Divestitures

Business Process Outsourcing (BPO)

As previously disclosed, on December 31, 2016, Xerox completed the Separation of its BPO business through the Distribution of all of the issued and outstanding stock of Conduent to Xerox Corporation stockholders. As a result of the Separation and Distribution, the financial position and results of operations of the BPO Business are presented as discontinued operations and, as such, have been excluded from continuing operations and segment results for all periods presented. Prior to the Separation and Distribution of Conduent, in connection with the annual goodwill impairment test, a pre-tax goodwill impairment charge of $935 was recorded in the fourth quarter 2016 associated with the Commercial Services reporting unit of the BPO business. This charge is reported in the Loss from discontinued operations, net of tax, for the year ended December 31, 2016.

Total separation costs of $159, which were incurred during 2016, are included in Loss from discontinued operations, net of tax, in the accompanying Consolidated Statements of (Loss) Income. Separation costs are primarily for third-party investment banking, accounting, legal, consulting and other similar types of services related to the Separation transaction as well as costs associated with the operational separation of the two companies, such as those related to human resources, brand management, real estate and information management to the extent not capitalized. Separation costs also include the costs associated with bonuses and restricted stock grants awarded to employees for retention through the Separation.

In connection with the Separation, Xerox and Conduent entered into various agreements to effect the Separation and provide a framework for their relationship after the Separation, including a separation and distribution agreement, a transition service agreement, a tax matters agreement, an employee matters agreement, an intellectual property agreement and a trademark license agreement. The transition services primarily involve Xerox providing services to Conduent related to information technology and human resource infrastructure and are all expected to be for terms of no more than one year post-separation. In addition, Xerox is also party to various commercial agreements with Conduent entities. The amount billed for transition services provided under the above agreements as well as sales and purchases to and from Conduent are not expected to be material in future periods.

In preparation for the Separation, in the fourth quarter 2016, Conduent incurred approximately $2.0 billion in new borrowings. The net proceeds from these borrowings of $1.9 billion, after debt issuance costs, were used to fund the approximately $1.8 billion of net cash distributions Conduent made to Xerox prior to the Distribution Date. Xerox used a portion of the cash distribution proceeds to repay the $1.0 billion Senior Unsecured Term Facility in January 2017, which was required to be repaid upon completion of the Separation. This $1.0 billion of cash and debt is excluded from the Cash and cash equivalents and Total Debt at December 31, 2016, respectively, and is reported in Current Assets and Current Liabilities of discontinued operations at December 31, 2016, respectively. Interest expense associated with this borrowing incurred during 2016 is included in Loss from discontinued operations, net of tax. Xerox intends to use the balance of the proceeds received to redeem Senior Notes that are coming due in the first quarter 2017. Refer to Note 13 - Debt for additional information.

Information Technology Outsourcing (ITO)

In 2014, we entered into an agreement for the sale of 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 was approximately $940 ($930 net of cash sold) and Atos also assumed approximately $85 of capital lease obligations and pension liabilities. The ITO business included approximately 9,600 employees in 42 countries, who were transferred to Atos upon closing.

We recorded a net pre-tax loss of $181 ($160 after-tax) in 2014 related to the agreement to sell, 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. We recorded an additional net pre-tax loss of $101 in 2015, 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 $44 in 2015 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.

We made an additional payment in 2016 to Atos of approximately $52, representing a $28 adjustment to the final sales price and a payment of $24 due from closing. The payment was reflected in investing cash flows of discontinued operations as an adjustment of the sales proceeds.

Other Discontinued Operations

In 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 2014, we sold the 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.

Summarized financial information for our Discontinued Operations is as follows:



	Year Ended December 31, 2016
	Conduent			ITO		Total
Revenue	$	6,355		$	—	$	6,355

Loss from operations	$	(1,343	)	$	—	$	(1,343	)
Loss on disposal	—			—		—
Net loss before income taxes	(1,343		)	—		(1,343		)
Income tax benefit	250			—		250
Loss from discontinued operations, net of tax	$	(1,093	)	$	—	$	(1,093	)



	Year Ended December 31, 2015
	Conduent			ITO			Total
Revenue	$	6,604		$	619		$	7,223

(Loss) income from operations	$	(511	)	$	104		$	(407	)
Loss on disposal	—			(101		)	(101		)
Net (loss) income before income taxes	(511		)	3			(508		)
Income tax benefit (expense)	215			(81		)	134
Loss from discontinued operations, net of tax	$	(296	)	$	(78	)	$	(374	)



	Year Ended December 31, 2014
	Conduent			ITO			Other			Total
Revenue	$	6,885		$	1,320		$	45		$	8,250

Income (loss) from operations	$	116		$	74		$	(1	)	$	189
Loss on disposal	—			(181		)	(1		)	(182		)
Net income (loss) before income taxes	116			(107		)	(2		)	7
Income tax expense	(17		)	(5		)	(1		)	(23		)
Income (loss) from discontinued operations, net of tax	$	99		$	(112	)	$	(3	)	$	(16	)

The following is a summary of selected financial information of Conduent for the three years ended December 31, 2016:



	Year Ended December 31,
	2016		2015		2014
Cost and Expenses:
Cost of services	$	5,456	$	5,923	$	5,749
Other Expenses⁽¹⁾	2,065		1,192		1,020
Total Costs and Expenses	$	7,521	$	7,115	$	6,769

Selected amounts included in Costs and Expenses:
Depreciation of buildings and equipment	$	130	$	126	$	145
Amortization of internal use software	49		51		52
Amortization of product software	61		65		58
Amortization of acquired intangible assets	280		250		250
Amortization of customer contract costs	93		108		122
Operating lease rent expense	378		389		385
Defined contribution plans	35		34		31
Interest expense ⁽²⁾	13		8		11
Goodwill impairment charge ⁽³⁾	935		—		—

Expenditures:
Cost of additions to land, buildings and equipment	$	150	$	126	$	144
Cost of additions to internal use software	39		26		26
Customer-related deferred set-up/transition and inducement costs	62		55		55

_____________


(1)	2016 amount excludes $159 of Separation related costs and $18 of interest on the $1.0 billion Senior Unsecured Term Facility, which was required to be repaid upon completion of the Separation, and therefore was also reported in the loss from discontinued operations.


(2)	Represents interest on Conduent third-party borrowings only that were transferred to Conduent as part of the Distribution. 2016 amount excludes $18 of interest associated with the $1.0 billion Senior Unsecured Term Facility noted above. No additional interest expense was allocated to discontinued operations for the three years ended December 31, 2016.


(3)	Prior to the Separation and Distribution of Conduent, in connection with the annual goodwill impairment test, a pre-tax goodwill impairment charge was recorded in the fourth quarter 2016 associated with the Commercial Services reporting unit of the BPO business.

The following is a summary of the major categories of assets and liabilities that were transferred to Conduent as of December 31, 2016. The balances as of December 31, 2015 are presented for comparative purposes and are included in Assets and Liabilities of discontinued operations in the Consolidated Balance Sheet at December 31, 2015:



	December 31, 2016		December 31, 2015
Cash and cash equivalents	$	390	$	140
Accounts receivable, net	1,287		1,251
Other current assets	239		227
Total current assets of discontinued operations	1,916		1,618
Land, buildings and equipment, net	283		279
Intangible assets, net	1,144		1,425
Goodwill	3,889		4,872
Other long-term assets	477		609
Total long-term assets of discontinued operations	5,793		7,185
Total Assets of Discontinued Operations	$	7,709	$	8,803

Current portion of long-term debt	$	28	$	23
Accounts payable	159		272
Accrued pension and benefit costs	284		245
Unearned income	208		226
Other current liabilities	742		861
Total current liabilities of discontinued operations	1,421		1,627
Long-term debt	1,913		37
Pension and other benefit liabilities	173		153
Other long-term liabilities	757		932
Total long-term liabilities of discontinued operations	2,843		1,122
Total Liabilities of Discontinued Operations	$	4,264	$	2,749

As a result of the Separation, the Company distributed $3,445 in net assets of Conduent, which has been reflected as a reduction to Preferred Stock for $142, Retained Earnings for $3,829 and Accumulated other comprehensive loss for $526 in the accompanying Consolidated Balance Sheet and Consolidated Statements of Shareholders' Equity as of December 31, 2016.

The following is a summary of disclosed acquisitions over the past three years that were part of the Distribution of Conduent at December 31, 2016.



Acquisition	Date of Acquisition	Acquisition Price

RSA Medical LLC (RSA Medical)	September 2015	$	141
Intellinex LLC	January 2015	28
Consilience Software, Inc. (Consilience)	September 2014	25
ISG Holdings, Inc. (ISG)	May 2014	225
Invoco Holding GmbH (Invoco)	January 2014	54