1. 2010 Annual Report

2. We give our clientsmore freedom tofocus on what counts:their core business,their real business.Ursula M. BurnsChairman and Chief Executive Officer 02Letter to Shareholders 08Board of Directors 10Our Business 26Managements Discussion and Analysis 54Consolidated Financial Statements 58Notes to Consolidated Financial Statements 103 Reports and Signatures 105 Quarterly Results of Operations 106 Five Years in Review 107 Performance Graph 107 Corporate Information 108 Officers 3. Financial Overview 2010 2009 Total revenue $21,633 $15,179 Equipment sales 3,857 3,550 Annuity revenue17,77611,629 Net income Xerox 606485 Adjusted net income* Xerox 1,296613 Diluted earnings per share 0.43 0.55 Adjusted earnings per share* 0.94 0.70 Net cash provided by operating activities 2,726 2,208 Adjusted operating margin*9.6% 8.6%* ee Page 7 for the reconciliation of the difference between this financial measure that is not in compliance with Generally AcceptedSAccounting Principles (GAAP) and the most directly comparable financial measure calculated in accordance with GAAP.With ACS, we now servea $500 Billion market.$150+ billionBusiness Process Outsourcing$130 billionTraditional Technology-drivenMarket$250 billionInformation TechnologyOutsourcing 4. Letter to ShareholdersDear Fellow Shareholders:I am pleased to report that 2010 was a year of both steadyprogress and historic transformation for Xerox. Our results speakto the strength of our business model, the expanding value webring to our customers, our growing distribution capability and thedetermination of our people to do what it takes to give you a good FPOreturn on the trust you place in us. Here is a summary of how weperformed in 2010: e delivered adjusted earnings per share of 94 cents1 for the W year well ahead of our expectations as we entered 2010.Ursula M. BurnsChairman and Chief Executive Officer otal revenue was $21.6 billion up 3 percent on a T 1 pro-forma basis. e generated a very substantial $2.7 billion in cash from operations. W rom the time we acquired Affiliated Computer Services (ACS) in F erox is now in places you may not X February, we reduced debt by $1.9 billion.expect to see us and still in places that ur operating margin for the year was 9.6 percent1 an O improvement of one percentage point1 over the previous year on are a natural fit with our technology. a pro-forma basis.And if you think of a vertical column running the height of theThese are the basic facts, but they dont begin to tell the whole story.building, that would be our document management capability,When the history of Xerox for this decade is written, I have no doubt supporting every facet of the enterprise.that 2010 will be viewed as a pivotal time. Many businesses talk abouttransformation. Were actually doing it. Through last years acquisitionMany of these functions and operations require expertise mostof Affiliated Computer Services, our significant expansion into servicescompanies dont have and time most companies dont want toand our expanding distribution capacity, Xerox is now the worlds invest. Its not their real business. By outsourcing it to Xerox, ourleading enterprise for business process and document management.clients have more freedom to focus on what counts: their corebusiness, their real business. And we do it in such a way thatThe New Xerox our customers save money and improve productivity by takingadvantage of the scale, speed and simplification that comes fromMost of you know us best for our world leadership in document our advantaged technology and expertise in managing basic andtechnology and services printers, multifunction devices, copiers, complex business functions. As a result, Xerox is now in places youproduction publishing systems, managed print services, andmay not expect to see us and still in places that are a natural fit withrelated software and solutions. Were proud of that heritage andour technology all indicative of our transforming business and ourwe continue to build on it today. And now we are also a leader in exciting future. Here are a few examples of what I mean:business process and IT outsourcing. We offer our customers a Italia, the Italian global media company, turned to Xerox to3wide variety of global services that may surprise you from claimsprovide superior customer care services for nine million customers.reimbursement and electronic toll transactions to the management3 Italia joins a long list of customers who use our services inof HR benefits and customer care centers.industries ranging from high-tech to aviation. With more than34,000 customer care agents in 142 customer care centers aroundThink of the modern-day enterprise as a multi-story office buildingthe world, we handle more than one million customer transactionswith IT occupying one floor, customer care on another, HR on topevery day and we do it in 20 different languages.of that and then finance and accounting on another. You mightjust find the new Xerox on any one or all of these floors using ourexpertise in business process and IT outsourcing to work behind thescenes to make it all operate more efficiently and more effectively.2 5. he State of Wisconsin signed an eight-year, $30 million T nd, of course, were using ACS ourselves to run some of our A contract to have Xerox continue handling the States child- own back-office operations such as HR benefits processing and support payment processing operations including processingaccounts payable. and disbursing payments, performing bank reconciliation and managing a customer service call center. All 50 states haveMultiply those examples by thousands more and you begin to contracts with us for a variety of business processing and other see the scope and scale of our company and the extraordinary services that include child support, food stamps, Medicaid,opportunities for growth. disability, health and welfare. iat Group signed a five-year contract for Xerox to manage its FGrowth Opportunities print infrastructure company-wide. Expected results include a 30 percent reduction in print-related cost and a 50 percent reduction With the building of our services business alongside our technology in energy use. Fiat joins other Xerox customers for managed printbusiness, the size of the market we address has grown exponentially. services like the Dow Chemical Company, Ingersoll Rand and Our traditional technology-driven market is valued at about hundreds more. $130 billion and is relatively flat. But we now participate in twoadditional markets: ransit riders in Denver will notice a faster, more efficient and T greener experience as the City implements an advanced fare usiness Process Outsourcing, which is currently valued at over B collection system managed by Xerox. As part of a four-year, $15 $150 billion and is growing at over 5 percent per year. million contract, public transportation users will receive smart nformation Technology Outsourcing, which is currently valued at I cards, load them with a pre-paid amount and simply wave the $250 billion a year and is growing at over 3 percent per year. smart card in front of a scanner to gain access to the transit system. We do this and similar applications like E-ZPass forIn total, thats a more than $500 billion market more than three scores of municipalities.times our traditional opportunity. Were attacking it aggressively on ore than 20,000 Procter & Gamble employees will soon be able Mfour fronts. to print e-mails, presentations and other business documents directly from their smart phones. Its all part of a much broaderFirst, were accelerating the transition to color. Until recently, Enterprise Print Services strategy managed by Xerox for P&Gthe barrier to color everywhere has been cost. That barrier was around the world. Its credited with driving cost down and broken first in the home with the advent of affordable color ink-jet productivity up while helping the company meet its aggressiveprinters. Now were breaking the cost barrier in office and production sustainability goals.environments with our advantaged solid ink technology. For some spen Marketing, the largest privately held marketing services Aapplications, a color page is already priced the same as a black-and- company in the United States, uses our digital technology white one. including Xerox iGen4 presses, DocuTech Highlight Color Systems, Xerox FreeFlow Web Services and XMPie PersonalEffectWe have our eyes wide open to the trends in the marketplace Cross-Media solution to help auto dealerships increase floor around a declining use of paper for transactional black-and-white traffic and grow revenue from maintenance services. Theyredocuments. A good example is all those bill statements that used to promoting client loyalty through personalized direct-marketing be mailed hardcopy every month and are now distributed by e-mail. materials such as postcards, letters and invitations.If you looked around most offices these days, youd be convincedthat paper is never really going away. That may be true, but the way he Scotts Miracle-Gro Company, the industry-leading lawn and Twe use paper is changing and our dependency on it is declining. garden care company, turned to Xerox for help on upgrading its IT infrastructure across Europe. The 10-country overhaul wasThe higher-value print communications are those produced in color accomplished in four months while reducing costs, improvingphoto books, marketing collaterals, direct mailers and packaging. And performance and embedding better innovation.those printed in color with messages customized for the individual o maximize ROI on its 401(k) plan, a global defense and Tcut through clutter in ways that no electronic communication ever technology giant asked Xerox to design and implement a can. Thats why our investments in printing are focused entirely on communication campaign to educate employees about thebreaking the cost barriers in color and advancing digital technology importance of saving for retirement. The results: increasedfor the creation of real-time, relevant, personalized communications. employee participation rates, increased contribution rates and improved asset allocation.Xerox 2010 Annual Report3 6. Net Income Xerox Total RevenueAnnuity Revenue(millions) (millions) (included in total revenue millions)06 1,21006 15,8950611,43807 1,13507 17,2280712,47508 230*1,047* 08 17,60808 12,92909485*613*0915,179 0911,62910606*1,296*1021,633 10 17,776 eve moved aggressively in WThird, were extending our lead in document outsourcing. Werethe acknowledged leader and intend to keep it that way. Our value recent years to both strengthen theproposition is simple: we can do your document management moreefficiently and at less cost than you can do it yourself. In todays distribution channels we have andworld, thats a powerful statement. And it removes one more acquire the new channels we need. distraction from our clients desire to focus on their core business.Although it may seem counter-intuitive coming from Xerox, we almostTo that end, heres another unexpected place youll find Xerox today: always help our customers print less, thereby saving them moneyMediaware Digital is a leading provider of digitally printed packaging. and helping them minimize their impact on the environment. OneIt depends on Xeroxs Automated Packaging Solution to produce the example: At Procter & Gamble, we consolidated all the devices it usedpackaging for Microsofts Windows 7. Its a good example of how for printing, copying, scanning and faxing into a more manageableour printing business has expanded way beyond putting marks onand cost-efficient network of multifunction systems. The manageda sheet of paper and why our technology is needed and remains print services we provide to P&G has enabled it to print eightmillionrelevant well into the future.fewer pages and reduce print-related energy by 30 percent.Second, were expanding our distribution. We already have Fourth, were expanding our business process and ITthe industrys broadest distribution to large enterprises and weoutsourcing businesses globally. Our acquisition of ACS wascontinue to increase our distribution capacity to small and mid-sizelargely based on our confidence in the significant services growthbusinesses. We understand that in todays world people buy andopportunity. Over 90 percent of the ACS business is currently inengage in a variety of ways. Weve moved aggressively in recent the United States. Our global strength and brand awareness giveyears to both strengthen the distribution channels we have andACS the capability and permission to expand into markets aroundacquire the new channels we need. the world often growing our business with existing Xerox clients.Our innovation in areas like advanced imaging and data analysisOne great move by Xerox was the acquisition of Global Imaging gives us an advantage in how we serve our clients more ways ofSystems a few years ago. The GIS network of 29 core companies automating typically manual processes and more ways to simplifygave us an additional 1,400 feet on the street. Weve since often complex document and data-intensive transactions, likeexpanded our distribution even more with acquisitions in key U.S. claims reimbursement and invoice processing. Our expertise inmarkets and in the Netherlands. You can expect to see us do morecreating cloud-based platforms for these services and our extensiveof the same growing our network of channels so more peopleexperience in labor management for delivering quality supportare on more streets selling more Xerox technology and services. become key differentiators for Xerox and position us incredibly wellfor long-term growth.* ee Page 7 for the reconciliation of the difference between this financial measure that is notSin compliance with Generally Accepted Accounting Principles (GAAP) and the most directlycomparable financial measure calculated in accordance with GAAP.4 7. Color Revenue Net Cash from(included in total revenue millions)Operating Activities(millions)065,578061,617076,35607 1,871086,66908939*1,554*09 5,972 092,208106,397 10 2,726One very positive sign: last year, we developed a services pipeline Our Real Business: Sound Strategy and Effective Executionof more than $5 billion in business that neither Xerox nor ACS couldhave signed without the value the other brought to the table. We now have two distinct yet synergistic business segments technology and services. This gives us a steady mix of annuity revenue.So we do not want for opportunity. I have great confidence in In technology, it comes from service and supplies. In services, it comesour value proposition and in the technology and talent we have to from multi-year outsourcing contracts. Together, they account fordeliver it. And thats a very good place to be. more than 80 percent of our total revenue a very attractive featureof our business model. By the way, annuity revenue in 2010 on a pro-Renowned Innovation forma basis was up 2 percent without the impact of currency1.This company was built on innovation, which remains central to ourIn technology, our annuity stream is fueled by the sales of Xeroxstrategy today. If you could look under the hood of our R&D labsequipment. Last year, equipment sales were up a significant 10around the world, you would probably be surprised at what you would percent without the impact of currency1. That growth reflectedfind. You would see work that is stretching the boundaries of whatboth strong demand for new products and expanded distributionis possible in digital printing of course, but you would also find in atcoverage around the world. The combination positioned usleast equal measure work on intuitive data analysis and a variety ofextraordinarily well to take advantage of an improving economygreen technologies to make business processes more sustainable. Inand the willingness for customers to begin investing in technology.other words, you would see innovation that reflects the new Xerox.Just as our annuity revenue is fueled by equipment sales, ourequipment sales are fueled by a steady stream of new products. revenue from services was up During 2010, we launched 21 products with an emphasis onmaintaining our leadership in both the production and office markets. 3 percent. Business signings wereBig contributors to equipment sales growth in 2010 were the Xerox up 13 percent.Color 800 and 1000 series as well as the ColorQube family ofmultifunction systems, which uses our proprietary solid ink technology.Total color revenue for the year was up 8 percent without the impactOne measure of how well we are doing is the number of patents of currency1 and color pages were up 9 percent strong signs that ourour innovators are awarded. Last year, that number was 1,031 up color strategy is on track.46 percent from 2009. That would rank us in the top 20 companies.Last years patents included innovations to improve inventory While our services business received a major power surge with themanagement, e-mail overload and personalized packaging. Other acquisition of ACS, this part of our business has been evolving for apatents help manage documents and make sense out of large very long time. By the time we acquired ACS one year ago, we alreadycollections of information. had over a $3.5 billion services business some of it through organicgrowth and some of it through smaller acquisitions. The ACS deal wasa logical albeit bold leap forward. Overnight, we became a $10billion services business. Xerox 2010 Annual Report5 8. Year-over-year our revenue from services was up 3 percent1 on a pro-forma basis and indicators for future revenues remain strong. Business e are focused on the basics Wsignings were up about 13 percent on a trailing 12-month basis. containing cost, generating cash,So positive results in both technology and services, goodgrowing revenue and providingopportunities going forward and a team that is focused on you with good returns.excellent execution.Delivering Shareholder Value Our 2011 priorities and plans keep us on track to grow revenue, generate significant cash and expand earnings. We wontIn 2010, we grew adjusted earnings, increased revenue, improvedcompromise our leadership position or give an inch in documentoperating margin and generated $2.7 billion in cash. We deliveredtechnology. By continuing to expand distribution, well increaseon our commitments across the board. And by doing so, we created install activity and equipment sales with an emphasis on drivinggreater value for our shareholders. That was then; this is now.color pages that help boost our annuity stream.We enter 2011 with building momentum and heightenedWell continue to grow our services business by leveraging our brand,confidence. I dont know that anyone has the hubris to predict withglobal scale, innovation and delivery platforms to win multimillion-any certainty what the post-recession business climate will be like. dollar deals in business process, IT and document outsourcing.But I do know this businesses and governments, large and small,will continue to struggle to contain costs, operate more efficiently,Well remain diligent on cost and expense management, capturinggrow revenue and build better client relationships. In other words,key cost synergies from the ACS acquisition and driving efficienciesthey will want to go about their real business and Xerox is ready to and productivity across the enterprise.help them. Well continue to focus on generating free cash flow1 about $2Were confident, but not complacent. Were differentiated in the billion of it all the while reducing debt, delivering dividends, closingmarketplace through our world-class innovation and renownedon tuck-in acquisitions and allotting a significant portion ofservice. We operate in some 160 countries and thats becomingavailable cash to repurchasing stock.more and more important to our larger customers who are lookingfor global solutions. Our world-class brand gives us a high degree ofWe are now 136,000 people strong doing business in 160 countriestrust that helps us open doors and build relationships. Were relevant and all with an overreaching mission of delivering value to ourto our customers who rely on us to make them better. Our businesscustomers and our shareholders.model has been tested under the most trying conditions the pastfew years and proven to be both resilient and flexible. We are Im confident we have the right strategy, a sound business model, thefocused on the basics containing cost, generating cash, growingcompetitive strength, a seasoned leadership team, talented people,revenue and providing you with good returns. and the discipline and focus to put it all together for you in 2011. This is our real business, and were ready.Note: estimates regarding market size and growth are based on a combination of third-partyand internal information.(1) e have discussed our results using non-GAAP measures. Management believes that these W Ursula M. Burns 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 Chairman and Chief Executive Officer measures should be viewed in addition to, and not as a substitute for, the Companys 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 financialmeasures calculated and presented in accordance with GAAP are set forth on the following page.6 9. Year Ended December 31, 2010Adjusted Net Income and Earnings Per Share (EPS): 2010 20092008(in millions, except per-share amounts)Net IncomeEPS Net IncomeEPSNet IncomeEPSAs Reported$ 606 $ 0.43 $485 $ 0.55 $ 230 $ 0.26Adjustments:Xerox and Fuji Xerox restructuring charges 355 0.26 41 0.05 308 0.34Acquisition-related costs58 0.04 49 0.06 Amortization of intangible assets 194 0.14 38 0.04 35 0.04ACS shareholders litigation settlement36 0.03 Venezuela devaluation costs21 0.02 Medicare subsidy tax law change16 0.01 Loss on early extinguishment of debt 10 0.01 Provision for litigation matters 491 0.54Equipment write-off 24 0.03Settlement of unrecognized tax benefits (41) (0.05) 690 0.51 128 0.15 817 0.90Adjusted $1,296 $ 0.94 $613 $ 0.70 $ 1,047 $ 1.16Weighted average shares for reported EPS 1,351 880 895Weighted average shares for adjusted EPS 1,378 880 897 Year Ended December 31,Revenue Growth pro-forma/without currency: As Reported As ReportedPro-forma % ChangePro-forma Pro-forma Change(in millions)2010 2009 2009(1) % Change (Ex. Curr.) Change(Ex. Curr.)Revenue Category Equipment sales $ 3,857 $ 3,550$ 3,5509% 10%9% 10% Supplies, paper and other 3,377 3,096 3,234 9% 10%4% 5% Sales 7,234 6,646 6,784 9% 10%7% 8%Service, outsourcing and rentals 13,739 7,820 13,58576%76%1% 1%Finance income660 713713(7)% (7)% (7)% (7)%Total Revenues $21,633 $15,179$21,08243%43%3% 3%Segment Technology$10,349 $10,067$10,0673%3% 3%3% Services 9,637 3,476 9,379* *3%3% Other 1,647 1,636 1,636 1%1% 1%1%Total Revenues $21,633 $15,179$21,08243%43% 3%3%Memo: Annuity Revenue $17,776 $11,629$17,53253%53% 1%2% Color $ 6,397 $ 5,972$ 5,9727%8% 7%8%* Percent change not meaningful.(1)Pro-forma includes ACSs 2009 estimated results from February 6 through December 31 adjusted for deferred revenue, exited businesses and certain non-recurring product sales.(Ex. Curr.) = change without the effects of currency Year Ended December 31,Operating Margin: As ReportedAs ReportedPro-formaPro-forma(in millions)2010 2009 2009(1) ChangeChangePre-tax income (loss) $ 815 $ 627 $ 1,267 30% (36)%Adjustments Xerox restructuring charge 483 (8) (8) Acquisition-related costs7772 104 Amortization of intangible assets 3126060 Other expenses, net 389 285 382Adjusted Operating Income $ 2,076 $ 1,036 $ 1,805100%15%Pre-tax Income Margin 3.8% 4.1% 6.0%(0.3) pts(2.2) ptsAdjusted Operating Margin 9.6% 6.8% 8.6%2.8 pts1.0 pts(1)P ro-forma reflects ACSs 2009 estimated results from February 6 through December 31 adjusted to reflect fair-value adjustments related to property, equipment and computer software as well as customercontract costs. In addition, adjustments were made for deferred revenue, exited businesses, certain non-recurring product sales and other material non-recurring costs associated with the acquisition.2010 Free Cash Flow Year EndedAdjusted Net Cash from Operating Activities Year Ended(in millions) December 31, 2010 (in millions) December 31, 2008Cash from Operations Reported$ 2,726 Operating Cash As Reported$ 939Adjustments: Adjustments: Cost of additions to land, buildings and equipment (355) Payments for securities litigation 615 Cost of additions to internal use software (164) Operating Cash As Adjusted$1,554Free Cash Flow $ 2,207 Xerox 2010 Annual Report7 10. Board of DirectorsA: Member of the Audit Committee 82 1B: Member of the Compensation Committee67C: Member of the Corporate3 Governance Committee 54D: Member of the Finance Committee1. Ursula M. Burns5. William Curt HunterA, CGlenn A. BrittA, BChairman andDean, Tippie College of BusinessChairman and Chief Executive OfficerChief Executive Officer University of IowaTime Warner Cable Inc.Xerox Corporation Iowa City, IA New York, NYNorwalk, CT (Not pictured)6. N. J. Nicholas, Jr.B, D2. Richard J. HarringtonAInvestorRobert J. KeeganBRetired President and New York, NYRetired Chairman, President and CEOChief Executive Officer The Goodyear Tire & Rubber Company7. Ann N. ReeseC, DThe Thomson Corporation Akron, OHExecutive DirectorStamford, CT(Not pictured)Center for Adoption Policy3. Mary Agnes WilderotterDRye, NYChairman and Chief Executive Officer8. Charles PrinceC, DFrontier Communications CorporationSenior Counselor,Stamford, CTAlbright Stonebridge Group and4. Robert A. McDonaldA, B Albright Capital Management LLCChairman, President and Retired Chairman andChief Executive Officer Chief Executive OfficerThe Procter & Gamble CompanyCitigroup Inc.Cincinnati, OHNew York, NY8 11. Xerox 2010 Annual Report 9 12. Our BusinessBusiness OverviewWe are a leader in a large, diverse andgrowing market estimated at over $500 billion With sales of $22 billion and operations (in billions) in 160 countries, we are the worlds leading enterprise for business process and document $130 management. We focus on managing the documents and millions of transaction touchpoints that simplify the ways real business gets done. $250We provide the industrys broadest portfolio of document technology,$150+services and software, and the most diverse array of business processand IT outsourcing support. Our document technology offerings servebusinesses of all sizes and across industries to deliver solutions for both $250B Information Technology Outsourcingthe workplace and production print environments. We leverage our We specialize in designing, developing and deliveringtechnology and the document expertise of our employees to delivereffective IT solutions. By outsourcing their IT infrastructure,further value for our customers through our document outsourcing companies are able to streamline and improve theirsolutions, which help customers improve their productivity and reduceIT functions while reducing costs and improving theircosts. We have transformed our business with the acquisition ofcompetitive position. We apply thought leadership,Affiliated Computer Services, Inc. (ACS) in February 2010, which allowsinnovation and operational excellence to deliver theXerox to capitalize on the rapidly growing services market. Through ourhighest level of service delivery to our customers.business process and IT outsourcing we offer global services from claimsreimbursement and electronic toll transactions to the management of$150B+ Business Process Outsourcing We are the largest worldwide diversified business processHR benefits and customer care centers to the operation of a companysoutsourcing company in the large and growing BPO market.technology infrastructure. The BPO market comprises the outsourcing of non-core, mission-critical business processes and functions that clients need to run their day-to-day operations. The market is very broad, encompassing horizontal business processes such as human resource management and finance and accounting, as well as industry-specific business processes.$130B Document Management We are well-positioned to lead in this market. The innovation that we bring to document systems, software and integrated solutions is unparalleled in the industry and is built into our broad portfolio of technology and services.These market estimates are calculated by leveraging third-party forecastsfrom firms such as International Data Corporation and InfoSource inconjunction with our assump ions about our markets. t10 13. Our Strategy We organize our business around two segments: Technology and Services.We are well-positioned to lead in the markets in which we participate.Our strategy leverages our core strengths to drive growth within our ur Technology segment comprises our business of providing Osegments and lines of businesses.customers with document technology and related supplies, technical service and equipment financing. Our product categories within this segment include Entry, Mid-range and High-end products. ur Services segment is comprised of business process outsourcing, O Core Strengths BusinessesGrowth Drivers information technology outsourcing and document outsourcing services. Because we provide all three of these business services,Document we are uniquely positioned in the industry, and we believe this allows Accelerate Our BrandTechnology us to provide a differentiated solution and deliver greater value to color transition High-end our customers. Mid-rangeAdvance customized Entry digital printing GlobalXerox is Uniquely Positioned* PresenceExpand distributionServices RenownedExtend lead in Innovation Documentdocument outsourcing Outsourcing Business ProcessExpand BPO and OutsourcingITO globally Services IT Outsourcing Operational Leverage Excellence innovation Business Process OutsourcingOur core strengths include: ur Brand We have a strong and well-recognized brand that is knownOby businesses worldwide for delivering industry-leading documenttechnology, services and solutions.Document lobal Presence Our geographic footprint spans 160 countriesGOutsourcingand allows us to serve customers of all sizes to deliver superiortechnology and services, regardless of complexity or number ofcustomer locations. enowned Innovation We have a history of innovation and, withRmore than 10,200 active U.S. patents and five global research centers, Information Technologywe are committed to continuing to lead in the document technology Outsourcingindustry and to leverage our technology into new service areas. ervices Operational Excellence We have an operationalSexcellence model that leverages our global delivery capabilities,production model, incentive-based compensation process, proprietarysystems and financial discipline to deliver productivity and lowercosts for our customers.* For a description of how we are uniquely positioned, see the Shareholderletter on page 2, left column, last paragraph.Xerox 2010 Annual Report 11 14. Our BusinessWe will leverage our core strengths and market opportunities to grow ourAcquisitionsbusinesses by executing on the following growth initiatives:In February 2010, we acquired Affiliated Computer Services, Inc. ccelerating the Transition to Color We have the broadest colorA ACS is a premier provider of diversified business process outsourcing andportfolio in the industry and leading technologies to help customersinformation technology services and solutions to commercialrealize the communication benefits of printing in color. Cost and and government clients worldwide.quality improvements are driving the transition from black-and-whiteto color. With only 23% of Xerox pages printed on color devices, we Subsequent to the acquisition of ACS, we acquired three additionalbelieve there remains tremendous opportunity to grow color pagesservice companies, further expanding our BPO capabilities:and revenues. n July 2010, we acquired ExcellerateHRO, LLP (EHRO), a globalI dvancing Customized Digital Printing We are the leader inA benefits administration and relocation services provider. Thisdigital production printing, and we continue to create new market acquisition establishes ACS as one of the worlds largest pension planopportunities for digital printing through technology that enablesadministrators and a leading provider of outsourced health, welfarepersonalized promotional and transactional documents, short-run bookand relocation services.publishing, cross-media customized campaigns and more. Color digital n October 2010, we acquired TMS Health, LLC (TMS), a U.S.-basedIproduction pages are estimated to grow over 20% CAGR from 2009 to teleservices company that provides customer care services to the2014, according to internal market estimates. pharmaceutical, biotech and healthcare industries. Through TMS, we xpand Distribution We strive to ensure Xerox is considered by everyE will improve communication between pharmaceutical companies,customer and potential customer. We will continue to broaden ourphysicians, consumers and pharmacists. By providing customerdistribution capacity through acquisitions and channel partnerships education, product sales and marketing, and clinical trial solutions,targeted at expanding our presence in the small and mid-size business we build on our ITO and BPO services we are already delivering to(SMB) market, and we will capitalize on our coverage investmentsthe healthcare and pharmaceutical industries.and partnerships to drive growth in digital production printing. n November 2010, we acquired Spur Information Solutions, LimitedI xtending Lead in Document Outsourcing We lead the industry withE (Spur), one of the United Kingdoms leading providers of parkingend-to-end Document Management Services. Through offerings such enforcement computer software used. Spurs core software helpsas managed print services, we can help our customers save up to 30% governments implement and enforce local parking codes acrosson printing costs by optimizing their use of document systems acrossmunicipalities. The acquisition strengthens our broad portfolio ofan entire enterprise. We will seek to grow our document outsourcing services that support the transportation industry.revenue by expanding our print services offerings to smaller companies,Additionally in 2010, we acquired two companies to further expand ourdelivering solutions in new service categories such as multi-channeldistribution capacity:marketing communications, and leveraging our BPO and ITO presenceto deliver even greater value to our customers. n January 2010, we acquired Irish Business Systems Limited (IBS)I xpand BPO and ITO Globally In 2010, approximately 90% of ourE to expand our reach into the small and mid-size business marketBPO and ITO revenues were from services provided to customers in thein Ireland. IBS, a managed print services provider, has eight officesUnited States. We believe there is tremendous opportunity to leverage located throughout Ireland and is the largest independent supplier ofXeroxs global presence and customer relationships to expand our BPOdigital imaging and printing solutions in Ireland.and ITO services internationally. n September 2010, we acquired Georgia Duplicating Products, Inc.,I everage Innovation We have a strong heritage in innovation andL an office equipment supplier. This acquisition furthers our strategywe continue to invest heavily in research and development. In 2010, of supporting business customers across the U.S. with an expandingtogether with Fuji Xerox, our research and development spending was network of office technology providers.$1,602 million. We see great opportunity in applying our documentmanagement technology to deliver industry-leading documentsolutions to the market, to increase ACSs existing BPO capabilities,and to deliver new services to help customers better manage theirdocument-intensive business processes.12 15. Business Model FundamentalsRevenue Stream Our annuity-based business model yields 18% strong and stable cash generation and earnings growth.Through our annuity-based business model, we deliver significant cashgeneration and have a strong foundation upon which we can expand 82%earnings.Annuity ModelThe fundamentals of our business rest upon an annuity model that82% AnnuityApproximately 82% of our revenue, annuity includesdrives significant recurring revenue and cash generation. Over 80%revenues from services, maintenance, supplies, rentalsof our 2010 total revenue was annuity-based revenue that includes and financing.contracted services, equipment maintenance and consumable supplies,among other elements. Some of the key indicators of annuity revenue 18% Equipment Salesgrowth include: The remaining 18% of our revenue comes from equipment sales, from either lease arrangements that he number of page-producing machines in the field (MIF), which isT qualify as sales for accounting purposes or outrightimpacted by the number of equipment installations cash sales. age volume and the mix of color pages, as color pages generate morePrevenue per page than black-and-white ervices signings growth, which reflects the year-over-year increase inS Cash Generationestimated future revenues from contracts signed during the period asmeasured on a trailing 12-month basisThe combination of consistently strong cash flow from operations ervices pipeline growth, which measures the year-over-year increaseSand modest capital investments enabled us in 2010 to pay down ain new business opportunitiessignificant amount of the debt associated with the ACS acquisition. xpanding the digital production printing market, as this is key toECash generation in the future will continue to provide a return toincreasing pages.shareholders through: uying back shares under our share repurchase program once debt B leverage targets are met xpanding our distribution and business process outsourcing E capabilities through acquisitions aintaining and, over time, increasing our quarterly dividend. M Expanded Earnings We will expand our operating margin and future earnings through: odest revenue growth M riving cost efficiencies to balance gross profit and expense D epurchasing shares R aking accretive acquisitions. MXerox 2010 Annual Report 13 16. Our BusinessSegment InformationTechnologyOur reportable segments are Technology, Services and Other. Wepresent operating segment financial information in Note 2 SegmentReporting in the Consolidated Financial Statements, which weThe innovation that we bring to documentincorporate by reference here. We have a very broad and diverse baseof customers by both geography and industry, ranging from SMB tosystems, software and integrated solutionsgraphic communications companies, governmental entities, educationalis unparalleled in the industry and is builtinstitutions and Fortune 1000 corporate accounts. None of our businessinto our broad portfolio of technology, forsegments depends upon a single customer, or a few customers, the loss businesses of any size, in any industry,of which would have a material adverse effect on our business.around the world. Revenues by Business Segment 9 9 >50 (in millions)$1,647 percent year-over-percent color percent of digital year increase inpage growth production color equipment salepages produced on revenue Xerox technology$10,349 $9,637 21100 7 product launchesbillion dollar +percent color in 2010 marketrevenue growth opportunity $10,349 Technology T echnology includes the sale of products and supplies, as well as the associated technical service and financing of those products.Technology includes the sale of products and supplies, as well as the associated technical service and financing of those products. The $9,637 ServicesTechnology segment is centered around strategic product groups that Our Services segment comprises three service offerings: share common technology, manufacturing and product platforms. Business Process Outsourcing (BPO), Information Technology Outsourcing (ITO) and Document Outsourcing (DO). $1,647 Other T he Other segment primarily includes revenue from paper sales, wide-format systems, and GIS network integration solutions and electronic presentation systems.14 17. Our Entry business products include: Technology Revenue Mix olorQube 8570/8870: Featuring advanced cartridge-free solid ink,Cthe ColorQube 8570 and ColorQube 8870 color printers are powerful,no-fuss and waste-conscious printing solutions that are simple, highlyproductive and affordable, with the advantage of superior color 22%output. At 40 pages-per-minute (ppm), these products are perfectfor small to mid-size workgroups. haser 7500: This 35 ppm color laser printer allows small and mid-Psize workgroups to attain professional-quality results. Key features 56%include improved print quality as a function of 1200 dpi, new Colorby Words Xerox technology a natural language technology enabling22% easy and intuitive color adjustments enhanced media handlingcapabilities and longer lives on customer-replaceable parts. orkCentre 6400: The WC6400 is Xeroxs first desktop multifunctionWprinter that utilizes Xeroxs Smart Controller platform and supports 56% Mid-range EIP, Xeroxs open platform allowing customization of applications onThe Mid-range business comprises a wide range ofthe MFP. The WorkCentre 6400 is also able to handle busy volumes,multifunction printers, copiers, digital printing presses,with print speeds up to 32 ppm color/37 ppm mono, and offers basicand light production printers and copiers sold to enterprises finishing, Print Around and ID Card Copy.of all sizes. 22% Entry Mid-rangeThe Entry business comprises products sold principallyMid-range comprises products sold to enterprises of all sizes, principallyto small and mid-size businesses. through dedicated Xerox-branded partners and our direct sales force. 22% High-endWe offer a wide range of multifunction printers, copiers, digital printingpresses and light production devices that deliver flexibility and advancedT he High-end business provides high-end digital monochromeand color systems designed for customers in the graphic features.communications industry and for large enterprises.In 2010, our Mid-range business continued to build on our position inthe market by: nhancing our already strong product portfolio, making color moreEOur strategic product groups are as follows:affordable, easier to use, faster and more reliable, while maintainingour leadership position in black-and-whiteEntry riving to a leadership position in the combined color page printer andDcolor MFP market segmentsEntry comprises products sold principally to small and mid-sizebusinesses through a worldwide network of independent resellers, and ffering a complete range of services and solutions in partnership withOincludes desktop monochrome and color printers and multifunctionindependent software partners that allow our customers to analyze,printers (MFPs) ranging from small personal devices to larger streamline, automate, secure and track their document workflows.workgroup printers designed to serve the needs of demanding officeusers. In 2010, we continued to build on our position in the market by: everaging the market transition from larger centralized devicesLto more-affordable desktop-centric devices with a full portfolio ofproducts aking high-quality desktop color more affordable and easier to useMfor small businesses and large enterprises alike xpanding our channel reach, partner programs and capacity toEsupport the needs of the SMB market.Xerox 2010 Annual Report 15 18. Our BusinessThe breadth of our Mid-range product portfolio is unmatched. Wecontinued to build on this portfolio in 2010 with the launches of: Xerox Mobile Offerings erox WorkCentre 7120: Xeroxs new multifunction printer combinesXThese offerings make it easier for office workersaffordable color with high-productivity workflow tools. Todays MFPsdo far more than copy and print they improve the way work gets to print from anywhere, at anytime. Mobiledone; the WorkCentre 7120 helps SMBs maximize office productivityoffice workers and IT professionals stayand produce affordable, impactful color documents. productive with three tools that make it easier orkCentre 7545 and 7556: These new multifunction printersWthan ever to print, regardless of location:are equipped with features to help mid-size businesses and largeworkgroups boost productivity and meet their sustainability goals. erox Mobile Print Solution makes mobile printing XThey offer speeds up to 45 and 50 ppm color and 45 and 55 ppmsimpler and more convenient. It keeps your businessblack-and-white, respectively. The MFPs, which can copy, scan, fax and documents secure while printing from any smartphonee-mail, include advanced document management and workflow toolsor electronic device, with no need to downloadto make office work easier.cumbersome drivers, tools or software. erox Color 550/560 Digital Color Printer: The new Xerox ColorX550/560 printer, with an easy-to-use color touchscreen, benchmark erox Mobile Express Driver enables printing from a Ximage quality and flexible finishing options, is an efficient choice PC to virtually anywhere. It is a single, universal printerfor quick-print shops, small commercial printers, in-plant operations, driver that can be downloaded to a PC and used to printadvertising agencies, creative shops and office settings. It is the perfectto any PostScript evice on a network, including printers dfit in any print setting for applications ranging from marketing piecesmade by other manufacturers.to office documents. ecure Access Unified ID System allows remote workers S and students to send documents to a centralized print server and activate their job at the device with a swipe of their magnetic or proximity ID card for authentication. Extensible Interface Platform This gives users quick, easy and secure access to Xerox Extensible Interface Platform (EIP) documents wherever they need them. is a software platform upon which developers can use standard Web-based tools to create server-based applications that can be configuredHigh-end for the multifunction printers (MFPs)We provide High-end digital monochrome and color systems designed touch-screen user interface. It brings a newfor customers in the graphic communications industry and for large world of possibilities to the Xerox MFP theenterprises. These High-end devices enable digital on-demand printing, ability to adapt to, support and automatedigital full-color printing and enterprise printing. We are the leading the work processes of our customers. provider in the market offering a complete family of monochrome andcolor production systems, business development tools and workflowsolutions. We are creating new market opportunities in targetedapplication areas with digital printing as a complement to traditionaloffset printing.For more than two decades, we have delivered innovative technologiesthat have revolutionized the production printing industry. We are theindustry leader in the number of pages produced on digital productioncolor presses. We continued to build on our award-winning lineup in2010 with the launches of:16 19. erox Color Press 800 and 1000: These new products are additionsX Servicesto the portfolio and are positioned below iGen4, and above theDocuColor 8002. They offer customers a set of new innovativefeatures. The optional fifth housing for clear dry ink allows users tocreate new applications and/or add value to existing work. The clear We are behind the scenes managing thedry ink allows for images and text to be highlighted for visual impact,essential processes that your business canor digital watermarks applied for artistic effect. Flexible finishingoptions include high-capacity stackers, booklet makers and a tape count on to be successful.bind option exclusive to Xerox. erox iGen4 EXP: We added more capabilities to the flagship of theXproduction color portfolio, iGen4. The industrys most reliable andproductive press added a number of new options that expand thereach of iGen, enabling new applications that were previously doneonly on offset presses. The expanded sheet size of 26", or 660mm,37900 4.4billion publicmillion healthcaremillion employeesallows print providers to produce full-size trifold brochures and moretransport fares claims processedand retirees servedmulti-up images such as postcards and business cards per page. A newprocessed annuallyby HR servicestouchless workflow allows for jobs to be completed without manual annuallyintervention or setup, saving time, reducing errors and producingmore-sellable prints. Integrating with the Adobe PDF print enginedrives quick and reliable printing of native Adobe PDF files.We are enabling print providers in graphic communications, service3 1.5 350year leader inmillion phone thousand desktopsbureaus and large enterprises to profit and grow by meeting theirGartner MPS calls handled supportedcustomers specific business needs with just-in-time, one-to-one andMagic Quadrantdaily in our calle-based services rather than simply manufacturing a printed piece.centersFreeFlow Digital Workflow: Our FreeFlow digital workflow is a collectionof software technology solutions that our customers can use to improveall aspects of their processes, from content creation and managementOur Services segment comprises three service offerings: Business Processto production and fulfillment. Our digital technology, combined withOutsourcing (BPO), Document Outsourcing (DO) and Informationtotal document solutions and services that enable personalization Technology Outsourcing (ITO). We provide non-core, mission-criticaland printing on demand, delivers value that improves our customers services that our clients need to run their day-to-day business. The servicesbusiness results. we provide enable our clients to concentrate on their core operations,Through our industry-leading FreeFlow Digital Workflow collection and respond rapidly to changing technologies and reduce expenses associatedFreeFlow Print Server, we deliver three primary values to our customers with their business processes and information processing.the ability to Connect, Control and Enable. Our solutions:The majority of our Services business is the result of our acquisition of onnect our customers to their customers 24/7, enabling them to beC ACS in February 2010.open for business around the clock. ontrol our customers costs, environmental impacts and security.CAutomated workflows provide extensive productivity gains and greatlyincrease document integrity by eliminating manual processes. nable new applications and revenue streams such as photo books,Esecure event tickets and packaging.Xerox 2010 Annual Report17 20. Our Business ustomer Care: One of our core values is delivering a positive customer C care experience. We have years of experience providing customer care Services Revenue Mixoutsourcing services that can improve productivity, efficiency and customer retention. Services include: 13% trategic Advisory Services S ccount Activations A ollections C evice/Technical Support. D34% 53%Finance and Accounting Outsourcing: Our finance and accounting services allow our clients to benefit from our global delivery model and our quality management systems, resulting in better accuracy and timeliness, and reduced risk for our clients. Services include: ccounts Payable, Accounts Receivable A 53% Business Process Outsourcing illing BBPO, which provides a multitude of services for eneral AccountingGour customers, is the largest component of theServices segment. ax Management T 34% Document Outsourcing reasury and Risk Management T ime and Expense Reporting. TOur DO business provides services that help customersoptimize their printing infrastructure and streamline theirHealthcare Payer and Insurance: We deliver administrative efficiencies communication and business processes.to our healthcare payer clients through our scalable and flexible 13% Information Technology Outsourcing transactional business solutions, which encompass both our global delivery model and domestic payer service centers. Services include:Our ITO business allows our customers worldwide to focuson their competencies instead of their IT infrastructure. ealthcare Payer Claim Processing H ealthcare Payer Customer Care H ost Recovery, Audit, Cost Avoidance. CBusiness Process Outsourcing Healthcare Provider: Our healthcare provider business offers services and solutions to meet the critical financial, operational and clinicalWe are the largest worldwide diversified business process outsourcing needs of the healthcare provider industry. We offer a full range ofcompany, with focused offerings in education, transportation, services, including:communication, healthcare, government, finance and accountingservices, manufacturing, consumer goods and retail. Our BPO service onsulting Solutions Cofferings are focused, transaction-intensive, back-office functions. Our evenue Cycle Management RBPO services include: pplication Services. A uman Resources Services: We provide a comprehensive portfolio ofHhuman resources solutions that allow our clients to benefit from bestpractices, our subject matter expertise, consulting and technologicalsolutions. Our human resources services include: R ConsultingH R Outsourcing H otal Benefits Outsourcing T earning.L18 21. overnment Services and Solutions: We help federal, state andG Our ITO services include:local government agencies by providing services that improve their ata Center Outsourcing: We provide a 24/7 support organizationDoperating efficiency, increase the level of service provided to theirthat maintains a unified set of tools and processes to support ourconstituents, increase their revenue streams and reduce overallclients IT environments, including systems administration, databaseoperating costs of service delivery. Our service offerings include:administration, systems monitoring, batch processing, data backup hild Support Payment ProcessingC and capacity planning. lectronic Benefits Transfer E id-range Server Outsourcing: We support our clients needs forM tudent Loan ServicingS adaptable computing environments and their potential growth. We overnment Records Management Gprovide comprehensive systems support services. lectronic Payment Cards.E etwork Outsourcing: We provide telecommunications managementNservices for voice and data networks. We are able to leverage our overnment Healthcare: We provide our state government clientsG enterprise agreements, proprietary tools, procedures and skilledwith health program management solutions to help them administerpersonnel to provide our clients with a scalable and automatedtheir programs and control the cost of healthcare. We support the processing environment.full healthcare continuum, including member enrollment, claims emote Infrastructure Management (RIM): We provide RIM servicesRprocessing and health management. Our service offerings include:that allow our clients to retain control of their IT assets but outsource edicaid Program AdministrationM the day-to-day IT operations management. ealthcare and Quality ManagementH elp Desk/Service Desk Management: We deliver specializedH ligibility and Enrollment SolutionsE service desk support from self-service to remote management and harmacy Benefits Management.P diagnostics. ransportation Solutions: We help transportation agencies worldwideT esktop Outsourcing: Our desktop services provide our clients with aDaddress the unique challenges associated with revenue collection andcomprehensive approach to managing their end-user platforms andregulation compliance services. From fare collection to toll and parkingdevices. We design and execute desktop management strategies thatsolutions and from back-office processing to infrastructure installation, address and resolve issues such as enterprise bandwidth constraints,we provide systems and services that help governments with theirunstable computing environments, areas of insecurity and unavailabletransportation problems. New innovations include the Smart Card network resources.Fare Payment Solution a streamlined and seamless fare payment anaged Storage: Data storage requirements have become largerMsystem. By adopting a fare payment system based on the financialand more complex. We help our clients define, monitor and optimizeindustrys open standards, transit agencies can now enable riders totheir data storage requirements while reducing the complexity of theirtap contactless bankcards for point-of-entry payments.storage environments and associated costs. tility Computing: We support large corporations with our utilityUInformation Technology Outsourcingcomputing model. Utility computing provides pay for use pricing formid-range server clients, which provides variable pricing and relievesWe specialize in designing, developing and delivering effective ITour clients from the burden of asset ownership.solutions. Our secure data centers, help desks and managed storagefacilities around the world provide a reliable IT infrastructure that isaster Recovery: We approach disaster recovery as aDminimizes the chance of disruption to our clients daily operations.multidisciplinary function. We assess our clients specific enterpriserequirements and then deploy solutions based on these requirements.With our global Information Technology Outsourcing solutions, ecurity Services: Our solutions provide security from the desktop toScommercial businesses and government organizations worldwide canLAN/WAN and Internet levels. We leverage a combination of maturefocus on their competencies instead of their IT infrastructure. methodologies and industry best practices that afford increasedThroughout our global IT services outsourcing portfolio, we:ability to protect valuable data while also satisfying industry auditrequirements. nfuse thought leadership and innovationI T Commercial Services: We possess category knowledge, tools andI anage to the highest level of quality for service deliveryM processes that allow us to reduce IT and telecommunication costs for nable our customers to transform their organization.E our clients.Xerox 2010 Annual Report 19 22. Our BusinessThrough these services, we: Cloud Computing elp our clients save up to 30% on printing costs through managedH Xerox is uniquely positioned to bring the best print services that optimize the use of document systems across anentire enterprise of enterprise-level Cloud services to our clients. implify document-driven processes, such as forms processing andS Weve been involved in virtualization andrecords management on-demand services for more than 20 years anage in-house print operations and special events by handlingM driving the evolution from mainframe computers technology procurement and print/copy centers to the ASP model to utility computing. Cloud ake information easier to manage and find through digital imaging,M is the next step in this evolution; representing archiving and indexing the maturation of what our company has enerate a better return on investment through personalized,G been doing all along. Our strength is delivering multi-channel marketing communications mprove commercial print operations, sales and profits throughI secure, enterprise-level Cloud solutions todocument outsourcing. large organizations with multi-site applications and large transaction volumes. We create As the market leader in managed print services, our approach tooptimizing across all print environments allows our customers to and execute the entire solution from the print from anywhere to anywhere in a seamless way, while ensuring initial consultation and development of thecompliance with budget targets, security protocols and environmental most appropriate Cloud strategy to the sustainability programs. phased transformation.OtherThe Other segment primarily includes revenue from paper sales,wide-format systems, and GIS network integration solutions andDocument Outsourcingelectronic presentation systems. Paper comprised approximatelyWe are an industry leader in document outsourcing services, with58% of the revenues in the Other segment.more than 20 years experience and 15,000 business professionalsacross 160 countries. Geographic InformationWe help companies optimize their printing infrastructure and streamline Our global presence is one of our core strengths. Overall, approximatelytheir communication and business processes to grow revenue, reduce36% of our revenue is generated by customers outside the U.S.costs and operate more efficiently. We specialize in the planning and Currently, ACS generates approximately 10% of its revenue outside thedelivery of the following services: U.S. We have a significant opportunity to leverage our global presenceand customer relationships to expand the ACS business in Europe and anaged print services for workplace, production environments andM developing markets.virtual worker printing sites onsolidating in-house production and commercial printing under aCsingle point of control mproving communication processes and back-office functionsIassociated with creating, capturing, managing and routing customer,employee and supplier information esigning, authoring and translating technical and userDdocumentation reating personalized, multi-channel marketing communications.C20 23. To ensure our success, we have aligned our R&D investment portfoliowith our growth initiatives, including accelerating our color transition, Revenues by Geographyenhancing customer value by building on our services leadership, and by (in millions)strengthening our leadership in digital color printing.Xerox conducts work in color science, computing, digital imaging, work $2,500 practices, electromechanical systems, novel materials, linguistics, workpractice analysis and other disciplines. Through our Smart DocumentTechnologies, we are developing ways to apply innovation to automateand differentiate our Services offerings. $5,332Sustaining engineering expenses, which are the hardware engineering $13,801and software development costs we incur after we launch a product, areincluded in our RD&E expenses. $13,801 U.S. RD&E Expenses $5,332 Europe(in millions) $2,500 Other Areas 10 $653 $128$781 Note: ACS generates approximately 10% of its revenue outside the U.S. 09 $713 $127 $840 Revenues by geography are based on the location of the unit reporting the revenue and include export sales. 08 $750 $134$884 R&DResearch and Development Sustaining Engineering Fuji Xerox invested $821 million in R&D in 2010, $796 million in 2009 and $788 million in 2008. Innovation drives growth and keeps us at the forefront of our industry.Investment in R&D is critical for competitiveness in our fast-pacedmarkets. Approximately 55% of our equipment sales are from productslaunched during the last two years. Our R&D investment also enablesinnovation within our Services segment.Research activities are conducted in the United States in Webster, NewYork, and Palo Alto, California; in Canada in Mississauga, Ontario; inEurope in Grenoble, France; and in Asia both at the India Innovation Hubin Chennai, India, and in collaboration with Fuji Xerox, Ltd. (Fuji Xerox).Xerox 2010 Annual Report 21 24. Our BusinessPatents, Trademarks and Licenses We manage our business based on the principal business segments described earlier. We have organized the marketing, selling andXerox and its subsidiaries were awarded 1,031 U.S. utility patents indistribution of our products and services by geography, channel type2010. On that basis, we would have ranked 20th on the list of companiesand line of business.that were awarded the most U.S. patents during the year. Includingour research partner Fuji Xerox, we were awarded over 1,600 U.S. We sell our products and services directly to customers through ourutility patents in 2010. Our patent portfolio evolves as new patents are worldwide sales force and through a network of independent agents,awarded to us and as older patents expire. As of December 31, 2010, we dealers, value-added resellers, systems integrators and the Web.held almost 10,200 design and utility U.S. patents. These patents expire In large enterprises, we follow a services-led approach that enables usat various dates up to 20 years or more from their original filing dates. to address two basic challenges facing large enterprise customers: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 ow to optimize infrastructure to be both cost-effective and globally Hsegment. In addition, any of our proprietary rights could be challenged, consistentinvalidated or circumvented, or may not provide significant competitive ow to improve their value proposition and communication with their Hadvantages.customersIn the U.S., we are party to numerous patent-licensing agreementsOur go-to-market approach includes the largest direct sales force in theand, in a majority of them we license or assign our patents to others in industry, with customers served by Client Managing Directors, Accountreturn for revenue and/or access to their patents. Most patent licensesGeneral Managers and Sales Representatives.expire concurrently with the expiration of the last patent identified inthe license. In 2010, we added 16 new agreements to our portfolio of For small and mid-size business, we continue to expand our distributionpatent-licensing and sale agreements, and Xerox and its subsidiaries partnerships in North America with additional information technologywere licensor or seller in 14 of the agreements. We are also a party resellers and by enhancing our network of independent agents. In 2010,to a number of cross-licensing agreements with companies that hold we acquired two companies to further expand this distribution capacity.substantial patent portfolios, including Canon, Microsoft, IBM, Hewlett- In Europe, Africa, the Middle East and parts of Asia, we distribute ourPackard, Oce, Sharp, Samsung and Seiko Epson. These agreements varyproducts through Xerox Limited, a company established under thein subject matter, scope, compensation, significance and time. laws of England, and related non-U.S. companies. Xerox Limited entersIn the U.S., we own more than 650 trademarks, either registered or into distribution agreements with unaffiliated third parties to provideapplied for. These trademarks have a perpetual life, subject to renewaldistribution of our products in many of the countries located in theseevery 10 years. We vigorously enforce and protect our trademarks.regions, and previously entered into agreements with unaffiliated third parties providing distribution of our products in Iran, Sudan andMarketing and Distribution Syria. Iran, Sudan and Syria, among others, have been designated as state sponsors of terrorism by the U.S. Department of State and are subject to U.S. economic sanctions. We maintain an export and sanctions compliance program and believe that we have been and are Our brand is valued at an estimated $6.1in compliance with U.S. laws and government regulations for these countries. We have no assets, liabilities or operations in these countries billion and was ranked as a Best Globalother than liabilities under the distribution agreements. After observing Brand by Business Week.required prior notice periods, Xerox Limited terminated its distribution agreements with distributors servicing Sudan and Syria in August 2006 and terminated its distribution agreement with the distributor servicing Iran in December 2006. Now, Xerox only has legacy obligations to third parties, such as providing spare parts and supplies to these third parties. In 2010, total Xerox revenues of $21.6 billion included less than $0.2 million attributable to Iran, Sudan and Syria.22 25. CompetitionWe operate in over 160 countries worldwide.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 provide the industrys broadest portfolio of We compete on the basis of technology, performance, price, quality,document technology, services and software,reliability, brand, distribution, and customer service and support.and the most diverse array of business processes Our competitors in the Technology business include Canon, Ricoh,and IT outsourcing support through a variety ofHewlett-Packard, Kodak, Oce, Konica Minolta and Lexmark. In thedistribution channels around the world.Services business, our larger competitors are Hewlett-Packard, Genpact, Teletech, Accenture, Aon Hewitt, Computer Services, IBM and Dell. In addition, in the Services segment, we compete with in-house departments performing the functions that we are seeking to have them outsource to us. We believe that our brand recognition, reputation for our business process and document management knowledge and expertise, innovative technology, service, breadth of product offerings, global distribution channels, customer relationships and large customer base are important competitive advantages. We and our competitors continue to develop and market new and innovative products and services at competitive prices and, at any given time, we may set new market standards for quality, speed, function and level of service. Global EmploymentXerox North America Globally, we have approximately 136,500 direct employees. We haveNorth American Operations includes the United States approximately 8,000 sales professionals, approximately 12,000 technicaland Canada.service employees and over 46,000 employees serving our customers through on-site operations or off-site delivery centers.Xerox EuropeXerox Europe covers 17 countries across Europe.Developing MarketsDeveloping Markets supports more than 130 countries.Fuji XeroxFuji Xerox, an unconsolidated entity of which we own25%, develops, manufactures and distributes documentmanagement systems, supplies and services.ACS maintains a global presence in the BusinessProcess Outsourcing and Information TechnologyOutsourcing businesses and leverages the Xeroxdistribution organizations within these geographies.Xerox 2010 Annual Report 23 26. Our BusinessCustomer FinancingManufacturing and SupplyWe finance a large portion of our direct channel customer purchases Our manufacturing and distribution facilities are located around theof Xerox equipment through bundled lease agreements. We believe world. The companys largest manufacturing site is in Webster, Newthat financing facilitates customer acquisition of Xerox technology and York, where we produce fusers, photoreceptors, Xerox iGen and Nuveraenhances our value proposition, while providing Xerox an attractive gross systems, components, consumables and other products, and we havemargin and a reasonable return on our investment in this business.an EA Toner plant located in Webster. Our other primary manufacturingoperations are located in: Dundalk, Ireland, for our high-end productionBecause our lease contracts permit customers to pay for equipmentproducts and consumables; and Wilsonville, Oregon, for solid inkover time rather than at the date of installation, we maintain a certainproducts, consumable supplies and components for our Mid-range andlevel of debt to support our investment in these lease contracts. WeEntry products. We also have a major facility in Venray, Netherlands,fund our customer financing activity through a combination of cashwhich handles supplies manufacturing and supply chain managementgenerated from operations, cash on hand and proceeds from capitalfor the Eastern Hemisphere.market offerings. At December 31, 2010, we had $6.6 billion of financereceivables and $0.6 billion of equipment on operating leases, or Total Our master supply agreement with Flextronics, a global electronicsFinance assets of $7.2 billion. We maintain an assumed 7:1 leverage manufacturing services company, to outsource portions of manufacturingratio of debt to equity as compared to our Finance assets and, therefore, for our Mid-range and Entry businesses, continues into 2011.a significant portion of our $8.6 billion of debt is associated with ourWe also acquire products from various third parties in order to increase thefinancing business.breadth of our product portfolio and meet channel requirements. We havearrangements with Fuji Xerox under which we purchase and sell products,some of which are the result of mutual research and developmentagreements. Refer to Note 7 Investments in Affiliates, at Equity inthe Consolidated Financial Statements in our 2010 Annual Report foradditional information regarding our relationship with Fuji Xerox.Services Global Production ModelWe believe our global services production model is one of our keycompetitive advantages. This model encompasses employees inproduction centers around the world including India, Mexico, thePhilippines, Jamaica, Ghana, Brazil, Guatemala, Chile, Argentina, Spain,Poland and Ireland, among others. Our global production model isenabled by the use of proprietary technology, which allows us to securelydistribute client transactions within data privacy limits across a globalworkforce. This global production model allows us to leverage lower-costproduction locations, consistent methodology and processes, and timezone advantages.24 27. Fuji Xerox BacklogFuji Xerox is an unconsolidated entity in which we currently own a 25% We believe that backlog, or the value of unfilled orders, is not ainterest and FUJIFILM Holdings Corporation (FujiFilm) owns 75%.meaningful indicator of future business prospects because of theFuji Xerox develops, manufactures and distributes document processingsignificant proportion of our revenue that follows contract signing and/products in Japan, China, Hong Kong, other areas of the Pacific Rim, or equipment installation, the large volume of products we deliver fromAustralia and New Zealand. We retain significant rights as a minorityshelf inventories, and the shortening of product life cycles.shareholder. Our technology licensing agreements with Fuji Xerox ensurethat the two companies retain uninterrupted access to each others Seasonalityportfolio of patents, technology and products. Our technology revenues are affected by such factors as the introduction of new products, the length of sales cycles and the seasonality ofInternational Operations technology purchases. These factors have historically resulted in lowerWe are incorporating by reference the financial measures byrevenue in the first quarter and the third quarter.geographical area for 2010, 2009 and 2008 that are included in Note2 Segment Reporting in the Consolidated Financial Statements inOther Informationour 2010 Annual Report. See also the risk factor entitled Our business, Xerox is a New York corporation, organized in 1906, and ourresults of operations and financial condition may be negatively impacted principal executive offices are located at 45 Glover Avenue,by economic conditions abroad, including local economies, political P.O. Box 4505, Norwalk, Connecticut 06856-4505. Our telephoneenvironments, fluctuating foreign currencies and shifting regulatory number is (203) 968-3000.schemes in Part I, Item 1A of Form 10-K. 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 Securities and Exchange Commission. Our Internet address is www.xerox.com. Xerox 2010 Annual Report 25 28. Managements Discussion and Analysis ofFinancial Condition and Results of OperationsThe following Managements Discussion and Analysis (MD&A) The fundamentals of our business rest upon an annuity model thatis intended to help the reader understand the results of operations drives significant recurring revenue and cash generation. Over 80%and financial condition of Xerox Corporation. MD&A is providedof our 2010 total revenue was annuity-based revenue that includesas a supplement to, and should be read in conjunction with, our contracted services, equipment maintenance and consumable supplies,consolidated financial statements and the accompanying notes. among other elements. Some of the key indicators of annuity revenuegrowth include:Throughout this document, references to we, our, the Companyand Xerox refer to Xerox Corporation and its subsidiaries. References The number of page-producing machines-in-the-field (MIF), whichto Xerox Corporation refer to the stand-alone parent company and is impacted by equipment installationsdo not include its subsidiaries. Page volume and the mix of color pages, as color pages generate more revenue per page than black-and-whiteExecutive Overview Services signings growth, which reflects the year-over-year increaseWe are a $22 billion leading global enterprise for business process andin estimated future revenues from contracts signed during the perioddocument management. We provide the industrys broadest portfolio of as measured on a trailing12-month basisdocument systems and services for businesses of any size. This includes Services pipeline growth, which measures the year-over-year increaseprinters, multifunction devices, production publishing systems, managedin new business opportunitiesprint services (MPS) and related software. We also offer financing,Subsequent to the acquisition of ACS, we acquired three additionalservice and supplies, as part of our document technology offerings. Inservice companies, further expanding our BPO capabilities:2010, we acquired Affiliated Computer Services, Inc. (ACS). ThroughACS we offer extensive business process outsourcing and information In July 2010, we acquired ExcellerateHRO, LLP (EHRO), a globaltechnology outsourcing services, including data processing, HR benefitsbenefits administration and relocation services providermanagement, finance support and customer relationship management In October 2010, we acquired TMS Health (TMS), a U.S.-basedservices for commercial and government organizations worldwide.teleservices company that provides customer care services to theWe operate in a market that is estimated to be $500 billion. We have pharmaceutical, biotech and healthcare industries136,500 employees and serve customers in more than 160 countries. In November 2010, we acquired Spur Information Solutions (Spur),Approximately 36% of our revenue is generated from customers outside one of the United Kingdoms leading providers of computer softwarethe U.S. used for parking enforcementWe organize our business around two segments: Technology andAdditionally, in 2010 we acquired two companies to further expandServices. our distribution capacity: Our Technology segment comprises our business of providing In January 2010, we acquired Irish Business Systems Limited customers with document technology and related supplies, technical(IBS) to expand our reach into the small and mid-size business service and equipment financing. Our product categories within this market in Ireland segment include Entry, Mid-range and High-End products. In September 2010, we acquired Georgia Duplicating Products Our Services segment is comprised of our business process (Georgia), an office equipment supplier outsourcing, information technology outsourcing and document outsourcing services. Because we participate in all three of these lines of business, we are uniquely positioned in the industry, andFinancial Overview we believe this allows us to provide a differentiated solution and During 2010, despite the continued economic weakness, we began deliver greater value to our customers.to see improvement in our markets. Results remained strong in ourdeveloping markets countries as well as in the small to mid-size businessmarket. We began to see increased demand and usage activity in largeenterprise customers, particularly in the fourth quarter 2010. We closed2010 with strong revenue growth, operating margin expansion andexcellent cash generation, reflecting the strength of our business modeland the benefits of our expanded technology and service offerings.26 Xerox 2010 Annual Report 29. Managements DiscussionThe following is a summary of key 2010 highlights: Our 2011 balance sheet and cash flow strategy includes: sustaining our working capital improvements; continued reductions in non-financing Exceeded on earnings and cash generation commitments debt; leveraging of our financing assets (finance receivables and Strong services performance, realizing benefits from the ACSequipment on operating leases); achieving an optimal cost of capital; acquisition and effectively deploying cash to maximize shareholder value through Technology revenue and activity growth; innovative products share repurchase, acquisitions and dividends. launched in key segments In addition, as a result of providing lease equipment financing to our Disciplined cost and expense management yielding operating customers, we expect to continue to make investments in lease contracts margin improvement(finance receivables and equipment on operating leases). Since weWe completed the acquisition of ACS on February 5, 2010, and its results maintain a certain level of debt to support this investment, we expect tosubsequent to that date are included in our results. Total revenue ofcontinue to leverage this investment in 2011 (see Customer Financing$21.6 billion in 2010 increased 43% from the prior year, primarily as aActivities for additional information).result of the ACS acquisition. Currency had a negligible impact on 2010total revenues. In order to provide a clearer comparison of our results (1) he pro-forma information included within this MD&A is different from the pro-forma T information provided in Note 3 Acquisitions. The pro-forma information includedto the prior year, we are also providing a discussion and analysis on ain Note 3 presents the combined results for 2010 and 2009 as if the acquisitionpro-forma basis, where we include ACSs 2009 estimated results fromwas completed January 1st of each respective year. See the Non-GAAP FinancialFebruary 6 through December 31 in our historical 2009 results(1). On Measures section for a further explanation and discussion of this non-GAAP measure.a pro-forma(1) basis, total revenue increased 3% in 2010, including a (2) nnuity revenue = Service, outsourcing and rentals + Supplies, paper and other sales + A Finance income.negligible impact from currency.2010 Annuity Revenue(2) increased 53% from the prior year, or 1% Currency Impactson a pro-forma(1) basis. Currency had a 1-percentage point unfavorableimpact on pro-forma annuity revenue. 2010 Equipment RevenueTo understand the trends in our business, we believe that it is helpful toincreased 9% from the prior year, including a 1-percentage point analyze the impact of changes in the translation of foreign currenciesnegative impact from currency. into U.S. Dollars on revenues and expenses. We refer to this analysis as currency impact or the impact from currency." This impact isNet income attributable to Xerox for 2010 was $606 million and calculated by translating current-period activity in local currency usingincluded $690 million of after-tax costs and expenses related to the comparable prior-year periods currency translation rate. Thisrestructuring, intangibles amortization, acquisition-related costs and impact is calculated for all countries where the functional currency isother discrete and unusual items. Net income attributable to Xerox for the local-country currency. Revenues and expenses from our developing2009 was $485 million and included $128 million of similar after-tax market countries (Latin America, Brazil, the Middle East, India, Eurasiacosts and expenses.and Central-Eastern Europe) are analyzed at actual exchange rates forCash flow from operations was $2.7 billion for 2010, primarily as aall periods presented, since these countries generally have unpredictableresult of increased earnings and working capital cash generation. Cash currency and inflationary environments, and our operations in theseused in investing activities of $2.2 billion primarily reflects the netcountries have historically implemented pricing actions to recover thecash consideration of $1.5 billion for the ACS acquisition. Cash used in impact of inflation and devaluation. We do not hedge the translationfinancing activities was $3.1 billion, primarily reflecting the repayment of effect of revenues or expenses denominated in currencies where theACSs debt of $1.7 billion as well as net payments on other debt duringlocal currency is the functional currency.2010, including the early redemption of $660 million of debt.Approximately 36% of our consolidated revenues are derived fromOur 2011 priorities include: operations outside of the United States where the U.S. Dollar is not the functional currency. When compared with the average of the major Strengthening our leadership in Technology through competitivelyEuropean currencies and Canadian Dollar on a revenue-weighted basis, advantaged products and increased distributionthe U.S. Dollar was 2% stronger in 2010 and 7% stronger in 2009, each Accelerating our services business capture significant BPOcompared to the prior year. As a result, the foreign currency translation opportunity and continue improvements in ITO and document impact on revenue was negligible in 2010 and a 3% detriment in 2009. outsourcing Refer to the Gross Margin section for additional information regarding Continued cost and expense discipline to enable operating margin the impact of currency on our product costs. expansion Driving cash flow, reducing debt and returning cash to shareholders Xerox 2010 Annual Report27 30. Managements DiscussionSummary ResultsRevenueRevenues for the three years ended December 31, 2010 were as follows:Pro-forma(3) Revenues Percent ChangeChange Percent of Total Revenue(in millions)20102009 2008 201020092010 2010 20092008Revenue: Equipment sales $ 3,857 $ 3,550 $ 4,679 9%(24)%9%18% 24%26% Supplies, paper and other 3,377 3,096 3,646 9%(15)%4%15% 20%21%Sales 7,234 6,646 8,325 9%(20)%7%33% 44%47%Service, outsourcing and rentals 13,739 7,820 8,48576% (8)%1%64% 51%48%Finance income660 713 798(7)% (11)% (7)%3%5% 5%Total Revenues $21,633$15,179 $17,60843%(14)%3% 100%100% 100%Segments: Technology $10,349 $10,067 $11,7143%(14)%3%48% 66%66% Services 9,637 3,476 3,828177% (9)%3%44% 23%22% Other 1,647 1,636 2,066 1%(21)%1% 8% 11%12%Total Revenues $21,633$15,179 $17,60843%(14)%3% 100% 100%100%Memo: Annuity Revenue (1)$17,776$11,629 $12,92953%(10)%1%82% 77%73% Color (2)$ 6,397$ 5,972 $ 6,669 7%(10)%7%30% 39%38%Revenue 2010 9% increase in equipment sales revenue, including a 1-percentageTotal revenues increased 43% compared to the prior year. Our point negative impact from currency. Growth in install activity wasconsolidated 2010 results include ACS results subsequent to February 5,partially offset by price declines of approximately 5% and mix.2010, the effective date of the acquisition. On a pro-forma(3) basis, total 7% increase in color revenue(2), including a 1-percentage pointrevenue grew 3%. Currency had a negligible impact on total revenuesnegative impact from currency reflecting:during 2010. Total revenues included the following: % increase in color annuity revenue, including a 1-percentage5 53% increase in annuity revenue(1), or 1% on a pro-forma(3) basis, withpoint negative impact from currency. The increase was driven by a 1-percentage point negative impact from currency. The components higher printer supplies sales and higher page volumes. of annuity revenue were as follows: 2% increase in color equipment sales revenue, including a1 ervice, outsourcing and rentals revenue of $13,739 millionS 2-percentage point negative impact from currency. The increase wasincreased 76%, or 1% on a pro-forma(3) basis, and included adriven by higher installs of new products.negligible impact from currency. The increase was driven by Business % growth in color pages(4). Color pages(4) represented 23% of total9Process Outsourcing (BPO) revenue that partially offset the declinespages in 2010, while color MIF represented 31% of total MIF.in technical service revenue which were driven by a continued butstabilizing decline in pages. Total digital pages declined 4%, whileRevenue 2009 Revenue decreased 14% compared to the prior year, includingcolor pages increased 9%. During 2010 digital MIF increased by 1%and color MIF increased by 15