEC File Number 001-04471. Form of Restricted Stock Unit Retention Award under 2013 ELTIP. Incorporated by reference to Exhibit 10(e)(25) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2011. See SEC File Number 001-04471. Amendment No. 1 dated as of December 11, 2013 to 2012 PIP. Incorporated by reference to Exhibit 10(e)(23) to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013. See SEC File Number 001-04471. Annual Performance Incentive Plan for 2014. *10(e)(7) *10(e)(8) *10(e)(9) Xerox 2015 Annual Report 136 *10(e)(10) *10(e)(11) *10(e)(12) *10(e)(13) *10(e)(14) *10(e)(15) *10(e)(16) *10(e)(17) Incorporated by reference to Exhibit 10(e)(14) to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014. See SEC File number 001-04471. Performance Elements for 2014 Executive Long-Term Incentive Plan. Incorporated by reference to Exhibit 10(e)(25) to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013. See SEC File Number 001-04471. Form of Award Agreement under 2012 PIP (Performance Shares). Incorporated by reference to Exhibit 10(e)(26) to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013. See SEC File Number 001-04471. Form of Award Summary under 2012 PIP (Performance Shares). Incorporated by reference to Exhibit 10(e)(27) to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013. See SEC File Number 001-04471. Form of Award Agreement under 2012 PIP (Retention Restricted Stock Units). Incorporated by reference to Exhibit 10(e)(28) to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013. See SEC File Number 001-04471. Form of Award Summary under 2012 PIP (Retention Restricted Stock Units). Incorporated by reference to Exhibit 10(e)(29) to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013. See SEC File Number 001-04471. Annual Performance Incentive Plan for 2015 (“2015 APIP”) Performance Elements for 2015 Executive Long-Term Incentive Program ("2015 ELTIP") Incorporated by reference to Exhibit 10(e)(21) to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014. See SEC File number 001-04471. Form of Award Agreement under 2015 ELTIP (Performance Shares) Incorporated by reference to Exhibit 10(e)(22) to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014. See SEC File number 001-04471. *10(e)(18) Form of Award Agreement under 2015 ELTIP (Retention Restricted Stock Units) Incorporated by reference to Exhibit 10(e)(23) to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014. See SEC File number 001-04471. *10(e)(19) *10(e)(20) *10(e)(21) *10(e)(22) *10(e)(23) *10(e)(24) *10(f) *10(g)(1) *10(g)(2) *10(g)(3) *10(g)(4) Annual Performance Incentive Plan for 2016 (“2016 APIP”) Performance Elements for 2016 Executive Long-Term Incentive Program Form of Award Agreement under 2016 ELTIP (Performance Shares) Form of Award Agreement under 2016 ELTIP (Restricted Stock Units) Form of Award Agreement under 2016 ELTIP (Retention Restricted Stock Units) Form of Award Agreement under 2016 ELTIP (Performance Shares and Restricted Stock Units) Letter Agreement dated March 19, 2014 between Registrant and Robert K. Zapfel, Executive Vice President and President, Services of Registrant. Incorporated by reference to Exhibit 10(f) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2014. See SEC File Number 001-04471. 2004 Restatement of Registrant's Unfunded Supplemental Executive Retirement Plan, as amended and restated December 4, 2007 (“2007 USERP”). Incorporated by reference to Exhibit 10(g)(1) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2007. See SEC File Number 001-04471. Amendment dated December 4, 2007 to Registrant's 2007 USERP. Incorporated by reference to Exhibit 10(g)(2) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2007. See SEC File Number 001-04471. Amendment No. 1 dated December 11, 2008 to Registrant's 2007 USERP. Incorporated by reference to Exhibit 10(g)(3) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2008. See SEC File Number 001-04471. Amendment No. 2 dated April 28, 2011 to Registrant's 2007 USERP. Incorporated by reference to Exhibit 10(g)(4) to Registrant's Quarterly Report on Form 10-Q for the Quarter ended June 30, 2011. See SEC File Number 001-04471. *10(g)(5) Amendment No. 3 dated December 7, 2011 to Registrant's 2007 USERP. 137 *10(h) 10(i) *10(j)(1) *10(j)(2) *10(k)(1) *10(k)(2) *10(k)(3) *10(l) 10(m) *10(n) 10(o) *10(p) *10(q) *10(r) 10(s) Incorporated by reference to Exhibit 10(g)(5) to Registrant's Current Report on Form 8-K dated December 7, 2011. See SEC File Number 001-04471. 1996 Amendment and Restatement of Registrant's Restricted Stock Plan for Directors, as amended through February 4, 2002. Incorporated by reference to Exhibit 10(h) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2004. See SEC File Number 001-04471. [Reserved] Registrant's Universal Life Plan as amended and restated as of August 26, 2013. Incorporated by reference to Exhibit 10(j)(1) to Registrant's Quarterly Report on Form 10-Q for the Quarter ended September 30, 2013. See SEC File Number 001-00471. Participant Agreement for Registrant's Universal Life Plan. Incorporated by reference to Exhibit 10(j)(2) to Registrant's Quarterly Report on Form 10-Q for the Quarter ended September 30, 2013. See SEC File Number 001-00471. Registrant's Deferred Compensation Plan for Directors, as amended and restated December 5, 2007 (“DCPD”). Incorporated by reference to Exhibit 10(k)(1) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2007. See SEC File Number 001-04471. Amendment dated December 5, 2007 to DCPD. Incorporated by reference to Exhibit 10(k)(2) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2007. See SEC File Number 001-04471. Amendment No. 2 dated May 17, 2010 to DCPD. Incorporated by reference to Exhibit 10(k)(3) to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2010. See SEC File Number 001-04471. Registrant's Deferred Compensation Plan for Executives, 2004 Restatement, as amended through August 11, 2004. Incorporated by reference to Exhibit 10(l) to Registrant's Quarterly Report on Form 10-Q for the Quarter ended September 30, 2004. See SEC File Number 001-04471. Separation Agreement dated May 11, 2000 between Registrant and G. Richard Thoman, former President and Chief Executive Officer of Registrant. Incorporated by reference to Exhibit 10(n) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2005. See SEC File Number 001-04471. Uniform Rule dated December 17, 2008 for all Deferred Compensation Promised by Registrant. Incorporated by reference to Exhibit 10(r) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2008. See SEC File Number 001-04471. 2006 Technology Agreement, effective as of April 1, 2006, by and between Registrant and Fuji Xerox Co., Ltd. Incorporated by reference to Exhibit 99.1 to Registrant's Current Report on Form 8-K dated March 9, 2006. See SEC File Number 001-04471.** Form of Severance Agreement entered into with various executive officers, effective October 2010. Incorporated by reference to Exhibit 10(t) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2010. See SEC File Number 001-04471. Letter Agreement dated March 25, 2013 between Registrant and Kathryn A. Mikells, Executive Vice President and Chief Financial Officer of Registrant. Incorporated by reference to Exhibit 10(f) to Registrant's Current Report on Form 8-K dated March 26, 2013. See SEC File Number 001-04471. Master Plan Amendment dated May 2, 2011 to Registrant-Sponsored Benefit Plans. Incorporated by reference to Exhibit 10(bb) to Registrant's Quarterly Report on Form 10-Q for the Quarter ended June 30, 2011. See SEC File Number 001-04471. Agreement dated January 28, 2016 between the Icahn Group and Registrant re: separation of Registrant’s Business Process Outsourcing business and voting at Registrant’s 2016 annual meeting of shareholders. Incorporated by reference to Exhibit 10(s) to Registrant’s Current Report on Form 8-K dated January 28, 2016. See SEC File Number 001-04471. Xerox 2015 Annual Report 138 12 21 23 31(a) 31(b) 32 101.CAL 101.DEF 101.INS 101.LAB 101.PRE 101.SCH Computation of Ratio of Earnings to Fixed charges and the Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends. Subsidiaries of Registrant. Consent of PricewaterhouseCoopers LLP. Certification of CEO pursuant to Rule 13a-14(a) or Rule 15d-14(a). Certification of CFO pursuant to Rule 13a-14(a) or Rule 15d-14(a). Certification of CEO and CFO pursuant to 18 U.S.C. §1350 as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002. XBRL Taxonomy Extension Calculation Linkbase. XBRL Taxonomy Extension Definition Linkbase. XBRL Instance Document. XBRL Taxonomy Extension Label Linkbase. XBRL Taxonomy Extension Presentation Linkbase. XBRL Taxonomy Extension Schema Linkbase. **Pursuant to the Freedom of Information Act and/or a request for confidential treatment filed with the Securities and Exchange Commission under Rule 24b-2 of the Securities Exchange Act of 1934, as amended, the confidential portion of this material has been omitted and filed separately with the Securities and Exchange Commission. 139 Xerox Corporation 45 Glover Avenue P.O. Box 4505 Norwalk, CT 06856-4505 United States 203.968.3000 www.xerox.com © 2016 Xerox Corporation All rights reserved. Xerox®, Xerox and Design®, and Rialto® are trademarks of Xerox Corporation in the U.S. and/or other countries. Paper from responsible sources 002CSN5F24 

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