Xerox Holdings Corporation Annual Report 2012

← All annual reports

FY2012 Annual Report · Xerox Holdings Corporation

Loading PDF…

2012 Annual Report

Today’s Xerox

Inside
Today’s Xerox

Letter to Shareholders

Innovation at Work

Financial Measures

Non-GAAP Measures

Board of Directors

Our Business

Management’s Discussion and Analysis

Consolidated Financial Statements

Notes to Consolidated Financial Statements

Reports and Signatures

Quarterly Results of Operations

Five Years in Review

Corporate Information

Officers

111

113

114

115

116

Financial Highlights (in millions, except EPS)

Total revenue

Equipment sales

Annuity revenue

Net income – Xerox

Adjusted net income* – Xerox

Diluted earnings per share

Adjusted earnings per share*

Net cash provided by operating activities

Adjusted operating margin*

2012

2011

$ 22,390

$ 22,626

3,476

18,914

1,195

1,398

0.88

1.03

2,580

9.3%

3,856

18,770

1,295

1,563

0.90

1.08

1,961

9.8%

* See non-GAAP measures on Page 11 for the reconciliation of the difference between this financial measure that is not in compliance with Generally Accepted
Accounting Principles (GAAP) and the most directly comparable financial measure calculated in accordance with GAAP.

Today’s Xerox is the world’s leading
enterprise for business process and
document management.

That means we help take some of the work
out of work. Our services, technology and
expertise enable workplaces, big and small,
to simplify the way work gets done so they
can operate more effectively and focus more
on what matters most: their real business.

Today’s Xerox is simplifying the way work
gets done in surprising ways.

Handling $421 billion in
accounts payables annually.
We simplify business by managing
global finance, accounting and
procurement operations for customers
across the entire order-to-cash life
cycle. All delivered as scalable solutions
designed to help achieve measureable
process efficiencies and cost savings
in both the short and the long term.

Reducing document-related
costs by up to 30%.
We simplify business by providing
print services that help companies
around the globe manage their costs
by printing fewer pages, digitizing more
documents, consolidating devices and
lowering printing-related energy use.

Processing 900 million
insurance claims every year.
We simplify business by helping
healthcare providers, insurers and
government agencies automate and
accelerate the claims process and stay
ahead of regulatory changes. Which
in turn reduces turnaround time and
costs for everyone.

Managing benefits for over
11 million employees.
We simplify business by supporting
HR teams with industry-leading benefits
administration ranging from complex
health, welfare and defined benefit plans
to innovative employee training tools
and technology. All designed to help
reduce risk, improve compliance and
create great places to work.

Collecting 37 billion annual
transit fares a year.
We simplify business by creating
innovative, scalable and flexible fare
collection solutions for public transit
operators around the world. The results
are not only an improved passenger
experience and reduced operating costs,
but with more people taking public
transportation, fewer cars are on the road.

Answering 1.6 million
customer interactions a day.
We simplify business by helping companies
manage their customer care operations,
help desks and online support. Giving access
to timely, scalable and cost-effective call
center solutions in any language, anywhere
around the world.

Xerox 2012 Annual ReportLetter to Shareholders

Ursula M. Burns
Chairman and
Chief Executive Officer

Dear Fellow Shareholders,

This report is filled with numbers. In our big data world, numbers speak
volumes about results. They influence your investment decisions and
they influence the way we run our business. I’m an engineer by training
and lead with a strong passion for our brand and an obsession with the
numbers that indicate our progress. We’re a company going through
considerable change at a time when economies are uncertain, the
markets we serve are shifting and our “always on” connected world
requires a faster pace and a more competitive edge to win. Numbers
keep me grounded. They provide clarity of where we’ve been and
where we’re headed. Here’s a glimpse of what I mean…

52 percent of our revenue now comes from Services. While our brand
is still associated with our heritage in copying and printing, today more
than half of our business is linked to a diverse portfolio of outsourcing
services, including customer care (likely even for the company who
makes your smartphone), healthcare claims reimbursement (likely for
your private insurance company) and automated tolling and parking
transactions (think EZ Pass and then think how long commutes would
be without it).

84 percent of Xerox’s revenue is annuity based. That’s $18.9 billion
in revenue. A stable, less volatile base.

$2.6 billion in operating cash flow, which reflects the cash-generating
strength of this annuity-based business model.

#1 worldwide revenue market share leadership for our Document
Technology. This speaks to the continued power of the Xerox brand
in a market that we created and continue to benefit from through
healthy margins and established relationships in 160 countries.

1,900. That’s the total number of patents garnered by Xerox along
with our colleagues at the Palo Alto Research Center and at Fuji Xerox
last year alone, bringing to more than 11,500 the number of active

U.S. patents in our portfolio. This year, October 22 to be exact, marks
the 75th anniversary of when Chester Carlson made the first xerographic
image in his lab in New York City. His humble ways of applying innovation
to more easily share information continue to be a source of inspiration
for our research community. And, remarkably 75 years later, our
innovation focus remains very true to Chester’s – finding smarter ways
to strip away complexity and simplify how work gets done.

These numbers are a big part of today’s Xerox. We’re evolving every
day from the well-established copier company to the world’s leading
enterprise for business process and document management.

Our transformation comes with its share of challenges. In 2012,
we continued to face them head on – prioritizing where we needed
to make improvement and executing with precision to deliver. We
made progress. In some areas, the progress isn’t fast enough for me.

For example, as we ramp up growth in our Services business, we must
also improve our Services operating margin. That means being more
disciplined in how we execute large contracts, so we’re applying
innovation and identifying efficient ways to serve our clients better.
We increased margins in the fourth quarter of 2012 – and I expect that
the benefits of our operational focus in this area will deliver continued
improvement going forward.

Despite the economic headwinds we faced last year, I believe we
can improve revenue trends in our Document Technology business.
We understand the market dynamics, know the pressure points and
can identify where weakness is due to economy and where weakness
is due to secular concerns. We are also clear eyed on areas of greatest
growth potential – like in color printing and reaching more small and
mid-size businesses around the world. Last year, we were conservative
in the way we managed our Document Technology business. Due to

Michelin wanted to outsource F&A, so they made tracks
to our door.

Our Challenge: Bring efficiency and cost savings to global
Finance and Accounting operations.

Bottom-line Results: Michelin was initiating a major
transformation program for its Finance function. To improve
performance, reduce costs and enhance overall quality, the
company chose us to provide global outsourced Finance and
Accounting services. We built an F&A solution that today meets
company requirements and service level expectations.

the economic uncertainty across most regions, we put our focus on
reducing the cost base while expanding distribution through indirect
channels. This year, we’re ramping up marketing investments and
introducing new offerings while broadening our channel partnerships –
positioning us better to pursue profitable opportunities.

So, although 2012 presented our business with some obstacles, we
moved forward in refining our business model, improving operational
efficiency and growing our Services business – all while delivering value
to you. Here’s a summary of how we performed:

• Net income of $1.2 billion; adjusted net income of $1.4 billion.1

• GAAP earnings per share of 88 cents; adjusted earnings per share

of $1.03.1

• Total revenue of $22.4 billion, down 1 percent or flat in constant

currency1 from 2011.

-Total Services revenue of $11.5 billion, up 6 percent or up
7 percent in constant currency.1

-Total Document Technology revenue of $9.5 billion, down
8 percent or down 6 percent in constant currency.1

• Operating margin of 9.3 percent.1

• Operating cash flow of $2.6 billion.

• Share repurchase of $1.05 billion and $255 million in dividends.

Priorities Drive Performance

We participate in a $600 billion market. And we continue to tackle
it aggressively on four fronts.

First: Managing our Services business for growth. I mentioned
earlier that revenue from our Services business is now more than half
of our total revenue and is growing at a steady pace. We expect it will
grow to two-thirds of our revenue by 2017. My confidence in the long-
term success of our Services business stems from the diversity of our
offerings and the deep expertise we’ve established to work closely with
clients on their important business processes:

• When a major automobile company selected Xerox to handle their
employee benefits program, we were able to build, manage and
support their open enrollment process in a matter of months.

• Just as a telecommunications company decided to start selling their
new product in Brazil, they tapped us to open, staff and lead their
in-country customer care service.

• As soon as the Affordable Care Act in the United States became

more of a certainty for state governments, several of our government
clients looked to us for help establishing Health Insurance Exchanges
and strengthening the administrative backbone of their Medicaid
and other health and welfare programs.

I could go on but the bottom line is that our Services business will
continue to grow because of the breadth and depth of our offerings
and, more important, because of our respected experience, innovation
and expertise that wins us trust from our clients. That trust helped us
sign new contracts during 2012 worth more than $2 billion in annual
revenue and to win 85 percent of the contracts that were up for
renewal during the year. It’s trust we never take for granted.

Xerox 2012 Annual ReportNorwegian State Railways needed dual-mode ticketing,
we gave them paper and plastic.

Our Challenge: Launch interoperable e-ticketing and paper-
based ticketing systems.

Bottom-line Results: To expand passenger self-service ticketing
options and reduce operating costs, the Norwegian State
Railway wanted an interoperable e-ticketing system and revenue
collection and control system. We deployed national, paper-
based and contactless smart card solutions that met the client’s
high requirements for quality, availability and reliability.

Second: Maintaining our leadership in Document Technology.
Print is changing, but it is far from dead. Where transactional
black-and-white documents are in decline, color printing in offices
and graphic communications settings is growing – and, not surprising,
is an area of strength for our business. We offer the industry’s
broadest range of color printing technology to serve small offices all
the way up to large production houses. You may no longer use inkjet
printers in your home. (That’s OK with me; it’s not the business we’re in.)
But, in offices and print shops, our color technology is in demand and
has resulted in pages on color devices growing 9 percent in 2012.
Through an expanded network of channel partners, we’re now able
to bring the Xerox brand to more establishments around the globe.

Third: Managing our business with a focus on operational
excellence. This is something we’re very proficient at today and
it’s an area where we never rest. It gives us the financial flexibility
to help offset certain pressures on the business – whether it’s
economic uncertainty or necessary investments that drive growth.
We continue to invest in what matters to our customers, including
high-value scalable products and unrivalled service and delivery that
earn customer loyalty.

Fourth: Delivering strong cash flow and returning value to you.
By executing with precision and excellence on the first three priorities,
we delivered on the fourth. We generated $2.6 billion in operating cash
flow in 2012 and allocated $1.05 billion of that cash to buy back
a significant number of Xerox shares during the year. In addition,
we paid out $255 million in dividends during the year. You expect
and deserve a strong return on your investment in Xerox and we owe
you nothing less.

So, that’s our story. Solid results in a challenging environment – a robust
strategy for an expanding market opportunity – and a clear set of
priorities aimed at creating value for all of our constituents. But that’s
only part of the story… here’s the rest.

Creating Customer Value

I spend a lot of my time meeting with customers, learning about their
business problems and trying to explain to them that we can help.
Just a few years ago, that was a tough sell. The Xerox brand is powerful,
but for many it stood for superior document technology. Period.

Talking to our customers about our Services offerings was often met
with “Is that what Xerox does?” That has changed – partly because
of our marketing efforts and partly because of the pervasiveness of
our footprint. Today I can tell customers that we handle $421 billion
in accounts payables annually… answer 1.6 million customer
interactions daily… manage benefits for more than 11 million
employees… process 900 million insurance claims every year…
collect 37 billion transit fares annually… reduce document-related
costs for enterprises large and small by up to 30 percent… and a
whole lot more.

Sustainable Strategy

I was speaking with students recently at NYU Polytechnic, my
undergraduate alma mater, when a student asked me what Xerox might
look like five years from now. The world is changing at such a dramatic
pace that I imagine a lot of CEOs might have a difficult time answering

InterContinental Hotels Group needed a world-class
managed print approach. We checked in with our global
leadership and innovation.

Our Challenge: Improve the quality, efficiency and cost of
document services at IHG’s corporate office that can be scaled
to other properties globally.

Bottom-line Results: When IHG wanted to build a foundation
to streamline and automate business processes, reduce outside
printing expenses and create a reliable in-house print center with
color output capabilities, they turned to us. We introduced a more
efficient back office that improved productivity through digital
documents and automated work processes and saved IHG more
than $1.5 million a year on outside printing.

that question. Frankly, I didn’t. That’s because our strategy is built to
evolve. We continue to invest heavily in innovation and to work with our
customers to understand their changing needs. Although I can’t tell you
how we will be solving their business process problems five years out, I
can tell you that we will continue to simplify the way their back-office
work gets done while boosting productivity and reducing costs.

We’ve been at this for a very long time – ever since Chester Carlson set
out to make office work a little easier. It’s a journey toward a never-
ending goal of making things simpler for our customers so they can
focus on what matters most. That’s what we’ll be doing five years from
now and likely 50 years from now as well.

To that end, the team at Xerox and I are bullish about the future. We
know there’ll be hurdles to overcome, we know where we can improve,
but we also know we’ll stay focused, impatient with the status quo and
hungry for greater success. So this is a good time to keep your eye on
Xerox. Here’s why:

• Services-led growth;

• profitable leadership from Document Technology;

• cash-generating annuity-based business model;

• consistent earnings expansion; and

• financial strength to invest in building value for Xerox…

and building value for you.

And, of course, we’ll be doing all this with a passion for helping our
customers succeed… a thirst for innovation… a respect for our people

and our commitment to help them grow… a deep desire to make
our communities and our planet always better than they are… and
a responsibility to create value for all our stakeholders. You can count
on us to make it happen.

Thank you for your trust in Xerox. We work hard every day to earn it and
to keep it. It’s that simple.

Ursula M. Burns

Chairman and Chief Executive Officer

We have discussed our results using non-GAAP measures. Management believes
that these non-GAAP financial measures provide an additional means of analyzing
the current periods’ results against the corresponding prior periods’ results. However,
these non-GAAP financial measures should be viewed in addition to, and not as a
substitute for, the Company’s reported results prepared in accordance with GAAP.
Our non-GAAP financial measures are not meant to be considered in isolation or as
a substitute for comparable GAAP measures and should be read only in conjunction
with our consolidated financial statements prepared in accordance with GAAP. Our
management regularly uses our supplemental non-GAAP financial measures internally
to understand, manage and evaluate our business and make operating decisions.
These non-GAAP measures are among the primary factors management uses in
planning for and forecasting future periods.

A reconciliation of these non-GAAP financial measures to the most directly comparable
financial measures calculated and presented in accordance with GAAP are set forth on
page 11.

Xerox 2012 Annual ReportInnovation at Work

Today’s Xerox is a company that was built

on innovation. It defines and differentiates us.

Every year, the Xerox group, which includes our

partnership with Fuji Xerox, invests well over a

billion dollars to discover new ways to make

our customers more successful.

As a global company, we benefit from gathering
the unique insights of the most skilled researchers
from around the world. Across five research
centers in the U.S., Canada, Europe and India, our
innovators are working together with partners and
customers to explore new ways of turning ideas into
differentiated value.

And it’s clear that these efforts are working. One
measure of how well we’re doing is the number
of patents our innovators are awarded. Currently,
we have more than 11,500 active patents in our
portfolio with 1,900 U.S. patents awarded to Xerox
last year. As a result, our patent issuance is up

17 percent, ranking the Xerox group in the top
10 for patents granted in 2012.

If you look behind the scenes of our labs, you’ll
find Xerox exploring the future in unexpected
but relevant ways. Sure, you’d see work that’s
broadening the boundaries of what’s possible
in digital printing, but you’d also find renowned
work on intuitive data analysis and a variety of
sustainable technologies and innovations that
reflect today’s Xerox. Here’s a closer look at how
innovation can simplify the ways work gets done.

Delivering Better Patient Care

Driving Public Transit with Data

Observation: Nurses spend a tremendous amount
of time compiling patient data from multiple sources.

Observation: In many cities, use of public transportation
is declining while roadways are becoming more crowded.

Insight: Consolidating and simplifying processes gives
nurses better information so they can spend more time
on patient care.

Xerox Innovation: Creation of a digital dashboard that:

Insight: Analyzing user data could improve the passenger
experience and increase overall use of public transportation.

Xerox Innovation: Mining previously unused ticketing
data to deliver insights that:

• Delivers a real-time view of patient status so they can

• Improve the overall network and remap the route system

make better healthcare decisions.

(schedules, number of stops and frequencies).

• Automatically aggregates data from electronic

• Reduce travel and wait times for passengers.

medical records, medical testing devices (X-rays, EKGs,
MRIs) and more.

• Mobilizes the information (on mobile devices or rolling

carts) for access wherever the patient goes.

• Inform timely decisions on new routes.

Xerox 2012 Annual ReportFinancial Measures

Net Income – Xerox (in millions)

Total Revenue (in millions)

2,000

1,500

1,000

1,047*

500

230

1,563*

1,296*

1,295

1,398*

1,195

613*
485

606

25,000

20,000

15,000

10,000

5,000

21,633

22,626

22,390

17,608

15,179

‘08

‘09

‘10

‘11

‘12

‘08

‘09

‘10

‘11

‘12

Total Services Segment Revenue
(in millions – percent of total revenue)

Annuity Revenue
(in millions – percent of total revenue)

11,528

10,837

52%

48%

9,637

45%

12,000

10,000

8,000

6,000

4,000

2,000

3,828

3,476

22%

23%

20,000

15,000

10,000

5,000

18,770

18,914

83%

84%

17,776

82%

12,929

73%

11,629

77%

‘08

‘09

‘10

‘11

‘12

‘08

‘09

‘10

‘11

‘12

Net Cash from Operating Activities (in millions)

Adjusted Operating Margin*

9.6%

9.8%

9.3%

8.4%

6.8%

2,726

2,580

2,208

1,961

3,000

2,500

2,000

1,500

1,000

500

1,554*

939

‘08

‘09

‘10

‘11

‘12

‘08

‘09

‘10

‘11

‘12

* See non-GAAP measures for the reconciliation of the difference between this financial measure that is not in compliance with Generally Accepted Accounting Principles (GAAP) and the most
directly comparable financial measure calculated in accordance with GAAP.

Non-GAAP Measures

Adjusted Earnings Per Share (EPS)

(in millions; except per-share amounts)
As Reported

Adjustments:
Amortization of intangible assets

Loss on early extinguishment of debt

Xerox and Fuji Xerox restructuring charge

ACS acquisition-related costs

ACS shareholders’ litigation settlement

Venezuelan devaluation costs

Medicare subsidy tax law change

Provision for litigation matters

Equipment write-off

Settlement of unrecognized tax benefits

2012

2011

2010

2009

2008

Net Income

EPS

Net Income

EPS Net Income Net Income Net Income

$ 1,195

$ 0.88

$ 1,295

$ 0.90

$ 606

$ 485

$ 230

Year Ended December 31,

203

0.15

248

0.17

0.01

203

0.15

268

0.18

194

355

690

128

$ 613

308

491

(41)

817

$ 1,047

Adjusted

Weighted average shares for reported EPS

Weighted average shares for adjusted EPS

$ 1,398

$ 1.03

$ 1,563

$ 1.08

$ 1,296

1,329

1,356

1,444

Operating Margin (in millions)

Total Revenues

Pre-tax Income (loss)

Adjustments:
Amortization of intangible assets

Xerox restructuring charge

Curtailment gain

ACS acquisition-related costs

Equipment write-off

Other expenses, net

Adjusted Operating Income

Pre-tax Income Margin

Adjusted Operating Margin

Adjusted Net Cash from Operating Activities (in millions)
Operating Cash Flow – As Reported
Adjustments:
Payments for securities litigation
Operating Cash Flow – As Adjusted

Year Ended December 31,

2012

2011

2010

2009

2008

$22,390

$22,626

$21,633

$15,179

$17,608

$1,348

$1,565

$815

$627

$(79)

328

153

398

(107)

256

322

312

483

389

(8)

285

429

1,033

$2,085

$2,211

$2,076

$1,036

$1,476

6.0%

9.3%

6.9%

9.8%

3.8%

9.6%

4.1%

6.8%

(0.4%)

8.4%

Year Ended December 31, 2008

$939

615

$1,554

Constant Currency
To better understand trends in our business, we believe that it is helpful to adjust revenue to exclude the impact of changes in the translation of foreign currencies

into U.S. dollars. We refer to this adjusted revenue as “constant currency.” Currencies for developing market countries (Latin America, Brazil, Middle East, India, Eurasia

and Central-Eastern Europe) that we operate in are reported at actual exchange rates for both actual and constant revenue growth rates because (1) these countries

historically have had volatile currency and inflationary environments and (2) our subsidiaries in these countries have historically taken pricing actions to mitigate the

impact of inflation and devaluation. Management believes the constant currency measure provides investors an additional perspective on revenue trends. Currency

impact can be determined as the difference between actual growth rates and constant currency growth rates.

Xerox 2012 Annual Report

Board of Directors

Left to right, standing
Glenn A. Britt B
Chairman and Chief Executive Officer
Time Warner Cable Inc.
New York, NY

Robert J. Keegan A, B
Retired Chairman,
Chief Executive Officer and President
The Goodyear Tire & Rubber Company
Akron, OH

Ann N. Reese C, D
Executive Director
Center for Adoption Policy
Rye, NY

Mary Agnes Wilderotter D
Chairman and Chief Executive Officer
Frontier Communications Corporation
Stamford, CT

William Curt Hunter A, C
Dean Emeritus, Tippie College of Business
University of Iowa
Iowa City, IA

Richard J. Harrington A
Retired President and Chief Executive Officer
The Thomson Corporation
Stamford, CT

Sara Martinez Tucker C, D
President and Chief Executive Officer
National Math and Science Initiative
Dallas, TX

Left to right, seated
Charles Prince C, D
Retired Chairman and Chief Executive Officer
Citigroup Inc.
New York, NY

Robert A. McDonald A, B
Chairman of the Board, President and
Chief Executive Officer
The Procter & Gamble Company
Cincinnati, OH

A: Member of the Audit Committee

B: Member of the Compensation Committee

C: Member of the Corporate Governance Committee

D: Member of the Finance Committee

Ursula M. Burns
Chairman and Chief Executive Officer
Xerox Corporation
Norwalk, CT

Today’s Xerox is a company on the move with
entrepreneurial grit and genuine competitive
advantages, including the unbeatable blend
of a broad range of diverse Services and
innovative Document Technologies. Most
important, we have talented and empowered
people who are committed to growing our
business with world-class service and
technological advancements that simplify
the ways work gets done.

Xerox 2012 Annual ReportOur Business

Business Overview

Xerox is the world’s leading enterprise for business process and
document management. We provide services, technology and
expertise to enable our customers – from small businesses to large
global enterprises – to focus on their core business and operate
more effectively. The key areas in which we help businesses are:

We are a leader in a large, diverse and growing market estimated
at over $600 billion. The global business process outsourcing
and information technology outsourcing markets are estimated at
roughly $250 billion each. These markets are very broad, encompassing
horizontal business processes as well as industry-specific processes.

Business Process Outsourcing

Market Size (in millions)

We are the largest worldwide diversified business process
outsourcing company with an expertise in managing transaction-
intensive processes. This includes services which support all
enterprises through offerings such as customer care, finance and
accounting and human resources, as well as vertically focused
offerings in areas such as healthcare, transportation, retail and
telecommunications, among others.

Information Technology Outsourcing

We specialize in designing, developing and delivering effective
IT solutions that leverage our secure data centers, help desks
and managed storage facilities around the world to provide
a reliable IT infrastructure.

Document Technology and Document Outsourcing

Our document technology products and solutions support the work
processes of our customers and provide them an efficient, cost
effective printing and communications infrastructure. Our managed
print services offering helps customers optimize the use of document
systems across small businesses or large global enterprises.

$130

$250

Information Technology
Outsourcing: $250

Business Process
Outsourcing: $250

Document
Management: $130

These market estimates are calculated by leveraging third party forecasts from
firms such as Gartner and NelsonHall in conjunction with our assumptions
about our markets.

The document management market is estimated at roughly
$130 billion. This market is comprised of the document systems,
software, solutions and services that our customers have relied on for
years to help run their businesses and reduce their costs. Xerox led the
establishment of the managed print services market and continues to
be the industry leader today.

Core Strengths

Businesses

Growth Drivers

Our Brand

Global Presence

Business Process Outsourcing

Expand Globally

IT Outsourcing

Renowned Innovation

Document Outsourcing

Operational Excellence

Document Technology

Capitalize on Advantaged
Verticals

Disciplined Management
of Portfolio

Leverage Document
Technology Leadership

Expand Customer
Relationships

Invest in New Services

Our Strategy and Business Model

We are well-positioned to lead in the markets in which we participate.
At the heart of our strategy is the creation of sustained shareholder
value through EPS growth and strong cash flow.

Our core strengths which drive our strategy include:

• Our Brand – We have a well-recognized and respected brand that
is known by businesses worldwide for delivering industry-leading
document technology, services and solutions. It continues to be
ranked in the top percentile of the most valuable global brands.

• Global Presence – Our geographic footprint spans 160 countries
and allows us to serve customers of all sizes to deliver superior
technology and services regardless of complexity or number of
customer locations.

• Renowned Innovation – We have a history of innovation and, with

more than 11,500 active U.S. patents and five global research centers,
we continue to lead the document technology industry and to take
our technology into new service areas. See the “Innovation and RD&E”
section for additional information about our renowned innovation.

• Operational Excellence – We have an operational excellence model
that leverages our global delivery capabilities, production model,
incentive-based compensation process, proprietary systems and
financial discipline to deliver productivity and lower costs for our
customers and for our business.

We use our core strengths and market opportunities to grow our
businesses by executing on the following growth drivers:

• Expand Globally – We leverage our global presence and customer
relationships to expand our BPO and ITO services internationally.
The majority of our BPO and ITO revenues are currently derived from
services provided to customers in the United States. In addition,
we will continue to grow globally through acquisitions. Three of our
2012 acquisitions were made outside of the United States.

• Capitalize on Advantaged Verticals – Within our Services and
Document Technology segments, we serve verticals in which we have
deep expertise resulting from years of experience, strong customer
relationships, large scale and our renowned innovation. Capitalizing
on the opportunities that these strengths provide us will continue to
be key to growth.

Xerox 2012 Annual Report
Our Business

An example of an advantaged vertical is healthcare, where we have
built a $2 billion business that touches every aspect of the industry –
government, provider, payer, employer and pharma. In addition,
we apply our innovation to differentiate our offerings. As a result, we
are positioned to capitalize on current industry trends, including the
changes presented by health reform. We also view transportation,
wireless communications and graphic communications, among
others, as advantaged verticals in which we have a leading position,
strong capabilities and attractive market opportunities.

• Disciplined Management of Portfolio – Xerox has the most broad
and diverse set of offerings in the Services segment and the most
complete product portfolio in the Document Technology business.
Our acquisitions are targeted at businesses that will increase our
Services capabilities, position us in attractive Services segments
and provide us with a greater global presence. We will continue
to focus on managing our portfolio to maximize profitable growth.

• Leverage Document Technology Leadership – Xerox is the market
share leader in the Document Technology market. We led the
establishment of the managed print services (“MPS”) market and
we continue to lead this area of market growth. Our MPS offerings
continue to expand, and now consist of a continuum of offerings
that serve large enterprise down through small and mid-size
businesses. In addition, we leverage our leadership in Document
Technology to help grow our business process outsourcing and
IT outsourcing businesses.

• Expand Customer Relationships – We expand customer

relationships through a strategy of “penetrate and radiate.” As
we establish relationships, we prove our capabilities and then
work with the customer to determine other areas where we
can improve their operations and drive down costs by managing
non-core parts of their business. Our wide array of Services offerings
enables us to do this effectively and results in a win-win for Xerox
and our customers.

supplies and financing, among other elements. The remaining
16 percent of our revenue comes from equipment sales, either from
lease agreements that qualify as sales for accounting purposes
or outright cash sales.

Revenue Stream

16%

Annuity: 84%

84%

Equipment Sales: 16%

Our strategy and business model fundamentals translate into the
following 2013 priorities:

• managing our Services business for growth;

• maintaining our leadership in Document Technology;

• managing our business with a focus on operational excellence; and

• delivering strong cash flow and returning value to shareholders.

Acquisitions

Consistent with our strategy to expand our Services offerings through
acquisitions, we acquired the following companies in 2012:

In July 2012 we acquired:

• Invest in New Services – Our Services acquisitions are a key

element of our strategy. We target companies that provide new
capabilities, offer access to adjacent services areas or expand our
geographic presence. We will continue to invest in new services to
grow our business profitably.

• Wireless Data Services (“WDS”), a telecommunications technical
support and consultancy firm headquartered in the U.K. WDS uses
a proprietary cloud-based platform called GlobalMineTM to capture,
analyze and manage millions of technical support interactions
across thousands of different types of mobile devices.

Annuity-Based Business Model

Through our annuity-based business model, we deliver significant
cash generation and have a strong foundation upon which we can
expand earnings.

The fundamentals of our business are based on an annuity model that
drives significant recurring revenue and cash generation. Approximately
84 percent of our 2012 total revenue was annuity-based revenue that
includes contracted services equipment maintenance, consumable

• Lateral Data, a leading e-discovery technology provider based in
the United States. Lateral Data’s flagship software, ViewpointTM,
brings simplicity and affordability to e-discovery by enabling
corporate legal departments and law firms to manage the entire
e-discovery lifecycle using a single, in-house solution.

In January 2012 we acquired:

• LaserNetworks Inc., a provider of MPS solutions that include print
device tracking, centralized service and supply management and
document routing. LaserNetworks is headquartered in Canada.

• XL World, a multi-lingual customer care firm based in Italy that
will further expand our business process outsourcing capabilities
across Europe.

expand the application space of digital printing to cover new
applications such as packaging printing and printing directly on
mediums that go far beyond paper, like food and clothing.

Additionally, we made the following acquisitions consistent with our
strategy to expand distribution to under-penetrated markets:

• In February 2012, we acquired R.K. Dixon, a leading provider
of IT services, printers and MPS, with locations in seven cities
in Iowa and Illinois.

• In addition, we enhanced our distribution capabilities by acquiring
office products distributors in Wisconsin, California and Illinois.

Innovation and RD&E

Xerox has a rich heritage of innovation that continues to be a core
strength of the company as well as a competitive differentiator. Our
investments in innovation align with growth opportunities in areas like
business services, color printing and customized communication. Our
overall aim is to create value for our customers, for our shareholders
and for our people by influencing the future in certain key areas. Our
research work can be categorized under four themes:

• Implementing Agile Business Processes: To enable true business
process agility, our research aims to automate business processes
via flexible platforms that run on robust and scalable infrastructures.
Automation of business processes benefits from our research
on image, video and natural language processing coupled with
machine learning. Application of these methods to business
processes enables technology to perform tasks that today are
performed manually by workers, thus enhancing worker productivity.

• Harvesting Knowledge from Information: Information comes

in two forms: structured, where the content sits tidily in searchable
indices or in limiting databases; or unstructured, where content can
be anything from photos, videos, hand-written forms, emails, etc.
Unstructured information has endless growth and creates a need
for businesses to be more effective in mining context from content.
This is a key research area for us – making sense of unstructured
information using natural language processing and semantic
analysis. We explore how to better analyze information for human
use by better understanding contextual detail on how the content
has been created and used. We are also developing proprietary
methods for predictive analytics applied to business processes.

• Delivering the Value of Personalization: Our research leads to
technologies that improve the efficiency, economics and relevancy
of business communications and printing applications. We research
methods to create affordable ubiquitous color printing, leveraging
our solid ink printing technology. We are also exploring ways to

• Enabling the Sustainable Enterprise: Our research also focuses on
developing technologies that minimize the environmental impact
of document systems and business processes. An example is how we
are continually working on lowering the operating and standby power
of our printing systems by using new materials and print processes.

Within this framework, one particular area of focus is data analytics –
simplifying complex data to turn it into actionable knowledge – helping
our customers drive operational efficiencies, guide decisions, yield new
insights and help predict what is next. The following are a few ways in
which we are achieving this:

• Digital Nurse Assistant

With the overload of information and data in the workplace,
often more time is spent wading through data than focusing
on the task at hand. When information can be intelligently
aggregated and grouped, time can be saved. In healthcare,
nurses sometimes spend 75 percent of their day coordinating
documents. One of the innovations we developed, Digital Nurse
Assistant, collects and categorizes all patient information into
a simple, touch-screen dashboard. This means that critical patient
information is not in a computer or in a file somewhere, it’s in the
hands of the people who need it.

• Mining Mobile Information

GlobalMine™, a proprietary cloud-based platform, captures,
analyzes and manages millions of technical support interactions
across thousands of different mobile device types. This data helps
telecommunications clients react, in real time, to any systems issues
or customer satisfaction problems that their customers may be
experiencing with their devices or service.

• Making Transportation Information and Data Meaningful

The millions of commuters who take public transportation also
provide critical data about their daily habits, and that can be used
to optimize service and save money for cities. Xerox analytics
uses this information to provide cities with structured data, which
becomes the basis for schedule and infrastructure improvements
that are responsive to what their passengers need. This has
resulted in increased ridership and lower costs in the cities in
which it has been implemented.

Xerox 2012 Annual ReportOur Business

Palo Alto, California

Grenoble, France

Mississauga, Ontario, Canada

Webster, New York

Chennai, India

Global Research Centers

We have five global research centers that have unique areas of focus.
They are places where creativity and entrepreneurship are truly valued
and leadership has empowered employees to deliver, resulting
in leading-edge research and high-impact innovations that make
a difference in the world. Our research centers are as follows:

Palo Alto Research Center (“PARC”) – Located in Palo Alto, California,
PARC is a wholly owned subsidiary of Xerox that is focused on
innovation on behalf of Xerox in areas that include content-centric
networking, intelligent mobile computing and intelligent automation.
PARC also leverages its heritage as the birthplace of modern
technologies to provide research and development for non-competitive
businesses in areas that include UV-LEDs and ethnography services.

Xerox Research Centre of Canada (“XRCC”) – Located in Mississauga,
Ontario, Canada, XRCC is Xerox’s materials research center with a focus
on imaging and consumable materials, such as toner and inks, for our
document technology.

Xerox Research Center Webster (“XRCW”) – Located in Webster,
New York, XRCW focuses on system design, imaging, computing and
marking science. In addition, XRCW is now focused on innovation to
help the healthcare industry.

Xerox Research Centre Europe (“XRCE”) – Located in Grenoble,
France, XRCE research differentiates Xerox business process service
offerings. The center focuses on image, text and data analytics,
business process modeling and the study and understanding of
work practices.

Xerox Research Center India (“XRCI”) – Located in Chennai, India,
XRCI focuses on unique innovation opportunities that emerge in,
and best serve, developing markets. As Xerox’s newest research lab,
XRCI has a broad mandate to foster innovation across our document
technology and business process services offerings.

Investment in R&D is critical for competitiveness in our fast-paced
markets. One of the ways that we maintain our market leadership is
through strategic coordination of our R&D with Fuji Xerox (an equity
investment in which we maintain a 25 percent ownership interest).
We have aligned our R&D investment portfolio with our growth
initiatives, including enhancing customer value by building on our
Services leadership as well as accelerating our color leadership.

Our total research, development and engineering expenses (including
sustaining engineering expenses, which are the hardware engineering
and software development costs incurred after we launch a product)
totaled $655 million in 2012, $721 million in 2011 and $781 million
in 2010. Fuji Xerox R&D expenses were $860 million in 2012,
$880 million in 2011 and $821 million in 2010.

Revenues by Business Segment

Our Services segment is the largest segment within the company,
with $11,528 million in revenue in 2012, representing 52 percent
of total revenue. The Document Technology segment contributed
$9,462 million in revenue, representing approximately 42 percent
of total revenue, while the Other segment contributed $1,400 million
in revenue representing approximately 6 percent of total revenue.

Revenues by Business Segment (in millions)

$1,400

RD&E Expenses (in millions)

800

$781

$721

$655

600

400

200

Fuji Xerox R&D Investments:

2010: $821

2011: $880

2012: $860

‘10

‘11

‘12

Segment Information

Our reportable segments are Services, Document Technology and
Other. We present operating segment financial information in Note
2 – Segment Reporting in the Consolidated Financial Statements,
which we incorporate by reference here. We have a very broad
and diverse base of customers by both geography and industry,
ranging from small and mid-size businesses (“SMBs”) to graphic
communications companies, governmental entities, educational
institutions and Fortune 1000 corporate accounts. None of our
business segments depend upon a single customer, or a few customers,
the loss of which would have a material adverse effect on our business.

$9,462

$11,528

Services: $11,528
Our Services segment comprises three service offerings: Business Process
Outsourcing (“BPO”), Information Technology Outsourcing (“ITO”) and
Document Outsourcing (“DO”).

Document Technology: $9,462
Document Technology includes the sale of products and supplies, as well
as the associated technical service and financing of those products.

Other: $1,400
The Other segment primarily includes revenue from paper sales,
wide-format systems, network integration solutions and electronic
presentation systems from Global Imaging Systems (“GIS”).

Xerox 2012 Annual ReportOur Business

Services Segment

Our Services segment comprises three service offerings: Business
Process Outsourcing (“BPO”), Information Technology Outsourcing
(“ITO”) and Document Outsourcing (“DO”). We provide non-core,
mission-critical services that our clients need to run their day-to-day
business. These services help our clients simplify the way work gets
done, giving them more time and resources to allocate to their core
operations, respond rapidly to changing technologies and reduce
expenses associated with their business processes and information
technology support.

Services Revenue Mix

12%

31%

57%

Business Process Outsourcing: 57%

Document Outsourcing: 31%

Information Technology Outsourcing: 12%

Business Process Outsourcing

We are the largest worldwide diversified business process outsourcing
company, with an expertise in transaction-intensive offerings tailored
for several industries. BPO represented 57 percent of our total Services
segment revenue in 2012. Our services include:

• Government Healthcare Solutions: This business serves state and
federal-funded government healthcare programs. We provide
a broad range of solutions, from processing Medicaid claims to
pharmacy benefits management, clinical program management,
supporting health information exchanges, eligibility application
processing and determination, delivering public and private health
benefit exchange services and care and quality management. We
have been delivering these systems since 1971 and we apply our deep
knowledge of the Medicaid system, along with technological advances,
to simplify and automate transactional-intensive processes. As a result,
we are uniquely positioned to capitalize on the opportunities that
healthcare reform is presenting.

• Healthcare Payer and Pharma: We deliver administrative

efficiencies to our healthcare payer clients through our scalable and
flexible transactional business solutions, which encompass both our
global delivery model and domestic payer service centers. Services
include data capture, claims processing, customer care, recovery
services and healthcare communications. No competitor has
offerings in all of these areas.

• Healthcare Provider Solutions: We provide consulting solutions,

revenue cycle management and application services that
are customized to meet the varying and changing needs of
healthcare providers. We serve every large health system in the
United States, with contracts in all 50 states. We also help our
clients improve care through an analytics solution designed
to provide clinical staff information.

• Human Resources Services (“HRS”): From actuarial expertise
to a full range of human resources consulting – from employee
service centers to learning, retirement, health and welfare
services – HRS delivers game-changing, innovative solutions that
enable our clients to focus on their business. We differentiate
ourselves around two themes of innovation: engagement and
enablement. We help HR departments engage employees
as individuals by communicating to them with personalized
messages and enabling employees to get smarter about
managing their own health, wealth and career outcomes.

• Financial Services: We provide finance and accounting services
for any industry – from accounting to billing to procurement to
accounts payables and receivables to tax management. In addition,
we provide outsourcing of financial aid and enrollment office
operations for colleges and universities and back-room functions
such as customer services, transaction processing and mailroom
operations for the financial services industry. We have a deep
understanding of what drives the customer and we move beyond
simply driving down costs.

• Customer Care: Xerox is the largest domestic customer care
provider to the wireless telecom industry. We have years of
experience in providing customer care services that improve our
customers’ productivity, efficiency and customer retention in
telecommunications as well as a variety of other industries. Our
customer care offerings include: customer service, sales, technical
support, transaction processing, fulfillment and managed mobility
services, among others.

• Retail, Travel and Insurance: We provide technology-based

transactional services for retail, travel and non-healthcare insurance
companies. We handle their data entry, mailrooms, imaging input
and hosting, call centers and help desks with targeted industry focus.

• Transportation Solutions: We provide revenue-generating

solutions in over 30 countries. Our solutions include fare collection,
toll and parking solutions and monitoring of red light cameras. We

differentiate through the breadth of our offerings and innovative
technology. For example, we developed dynamic pricing algorithms,
which will be used in the new Los Angeles ExpressPark program.
This program will create a new pricing system designed to relieve
traffic congestion, reduce air pollution and improve the efficiency
of downtown LA’s transit operations.

• Government Solutions: We support our government clients with
solutions for child support payment processing, tax and revenue
systems, eligibility systems and services, electronic payments
transfer, electronic payment cards and unclaimed property
services, among others. Our competitive advantage is our depth
of local expertise, while at the same time having the scale required
to deliver and manage multiple programs for federal, state, county
and town governments.

Information Technology Outsourcing

We specialize in designing, developing and delivering effective
IT solutions. Our secure data centers, help desks and managed storage
facilities around the world provide a reliable IT infrastructure that
minimizes the risk of disruption to our clients’ daily operations. ITO
represented 12 percent of our total Services segment revenue in 2012.

We provide our ITO services across several verticals. Our ITO
services include:

• Mainframe and Server Outsourcing: We support our clients’ needs
for adaptable computing environments and their potential growth,
and provide comprehensive systems support services. We provide a
24/7 support organization that maintains a unified set of tools and
processes to support our clients’ IT environments, including systems
administration, database administration, systems monitoring, batch
processing, data backup and capacity planning.

• Network Outsourcing: We provide telecommunications

management services for voice and data networks. We leverage
our enterprise agreements, proprietary tools, procedures and skilled
personnel to provide our clients with a scalable and automated
processing environment.

• Desktop Outsourcing: Our desktop services provide our clients with
a comprehensive approach to managing their end-user platforms
and devices. We design and execute desktop management
strategies that address and resolve issues such as enterprise
bandwidth constraints, unstable computing environments, areas
of insecurity and unavailable network resources.

• Cloud Services: Our cloud services solutions cover the full range from
infrastructure, mobility, collaboration and platform. We designed
our solutions to quickly scale up or down and fit different business
needs. These solutions are delivered through our cloud-based, multi-
tenant infrastructure with compliance, monitoring and performance
transparency built in.

In addition, we provide Remote Infrastructure Management, Help
Desk/Service Desk Management, Managed Storage, Utility Computing,
Disaster Recovery and Security Services.

Document Outsourcing

We are the industry leader in document outsourcing services, with more
than 20 years experience and 15,000 business professionals across
160 countries. We help companies optimize their printing infrastructure
and simplify their communication and business processes to grow
revenue, reduce costs and operate more efficiently. DO represented
31 percent of our total Services segment revenue in 2012. Our two
primary offerings within Document Outsourcing are Managed Print
Services and Communication and Marketing Services.

• Managed Print Services (“MPS”): Xerox MPS optimizes, rationalizes
and manages the operations of Xerox and non-Xerox print devices,
driving efficiencies that can save clients up to 30 percent on their
document-related costs. We provide the most comprehensive
portfolio of MPS services in the industry, supporting small and mid-size
businesses up through large global enterprises.

The key factors that differentiate us include our commitment to
innovation and technology, including our cloud-based connectivity
and integrated suite of software tools, as well as our global direct
and channel partner coverage and certification programs. In
addition, the industry’s broadest portfolio of printing products sets us
apart from our competition. We are recognized as an industry leader
by several major analyst companies, including Gartner, IDC, Quocirca
and Forrester.

We also partner with industry leaders to enhance our solutions.
As an example, we recently selected Cisco’s Unified Computing
System (“UCS”) to support our network of cloud-based MPS delivery
centers around the world and speed up the connection between
data servers and the more than one million Xerox and non-Xerox
print devices we manage. As a result, customers experience a
faster, more reliable delivery of MPS applications and we stay
ahead of their needs by utilizing the data we collect to continually
recommend new ways to simplify the way they work with both
paper and digital documents.

The Xerox MPS continuum complements and provides opportunities
to expand existing BPO and ITO services. Within BPO accounts, Xerox
MPS helps to improve workflow and enhance employee productivity.
In ITO accounts, MPS complements the client IT services that we
are currently managing and positions Xerox as a complete IT
services provider.

Xerox 2012 Annual ReportOur Business

• Communication & Marketing Services (“CMS”): CMS delivers
end-to-end outsourcing for design, communications, marketing,
logistics and distribution services that help clients communicate
with their customers and employees more effectively. We deliver
communications through traditional routes such as print, but also
through a growing number of multimedia channels including SMS,
Web, email and mobile media.

We help our clients identify how their customers want to be
engaged, tailor their content, translate it, personalize their
communication, decide on the appropriate channel, execute on
campaigns and measure the resulting success.

Our advantage results from the breadth of our capabilities and our
service-orientated approach that provides a single, seamless service
for all communication and marketing logistics.

Document Technology Segment

Document Technology includes the sale of products and supplies,
as well as the associated technical service and financing of those
products (that which is not related to document outsourcing
contracts). Our Document Technology business is centered
around strategic product groups that share common technology,
manufacturing and product platforms.

Document Technology Revenue Mix

20%

22%

58%

Entry: 22%

Mid-range: 58%

High-end: 20%

Our strategic product groups are as follows:

Entry

Entry comprises products sold primarily to small and mid-size businesses
through a worldwide network of independent resellers and online
merchants. Our entry products represented 22 percent of our total
Document Technology segment revenue in 2012. It includes desktop
monochrome and color printers and multifunction printers (“MFPs”)

ranging from small personal devices to larger workgroup printers
designed to serve the needs of demanding office users. In 2012,
we continued to build on our position in the market by:

• making high-quality desktop color more affordable and easier

to use for all businesses;

• expanding our channel reach, partner programs and capacity to

support the needs of small to mid-size businesses in our customers’
preferred buying locations; and

• launching products and solutions that help individuals, small work
teams, large workgroups or whole departments achieve their
business goals.

In 2012, we added the following products:

• ColorQube® family multifunction printers: Based on Xerox

solid ink technology, the ColorQube 8700 and ColorQube 8900
multifunction printers provide cost savings and color quality for
small and mid-size businesses. In addition, they have the ability
to expand into a floor device with extra paper capacity and helpful
finishing options.

• WorkCentre® 3315 and WorkCentre® 3325: These high-

performance monochrome products feature a print speed of up
to 37 pages per minute (ppm) and a first-page-out time of 6.5
seconds. The WorkCentre 3325 also comes standard with internal
Wi-Fi connectivity and the latest security features. Both devices
feature a small footprint, allowing for easy integration within
customer work environments.

• Phaser® 7100 Color Printer: This printer produces exceptional print
quality on a wide variety of media – including oversize paper. The
Phaser 7100 can be used either on a desktop or as a floor device
with print speeds of up to 30 pages per minute and simple printer
management with CentreWare Internet service.

• The WorkCentre® 6605 and Phaser® 6600 printers: These devices
provide vibrant color output for smaller businesses and feature print
resolution of up to 600 X 600 X 4 dpi and color and black-and-white
print speeds of up to 36 ppm.

Mid-Range

Mid-range comprises products sold to enterprises of all sizes,
principally through dedicated Xerox-branded partners and our direct
sales force, indirect multi-branded channel partners and resellers
worldwide. Our mid-range products represented 58 percent of our total
Document Technology segment revenue in 2012. We offer a wide
range of multifunction printers, copiers, digital printing presses and
light production devices that deliver flexibility and advanced features.
In 2012, our mid-range business continued to build on our position
in the market by:

• making high-quality color more affordable and easier to use

for small and mid-size businesses and large enterprises;

• expanding our channel reach, partner programs and capacity

to support the needs of the SMB market; and

• offering a complete range of services and solutions in partnership
with independent software partners that allow our customers to
analyze, streamline, automate, secure and track document workflows.

The breadth of our mid-range product portfolio is unmatched. These
products include:

• Xerox WorkCentre® 7525/7530/7535: These multifunction printers
are equipped with features to help small and mid-size businesses
boost productivity and meet their sustainability goals. They offer
speeds up to 25, 30 and 35 ppm color and black-and-white. The
MFPs, which can print, copy, scan, fax and email, include advanced
document management and workflow tools to make office work
easier and also offer unparalleled ease of use and security features.
In addition, the Hi-Q LED print engine technology consumes less
energy and space and produces less noise, with a printing resolution
of 1200 x 2400 dots per inch.

• Xerox ColorQube® 9301/9302/9303: The ColorQube 9300 series
combines Xerox’s solid ink innovation with our legacy of advanced
multifunction product leadership. This results in a multifunction
printer that produces vivid color quality that is affordable and
produces significantly less printing waste versus comparable color
laser devices. The device copies and prints at speeds up to 55 ppm
color and 60 ppm black-and-white, while increasing productivity even
further with speeds up to 85 ppm in Fast Color mode for draft or
short-life documents.

• Xerox WorkCentre® 5325/5330/5335: The highly modular
WorkCentre 5300 series black-and-white MFP serves both small
and mid-size businesses as well as enterprise office environments.
Its customizable workflow solutions help customers in document-
intensive industries such as legal, healthcare and financial make their
daily tasks more efficient.

• Xerox D95/110/125 Copier/Printer: This device offers production
print, copy, scan and advanced finishing capabilities for pay-for-
print shops and centralized reprographic departments, in addition
to education, healthcare and many other industries. With industry
leading speeds of up to 125 ppm, this D95/110/125 Copier/Printer
helps customers increase productivity and reduce costs.

High-End

Our high-end digital color and monochrome solutions are designed
for customers in the graphic communications industry and for large
enterprises. Our high-end products comprised 20 percent of our total

Document Technology segment revenue in 2012. These devices enable
digital on-demand printing, full-color printing and enterprise printing.
We continue to expand our portfolio of cut sheet and continuous
feed offerings in both toner and inkjet products. Our hardware and
our integrated solutions, such as automated in-line finishing, result in
“touch less” workflows (with little to no manual processing or human
intervention) allowing Xerox customers to produce more jobs and grow
their business.

For more than two decades, Xerox has delivered innovative
technologies that have revolutionized the production printing industry,
maintaining our position as the industry leader in the number of pages
produced on digital production color presses. We continued to build on
our award-winning lineup in 2012 with the launches of:

• Xerox iGen® 150: In May at drupa, we introduced our latest iGen

product. The iGen 150 builds on the capabilities of the Xerox® iGen4
with a number of new feature sets. The fastest cut sheet product
in the production color fleet prints at 150 A4 ppm. In addition,
we included a new 26” internal stacker to maximize output of
the largest sheet size in the industry. A number of automated color
management tools help enable productivity and our latest finishing
solution, Integrated Plus, makes the production of booklets simpler.

• Xerox Nuvera® 157/314: At Graph Expo in October, we introduced
the latest members of the Xerox Nuvera family, the Xerox Nuvera
157 and tandem engine 314 black-and-white production products.
These products build on the success of the Xerox Nuvera family and
offer new speed levels and functionality. The top speed of the
single engine is increased to 157 ppm and to 314 images per minute
in the tandem configuration. These devices also contain a new
production stacking system that delivers neat output stacks at waist
level that can be unloaded as the engine continues to print.

• FreeFlow® Digital Workflow: Our FreeFlow Digital Workflow is
a collection of software technology solutions that our customers
can use to improve all aspects of their processes, from content
creation and management to production and fulfillment. Our
digital technology combined with total document solutions and
services that enable personalization and printing on demand,
delivers value that improves our customers’ business results.

Other Segment

The Other segment primarily includes revenue from paper sales,
wide-format systems, network integration solutions and electronic
presentation systems from Global Imaging Systems. Paper
comprised approximately 59 percent of the revenues in the Other
segment in 2012.

Xerox 2012 Annual ReportOur Business

Geographic Information

Our global presence is one of our core strengths. Overall, approximately
34 percent of our revenue is generated by customers outside the U.S.
We have a significant opportunity to leverage our global presence and
customer relationships to expand our Services business in Europe and
developing markets.

In 2012, our revenues by geography were as follows: United States:
$14,701 million (66 percent of total revenue), Europe: $5,111 million
(23 percent of total revenue) and Other areas: $2,578 million
(11 percent of total revenue).

Revenues by Geography (in millions)

$2,578

$5,111

U.S.: $14,701

Europe: $5,111

Other Areas: $2,578

$14,701

Revenues by geography are based on the location of the unit reporting the revenue
and include export sales.

Patents, Trademarks and Licenses

Xerox and its subsidiaries were awarded 1,215 U.S. utility patents
in 2012. On that basis, we would rank 20th on the list of companies
that were awarded the most U.S. patents during the year. Including our
research partner Fuji Xerox, we were awarded about 1,900 U.S. utility
patents in 2012. Our patent portfolio evolves as new patents are
awarded to us and as older patents expire. As of December 31, 2012,
we held more than 11,500 U.S. design and utility patents. These
patents expire at various dates up to 20 years or more from their
original filing dates. While we believe that our portfolio of patents
and applications has value, in general no single patent is essential
to our business or any individual segment. In addition, any of our

proprietary rights could be challenged, invalidated or circumvented,
or may not provide significant competitive advantages.

In the U.S., we are party to numerous patent-licensing agreements
and, in a majority of them, we license or assign our patents to others
in return for revenue and/or access to their patents. Most patent
licenses expire concurrently with the expiration of the last patent
identified in the license. In 2012, we added 11 new agreements
to our portfolio of patent-licensing and sale agreements, and Xerox
and its subsidiaries were licensor or seller in all 11 of the agreements.
We are also a party to a number of cross-licensing agreements with
companies that hold substantial patent portfolios, including Canon,
Microsoft, IBM, Hewlett-Packard, Oce, Sharp, Samsung, Seiko Epson
and Toshiba TEC. These agreements vary in subject matter, scope,
compensation, significance and time.

In the U.S., we own more than 500 U.S. trademarks, either registered
or applied for. These trademarks have a perpetual life, subject to renewal
every 10 years. We vigorously enforce and protect our trademarks.

Marketing and Distribution

We operate in over 160 countries worldwide and provide the industry’s
broadest portfolio of document technology, services and software.
And, the most diverse array of business processes and IT outsourcing
support through a variety of distribution channels around the world.
We manage our business based on the principal segments described
earlier. We have organized the marketing, selling and distribution of our
products and services by geography, channel type and line of business.

We go to market with a Services-led approach and sell our products
and services directly to customers through our worldwide sales
force and through a network of independent agents, dealers, value-
added resellers, systems integrators and the Web. In addition, our
wholly-owned subsidiary, Global Imaging Systems (“GIS”), an office
technology dealer which is comprised of regional core companies in
the United States, sells and services document management systems,
network integration devices and electronic presentation systems.

For small and mid-size businesses, we continued to expand our
distribution in 2012 as GIS acquired four companies. Our brand is
a valuable resource and continues to be ranked in the top percentile
of the most valuable global brands.

In Europe, Africa, the Middle East and parts of Asia, we distribute our
products through Xerox Limited, a company established under the laws
of England, and related non-U.S. companies. Xerox Limited enters into
distribution agreements with unaffiliated third parties to distribute
our products in many of the countries located in these regions, and
previously entered into agreements with unaffiliated third parties
distributing our products in Sudan and Syria. 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 in compliance with U.S. laws
and government regulations for these countries. We have no assets,
liabilities or operations in these countries other than liabilities under the
distribution agreements. After observing required prior notice periods,
Xerox Limited terminated its distribution agreements with distributors
servicing Sudan and Syria in August 2006. Now, Xerox has only legacy
obligations to third parties, such as providing spare parts and supplies
to these third parties. In 2012, total Xerox revenues of $22.4 billion
included less than $35 thousand attributable to Sudan and Syria.

Because our lease contracts permit customers to pay for equipment over
time rather than at the date of installation, we maintain a certain level
of debt to support our investment in these lease contracts. We fund our
customer financing activity through a combination of cash generated
from operations, cash on hand, proceeds from capital market offerings
and the sale of selected U.S. finance receivables. At December 31, 2012,
we had $5.3 billion of finance receivables and $0.5 billion of equipment
on operating leases, or total finance assets of $5.8 billion. We maintain
an assumed 7:1 leverage ratio of debt to equity as compared to our
finance assets, which results in a significant portion of our $8.5 billion
of debt being associated with our financing business.

Competition

Manufacturing and Supply

Our manufacturing and distribution facilities are located around
the world. The company’s largest manufacturing site is in Webster,
NY, where we produce fusers, photoreceptors, Xerox iGen and Xerox
Nuvera systems, components, consumables and other products. We
also have an EA Toner plant located in Webster. Our other primary
manufacturing operations are located in: Dundalk, Ireland, for our
high-end production products and consumables; and Wilsonville,
OR, for solid ink products, consumable supplies and components for
our mid-range and entry products. We also have a facility in Venray,
Netherlands, which handles supplies manufacturing and supply chain
management for the Eastern Hemisphere.

Our master supply agreement with Flextronics, a global electronics
manufacturing services company, to outsource portions of
manufacturing for our mid-range and entry businesses, continues
through 2014. We also acquire products from various third parties
in order to increase the breadth of our product portfolio and meet
channel requirements.

We have arrangements with Fuji Xerox under which we purchase and
sell products, some of which are the result of mutual research and
development agreements. Refer to Note 8 – Investments in Affiliates,
at Equity in the Consolidated Financial Statements in our 2012
Annual Report for additional information regarding our relationship
with Fuji Xerox.

Although we encounter competition in all areas of our business, we
are the leader, or among the leaders, in each of our principal business
segments. We compete on the basis of technology, performance, price,
quality, reliability, brand, distribution and customer service and support.

In the Services business, our larger competitors include Accenture, Aon,
Computer Sciences Corporation, Convergys, Dell, Genpact, Hewlett-
Packard, IBM and Teletech. In addition, we compete with in-house
departments performing the functions that we are seeking to have
them outsource to us.

In the Document Technology business, our larger competitors include
Canon, Hewlett-Packard, Kodak, Konica Minolta, Lexmark and Ricoh.

Our brand recognition, positive reputation for business process and
document management, innovative technology and service delivery
are our competitive advantages. This combined with our breadth
of product offerings, global distribution channels and customer
relationships positions us as a strong competitor going forward.

Global Employment

Globally, we have approximately 147,600 direct employees,
including approximately 7,100 sales professionals, approximately
11,300 technical service employees and approximately 100,000
employees serving our customers through on-site operations or off-site
delivery centers.

Customer Financing

We finance a large portion of our direct channel customer purchases
of Xerox equipment through bundled lease agreements. Financing
facilitates customer acquisition of Xerox technology and enhances
our value proposition, while providing Xerox an attractive gross
margin and a reasonable return on our investment in this business.
Additionally, because we primarily finance our own products and have
a long history of providing financing to our customers, we are able to
minimize much of the risk normally associated with a finance business.

Xerox 2012 Annual ReportOur Business

Services Global Production Model

Seasonality

Our technology revenues are affected by such factors as the
introduction of new products, the length of sales cycles and the
seasonality of technology purchases. These factors have historically
resulted in lower revenue in the first quarter and the third quarter.

Other Information

Xerox is a New York corporation, organized in 1906, and our
principal executive offices are located at 45 Glover Avenue, P.O. Box
4505, Norwalk, Connecticut 06856-4505. Our telephone number
is 203.968.3000.

In the Investor Information section of our Internet Website, you will
find our Annual Reports on Form 10-K, Quarterly Reports on Form
10-Q, Current Reports on Form 8-K and any amendments to these
reports. We make these documents available as soon as we can after
we have filed them with, or furnished them to, the Securities and
Exchange Commission.

Our Internet address is www.xerox.com.

Our global services production model is one of our key competitive
advantages. We have approximately 120 Strategic Delivery Centers
located around the world including India, Mexico, Philippines, Jamaica,
Ghana, Brazil, Guatemala, Chile, Argentina, Spain, Poland and Ireland,
among others. These locations are comprised of Customer Care
Centers, Mega IT Data Centers, Finance and Accounting Centers,
Human Resource Centers and Document Process Centers. Our global
production model is enabled by the use of proprietary technology,
which allows us to securely distribute client transactions within data
privacy limits across a global workforce. This global production model
allows us to leverage lower-cost production locations, consistent
methodology and processes and time zone advantages.

Fuji Xerox

Fuji Xerox is an unconsolidated entity in which we own a 25 percent
interest and FUJIFILM Holdings Corporation (“FujiFilm”) owns a
75 percent interest. Fuji Xerox develops, manufactures and distributes
document processing products in Japan, China, Hong Kong, other areas
of the Pacific Rim, Australia and New Zealand. We retain significant
rights as a minority shareholder. Our technology licensing agreements
with Fuji Xerox ensure that the two companies retain uninterrupted
access to each other’s portfolio of patents, technology and products.

International Operations

We are incorporating by reference the financial measures by
geographical area for 2012, 2011 and 2010 that are included in Note
2 – Segment Reporting in the Consolidated Financial Statements in
our 2012 Annual Report. See also the risk factor entitled “Our business,
results of operations and financial condition may be negatively
impacted by economic conditions abroad, including local economies,
political environments, fluctuating foreign currencies and shifting
regulatory schemes” in Part I, Item 1A of our 2012 Form 10-K.

Backlog

Backlog, or the value of unfilled orders, is not a meaningful indicator
of future business prospects because of the significant proportion of
our revenue that follows contract signing and/or equipment installation,
the large volume of products we deliver from shelf inventories and the
shortening of product life cycles.

Management’s Discussion and Analysis of Financial Condition
and Results of Operations

The following Management’s Discussion and Analysis (“MD&A”) is
intended to help the reader understand the results of operations
and financial condition of Xerox Corporation. MD&A is provided
as a supplement to, and should be read in conjunction with, our
Consolidated Financial Statements and the accompanying notes.

Throughout this document, references to “we,” “our,” the “Company,”
and “Xerox” refer to Xerox Corporation and its subsidiaries. References
to “Xerox Corporation” refer to the stand-alone parent company and
do not include its subsidiaries.

Executive Overview

With sales approaching $23 billion, we are the world’s leading global
enterprise for business process and document management. Our
services, technology and expertise enable customers – from small
businesses to large global enterprises – to focus on their core business
and operate more effectively. Headquartered in Norwalk, Connecticut,
we offer business process outsourcing, document outsourcing and IT
outsourcing services, including data processing, healthcare solutions,
HR benefits management, finance support, transportation solutions
and customer relationship management services for commercial
and government organizations worldwide. We also provide
extensive leading-edge document technology, services, software
and genuine Xerox supplies for graphic communication and office
printing environments of any size. Through our business process
and IT outsourcing services as well as our document technology and
managed print services, we operate in a market estimated at over
$600 billion. The 147,600 people of Xerox serve customers in more
than 160 countries. Approximately 34% of our revenue is generated
outside the U.S.

We organize our business around two main segments: Services and
Document Technology.

Our Services segment is comprised of business process outsourcing,
information technology outsourcing and document outsourcing.
The diversity of our offerings gives us a differentiated solution and
delivers greater value to our customers.

A key priority in 2012 was continued growth in our services business.
Revenue from services grew 6%, reflecting growth from all three
lines of business, business process outsourcing (“BPO”), information
technology outsourcing (“ITO”) and document outsourcing services
(“DO”). Growth in BPO benefited from recent modestly-sized
acquisitions, consistent with our strategy to continue diversifying our
services portfolio and to expand our business globally. In 2012, total
business signings were nearly $11 billion and revenue from services
represented 52% of our total 2012 revenue. Segment margin began
to improve during 2012 and was up 0.9 points in the fourth quarter
2012 as compared to the prior year.

Our Document Technology segment is comprised of our document
technology and related supplies, technical service and equipment
financing (excluding contracts related to document outsourcing).

Our product groups within this segment include Entry, Mid-range
and High-end products.

In 2012, as a result of economic uncertainties in several regions
and secular shifts in the marketplace, we focused our efforts on
productivity improvements and reductions in our cost base, as well
as steadily expanding distribution through indirect channels. As a
result, we maintained market leadership in the fastest growing, most
attractive segments of this market and segment margin remained
comparable with 2011. During the first quarter of 2013, we will
launch new and refreshed products that enhance our portfolio of
mid-range and production color document systems. In addition,
we are launching a new operating system and software for our line
of multifunction printers (“MFPs”) that add extensive cloud-based
functionality and embedded security protection from McAfee. We
expect that this operating system integrated with new products
will help drive improved installs and sales of Xerox equipment
throughout the year.

Approximately 84% of our 2012 total revenue was annuity-based
revenue that includes contracted services, equipment maintenance,
consumable supplies and financing, among other elements. Our
annuity revenue significantly benefits from growth in Services. Some
of the key indicators of annuity revenue growth include:

New Services business signings growth, which reflects the year-over-
year increase in estimated future revenues from contracts signed
during the period.

Services renewal rate, which is defined as the annual recurring

revenue (“ARR”) on contracts that are renewed during the period,
calculated as a percentage of ARR on all contracts that were up for
renewal during the period.

Services pipeline growth, which measures the year-over-year increase

in new business opportunities.

Installations of printers and multifunction printers as well as the
number of page-producing machines in the field (“MIF”) and the
page volume and mix of pages printed on color devices, where
available.

Consistent with our strategy to expand our Services offerings through
acquisitions, we acquired the following companies in 2012:

Wireless Data Services (“WDS”), a telecommunications technical
support and consultancy firm headquartered in the United Kingdom.

Lateral Data, a leading e-discovery technology provider based in the
United States.

LaserNetworks Inc., a Canada-based provider of managed print
services solutions that include print device tracking, centralized
service and supply management and document routing.

XL World, a multi-lingual customer care firm based in Italy that will
further expand our BPO capabilities across Europe.

Xerox 2012 Annual Report

•
•
•
•
•
•
•
•
•
•
Management’s Discussion

In addition, during 2012 we acquired companies that expand our
distribution capacity for Xerox document technology to small and
mid-sized businesses (“SMB”) and in under-penetrated markets. These
acquisitions include R.K. Dixon, a leading provider of IT services,
printers and managed print services, with locations in seven Iowa and
Illinois cities. We also enhanced our distribution capabilities by acquiring
office products distributors in Wisconsin, California and Illinois.

Financial Overview

During 2012 we focused on aligning our costs, investments, diverse
portfolio and operations with our services-led strategy that is designed
to accelerate growth in Services while maximizing the profitability of
our Document Technology business.

Total revenue of $22.4 billion in 2012 declined 1% from the prior
year, with a 1-percentage point negative impact from currency. Total
revenue reflected 6% growth in our Services segment as a result
of strong performance in BPO, ITO and DO services. Document
Technology revenues in 2012 declined 8% from the prior year and
included a 2-percentage point negative impact from currency.
Document Technology revenues in 2012 continued to be impacted
by the weak macro-economic environment as well as an increasing
migration of customers to our managed print services.

Net income attributable to Xerox for 2012 was $1,195 million and
included $316 million of after-tax costs and expenses related to the
amortization of intangible assets and restructuring. Net income for
2012 reflects continued pressure on margins, as we scale our revenue
in Services and ramp-up new contracts, partially offset by operational
improvements and cost reductions from restructuring actions. We
incurred additional pre-tax restructuring charges of $120 million in
2012 as compared to 2011 as we actively manage our cost structure
to improve profitability and better align it with our services-focused
business model. Net income attributable to Xerox for 2011 was
$1,295 million and included $305 million of after-tax costs and
expenses related to the amortization of intangible assets, restructuring
and the loss on the early extinguishment of a long-term liability, which
were partially offset by an after-tax curtailment gain of $66 million.

Cash flow from operations was $2.6 billion in 2012 as compared to
$2.0 billion in 2011. The increase in cash was primarily due to the sales
of receivables as well as a higher net runoff of finance receivables as
a result of lower equipment sales. This increase was partially offset by
higher accounts receivables primarily due to the growth in Services
revenue. Cash used in investing activities of $761 million primarily
reflects capital expenditures of $513 million and acquisitions of
$276 million. Cash used in financing activities was $1.5 billion, which
primarily reflects $1.1 billion for the repurchase of common stock,
$255 million for dividends and a $100 million reduction in Commercial
Paper. We also issued approximately $1.1 billion in new Senior Notes to
fund the May 2012 maturity of our $1.1 billion 5.59% Senior Notes.

We expect 2013 revenue in the range of flat to growing 2%, excluding
the impact of currency. In our Services business, we expect continued
revenue growth in the mid-to-high single digits. Services margins are
expected to be in the 10%-12% range as the Company places a
heightened focus on operational efficiencies and applying innovation
to automate more business processes. In our Document Technology
business, we expect a mid-single digit revenue decline, an improvement
from the prior year. The Company expects to benefit from product
launches and the expansion of indirect channels plus the acceleration
of color printing in key markets, all of which partially offset declines
primarily related to black-and-white printing. Margins in Document
Technology are expected to be flat on a year-over-year basis, continuing
to support the strong profitability of this mature business and providing
flexibility to accelerate growth in the digital color and SMB markets.

Europe

As of and for the year ended December 31, 2012, approximately
$3.1 billion of our total revenues and $4.1 billion of our total assets
are based in countries where the Euro is the functional currency.
Approximately $1.8 billion of those assets are finance receivables
and approximately 15% of those receivables are with governmental
entities. Accordingly, we are impacted by the challenges facing the Euro
zone economies and governments, and we expect those challenges to
continue into 2013.

Currency Impact

To understand the trends in the business, we believe that it is helpful to
analyze the impact of changes in the translation of foreign currencies
into U.S. Dollars on revenue and expenses. We refer to this analysis
as “currency impact” or “the impact from currency.” This impact is
calculated by translating current period activity in local currency using
the comparable prior year period’s currency translation rate. This
impact is calculated for all countries where the functional currency
is the local country currency. Revenues and expenses from our
developing market countries (Latin America, Brazil, the Middle East,
India, Eurasia and Central-Eastern Europe) are analyzed at actual
exchange rates for all periods presented, since these countries generally
have unpredictable currency and inflationary environments, and our
operations in these countries have historically implemented pricing
actions to recover the impact of inflation and devaluation. We do not
hedge the translation effect of revenues or expenses denominated in
currencies where the local currency is the functional currency.

Approximately 34% of our consolidated revenues are derived
from operations outside of the United States where the U.S. Dollar
is normally not the functional currency. When compared with the
average of the major European currencies and Canadian Dollar on a
revenue-weighted basis, the U.S. Dollar was 5% stronger in 2012 and
5% weaker in 2011, each compared to the prior year. As a result, the
foreign currency translation impact on revenue was a 1% detriment in
2012 and a 2% benefit in 2011.

Application of Critical Accounting Policies

In preparing our Consolidated Financial Statements and accounting for
the underlying transactions and balances, we apply various accounting
policies. Senior management has discussed the development and
selection of the critical accounting policies, estimates and related
disclosures included herein with the Audit Committee of the Board
of Directors. We consider the policies discussed below as critical
to understanding our Consolidated Financial Statements, as their
application places the most significant demands on management’s
judgment, since financial reporting results rely on estimates of the
effects of matters that are inherently uncertain. In instances where
different estimates could have reasonably been used, we disclosed
the impact of these different estimates on our operations. In certain
instances, like revenue recognition for leases, the accounting rules are
prescriptive; therefore, it would not have been possible to reasonably
use different estimates. Changes in assumptions and estimates are
reflected in the period in which they occur. The impact of such changes
could be material to our results of operations and financial condition in
any quarterly or annual period.

Specific risks associated with these critical accounting policies are
discussed throughout the MD&A, where such policies affect our
reported and expected financial results. For a detailed discussion of the
application of these and other accounting policies, refer to
Note 1 – Summary of Significant Accounting Policies in the
Consolidated Financial Statements.

Revenue Recognition

Application of the various accounting principles in GAAP related to
the measurement and recognition of revenue requires us to make
judgments and estimates. Complex arrangements with nonstandard
terms and conditions may require significant contract interpretation
to determine the appropriate accounting. Refer to Note 1 – Summary
of Significant Accounting Policies – Revenue Recognition in the
Consolidated Financial Statements for additional information
regarding our revenue recognition policies. Specifically, the revenue
related to the following areas involves significant judgments and
estimates:

Bundled Lease Arrangements
Sales to Distributors and Resellers
Services – Percentage-of-completion

Bundled Lease Arrangements – We sell our equipment under
bundled lease arrangements, which typically include the equipment,
service, supplies and a financing component for which the customer
pays a single negotiated monthly fixed price for all elements over
the contractual lease term. Approximately 35% of our equipment
sales revenue is related to sales made under bundled lease
arrangements. Recognizing revenues under these arrangements
requires us to allocate the total consideration received to the lease
and non-lease deliverables included in the bundled arrangement,
based upon the estimated fair values of each element.

Sales to Distributors and Resellers – We utilize distributors and
resellers to sell many of our Document Technology products to
end-user customers. Sales to distributors and resellers are generally
recognized as revenue when products are sold to such distributors and
resellers. Distributors and resellers participate in various rebate, price-
protection, cooperative marketing and other programs, and we record
provisions and allowances for these programs as a reduction to revenue
when the sales occur. Similarly, we also record estimates for sales
returns and other discounts and allowances when the sales occur. We
consider various factors, including a review of specific transactions and
programs, historical experience and market and economic conditions
when calculating these provisions and allowances. Approximately 10%
of our revenues include sales to distributors and resellers, and provisions
and allowances recorded on these sales are approximately 20% of the
associated gross revenues.

Revenue Recognition for Services – Percentage-of-Completion –
A portion of our Services revenue is recognized using the percentage-
of-completion (“POC”) accounting method. This method requires the
use of estimates and judgment. Approximately 3% of our Services
revenue uses the POC accounting method. Although not significant to
total Services revenue, the percentage-of-completion methodology is
normally applied to certain of our larger and longer term outsourcing
contracts involving system development and implementation services.
The POC accounting methodology involves recognizing probable
and reasonably estimable revenue using the percentage of services
completed based on a current cumulative cost to estimated total cost
basis and a reasonably consistent profit margin over the period. Due to
the long-term nature of these arrangements, developing the estimates
of cost often requires significant judgment. Factors that must be
considered in estimating the progress of work completed and ultimate
cost of the projects include, but are not limited to, the availability of
labor and labor productivity, the nature and complexity of the work
to be performed and the impact of delayed performance. If changes
occur in delivery, productivity or other factors used in developing
the estimates of costs or revenues, we revise our cost and revenue
estimates, which may result in increases or decreases in revenues and
costs. Such revisions are reflected in income in the period in which the
facts that give rise to that revision become known. We perform ongoing
profitability analysis of our POC services contracts in order to determine
whether the latest estimates require updating. Key factors reviewed by
the company to estimate the future costs to complete each contract
are future labor costs, future product costs and expected productivity
efficiencies. If at any time these estimates indicate the POC contract
will be unprofitable, the entire estimated loss for the remainder of the
contract is recorded immediately in cost of services.

Xerox 2012 Annual Report

•
•
•
Management’s Discussion

Allowance for Doubtful Accounts and Credit Losses

We continuously monitor collections and payments from our customers
and maintain a provision for estimated credit losses based upon our
historical experience adjusted for current conditions. We recorded bad
debt provisions of $120 million, $157 million and $188 million in SAG
expenses in our Consolidated Statements of Income for the years
ended December 31, 2012, 2011 and 2010, respectively.

Bad debt provisions decreased by $37 million in 2012. Reserves, as a
percentage of trade and finance receivables, were 3.3% at
December 31, 2012, which was consistent with the percentage at
December 31, 2011 and 2010. The decrease in bad debt provisions was
primarily related to improvements in Europe, reflecting a stabilization
of credit issues noted in the prior year. We continue to assess our
receivable portfolio in light of the current economic environment
and its impact on our estimation of the adequacy of the allowance
for doubtful accounts. In addition, although our bad debt provisions
improved in Europe, this region continues to be a focus of our credit
review and analysis.

As discussed above, we estimated our provision for doubtful accounts
based on historical experience and customer-specific collection issues.
This methodology was consistently applied for all periods presented.
During the five year period ended December 31, 2012, our reserve for
doubtful accounts ranged from 3.3% to 4.1% of gross receivables.
Holding all assumptions constant, a 1-percentage point increase or
decrease in the reserve from the December 31, 2012 rate of 3.3%
would change the 2012 provision by approximately $85 million.

Refer to Note 4 – Accounts Receivables, Net and Note 5 – Finance
Receivables, Net in the Consolidated Financial Statements for
additional information regarding our allowance for doubtful accounts.

Pension Plan Assumptions

We sponsor defined benefit pension plans in various forms in several
countries covering employees who meet eligibility requirements.
Several statistical and other factors that attempt to anticipate future
events are used in calculating the expense, liability and asset values
related to our defined benefit pension plans. These factors include
assumptions we make about the expected return on plan assets,
discount rates, the rate of future compensation increases and mortality.
Differences between these assumptions and actual experiences
are reported as net actuarial gains and losses and are subject to
amortization to net periodic benefit cost over future periods.

Cumulative net actuarial losses for our defined benefit pension plans of
$3.4 billion as of December 31, 2012 increased by approximately
$800 million from December 31, 2011. This increase reflects the
increase in our benefit obligations as a result of a lower discount rate,
which was only partially offset by positive returns on plan assets in
2012 as compared to expected returns. The total actuarial loss will be
amortized over future periods, subject to offsetting gains or losses that
will impact the future amortization amounts.

We used a consolidated weighted average expected rate of return on
plan assets of 6.9% for 2012, 7.2% for 2011 and 7.3% for 2010, on
a worldwide basis. During 2012, the actual return on plan assets was
$792 million as compared to an expected return of $613 million. When
estimating the 2013 expected rate of return, in addition to assessing
recent performance, we considered the historical returns earned on
plan assets, the rates of return expected in the future, particularly in
light of current economic conditions, and our investment strategy
and asset mix with respect to the plans’ funds. The weighted average
expected rate of return on plan assets we will use in 2013 is 6.7%.
The reduction in the expected rate of return in 2013 as compared to
2012 primarily reflects an expected slight decrease in long-term capital
market returns.

Another significant assumption affecting our defined benefit pension
obligations and the net periodic benefit cost is the rate that we use
to discount our future anticipated benefit obligations. In the U.S. and
the U.K., which comprise approximately 75% of our projected benefit
obligation, we consider the Moody’s Aa Corporate Bond Index and the
International Index Company’s iBoxx Sterling Corporate AA Cash Bond
Index, respectively, in the determination of the appropriate discount
rate assumptions. The consolidated weighted average discount rate we
used to measure our pension obligations as of December 31, 2012 and
to calculate our 2013 expense was 3.9%, which is lower than the 4.7%
that was used to calculate our obligations as of December 31, 2011
and our 2012 expense. The weighted average discount rate we used to
measure our retiree health obligation as of December 31, 2012 and to
calculate our 2013 expense was 3.6%, which is lower than the 4.5%
that was used to calculate our obligation at December 31, 2011 and
our 2012 expense.

Holding all other assumptions constant, a 0.25% increase or decrease
in the discount rate would change the 2013 projected net periodic
pension cost by $31 million. Likewise, a 0.25% increase or decrease in
the expected return on plan assets would change the 2013 projected
net periodic pension cost by $19 million.

One of the most significant and volatile elements of our net periodic
defined benefit pension plan expense is settlement losses. Our primary
domestic plans allow participants the option of settling their vested
benefits through either the receipt of a lump-sum payment or the
purchase of a non-participating annuity contract with an insurance
company. Annuity purchases represent benefits to be provided via
contracts under which an insurance company is obligated to pay the
benefits. Accordingly, under either option, the participant’s vested
benefit is considered fully settled upon payment of the lump-sum or
the purchase of the annuity. Approximately two-thirds of participants
elect to receive a lump-sum payment.

We have elected to apply settlement accounting and, therefore, we
recognize the losses associated with these settlements immediately
upon the settlement of the vested benefits. Settlement accounting
requires us to recognize a pro rata portion of the aggregate

unamortized net actuarial losses upon settlement. As noted above,
cumulative unamortized net actuarial losses were $3.4 billion at
December 31, 2012, of which the U.S. primary domestic plans
represented $1.1 billion. The pro rata factor is computed as the
percentage reduction in the projected benefit obligation due to the
settlement of a participant’s vested benefit. Settlement accounting
is only applied when the event of settlement occurs – i.e. the lump-
sum payment is made or the annuity purchased. Since settlement
is dependent on an employee’s decision and election, the level of
settlements and the associated losses can fluctuate significantly period
to period. In 2012, settlement losses associated with our primary
domestic pension plans amounted to $82 million and were $16 million,
$14 million, $24 million and $28 million for the first through fourth
quarters of 2012, respectively. Currently, on average, approximately
$100 million of plan settlements will result in settlement losses of
approximately $24 million. During the three years ended December
31, 2012, U.S. plan settlements were $481 million, $598 million and
$393 million, respectively.

Refer to Note 15 – Employee Benefit Plans in the Consolidated
Financial Statements for additional information regarding our defined
benefit pension plan assumptions.

The following is a summary of our benefit plan costs and funding
for the three years ended December 31, 2012 as well as estimated
amounts for 2013:

(in millions)

Estimated

Actual

Benefit Plan Costs:

2013

2012

2011

2010

Defined benefit pension plans (1)

$ 202

$ 300

$ 284

$ 304

Curtailment gain (2)

–

(107)

Defined contribution plans

Retiree health benefit plans

113

–

Total Benefit Plan Expense

$ 318

$ 374

$ 257

$ 387

(1) Estimated 2013 assumes settlement losses are consistent with 2012.
(2) Refer to the “Plan Amendment” section in Note 15 – Employee Benefit Plans in the

Consolidated Financial Statements for further information.

Our estimated 2013 defined benefit pension plan cost is expected
to be approximately $100 million lower than 2012, primarily driven
by the U.S. defined benefit plan freeze at December 31, 2012,
which eliminated approximately $100 million of service costs and
reduced the amortization of actuarial losses by $47 million. These
impacts were partially offset by the worldwide 80 bps decrease in the
discount rate. Offsetting the decrease in our defined benefit pension
plan expense is an increase in expense associated with our defined
contribution plans as employees from those defined benefit pension
plans that have been amended to freeze future service accruals are
transitioned to enhanced defined contribution plans.

Benefit plan costs are included in several income statement
components based on the related underlying employee costs.

(in millions)

Estimated

Actual

Benefit Plan Funding:

2013

2012

2011

2010

Defined benefit pension plans:

Cash

Stock

Total

Defined contribution plans

Retiree health benefit plans

$ 195

$ 364

$ 426

$ 237

–

195

113

130

494

130

556

–

237

Total Benefit Plan Funding

$ 388

$ 641

$ 695

$ 380

The decrease in required contributions to our worldwide defined
benefit pension plans is largely in the U.S. and reflects the expected
benefits from the pension funding legislation enacted in the U.S.
during 2012. This decrease is partially offset by an expected increase in
contributions to our defined contribution plans.

Refer to Note 15 – Employee Benefit Plans in the Consolidated
Financial Statements for additional information regarding expense
and funding.

Income Taxes

We record the estimated future tax effects of temporary differences
between the tax bases of assets and liabilities and amounts reported
in our Consolidated Balance Sheets, as well as operating loss and tax
credit carryforwards. We follow very specific and detailed guidelines
in each tax jurisdiction regarding the recoverability of any tax assets
recorded in our Consolidated Balance Sheets and provide valuation
allowances as required. We regularly review our deferred tax assets
for recoverability considering historical profitability, projected future
taxable income, the expected timing of the reversals of existing
temporary differences and tax planning strategies. Adjustments to our
valuation allowance, through (credits) charges to income tax expense,
were $(9) million, $(5) million and $22 million for the years ended
December 31, 2012, 2011 and 2010, respectively. There were other
(decreases) increases to our valuation allowance, including the effects
of currency, of $(14) million, $(53) million and $11 million for the years
ended December 31, 2012, 2011 and 2010, respectively. These did
not affect income tax expense in total as there was a corresponding
adjustment to deferred tax assets or other comprehensive income.
Gross deferred tax assets of $3.8 billion and $3.8 billion had valuation
allowances of $654 million and $677 million at December 31, 2012
and 2011, respectively.

Xerox 2012 Annual Report

Management’s Discussion

We are subject to ongoing tax examinations and assessments in
various jurisdictions. Accordingly, we may incur additional tax expense
based upon our assessment of the more-likely-than-not outcomes of
such matters. In addition, when applicable, we adjust the previously
recorded tax expense to reflect examination results. Our ongoing
assessments of the more-likely-than-not outcomes of the examinations
and related tax positions require judgment and can materially increase
or decrease our effective tax rate, as well as impact our operating
results. Unrecognized tax benefits were $201 million, $225 million and
$186 million at December 31, 2012, 2011 and 2010, respectively.

Refer to Note 16 – Income and Other Taxes in the Consolidated
Financial Statements for additional information regarding deferred
income taxes and unrecognized tax benefits.

Business Combinations and Goodwill

The application of the purchase method of accounting for business
combinations requires the use of significant estimates and
assumptions in the determination of the fair value of assets acquired
and liabilities assumed in order to properly allocate purchase price
consideration between assets that are depreciated and amortized
from goodwill. Our estimates of the fair values of assets and liabilities
acquired are based upon assumptions believed to be reasonable, and
when appropriate, include assistance from independent third-party
appraisal firms. Refer to Note 3 – Acquisitions in the Consolidated
Financial Statements for additional information regarding the
allocation of the purchase price consideration for our acquisitions.

As a result of our acquisition of ACS, as well as other acquisitions
including GIS, we have a significant amount of goodwill. Goodwill at
December 31, 2012 was $9.1 billion. Goodwill is not amortized but
rather is tested for impairment annually or more frequently if an event
or circumstance indicates that an impairment may have been incurred.

Application of the annual goodwill impairment test requires judgment,
including the identification of reporting units, assignment of assets and
liabilities to reporting units, assignment of goodwill to reporting units
and the assessment – qualitatively or quantitatively – of the fair value
of each reporting unit against its carrying value. At December 31, 2012,
$6.8 billion and $2.3 billion of goodwill was allocated to reporting units
within our Services and Document Technology segments, respectively.
Our Services segment is comprised of three reporting units while our
Document Technology segment is comprised of one reporting unit for
a total of four reporting units with goodwill balances.

Our annual impairment test of goodwill was performed in the fourth
quarter of 2012. As a result of market and business conditions, we
elected to utilize a quantitative assessment of the recoverability of our
goodwill balances for each of our reporting units.

In our quantitative test, we estimate the fair value of each reporting unit
using a discounted cash flow methodology. This valuation approach
requires significant judgment and considers a number of factors that
include, but are not limited to, expected future cash flows, growth rates

and discount rates, and it requires us to make certain assumptions and
estimates regarding the current economic environment, industry factors
and the future profitability of our business.

When performing our discounted cash flow analysis for each reporting
unit, we incorporate the use of projected financial information and
discount rates that are developed using market participant-based
assumptions. The cash-flow projections are based on five-year financial
forecasts developed by management that include revenue and expense
projections, capital spending trends, and investment in working
capital to support anticipated revenue growth or other changes in the
business. The selected discount rates consider the risk and nature of
the respective reporting units’ cash flows and an appropriate capital
structure and rates of return that market participants would require to
invest their capital in our reporting units.

In performing our 2012 impairment test, the following were the long-
term assumptions for Document Technology and the three reporting
units within our Services segment with respect to revenue, operating
income and margins, which formed the basis for estimating future cash
flows used in the discounted cash flow model:

Document Technology – revenue decline: 2%-3%, operating
income: flat, operating margin: 10%-12% – as we continue to
manage costs as a result of an expected decline in revenues.

Services – revenue growth: 4%-6%, operating income growth:
7%-10%, operating margin: 10%-12% – as we benefit from
recurring revenue and strong signings growth in recent years while
maintaining costs and expenses.

We believe these assumptions are appropriate because they are
consistent with historical results as well as our forecasted long-
term business model and give appropriate consideration to the
current economic environment and markets that we serve. The
average discount rate applied to our projected cash flows was
approximately 10%, which we considered reasonable based on the
estimated capital costs of applicable market participants. Although
the sum of the fair values of our reporting units was in excess of
our market capitalization, we believe the difference is reasonable
when market-based control premiums and other factors are taken
into consideration, including the evolution of our business to be
predominantly services-based. We also compared our reporting unit
and consolidated valuations against market multiples and likewise
concluded that our valuations were reasonable.

The results of our testing indicated that each of our reporting units
has a fair value in excess of its carrying value and no impairment
charge was required. The excess of reporting unit fair values over
carrying values for our Document Technology reporting unit and the
BPO/ITO Government reporting unit within our Services segment
(which has approximately $2.0 billion of goodwill) are significantly
less than in prior years with excess of fair value over carrying value of
approximately 20% and 10%, respectively.

•
•
We will to continue to monitor the impact of economic, market and industry factors impacting these reporting units in 2013. Subsequent to our
fourth quarter impairment test, we did not identify any indicators of potential impairment that required an update to the annual impairment test.

Refer to Note 9 – Goodwill and Intangible Assets, Net in the Consolidated Financial Statements for additional information regarding goodwill by
reportable segment.

Revenue Results Summary

Total Revenue

Revenue for the three years ended December 31, 2012 was as follows:

(in millions)

Equipment sales

Annuity revenue

Total Revenue

Revenues

Change

Pro-forma (1)

Percent of Total Revenue

2012

2011

2010

2012

2011

2012

2011

2010

$ 3,476

$ 3,856

$ 3,857

(10)%

–

18,914

18,770

17,776

$ 22,390

$ 22,626

$ 21,633

(1)%

–

16%

84%

17%

18%

83%

82%

100%

Reconciliation to Consolidated Statements of Income:

Sales

$ 6,578

$ 7,126

$ 7,234

Less: Supplies and other sales

(2,273)

(2,371)

(2,420)

Less: Paper sales

Equipment Sales

(829)

(899)

(957)

$ 3,476

$ 3,856

$ 3,857

(10)%

Outsourcing, service and rentals

$ 15,215

$ 14,868

$ 13,739

Add: Finance income

597

632

660

Add: Supplies and other sales

2,273

2,371

2,420

Add: Paper sales

Annuity Revenue

829

899

957

$ 18,914

$ 18,770

$ 17,776

(6)%

(4)%

(8)%

–

(4)%

(2)%

(6)%

–

(4)%

(3)%

(6)%

16%

68%

10%

84%

17%

66%

10%

83%

18%

64%

11%

82%

(1) 2011 Results are discussed primarily on a pro-forma basis and include ACS’s estimated results from January 1 through February 5 in 2010. See the “Non-GAAP Financial Measures” section

for an explanation of this non-GAAP financial measure.

Revenue 2012

Total revenues decreased 1% compared to the prior year and included
a 1-percentage point negative impact from currency. Total revenues
included the following:

Annuity revenue increased 1% and included a 1-percentage point
negative impact from currency. Annuity revenue is comprised of the
following:

- Outsourcing, service and rentals revenue – includes outsourcing
revenue within our Services segment and technical service revenue
(including bundled supplies) and rental revenue, both primarily
within our Document Technology segment. Revenues of
$15,215 million increased 2% and included a 2-percentage point
negative impact from currency. The increase was primarily driven
by growth in all three lines of business in our Services segment,
partially offset by a decline in technical service revenues. Total
digital pages declined 2% despite a 3% increase in digital MIF.

- Supplies and other sales – includes unbundled supplies and
other sales, primarily within our Document Technology segment.
Revenues of $2,273 million decreased 4% and included a
1-percentage negative impact from currency. The decrease was
primarily due to moderately lower demand.

- Paper sales – which are primarily included within our Other
segment, of $829 million decreased 8% and included a
2-percentage point negative impact from currency, driven primarily
by market pricing and lower activity.

- Finance income – includes $44 million in gains from the sale of
finance receivables from our Document Technology segment (see
Note 5 – Finance Receivables, Net in the Consolidated Financial
Statements for additional information).

Xerox 2012 Annual Report

•
Management’s Discussion

Equipment sales revenue is reported primarily within our
Document Technology segment and the document outsourcing
business within our Services segment. Equipment sales revenue
decreased 10% and included a 2-percentage point negative impact
from currency, primarily driven by delayed customer decision-making
and overall weak economic and market conditions. An increase in
total product installs was offset by the impact of lower product mix
and price declines. Price declines were in the range of 5%-10%.

Equipment sales within our Services segment continued to grow,
driven by the migration of customers looking to reduce printing costs
by moving to our document outsourcing offering.

Color 2 revenue decreased 6%, including a 2-percentage point

negative impact from currency. An increase in color pages of 9%
and color MIF of 14% were offset by a decline in color equipment
sales revenue, driven primarily by weakness in Europe and the
impact of lower product mix. Color pages represented 30% of total
pages in 2012.

Revenue 2011

Total revenues increased 5% compared to the prior year. Our
consolidated 2011 results include a full year of revenues from ACS,
which was acquired on February 5, 2010. On a pro-forma1 basis,
including ACS’s estimated 2010 revenues for the period from January 1
through February 5 in our historical 2010 results, the total revenue for
2011 grew 2%. Total revenue growth included a 2-percentage point
positive impact from currency. Total revenues included the following:

Annuity revenue increased 6% or 2% on a pro-forma1 basis, with a

1-percentage point positive impact from currency. Annuity revenue is
comprised of the following:

- Outsourcing, service and rentals revenue of $14,868 million
increased 8%, or 4% on a pro-forma1 basis, and included a
2-percentage point positive impact from currency. The increase
was primarily due to growth in BPO and DO revenue in our Services
segment partially offset by a decline in pages. Total digital pages
declined 3% despite a 2% increase in digital MIF.

- Supplies and other sales of $2,371 million decreased 2%, or 3% on
a pro-forma1 basis, with no impact from currency.

- Paper sales of $899 million decreased 6% and included a
2-percentage point negative impact from currency.

Equipment sales revenue was flat and included a 1-percentage point
positive impact from currency. Favorable product mix in high-end
products was offset by price declines in the range of 5%-10%.

Color2 revenue increased 5%, including a 2-percentage point

negative impact from currency. This increase was due to an increase
in color pages of 9% and an increase in color equipment sales
revenue of 4%. Color2 pages represented 27% of total pages in
2011 while color device MIF represented 35% of total MIF.

An analysis of the change in revenue for each business segment is
included in the “Operations Review of Segment Revenue and Profit”
section.

Costs, Expenses and Other Income

Summary of Key Financial Ratios

Total Gross Margin

RD&E as a % of Revenue

SAG as a % of Revenue

Operating Margin (1)

Pre-tax Income Margin

Year Ended December 31,

Change

Pro-forma (1)

2012

2011

2010

2012

2011

2010

31.4%

2.9%

19.2%

9.3%

6.0%

32.8%

34.4%

(1.4) pts

(1.6) pts

(1.1) pts

(0.2) pts

3.2%

3.6%

(0.3) pts

(0.4) pts

(0.3) pts

(0.4) pts

19.9%

21.2%

(0.7) pts

(1.3) pts

(1.0) pts

(0.9) pts

9.8%

6.9%

9.6%

3.8%

(0.5) pts

0.2 pts

0.3 pts

1.0 pts

(0.9) pts

3.1 pts

3.4 pts

(2.2) pts

(1) See the “Non-GAAP Financial Measures” section for an explanation of Pro-forma and Operating Margin non-GAAP financial measures.

•
•
•
•
•
Operating Margin

The operating margin1 for the year ended December 31, 2012 of 9.3%
decreased 0.5-percentage points as compared to 2011. The decline,
which was primarily in our Services segment due to a decrease in gross
margin, was partially offset by expense reductions.

The operating margin1 for the year ended December 31, 2011 of 9.8%
increased 0.2-percentage points, or 0.3-percentage points on a pro-
forma1 basis, as compared to 2010. The increase was due primarily to
disciplined cost and expense management.

Note: The acquisition of ACS increased the proportion of our revenue
from services, which has a lower gross margin and SAG as a percent
of revenue than we historically experienced when Xerox was primarily
a technology company. As a result, in 2011 gross margins and SAG
are also discussed below on a pro-forma basis where we adjust our
historical 2010 results to include ACS’s 2010 estimated results for
the period from January 1 through February 5, 2010. Refer to the
“Non-GAAP Financial Measures” section for a further explanation and
discussion of this non-GAAP presentation.

Gross Margin

Gross margin for year ended December 31, 2012 of 31.4% decreased
1.4-percentage points as compared to 2011. The decrease was driven
by the overall mix of services revenue, the ramping of new services
contracts and pressure on government contracts, particularly in the
third quarter 2012. These negative impacts were partially offset by
productivity improvements and cost savings from restructuring.

Gross margin for year ended December 31, 2011 of 32.8% decreased
1.6-percentage points, or 1.1-percentage points on a pro-forma1 basis,
as compared to 2010. The decrease was driven by the ramping of new
services contracts, the impact of lower contract renewals, transaction
currency and the mix of higher services revenue.

Services gross margin for the year ended December 31, 2012
decreased 1.7-percentage points as compared to 2011. The decrease
is primarily due to the ramping of new services contracts within BPO
and ITO and pressure on government contracts, particularly in the third
quarter 2012.

Services gross margin for the year ended December 31, 2011
decreased 1.7-percentage points, or 1.2 percentage points, on a pro-
forma1 basis, as compared to 2010. The decrease is primarily due to
the ramping of new services contracts within BPO and ITO and the
impact of lower contract renewals.

Document Technology gross margin for the year ended December
31, 2012 increased by 0.1-percentage points as compared to 2011.
Productivity improvements, restructuring savings and gains recognized
on the sales of finance receivables (see Note 5 – Finance Receivables,
Net in the Consolidated Financial Statements for additional
information) more than offset the impact of price declines, product mix
and the unfavorable year-over-year impact of transaction currency.

Document Technology gross margin for the year ended December
31, 2011 decreased by 0.9-percentage points as compared to 2010
due to the impact of price declines and the negative year-over-year
impact of transaction currency. The decline was partially offset by cost
productivities and restructuring savings which reflect our continued
focus on cost management.

Research, Development and Engineering Expenses (“RD&E”)

(in millions)

R&D

Sustaining engineering

Total RD&E Expenses

R&D Investment by Fuji Xerox(1)

(1) Fluctuation in Fuji Xerox R&D was primarily due to changes in foreign exchange rates.

Year Ended December 31,

Change

2012

2011

2010

2012

2011

$ 545

110

$ 655

$ 860

$ 613

108

$ 721

$ 880

$ 653

128

$ 781

$ 821

$ (68)

$ (66)

$ (20)

$ (40)

(20)

$ (60)

$ 59

Xerox 2012 Annual Report

Management’s Discussion

RD&E as a percent of revenue for the year ended December 31,
2012 of 2.9% decreased 0.3-percentage points. In addition to lower
spending, the decrease was also driven by the positive mix impact of
the continued growth in Services revenue, which historically has a lower
RD&E percent of revenue.

SAG expenses of $4,497 million for the year ended December 31,
2011 was $97 million lower than the prior year period, or $156 million
lower on a pro-forma1 basis, both including a $68 million unfavorable
impact from currency. The pro-forma SAG expense decrease reflects
the following:

RD&E of $655 million for the year ended December 31, 2012, was
$66 million lower, reflecting the impact of restructuring and
productivity improvements. Innovation is one of our core strengths
and we continue to invest at levels that enhance this core strength,
particularly in color, software and services. During 2012 we managed
our investments in R&D to align with growth opportunities in areas like
business services, color printing and customized communication. Xerox
R&D is also strategically coordinated with Fuji Xerox.

RD&E as a percent of revenue for the year ended December 31,
2011 of 3.2% decreased 0.4-percentage points. In addition to lower
spending, the decrease was also driven by the positive mix impact of
the continued growth in Services revenue, which historically has a lower
RD&E percent of revenue.

RD&E of $721 million for the year ended December 31, 2011, was
$60 million lower, reflecting the impact of restructuring and
productivity improvements.

Selling, Administrative and General Expenses (“SAG”)

SAG as a percent of revenue of 19.2% decreased 0.7-percentage
points for the year ended December 31, 2012. The decrease was driven
by spending reductions reflecting benefits from restructuring and
productivity improvements in addition to the positive mix impact from
the continued growth in Services revenue, which historically has a lower
SAG percent of revenue.

SAG expenses of $4,288 million for the year ended December 31, 2012
were $209 million lower than the prior year period including a
$60 million favorable impact from currency. The decrease in SAG
expenses reflects the following:

$240 million decrease in selling expenses reflecting the benefits

from restructuring and productivity improvements, as well as lower
compensation-related expenses and advertising spending partially
offset by the impact of acquisitions.

$68 million increase in general and administrative expenses
as restructuring savings and productivity improvements were
more than offset by the impact of acquisitions and deferred
compensation expense.

$37 million decrease in bad debt expenses to $120 million, driven

primarily by lower write-offs in Europe.

SAG as a percent of revenue of 19.9% decreased 1.3-percentage
points, or 1.0-percentage points on a pro-forma1 basis, for the year
ended December 31, 2011.

$68 million decrease in selling expenses reflecting the benefits from

restructuring, productivity improvements and decrease in brand
advertising partially offset by the impact of acquisitions.

$54 million decrease in general and administrative expenses

primarily reflecting lower compensation as well as the benefits from
restructuring and operational improvements.

$31 million decrease in bad debt expense, to $157 million as

improvements in write-off trends in North America were more than
offset by higher write-offs in southern Europe.

Restructuring and Asset Impairment Charges

During the year ended December 31, 2012, we recorded net
restructuring and asset impairment charges of $153 million
($97 million after-tax). Approximately 47% of the charges were related
to our Services segment and 53% to our Document Technology
segment and included the following:

$160 million of severance costs related to headcount reductions of
approximately 6,300 employees primarily in North America. The
actions impacted several functional areas, and approximately 63%
of the costs were focused on gross margin improvements, 31% in
SAG and 6% on the optimization of RD&E investments.

$5 million for lease termination costs primarily reflecting continued

optimization of our worldwide operating locations.

$2 million of asset impairment losses.

The above charges were partially offset by $14 million of net reversals
for changes in estimated reserves from prior period initiatives.

We expect 2013 pre-tax savings of approximately $170 million from
our 2012 restructuring actions.

During the year ended December 31, 2011, we recorded net
restructuring and asset impairment charges of $33 million ($18 million
after-tax) which included the following:

$98 million of severance costs related to headcount reductions of
approximately 3,900 employees primarily in North America. The
actions impacted several functional areas, and approximately 55%
of the costs were focused on gross margin improvements, 36% on
SAG and 9% on the optimization of RD&E investments.

$1 million for lease termination costs.

$5 million of asset impairment losses from the disposition of two
aircraft associated with the restructuring of our corporate aviation
operations.

•
•
•
•
•
•
•
•
•
•
•
•
The above charges were partially offset by $71 million of net reversals
for changes in estimated reserves from prior period initiatives.

Restructuring Summary

The restructuring reserve balance as of December 31, 2012 for all
programs was $130 million, of which approximately $122 million is
expected to be spent over the next twelve months. Refer to
Note 10 – Restructuring and Asset Impairment Charges, in the
Consolidated Financial Statements for additional information
regarding our restructuring programs.

Acquisition Related Costs

Costs of $77 million were incurred during 2010 in connection with
our acquisition of ACS. These costs include $53 million of transaction
costs, which represent external costs directly related to completing
the acquisition of ACS. The remainder of the acquisition-related costs
represents external incremental costs directly related to the integration
of ACS and Xerox.

Amortization of Intangible Assets

During the year ended December 31, 2012, we recorded $328 million
of expense related to the amortization of intangible assets, which is
$70 million lower than the prior year. The prior year expense included
$52 million related to the accelerated amortization of the ACS trade
name intangible asset which was fully written off in 2011 as a result of
the decision to discontinue its use and transition the services business
to the “Xerox Business Services” trade name. The impact from the write
off of the ACS trade name was partially offset by the amortization of
intangible assets associated with current and prior-year acquisitions.

During the year ended December 31, 2011, we recorded $398 million
of expense related to the amortization of intangible assets, which
was $86 million higher than the prior year primarily as a result of the
accelerated write-off of the ACS trade name.

Curtailment Gain

In December 2011, we amended all of our primary non-union U.S.
defined benefit pension plans for salaried employees. Our primary
qualified plans had previously been amended to freeze the final
average pay formulas within the plans as of December 31, 2012,
but the cash balance service credit was expected to continue post
December 31, 2012. The 2011 amendments now fully freeze benefit
and service accruals after December 31, 2012 for these plans, including
the related non-qualified plans. As a result of these plan amendments,
we recognized a pre-tax curtailment gain of $107 million ($66 million
after-tax), which represents the recognition of deferred gains from
other prior year amendments (“prior service credits”) as a result of the
discontinuation (“freeze”) of any future benefit or service accrual period.
The amendments did not materially impact 2012 pension expense.

Worldwide Employment

Worldwide employment of 147,600 at December 31, 2012 increased
approximately 8,000 from December 31, 2011, primarily due to the
impact of acquisitions, partially offset by restructuring related actions.
Worldwide employment was approximately 139,650 and 136,500 at
December 2011 and 2010, respectively.

Other Expenses, Net

(in millions)

Year Ended December 31,

2012

2011

2010

Non-financing interest expense

$ 230

$ 247

$ 346

Interest income

(13)

(21)

(19)

Loss (gains) on sales of businesses and assets

Currency losses, net

ACS shareholders litigation settlement

Litigation matters

–

(9)

(18)

–

(1)

(4)

Loss on sales of accounts receivables

Loss on early extinguishment of liability

–

Deferred compensation investment gains

(10)

–

(12)

All other expenses, net

Total Other Expenses, Net

$ 256

$ 322

$ 389

Non-Financing Interest Expense: Non-financing interest expense for
the year ended December 31, 2012 of $230 million was $17 million
lower than prior year. The decrease in interest expense is primarily
due to the benefit of lower borrowing costs achieved as a result of
refinancing existing debt.

Non-financing interest expense for the year ended December 31, 2011
of $247 million was $99 million lower than the prior year. The decrease
in interest expense reflects a lower average debt balance due to the
repayments of Senior Notes, as well as the benefit of lower borrowing
costs achieved as a result of refinancing existing debt and utilizing the
commercial paper program.

Loss (Gains) on Sales of Businesses and Assets: The gains in 2011
and 2010 were primarily related to the sales of certain surplus facilities
in Latin America.

Currency Losses, Net: Currency losses primarily result from the re-
measurement of foreign currency-denominated assets and liabilities,
the cost of hedging foreign currency-denominated assets and liabilities
and the mark-to-market of foreign exchange contracts utilized to
hedge those foreign currency-denominated assets and liabilities.

The 2011 net currency losses were primarily due to the significant
movement in exchange rates during the third quarter of 2011 among
the U.S. Dollar, Euro, Yen and several developing market currencies.

Xerox 2012 Annual Report

Management’s Discussion

The 2010 net currency losses included a currency loss of $21 million for
the re-measurement of our Venezuelan Bolivar denominated monetary
net assets following a devaluation of the Bolivar in the first quarter of
2010. This loss was partially offset by a cumulative translation gain
of $6 million that was recognized upon the repatriation of cash and
liquidation of a foreign subsidiary.

ACS Shareholders’ Litigation Settlement: The 2010 expense of
$36 million relates to the settlement of claims by ACS shareholders
arising from our acquisition of ACS in 2010. The total settlement for
all defendants was approximately $69 million, with Xerox paying
approximately $36 million net of insurance proceeds.

Litigation Matters: Litigation matters for 2012, 2011 and 2010
represent charges related to probable losses for various legal
matters, none of which were individually material. Refer to Note 17 –
Contingencies and Litigation, in the Consolidated Financial Statements
for additional information regarding litigation against the Company.

Loss on Sales of Accounts Receivables: Represents the loss incurred
on our sales of accounts receivables. Refer to “Sales of Accounts
Receivables” below and Note 4 – Accounts Receivables, Net in
the Consolidated Financial Statements for additional information
regarding our sales of receivables.

Loss on Early Extinguishment of Liability: The 2011 loss of
$33 million was related to the redemption by Xerox Capital Trust I,
our wholly-owned subsidiary trust, of its $650 million 8% Preferred
Securities due in 2027. The redemption resulted in a pre-tax loss of
$33 million ($20 million after-tax), representing the call premium of
approximately $10 million, as well as the write-off of unamortized debt
costs and other liability carrying value adjustments of $23 million.

The 2010 loss of $15 million represents the loss associated with the
redemption of senior and medium-term notes in the fourth quarter
2010 and reflects a call premium and the write-off of unamortized
debt costs.

Deferred Compensation Investment Gains: Represents gains
on investments supporting certain of our deferred compensation
arrangements. These gains or losses are offset by an increase or
decrease, respectively, in compensation expense recorded in SAG in our
Services segment as a result of the increase or decrease in the liability
associated with these arrangements.

The 2011 effective tax rate was 24.7% or 27.5% on an adjusted basis.1
The adjusted tax rate for the year was lower than the U.S. statutory
rate primarily due to the geographical mix of profits as well as a higher
foreign tax credit benefit as a result of our decision to repatriate current
year income from certain non-U.S. subsidiaries.

The 2010 effective tax rate was 31.4% or 31.2% on an adjusted basis.1
The adjusted tax rate for the year was lower than the U.S. statutory rate
primarily due to the geographical mix of income before taxes and the
related tax rates in those jurisdictions as well as the U.S. tax impacts on
certain foreign income and tax law changes.

Xerox operations are widely dispersed. The statutory tax rate in most
non-U.S. jurisdictions is lower than the combined U.S. and state tax
rate. The amount of income subject to these lower foreign rates
relative to the amount of U.S. income will impact our effective tax
rate. However, no one country outside of the U.S. is a significant factor
to our overall effective tax rate. Certain foreign income is subject to
U.S. tax net of any available foreign tax credits. Our full year effective
tax rate for 2012 includes a benefit of approximately 12-percentage
points from these non-U.S. operations. Refer to Note 16 – Income and
Other Taxes, in the Consolidated Financial Statements for additional
information regarding the geographic mix of income before taxes and
the related impacts on our effective tax rate.

Our effective tax rate is based on nonrecurring events as well as
recurring factors, including the taxation of foreign income. In
addition, our effective tax rate will change based on discrete or
other nonrecurring events (e.g. audit settlements, tax law changes,
changes in valuation allowances, etc.) that may not be predictable. We
anticipate that our effective tax rate for 2013 will be approximately
28%, which excludes the effects of intangibles amortization and
other discrete events. We also expect to record an estimated discrete
benefit of approximately $19 million in the first quarter 2013 for the
retroactive benefits of the American Taxpayer Relief Act of 2012 which
was signed into law on January 2, 2013.

Equity in Net Income of Unconsolidated Affiliates

(in millions)

Total equity in net income of
unconsolidated affiliates

Year Ended December 31,

2012

2011

2010

$ 152

$ 149

$ 78

Income Taxes

Fuji Xerox after-tax restructuring costs

The 2012 effective tax rate was 20.5% or 24.0% on an adjusted basis.1
The adjusted tax rate for the year was lower than the U.S. statutory
rate primarily due to foreign tax credits resulting from anticipated
dividends and other foreign transactions as well as the geographical
mix of profits. In addition, a net tax benefit from adjustments of certain
unrecognized tax positions and deferred tax valuation allowances was
offset by a tax law change.

Equity in net income of unconsolidated affiliates primarily reflects our
25% share of Fuji Xerox.

The 2011 increase of $71 million was primarily due to an increase in
Fuji Xerox’s net income, which was primarily driven by higher revenue
and cost improvements, as well as the strengthening of the Yen and
lower restructuring costs.

Refer to Note 8 – Investment in Affiliates, at Equity, in the Consolidated
Financial Statements for additional information.

Net Income

Net income attributable to Xerox for the year ended December 31,
2012 was $1,195 million, or $0.88 per diluted share. On an adjusted
basis1, net income attributable to Xerox was $1,398 million, or $1.03
per diluted share, and included adjustments for the amortization of
intangible assets.

Net income attributable to Xerox for the year ended December 31,
2011 was $1,295 million, or $0.90 per diluted share. On an adjusted
basis1, net income attributable to Xerox was $1,563 million, or $1.08
per diluted share, and included adjustments for the amortization of
intangible assets and the loss on early extinguishment of liability.

Net income attributable to Xerox for the year ended December 31,
2010 was $606 million, or $0.43 per diluted share. On an adjusted
basis1, net income attributable to Xerox was $1,296 million, or $0.94
per diluted share, and included adjustments for the amortization
of intangible assets, restructuring and asset impairment charges
(including those incurred by Fuji Xerox), acquisition-related costs and
other discrete costs and expenses.

Refer to the “Non-GAAP Financial Measures” section for the
reconciliation of reported net income to adjusted net income.

Other Comprehensive Income

2012 Other comprehensive loss attributable to Xerox of $511 million
decreased $217 million from 2011. The decreased loss was primarily
due to gains from the translation of our foreign currency-denominated
net assets in 2012 as compared to translation losses in 2011. The
translation gains are the result of a strengthening of our major foreign
currencies against the U.S. Dollar in 2012 as compared to a weakening
of those same currencies in 2011. A decrease in losses associated
with our defined benefit plans was offset by an increase in unrealized
losses from our cash flow hedges primarily due to a weakening of the
Japanese Yen particularly in the fourth quarter 2012 (See Note 13 –
Financial Instruments in the Consolidated Financial Statements for
additional information regarding our cash flow hedges).

2011 Other comprehensive loss attributable to Xerox of $728 million
increased $728 million from 2010. The increased loss was primarily due
to losses associated with our defined benefit plans due to an increase
in our benefit obligations as a result of a decrease in the discount
rates used to measure our obligations (See discussion of Pension
Plan Assumptions in the Application of Critical Accounting Policies
section of the MD&A as well as Note 15 – Employee Benefit Plans in
the Consolidated Financial Statements for additional information).
In addition, losses from the translation of our foreign currency-
denominated net assets increased in 2011 as compared to 2010 as a
result of the further weakening of our major foreign currencies against
the U.S. Dollar in 2011.

Recent Accounting Pronouncements

Refer to Note 1 – Summary of Significant Accounting Policies in
the Consolidated Financial Statements for a description of recent
accounting pronouncements including the respective dates of adoption
and the effects on results of operations and financial conditions.

Operations Review of Segment Revenue
and Profit

Our reportable segments are consistent with how we manage the
business and view the markets we serve. Our reportable segments are
Services, Document Technology and Other. Revenues by segment for
the three years ended December 31, 2012 were as follows:

(in millions)

2012

Services

Document Technology

Other

Total

2011

Services

Document Technology

Other

Total

2010

Services

Document Technology

Other

Total

2010 Pro-forma(1)

Services

Total
Revenue

Segment
Profit (Loss)

Segment
Margin

$ 11,528

$ 1,173

10.2%

9,462

1,400

1,065

11.3%

(241)

(17.2)%

$ 22,390

$ 1,997

8.9%

$ 10,837

1,207

11.1%

10,259

1,530

1,140

11.1%

(255)

(16.7)%

$ 22,626

$ 2,092

9.2%

$ 9,637

$ 1,132

11.7%

10,349

1,647

1,085

10.5%

(342)

(20.8)%

$ 21,633

$ 1,875

8.7%

$ 10,256

$ 1,166

11.4%

Document Technology

10,349

1,085

10.5%

Other

Total

1,647

(353)

(21.4)%

$ 22,252

$ 1,898

8.5%

(1) Results are discussed primarily on a pro-forma basis and include ACS’s estimated results
from January 1 through February 5 in 2010. See the “Non-GAAP Financial Measures”
section for an explanation of these non-GAAP financial measures.

Services Segment

Our Services segment is comprised of three service offerings: Business
Process Outsourcing (“BPO”), Document Outsourcing (“DO”) and
Information Technology Outsourcing (“ITO”). The DO business included
within the Services segment essentially represents Xerox’s pre-ACS
acquisition outsourcing business, as ACS’s outsourcing business is
reported as BPO and ITO revenue.

Xerox 2012 Annual Report

Management’s Discussion

Services segment revenues for the three years ended December 31, 2012 were as follows:

(in millions)

Business processing outsourcing

Document outsourcing

Information technology outsourcing

Less: Intra-segment elimination

Total Services Revenue

2012

Revenue

2011

Change

Pro-forma(1)
Change

2010

2012

2011

$ 6,610

$ 6,074

$ 5,145

3,659

1,426

3,545

1,326

3,264

1,249

(167)

(108)

(21)

$ 11,528

$ 10,837

$ 9,637

18%

12%

(4)%

* Percent not meaningful.
(1) See the “Non-GAAP Financial Measures” section for an explanation of this non-GAAP financial measure.

Note: In 2011, the Services segment is discussed on a pro-forma1 basis.
ACS was acquired on February 5, 2010, accordingly for comparison
purposes, we adjusted our historical 2010 results to include ACS’s 2010
estimated results for the period from January 1 through February 5,
2010. We believe these pro-forma comparisons provide a perspective
on the impact of the ACS acquisition on our results and trends. Refer to
the “Non-GAAP Financial Measures” section for a further explanation
and discussion of this non-GAAP presentation.

Revenue 2012

Services revenue of $11,528 million increased 6% with a 1-percentage
point negative impact from currency.

BPO revenue increased 9%, including a 1-percentage point negative

impact from currency, and represented 57% of total Services
revenue. BPO growth was driven by the government healthcare,
healthcare payer, customer care, financial services, retail, travel and
insurance businesses and other state government solutions, as well
as the benefits from recent acquisitions.

DO revenue increased 3%, including a 2-percentage point negative

impact from currency, and represented 31% of total Services
revenue. The increase in DO revenue was primarily driven by our new
partner print services offerings as well as new signings.

Metrics

Pipeline

Our total services sales pipeline at December 31, 2012, including
synergy opportunities, grew 6% over the prior year. This sales pipeline
includes the Total Contract Value (“TCV”) of new business opportunities
that potentially could be contracted within the next six months and
excludes business opportunities with estimated annual recurring
revenue in excess of $100 million.

Signings

Signings are defined as estimated future revenues from contracts
signed during the period, including renewals of existing contracts.TCV
represents the estimated future contract revenue for pipeline or signed
contracts for signings, as applicable.

Signings were as follows:

(in billions)

BPO

ITO

Year Ended December 31,

2012

2011

2010

$ 6.0

$ 6.8

$ 10.0

3.3

1.5

4.4

3.4

3.3

1.3

$ 10.8

$ 14.6

ITO revenue increased 8% and represented 12% of total Services

Total Signings

revenue. ITO growth was driven by the revenue ramp resulting from
strong growth in recent quarters and also includes 3-percentage
points of growth related to revenue from intercompany services,
which is eliminated in total Services segment revenue.

Segment Margin 2012

Services segment margin of 10.2% decreased 0.9-percentage points
from the prior year primarily due to a decline in gross margin, which
was driven by the ramping of new services contracts, pressure on
government contracts, the impact of lower contract renewals and
lower volumes in some areas of the business. The gross margin decline
was partially offset by the benefits from restructuring and lower SAG,
primarily in DO.

Services signings were an estimated $10.8 billion in TCV for 2012 and
decreased 25% compared to the prior year. This decline was driven
by a decrease in large deals from the prior year as well as delays
in customer decision making. While the total number of BPO/ITO
contracts signed in 2012 increased from 2011, the decline in large
deals drove a reduction in the average contract length of new business
signings in 2012. The above DO signings amount represents Enterprise
signings only and does not include signings from our partner print
services offerings, which is driving the revenue growth in DO.

•
•
•

Services signings were an estimated $14.6 billion in TCV for 2011
and were flat as compared to the prior year and were impacted by
the cyclicality of large deals particularly the California Medicaid
signing in 2010. Signings did trend positively in 2011, increasing
sequentially for the last three quarters of the year with signings
growth particularly in ITO.

Renewal rate (BPO and ITO only)

Renewal rate is defined as the annual recurring revenue (“ARR”) on
contracts that are renewed during the period as a percentage of
ARR on all contracts on which a renewal decision was made during
the period. Although our renewal rate was below our target range in
the fourth quarter 2012, our full year 2012 renewal rate was 85%,
which was within our target range of 85%-90% and 5-percentage
points higher than full year 2011. Our 2011 renewal rate of 80% was
7-percentage points lower than the 2010 renewal rate of 87%.

Revenue 2011

Services revenue of $10,837 million increased 12%, or 6% on a pro-
forma1 basis, with no impact from currency.

BPO revenue had pro-forma1 revenue growth of 8% and

represented 55% of total Services revenue. The growth in BPO was
primarily driven by acquisitions over the past two years consistent
with our strategy to expand our service offerings through “tuck-in”
acquisitions. BPO growth was also driven to a lesser extent by growth
in the healthcare payer, human resources services, business process
solutions and transportation solutions businesses.

DO revenue increased 9%, including a 2-percentage point positive

impact from currency, and represented 33% of total Services
revenue. The increase in DO revenue reflects an improving growth
trend from our partner print services offerings as well as new
signings.

ITO revenue on a pro-forma1 basis decreased 4% and represented
12% of total Services revenue. The decrease in ITO revenue was
driven by lower third-party equipment sales as well as the impact of
lower contract renewals partially offset by growth in new commercial
business.

Segment Margin 2011

Services segment margin of 11.1% decreased 0.6-percentage points, or
0.3-percentage points on a pro-forma1 basis, from the prior year as the
gross margin decline, which was driven by the ramping of new services
contracts and the impact of lower contract renewals more than offset
the lower costs and expenses from restructuring and synergy savings.

Document Technology Segment

Our Document Technology segment includes the sale of products
and supplies, as well as the associated technical service and financing
of those products. The Document Technology segment represents
our pre-ACS acquisition equipment-related business exclusive of our
document outsourcing business, which was integrated into the Services
segment together with the acquired ACS outsourcing businesses –
business process outsourcing and information technology outsourcing.

Revenue

(in millions)

2012

2011

2010

2012 2011

Year Ended December 31,

Change

Equipment sales

$ 2,879 $ 3,277 $ 3,404

(12)%

(4)%

Annuity revenue

6,583

6,982

6,945

(6)%

Total Revenue

$ 9,462 $ 10,259 $ 10,349

(8)%

(1)%

Revenue 2012

Document Technology revenue of $9,462 million decreased 8%,
including a 2-percentage point negative impact from currency. Total
revenues include the following:

12% decrease in equipment sales revenue with a 1-percentage

point negative impact from currency. This decline, primarily in mid-
range and high-end equipment, was driven by delayed customer
decision-making reflecting the continued weak macro-environment.
In addition, the impact of lower product mix and price declines
in the range of 5%-10% more than offset growth in installs.
Document Technology revenue excludes increasing revenues in our
DO offerings. As noted previously, in 2013 we will be investing in our
portfolio with significant product announcements in the mid-range
and entry production color spaces.

6% decrease in annuity revenue, including a 2-percentage point

negative impact from currency, driven by lower supplies and
a decline in total digital pages of 2% as well as the continued
migration of customers to our partner print services offerings, which
is included in our Services segment.

Document Technology revenue mix is 22% entry, 57% mid-range

and 21% high-end.

Segment Margin 2012

Document Technology segment margin of 11.3% increased
0.2-percentage points from prior year. Productivity improvements,
restructuring savings and gains recognized on the sale of finance
receivables (see Note 5 – Finance Receivables, Net in the Consolidated
Financial Statements for additional information) more than offset the
impact of price declines and overall lower revenues.

Xerox 2012 Annual Report

•
•
•
•
•
•
Management’s Discussion

Installs 2012

Entry

39% increase in color multifunction devices driven by demand for
the WorkCentre® 6015, WorkCentre 6605 and Xerox® ColorQube
8700/8900.

Segment Margin 2011

Document Technology segment margin of 11.1% increased
0.6-percentage points from prior year. Lower cost and expense from
restructuring savings in addition to an increase in equity in net income
from unconsolidated affiliates more than offset the gross margin
decline.

23% increase in entry black-and-white multifunction devices driven

by demand for the WorkCentre® 3045.

7% decrease in color printers driven by a decrease in sales to OEM

Installs 2011

Entry

partners.

Mid-Range

2% decrease in installs of mid-range color devices driven as a
difficult compare in the U.S. from the fourth quarter 2012 was
partially offset by demand for products such as the WorkCentre®
7535/7125/7530 and the WorkCentre® 7556, which enabled
continued market share gains in the fastest growing and most
profitable segment of the office color market.

10% decrease in installs of mid-range black-and-white devices.

High-End

34% increase in installs of high-end color systems driven by strong
demand for the Xerox Color 770. This product has enabled large
market share gains in the Entry Production Color market segment.

26% decrease in installs of high-end black-and-white systems,

reflecting continued declines in the overall market.

Install activity percentages include installations for Document
Outsourcing and the Xerox-branded product shipments to GIS.
Descriptions of “Entry”, “Mid-range” and “High-end” are defined in
Note 2 – Segment Reporting, in the Consolidated Financial Statements.

Revenue 2011

Document Technology revenue of $10,259 million decreased 1%,
including 2-percentage points positive impact from currency. Total
revenues include the following:

4% decrease in equipment sales revenue, with a 1-percentage point
positive impact from currency, primarily driven by a decline in Europe
reflecting the economic conditions in the Euro Zone, particularly
in the fourth quarter 2011. In addition, install declines of entry
and mono products were only partially offset by install growth in
mid-range and high-end color products. Consistent with prior years,
price declines were in the range of 5%-10%. Document Technology
revenue excludes increasing revenues in our DO offerings.

1% increase in annuity revenue, including a 2-percentage point

positive impact from currency. An increase in supplies revenue was
offset by a decline in pages.

Document Technology revenue mix is 22% entry, 57% mid-range

and 21% high-end.

4% decrease in entry black-and-white and color multifunction devices
and color printers reflecting:

A decline in sales to OEM partners.

A decline in developing markets due in part to a very strong 2010 in

which installs increased significantly.

These declines were partially offset by growth in newly launched
products such as the WorkCentre® 3045 and WorkCentre® 6015.

Mid-Range

26% increase in installs of mid-range color devices driven primarily
by demand for new products, such as the WorkCentre® 7530/7535,
WorkCentre® 7545/7556 and WorkCentre® 7120 and the Xerox
Color 550/560. This growth has enabled market share gains in the
fastest growing and most profitable segment of the office color
market.

2% increase in installs of mid-range black-and-white devices
driven by strong demand for the recently launched WorkCentre®
5325/5330/5335 products partially offset by declines in Europe.

High-End

7% increase in installs of high-end color systems driven primarily by
installs of our market-leading Xerox Color 800 and 1000 and iGen
as well as strong demand for the recently launched Xerox Color
770 and the DocuColorTM 8080. These products have improved our
offerings in the entry production color product category.

8% decrease in installs of high-end black-and-white systems driven

by declines across most product areas.

Other Segment

Revenue 2012

Other segment revenue of $1,400 million decreased 8%, including a
1-percentage point negative impact from currency, due to a decline in
paper sales, which is driven by lower market pricing and activity, as well
as a decline in revenues from wide format systems and lower patent
sales and licensing revenue. Paper comprised approximately 59% of
the 2012 Other segment revenue.

•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Segment Loss 2012

Other segment loss of $241 million, improved $14 million from the prior
year, primarily driven by a decrease in Other Expenses, Net partially
offset by lower gross profit as a result of the decline in revenues.

Revenue 2011

Other segment revenue of $1,530 million decreased 7%, including
2-percentage points positive impact from currency, due to a decline
in paper sales, wide format systems and other supplies partially offset
by an increase in revenue from patent sales and licensing as noted
below. Paper comprised approximately 59% of the 2011 Other
segment revenue.

In 2011, we entered into an agreement with another company that
included, among other items, the sale of certain patents and the
cross-licensing of certain patents of each party, pursuant to which we
received an up-front payment with the remaining amount payable
in two equal annual installment payments. Consistent with our
accounting policy for these transactions, revenue associated with this
agreement will be recorded as earned and only to the extent of cash
received. During 2011, the Other segment included revenue and pre-
tax income/segment profit of approximately $32 million and
$26 million ($16 million after-tax), respectively, which is net of certain
expenses paid in connection with this agreement.

Segment Loss 2011

Other segment loss of $255 million, improved $87 million from the
prior year, primarily driven by lower non-financing interest expense and
SAG expense.

(1) See the “Non-GAAP Financial Measures” section for an explanation of this non-GAAP

financial measure.

(2) Color revenues and pages represent revenues and pages from color enabled devices and

are a subset of total revenues and excludes Global Imaging Systems, Inc. (“GIS”).

Capital Resources and Liquidity

Our ability to maintain positive liquidity going forward depends on
our ability to continue to generate cash from operations and access
the financial capital markets, both of which are subject to general
economic, financial, competitive, legislative, regulatory and other
market factors that are beyond our control.

As of December 31, 2012 and 2011, total cash and cash equivalents

were $1,246 million and $902 million, respectively, we had no
borrowings under our Commercial Paper Programs as of December
31, 2012 and $100 million as of December 31, 2011. There were
no outstanding borrowings or letters of credit under our $2 billion
Credit Facility for either year end. The increase in our cash balance
in 2012 was largely from the sales and run-off of finance receivables
partially offset by an increase in share repurchases. We expect to use
approximately $400 million of our total cash to pay down maturing
Senior Notes in May 2013.

Our Commercial Paper program was established in 2010 as a means
to reduce our cost of capital and to provide us with an additional
liquidity vehicle in the market. Aggregate Commercial Paper and
Credit Facility borrowings may not exceed the borrowing capacity
under our Credit Facility at any time.

Over the past three years we have consistently delivered strong
cash flow from operations driven by the strength of our
annuity-based revenue model. Cash flows from operations were
$2,580 million, $1,961 million and $2,726 million for the three years
ended December 31, 2012, respectively.

We expect cash flows from operations between $2.1 and $2.4 billion
for 2013. We expect lower contributions from finance receivables of
approximately $500 million, due to fewer collections as a result of
the 2012 finance receivables sales and a lower natural run-off of the
portfolio, given our expectations of better equipment activity. This
impact is expected to be partially offset by lower pension funding
requirements. We expect the rest of working capital to be essentially
flat year-over-year.

Cash Flow Analysis

The following summarizes our cash flows for the three years ended December 31, 2012, as reported in our Consolidated Statements of Cash Flows
in the accompanying Consolidated Financial Statements:

(in millions)

Year Ended December 31,

Change

2012

2011

2010

2012

2011

Net cash provided by operating activities

$ 2,580

$ 1,961

$ 2,726

$ 619

$ (765)

Net cash used in investing activities

Net cash used in financing activities

Effect of exchange rate changes on cash and cash equivalents

Increase (decrease) in cash and cash equivalents

Cash and cash equivalents at beginning of year

(761)

(675)

(1,472)

(1,586)

(3)

(9)

(2,178)

(3,116)

(20)

344

902

(309)

(2,588)

1,211

3,799

(86)

114

653

(309)

1,503

1,530

2,279

(2,588)

Cash and Cash Equivalents at End of Year

$ 1,246

$ 902

$ 1,211

$ 344

$ (309)

Xerox 2012 Annual Report

•
•
•
•

Management’s Discussion

Cash Flows from Operating Activities

Net cash provided by operating activities was $2,580 million for the
year ended December 31, 2012. The $619 million increase in cash from
2011 was primarily due to the following:

$879 million increase from finance receivables primarily due to sales
of receivables as well as higher net run-off of finance receivables as
a result of lower equipment sales (see Note 5 – Finance Receivables,
Net in the Consolidated Financial Statements for additional
information).

$124 million increase due to lower inventory growth.

$74 million increase due to lower restructuring payments.

$62 million increase due to lower contributions to our defined

benefit pension plans primarily in the U.S. as a result of the recently
enacted pension funding legislation.

$41 million increase as a result of less up-front costs and other

customer-related spending associated primarily with new services
contracts.

$390 million decrease due to a lower benefit from accounts

receivable sales as well as growth in services revenue.

$45 million decrease from higher net income tax payments primarily

due to refunds in the prior year.

In March 2012, we elected to make a contribution of 15.4 million
shares of our common stock, with an aggregate value of approximately
$130 million, to our U.S. defined benefit pension plan for salaried
employees in order to meet our planned level of funding.

Net cash provided by operating activities was $1,961 million for the
year ended December 31, 2011. The $765 million decrease in cash
from 2010 was primarily due to the following:

$533 million decrease due to lower benefit from changes in accounts
payable and accrued compensation primarily related to the timing
of payments as well as lower spending.

$189 million decrease due to higher contributions to our defined

benefit pension plans.

$101 million decrease as a result of up-front costs and other

customer-related spending associated primarily with new services
contracts.

$16 million decrease due to a lower benefit from accounts receivable

sales partially offset by improved collections.

$290 million increase in pre-tax income before depreciation

and amortization, litigation, restructuring, curtailment and the
Venezuelan currency devaluation.

$113 million increase due to the absence of cash outflows from

acquisition-related expenditures.

In September 2011, we elected to make a contribution of 16.6 million
shares of our common stock, with an aggregate value of approximately
$130 million, to our U.S. defined benefit pension plan for salaried
employees in order to meet our planned level of funding.

Cash Flows from Investing Activities

Net cash used in investing activities was $761 million for the year
ended December 31, 2012. The $86 million increase in the use of cash
from 2011 was primarily due to the following:

$64 million increase in acquisitions. 2012 acquisitions include

Wireless Data for $95 million, RK Dixon for $58 million, as well as
seven smaller acquisitions totaling $123 million. 2011 acquisitions
include Unamic/HCN B.V. for $55 million, ESM for $43 million,
Concept Group for $41 million, MBM for $42 million, Breakaway for
$18 million and ten smaller acquisitions for an aggregate of
$46 million, as well as a net cash receipt of $35 million for Symcor.

$19 million increase due to lower cash proceeds from asset sales.

Net cash used in investing activities was $675 million for the year
ended December 31, 2011. The $1,503 million decrease in the use of
cash from 2010 was primarily due to the following:

$1,522 million decrease in acquisitions. 2011 acquisitions include
Unamic/HCN B.V. for $55 million, ESM for $43 million, Concept
Group for $41 million, MBM for $42 million, Breakaway for
$18 million and ten smaller acquisitions for an aggregate of
$46 million, as well as a net cash receipt of $35 million for Symcor.
2010 acquisitions include ACS for $1,495 million, ExcellerateHRO,
LLP for $125 million, TMS Health, LLC for $48 million, Irish Business
Systems Limited for $29 million, Georgia Duplicating Products for
$21 million and Spur Information Solutions for $12 million.

$24 million increase due to lower cash proceeds from asset sales.

$65 million decrease from higher net income tax payments primarily

Cash Flows from Financing Activities

due to refunds in the prior year.

$49 million decrease due to higher finance receivables of $39 million
and equipment on operating leases of $10 million, both reflective of
increased equipment placements.

$46 million decrease in derivatives primarily due to the absence of
proceeds from the early termination of certain interest rate swaps.

Net cash used in financing activities was $1,472 million for the year
ended December 31, 2012. The $114 million decrease in the use of
cash from 2011 was primarily due to the following:

$670 million decrease reflecting the absence of payment of our

liability to Xerox Capital Trust I in connection with their redemption
of preferred securities.

•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
$351 million increase from higher share repurchases in 2012.

$157 million increase from net debt activity. 2012 reflects net

proceeds of $1.1 billion from Senior Notes issued in March offset by
net payments on 2012 Senior Notes of $1.1 billion that matured
in May and a decrease of $100 million in Commercial Paper. 2011
includes proceeds of $1.0 billion from the issuance of Senior Notes
offset by the repayment of $750 million for Senior Notes due in
2011 and a decrease of $200 million in Commercial Paper.

$47 million increase due to higher distributions to noncontrolling

interests.

Net cash used in financing activities was $1,586 million for the year
ended December 31, 2011. The $1,530 million decrease in the use of
cash from 2010 was primarily due to the following:

$3,105 million decrease from net debt activity. 2011 includes

proceeds of $1.0 billion from the issuance of Senior Notes offset by
the repayment of $750 million for Senior Notes due in 2011 and a
decrease of $200 million in Commercial Paper. 2010 includes the
repayments of $1,733 million of ACS’s debt on the acquisition date,
$950 million of Senior Notes, $550 million early redemption of the
2013 Senior Notes, net payments of $109 million for other debt
and $14 million of debt issuance costs for the bridge loan facility
commitment, which was terminated in 2009. These payments were
offset by an increase of $300 million in Commercial Paper.

$701 million increase resulting from the resumption of our share

repurchase program.

$670 million increase reflecting the payment of our liability to Xerox

Capital Trust I in connection with their redemption of preferred
securities.

$139 million increase due to lower proceeds from the issuances of

common stock under our stock option plans.

$26 million increase reflecting a full year of dividend payments on
shares issued in connection with the acquisition of ACS in 2010.

$12 million increase due to higher share repurchases related to

employee withholding taxes on stock-based compensation vesting.

Customer Financing Activities

We provide lease equipment financing to our customers, primarily
in our Document Technology segment. Our lease contracts permit
customers to pay for equipment over time rather than at the date
of installation. Our investment in these contracts is reflected in Total
finance assets, net. We primarily fund our customer financing activity
through cash generated from operations, cash on hand, commercial
paper borrowings, sales and securitizations of finance receivables and
proceeds from capital markets offerings.

We have arrangements in certain international countries and
domestically with our small and mid-sized customers, where third-
party financial institutions independently provide lease financing,
on a non-recourse basis to Xerox, directly to our customers. In these
arrangements, we sell and transfer title of the equipment to these
financial institutions. Generally, we have no continuing ownership
rights in the equipment subsequent to its sale; therefore, the
unrelated third-party finance receivable and debt are not included in
our Consolidated Financial Statements.

The following represents our Total finance assets, net associated with
our lease and finance operations:

December 31,

(in millions)

Total Finance receivables, net (1)

Equipment on operating leases, net

Total Finance Assets, Net

2012

2011

$ 5,313

$ 6,362

535

533

$ 5,848

$ 6,895

(1) Includes (i) billed portion of finance receivables, net, (ii) finance receivables, net and

(iii) finance receivables due after one year, net as included in our Consolidated Balance
Sheets.

The decrease of $1,047 million in Total finance assets, net reflects
the sale of finance receivables (discussed further below) and the
decrease in equipment sales over the past several years, as well as
equipment sales growth in regions or operations where we don’t
offer direct leasing. These impacts were partially offset by an
increase of $83 million due to currency.

We maintain a certain level of debt, referred to as financing debt,
to support our investment in these lease contracts or Total finance
assets, net. We maintain this financing debt at an assumed 7:1
leverage ratio of debt to equity as compared to our Total finance
assets, net for this financing aspect of our business. Based on this
leverage, the following represents the breakdown of our total debt
at December 31, 2012 and 2011 between financing debt and core
debt:

December 31,

(in millions)

Financing debt (1)

Core debt

Total Debt

2012

2011

$ 5,117

$ 6,033

3,372

2,600

$ 8,489

$ 8,633

(1) Financing debt includes $4,649 million and $5,567 million as of December 31, 2012

and December 31, 2011, respectively, of debt associated with Total finance receivables,
net and is the basis for our calculation of “Equipment financing interest” expense. The
remainder of the financing debt is associated with Equipment on operating leases.

Xerox 2012 Annual Report

•
•
•
•
•
•
•
•
•
Management’s Discussion

In 2013, we expect to continue the leveraging of our finance assets at
an assumed 7:1 ratio of debt to equity. We also may sell or securitize
certain finance receivables as another means to support our customer
financing activities – see discussion further below of finance receivable
sale activity in 2012. The following summarizes our total debt at
December 31, 2012 and 2011:

(in millions)

Principal debt balance (1)

Net unamortized discount

Fair value adjustments

Total Debt

December 31,

2012

2011

$ 8,410

$ 8,450

(63)

(7)

142

190

$ 8,489

$ 8,633

(1) Includes Commercial Paper of $0 and $100 million as of December 31, 2012 and 2011,

respectively.

Sales of Accounts Receivable

Accounts receivable sales arrangements are utilized in the normal
course of business as part of our cash and liquidity management. We
have facilities in the U.S., Canada and several countries in Europe that
enable us to sell certain accounts receivables without recourse to third-
parties. The accounts receivables sold are generally short-term trade
receivables with payment due dates of less than 60 days.

Accounts receivables sales were as follows:

(in millions)

Year ended December 31,

2012

2011

2010

Accounts receivable sales

$ 3,699

$ 3,218

$ 2,374

Deferred proceeds

639

386

307

Loss on sale of accounts receivable

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

(78)

133

106

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

continue to service the sold receivables and expect to a record servicing
fee income of approximately $12 million over the expected life of the
associated receivables.

Refer to Note 5 – Finance Receivables, Net in the Consolidated
Financial Statements for additional information.

The net impact on operating cash flows from the sales of accounts
receivable and finance receivables is summarized below:

(in millions)

Year ended December 31,

2012

2011

2010

Cash received from finance receivables sales

$ 625

Collections on sold finance receivables (1)

Net cash impact of finance receivable sales

(45)

580

–

Net cash impact of accounts receivable sales

(78)

133

106

Net Cash Impact On Cash Flows
From Operating Activities

$ 502

$ 133

$ 106

(1) Represents cash that would have been collected if we had not sold finance receivables.

Capital Market Activity

Debt Exchange

In February 2012, we completed an exchange of our 5.71% Zero
Coupon Notes due 2023 with an accreted book value at the date of the
exchange of $303 million, for $362 million of our 4.50% Senior Notes
due 2021. Accordingly, this increased the principal amount for our
4.50% Senior Notes due 2021 from $700 million to $1,062 million. The
exchange was conducted to retire high-interest, long-dated debt in a
favorable interest rate environment. The debt exchange was accounted
for as a non-revolving debt modification and, therefore, it did not result
in any gain or loss. The difference between the book value of our Zero
Coupon Notes and the principal value of the Senior Notes issued in
exchange will be accreted over the remaining term of the Senior Notes.
Upfront fees paid to third parties in connection with the exchange were
not material and were expensed as incurred.

Refer to Note 4 – Accounts Receivables, Net in the Consolidated
Financial Statements for additional information.

Senior Notes

Sales of Finance Receivables

In 2012, we sold our entire interest in two separate portfolios of U.S.
finance receivables from our Document Technology segment with a
combined net carrying value of $682 million to a third-party financial
institution for cash proceeds of $630 million and beneficial interests
from the purchaser of $101 million. These transactions enable us to
lower the cost associated with our financing portfolio.

A pre-tax gain of $44 million was recognized on these sales and is net
of additional fees and expenses of $5 million. The gain was reported in
Finance income in Document Technology segment revenues. We will

In March 2012, we issued $600 million of Floating Rate Senior Notes
due 2013 (the “2013 Floating Rate Notes”) and $500 million of 2.95%
Senior Notes due 2017 (the “2017 Senior Notes”). The 2013 Floating
Rate Notes were issued at par and the 2017 Senior Notes were issued
at 99.875% of par, resulting in aggregate net proceeds for both notes
of approximately $1,093 million. The 2013 Floating Rate Notes accrue
interest at a rate per annum, reset quarterly, equal to the three-month
LIBOR plus 1.400% and are payable quarterly. The 2017 Senior Notes
accrue interest at a rate of 2.95% per annum and are payable semi-
annually. As a result of the discount, they have a weighted average
effective interest rate of 2.977%. In connection with the issuance of

these Senior Notes, debt issuance costs of $6 million were deferred.
This debt issuance partially funded the May 2012 maturity of our
$1,100 million of 5.59% Senior Notes.

Refer to Note 12 – Debt in the Consolidated Financial Statements for
additional information regarding our debt.

Financial Instruments

Refer to Note 13 – Financial Instruments in the Consolidated Financial
Statements for additional information regarding our derivative
financial instruments.

Share Repurchase Programs – Treasury Stock

During 2012, we repurchased 146.3 million shares for an aggregate
cost of $1.1 billion, including fees. Through February 20, 2013, we
repurchased an additional 1.4 million shares at an aggregate cost of
$10.1 million, including fees, for a cumulative program total of
429.7 million shares at a cost of $4.7 billion, including fees. We expect
total share repurchases of at least $400 million in 2013.

In October 2012, the Board of Directors authorized an additional
$1.0 billion in share repurchase, bringing the total remaining
authorization for share repurchases to $1.3 billion as of
February 20, 2013.

Refer to Note 19 – Shareholders’ Equity – Treasury Stock in the
Consolidated Financial Statements for additional information
regarding our share repurchase programs.

Dividends

The Board of Directors declared aggregate dividends of $226 million,
$241 million and $243 million on common stock in 2012, 2011 and
2010, respectively. The decrease in 2012 as compared to prior years is
primarily due to a lower level of outstanding shares in 2012 as a result
of the repurchase of shares under our share repurchase programs.

The Board of Directors declared aggregate dividends of $24 million,
$24 million and $21 million on the Series A Convertible Preferred Stock
in 2012, 2011 and 2010, respectively. The preferred shares were issued
in connection with the acquisition of ACS.

In addition, the company increased its dividend from 4.25 cents per
share to 5.75 cents per share per quarter, beginning with the dividend
payable on April 30, 2013. Accordingly, we expect approximately
$300 million in dividend payments for the full year 2013.

Liquidity and Financial Flexibility

We manage our worldwide liquidity using internal cash management
practices, which are subject to (1) the statutes, regulations and
practices of each of the local jurisdictions in which we operate,
(2) the legal requirements of the agreements to which we are a
party and (3) the policies and cooperation of the financial institutions
we utilize to maintain and provide cash management services.

Our principal debt maturities are in line with historical and projected
cash flows and are spread over the next ten years as follows (in millions):

Year

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022 and thereafter

Total

Foreign Cash

Amount

$ 1,039

1,093

1,259

954

1,002

1,001

650

–

1,062

350

$ 8,410

At December 31, 2012, we had $1,246 million of cash and cash
equivalents on a consolidated basis. Of that amount, approximately
$400 million was held outside the U.S. by our foreign subsidiaries to
fund future working capital, investment and financing needs of our
foreign subsidiaries. Accordingly, we have asserted that such funds are
indefinitely reinvested outside the U.S.

We believe we have sufficient levels of cash and cash flows to support
our domestic requirements. However, if the cash held by our foreign
subsidiaries was needed to fund our U.S. requirements, there would not
be a significant tax liability associated with the repatriation, as any U.S.
liability would be reduced by the foreign tax credits associated with the
repatriated earnings.

However, our determination above is based on the assumption that
only the cash held outside the U.S. would be repatriated as a result
of an unanticipated or unique domestic need. It does not assume
repatriation of the entire amount of indefinitely reinvested earnings of
our foreign subsidiaries. As disclosed in Note 16 – Income and Other
Taxes in our Consolidated Financial Statements, we have not estimated
the potential tax consequences associated with the repatriation of the
entire amount of our foreign earnings indefinitely reinvested outside
the U.S. We do not believe it is practical to calculate the potential tax
impact, as there is a significant amount of uncertainty with respect to
determining the amount of foreign tax credits as well as any additional
local withholding tax and other indirect tax consequences that may
arise from the distribution of these earnings. In addition, because such
earnings have been indefinitely reinvested in our foreign operations,
repatriation would require liquidation of those investments or a
recapitalization of our foreign subsidiaries, the impacts and effects of
which are not readily determinable.

Xerox 2012 Annual Report

Management’s Discussion

Loan Covenants and Compliance

At December 31, 2012, we were in full compliance with the
covenants and other provisions of our Credit Facility and Senior
Notes. We have the right to terminate the Credit Facility without
penalty. Failure to comply with material provisions or covenants of
the Credit Facility and Senior Notes could have a material adverse
effect on our liquidity and operations, and our ability to continue
to fund our customers’ purchase of Xerox equipment.

Refer to Note 12 – Debt in the Consolidated Financial Statements for
additional information regarding debt arrangements.

Contractual Cash Obligations and Other Commercial Commitments and Contingencies

At December 31, 2012, we had the following contractual cash obligations and other commercial commitments and contingencies:

(in millions)

2013

2014

2015

2016

2017

Thereafter

Total debt, including capital lease obligations (1)

$ 1,039

$ 1,093

$ 1,259

$ 954

$ 1,002

$ 3,063

Interest on debt (1)

Minimum operating lease commitments (2)

Defined benefit pension plans

Retiree health payments

Estimated Purchase Commitments:

Flextronics (3)

Fuji Xerox (4)

Other (5)

Total

421

636

195

498

2,069

169

363

425

293

265

234

157

–

131

–

177

777

–

339

–

$ 5,107

$ 2,092

$ 1,939

$ 1,438

$ 1,329

$ 4,262

(1) Refer to Note 12 – Debt in the Consolidated Financial Statements for additional information regarding debt.
(2) Refer to Note 7 – Land, Buildings, Equipment and Software, Net in the Consolidated Financial Statements for additional information related to minimum operating lease commitments.
(3) Flextronics: We outsource certain manufacturing activities to Flextronics. The amount included in the table reflects our estimate of purchases over the next year and is not a contractual

commitment. In the past two years, actual purchases from Flextronics averaged approximately $600 million per year.

(4) Fuji Xerox: The amount included in the table reflects our estimate of purchases over the next year and is not a contractual commitment.
(5) Other purchase commitments: We enter into other purchase commitments with vendors in the ordinary course of business. Our policy with respect to all purchase commitments is to record

losses, if any, when they are probable and reasonably estimable. We currently do not have, nor do we anticipate, material loss contracts.

Pension and Other Post-retirement Benefit Plans

We sponsor defined benefit pension plans and retiree health plans
that require periodic cash contributions. Our 2012 cash contributions
for these plans were $364 million for our defined benefit pension plans
and $84 million for our retiree health plans. We also elected to make
a contribution of 15.4 million shares of our common stock, with an
aggregate value of approximately $130 million, to our U.S. defined
benefit pension plan for salaried employees in order to meet our
planned level of funding for 2012. Accordingly, total contributions to
our defined benefit pension plans were $494 million in 2012.

In 2013, based on current actuarial calculations, we expect to make
contributions of approximately $195 million to our worldwide defined
benefit pension plans and approximately $80 million to our retiree
health benefit plans. The decrease in required contributions to our
worldwide defined benefit pension plans is largely in the U.S. and
reflects the expected benefits from the pension funding legislation
enacted in the U.S. during 2012. Contributions in subsequent years will
depend on a number of factors, including the investment performance
of plan assets and discount rates, as well as potential legislative and
plan changes. Although we currently expect contributions to our
worldwide defined benefit pension plans to increase moderately in
2014, primarily in the U.S., contributions are still expected to be lower
over the next several years as compared to 2011 and 2012, primarily
as a result of the amendment of several of our defined benefit pension
plans to freeze current benefits and eliminate benefit accruals for
future service.

Our retiree health benefit plans are non-funded and are almost entirely
related to domestic operations. Cash contributions are made each year
to cover medical claims costs incurred during the year. The amounts
reported in the above table as retiree health payments represent our
estimate of future benefit payments.

Fuji Xerox

We purchased products, including parts and supplies, from Fuji Xerox
totaling $2.1 billion, $2.2 billion and $2.1 billion in 2012, 2011 and
2010, respectively. Our purchase commitments with Fuji Xerox are
entered into in the normal course of business and typically have a
lead time of three months. Related party transactions with Fuji Xerox
are discussed in Note 8 – Investments in Affiliates, at Equity in the
Consolidated Financial Statements.

Brazil Tax and Labor Contingencies

We are disputing these tax matters and intend to vigorously defend our
positions. Based on the opinion of legal counsel and current reserves
for those matters deemed probable of loss, we do not believe that
the ultimate resolution of these matters will materially impact our
results of operations, financial position or cash flows. The labor matters
principally relate to claims made by former employees and contract
labor for the equivalent payment of all social security and other related
labor benefits, as well as consequential tax claims, as if they were
regular employees.

As of December 31, 2012, the total amounts related to the unreserved
portion of the tax and labor contingencies, inclusive of related interest,
amounted to approximately $1,010 million, with the decrease from
the December 31, 2011 balance of approximately $1,120 million,
primarily related to currency and closed cases partially offset by
interest. With respect to the unreserved balance of $1,010 million,
the majority has been assessed by management as being remote as
to the likelihood of ultimately resulting in a loss to the Company. In
connection with the above proceedings, customary local regulations
may require us to make escrow cash deposits or post other security of
up to half of the total amount in dispute. As of December 31, 2012 we
had $211 million of escrow cash deposits for matters we are disputing,
and there are liens on certain Brazilian assets with a net book value of
$13 million and additional letters of credit of approximately
$242 million, which include associated indexation. Generally, any
escrowed amounts would be refundable and any liens would be
removed to the extent the matters are resolved in our favor. We
routinely assess all these matters as to the probability of ultimately
incurring a liability against our Brazilian operations and record our
best estimate of the ultimate loss in situations where we assess the
likelihood of an ultimate loss as probable.

Other Contingencies and Commitments

As more fully discussed in Note 17 – Contingencies and Litigation in
the Consolidated Financial Statements, we are involved in a variety of
claims, lawsuits, investigations and proceedings concerning securities
law, intellectual property law, environmental law, employment law and
the Employee Retirement Income Security Act. In addition, guarantees,
indemnifications and claims may arise during the ordinary course
of business from relationships with suppliers, customers and non-
consolidated affiliates. Nonperformance under a contract including a
guarantee, indemnification or claim could trigger an obligation of the
Company.

We determine whether an estimated loss from a contingency should
be accrued by assessing whether a loss is deemed probable and can
be reasonably estimated. Should developments in any of these areas
cause a change in our determination as to an unfavorable outcome
and result in the need to recognize a material accrual, or should any
of these matters result in a final adverse judgment or be settled for
significant amounts, they could have a material adverse effect on

Xerox 2012 Annual Report

Management’s Discussion

our results of operations, cash flows and financial position in the
period or periods in which such change in determination, judgment or
settlement occurs.

Unrecognized Tax Benefits

As of December 31, 2012, we had $201 million of unrecognized tax
benefits. This represents the tax benefits associated with various tax
positions taken, or expected to be taken, on domestic and foreign tax
returns that have not been recognized in our financial statements due
to uncertainty regarding their resolution. The resolution or settlement
of these tax positions with the taxing authorities is at various stages
and therefore we are unable to make a reliable estimate of the
eventual cash flows by period that may be required to settle these
matters. In addition, certain of these matters may not require cash
settlement due to the existence of credit and net operating loss
carryforwards, as well as other offsets, including the indirect benefit
from other taxing jurisdictions that may be available.

Off-Balance Sheet Arrangements

Occasionally we may utilize off-balance sheet arrangements in our
operations (as defined by the SEC Financial Reporting Release 67
(FRR-67), “Disclosure in Management’s Discussion and Analysis
about Off-Balance Sheet Arrangements and Aggregate Contractual
Obligations.”). We enter into the following arrangements that have
off-balance sheet elements:

Operating leases in the normal course of business. The nature of

these lease arrangements is discussed in Note 7 – Land, Buildings,
Equipment and Software, Net in the Consolidated Financial
Statements.

We have facilities, primarily in the U.S., Canada and several countries

in Europe, that enable us to sell to third-parties certain accounts
receivable without recourse. In most instances a portion of the sales
proceeds are held back by the purchaser and payment is deferred
until collection of the related sold receivables. Refer to Note 4 –
Accounts Receivables, Net in the Consolidated Financial Statements
for further information regarding these facilities.

During 2012 we entered into arrangements to sell our entire interest
in certain groups of finance receivables where we received cash and
beneficial interests from the third-party purchaser. Refer to Note 5 –
Finance Receivables, Net in the Consolidated Financial Statements
for further information regarding these sales.

At December 31, 2012, we do not believe we have any off-balance
sheet arrangements that have, or are reasonably likely to have, a
material current or future effect on financial condition, changes
in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources.

In addition, see the table above for the Company’s contractual cash
obligations and other commercial commitments and Note 17 –
Contingencies and Litigation in the Consolidated Financial Statements
for additional information regarding contingencies, guarantees,
indemnifications and warranty liabilities.

Financial Risk Management

We are exposed to market risk from foreign currency exchange rates
and interest rates, which could affect operating results, financial
position and cash flows. We manage our exposure to these market
risks through our regular operating and financing activities and, when
appropriate, through the use of derivative financial instruments. We
utilized derivative financial instruments to hedge economic exposures,
as well as reduce earnings and cash flow volatility resulting from shifts
in market rates.

Recent market events have not caused us to materially modify or
change our financial risk management strategies with respect to our
exposures to interest rate and foreign currency risk. Refer to Note 13 –
Financial Instruments in the Consolidated Financial Statements for
additional discussion on our financial risk management.

Foreign Exchange Risk Management

Assuming a 10% appreciation or depreciation in foreign currency
exchange rates from the quoted foreign currency exchange rates at
December 31, 2012, the potential change in the fair value of foreign
currency-denominated assets and liabilities in each entity would not be
significant because all material currency asset and liability exposures
were economically hedged as of December 31, 2012. A 10%
appreciation or depreciation of the U.S. Dollar against all currencies
from the quoted foreign currency exchange rates at December 31,
2012 would have an impact on our cumulative translation adjustment
portion of equity of approximately $711 million. The net amount
invested in foreign subsidiaries and affiliates, primarily Xerox Limited,
Fuji Xerox, Xerox Canada Inc. and Xerox Brasil, and translated into U.S.
Dollars using the year-end exchange rates, was approximately
$7.1 billion at December 31, 2012.

Interest Rate Risk Management

The consolidated weighted-average interest rates related to our total
debt for 2012, 2011 and 2010 approximated 4.7%, 5.2%, and 5.8%,
respectively. Interest expense includes the impact of our interest rate
derivatives.

Virtually all customer-financing assets earn fixed rates of interest.
The interest rates on a significant portion of the Company’s term debt
are fixed.

As of December 31, 2012, $903 million of our total debt of
$8,489 million carried variable interest rates, including the effect of pay
variable interest rate swaps, if any, we may use to reduce the effective
interest rate on our fixed coupon debt.

•
•
•
The fair market values of our fixed-rate financial instruments are
sensitive to changes in interest rates. At December 31, 2012, a 10%
change in market interest rates would change the fair values of such
financial instruments by approximately $113 million.

Non-GAAP Financial Measures

We have reported our financial results in accordance with generally
accepted accounting principles (“GAAP”). In addition, we have
discussed our results using non-GAAP measures.

Management believes that these non-GAAP financial measures
provide an additional means of analyzing the current periods’ results
against the corresponding prior periods’ results. However, these
non-GAAP financial measures should be viewed in addition to, and
not as a substitute for, the Company’s reported results prepared in
accordance with GAAP. Our non-GAAP financial measures are not
meant to be considered in isolation or as a substitute for comparable
GAAP measures, and should be read only in conjunction with our
consolidated financial statements prepared in accordance with GAAP.
Our management regularly uses our supplemental non-GAAP financial
measures internally to understand, manage and evaluate our business
and make operating decisions. These non-GAAP measures are among
the primary factors management uses in planning for and forecasting
future periods. Compensation of our executives is based in part on the
performance of our business based on these non-GAAP measures.

A reconciliation of these non-GAAP financial measures, and the most
directly comparable measures calculated and presented in accordance
with GAAP, are set forth on the following tables.

Adjusted Earnings Measures

To better understand the trends in our business and the impact of
the ACS acquisition, we believe it is necessary to adjust the following
amounts determined in accordance with GAAP to exclude the effects
of the certain items as well as their related income tax effects. For our
2012 reporting year, adjustments were limited to the amortization of
intangible assets:

Net income and Earnings per share (“EPS”), and

Effective tax rate.

The above have been adjusted for the following items:

Amortization of intangible assets (all periods): The amortization
of intangible assets is driven by our acquisition activity which can
vary in size, nature and timing as compared to other companies
within our industry and from period to period. Accordingly, due to the
incomparability of acquisition activity among companies and from
period to period, we believe exclusion of the amortization associated
with intangible assets acquired through our acquisitions allows
investors to better compare and understand our results. The use
of intangible assets contributed to our revenues earned during the
periods presented and will contribute to our future period revenues
as well. Amortization of intangible assets will recur in future periods.

Restructuring and asset impairment charges (including those
incurred by Fuji Xerox) (2010 only): Restructuring and asset
impairment charges consist of costs primarily related to severance
and benefits for employees terminated pursuant to formal
restructuring and workforce reduction plans. We exclude these
charges because we believe that these historical costs do not reflect
expected future operating expenses and do not contribute to a
meaningful evaluation of our current or past operating performance.
In addition, such charges are inconsistent in amount and frequency.
Such charges are expected to yield future benefits and savings with
respect to our operational performance.

Acquisition-related costs (2010 only): We incurred significant
expenses in connection with our acquisition of ACS which we
generally would not have otherwise incurred in the periods presented
as a part of our continuing operations. Acquisition-related costs
include transaction and integration costs, which represent external
incremental costs directly related to completing the acquisition and
the integration of ACS and Xerox. We believe it is useful for investors
to understand the effects of these costs on our total operating
expenses.

Other discrete, unusual or infrequent costs and expenses:
In addition, we have also excluded the following additional items
given the discrete, unusual or infrequent nature of the item on our
results of operations for the period: (1) Loss on early extinguishment
of liability (2011 and 2010), (2) Medicare subsidy tax law change
(income tax effect only) (2010), (3) ACS shareholder’s litigation
settlement (2010) and (4) Venezuela devaluation (2010). We believe
the exclusion of these items allows investors to better understand
and analyze the results for the period as compared to prior periods
as well as expected trends in our business.

We also calculate and utilize an Operating income and margin earnings
measure by adjusting our pre-tax income and margin amounts to
exclude certain items. In addition to the amortization of intangible
assets and restructuring expenses (see above), operating income and
margin also exclude Other expenses, net. 2011 operating income
and margin also exclude a Curtailment gain recorded in the fourth
quarter 2011 while 2010 operating income and margin exclude ACS
acquisition related costs (see above). Other expenses, net is primarily
comprised of non-financing interest expense and also includes certain
other non-operating costs and expenses. The Curtailment gain resulted
from the amendment of our primary non-union U.S. defined benefit
pension plans for salaried employees to fully freeze future benefit and
service accruals after December 31, 2012. We exclude these amounts
in order to evaluate our current and past operating performance and to
better understand the expected future trends in our business.

Xerox 2012 Annual Report

•
•
•
•
•
•
Management’s Discussion

Pro-forma Basis

To better understand the trends in our business, we discuss our 2011
operating results by comparing them against adjusted prior period
results which include ACS historical results for the comparable period.
We acquired ACS on February 5, 2010 and ACS’s results subsequent
to that date are included in our reported results. Accordingly, for the
comparison of our reported 2011 results to 2010, we included ACS’s
2010 estimated results for the period January 1 through February 5,
2010 in our reported 2010 results (pro-forma 2010). We refer to these
comparisons against adjusted results as “pro-forma” basis comparisons.
ACS’s historical results for this period have been adjusted to reflect
fair value adjustments related to property, equipment and computer
software as well as customer contract costs. In addition, adjustments

Net Income and EPS reconciliation:

were made for deferred revenue, exited businesses and other material
non-recurring costs associated with the acquisition. We believe
comparisons on a pro-forma basis provide an enhanced assessment
than the actual comparisons, given the size and nature of the ACS
acquisition. In addition, the acquisition of ACS increased the proportion
of our revenue from services, which has a lower gross margin and
SAG as a percent of revenue than we historically experienced when
Xerox was primarily a Technology company. We believe the pro-forma
basis comparisons provide investors with a better understanding and
additional perspective of the expected trends in our business as well as
the impact of the ACS acquisition on the Company’s operations.

Year Ended December 31,

2012

2011

2010

(in millions; except per share amounts)

Net Income

EPS

Net Income

EPS

Net Income

EPS

As Reported

Adjustments:

$ 1,195

$ 0.88

$ 1,295

$ 0.90

$ 606

$ 0.43

Amortization of intangible assets

203

0.15

248

0.17

Loss on early extinguishment of liability

Xerox and Fuji Xerox restructuring charges

ACS acquisition-related costs

ACS shareholders’ litigation settlement

Venezuelan devaluation costs

Medicare subsidy tax law change

Adjusted

Weighted average shares for adjusted EPS (1)

Fully diluted shares at December 31, 2012 (2)

–

0.01

–

194

355

0.14

0.01

0.26

0.04

0.03

0.02

0.01

$ 1,398

$ 1.03

$ 1,563

$ 1.08

$ 1,296

$ 0.94

1,356

1,271

1,444

1,378

(1) Average shares for the calculation of adjusted EPS and include 27 million of shares associated with the Series A convertible preferred stock and therefore the related annual dividend

was excluded.

(2) Represents common shares outstanding at December 31, 2012 as well as shares associated with our Series A convertible preferred stock plus dilutive potential common shares as used

for the calculation of diluted earnings per share in the fourth quarter 2012.

Effective Tax reconciliation:

(in millions)

As Reported

Adjustments:

Year Ended December 31, 2012

Year Ended December 31, 2011

Year Ended December 31, 2010

Pre-Tax Income Tax Effective
Expense Tax Rate
Income

Pre-Tax Income Tax Effective
Tax Rate
Expense
Income

Pre-Tax Income Tax Effective
Expense Tax Rate
Income

$ 1,348

$ 277

20.5%

$ 1,565

$ 386

24.7%

$ 815

$ 256

31.4%

Amortization of intangible assets

328

125

Loss on early extinguishment of liability

Xerox restructuring charge

ACS acquisition-related costs

ACS shareholders’ litigation settlement

Venezuelan devaluation costs

Medicare subsidy tax law change

–

398

150

–

312

483

–

118

166

–

(16)

Adjusted

$ 1,676

$ 402

24.0%

$ 1,996

$ 549

27.5%

$ 1,759

$ 548

31.2%

Operating Income/Margin reconciliation:

(in millions)

Total Revenue

Pre-tax Income

Adjustments:

Amortization of intangible assets

Xerox restructuring charge

Curtailment gain

ACS acquisition-related costs

Other expenses, net

Adjusted Operating Income

Pre-tax Income Margin

Adjusted Operating Margin

As Reported

Pro-forma (1)

2012

2011

2010

$ 22,390

$ 22,626

$ 21,633

$ 22,252

1,348

1,565

815

328

153

–

256

398

(107)

–

322

312

483

–

389

777

339

483

–

444

$ 2,085

$ 2,211

$ 2,076

$ 2,120

6.0%

9.3%

6.9%

9.8%

3.8%

9.6%

3.5%

9.5%

(1) Pro-forma 2010 includes ACS’s 2010 estimated results from January 1 through February 5 in our reported 2010 results.

Xerox 2012 Annual Report

Management’s Discussion

Forward-Looking Statements

This Annual Report contains forward-looking statements as defined
in the Private Securities Litigation Reform Act of 1995. The words
“anticipate,” “believe,” “estimate,” “expect,” “intend,” “will,” “should”
and similar expressions, as they relate to us, are intended to identify
forward-looking statements. These statements reflect management’s
current beliefs, assumptions and expectations and are subject to a

number of factors that may cause actual results to differ materially.
Information concerning these factors is included in our 2012
Annual Report on Form 10-K filed with the Securities and Exchange
Commission (“SEC”). We do not intend to update these forward-looking
statements, except as required by law.

Consolidated Statements of Income

(in millions, except per-share data)

Revenues

Sales

Outsourcing, service and rentals

Finance income

Total Revenues

Costs and Expenses

Cost of sales

Cost of outsourcing, service and rentals

Equipment financing interest

Research, development and engineering expenses

Selling, administrative and general expenses

Restructuring and asset impairment charges

Acquisition-related costs

Amortization of intangible assets

Curtailment gain

Other expenses, net

Total Costs and Expenses

Income Before Income Taxes and Equity Income

Income tax expense

Equity in net income of unconsolidated affiliates

Net Income

Less: Net income attributable to noncontrolling interests

Net Income Attributable to Xerox

Basic Earnings per Share

Diluted Earnings per Share

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

Year Ended December 31,

2012

2011

2010

$ 6,578

15,215

597

22,390

4,362

10,802

198

655

$ 7,126

14,868

632

22,626

4,697

10,269

231

721

$ 7,234

13,739

660

21,633

4,741

9,195

246

781

4,288

4,497

4,594

153

–

328

–

256

21,042

1,348

277

152

1,223

$ 1,195

$ 0.90

$ 0.88

–

398

(107)

322

21,061

1,565

386

149

1,328

$ 1,295

$ 0.92

$ 0.90

483

312

–

389

20,818

815

256

637

606

$ 0.44

$ 0.43

Xerox 2012 Annual Report

Consolidated Statements of Comprehensive Income

(in millions)

Net Income

Less: Net income attributable to noncontrolling interests

Net Income Attributable to Xerox

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

Translation adjustments, net

Unrealized (losses) gains, net

Changes in defined benefit plans, net

Other Comprehensive Loss, Net

Less: Other comprehensive loss, net attributable to noncontrolling interests

Other Comprehensive Loss, Net Attributable to Xerox

Comprehensive Income, Net

Less: Comprehensive income, net attributable to noncontrolling interests

Year Ended December 31,

2012

2011

$ 1,223

$ 1,328

$ 1,195

$ 1,295

2010

$ 637

$ 606

113

(105)

(35)

(63)

(561)

(511)

–

(511)

$ 712

(636)

(729)

(1)

$ (728)

$ 599

–

$ 637

$ 606

Comprehensive Income, Net Attributable to Xerox

$ 684

$ 567

(1) Refer to Note 20 – Other Comprehensive Income for gross components of other comprehensive income, reclassification adjustments out of accumulated other comprehensive income and

related tax effects.

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

Consolidated Balance Sheets

(in millions, except share data in thousands)

Assets

Cash and cash equivalents

Accounts receivable, net

Billed portion of finance receivables, net

Finance receivables, net

Inventories

Other current assets

Total current assets

Finance receivables due after one year, net

Equipment on operating leases, net

Land, buildings and equipment, net

Investments in affiliates, at equity

Intangible assets, net

Goodwill

Deferred tax assets, long-term

Other long-term assets

Total Assets

Liabilities and Equity

Short-term debt and current portion of long-term debt

Accounts payable

Accrued compensation and benefits costs

Unearned income

Other current liabilities

Total current liabilities

Long-term debt

Pension and other benefit liabilities

Post-retirement medical benefits

Other long-term liabilities

Total Liabilities

Series A Convertible Preferred Stock

Common stock

Additional paid-in capital

Treasury stock, at cost

Retained earnings

Accumulated other comprehensive loss

Xerox shareholders’ equity

Noncontrolling interests

Total Equity

Total Liabilities and Equity

Shares of common stock issued

Treasury stock

Shares of common stock outstanding

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

December 31,

2012

1,246

2,866

152

1,836

1,011

1,162

8,273

3,325

535

1,556

1,381

2,783

9,062

763

2,337

2011

902

2,600

166

2,165

1,021

1,058

7,912

4,031

533

1,612

1,395

3,042

8,803

672

2,116

$ 30,015

30,116

1,042

1,913

741

438

1,776

5,910

7,447

2,958

909

778

1,545

2,016

757

432

1,631

6,381

7,088

2,487

925

861

18,002

17,742

349

1,239

5,622

(104)

7,991

(3,227)

11,521

143

11,664

$ 30,015

1,238,696

349

1,353

6,317

(124)

7,046

(2,716)

11,876

149

12,025

30,116

1,352,849

(14,924)

(15,508)

1,223,772

1,337,341

Xerox 2012 Annual Report

Consolidated Statements of Cash Flows

(in millions)

Cash Flows from Operating Activities:
Net income

Adjustments required to reconcile net income to cash flows from operating activities:

Depreciation and amortization

Provision for receivables

Provision for inventory

Deferred tax expense (benefit)

Undistributed equity in net income of unconsolidated affiliates

Stock-based compensation

Restructuring and asset impairment charges

Payments for restructurings

Contributions to defined benefit pension plans

Increase in accounts receivable and billed portion of finance receivables

Collections of deferred proceeds from sales of receivables

Increase in inventories

Increase in equipment on operating leases

Decrease in finance receivables

Increase in other current and long-term assets

Increase in accounts payable and accrued compensation

Decrease in other current and long-term liabilities

Net change in income tax assets and liabilities

Net change in derivative assets and liabilities

Other operating, net

Net cash provided by operating activities

Cash Flows from Investing Activities:
Cost of additions to land, buildings and equipment

Proceeds from sales of land, buildings and equipment

Cost of additions to internal use software

Acquisitions, net of cash acquired

Other investing, net

Net cash used in investing activities
Cash Flows from Financing Activities:
Net (payments) proceeds on debt

Payment of liability to subsidiary trust issuing preferred securities

Common stock dividends

Preferred stock dividends

Proceeds from issuances of common stock

Excess tax benefits from stock-based compensation

Payments to acquire treasury stock, including fees

Repurchases related to stock-based compensation

Distributions to noncontrolling interests

Net cash used in financing activities

Effect of exchange rate changes on cash and cash equivalents

Increase (decrease) in cash and cash equivalents

Cash and cash equivalents at beginning of year

Cash and Cash Equivalents at End of Year

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

58
58

Year Ended December 31,

2012

2011

2010

$ 1,223

$ 1,328

637

1,301

1,251

1,097

127

(90)

125

153

(144)

(364)

(776)

470

–

(276)

947

(265)

120

(71)

(79)

2,580

(388)

(125)

(276)

(761)

(108)

–

(231)

(24)

(1,052)

(42)

(69)

(1,472)

(3)

344

902

$ 1,246

154

203

(86)

123

(218)

(426)

(296)

380

(124)

(298)

(249)

(22)

(131)

1,961

(338)

(163)

(212)

(675)

(670)

(241)

(24)

(701)

(27)

(22)

(1,586)

(9)

(309)

1,211

902

180

(2)

(37)

123

483

(213)

(237)

(118)

218

(151)

(288)

129

(98)

615

(9)

229

2,726

(355)

(164)

(1,734)

(2,178)

(3,056)

–

(215)

(15)

183

–

(15)

(22)

(3,116)

(20)

(2,588)

3,799

$ 1,211

Consolidated Statements of Shareholders’ Equity

(in millions)

Common
Stock

Additional
Paid-in
Capital

Treasury
Stock

Retained
Earnings

AOCL(3)

Xerox

Non-
Shareholders’ controlling
Interests

Equity

Total
Equity

Balance at December 31, 2009

$ 871

$ 2,493

Comprehensive income

ACS acquisition

Cash dividends declared-common stock (1)

Cash dividends declared-preferred stock (2)

Stock option and incentive plans, net

Distributions to noncontrolling interests

–

490

3,825

–

262

–

Balance at December 31, 2010

$ 1,398

$ 6,580

Comprehensive income

Cash dividends declared-common stock (1)

Cash dividends declared-preferred stock (2)

Contribution of common stock to
U.S. pension plan

Stock option and incentive plans, net

Payments to acquire treasury stock,

including fees

Cancellation of treasury stock

Distributions to noncontrolling interests

–

(73)

–

113

128

–

(701)

(504)

–

577

–

$ 5,674

$ (1,988)

$ 7,050

$ 141 $ 7,191

606

–

(243)

(21)

–

606

637

4,315

(243)

(21)

299

–

(19)

4,315

(243)

(21)

299

(19)

$ 6,016

$ (1,988)

$ 12,006

$ 153 $ 12,159

1,295

(728)

(241)

(24)

–

567

(241)

(24)

130

139

(701)

–

(36)

599

(241)

(24)

130

139

(701)

–

(36)

Balance at December 31, 2011

$ 1,353

$ 6,317

(124)

$ 7,046

$ (2,716)

$ 11,876

$ 149 $ 12,025

Comprehensive income

Cash dividends declared-common stock (1)

Cash dividends declared-preferred stock (2)

Contribution of common stock to
U.S. pension plan

Stock option and incentive plans, net

Payments to acquire treasury stock,

including fees

–

115

–

(1,052)

Cancellation of treasury stock

(147)

(925)

1,072

Distributions to noncontrolling interests

–

1,195

(511)

(226)

(24)

–

684

(226)

(24)

130

133

(1,052)

–

(34)

712

(226)

(24)

130

133

(1,052)

–

(34)

Balance at December 31, 2012

$ 1,239

$ 5,622

(104)

$ 7,991

$ (3,227)

$ 11,521

$ 143 $ 11,664

(1) Cash dividends declared on common stock of $0.0425 in each of the four quarters in 2012, 2011 and 2010.
(2) Cash dividends declared on preferred stock of $12.22 per share in the first quarter of 2010 and $20 per share in each quarter thereafter in 2010, 2011 and 2012.
(3) AOCL – Accumulated other comprehensive loss.

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

Xerox 2012 Annual Report

Notes to Consolidated Financial Statements
(in millions, except per-share data and where otherwise noted)

Note 1 – Summary of Significant
Accounting Policies

References herein to “we,” “us,” “our,” the “Company” and “Xerox”
refer to Xerox Corporation and its consolidated subsidiaries unless the
context specifically requires otherwise.

Description of Business and Basis of Presentation

We are a $22.4 billion global enterprise for business process and
document management. We offer business process outsourcing and
IT outsourcing services, including data processing, healthcare solutions,
human resource benefits management, finance support, transportation
solutions and customer relationship management services for
commercial and government organizations worldwide. The Company
also provides extensive leading-edge document technology, services,
software and genuine Xerox supplies for graphic communication and
office printing environments of any size.

Basis of Consolidation

The Consolidated Financial Statements include the accounts of
Xerox Corporation and all of our controlled subsidiary companies.
All significant intercompany accounts and transactions have been
eliminated. Investments in business entities in which we do not have
control, but we have the ability to exercise significant influence over
operating and financial policies (generally 20% to 50% ownership)
are accounted for using the equity method of accounting. Operating
results of acquired businesses are included in the Consolidated
Statements of Income from the date of acquisition.

We consolidate variable interest entities if we are deemed to be the
primary beneficiary of the entity. Operating results for variable interest
entities in which we are determined to be the primary beneficiary are
included in the Consolidated Statements of Income from the date such
determination is made.

For convenience and ease of reference, we refer to the financial
statement caption “Income before Income Taxes and Equity Income”
as “pre-tax income” throughout the Notes to the Consolidated
Financial Statements.

Use of Estimates

The preparation of our Consolidated Financial Statements requires
that we make estimates and assumptions that affect the reported
amounts of assets and liabilities, as well as the disclosure of contingent
assets and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting
period. Future events and their effects cannot be predicted with
certainty; accordingly, our accounting estimates require the exercise
of judgment. The accounting estimates used in the preparation of our
Consolidated Financial Statements will change as new events occur, as
more experience is acquired, as additional information is obtained and
as our operating environment changes. Actual results could differ from
those estimates.

The following table summarizes certain significant costs and expenses
that require management estimates for the three years ended
December 31, 2012:

Expense/(Income)

Year Ended December 31,

2012

2011

2010

Provision for restructuring and asset impairments

$ 153

$ 33 $ 483

Provision for receivables

127

154

180

Provisions for litigation and regulatory matters

Provisions for obsolete and excess inventory

Provision for product warranty liability

Depreciation and obsolescence of equipment

on operating leases

Depreciation of buildings and equipment

Amortization of internal use software

Amortization of product software

Amortization of acquired intangible assets

Amortization of customer contract costs

Defined pension benefits –
net periodic benefit cost (1)

Retiree health benefits – net periodic benefit cost

Income tax expense

(1)

279

452

116

328

107

300

277

294

405

401

177

386

(4)

313

379

316

304

256

(1) 2011 includes $107 pre-tax curtailment gain – refer to Note 15 – Employee Benefit Plans

for additional information.

Changes in Estimates

In the ordinary course of accounting for the items discussed above,
we make changes in estimates as appropriate and as we become
aware of circumstances surrounding those estimates. Such changes
and refinements in estimation methodologies are reflected in reported
results of operations in the period in which the changes are made and,
if material, their effects are disclosed in the Notes to the Consolidated
Financial Statements and in Management’s Discussion and Analysis of
Financial Condition and Results of Operation.

New Accounting Standards and
Accounting Changes

Except for the Accounting Standard Updates (“ASUs”) discussed below,
the new ASUs issued by the FASB during the last two years did not have
any significant impact on the Company.

Goodwill:

In September 2011, the FASB issued ASU No. 2011-08, Intangibles
– Goodwill and Other (Topic 350) – Testing Goodwill for Impairment,
which allows an entity to use a qualitative approach to test goodwill
for impairment. ASU 2011-08 permits an entity to first perform a
qualitative assessment to determine whether it is more likely than not

that the fair value of a reporting unit is less than its carrying value. If it
is concluded that a potential exposure exists, it is necessary to perform
the currently prescribed two-step goodwill impairment test. Otherwise,
the two-step goodwill impairment test is not required. We adopted ASU
2011-08 in 2011. The adoption of this update did not have a material
effect on our financial condition or results of operations. See “Goodwill
and Other Intangible Assets” below for additional information.

Presentation of Comprehensive Income:

In June 2011, the FASB issued ASU 2011-05, Comprehensive
Income (Topic 220) – Presentation of Comprehensive Income, which
requires an entity to present the total of comprehensive income,
the components of net income and the components of other
comprehensive income either in a single continuous statement of
comprehensive income or in two separate but consecutive statements.
ASU 2011-05 eliminates the option to present the components of
other comprehensive income as part of the Statement of Shareholders’
Equity. The items that must be reported in other comprehensive
income or when an item of other comprehensive income must be
reclassified to net income were not changed. Additionally, no changes
were made to the calculation and presentation of earnings per share.

We adopted ASU 2011-05 effective for our fiscal year ending
December 31, 2011 and have retrospectively applied the new
presentation of comprehensive income to 2010. We elected to present
comprehensive income in two separate but consecutive statements.
Note 20 – Other Comprehensive Income provides details regarding
the gross components of other comprehensive income, reclassification
adjustments out of accumulated other comprehensive income
and the related tax effects. Other than the change in presentation
and disclosure, the update did not have an impact on our financial
condition or results of operations.

In February 2013, the FASB issued ASU No. 2013-02, Comprehensive
Income (Topic 220) – Reporting of Amounts Reclassified Out of
Accumulated Other Comprehensive Income, which requires an entity
to provide additional information about the amounts reclassified out
of Accumulated Other Comprehensive Income by component. This
update is effective for us beginning January 1, 2013.

Balance Sheet Offsetting:

In December 2011, the FASB issued ASU 2011-11, Balance Sheet
(Topic 210) – Disclosures about Offsetting Assets and Liabilities. ASU
2011-11 requires entities to disclose both gross information and net
information about both instruments and transactions eligible for offset
in the Balance Sheet and instruments and transactions subject to an
agreement similar to a master netting arrangement to enable users
of its financial statements to understand the effects of offsetting and
related arrangements on its financial position. This update is effective
for our fiscal year beginning January 1, 2013 and must be applied
retrospectively. In January 2013, the FASB issued ASU 2013-01
which limited the scope of this guidance to derivatives, repurchase
type agreements and securities borrowing and lending transactions.
The principal impact from this update will be to expand disclosures
regarding our financial instruments. We currently report our derivative
assets and liabilities on a gross basis in the Balance Sheet even in those
instances where offsetting may be allowed under a master netting
agreement.

Summary of Accounting Policies

Revenue Recognition

We generate revenue through services, the sale and rental of
equipment, supplies and income associated with the financing of our
equipment sales. Revenue is recognized when it is realized or realizable
and earned. We consider revenue realized or realizable and earned
when we have persuasive evidence of an arrangement, delivery has
occurred, the sales price is fixed or determinable and collectibility is
reasonably assured. Delivery does not occur until equipment has been
shipped or services have been provided to the customer, risk of loss has
transferred to the customer and either customer acceptance has been
obtained, customer acceptance provisions have lapsed or the company
has objective evidence that the criteria specified in the customer
acceptance provisions have been satisfied. The sales price is not
considered to be fixed or determinable until all contingencies related
to the sale have been resolved. More specifically, revenue related to
services and sales of our products is recognized as follows:

Fair Value Accounting:

Equipment-Related Revenues

In May 2011, the FASB issued ASU 2011-04, which amended Fair
Value Measurements and Disclosures – Overall (ASC Topic 820-10)
to provide a consistent definition of fair value and ensure that the
fair value measurement and disclosure requirements are similar
between U.S. GAAP and International Financial Reporting Standards.
This update changed certain fair value measurement principles and
enhanced the disclosure requirements, particularly for level 3 fair value
measurements. We adopted this update prospectively effective for
our fiscal year beginning January 1, 2012. This update did not have a
material effect on financial condition or results of operations.

Equipment: Revenues from the sale of equipment, including those
from sales-type leases, are recognized at the time of sale or at the
inception of the lease, as appropriate. For equipment sales that require
us to install the product at the customer location, revenue is recognized
when the equipment has been delivered and installed at the customer
location. Sales of customer-installable products are recognized upon
shipment or receipt by the customer according to the customer’s
shipping terms. Revenues from equipment under other leases and
similar arrangements are accounted for by the operating lease method
and are recognized as earned over the lease term, which is generally on
a straight-line basis.

Xerox 2012 Annual Report

Notes to Consolidated Financial Statements
(in millions, except per-share data and where otherwise noted)

Technical Services: Technical service revenues are derived primarily
from maintenance contracts on the equipment sold to our customers
and are recognized over the term of the contracts. A substantial portion
of our products are sold with full service maintenance agreements for
which the customer typically pays a base service fee plus a variable
amount based on usage. As a consequence, other than the product
warranty obligations associated with certain of our low end products,
we do not have any significant product warranty obligations, including
any obligations under customer satisfaction programs.

Bundled Lease Arrangements: We sell our products and services
under bundled lease arrangements, which typically include equipment,
service, supplies and financing components for which the customer
pays a single negotiated fixed minimum monthly payment for all
elements over the contractual lease term. These arrangements
also typically include an incremental, variable component for page
volumes in excess of contractual page volume minimums, which
are often expressed in terms of price-per-page. The fixed minimum
monthly payments are multiplied by the number of months in the
contract term to arrive at the total fixed minimum payments that
the customer is obligated to make (“fixed payments”) over the lease
term. The payments associated with page volumes in excess of the
minimums are contingent on whether or not such minimums are
exceeded (“contingent payments”). In applying our lease accounting
methodology, we only consider the fixed payments for purposes of
allocating to the relative fair value elements of the contract. Contingent
payments, if any, are recognized as revenue in the period when the
customer exceeds the minimum copy volumes specified in the contract.
Revenues under bundled arrangements are allocated considering the
relative selling prices of the lease and non-lease deliverables included
in the bundled arrangement. Lease deliverables include the equipment,
financing, maintenance and other executory costs, while non-lease
deliverables generally consist of the supplies and non-maintenance
services. The allocation for the lease deliverables begins by allocating
revenues to the maintenance and other executory costs plus a profit
thereon. These elements are generally recognized over the term of
the lease as service revenue. The remaining amounts are allocated
to the equipment and financing elements which are subjected to the
accounting estimates noted below under “Leases.”

Our pricing interest rates, which are used in determining customer
payments in a bundled lease arrangement, are developed based upon
a variety of factors including local prevailing rates in the marketplace
and the customer’s credit history, industry and credit class. We reassess
our pricing interest rates quarterly based on changes in the local
prevailing rates in the marketplace. These interest rates have generally
been adjusted if the rates vary by 25 basis points or more, cumulatively,
from the last rate in effect. The pricing interest rates generally equal the
implicit rates within the leases, as corroborated by our comparisons of
cash to lease selling prices.

Sales to distributors and resellers: We utilize distributors and resellers
to sell many of our technology products to end-user customers. We
refer to our distributor and reseller network as our two-tier distribution
model. Sales to distributors and resellers are generally recognized
as revenue when products are sold to such distributors and resellers.
However, revenue is only recognized when the distributor or reseller
has economic substance apart from the company, the sales price is
not contingent upon resale or payment by the end user customer and
we have no further obligations related to bringing about the resale,
delivery or installation of the product.

Distributors and resellers participate in various rebate, price-protection,
cooperative marketing and other programs, and we record provisions
for these programs as a reduction to revenue when the sales occur.
Similarly, we account for our estimates of sales returns and other
allowances when the sales occur based on our historical experience.

In certain instances, we may provide lease financing to end-user
customers who purchased equipment we sold to distributors or
resellers. We compete with other third-party leasing companies with
respect to the lease financing provided to these end-user customers.

Supplies: Supplies revenue is generally recognized upon shipment or
utilization by customers in accordance with the sales contract terms.

Software: Most of our equipment has both software and non-software
components that function together to deliver the equipment’s
essential functionality and therefore they are accounted for together
as part of equipment sales revenues. Software accessories sold in
connection with our equipment sales, as well as free-standing software
sales are accounted for as separate deliverables or elements. In most
cases, these software products are sold as part of multiple element
arrangements and include software maintenance agreements for
the delivery of technical service, as well as unspecified upgrades or
enhancements on a when-and-if-available basis. In those software
accessory and free-standing software arrangements that include more
than one element, we allocate the revenue among the elements based
on vendor-specific objective evidence (“VSOE”) of fair value. Revenue
allocated to software is normally recognized upon delivery while
revenue allocated to the software maintenance element is recognized
ratably over the term of the arrangement.

Leases: As noted above, equipment may be placed with customers
under bundled lease arrangements. The two primary accounting
provisions which we use to classify transactions as sales-type or
operating leases are: (1) a review of the lease term to determine if it is
equal to or greater than 75% of the economic life of the equipment
and (2) a review of the present value of the minimum lease payments
to determine if they are equal to or greater than 90% of the fair
market value of the equipment at the inception of the lease.

We consider the economic life of most of our products to be five years,
since this represents the most frequent contractual lease term for our
principal products and only a small percentage of our leases are for

original terms longer than five years. There is no significant after-
market for our used equipment. We believe five years is representative
of the period during which the equipment is expected to be
economically usable, with normal service, for the purpose for which it is
intended. Residual values are not significant.

With respect to fair value, we perform an analysis of equipment fair
value based on cash selling prices during the applicable period. The
cash selling prices are compared to the range of values determined
for our leases. The range of cash selling prices must be reasonably
consistent with the lease selling prices in order for us to determine that
such lease prices are indicative of fair value.

Financing: Finance income attributable to sales-type leases, direct
financing leases and installment loans is recognized on the accrual
basis using the effective interest method.

Services-Related Revenue

Outsourcing: Revenues associated with outsourcing services are
generally recognized as services are rendered, which is generally
on the basis of the number of accounts or transactions processed.
Information technology processing revenues are recognized as services
are provided to the customer, generally at the contractual selling prices
of resources consumed or capacity utilized by our customers. In those
service arrangements where final acceptance of a system or solution
by the customer is required, revenue is deferred until all acceptance
criteria have been met. Revenues on cost reimbursable contracts
are recognized by applying an estimated factor to costs as incurred,
determined by the contract provisions and prior experience. Revenues
on unit-price contracts are recognized at the contractual selling prices
as work is completed and accepted by the customer. Revenues on time
and material contracts are recognized at the contractual rates as the
labor hours and direct expenses are incurred.

Revenues on certain fixed price contracts where we provide system
development and implementation services are recognized over
the contract term based on the percentage of development and
implementation services that are provided during the period compared
with the total estimated development and implementation services
to be provided over the entire contract using the percentage-of-
completion accounting methodology. These services require that
we perform significant, extensive and complex design, development,
modification or implementation of our customers’ systems.
Performance will often extend over long periods, and our right to
receive future payment depends on our future performance in
accordance with the agreement.

The percentage-of-completion methodology involves recognizing
probable and reasonably estimable revenue using the percentage of
services completed, on a current cumulative cost to estimated total
cost basis, using a reasonably consistent profit margin over the period.

Revenues earned in excess of related billings are accrued, whereas
billings in excess of revenues earned are deferred until the related

services are provided. We recognize revenues for non-refundable,
upfront implementation fees on a straight-line basis over the period
between the initiation of the ongoing services through the end of the
contract term.

In connection with our services arrangements, we incur and capitalize
costs to originate these long-term contracts and to perform the
migration, transition and setup activities necessary to enable us to
perform under the terms of the arrangement. Certain initial direct costs
of an arrangement are capitalized and amortized over the contractual
service period of the arrangement to cost of services.

From time to time, we also provide inducements to customers in
various forms, including contractual credits, which are capitalized and
amortized as a reduction of revenue over the term of the contract.
Customer-related deferred set-up/transition and inducement costs
were $356 and $294 at December 31, 2012 and 2011, respectively,
and the balance at December 31, 2012 is expected to be amortized
over a weighted average period of approximately seven years.
Amortization expense associated with customer-related contract costs
at December 31, 2012 is expected to be approximately $103 in 2013.

Long-lived assets used in the fulfillment of the arrangements are
capitalized and depreciated over the shorter of their useful life or the
term of the contract if an asset is contract specific.

Our outsourcing services contracts may also include the sale of
equipment and software. In these instances we follow the policies
noted above under Equipment-related Revenue.

Other Revenue Recognition Policies

Multiple Element Arrangements: As described above, we enter into
the following revenue arrangements that may consist of multiple
deliverables:

Bundled lease arrangements, which typically include both lease

deliverables and non-lease deliverables as described above.

Contracts for multiple types of outsourcing services, as well as

professional and value-added services. For instance, we may contract
for an implementation or development project and also provide
services to operate the system over a period of time; or we may
contract to scan, manage and store customer documents.

In substantially all of our multiple element arrangements, we are able
to separate the deliverables since we normally will meet both of the
following criteria:

The delivered item(s) has value to the customer on a stand-alone

basis; and

If the arrangement includes a general right of return relative to the
delivered item(s), delivery or performance of the undelivered item(s)
is considered probable and substantially in our control.

Xerox 2012 Annual Report

•
•
•
•
Notes to Consolidated Financial Statements
(in millions, except per-share data and where otherwise noted)

Consideration in a multiple-element arrangement is allocated at the
inception of the arrangement to all deliverables on the basis of the
relative selling price. When applying the relative selling price method,
the selling price for each deliverable is primarily determined based on
VSOE or third-party evidence (“TPE”) of the selling price. The above
noted revenue policies are then applied to each separated deliverable,
as applicable.

Revenue-based taxes: We report revenue net of any revenue-based
taxes assessed by governmental authorities that are imposed on and
concurrent with specific revenue-producing transactions. The primary
revenue-based taxes are sales tax and value-added tax (“VAT”).

Other Significant Accounting Policies

Shipping and Handling

Costs related to shipping and handling are recognized as incurred and
included in Cost of sales in the Consolidated Statements of Income.

Research, Development and Engineering (“RD&E”)

Research, development and engineering costs are expensed as
incurred. Sustaining engineering costs are incurred with respect to on-
going product improvements or environmental compliance after initial
product launch. Sustaining engineering costs were $110, $108 and
$128 in 2012, 2011 and 2010, respectively. Refer to Management’s
Discussion and Analysis, RD&E section for additional information
regarding RD&E expense.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash on hand, including money
market funds, and investments with original maturities of three months
or less.

Receivable Sales

We regularly sell certain portions of our receivable portfolios. Gains
or losses on the sale of receivables depend, in part, on both (a) the
cash proceeds and (b) the net non-cash proceeds received or paid.
When we sell receivables we normally receive beneficial interests in the
transferred receivables from the purchasers as part of the proceeds.
We refer to these beneficial interests as a deferred purchase price.
The beneficial interests obtained are initially measured at their fair
value. We generally estimate fair value based on the present value of
expected future cash flows, which are calculated using management’s
best estimates of the key assumptions including credit losses,
prepayment rate and discount rates commensurate with the risks
involved. Refer to Note 4 – Accounts Receivable, Net and Note 5 –
Finance Receivables, Net for more details on our receivable sales.

Inventories

Inventories are carried at the lower of average cost or market.
Inventories also include equipment that is returned at the end of the
lease term. Returned equipment is recorded at the lower of remaining
net book value or salvage value, which normally are not significant.
We regularly review inventory quantities and record a provision for
excess and/or obsolete inventory based primarily on our estimated
forecast of product demand, production requirements and servicing
commitments. Several factors may influence the realizability of our
inventories, including our decision to exit a product line, technological
changes and new product development. The provision for excess and/
or obsolete raw materials and equipment inventories is based primarily
on near term forecasts of product demand and include consideration
of new product introductions, as well as changes in remanufacturing
strategies. The provision for excess and/or obsolete service parts
inventory is based primarily on projected servicing requirements over
the life of the related equipment populations.

Land, Buildings and Equipment and Equipment
on Operating Leases

Land, buildings and equipment are recorded at cost. Buildings and
equipment are depreciated over their estimated useful lives. Leasehold
improvements are depreciated over the shorter of the lease term or the
estimated useful life. Equipment on operating leases is depreciated to
estimated salvage value over the lease term. Depreciation is computed
using the straight-line method. Significant improvements are
capitalized and maintenance and repairs are expensed. Refer to Note
6 – Inventories and Equipment on Operating Leases, Net and Note 7 –
Land, Buildings, Equipment and Software, Net for further discussion.

Software – Internal Use and Product

We capitalize direct costs associated with developing, purchasing or
otherwise acquiring software for internal use and amortize these costs
on a straight-line basis over the expected useful life of the software,
beginning when the software is implemented (“Internal Use Software”).
Costs incurred for upgrades and enhancements that will not result in
additional functionality are expensed as incurred. Amounts expended
for Internal Use Software are included in Cash Flows from Investing.

We also capitalize certain costs related to the development of software
solutions to be sold to our customers upon reaching technological
feasibility (“Product Software”). These costs are amortized based on
estimated future revenues over the estimated economic life of the
software. Amounts expended for Product Software are included in
Cash Flows from Operations. We perform periodic reviews to ensure
that unamortized Product Software costs remain recoverable from
estimated future operating profits (net realizable value or NRV). Costs
to support or service licensed software are charged to costs of services
as incurred.

Refer to Note 7 – Land, Buildings, Equipment and Software, Net for
further information.

Goodwill and Other Intangible Assets

Impairment of Long-Lived Assets

Goodwill represents the excess of the purchase price over the fair value
of acquired net assets in a business combination, including the amount
assigned to identifiable intangible assets. The primary drivers that
generate goodwill are the value of synergies between the acquired
entities and the company and the acquired assembled workforce,
neither of which qualifies as an identifiable intangible asset. Goodwill
is not amortized but rather is tested for impairment annually or more
frequently if an event or circumstance indicates that an impairment
loss may have been incurred.

Impairment testing for goodwill is done at the reporting unit level.
A reporting unit is an operating segment or one level below an
operating segment (a “component”) if the component constitutes
a business for which discrete financial information is available, and
segment management regularly reviews the operating results of that
component.

When testing goodwill for impairment, we may assess qualitative
factors for some or all of our reporting units to determine whether it
is more likely than not (that is, a likelihood of more than 50 percent)
that the fair value of a reporting unit is less than its carrying amount,
including goodwill. Alternatively, we may bypass this qualitative
assessment for some or all of our reporting units and perform a
detailed quantitative test of impairment (Step 1). If we perform the
detailed quantitative impairment test and the carrying amount of the
reporting unit exceeds its fair value, we would perform an analysis (Step
2) to measure such impairment. In 2012, we elected to proceed to the
quantitative assessment of the recoverability of our goodwill balances
for each of our reporting units in performing our annual impairment
test. Based on our quantitative assessments, we concluded that the fair
values of each of our reporting units exceeded their carrying values and
no impairments were identified.

Other intangible assets primarily consist of assets obtained in
connection with business acquisitions, including installed customer
base and distribution network relationships, patents on existing
technology and trademarks. We apply an impairment evaluation
whenever events or changes in business circumstances indicate that
the carrying value of our intangible assets may not be recoverable.
Other intangible assets are amortized on a straight-line basis over their
estimated economic lives. We believe that the straight-line method
of amortization reflects an appropriate allocation of the cost of the
intangible assets to earnings in proportion to the amount of economic
benefits obtained annually by the Company.

Refer to Note 9 – Goodwill and Intangible Assets, Net for further
information.

We review the recoverability of our long-lived assets, including
buildings, equipment, internal use software and other intangible assets,
when events or changes in circumstances occur that indicate that the
carrying value of the asset may not be recoverable. The assessment
of possible impairment is based on our ability to recover the carrying
value of the asset from the expected future pre-tax cash flows
(undiscounted and without interest charges) of the related operations.
If these cash flows are less than the carrying value of such asset, an
impairment loss is recognized for the difference between estimated fair
value and carrying value. Our primary measure of fair value is based on
discounted cash flows.

Pension and Post-Retirement Benefit Obligations

We sponsor defined benefit pension plans in various forms in several
countries covering employees who meet eligibility requirements. Retiree
health benefit plans cover U.S. and Canadian employees for retiree
medical costs. We employ a delayed recognition feature in measuring
the costs of pension and post-retirement benefit plans. This requires
changes in the benefit obligations and changes in the value of assets
set aside to meet those obligations to be recognized not as they occur,
but systematically and gradually over subsequent periods. All changes
are ultimately recognized as components of net periodic benefit cost,
except to the extent they may be offset by subsequent changes. At
any point, changes that have been identified and quantified but not
recognized as components of net periodic benefit cost, are recognized
in Accumulated Other Comprehensive Loss, net of tax.

Several statistical and other factors that attempt to anticipate future
events are used in calculating the expense, liability and asset values
related to our pension and retiree health benefit plans. These factors
include assumptions we make about the discount rate, expected return
on plan assets, rate of increase in healthcare costs, the rate of future
compensation increases and mortality. Actual returns on plan assets
are not immediately recognized in our income statement due to the
delayed recognition requirement. In calculating the expected return
on the plan asset component of our net periodic pension cost, we
apply our estimate of the long-term rate of return on the plan assets
that support our pension obligations, after deducting assets that are
specifically allocated to Transitional Retirement Accounts (which are
accounted for based on specific plan terms).

For purposes of determining the expected return on plan assets, we
utilize a market-related value approach in determining the value of
the pension plan assets, rather than a fair market value approach. The
primary difference between the two methods relates to systematic
recognition of changes in fair value over time (generally two years)

Xerox 2012 Annual Report

Notes to Consolidated Financial Statements
(in millions, except per-share data and where otherwise noted)

Foreign Currency Translation and Re-measurement

The functional currency for most foreign operations is the local
currency. Net assets are translated at current rates of exchange
and income, expense and cash flow items are translated at average
exchange rates for the applicable period. The translation adjustments
are recorded in Accumulated other comprehensive loss.

The U.S. Dollar is used as the functional currency for certain foreign
subsidiaries that conduct their business in U.S. Dollars. A combination
of current and historical exchange rates is used in re-measuring the
local currency transactions of these subsidiaries and the resulting
exchange adjustments are recorded in Currency (gains) and losses
within Other expenses, net together with other foreign currency
remeasurments.

Note 2 – Segment Reporting

Our reportable segments are aligned with how we manage the
business and view the markets we serve. We report our financial
performance based on the following two primary reportable
segments – Services and Document Technology. Our Services
segment operations involve delivery of a broad range of services
including business process, document and IT outsourcing. Our
Document Technology segment includes the sale and support of a
broad range of document systems from entry level to high-end.

The Services segment is comprised of three outsourcing service
offerings:

Business Process Outsourcing (“BPO”)

Document Outsourcing (which includes Managed Print Services)

(“DO”)

Information Technology Outsourcing (“ITO”)

Business process outsourcing services include service arrangements
where we manage a customer’s business activity or process.
Document outsourcing services include service arrangements that
allow customers to streamline, simplify and digitize their document-
intensive business processes through automation and deployment
of software applications and tools and the management of their
printing needs. Document outsourcing also includes revenues from our
partner print services offerings. Information technology outsourcing
services include service arrangements where we manage a customer’s
IT-related activities, such as application management and application
development, data center operations or testing and quality assurance.

versus immediate recognition of changes in fair value. Our expected
rate of return on plan assets is applied to the market-related asset value
to determine the amount of the expected return on plan assets to be
used in the determination of the net periodic pension cost. The market-
related value approach reduces the volatility in net periodic pension
cost that would result from using the fair market value approach.

The discount rate is used to present value our future anticipated benefit
obligations. The discount rate reflects the current rate at which benefit
liabilities could be effectively settled considering the timing of expected
payments for plan participants. In estimating our discount rate, we
consider rates of return on high-quality fixed-income investments
adjusted to eliminate the effects of call provisions, as well as the
expected timing of pension and other benefit payments.

Each year, the difference between the actual return on plan assets and
the expected return on plan assets, as well as increases or decreases
in the benefit obligation as a result of changes in the discount rate
and other actuarial assumptions, are added to or subtracted from
any cumulative actuarial gain or loss from prior years. This amount
is the net actuarial gain or loss recognized in Accumulated other
comprehensive loss. We amortize net actuarial gains and losses as a
component of net pension cost for a year if, as of the beginning of the
year, that net gain or loss (excluding asset gains or losses that have
not been recognized in market-related value) exceeds 10% of the
greater of the projected benefit obligation or the market-related value
of plan assets (the “corridor” method). This determination is made on
a plan-by-plan basis. If amortization is required for a particular plan, we
amortize the applicable net gain or loss in excess of the 10% threshold
on a straight-line basis in net periodic pension cost over the remaining
service period of the employees participating in that pension plan. In
plans where substantially all participants are inactive, the amortization
period for the excess is the average remaining life expectancy of the
plan participants.

Our primary domestic plans allow participants the option of settling
their vested benefits through either the receipt of a lump-sum
payment or the purchase of a non-participating annuity contract with
an insurance company. Under either option the participant’s vested
benefit is considered fully settled upon payment of the lump-sum or
the purchase of the annuity. We have elected to apply settlement
accounting and therefore we recognize the losses associated with
settlements in this plan immediately upon the settlement of the
vested benefits. Settlement accounting requires us to recognize a
pro rata portion of the aggregate unamortized net actuarial losses
upon settlement. The pro rata factor is computed as the percentage
reduction in the projected benefit obligation due to the settlement of
the participant’s vested benefit.

Refer to Note 15 – Employee Benefit Plans for further information
regarding our Pension and Post-Retirement Benefit Obligations.

•
•
•
Our Document Technology segment is centered on strategic product
groups, which share common technology, manufacturing and product
platforms. This segment includes the sale of document systems and
supplies, technical services and product financing. Our products range
from:

Entry, which includes A4 devices and desktop printers; to

Mid-range, which includes A3 devices that generally serve
workgroup environments in mid to large enterprises and includes
products that fall into the following market categories: Color 41+
ppm priced at less than $100K and Light Production 91+ ppm priced
at less than $100K; to

High-end, which includes production printing and publishing
systems that generally serve the graphic communications
marketplace and large enterprises.

The segment classified as Other includes several units, none of
which meet the thresholds for separate segment reporting. This
group primarily includes Global Paper and Supplies Distribution
Group (predominantly paper sales), licensing revenues, GIS network
integration solutions and electronic presentation systems and non-
allocated Corporate items including non-financing interest, as well as
other items included in Other expenses, net.

Selected financial information for our Operating segments was as follows:

2012 (1)

Revenue

Finance income

Total Segment Revenue

Interest expense

Segment profit (loss) (2)

Equity in net income of unconsolidated affiliates

2011(1)

Revenue

Finance income

Total Segment Revenue

Interest expense

Segment profit (loss) (2)

Equity in net income of unconsolidated affiliates

2010 (1)

Revenue

Finance income

Total Segment Revenue

Interest expense

Segment profit (loss) (2)

Equity in net income of unconsolidated affiliates

Years Ended December 31,

Services

Document
Technology

Other

Total

$ 11,453

$ 8,951

$ 1,389

$ 21,793

511

597

$ 11,528

$ 9,462

$ 1,400

$ 22,390

1,173

172

1,065

122

234

(241)

–

428

1,997

152

$ 10,754

$ 9,722

$ 1,518

$ 21,994

$ 10,837

1,207

537

$ 10,259

202

1,140

118

$ 1,530

$ 251

(255)

–

632

$ 22,626

478

2,092

149

$ 9,548

$ 9,790

$ 1,635

$ 20,973

$ 9,637

1,132

559

$ 10,349

212

1,085

$ 1,647

$ 352

(342)

–

660

$ 21,633

592

1,875

(1) Asset information on a segment basis is not disclosed as this information is not separately identified and internally reported to our chief executive officer.
(2) Depreciation and amortization expense, which is recorded in Cost of Sales, Services, RD&E and SAG are included in segment profit above. This information is neither identified nor internally
reported to our chief executive officer. The separate identification of this information for purposes of segment disclosure is impracticable, as it is not readily available and the cost to develop
it would be excessive.

Xerox 2012 Annual Report

•
•
•
Notes to Consolidated Financial Statements
(in millions, except per-share data and where otherwise noted)

The following is a reconciliation of segment profit to pre-tax income:

Segment Profit Reconciliation to Pre-tax Income

Total Segment Profit

Reconciling items:

Restructuring and asset impairment charges

Restructuring charges of Fuji Xerox

Acquisition-related costs

Amortization of intangible assets

Venezuelan devaluation costs

ACS shareholders’ litigation settlement

Loss on early extinguishment of liability and debt

Equity in net income of unconsolidated affiliates

Curtailment gain

Other

Pre-tax Income

Years Ended December 31,

2012

2011

$ 1,997

$ 2,092

2010

$ 1,875

(483)

(38)

(77)

(33)

(19)

–

(398)

(312)

–

(33)

(149)

107

(2)

(21)

(36)

(15)

(78)

–

(153)

(16)

–

(328)

–

(152)

–

$ 1,348

$ 1,565

$ 815

Geographic area data is based upon the location of the subsidiary reporting the revenue or long-lived assets and is as follows for the three years
ended December 31, 2012:

United States

Europe

Other areas

Revenues

Long-Lived Assets (1)

2012

2011

2010

2012

2011

2010

$ 14,701

$ 14,493

$ 13,801

$ 1,966

$ 1,894

$ 1,764

5,111

2,578

5,557

2,576

5,332

2,500

784

262

776

276

741

309

Total Revenues and Long-Lived Assets

$ 22,390

$ 22,626

$ 21,633

$ 3,012

$ 2,946

$ 2,814

(1) Long-lived assets are comprised of (i) land, buildings and equipment, net, (ii) equipment on operating leases, net, (iii) internal use software, net and (iv) product software, net.

Note 3 – Acquisitions

2012 Acquisitions

In July 2012, we acquired Wireless Data Services, Ltd. (“WDS”), a
provider of technical support, knowledge management and related
consulting to the world’s largest wireless telecommunication brands
for approximately $95 (£60 million) in cash. Based in the U.K., WDS’s
expertise in the telecommunications industry strengthens our broad
portfolio of customer care solutions.

In February 2012, we acquired R.K. Dixon, a leading provider of IT
services, copiers, printers and managed print services for approximately
$58 in cash. The acquisition furthers our coverage of central Illinois and
eastern Iowa, building on our strategy to create a nationwide network
of locally-based companies focused on customers’ needs to improve
performance through efficiencies.

Our Document Technology segment also acquired three additional
businesses in 2012 for a total of $62 in cash as part of our strategy of
increasing our U.S. distribution network primarily for small and mid-size
businesses. Our Services segment acquired four additional businesses in
2012 for a total of $61 in cash, primarily related to customer care and
software to support our BPO service offerings.

2012 Summary

All of our 2012 acquisitions reflected 100% ownership of the acquired
companies. The operating results of the acquisitions described above
are not material to our financial statements and are included within our
results from the respective acquisition dates. WDS is included within our
Services segment while the acquisition of R.K. Dixon is included within
our Document Technology segment. Our 2012 acquisitions contributed
aggregate revenues of approximately $162 to our 2012 total revenues
from their respective acquisition dates. The purchase prices for all
acquisitions were primarily allocated to intangible assets and goodwill
based on third-party valuations and management’s estimates.
The primary elements that generated the goodwill are the value of
synergies and the acquired assembled workforce. Approximately 50%
of the goodwill recorded in 2012 is expected to be deductible for tax
purposes. Refer to Note 9 – Goodwill and Intangible Assets, Net for
additional information.

The following table summarizes the purchase price allocations for our
2012 acquisitions as of the acquisition dates:

Weighted-Average

Total 2012
Life (Years) Acquisitions

Accounts/finance receivables

Intangible assets:

Customer relationships

Trademarks

Non-compete agreements

Software

Goodwill

Other assets

Total Assets Acquired

Liabilities assumed

Total Purchase Price

$ 51

184

341

(65)

$ 276

2011 and 2010 Acquisitions

In December 2011, we acquired the Merizon Group Inc. which operates
MBM, formerly known as Modern Business Machines, a Wisconsin-
based office products distributor for approximately $42 net of cash
acquired. The acquisition furthers our strategy of creating a nationwide
network of locally-based companies focused on improving document
workflow and office efficiency.

In November 2011, we acquired The Breakaway Group (“Breakaway”),
a cloud-based service provider that helps healthcare professionals
accelerate their adoption of an electronic medical records (“EMR”)
system, for approximately $18 net of cash acquired. We are also
obligated to pay the sellers up to an additional $25 if certain future
performance targets are achieved, of which $18 was recorded as of the
acquisition date representing the estimated fair value of this obligation
for a total acquisition fair value of $36. The Denver-based firm’s
technology allows caregivers to practice using an EMR system without
jeopardizing actual patient data. This acquisition adds to our offering
of services that help healthcare professionals use the EMR system for
clinical benefit.

In September 2011, we acquired the net assets related to the
U.S. operations of Symcor Inc. (“Symcor”). In connection with the
acquisition, we assumed and took over the operational responsibility

Xerox 2012 Annual Report

Notes to Consolidated Financial Statements
(in millions, except per-share data and where otherwise noted)

for the customer contracts related to this operation. We agreed to
pay $17 for the acquired net assets and the seller agreed to pay us
$52, which represented the fair value of the liabilities assumed for
a net cash receipt of $35. The assumed liabilities primarily include
customer contract liabilities representing the estimated fair value of
the obligations associated with the assumed customer contracts. We
are recognizing these liabilities over a weighted-average period of
approximately two years consistent with the cash outflows from the
contracts. Symcor specializes in outsourcing services for U.S. financial
institutions and its offerings range from cash management services to
statement and check processing.

In July 2011, we acquired Education Sales and Marketing, LLC (“ESM”),
a leading provider of outsourced enrollment management and student
loan default solutions, for approximately $43 net of cash acquired.
The acquisition of ESM enables us to offer a broader range of services
to assist post-secondary schools in attracting and retaining the most
qualified students while reducing accreditation risk.

In April 2011, we acquired Unamic/HCN B.V., the largest privately-
owned customer care provider in the Benelux region in Western Europe,
for approximately $55 net of cash acquired. Unamic/HCN’s focus on
the Dutch-speaking market expands our customer care capabilities in
the Netherlands, Belgium, Turkey and Suriname.

In February 2011, we acquired Concept Group, Ltd. for $41 net of
cash acquired. This acquisition expands our reach into the small and
mid-size business market in the U.K. Concept Group has nine locations
throughout the U.K. and provides document imaging solutions and
technical services to more than 3,000 customers.

In October 2010, we acquired TMS Health, LLC (“TMS”), a U.S. based
teleservices company that provides customer care services to the
pharmaceutical, biotech and healthcare industries, for approximately
$48 in cash. TMS enables us to improve communications among
pharmaceutical companies, physicians, consumers and pharmacists. By
providing customer education, product sales and marketing and clinical
trial solutions, we augment the IT and BPO services we deliver to the
healthcare and pharmaceutical industries.

In July 2010, we acquired ExcellerateHRO, LLP (“EHRO”), a global
benefits administration and relocation services provider, for $125 net
of cash acquired. EHRO established us as one of the world’s largest
pension plan administrators and as a leading provider of outsourced
health and welfare and relocation services.

Our Document Technology segment also acquired seven additional
businesses in 2011 and two additional businesses in 2010 for $21
and $50, respectively, in cash as part of our strategy of increasing our
distribution network for small and mid-size businesses. Our Services
segment acquired three additional businesses in 2011 and one
additional business in 2010 for $25 and $12, respectively, in cash
primarily related to software to support our BPO service offerings.

Summary – 2011 and 2010 Acquisitions

All of our 2011 and 2010 acquisitions reflected 100% ownership
of the acquired companies. The operating results of the 2011 and
2010 acquisitions described above were not material to our financial
statements and were included within our results from the respective
acquisition dates. Breakaway, Symcor, ESM, Unamic/HCN, TMS and
EHRO were included within our Services segment while the acquisitions
of MBM and Concept Group were primarily included within our
Document Technology segment. The purchase price for all acquisitions,
except Symcor, was primarily allocated to intangible assets and
goodwill based on third-party valuations and management’s estimates.
Refer to Note 9 – Goodwill and Intangible Assets, Net for additional
information. Our 2011 acquisitions contributed aggregate revenues
from their respective acquisition dates of approximately $397 and
$177 to our 2012 and 2011 total revenues, respectively. Excluding
ACS, our 2010 acquisitions contributed aggregate revenues from their
respective acquisition dates of approximately $323, $318 and $140 to
our 2012, 2011 and 2010 total revenues, respectively.

Contingent Consideration

In connection with certain acquisitions, we are obligated to make
contingent payments if specified contractual performance targets
are achieved. Contingent consideration obligations are recorded at
their respective fair value. As of December 31, 2012, the maximum
aggregate amount of outstanding contingent obligations to former
owners of acquired entities was approximately $55, of which $32 was
accrued representing the estimated fair value of this obligation.

Affiliated Computer Services, Inc. (“ACS”)

In February 2010, we acquired ACS in a cash-and-stock transaction
valued at approximately $6.5 billion. Each outstanding share of ACS
common stock was converted into a combination of 4.935 shares of
Xerox common stock and $18.60 in cash. We also issued convertible
preferred stock with a fair value of $349 and stock options valued at
$222. Refer to Note 18 – Preferred Stock and Note 19 – Shareholders’
Equity for additional information regarding the issuance of preferred
stock and stock options, respectively. In addition, we repaid $1.7 billion
of ACS’s debt and assumed an additional $0.6 billion of debt. The total
aggregate purchase price was $8.8 billion.

The transaction was accounted for using the acquisition method of
accounting which requires, among other things, that most assets
acquired and liabilities assumed are recognized at their fair values as
of the acquisition date. The acquisition of ACS resulted in recognized
Goodwill of $5.1 billion and Intangible assets of $3.0 billion. The
operating results of ACS are included in our Services segment from
February 6, 2010. Had we acquired ACS on January 1, 2010, full year
2010 revenues, net income and diluted EPS would have been $22,252,
$592 and $0.41, respectively.

Note 4 – Accounts Receivable, Net

Accounts receivable, net were as follows:

Amounts billed or billable

Unbilled amounts

Allowance for doubtful accounts

Accounts Receivable, Net

December 31,

2012

2011

$ 2,639

$ 2,307

335

395

(108)

(102)

$ 2,866

$ 2,600

Unbilled amounts include amounts associated with percentage-of-
completion accounting and other earned revenues not currently
billable due to contractual provisions. Amounts to be invoiced in
the subsequent month for current services provided are included
in amounts billable, and at December 31, 2012 and 2011 were
approximately $1,049 and $963, respectively.

We perform ongoing credit evaluations of our customers and adjust
credit limits based upon customer payment history and current
creditworthiness. The allowance for uncollectible accounts receivables
is determined principally on the basis of past collection experience as
well as consideration of current economic conditions and changes in our
customer collection trends.

Accounts Receivable Sales Arrangements

Accounts receivable sales arrangements are utilized in the normal
course of business as part of our cash and liquidity management. We
have facilities in the U.S., Canada and several countries in Europe that
enable us to sell certain accounts receivable without recourse to third-
parties. The accounts receivables sold are generally short-term trade
receivables with payment due dates of less than 60 days.

All of our arrangements involve the sale of our entire interest in
groups of accounts receivable for cash. In most instances a portion
of the sales proceeds are held back by the purchaser and payment is
deferred until collection of the related receivables sold. Such holdbacks
are not considered legal securities nor are they certificated. We
report collections on such receivables as operating cash flows in the
Consolidated Statements of Cash Flows because such receivables
are the result of an operating activity and the associated interest
rate risk is de minimis due to their short-term nature. Our risk of loss
following the sales of accounts receivable is limited to the outstanding
deferred purchase price receivable. These receivables are included in
the caption “Other current assets” in the accompanying Consolidated
Balance Sheets and were $116 and $97 at December 31, 2012 and
2011, respectively.

Under most of the agreements, we continue to service the sold
accounts receivable. When applicable, a servicing liability is recorded
for the estimated fair value of the servicing. The amounts associated
with the servicing liability were not material.

Of the accounts receivables sold and derecognized from our balance
sheet, $766 and $815 remained uncollected as of December 31, 2012
and 2011, respectively. Accounts receivable sales were as follows:

Year Ended December 31,

2012

2011

2010

Accounts receivable sales

$ 3,699

$ 3,218

$ 2,374

Deferred proceeds

639

386

307

Loss on sale of accounts receivables

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

(78)

133

106

Note 5 – Finance Receivables, Net

Finance receivables include sales-type leases, direct financing leases
and installment loans arising from the marketing of our equipment.
These receivables are typically collateralized by a security interest in the
underlying assets. Finance receivables, net were as follows:

Gross receivables

Unearned income

Subtotal

Residual values

Allowance for doubtful accounts

Finance Receivables, Net

Less: Billed portion of finance receivables, net

December 31,

2012

2011

$ 6,290 $ 7,583

(809)

(1,027)

5,481

6,556

(170)

(201)

5,313

6,362

152

166

Less: Current portion of finance receivables not billed, net

1,836

2,165

Finance Receivables Due After One Year, Net

$ 3,325

$ 4,031

Contractual maturities of our gross finance receivables as of December
31, 2012 were as follows (including those already billed of $152):

2013

2014

2015

2016

2017 Thereafter

Total

$2,353

$1,753 $1,234

$680

$242

$28

$6,290

Sale of Finance Receivables

In 2012, we sold our entire interest in two separate portfolios of U.S.
finance receivables from our Document Technology segment with a
combined net carrying value of $682 (net of an allowance of $18)
to a third-party financial institution for cash proceeds of $630 and
beneficial interests from the purchaser of $101. The lease contracts,
including associated service and supply elements, were initially sold

Xerox 2012 Annual Report

Notes to Consolidated Financial Statements
(in millions, except per-share data and where otherwise noted)

to wholly-owned consolidated bankruptcy-remote limited purpose
subsidiaries which in turn sold the principal and interest portions of
such contracts to the third-party financial institution (the “ultimate
purchaser”). As of December 31, 2012, the net carrying value of the
receivables sold and derecognized from our balance sheet was $647.

A pre-tax gain of $44 was recognized on these sales and is net of fees
and expenses of approximately $5. The gain was reported in Finance
income in Document Technology segment revenues. We continue to
service the sold receivables for which we receive a 1% servicing fee. We
have concluded that the 1% servicing fee (approximately $12 over the
expected life of the associated receivables) is adequate compensation
and, accordingly, no servicing asset or liability was recorded.

The beneficial interests represent our right to receive future cash flows
from the sold receivables which exceed the ultimate purchaser’s initial
investment and associated return on that investment as well as the
servicing fee. The beneficial interests were initially recognized at an
estimate of fair value based on the present value of the expected
future cash flows. The present value of the expected future cash flows
was calculated using management’s best estimate of key assumptions
including credit losses, prepayment rates and an appropriate risk-
adjusted discount rate (all unobservable Level 3 inputs) for which we
utilized annualized rates of approximately 2.1%, 9.3% and 10.0%,
respectively. These assumptions are supported by both our historical
experience and anticipated trends relative to the particular portfolios
of receivables sold. However, to assess the sensitivity on the fair value
of the beneficial interests, we adjusted the credit loss rate, prepayment
rate and discount rate assumptions individually by 10% and 20%
while holding the other assumptions constant. Although the effect of
multiple assumption changes was not considered in this analysis, a
10% or 20% adverse variation in any one of these three individual
assumptions would each decrease the recorded beneficial interests by
approximately $4 or less.

The ultimate purchaser has no recourse to our other assets for the
failure of customers to pay principal and interest when due beyond our
beneficial interests of which $35 and $68 is included in “Other current
assets” and “Other long-term assets,” respectively, in the accompanying
Consolidated Balance Sheets at December 31, 2012. The beneficial
interests are held by the bankruptcy-remote subsidiaries and therefore
are not available to satisfy any of our creditor obligations. We will
report collections on the beneficial interests as operating cash flows in
the Consolidated Statements of Cash Flows because such beneficial
interests are the result of an operating activity and the associated
interest rate risk is de minimis considering their weighted average lives
of less than 2 years.

Allowance for Credit Losses and Credit Quality

Our finance receivable portfolios are primarily in the U.S., Canada and
Western Europe. We generally establish customer credit limits and
estimate the allowance for credit losses on a country or geographic
basis. We establish credit limits based upon an initial evaluation of the
customer’s credit quality and adjust that limit accordingly based upon
ongoing credit assessments of the customer, including payment history
and changes in credit quality.

The allowance for doubtful accounts and provision for credit losses
represents an estimate of the losses expected to be incurred from the
Company’s finance receivable portfolio. The level of the allowance is
determined on a collective basis by applying projected loss rates to our
different portfolios by country, which represent our portfolio segments.
This is the level at which we develop and document our methodology
to determine the allowance for credit losses. This loss rate is primarily
based upon historical loss experiences adjusted for judgments about
the probable effects of relevant observable data including current
economic conditions as well as delinquency trends, resolution rates, the
aging of receivables, credit quality indicators and the financial health of
specific customer classes or groups. The allowance for doubtful finance
receivables is inherently more difficult to estimate than the allowance
for trade accounts receivable because the underlying lease portfolio has
an average maturity, at any time, of approximately two to three years
and contains past due billed amounts, as well as unbilled amounts. We
consider all available information in our quarterly assessments of the
adequacy of the allowance for doubtful accounts. The identification
of account-specific exposure is not a significant factor in establishing
the allowance for doubtful finance receivables. Our policy and
methodology used to establish our allowance for doubtful accounts has
been consistently applied over all periods presented.

Since our allowance for doubtful finance receivables is determined
by country, the risk characteristics in our finance receivable portfolio
segments will generally be consistent with the risk factors associated
with the economies of those countries/regions. Loss rates declined in
both the U.S. and Canada reflecting the effects of improved collections
in those countries during 2011 and 2012. Since Europe is comprised
of various countries and regional economies, the risk profile within
our European portfolio segment is somewhat more diversified due to
the varying economic conditions among the countries. Charge-offs
in Europe were flat in 2012 as compared to the prior year’s, reflecting
a stabilization of the credit issues noted in 2011. Loss rates peaked in
2011 as a result of the European economic challenges particularly for
those countries in the southern region.

The following table is a rollforward of the allowance for doubtful finance receivables as well as the related investment in finance receivables:

Allowance for Credit Losses

Balance at December 31, 2010

Provision

Charge-offs

Recoveries and other (1)

Balance at December 31, 2011

Provision

Charge-offs

Recoveries and other (1)

Sale of finance receivables

Balance at December 31, 2012

Finance Receivables Collectively Evaluated for Impairment:

December 31, 2011 (2)

December 31, 2012 (2)

United States

Canada

Europe

Other (3)

Total

(31)

–

(21)

(18)

$ 37

(17)

(15)

–

(59)

(5)

(59)

–

$ 31

–

(1)

–

(2)

–

$ 2,993

$ 2,012

$ 825

$ 801

$ 2,630

$ 2,474

$ 108

$ 194

$ 212

100

(108)

(3)

201

(97)

(18)

$ 170

$ 6,556

$ 5,481

(1) Includes the impacts of foreign currency translation and adjustments to reserves necessary to reflect events of non-payment such as customer accommodations and contract terminations.
(2) Total Finance receivables exclude residual values of $2 and $7 and the allowance for credit losses of $170 and $201 at December 31, 2012 and 2011, respectively.
(3) Includes developing market countries and smaller units.

In the U.S. and Canada, customers are further evaluated or segregated
by class based on industry sector. The primary customer classes are
Finance & Other Services; Government & Education; Graphic Arts;
Industrial; Healthcare and Other. In Europe, customers are further
grouped by class based on the country or region of the customer.
The primary customer classes include the U.K./Ireland, France and
the following European regions – Central, Nordic and Southern. These
groupings or classes are used to understand the nature and extent of
our exposure to credit risk arising from finance receivables.

We evaluate our customers based on the following credit quality
indicators:

Investment grade: This rating includes accounts with excellent to
good business credit, asset quality and the capacity to meet financial
obligations. These customers are less susceptible to adverse effects
due to shifts in economic conditions or changes in circumstance.
The rating generally equates to a Standard & Poors (“S&P”) rating
of BBB- or better. Loss rates in this category are normally minimal at
less than 1%.

Non-investment grade: This rating includes accounts with average
credit risk that are more susceptible to loss in the event of adverse
business or economic conditions. This rating generally equates to a
BB S&P rating. Although we experience higher loss rates associated
with this customer class, we believe the risk is somewhat mitigated
by the fact that our leases are fairly well dispersed across a large and
diverse customer base. In addition, the higher loss rates are largely
offset by the higher rates of return we obtain with such leases. Loss
rates in this category are generally in the range of 2% to 4%.

Substandard: This rating includes accounts that have marginal
credit risk such that the customer’s ability to make repayment
is impaired or may likely become impaired. We use numerous
strategies to mitigate risk including higher rates of interest,
prepayments, personal guarantees, etc. Accounts in this category
include customers who were downgraded during the term of the
lease from investment and non-investment grade evaluations when
the lease was originated. Accordingly there is a distinct possibility for
a loss of principal and interest or customer default. The loss rates in
this category are around 10%.

Xerox 2012 Annual Report

•
•
•
Notes to Consolidated Financial Statements
(in millions, except per-share data and where otherwise noted)

Credit quality indicators are updated at least annually, and the credit quality of any given customer can change during the life of the portfolio.
Details about our finance receivables portfolio based on industry and credit quality indicators are as follows:

December 31, 2012

Investment Non-investment
Grade

Grade

Substandard

Total Finance
Receivables

252

$ 147

$ 59

$ 458

750

115

109

1,388

151

117

446

274

215

315

139

992

148

359

116

243

294

155

445

230

1,160

137

265

112

134

322

769

319

163

160

143

2,012

307

129

101

135

129

801

702

420

816

442

2,474

194

$ 2,974

$ 1,801

$ 706

$ 5,481

Finance and other services

Government and education

Graphic arts

Industrial

Healthcare

Other

Total United States

Finance and other services

Government and education

Graphic arts

Industrial

Other

Total Canada

France

U.K./Ireland

Central (1)

Southern (2)

Nordics (3)

Total Europe

Other

Total

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

Finance and other services

Government and education

Graphic arts

Industrial

Healthcare

Other

Total United States

Finance and other services

Government and education

Graphic arts

Industrial

Other

Total Canada

France

U.K./Ireland

Central (1)

Southern (2)

Nordics (3)

Total Europe

Other

Total

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

December 31, 2011

Investment Non-investment
Grade

Grade

Substandard

Total Finance
Receivables

349

$ 380

$ 160

$ 889

821

126

180

130

1,703

153

121

440

246

201

330

219

1,056

200

818

118

249

354

162

494

256

1,305

172

472

136

269

845

498

295

200

266

2,993

322

134

110

131

128

825

692

417

881

538

102

2,630

108

$ 3,274

$ 2,398

$ 884

$ 6,556

Xerox 2012 Annual Report

Notes to Consolidated Financial Statements
(in millions, except per-share data and where otherwise noted)

The aging of our receivables portfolio is based upon the number
of days an invoice is past due. Receivables that are more than 90
days past due are considered delinquent. Receivable losses are
charged against the allowance when management believes the
uncollectibility of the receivable is confirmed and is generally based on
individual credit evaluations, results of collection efforts and specific
circumstances of the customer. Subsequent recoveries, if any, are
credited to the allowance.

We generally continue to maintain equipment on lease and provide
services to customers that have invoices for finance receivables that
are 90 days or more past due and, as a result of the bundled nature
of billings, we also continue to accrue interest on those receivables.
However, interest revenue for such billings is only recognized if
collectability is deemed reasonably assured. The aging of our billed
finance receivables is as follows:

December 31, 2012

Current

31-90 Days
Past Due

>90 Days
Past Due

Total Billed
Finance
Receivables

Unbilled
Finance
Receivables

Total

Finance
Receivables
Finance >90 Days and
Accruing

Receivables

Finance and other services

Government and education

Graphic arts

Industrial

Healthcare

Other

Total United States

Canada

France

U.K./Ireland

Central (1)

Southern (2)

Nordics (3)

Total Europe

Other

Total

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

$ 12

$ 3

$ 2

$ 17

$ 441

$ 458

$ 18

–

740

301

155

151

136

769

319

163

160

143

1,924

2,012

794

696

416

807

400

2,412

191

801

702

420

816

442

2,474

194

$ 95

$ 33

$ 32

$ 160

$ 5,321

$ 5,481

–

126

–

$ 249

December 31, 2011

Current

31-90 Days
Past Due

>90 Days
Past Due

Total Billed
Finance
Receivables

Unbilled
Finance
Receivables

Total

Finance
Receivables
Finance >90 Days and
Accruing

Receivables

Finance and other services

Government and education

Graphic arts

Industrial

Healthcare

Other

Total United States

Canada

France

U.K./Ireland

Central (1)

Southern (2)

Nordics (3)

Total Europe

Other

Total

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

$ 18

$ 4

$ 1

$ 23

$ 866

$ 889

–

817

479

285

193

257

845

498

295

200

266

2,897

2,993

819

689

409

869

490

101

2,558

105

825

692

417

881

538

102

2,630

108

$ 15

–

148

–

$ 123

$ 28

$ 26

$ 177

$ 6,379

$ 6,556

$ 241

Xerox 2012 Annual Report

Notes to Consolidated Financial Statements
(in millions, except per-share data and where otherwise noted)

Note 6 – Inventories and Equipment
on Operating Leases, Net

Note 7 – Land, Buildings, Equipment
and Software, Net

The following is a summary of Inventories by major category:

Land, buildings and equipment, net were as follows:

Finished goods

Work-in-process

Raw materials

Total Inventories

December 31,

2012

2011

Estimated

December 31,

Useful Lives (Years)

2012

2011

$ 844

$ 866

Land

61 $

106

Buildings and building equipment

25 to 50

1,135

1,121

Leasehold improvements

Varies

506

461

$ 1,011

$ 1,021

Plant machinery

5 to 12

1,571

1,557

Office furniture and equipment

3 to 15

1,681

1,470

The transfer of equipment from our inventories to equipment subject
to an operating lease is presented in our Consolidated Statements of
Cash Flows in the operating activities section. Equipment on operating
leases and similar arrangements consists of our equipment rented to
customers and depreciated to estimated salvage value at the end of
the lease term. We recorded $30, $39 and $31 in inventory write-down
charges for the years ended December 31, 2012, 2011 and 2010,
respectively.

Equipment on operating leases and the related accumulated
depreciation were as follows:

Equipment on operating leases

Accumulated depreciation

December 31,

2012

2011

$ 1,533

$ 1,556

(998)

(1,023)

Equipment on Operating Leases, Net

$ 535

$ 533

Depreciable lives generally vary from three to four years consistent
with our planned and historical usage of the equipment subject
to operating leases. Depreciation and obsolescence expense for
equipment on operating leases was $279, $294 and $313 for the
years ended December 31, 2012, 2011 and 2010, respectively. Our
equipment operating lease terms vary, generally from one to three
years. Scheduled minimum future rental revenues on operating leases
with original terms of one year or longer are:

Other

4 to 20

Construction in progress

Subtotal

Accumulated depreciation

5,111

4,861

(3,555)

(3,249)

Land, Buildings and Equipment, Net

$ 1,556 $ 1,612

Depreciation expense and operating lease rent expense were as
follows:

Year Ended December 31,

2012

2011

2010

Depreciation expense

$ 452

$ 405

$ 379

Operating lease rent expense (1)

646

681

632

(1) We lease certain land, buildings and equipment, substantially all of which are accounted
for as operating leases. Capital leased assets were less than $80 at December 31, 2012
and 2011, respectively.

Future minimum operating lease commitments that have initial or
remaining non-cancelable lease terms in excess of one year at
December 31, 2012 were as follows:

2013

2014

$636

$425

2015

$265

2016

2017

Thereafter

$157

$74

$83

Internal Use and Product Software

2013

2014

$397

$285

2015

$177

2016

$103

2017

Thereafter

$46

$15

Additions to:

Total contingent rentals on operating leases, consisting principally of
usage charges in excess of minimum contracted amounts, for the years
ended December 31, 2012, 2011 and 2010 amounted to $158, $154
and $133, respectively.

Internal use software

Product software

Capitalized costs, net:

Internal use software

Product software

Year Ended December 31,

2012

2011

2010

$ 125

$ 163

$ 164

107

108

December 31,

2012

2011

$ 577

$ 545

344

256

Useful lives of our internal use and product software generally vary from
three to ten years. Included within product software is approximately
$200 of capitalized costs associated with a software system developed
for use in certain of our government services businesses.

Our 2012 impairment review indicated these costs will be recoverable
from estimated future operating profits. However, since the review
indicated that the excess of estimated future operating profits over
capitalized costs was less than 5%; in 2013 we will continue to closely
monitor any significant changes in the estimated future revenues or
margins from current or potential customers. Beginning in 2013, the
costs associated with this software system will be amortized over seven
years.

Note 8 – Investment in Affiliates, at Equity

Investments in corporate joint ventures and other companies in which
we generally have a 20% to 50% ownership interest were as follows:

Fuji Xerox

All other equity investments

Investments in Affiliates, at Equity

December 31,

2012

2011

$ 1,317

$ 1,334

$ 1,381

$ 1,395

Our equity in net income of our unconsolidated affiliates was as
follows:

Condensed financial data of Fuji Xerox was as follows:

Summary of Operations

Revenues

Costs and expenses

Income before income taxes

Income tax expense

Net Income

Year Ended December 31,

2012

2011

2010

$ 12,633 $ 12,367 $ 11,276

11,783

11,464

10,659

850

279

571

903

312

591

617

291

326

Less: Net income – noncontrolling interests

Net Income – Fuji Xerox

565 $

586 $

321

Balance Sheet

Assets:

Current assets

Long-term assets

Total Assets

Liabilities and Equity:

Current liabilities

Long-term debt

Other long-term liabilities

Noncontrolling interests

$ 5,154

$ 5,056

$ 4,884

6,158

6,064

5,978

$11,312 $11,120 $10,862

$ 3,465

$ 3,772

$ 3,534

1,185

917

817

700

1,260

707

Fuji Xerox

Other investments

Total Equity in Net Income of
Unconsolidated Affiliates

Fuji Xerox

Year Ended December 31,

2012

2011

2010

$ 139

$ 137

$ 63

Fuji Xerox shareholders’ equity

5,718

5,806

5,339

Total Liabilities and Equity

$11,312 $11,120 $10,862

Yen/U.S. Dollar exchange rates used to translate are as follows:

$ 152

$ 149

$ 78

Financial Statement

Exchange Basis

2012

2011

2010

Summary of Operations Weighted average rate

79.89

79.61

87.64

Balance Sheet

Year-end rate

86.01

77.62

81.66

Fuji Xerox is headquartered in Tokyo and operates in Japan, China,
Australia, New Zealand and other areas of the Pacific Rim. Our
investment in Fuji Xerox of $1,317 at December 31, 2012, differs from
our implied 25% interest in the underlying net assets, or $1,430, due
primarily to our deferral of gains resulting from sales of assets by us to
Fuji Xerox.

Equity in net income of Fuji Xerox is affected by certain adjustments to
reflect the deferral of profit associated with intercompany sales. These
adjustments may result in recorded equity income that is different
from that implied by our 25% ownership interest.

Xerox 2012 Annual Report

Notes to Consolidated Financial Statements
(in millions, except per-share data and where otherwise noted)

Transactions with Fuji Xerox

Note 9 – Goodwill and Intangible Assets, Net

We receive dividends from Fuji Xerox, which are reflected as a reduction
in our investment. Additionally, we have a Technology Agreement
with Fuji Xerox whereby we receive royalty payments for their use
of our Xerox brand trademark, as well as rights to access our patent
portfolio in exchange for access to their patent portfolio. These
payments are included in Outsourcing, service and rental revenues in
the Consolidated Statements of Income. We also have arrangements
with Fuji Xerox whereby we purchase inventory from and sell inventory
to Fuji Xerox. Pricing of the transactions under these arrangements is
based upon terms the Company believes to be negotiated at arm’s
length. Our purchase commitments with Fuji Xerox are in the normal
course of business and typically have a lead time of three months. In
addition, we pay Fuji Xerox and they pay us for unique research and
development costs.

Transactions with Fuji Xerox were as follows:

Year Ended December 31,

2012

2011

2010

Goodwill

The following table presents the changes in the carrying amount of
goodwill, by reportable segment:

Document
Services Technology

Total

Balance at December 31, 2009 (1)

$ 1,295

$ 2,127 $ 3,422

Foreign currency translation

(22)

(25)

(47)

Acquisitions:

ACS

EHRO

TMS

IBS

Other

5,127

–

5,127

Balance at December 31, 2010

$ 6,522

$ 2,127 $ 8,649

Dividends received from Fuji Xerox

Foreign currency translation

(28)

(6)

(34)

Royalty revenue earned

132

128

116

Inventory purchases from Fuji Xerox

2,069

2,180

2,098

Inventory sales to Fuji Xerox

147

151

147

R&D payments received from Fuji Xerox

R&D payments paid to Fuji Xerox

As of December 31, 2012 and 2011, net amounts due to Fuji Xerox
were $110 and $105, respectively.

Acquisitions:

Unamic/HCN

Breakaway

ESM

Concept Group

MBM

Other

–

Balance at December 31, 2011

$ 6,619

$ 2,184 $ 8,803

Foreign currency translation

Acquisitions:

WDS

R.K. Dixon

Other

–

Balance at December 31, 2012

$ 6,780

$ 2,282 $ 9,062

(1) Includes the reallocation of approximately $300 of goodwill related to our Managed
Print Services business from Document Technology to Services to reflect the current
composition of our Segments.

Intangible Assets, Net

Net intangible assets were $2.8 billion at December 31, 2012 and approximately $2.4 billion related to the Services segment and $0.4 billion related
to the Document Technology segment. Intangible assets were comprised of the following:

December 31, 2012

December 31, 2011

Weighted
Average
Amortization

Gross
Carrying
Amount

Accumulated
Amortization

Net
Amount

Gross
Carrying
Accumulated
Amount Amortization

Net
Amount

Customer relationships

Distribution network

Trademarks (1)

12 years

25 years

20 years

Technology, patents and non-compete (1)

4 years

$ 3,562

$ 1,052

$ 2,510

$ 3,522

$ 751

$ 2,771

123

257

198

123

238

191

Total Intangible Assets

$ 3,965

$ 1,182

$ 2,783

$ 3,912

$ 870

$ 3,042

(1) Includes $10 and $5 of indefinite-lived assets within trademarks and technology, respectively, related to the 2010 acquisition of ACS.

Amortization expense related to intangible assets was $328, $401,
and $316 for the years ended December 31, 2012, 2011 and 2010,
respectively. Amortization expense for 2011 includes $52 for the
accelerated write-off of the ACS trade name as a result of the fourth
quarter 2011 decision to discontinue its use and transition our services
business to the “Xerox Business Services” trade name.

Excluding the impact of additional acquisitions, amortization expense
is expected to approximate $333 in 2013 and 2014, and $328 in years
2015 through 2017.

Xerox 2012 Annual Report

Notes to Consolidated Financial Statements
(in millions, except per-share data and where otherwise noted)

Note 10 – Restructuring and Asset
Impairment Charges

Over the past several years, we have engaged in a series of
restructuring programs related to downsizing our employee base,
exiting certain activities, outsourcing certain internal functions and
engaging in other actions designed to reduce our cost structure and
improve productivity. These initiatives primarily consist of severance
actions and impact all major geographies and segments. Management
continues to evaluate our business, therefore, in future years, there may
be additional provisions for new plan initiatives as well as changes in
previously recorded estimates, as payments are made or actions are
completed. Asset impairment charges were also incurred in connection

with these restructuring actions for those assets sold, abandoned or
made obsolete as a result of these programs.

Costs associated with restructuring, including employee severance
and lease termination costs are generally recognized when it has been
determined that a liability has been incurred, which is generally upon
communication to the affected employees or exit from the leased
facility, respectively. In those geographies where we have either a
formal severance plan or a history of consistently providing severance
benefits representing a substantive plan, we recognize employee
severance costs when they are both probable and reasonably
estimable.

A summary of our restructuring program activity during the three years
ended December 31, 2012 is as follows:

Balance at December 31, 2009

Restructuring provision

Reversals of prior accruals

Net current period charges (2)

Charges against reserve and currency

Balance at December 31, 2010

Restructuring provision

Reversals of prior accruals

Net current period charges (2)

Charges against reserve and currency

Balance at December 31, 2011

Restructuring provision

Reversals of prior accruals

Net current period charges (2)

Charges against reserve and currency

Balance at December 31, 2012

Severance and
Related Costs

Lease Cancellation
and Other Costs

Asset

Impairments (1)

470

(32)

438

(194)

298

(65)

(215)

116

160

(13)

147

(140)

(9)

(14)

(6)

(5)

(13)

–

(5)

$ 123

–

(26)

–

(5)

–

(1)

–

Total

524

(41)

483

(234)

323

104

(71)

(233)

123

167

(14)

153

(146)

$ 130

(1) Charges associated with asset impairments represent the write-down of the related assets to their new cost basis and are recorded concurrently with the recognition of the provision.
(2) Represents amount recognized within the Consolidated Statements of Income for the years shown.

The following table summarizes the reconciliation to the Consolidated
Statements of Cash Flows:

(continued)

Year Ended December 31,

December 31,

2012

2011

Charges against reserve

$ (146)

$ (233) $ (234)

Deferred taxes and income taxes payable

105

2012

2011

2010

Other Current Liabilities

Asset impairment

Effects of foreign currency and

other non-cash items

Other taxes payable

Interest payable

(5)

Restructuring reserves

Restructuring Cash Payments

$ (144)

$ (218) $ (213)

Derivative instruments

The following table summarizes the total amount of costs incurred in
connection with these restructuring programs by segment:

Services

Document Technology

Other

Year Ended December 31,

2012

2011

2010

$ 104

–

325

(2)

Total Net Restructuring Charges

$ 153

$ 33

$ 483

Refer to the “Restructuring and Asset Impairment Charges” section of
our MD&A for additional discussion of net restructuring charges for the
three years ended December 31, 2012.

Note 11 – Supplementary Financial Information

The components of other current and long-term assets and liabilities
were as follows:

Product warranties

Dividends payable

Distributor and reseller rebates/commissions

Servicer liabilities

Other

Other Long-term Assets

Prepaid pension costs

Net investment in discontinued operations

Internal use software, net

Product software, net

Restricted cash

Debt issuance costs, net

Customer contract costs, net

Beneficial interests – sales of finance receivables

December 31,

Deferred compensation plan investments

2012

2011

Other

Total Other Current Liabilities

$ 1,776

$ 1,631

Other Current Assets

Total Other Long-term Assets

$ 2,337

$ 2,116

Deferred taxes and income taxes receivable

$ 296

$ 261

Other Long-term Liabilities

Royalties, license fees and software maintenance

165

143

Deferred and other tax liabilities

262

$ 290

Restricted cash

Prepaid expenses

Derivative instruments

Deferred purchase price from sales of accounts receivables

116

Beneficial interests – sales of finance receivables

Advances and deposits

Other

Total Other Current Assets

151

Environmental reserves

143

147

Unearned income

Restructuring reserves

Other

–

216

227

$ 1,162

$ 1,058

Total Other Long-term Liabilities

$ 778

$ 861

Xerox 2012 Annual Report

170

150

122

116

117

146

869

112

878

190

577

344

214

204

545

256

246

356

294

100

416

–

365

134

360

466

Notes to Consolidated Financial Statements
(in millions, except per-share data and where otherwise noted)

Restricted Cash and Investments

Long-term debt was as follows:

December 31,

Notes due 2016

2012

2011

Senior Notes due 2016

As more fully discussed in Note 17 – Contingencies and Litigation,
various litigation matters in Brazil require us to make cash deposits
to escrow as a condition of continuing the litigation. In addition, as
more fully discussed in Note 4 – Accounts Receivable, Net and Note
5 – Finance Receivables, Net, we continue to service the receivables
sold under most of our receivable sale agreements. As servicer, we may
collect cash related to sold receivables prior to month-end that will be
remitted to the purchaser the following month. Since we are acting on
behalf of the purchaser in our capacity as servicer, such cash collected
is reported as restricted cash. Restricted cash amounts are classified
in our Consolidated Balance Sheets based on when the cash will be
contractually or judicially released.

Restricted cash amounts were as follows:

Tax and labor litigation deposits in Brazil

$ 211

$ 240

Escrow and cash collections related to receivable sales

146

Other restricted cash

Total Restricted Cash and Investments

$ 365

$ 343

Net Investment in Discontinued Operations

At December 31, 2012, our net investment in discontinued operations
primarily consisted of a $208 performance-based instrument relating
to the 1997 sale of The Resolution Group (“TRG”) net of remaining
net liabilities associated with our discontinued operations of $18.
The recovery of the performance-based instrument is dependent
on the sufficiency of TRG’s available cash flows, as guaranteed by
TRG’s ultimate parent, which are expected to be recovered in annual
cash distributions through 2017. The performance-based instrument
is pledged as security for our future funding obligations to our U.K.
Pension Plan for salaried employees.

Note 12 – Debt

Short-term borrowings were as follows:

Commercial paper

Current maturities of long-term debt

Total Short-term Debt

December 31,

2012

2011

–

$ 100

1,042

1,445

$ 1,042

$ 1,545

We classify our debt based on the contractual maturity dates of the
underlying debt instruments or as of the earliest put date available to
the debt holders. We defer costs associated with debt issuance over
the applicable term, or to the first put date in the case of convertible
debt or debt with a put feature. These costs are amortized as interest
expense in our Consolidated Statements of Income.

Xerox Corporation

Senior Notes due 2012

Senior Notes due 2013

Floating Rate Notes due 2013

Convertible Notes due 2014

Senior Notes due 2014

Floating Rate Notes due 2014

Senior Notes due 2015

Senior Notes due 2017

Notes due 2018

Senior Notes due 2018

Senior Notes due 2019

Senior Notes due 2021

Zero Coupon Notes due 2023

Weighted Average
Interest Rates at
December 31, 2012 (2)

December 31,

2012

2011

–

$ 1,100

5.65%

1.71%

9.00%

8.25%

1.13%

4.29%

7.20%

6.48%

6.83%

2.98%

0.57%

6.37%

5.66%

5.39%

–

400

600

750

300

1,000

250

700

500

1,000

650

1,062

–

400

–

750

300

1,000

250

700

500

–

1,000

650

700

301

350

Senior Notes due 2039

6.78%

350

Subtotal – Xerox Corporation

$ 8,082

$ 8,021

Subsidiary Companies

Senior Notes due 2015

4.25%

250

Borrowings secured by other assets

4.31%

Other

1.23%

Subtotal-Subsidiary Companies

$ 328

$ 329

Principal Debt Balance

Unamortized discount

Fair value adjustments (1)

Less: current maturities

Total Long-term Debt

8,410

8,350

(63)

(7)

142

190

(1,042)

(1,445)

$ 7,447

$ 7,088

(1) Fair value adjustments represent changes in the fair value of hedged debt obligations
attributable to movements in benchmark interest rates. Hedge accounting requires
hedged debt instruments to be reported at an amount equal to the sum of their carrying
value (principal value plus/minus premiums/discounts) and any fair value adjustment.
(2) Represents weighted average effective interest rate which includes the effect of discounts

and premiums on issued debt.

Scheduled principal payments due on our long-term debt for the next
five years and thereafter are as follows:

2013(1)

2014

2015

2016

2017 Thereafter

Total

An annual facility fee is payable to each participator in the Credit
Facility at a rate that varies between 0.10% and 0.30% depending on
our credit rating. Based on our credit rating as of December 31, 2012,
the applicable rate is 0.20%.

$ 1,039

$ 1,093

$ 1,259

$ 954

$ 1,002

$ 3,063 $ 8,410

(1) Quarterly total debt maturities for 2013 are $12, $410, $609 and $8 for the first, second,

third and fourth quarters, respectively.

The Credit Facility contains various conditions to borrowing and
affirmative, negative and financial maintenance covenants. Certain of
the more significant covenants are summarized below:

Commercial Paper

We have a private placement commercial paper (“CP”) program in
the U.S. under which we may issue CP up to a maximum amount of
$2.0 billion outstanding at any time. Aggregate CP and Credit Facility
borrowings may not exceed $2.0 billion outstanding at any time. The
maturities of the CP Notes will vary, but may not exceed 390 days
from the date of issue. The CP Notes are sold at a discount from par or,
alternatively, sold at par and bear interest at market rates. At December
31, 2012, we did not have any CP Notes outstanding.

Credit Facility

We have a $2.0 billion unsecured revolving Credit Facility with a group
of lenders which matures in 2016. The Credit Facility contains a $300
letter of credit sub-facility, and also includes an accordion feature that
would allow us to increase (from time to time, with willing lenders) the
overall size of the facility up to an aggregate amount not to exceed
$2.75 billion. We entered into the facility in December 2011 and we
have the right to request a one year extension on each of the first and
second anniversary dates of this facility. No extension was requested at
the first anniversary date in 2012.

The Credit Facility provides a backstop to our $2.0 billion CP program.
Proceeds from any borrowings under the Credit Facility can be used to
provide working capital for the Company and its subsidiaries and for
general corporate purposes.

At December 31, 2012 we had no outstanding borrowings or letters of
credit under the Credit Facility.

The Credit Facility is available, without sublimit, to certain of our
qualifying subsidiaries. Our obligations under the Credit Facility are
unsecured and are not currently guaranteed by any of our subsidiaries.
Any domestic subsidiary that guarantees more than $100 of Xerox
Corporation debt must also guaranty our obligations under the Credit
Facility. In the event that any of our subsidiaries borrows under the
Credit Facility, its borrowings thereunder would be guaranteed by us.

Borrowings under the Credit Facility bear interest at our choice, at
either (a) a Base Rate as defined in our Credit Facility agreement, plus
a spread that varies between 0.00% and 0.45% depending on our
credit rating at the time of borrowing, or (b) LIBOR plus an all-in spread
that varies between 0.90% and 1.45% depending on our credit rating
at the time of borrowing. Based on our credit rating as of December
31, 2012, the applicable all-in spreads for the Base Rate and LIBOR
borrowing were 0.175% and 1.175%, respectively.

(a) Maximum leverage ratio (a quarterly test that is calculated as
principal debt divided by consolidated EBITDA, as defined) of 3.75x.

(b) Minimum interest coverage ratio (a quarterly test that is calculated
as consolidated EBITDA divided by consolidated interest expense) may
not be less than 3.00x.

(c) Limitations on (i) liens of Xerox and certain of our subsidiaries
securing debt, (ii) certain fundamental changes to corporate structure,
(iii) changes in nature of business and (iv) limitations on debt incurred
by certain subsidiaries.

The Credit Facility also contains various events of default, the
occurrence of which could result in termination of the lenders’
commitments to lend and the acceleration of all our obligations under
the Credit Facility. These events of default include, without limitation:
(i) payment defaults, (ii) breaches of covenants under the Credit Facility
(certain of which breaches do not have any grace period), (iii) cross-
defaults and acceleration to certain of our other obligations and (iv) a
change of control of Xerox.

Capital Market Activity

Refer to the “Capital Market Activity” section in our Capital Resources
and Liquidity section of the MDA for a discussion of 2012 Capital
Market activity.

Interest

Interest paid on our short-term and long-term debt amounted to $462,
$538 and $586 for the years ended December 31, 2012, 2011 and
2010, respectively.

Interest expense and interest income was as follows:

Interest expense (1)

Interest income (2)

Year Ended December 31,

2012

2011

2010

$ 428

$ 478

$ 592

610

653

679

(1) Includes Equipment financing interest expense, as well as non-financing interest expense

included in Other expenses, net in the Consolidated Statements of Income.

(2) Includes Finance income, as well as other interest income that is included in Other

expenses, net in the Consolidated Statements of Income.

Xerox 2012 Annual Report

Notes to Consolidated Financial Statements
(in millions, except per-share data and where otherwise noted)

Equipment financing interest is determined based on an estimated
cost of funds, applied against the estimated level of debt required to
support our net finance receivables. The estimated cost of funds is
based on our overall corporate cost of borrowing adjusted to reflect a
rate that would be paid by a typical BBB rated leasing company. The
estimated level of debt is based on an assumed 7:1 leverage ratio of
debt/equity as compared to our average finance receivable balance
during the applicable period.

Net (Payments) Proceeds on Debt

Net (payments) proceeds on debt as shown on the Consolidated
Statements of Cash Flows was as follows:

Year Ended December 31,

2012

2011

2010

Net (payments) proceeds on short-term debt

$ (108)

$ (200) $ 300

Proceeds from issuance of long-term debt

1,116

1,000

–

Payments on long-term debt

(1,116)

(751)

(3,357)

Interest Rate Risk Management

We may use interest rate swap agreements to manage our interest rate
exposure and to achieve a desired proportion of variable and fixed rate
debt. These derivatives may be designated as fair value hedges or
cash flow hedges depending on the nature of the risk being hedged.
We did not have any interest rate swap agreements outstanding at
December 31, 2012 or 2011.

Terminated Swaps: During the period from 2004 to 2011, we early
terminated several interest rate swaps that were designated as fair
value hedges of certain debt instruments. The associated net fair value
adjustments to the debt instruments are being amortized to interest
expense over the remaining term of the related notes. In 2012, 2011
and 2010, the amortization of these fair value adjustments reduced
interest expense by $49, $53 and $28, respectively, and we expect
to record a net decrease in interest expense of $142 in future years
through 2018.

Net (Payments) Proceeds on Other Debt

$ (108)

$ 49 $ (3,057)

Foreign Exchange Risk Management

As a global company, we are exposed to foreign currency exchange
rate fluctuations in the normal course of our business. As a part of
our foreign exchange risk management strategy, we use derivative
instruments – primarily forward contracts and purchased option
contracts – to hedge the following foreign currency exposures, thereby
reducing volatility of earnings or protecting fair values of assets and
liabilities:

Foreign currency-denominated assets and liabilities

Forecasted purchases and sales in foreign currency

Summary of Foreign Exchange Hedging Positions: At December 31,
2012, we had outstanding forward exchange and purchased option
contracts with gross notional values of $3,505, which is typical of the
amounts that are normally outstanding at any point during the year.
These contracts generally mature in 12 months or less.

Note 13 – Financial Instruments

We are exposed to market risk from changes in foreign currency
exchange rates and interest rates, which could affect operating
results, financial position and cash flows. We manage our exposure
to these market risks through our regular operating and financing
activities and, when appropriate, through the use of derivative financial
instruments. These derivative financial instruments are utilized to
hedge economic exposures, as well as to reduce earnings and cash
flow volatility resulting from shifts in market rates. We enter into limited
types of derivative contracts, including interest rate swap agreements,
foreign currency spot, forward and swap contracts and net purchased
foreign currency options to manage interest rate and foreign currency
exposures. Our primary foreign currency market exposures include the
Japanese Yen, Euro and U.K. Pound Sterling. The fair market values of
all our derivative contracts change with fluctuations in interest rates
and/or currency exchange rates and are designed so that any changes
in their values are offset by changes in the values of the underlying
exposures. Derivative financial instruments are held solely as risk
management tools and not for trading or speculative purposes. The
related cash flow impacts of all of our derivative activities are reflected
as cash flows from operating activities.

We do not believe there is significant risk of loss in the event of non-
performance by the counterparties associated with our derivative
instruments because these transactions are executed with a diversified
group of major financial institutions. Further, our policy is to deal with
counterparties having a minimum investment grade or better credit
rating. Credit risk is managed through the continuous monitoring of
exposures to such counterparties.

•
•

The following is a summary of the primary hedging positions and
corresponding fair values as of December 31, 2012:

Currencies Hedged (Buy/Sell)

Notional Value Asset (Liability)(1)

Gross

Fair Value

Japanese Yen/U.S. Dollar

640

(37)

U.S. Dollar/Euro

U.K. Pound Sterling/Euro

Euro/U.K. Pound Sterling

Japanese Yen/Euro

Euro/U.S. Dollar

U.S. Dollar/Japanese Yen

Indian Rupee/U.S. Dollar

Mexican Peso/U.S. Dollar

Euro/Japanese Yen

Philippine Peso/U.S. Dollar

Euro/Swiss Franc

Swiss Franc/Euro

U.S. Dollar/Canadian Dollar

All Other

559

516

502

463

188

216

(6)

(4)

(33)

–

Total Foreign Exchange Hedging

$ 3,505

(71)

(1) Represents the net receivable (payable) amount included in the Consolidated Balance

Sheet at December 31, 2012.

Foreign Currency Cash Flow Hedges: We designate a portion of our
foreign currency derivative contracts as cash flow hedges of our foreign
currency-denominated inventory purchases, sales and expenses.
No amount of ineffectiveness was recorded in the Consolidated
Statements of Income for these designated cash flow hedges and
all components of each derivative’s gain or loss was included in the
assessment of hedge effectiveness. The net (liability) asset fair value
of these contracts was $(48) and $26 as of December 31, 2012 and
December 31, 2011, respectively.

Xerox 2012 Annual Report

Notes to Consolidated Financial Statements
(in millions, except per-share data and where otherwise noted)

Summary of Derivative Instruments Fair Value: The following table provides a summary of the fair value amounts of our derivative instruments:

Designation of Derivatives

Balance Sheet Location

2012

2011

December 31,

Derivatives Designated as Hedging Instruments

Foreign exchange contracts – forwards

Derivatives NOT Designated as Hedging Instruments

Foreign exchange contracts – forwards

Summary of Derivatives

Other current assets

Other current liabilities

Net Designated (Liability) Asset

Other current assets

Other current liabilities

Net Undesignated (Liability) Asset

Total Derivative Assets

Total Derivative Liabilities

Net Derivative (Liability) Asset

(51)

$ (48)

(31)

$ (23)

$ 11

(82)

$ (71)

$ 37

(11)

$ 26

$ 21

(20)

$ 1

$ 58

(31)

$ 27

Summary of Derivative Instruments Gains (Losses)

Derivative gains and (losses) affect the income statement based on whether such derivatives are designated as hedges of underlying exposures.
The following is a summary of derivative gains and (losses).

Designated Derivative Instruments Gains (Losses): The following tables provide a summary of gains (losses) on derivative instruments:

Derivatives in Fair Value Relationships

Location of Gain (Loss)
Recognized in Income

Year Ended December 31,

Derivative Gain (Loss)
Recognized in Income

Hedged Item Gain (Loss)
Recognized in Income

2012

2011

2010

2012

2011

2010

Interest rate contracts

Interest expense

–

$ 15

$ 99

–

$ (15)

$ (99)

Derivatives in Cash Flow
Hedging Relationships

Derivative Gain (Loss) Recognized
in OCI (Effective Portion)

2012

2011

2010

Year Ended December 31,

Location of Derivative
Gain (Loss) Reclassified
from AOCI into Income
(Effective Portion)

Foreign exchange contracts – forwards

$ (50)

$ 30

$ 46

Cost of sales

Gain (Loss) Reclassified from AOCI
to Income (Effective Portion)

2012

$ 37

2011

$ 14

2010

$ 28

No amount of ineffectiveness was recorded in the Consolidated
Statements of Income for these designated cash flow hedges and
all components of each derivative’s gain or (loss) were included in
the assessment of hedge effectiveness. In addition, no amount was
recorded for an underlying exposure that did not occur or was not
expected to occur.

At December 31, 2012, net after-tax losses of $37 were recorded in
accumulated other comprehensive loss associated with our cash flow

hedging activity. The entire balance is expected to be reclassified
into net income within the next 12 months, providing an offsetting
economic impact against the underlying anticipated transactions.

Non-Designated Derivative Instruments Gains (Losses): Non-
designated derivative instruments are primarily instruments used to
hedge foreign currency-denominated assets and liabilities. They are
not designated as hedges since there is a natural offset for the re-
measurement of the underlying foreign currency-denominated asset
or liability.

The following table provides a summary of gains (losses) on non-designated derivative instruments:

Derivatives NOT Designated as Hedging Instruments

Location of Derivative (Loss) Gain

Foreign exchange contracts – forwards

Other expense – Currency (losses) gains, net

Year Ended December 31,

2012

$ (38)

2011

$ 33

2010

$ 113

During the three years ended December 31, 2012, we recorded Currency losses, net of $3, $12 and $11, respectively. Currency losses, net includes
the mark-to-market adjustments of the derivatives not designated as hedging instruments and the related cost of those derivatives, as well as the
re-measurement of foreign currency-denominated assets and liabilities.

Note 14 – Fair Value of Financial Assets
and Liabilities

Summary of Other Financial Assets and Liabilities Fair
Value Measured on a Nonrecurring Basis

The estimated fair values of our other financial assets and liabilities fair
value measured on a nonrecurring basis were as follows:

December 31, 2012

December 31, 2011

Carrying
Amount

Fair
Value

Carrying
Amount

Fair
Value

Cash and cash equivalents

$ 1,246 $ 1,246

$ 902

Accounts receivable, net

2,866

2,600

Short-term debt

Long-term debt

1,042

1,051

1,545

1,622

7,447

8,040

7,088

7,496

The fair value amounts for Cash and cash equivalents and Accounts
receivable, net, approximate carrying amounts due to the short
maturities of these instruments. The fair value of Short- and Long-term
debt was estimated based on quoted market prices for publicly traded
securities (Level 1) or on the current rates offered to us for debt of
similar maturities (Level 2). The difference between the fair value and
the carrying value represents the theoretical net premium or discount
we would pay or receive to retire all debt at such date.

The following table represents assets and liabilities fair value measured
on a recurring basis. The basis for the measurement at fair value in all
cases is Level 2 – Significant Other Observable Inputs.

As of December 31,

2012

2011

Assets:

Foreign exchange contracts – forwards

$ 11

$ 58

Deferred compensation investments in

cash surrender life insurance

Deferred compensation investments in mutual funds

Total

Liabilities:

Foreign exchange contracts – forwards

Deferred compensation plan liabilities

Total

$ 111

$ 150

$ 82

$ 31

110

$ 192

$ 128

We utilize the income approach to measure the fair value for our
derivative assets and liabilities. The income approach uses pricing
models that rely on market observable inputs such as yield curves,
currency exchange rates and forward prices, and therefore are classified
as Level 2.

Fair value for our deferred compensation plan investments in
Company-owned life insurance is reflected at cash surrender value.
Fair value for our deferred compensation plan investments in mutual
funds is based on quoted market prices for actively traded investments
similar to those held by the plan. Fair value for deferred compensation
plan liabilities is based on the fair value of investments corresponding
to employees’ investment selections, based on quoted prices for similar
assets in actively traded markets.

Xerox 2012 Annual Report

Notes to Consolidated Financial Statements
(in millions, except per-share data and where otherwise noted)

Note 15 – Employee Benefit Plans

We sponsor numerous defined benefit and defined contribution pension and other post-retirement benefit plans, primarily retiree health care, in our
domestic and international operations. December 31 is the measurement date for all of our post-retirement benefit plans.

Change in Benefit Obligation:

Benefit obligation, January 1

Service cost

Interest cost

Plan participants’ contributions

Actuarial loss

Currency exchange rate changes

Curtailments

Benefits paid/settlements

Other

Pension Benefits

U.S. Plans

Non-U.S. Plans

Retiree Health

2012

2011

2012

2011

2012

2011

$ 4,670

$ 4,456

$ 5,835

$ 5,275

$ 1,007

$ 1,006

112

282

–

480

–

(509)

(2)

108

328

–

403

–

(623)

(2)

270

537

232

(1)

(256)

(1)

284

513

(85)

–

(247)

–

(103)

(7)

(3)

–

(106)

(4)

Benefit Obligation, December 31

$ 5,033

$ 4,670

$ 6,708

$ 5,835

$ 989

$ 1,007

Change in Plan Assets:

Fair value of plan assets, January 1

$ 3,393

$ 3,202

$ 4,884

$ 4,738

Actual return on plan assets

Employer contribution

Plan participants’ contributions

Currency exchange rate changes

Benefits paid/settlements

Other

358

331

–

(509)

–

406

408

–

(623)

–

434

163

197

(256)

–

288

148

(57)

(247)

Fair Value of Plan Assets, December 31

$ 3,573

$ 3,393

$ 5,431

$ 4,884

Net Funded Status at December 31 (1)

$ (1,460)

$ (1,277)

(951)

Amounts Recognized in the Consolidated Balance Sheets:

Other long-term assets

–

Accrued compensation and benefit costs

(23)

(22)

(25)

(23)

Pension and other benefit liabilities

(1,437)

(1,255)

(1,287)

(1,004)

–

$ (1,460)

$ (1,277)

(951)

(989)

$ (1,007)

–

(103)

(106)

–

(989)

$ (1,007)

(80)

–

(909)

(82)

–

(925)

Post-retirement medical benefits

Net Amounts Recognized

(1) Includes under-funded and non-funded plans.

Benefit plans pre-tax amounts recognized in AOCL at December 31:

Pension Benefits

Net actuarial loss

Prior service (credit) cost

Total Pre-tax Loss (Gain)

Accumulated Benefit Obligation

U.S. Plans

Non-U.S. Plans

Retiree Health

2012

2011

2012

2011

2012

2011

$ 1,255

$ 963

$ 2,013

$ 1,589

(17)

(38)

–

(128)

(163)

$ 1,238

$ 5,027

$ 925

$ 4,617

$ 2,013

$ 1,590

(31)

(93)

$ 6,359

$ 5,517

Aggregate information for pension plans with an Accumulated benefit obligation in excess of plan assets is presented below:

Underfunded Plans

U.S.

Non-U.S.

Unfunded Plans

U.S.

Non-U.S.

Total

U.S.

Non-U.S.

Total

December 31, 2012

Projected benefit obligation

$ 4,679

$ 5,997

$ 355

$ 527

$ 5,034

$ 6,524

$ 11,558

Accumulated benefit obligation

Fair value of plan assets

4,672

3,574

5,686

5,213

355

520

–

5,027

3,574

6,206

5,213

11,233

8,787

Underfunded Plans

U.S.

Non-U.S.

Unfunded Plans

Total

U.S.

Non-U.S.

U.S.

Non-U.S.

Total

December 31, 2011

Projected benefit obligation

$ 4,342

$ 4,391

$ 327

$ 445

$ 4,669

$ 4,836

$ 9,505

Accumulated benefit obligation

Fair value of plan assets

4,291

3,393

4,127

3,811

326

434

–

4,617

3,393

4,561

3,811

9,178

7,204

Our pension plan assets and benefit obligations at December 31, 2012
were as follows:

(in billions)

U.S. funded

U.S. unfunded

Total U.S.

U.K.

Canada

Other funded

Other unfunded

Total

Fair Value
of Pension Pension Benefit Net Funded
Status
Plan Assets

Obligations

$ 3.6

–

$ 3.6

3.4

0.7

1.3

–

4.6

0.4

5.0

3.7

1.0

1.5

0.5

$ (1.0)

(0.4)

$ (1.4)

(0.3)

(0.2)

(0.5)

$ 9.0

$ 11.7

$ (2.7)

Most of our defined benefit pension plans generally provide employees
a benefit, depending on eligibility, calculated under a highest average
pay and years of service formula. Our primary domestic defined
benefit pension plans provide a benefit at the greater of (i) the highest
average pay and years of service formula, (ii) the benefit calculated
under a formula that provides for the accumulation of salary and
interest credits during an employee’s work life or (iii) the individual
account balance from the Company’s prior defined contribution plan
(Transitional Retirement Account or TRA).

Xerox 2012 Annual Report

Notes to Consolidated Financial Statements
(in millions, except per-share data and where otherwise noted)

The components of Net periodic benefit cost and other changes in plan assets and benefit obligations were as follows:

Components of Net Periodic Benefit Costs:

Service cost

Interest cost (1)

Expected return on plan assets (2)

Recognized net actuarial loss

Amortization of prior service credit

Recognized settlement loss

Recognized curtailment gain

Defined Benefit Plans

Defined contribution plans

Net Periodic Benefit Cost

Other changes in plan assets and benefit obligations

recognized in Other Comprehensive Income:

Net actuarial loss

Prior service credit

Amortization of net actuarial loss

Amortization of net prior service credit

Curtailment gain – recognition of net prior service credit

Total Recognized in Other Comprehensive Income

Total Recognized in Net Periodic Benefit Cost and
Other Comprehensive Income

Pension Benefits
Year Ended December 31,

U.S. Plans

Non-U.S. Plans

2012

2011

2010

2012

2011

2010

$ 112

$ 108

$ 109

$ 83

$ 78

282

(306)

(23)

–

200

228

(2)

(135)

–

313

328

310

(337)

(296)

(23)

(107)

113

(23)

–

212

237

(17)

270

(307)

–

100

135

284

(310)

–

130

265

(274)

–

118

416

518

190

427

334

(2)

(1)

–

(113)

(112)

(54)

(40)

107

349

–

(98)

–

361

478

156

(2)

(31)

(1)

–

$ 541

$ 462

$ 139

$ 496

$ 608

$ 274

(1) Interest cost includes interest expense on non-TRA obligations of $382, $388 and $381 and interest expense directly allocated to TRA participant accounts of $170, $224 and $194 for the

years ended December 31, 2012, 2011 and 2010, respectively.

(2) Expected return on plan assets includes expected investment income on non-TRA assets of $443, $423 and $376 and actual investment income on TRA assets of $170, $224 and $194 for

the years ended December 31, 2012, 2011 and 2010, respectively.

Components of Net Periodic Benefit Costs:

Service cost

Interest cost

Recognized net actuarial loss

Amortization of prior service credit

Net periodic benefit cost

Other changes in plan assets and benefit
obligations recognized in
Other Comprehensive Income:

Net actuarial loss

Prior service credit

Amortization of net actuarial loss

Retiree Health

Year Ended December 31,

2012

2011

2010

$ 9

$ 8

–

(41)

–

(30)

(6)

(1)

(3)

–

(86)

–

Amortization of net prior service credit

Total recognized in Other
Comprehensive Income

(43)

Total recognized in Net Periodic Benefit Cost
and Other Comprehensive Income

$ 63

$ 77

$ (11)

The net actuarial loss and prior service credit for the defined benefit
pension plans that will be amortized from Accumulated other
comprehensive loss into net periodic benefit cost over the next fiscal
year are $106 and $(2), respectively, excluding amounts that may be
recognized through settlement losses. The net actuarial loss and prior
service credit for the retiree health benefit plans that will be amortized
from Accumulated other comprehensive loss into net periodic benefit
cost over the next fiscal year are $2 and $(43), respectively.

Pension plan assets consist of both defined benefit plan assets and
assets legally restricted to the TRA accounts. The combined investment
results for these plans, along with the results for our other defined
benefit plans, are shown above in the “actual return on plan assets”
caption. To the extent that investment results relate to TRA, such results
are charged directly to these accounts as a component of interest cost.

Plan Amendments

Pension Plan Freezes

Over the past several years, we have amended several of our defined
benefit pension plans to freeze current benefits and eliminate
benefits accruals for future service. In certain plans we are required
to continue to consider salary increases in determining the benefit
obligation related to prior service. The following is a discussion of these
amendments and their impact on our primary defined benefit pension
plans.

In 2011, we amended all of our primary U.S. defined benefit plans
for salaried employees. Our primary qualified plans had previously
been amended to freeze the final pay formulas within the plans as of
December 31, 2012, but a cash balance service credit was expected to
continue post December 31, 2012. The 2011 amendments fully freeze
any further benefit and service accrual after December 31, 2012 for all
of these plans, including the non-qualified plans. As a result of these
plan amendments, in 2011 we recognized a pre-tax curtailment gain of
$107 ($66 after-tax). The gain represents the recognition of deferred
gains from other prior year amendments (“Prior service credits”) as a
result of the discontinuation of any future benefit or service accrual
period. This amendment will also result in a change in amortization
period as of January 1, 2013 for actuarial gains and losses from the
average remaining service period of participants (approximately ten
years) to the average remaining life expectancy of all participants
(approximately thirty-three years) as a result of all participants being
considered inactive as of the effective date of the freeze.

As of December 31, 2012, the aggregate accumulated actuarial losses
for our primary U.S. Defined Benefit Plans for salaried employees
amounted to $1.1 billion. This change is expected to reduce our 2013
pension expense by approximately $47. This reduction is expected
to be partially offset by an increased contribution to the U.S. defined
contribution plan as all employees have been transferred to that plan
following the freeze.

In 2011, the Canadian Salary Pension Plan was amended to close
the plan to future service accrual effective January 1, 2014. Benefits
earned up to January 1, 2014 will not be affected and participants will
continue receive the benefit of future salary increases to the extent
applicable; therefore, the amendment did not result in a material
change to the projected benefit obligation at the re-measurement date
of December 31, 2011.

In 2009, the U.K. Final Salary Pension Plan was amended to close
the plan to future service accrual effective January 1, 2014. Benefits
earned up to January 1, 2014 will not be affected and participants will
continue receive the benefit of future salary and inflation increases
to the extent applicable; therefore, the amendment does not result
in a material change to the projected benefit obligation at the re-
measurement date of December 31, 2009.

Retiree Health Plan Amendments

In 2010, we amended our domestic retiree health benefit plan to
eliminate the use of the Retiree Drug Subsidy that the Company
receives from Medicare as an offset to retiree contributions. This
amendment was effective January 1, 2011. The Company instead
decided to use this subsidy to reduce its retiree healthcare costs. The
amendment resulted in a net decrease of $55 to the retiree medical
benefit obligation and a corresponding $34 after tax increase to equity.
This amendment reduced both the 2012 and 2011 retiree-health
expenses by approximately $13.

Xerox 2012 Annual Report

Notes to Consolidated Financial Statements
(in millions, except per-share data and where otherwise noted)

Plan Assets

Current Allocation

As of the 2012 and 2011 measurement dates, the global pension plan assets were $9.0 billion and $8.3 billion, respectively. These assets were
invested among several asset classes. Our common stock represents approximately $99 or 1.0% of total plan assets at December 31, 2012.

The following tables presents the defined benefit plans assets measured at fair value and the basis for that measurement:

Asset Class

Cash and cash equivalents

Equity Securities:

U.S. large cap

Xerox common stock

U.S. mid cap

U.S. small cap

International developed

Emerging markets

Global equity

Total Equity Securities

Debt Securities:

U.S. treasury securities

Debt security issued by government agency

Corporate Bonds

Asset backed securities

Total Debt Securities

Derivatives:

Interest rate contracts

Foreign exchange contracts

Equity contracts

Credit contracts

Total Derivatives

Real estate

Private equity/Venture capital

Other (1)

December 31, 2012

U.S. Defined Benefit Plans Assets

Level 1

Level 2

Level 3

Total

% of Total

–

411

133

282

–

205

1,073

316

–

(2)

–

367

153

1,080

1,611

–

(1)

–

300

–

421

12%

338

349

1,389

367

153

1,080

1,611

(2)

(1)

163

300

10%

–%

39%

10%

31%

–%

45%

–%

Total Defined Benefit Plans Assets

$ 1,195

$ 2,020

$ 358

$ 3,573

100%

(1) Other Level 1 assets include net non-financial assets of $13 such as due to/from broker, interest receivables and accrued expenses.

Asset Class

Cash and cash equivalents

Equity Securities:

U.S. large cap

U.S. mid cap

U.S. small cap

International developed

Emerging markets

Global equity

Total Equity Securities

Debt Securities:

U.S. treasury securities

Debt security issued by government agency

Corporate bonds

Asset backed securities

Total Debt Securities

Common/Collective trust

Derivatives:

Interest rate contracts

Foreign exchange contracts

Other contracts

Total Derivatives

Hedge funds

Real estate

Guaranteed insurance contracts

Other (1)

December 31, 2012

Non-U.S. Defined Benefit Plans Assets

Level 1

Level 2

Level 3

Total

% of Total

$ 500

–

$ 500

204

1,107

322

–

174

1,682

313

150

1,253

753

189

2,056

–

(4)

–

332

131

–

254

1,281

398

1,995

1,288

903

2,245

160

386

131

–%

24%

–%

37%

–%

24%

17%

42%

–%

Total Defined Benefit Plans Assets

$ 2,483

$ 2,482

$ 466

$ 5,431

100%

(1) Other Level 1 assets include net non-financial assets of $5 such as due to/from broker, interest receivables and accrued expenses.

Xerox 2012 Annual Report

Notes to Consolidated Financial Statements
(in millions, except per-share data and where otherwise noted)

Asset Class

Cash and cash equivalents

Equity Securities:

U.S. large cap

Xerox common stock

U.S. mid cap

U.S. small cap

International developed

Emerging markets

Total Equity Securities

Debt Securities:

U.S. treasury securities

Debt security issued by government agency

Corporate bonds

Asset backed securities

Total Debt Securities

Derivatives:

Interest rate contracts

Foreign exchange contracts

Equity contracts

Total Derivatives

Real estate

Private equity/Venture capital

Other (1)

December 31, 2011

U.S. Defined Benefit Plans Assets

Level 1

Level 2

Level 3

Total

% of Total

$ 198

–

$ 198

366

162

117

820

–

(62)

–

327

–

423

393

180

875

1,458

–

318

–

373

145

489

117

1,243

397

180

881

1,468

152

318

(48)

11%

15%

37%

12%

26%

–

43%

–

(2)%

100%

Total Defined Benefit Plans Assets

$ 1,060

$ 1,943

$ 390

$ 3,393

(1) Other Level 1 assets include net non-financial liabilities of $62 such as due to/from broker, interest receivables and accrued expenses.

Asset Class

Cash and cash equivalents

Equity Securities:

U.S. large cap

U.S. mid cap

U.S. small cap

International developed

Emerging markets

Global equity

Total Equity Securities

Debt Securities:

U.S. treasury securities

Debt security issued by government agency

Corporate bonds

Asset backed securities

Total Debt Securities

Common/Collective trust

Derivatives:

Interest rate contracts

Foreign exchange contracts

Other contracts

Total Derivatives

Hedge funds

Real estate

Guaranteed insurance contracts

Other (1)

December 31, 2011

Non-U.S. Defined Benefit Plans Assets

Level 1

Level 2

Level 3

Total

% of Total

$ 380

–

$ 380

145

1,047

180

–

154

1,427

268

144

1,227

595

215

1,896

–

(1)

–

280

116

–

188

1,201

234

1,695

1,291

739

2,111

159

399

116

–

25%

–

35%

26%

15%

43%

–

Total Defined Benefit Plans Assets

$ 2,131

$ 2,354

$ 399

$ 4,884

100%

(1) Other Level 1 assets include net non-financial assets of $8 such as due to/from broker, interest receivables and accrued expenses.

Xerox 2012 Annual Report

Notes to Consolidated Financial Statements
(in millions, except per-share data and where otherwise noted)

Balance at December 31, 2012

$ 58

$ 300

$ 358

Fixed income investments

43%

47%

(31)

Equity investments

41%

40%

The following tables represent a roll-forward of the defined benefit plans
assets measured using significant unobservable inputs (Level 3 assets):

Fair Value Measurement Using
Significant Unobservable Inputs (Level 3)

U.S. Defined
Benefit Plans Assets

Private Equity/
Real Estate Venture Capital

Total

Balance at December 31, 2010

$ 69

$ 307

$ 376

Purchases

Sales

Realized gains (losses)

Unrealized gains (losses)

Other

Balance at December 31, 2011

Purchases

Sales

Realized gains (losses)

Unrealized gains (losses)

(6)

–

(11)

(5)

(61)

(4)

–

318

(48)

(26)

(67)

390

(59)

Fair Value Measurement Using
Significant Unobservable Inputs (Level 3)

Guaranteed
Insurance
Real Estate Contracts Hedge Funds

Total

Non-U.S. Defined
Benefit Plans Assets

Balance at December 31, 2010 $ 206

$ 97

$ 3

$ 306

Purchases

Sales

Net transfers in from Level 1

Net transfers in from Level 2

Realized gains (losses)

–

Unrealized gains (losses)

Currency translation

Other

(4)

(3)

(1)

(4)

(3)

Balance at December 31, 2011

280

116

Purchases

Sales

(21)

Net transfers in from Level 2

Realized gains (losses)

Unrealized gains (losses)

Currency translation

(25)

(7)

–

(1)

–

(1)

(4)

–

(1)

(7)

399

(28)

(26)

Balance at December 31, 2012 $ 332

$ 131

$ 3

$ 466

Valuation Method

Our primary Level 3 assets are Real Estate and Private Equity/Venture
Capital investments. The fair value of our real estate investment funds
are based on the Net Asset Value (“NAV”) of our ownership interest in
the funds. NAV information is received from the investment advisers
and is primarily derived from third-party real estate appraisals for the
properties owned. The fair value for our private equity/venture capital
partnership investments are based on our share of the estimated
fair values of the underlying investments held by these partnerships
as reported in their audited financial statements. The valuation
techniques and inputs for our Level 3 assets have been consistently
applied for all periods presented.

Investment Strategy

The target asset allocations for our worldwide defined benefit pension
plans were:

2012

2011

U.S. Non-U.S.

41%

43%

41%

46%

–%

Real estate

Private equity

Other

–%

Total Investment Strategy

100%

We employ a total return investment approach whereby a mix of
equities and fixed income investments are used to maximize the long-
term return of plan assets for a prudent level of risk. The intent of this
strategy is to minimize plan expenses by exceeding the interest growth
in long-term plan liabilities. Risk tolerance is established through careful
consideration of plan liabilities, plan funded status and corporate
financial condition. This consideration involves the use of long-term
measures that address both return and risk. The investment portfolio
contains a diversified blend of equity and fixed income investments.
Furthermore, equity investments are diversified across U.S. and non-U.S.
stocks, as well as growth, value and small and large capitalizations, and
may include Company stock. Other assets such as real estate, private
equity and hedge funds are used to improve portfolio diversification.
Derivatives may be used to hedge market exposure in an efficient
and timely manner; however, derivatives may not be used to leverage
the portfolio beyond the market value of the underlying investments.
Investment risks and returns are measured and monitored on an
ongoing basis through annual liability measurements and quarterly
investment portfolio reviews.

Expected Long-term Rate of Return

We employ a “building block” approach in determining the long-term
rate of return for plan assets. Historical markets are studied and long-
term relationships between equities and fixed income are assessed.
Current market factors such as inflation and interest rates are evaluated
before long-term capital market assumptions are determined. The long-
term portfolio return is established giving consideration to investment
diversification and rebalancing. Peer data and historical returns are
reviewed periodically to assess reasonableness and appropriateness.

In 2013 we expect, based on current actuarial calculations, to make
contributions of approximately $195 ($26 U.S. and $169 non-U.S.) to
our defined benefit pension plans and $80 to our retiree health benefit
plans. The decrease in required contributions to our U.S. defined benefit
pension plans reflect the expected benefits from the pension funding
legislation enacted in the U.S. during 2012.

Estimated Future Benefit Payments

The following benefit payments, which reflect expected future service,
as appropriate, are expected to be paid during the following years:

Contributions

In 2012, we made cash contributions of $364 ($201 U.S. and
$163 Non-U.S.) and $84 to our defined benefit pension plans and
retiree health benefit plans, respectively. We also elected to make
a contribution of 15.4 million shares of our common stock, with an
aggregate value of approximately $130, to our U.S. defined benefit
pension plan for salaried employees in order to meet our planned
level of funding for 2012. Accordingly, total contributions to our
defined benefit pension plans were $494 ($331 U.S. and $163
Non-U.S.) in 2012.

2013

2014

2015

2016

2017

Pension Benefits

U.S.

Non-U.S.

Total

Retiree Health

$ 483

$ 248

$ 731

$ 80

445

251

402

370

348

261

274

280

696

663

644

628

2,975

339

Years 2018-2022

1,425

1,550

Assumptions

Weighted-average assumptions used to determine benefit obligations at the plan measurement dates:

Discount rate

Rate of compensation increase

Discount rate

2012

Pension Benefits

2011

U.S.

3.7%

0.2%

Non-U.S.

U.S.

Non-U.S.

4.0%

2.6%

4.8%

3.5%

4.6%

2.7%

2010

U.S.

5.1%

3.5%

Non-U.S.

5.3%

2.7%

2012

3.6%

Retiree Health

2011

4.5%

2010

4.9%

Weighted-average assumptions used to determine net periodic benefit cost for years ended December 31:

2013

2012

2011

2010

U.S.

Non-U.S.

U.S.

Non-U.S.

U.S.

Non-U.S.

U.S.

Non-U.S.

Pension Benefits

Discount rate

Expected return on plan assets

Rate of compensation increase

3.7%

7.8%

0.2%

4.0%

6.1%

2.6%

4.8%

7.8%

3.5%

Discount rate

4.6%

6.2%

2.7%

2013

3.6%

5.7%

8.3%

3.5%

5.1%

8.3%

3.5%

5.3%

6.6%

2.7%

Retiree Health

2012

4.5%

2011

4.9%

5.7%

6.6%

3.6%

2010

5.4%

Note: Expected return on plan assets is not applicable to retiree health benefits as these plans are not funded. Rate of compensation increase is not applicable to retiree health benefits as
compensation levels do not impact earned benefits.

Xerox 2012 Annual Report

Notes to Consolidated Financial Statements
(in millions, except per-share data and where otherwise noted)

Assumed healthcare cost trend rates were as follows:

Healthcare cost trend rate assumed for next year

Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)

Year that the rate reaches the ultimate trend rate

December 31,

2012

7.5%

4.9%

2017

2011

8.5%

4.9%

2017

Assumed healthcare cost trend rates have a significant effect on the amounts reported for the healthcare plans. A one-percentage-point change in
assumed healthcare cost trend rates would have the following effects:

Effect on total service and interest cost components

Effect on post-retirement benefit obligation

Defined Contribution Plans

1% increase

1% decr ease

$ 3

(3)

We have savings and investment plans in several countries, including the U.S., Finland and Canada. In many instances, employees from those
defined benefit pension plans that have been amended to freeze future service accruals will be transitioned to an enhanced defined contribution
plan. For the U.S. plans, employees may contribute a portion of their salaries and bonuses to the plans, and we match a portion of the employee
contributions. We recorded charges related to our defined contribution plans of $63 in 2012, $66 in 2011 and $51 in 2010.

Note 16 – Income and Other Taxes

Income before income taxes (“pre-tax income”) was as follows:

Domestic income

Foreign income

Year Ended December 31,

2012

2011

2010

$ 878 $ 917

$ 433

470

648

382

Income Before Income Taxes

$ 1,348 $ 1,565

$ 815

Provisions (benefits) for income taxes were as follows:

Year Ended December 31,

2012

2011

2010

A reconciliation of the U.S. federal statutory income tax rate to the
consolidated effective income tax rate was as follows:

Year Ended December 31,

2012

2011

2010

U.S. federal statutory income tax rate

35.0%

Nondeductible expenses

Effect of tax law changes

Change in valuation allowance for

deferred tax assets

State taxes, net of federal benefit

2.6%

2.0%

6.3%

0.7%

0.2%

(0.2)%

(0.7)%

(0.3)%

2.1%

2.4%

2.6%

2.0%

Audit and other tax return adjustments

(4.7)%

(1.0)%

(3.6)%

Tax-exempt income, credits and incentives

(2.6)%

(3.1)%

(3.9)%

Federal Income Taxes

Current

Deferred

Foreign Income Taxes

Current

Deferred

State Income Taxes

Current

Deferred

$ 24

$ 52

$ 153

Foreign rate differential adjusted for
U.S. taxation of foreign profits (1)

134

(17)

Other

(11.8)%

(10.4)%

(6.7)%

(0.1)%

123

–

103

Effective Income Tax Rate

20.5%

24.7%

31.4%

(1) The “U.S. taxation of foreign profits” represents the U.S. tax, net of foreign tax credits,

associated with actual and deemed repatriations of earnings from our non-U.S.
subsidiaries.

On a consolidated basis, we paid a total of $137, $94 and $49 in
income taxes to federal, foreign and state jurisdictions during the three
years ended December 31, 2012, respectively.

Total Provision (Benefit)

$ 277

$ 386

$ 256

100

Included in the balances at December 31, 2012, 2011 and 2010 are
$16, $36 and $39, respectively, of tax positions that are highly certain
of realizability but for which there is uncertainty about the timing
or that they may be reduced through an indirect benefit from other
taxing jurisdictions. Because of the impact of deferred tax accounting,
other than for the possible incurrence of interest and penalties, the
disallowance of these positions would not affect the annual effective
tax rate.

We recognized interest and penalties accrued on unrecognized tax
benefits, as well as interest received from favorable settlements within
income tax expense. We had $20, $28 and $31 accrued for the
payment of interest and penalties associated with unrecognized tax
benefits at December 31, 2012, 2011 and 2010, respectively.

In the U.S., with the exception of ACS, we are no longer subject to
U.S. federal income tax examinations for years before 2007. ACS is
no longer subject to such examinations for years before 2005. With
respect to our major foreign jurisdictions, we are no longer subject to
tax examinations by tax authorities for years before 2000.

Deferred Income Taxes

We had undistributed earnings of foreign subsidiaries and other
foreign investments carried at equity at December 31, 2012 of
approximately $8.8 billion. We have provided deferred taxes on
approximately $500 of those earnings due to their anticipated
repatriation to the U.S. The remaining $8.3 billion of undistributed
earnings have been indefinitely reinvested and we currently do not
plan to initiate any action that would precipitate a deferred tax impact.
We do not believe it is practical to calculate the potential deferred tax
impact, as there is a significant amount of uncertainty with respect to
determining the amount of foreign tax credits as well as any additional
local withholding tax and other indirect tax consequences that may
arise from the distribution of these earnings. In addition, because such
earnings have been indefinitely reinvested in our foreign operations,
repatriation would require liquidation of those investments or a
recapitalization of our foreign subsidiaries, the impacts and effects of
which are not readily determinable.

Total income tax expense (benefit) was allocated as follows:

Year Ended December 31,

2012

2011

2010

Pre-tax income

$ 277

$ 386

$ 256

Common shareholders’ equity:

Changes in defined benefit plans

(233)

(277)

Stock option and incentive plans, net

Cash flow hedges

Translation adjustments

(5)

(24)

(9)

(6)

Total Income Tax Expense (Benefit)

$ 115

$ 273

Unrecognized Tax Benefits and Audit Resolutions

Due to the extensive geographical scope of our operations, we are
subject to ongoing tax examinations in numerous jurisdictions.
Accordingly, we may record incremental tax expense based upon
the more-likely-than-not outcomes of any uncertain tax positions.
In addition, when applicable, we adjust the previously recorded tax
expense to reflect examination results when the position is effectively
settled. Our ongoing assessments of the more-likely-than-not outcomes
of the examinations and related tax positions require judgment and
can increase or decrease our effective tax rate, as well as impact our
operating results. The specific timing of when the resolution of each
tax position will be reached is uncertain. As of December 31, 2012, we
do not believe that there are any positions for which it is reasonably
possible that the total amount of unrecognized tax benefits will
significantly increase or decrease within the next 12 months.

A reconciliation of the beginning and ending amount of unrecognized
tax benefits is as follows:

2012

2011

2010

Balance at January 1

$ 225

$ 186

$ 148

Additions from acquisitions

Additions related to current year

Additions related to prior years positions

Reductions related to prior years positions

Settlements with taxing authorities (1)

Reductions related to lapse of

statute of limitations

Currency

–

(36)

(13)

(8)

–

(17)

(14)

(8)

(3)

(16)

(19)

(35)

–

Balance at December 31

$ 201

$ 225

$ 186

(1) Majority of settlements did not result in the utilization of cash.

Xerox 2012 Annual Report

101

Notes to Consolidated Financial Statements
(in millions, except per-share data and where otherwise noted)

The tax effects of temporary differences that give rise to significant
portions of the deferred taxes were as follows:

Deferred Tax Assets

Research and development

Post-retirement medical benefits

Anticipated foreign repatriations

Depreciation and amortization

Net operating losses

Other operating reserves

Tax credit carryforwards

Deferred compensation

Allowance for doubtful accounts

Restructuring reserves

Pension

Other

Subtotal

Valuation allowance

Total

Deferred Tax Liabilities

Unearned income and installment sales

Intangibles and goodwill

Other

Total

Total Deferred Taxes, Net

December 31,

2012

2011

$ 793

$ 876

359

368

264

630

637

300

285

177

379

312

306

696

547

143

132

3,829

3,764

(654)

(677)

$ 3,175

$ 3,087

$ 947

$ 996

1,252

1,261

$ 2,247

$ 2,298

$ 928

$ 789

The above amounts are classified as current or long-term in the
Consolidated Balance Sheets in accordance with the asset or liability
to which they relate or, when applicable, based on the expected timing
of the reversal. Current deferred tax assets at December 31, 2012 and
2011 amounted to $273 and $229, respectively.

The deferred tax assets for the respective periods were assessed
for recoverability and, where applicable, a valuation allowance was
recorded to reduce the total deferred tax asset to an amount that
will more-likely-than-not be realized in the future. The net change in
the total valuation allowance for the years ended December 31, 2012
and 2011 was a decrease of $23 and $58, respectively. The valuation
allowance relates primarily to certain net operating loss carryforwards,
tax credit carryforwards and deductible temporary differences for
which we have concluded it is more-likely-than-not that these items will
not be realized in the ordinary course of operations.

Although realization is not assured, we have concluded that it is
more-likely-than-not that the deferred tax assets, for which a valuation

102

allowance was determined to be unnecessary, will be realized in the
ordinary course of operations based on the available positive and
negative evidence, including scheduling of deferred tax liabilities and
projected income from operating activities. The amount of the net
deferred tax assets considered realizable, however, could be reduced
in the near term if actual future income or income tax rates are lower
than estimated, or if there are differences in the timing or amount of
future reversals of existing taxable or deductible temporary differences.

At December 31, 2012, we had tax credit carryforwards of $177
available to offset future income taxes, of which $79 are available
to carryforward indefinitely while the remaining $98 will expire
2013 through 2032 if not utilized. We also had net operating loss
carryforwards for income tax purposes of $1.3 billion that will expire
2013 through 2032, if not utilized, and $2.4 billion available to offset
future taxable income indefinitely.

Note 17 – Contingencies and Litigation

As more fully discussed below, we are involved in a variety of claims,
lawsuits, investigations and proceedings concerning securities law,
intellectual property law, environmental law, employment law and the
Employee Retirement Income Security Act (“ERISA”). We determine
whether an estimated loss from a contingency should be accrued by
assessing whether a loss is deemed probable and can be reasonably
estimated. We assess our potential liability by analyzing our litigation
and regulatory matters using available information. We develop our
views on estimated losses in consultation with outside counsel handling
our defense in these matters, which involves an analysis of potential
results, assuming a combination of litigation and settlement strategies.
Should developments in any of these matters cause a change in our
determination as to an unfavorable outcome and result in the need to
recognize a material accrual, or should any of these matters result in a
final adverse judgment or be settled for significant amounts, they could
have a material adverse effect on our results of operations, cash flows
and financial position in the period or periods in which such change in
determination, judgment or settlement occurs.

Additionally, guarantees, indemnifications and claims arise during
the ordinary course of business from relationships with suppliers,
customers and nonconsolidated affiliates when the Company
undertakes an obligation to guarantee the performance of others if
specified triggering events occur. Nonperformance under a contract
could trigger an obligation of the Company. These potential claims
include actions based upon alleged exposures to products, real estate,
intellectual property such as patents, environmental matters and other
indemnifications. The ultimate effect on future financial results is not
subject to reasonable estimation because considerable uncertainty
exists as to the final outcome of these claims. However, while the
ultimate liabilities resulting from such claims may be significant to
results of operations in the period recognized, management does not
anticipate they will have a material adverse effect on the Company’s
consolidated financial position or liquidity. As of December 31,

2012, we have accrued our estimate of liability incurred under our
indemnification arrangements and guarantees.

Brazil Tax and Labor Contingencies

Our Brazilian operations are involved in various litigation matters
and have received or been the subject of numerous governmental
assessments related to indirect and other taxes, as well as disputes
associated with former employees and contract labor. The tax matters,
which comprise a significant portion of the total contingencies,
principally relate to claims for taxes on the internal transfer of
inventory, municipal service taxes on rentals and gross revenue taxes.
We are disputing these tax matters and intend to vigorously defend our
positions. Based on the opinion of legal counsel and current reserves
for those matters deemed probable of loss, we do not believe that the
ultimate resolution of these matters will materially impact our results of
operations, financial position or cash flows.

The labor matters principally relate to claims made by former
employees and contract labor for the equivalent payment of all social
security and other related labor benefits, as well as consequential
tax claims, as if they were regular employees. As of December 31,
2012, the total amounts related to the unreserved portion of the tax
and labor contingencies, inclusive of related interest, amounted to
approximately $1,010 with the decrease from December 31, 2011
balance of approximately $1,120, primarily related to currency and
closed cases partially offset by interest. With respect to the unreserved
balance of $1,010, the majority has been assessed by management as
being remote as to the likelihood of ultimately resulting in a loss to the
Company. In connection with the above proceedings, customary local
regulations may require us to make escrow cash deposits or post other
security of up to half of the total amount in dispute. As of December
31, 2012 we had $211 of escrow cash deposits for matters we are
disputing, and there are liens on certain Brazilian assets with a net book
value of $13 and additional letters of credit of approximately $242,
which include associated indexation. Generally, any escrowed amounts
would be refundable and any liens would be removed to the extent
the matters are resolved in our favor. We routinely assess all these
matters as to the probability of ultimately incurring a liability against
our Brazilian operations and record our best estimate of the ultimate
loss in situations where we assess the likelihood of an ultimate loss as
probable.

Litigation Against the Company

In re Xerox Corporation Securities Litigation: A consolidated
securities law action (consisting of 17 cases) is pending in the United
States District Court for the District of Connecticut. Defendants are
the Company, Barry Romeril, Paul Allaire and G. Richard Thoman.
The consolidated action is a class action on behalf of all persons and
entities who purchased Xerox Corporation common stock during the
period October 22, 1998 through October 7, 1999 inclusive (“Class
Period”) and who suffered a loss as a result of misrepresentations or

omissions by Defendants as alleged by Plaintiffs (the “Class”). The Class
alleges that in violation of Section 10(b) and/or 20(a) of the Securities
Exchange Act of 1934, as amended (“1934 Act”), and SEC Rule 10b-5
thereunder, each of the defendants is liable as a participant in a
fraudulent scheme and course of business that operated as a fraud or
deceit on purchasers of the Company’s common stock during the Class
Period by disseminating materially false and misleading statements
and/or concealing material facts relating to the defendants’ alleged
failure to disclose the material negative impact that the April 1998
restructuring had on the Company’s operations and revenues. The
complaint further alleges that the alleged scheme: (i) deceived the
investing public regarding the economic capabilities, sales proficiencies,
growth, operations and the intrinsic value of the Company’s common
stock; (ii) allowed several corporate insiders, such as the named
individual defendants, to sell shares of privately held common stock
of the Company while in possession of materially adverse, non-
public information; and (iii) caused the individual plaintiffs and the
other members of the purported class to purchase common stock
of the Company at inflated prices. The complaint seeks unspecified
compensatory damages in favor of the plaintiffs and the other
members of the purported class against all defendants, jointly and
severally, for all damages sustained as a result of defendants’ alleged
wrongdoing, including interest thereon, together with reasonable costs
and expenses incurred in the action, including counsel fees and expert
fees. In 2001, the Court denied the defendants’ motion for dismissal
of the complaint. The plaintiffs’ motion for class certification was
denied by the Court in 2006, without prejudice to refiling. In February
2007, the Court granted the motion of the International Brotherhood
of Electrical Workers Welfare Fund of Local Union No. 164, Robert W.
Roten, Robert Agius (“Agius”) and Georgia Stanley to appoint them as
additional lead plaintiffs.

In July 2007, the Court denied plaintiffs’ renewed motion for class
certification, without prejudice to renewal after the Court holds a
pre-filing conference to identify factual disputes the Court will be
required to resolve in ruling on the motion. After that conference and
Agius’s withdrawal as lead plaintiff and proposed class representative,
in February 2008 plaintiffs filed a second renewed motion for class
certification. In April 2008, defendants filed their response and motion
to disqualify Milberg LLP as a lead counsel. On September 30, 2008,
the Court entered an order certifying the class and denying the
appointment of Milberg LLP as class counsel. Subsequently, on April 9,
2009, the Court denied defendants’ motion to disqualify Milberg LLP.
On November 6, 2008, the defendants filed a motion for summary
judgment. Briefing with respect to the motion is complete. The Court
has not yet rendered a decision. The parties also filed motions to
exclude the testimony of certain expert witnesses. On April 22, 2009,
the Court denied plaintiffs’ motions to exclude the testimony of two
of defendants’ expert witnesses. On September 30, 2010, the Court
denied plaintiffs’ motion to exclude the testimony of another of
defendants’ expert witnesses. The Court also granted defendants’

Xerox 2012 Annual Report

103

Notes to Consolidated Financial Statements
(in millions, except per-share data and where otherwise noted)

motion to exclude the testimony of one of plaintiffs’ expert witnesses,
and granted in part and denied in part defendants’ motion to exclude
the testimony of plaintiffs’ two remaining expert witnesses. The
individual defendants and we deny any wrongdoing and are vigorously
defending the action. At this time, we do not believe it is reasonably
possible that we will incur additional material losses in excess of the
amount we have already accrued for this matter. In the course of
litigation, we periodically engage in discussions with plaintiffs’ counsel
for possible resolution of this matter. Should developments cause a
change in our determination as to an unfavorable outcome, or result
in a final adverse judgment or a settlement for a significant amount,
there could be a material adverse effect on our results of operations,
cash flows and financial position in the period in which such change in
determination, judgment or settlement occurs.

Guarantees, Indemnifications and Warranty Liabilities

Indemnifications Provided as Part of Contracts and Agreements

We are a party to the following types of agreements pursuant to which
we may be obligated to indemnify the other party with respect to
certain matters:

Contracts that we entered into for the sale or purchase of businesses

or real estate assets, under which we customarily agree to hold
the other party harmless against losses arising from a breach of
representations and covenants, including obligations to pay rent.
Typically, these relate to such matters as adequate title to assets
sold, intellectual property rights, specified environmental matters
and certain income taxes arising prior to the date of acquisition.

Guarantees on behalf of our subsidiaries with respect to real estate
leases. These lease guarantees may remain in effect subsequent to
the sale of the subsidiary.

Agreements to indemnify various service providers, trustees and

bank agents from any third-party claims related to their performance
on our behalf, with the exception of claims that result from third
party’s own willful misconduct or gross negligence.

Guarantees of our performance in certain sales and services

contracts to our customers and indirectly the performance of third
parties with whom we have subcontracted for their services. This
includes indemnifications to customers for losses that may be
sustained as a result of the use of our equipment at a customer’s
location.

In each of these circumstances, our payment is conditioned on the
other party making a claim pursuant to the procedures specified in
the particular contract and such procedures also typically allow us to
challenge the other party’s claims. In the case of lease guarantees,
we may contest the liabilities asserted under the lease. Further, our
obligations under these agreements and guarantees may be limited
in terms of time and/or amount, and in some instances, we may have
recourse against third parties for certain payments we made.

104

Patent Indemnifications

In most sales transactions to resellers of our products, we indemnify
against possible claims of patent infringement caused by our products
or solutions. In addition, we indemnify certain software providers
against claims that may arise as a result of our use or our subsidiaries’,
customers’ or resellers’ use of their software in our products and
solutions. These indemnities usually do not include limits on the claims,
provided the claim is made pursuant to the procedures required in the
sales contract.

Indemnification of Officers and Directors

Our corporate by-laws require that, except to the extent expressly
prohibited by law, we must indemnify Xerox Corporation’s officers
and directors against judgments, fines, penalties and amounts paid in
settlement, including legal fees and all appeals, incurred in connection
with civil or criminal actions or proceedings, as it relates to their services
to Xerox Corporation and our subsidiaries. Although the by-laws
provide no limit on the amount of indemnification, we may have
recourse against our insurance carriers for certain payments made by
us. However, certain indemnification payments (such as those related
to “clawback” provisions in certain compensation arrangements) may
not be covered under our directors’ and officers’ insurance coverage.
In addition, we indemnify certain fiduciaries of our employee benefit
plans for liabilities incurred in their service as fiduciary whether or not
they are officers of the Company.

Product Warranty Liabilities

In connection with our normal sales of equipment, including those
under sales-type leases, we generally do not issue product warranties.
Our arrangements typically involve a separate full service maintenance
agreement with the customer. The agreements generally extend
over a period equivalent to the lease term or the expected useful life
of the equipment under a cash sale. The service agreements involve
the payment of fees in return for our performance of repairs and
maintenance. As a consequence, we do not have any significant
product warranty obligations, including any obligations under customer
satisfaction programs. In a few circumstances, particularly in certain
cash sales, we may issue a limited product warranty if negotiated by
the customer. We also issue warranties for certain of our entry level
products, where full service maintenance agreements are not available.
In these instances, we record warranty obligations at the time of the
sale. Aggregate product warranty liability expenses for the three years
ended December 31, 2012 were $29, $30 and $33, respectively. Total
product warranty liabilities as of December 31, 2012 and 2011 were
$14 and $16, respectively.

•
•
•
•
Other Contingencies

We have issued or provided the following guarantees as of December
31, 2012:

$454 for letters of credit issued to (i) guarantee our performance
under certain services contracts; (ii) support certain insurance
programs and (iii) support our obligations related to the Brazil tax
and labor contingencies.

$736 for outstanding surety bonds. Certain contracts, primarily those
involving public sector customers, require us to provide a surety bond
as a guarantee of our performance of contractual obligations.

In general, we would only be liable for the amount of these guarantees
in the event of default in our performance of our obligations under
each contract; the probability of which we believe is remote. We believe
that our capacity in the surety markets as well as under various credit
arrangements (including our Credit Facility) is sufficient to allow us to
respond to future requests for proposals that require such credit support.

We have service arrangements where we service third-party student
loans in the Federal Family Education Loan program (“FFEL”) on behalf
of various financial institutions. We service these loans for investors
under outsourcing arrangements and do not acquire any servicing
rights that are transferable by us to a third party. At December 31,
2012, we serviced a FFEL portfolio of approximately 3.7 million loans
with an outstanding principal balance of approximately $53.0 billion.
Some servicing agreements contain provisions that, under certain
circumstances, require us to purchase the loans from the investor if the
loan guaranty has been permanently terminated as a result of a loan
default caused by our servicing error. If defaults caused by us are cured
during an initial period, any obligation we may have to purchase these
loans expires. Loans that we purchase may be subsequently cured,
the guaranty reinstated and the loans repackaged for sale to third
parties. We evaluate our exposure under our purchase obligations on
defaulted loans and establish a reserve for potential losses, or default
liability reserve, through a charge to the provision for loss on defaulted
loans purchased. The reserve is evaluated periodically and adjusted
based upon management’s analysis of the historical performance of
the defaulted loans. As of December 31, 2012, other current liabilities
include reserves which we believe to be adequate. At December 31,
2012, other current liabilities include reserves of approximately $3.6 for
losses on defaulted loans purchased.

Note 18 – Preferred Stock

Series A Convertible Preferred Stock

In 2010, in connection with our acquisition of ACS, we issued 300,000
shares of Series A convertible perpetual preferred stock with an
aggregate liquidation preference of $300 and an initial fair value of
$349. The convertible preferred stock pays quarterly cash dividends
at a rate of 8% per year ($24 per year). Each share of convertible
preferred stock is convertible at any time, at the option of the holder,

into 89.8876 shares of common stock for a total of 26,966 thousand
shares (reflecting an initial conversion price of approximately $11.125
per share of common stock), subject to customary anti-dilution
adjustments.

On or after February 5, 2015, if the closing price of our common stock
exceeds 130% of the then applicable conversion price (currently
$11.125 per share of common stock) for 20 out of 30 trading days,
we have the right to cause any or all of the convertible preferred stock
to be converted into shares of common stock at the then applicable
conversion rate. The convertible preferred stock is also convertible, at
the option of the holder, upon a change in control, at the applicable
conversion rate plus an additional number of shares determined by
reference to the price paid for our common stock upon such change
in control. In addition, upon the occurrence of certain fundamental
change events, including a change in control or the delisting of Xerox’s
common stock, the holder of convertible preferred stock has the right to
require us to redeem any or all of the convertible preferred stock in cash
at a redemption price per share equal to the liquidation preference and
any accrued and unpaid dividends to, but not including the redemption
date. The convertible preferred stock is classified as temporary equity
(i.e., apart from permanent equity) as a result of the contingent
redemption feature.

Note 19 – Shareholders’ Equity

Preferred Stock

As of December 31, 2012, we had one class of preferred stock
outstanding. See Note 18 – Preferred Stock for further information. We
are authorized to issue approximately 22 million shares of cumulative
preferred stock, $1.00 par value per share.

Common Stock

We have 1.75 billion authorized shares of common stock, $1.00
par value per share. At December 31, 2012, 155 million shares were
reserved for issuance under our incentive compensation plans,
48 million shares were reserved for debt to equity exchanges,
27 million shares were reserved for conversion of the Series A
convertible preferred stock and 2 million shares were reserved for
the conversion of convertible debt.

Treasury Stock

We account for the repurchased common stock under the cost method
and include such treasury stock as a component of our common
shareholder’s equity. Retirement of treasury stock is recorded as a
reduction of Common stock and Additional paid-in capital at the time
such retirement is approved by our Board of Directors.

Xerox 2012 Annual Report

105

•
•
Notes to Consolidated Financial Statements
(in millions, except per-share data and where otherwise noted)

The following provides cumulative information relating to our share
repurchase programs from their inception in October 2005 through
December 31, 2012 (shares in thousands):

Authorized share repurchase programs

Share repurchase cost

Share repurchase fees

Number of shares repurchased

6,000

4,691

428,314

In 2012, the Board of Directors authorized an additional $1.5 billion in
share repurchase bringing the total authorization to $6 billion.

The following table reflects the changes in Common and Treasury stock
shares (shares in thousands):

Common Stock Treasury Stock
Shares

Balance at December 31, 2009

Stock based compensation plans, net

ACS acquisition (1)

Other

869,381

37,018

489,802

1,377

Balance at December 31, 2010

1,397,578

Stock based compensation plans, net

Contributions to U.S. pension plan (2)

11,027

16,645

–

Acquisition of Treasury stock

–

87,943

Cancellation of Treasury stock

(72,435)

Other

–

Balance at December 31, 2011

1,352,849

15,508

Stock based compensation plans, net

Contributions to U.S. pension plan (2)

17,343

15,366

–

Acquisition of Treasury stock

–

146,278

Cancellation of Treasury stock

(146,862)

Other

–

Balance at December 31, 2012

1,238,696

14,924

(1) Refer to Note 3 – Acquisitions for additional information.
(2) Refer to Note 15 – Employee Benefits Plans for additional information.

Stock-Based Compensation

We have a long-term incentive plan whereby eligible employees
may be granted restricted stock units (“RSUs”), performance shares
(“PSs”) and non-qualified stock options. We grant stock-based awards
in order to continue to attract and retain employees and to better
align employees’ interests with those of our shareholders. Each of
these awards is subject to settlement with newly issued shares of our
common stock. At December 31, 2012 and 2011, 50 million and 31
million shares, respectively, were available for grant of awards.

106

Stock-based compensation expense was as follows:

Year Ended December 31,

2012

2011

2010

Stock-based compensation expense, pre-tax

$ 125

$ 123

Income tax benefit recognized in earnings

Restricted Stock Units: Compensation expense is based upon the
grant date market price for most awards. The primary grant in 2009
had a market based condition and therefore the grant date price was
based on a Monte Carlo simulation. Compensation expense is recorded
over the vesting period, which is normally three years from the date
of grant, based on management’s estimate of the number of shares
expected to vest.

Performance Shares: We grant officers and selected executives PSs
that vest contingent upon meeting pre-determined Revenue, Earnings
per Share (“EPS”) and Cash Flow from Operations targets. These
shares entitle the holder to one share of common stock, payable after
a three-year period and the attainment of the stated goals. If the
annual actual results for Revenue exceed the stated targets and if
the cumulative three-year actual results for EPS and Cash Flow from
Operations exceed the stated targets, then the plan participants
have the potential to earn additional shares of common stock. This
overachievement cannot exceed 50% for officers and 25% for non-
officers of the original grant.

The fair value of PSs is based upon the market price of our stock on
the date of the grant. Compensation expense is recognized over the
vesting period, which is normally three years from the date of grant,
based on management’s estimate of the number of shares expected
to vest. If the stated targets are not met, any recognized compensation
cost would be reversed.

In connection with the ACS acquisition, selected ACS executives
received a special one-time grant of PSs that vest over a three-year
period ending February 2013 contingent upon ACS meeting pre-
determined annual earnings targets. These shares entitle the holder to
one share of common stock, payable after the three-year period and
the attainment of the targets. The aggregate number of shares that
may be delivered based on achievement of the targets was determined
on the date of grant and ranges in value as follows: 50% of base salary
(threshold); 100% of base salary (target); and 200% of base salary
plus 50% of the value of the August 2009 options (maximum).

Employee Stock Options: With the exception of the conversion of
ACS options in connection with the ACS acquisition (see below), we
have not issued any new stock options associated with our employee
long-term incentive plan since 2004. Substantially all stock options
previously issued under our employee long-term incentive plan are fully
exercised, cancelled or expired as of December 31, 2012.

Summary of Stock-based Compensation Activity

(Shares in thousands; amounts per share)

Restricted Stock Units

Outstanding at January 1

Granted

Vested

Cancelled

2012

2011

Weighted
Average Grant
Date Fair
Value

2010

Weighted
Average Grant
Date Fair
Value

33,784

$ 8.70

32,431

$ 8.68

25,127

$ 10.18

13,033

7.82

8,035

10.66

(14,848)

6.89

(5,225)

11.64

(1,555)

8.97

(1,457)

8.57

Outstanding at December 31

30,414

9.19

33,784

8.70

Performance Shares

Outstanding at January 1

Granted

Vested

Cancelled

9,763

5,193

–

$ 9.21

7.87

–

7,771

4,852

$ 9.78

10.42

(1,587)

12.84

(420)

8.96

(1,273)

12.79

Outstanding at December 31

14,536

8.74

9,763

9.21

11,845

(3,671)

(870)

32,431

4,874

5,364

(1,566)

(901)

7,771

8.56

18.22

10.36

8.68

$ 15.49

8.10

18.48

15.51

9.78

Stock Options

Outstanding at January 1

Granted

Cancelled/expired

Exercised

Outstanding at December 31

Exercisable at December 31

50,070

$ 6.98

71,038

$ 8.00

28,363

$ 10.13

–

(8,617)

8.58

(14,889)

8.38

(7,721)

5.69

(6,079)

8.21

33,732

28,676

6.86

6.95

50,070

39,987

6.98

7.14

96,662

(2,735)

(51,252)

71,038

57,985

6.79

7.33

6.92

8.00

8.38

The total unrecognized compensation cost related to non-vested stock-
based awards at December 31, 2012 was as follows:

Information related to stock options outstanding and exercisable at
December 31, 2012 was as follows:

Awards

Restricted Stock Units

Performance Shares

Stock Options

Total

Remaining Weighted-
Unrecognized Average Vesting Period
(Years)
Compensation

$ 125

$ 195

Aggregate intrinsic value

Weighted-average remaining
contractual life (years)

1.5

1.6

Options

Outstanding Exercisable

$ 5

4.3

3.9

The aggregate intrinsic value of outstanding RSUs and PSs awards was
as follows:

Awards

Restricted Stock Units

Performance Shares

December 31, 2012

$ 207

Xerox 2012 Annual Report

107

Notes to Consolidated Financial Statements
(in millions, except per-share data and where otherwise noted)

The total intrinsic value and actual tax benefit realized for vested and exercised stock-based awards was as follows:

Awards

December 31, 2012

December 31, 2011

December 31, 2010

Total
Intrinsic
Value

Cash
Received

Tax
Benefit

Total
Intrinsic
Value

Cash
Received

Tax
Benefit

Total
Intrinsic
Value

Cash
Received

Tax
Benefit

Restricted Stock Units

$ 117

–

$ 33

$ 56

$ 31

Performance Shares

Stock Options

–

$ 22

–

183

$ 10

155

No Performance Shares vested in 2012 since the 2009 primary award grant that normally would have vested in 2012 was replaced with a grant of
Restricted Stock Units with a market based condition and therefore were accounted and reported for as part of Restricted Stock Units.

in-control provisions, and was recorded as part of the acquisition fair
value. The remaining $54 is associated with ACS options issued in
August 2009 which did not fully vest and become exercisable upon
the acquisition, but continue to vest according to specified vesting
schedules and, therefore, is being expensed as compensation cost over
the remaining vesting period. The options generally expire 10 years
from date of grant. 33,693 thousand Xerox options issued upon this
conversion remain outstanding at December 31, 2012.

Pre-August 2009 Options

August 2009 Options

$ 6.89

37.90%

0.23%

1.97%

0.75 years

$ 6.33

38.05%

1.96%

1.97%

4.2 years

ACS Acquisition

In connection with the acquisition of ACS (see Note 3 – Acquisitions for
additional information), outstanding ACS options were converted into
96,662 thousand Xerox options. The Xerox options have a weighted
average exercise price of $6.79 per option. The estimated fair value
associated with the options issued was approximately $222 based on a
Black-Scholes valuation model utilizing the assumptions stated below.
Approximately $168 of the estimated fair value is associated with ACS
options issued prior to August 2009, which became fully vested and
exercisable upon the acquisition in accordance with preexisting change-

Assumptions

Strike price

Expected volatility

Risk-free interest rate

Dividend yield

Expected term

108

Note 20 – Other Comprehensive Income

Other Comprehensive Income is composed of the following:

Year Ended December 31,

2012

2011

2010

Pre-tax

Net of Tax

Pre-tax

Net of Tax

Pre-tax

Net of Tax

Translation Adjustments Gains (Losses)

$ 104

$ 113

(103)

$ (105)

(29)

(35)

Unrealized (Losses) Gains:

Changes in fair value of cash flow hedges – (losses) gains

Changes in cash flow hedges reclassed to earnings (1)

Other

(50)

(37)

–

(35)

(28)

–

(14)

(1)

(9)

(1)

(28)

(1)

(18)

(1)

Net unrealized (losses) gains

(87)

(63)

$ 12

(191)

164

–

$ 23

–

Defined Benefit Plans (Losses) Gains:

Actuarial/Prior service losses

Amortization (2)

Curtailment gain – recognition of prior service credit

Fuji Xerox changes in defined benefit plans, net (3)

Other (4)

(852)

126

–

(13)

(55)

(578)

–

(13)

(55)

(872)

(107)

(31)

(66)

(31)

(607)

(106)

Changes in defined benefit plans (losses) gains

$ (794)

$ (561)

(913)

$ (636)

Other Comprehensive (Loss) Income

(777)

(511)

(1,001)

(729)

Less: Other comprehensive loss attributable to
noncontrolling interests

–

(1)

–

Other Comprehensive (Loss) Income Attributable to Xerox

$ (777)

$ (511)

$ (1,000)

$ (728)

(1) Reclassified to Cost of sales – refer to Note 13 – Financial Instruments for additional information regarding our cash flow hedges.
(2) Reclassified to Total Net Periodic Benefit Cost – refer to Note 15 – Employee Benefit Plans for additional information.
(3) Represents our share of Fuji Xerox’s benefit plan changes.
(4) Primarily represents currency impact on cumulative amount of benefit plan net actuarial losses and prior service credits included in AOCL.

Accumulated Other Comprehensive Loss (“AOCL”)

AOCL is composed of the following:

December 31,

2012

2011

2010

Cumulative translation adjustments

(826)

(939)

(835)

Benefit plans net actuarial losses
and prior service credits (1)

(2,364)

(1,803)

(1,167)

Other unrealized (losses) gains, net

(37)

Total Accumulated Other
Comprehensive Loss

(1) Includes our share of Fuji Xerox.

$ (3,227)

$ (2,716)

$ (1,988)

Xerox 2012 Annual Report

109

Notes to Consolidated Financial Statements
(in millions, except per-share data and where otherwise noted)

Note 21 – Earnings per Share

The following table sets forth the computation of basic and diluted earnings per share of common stock (shares in thousands):

Basic Earnings per Share:

Net income attributable to Xerox

Accrued dividends on preferred stock

Adjusted Net Income Available to Common Shareholders

Weighted-average common shares outstanding

Basic Earnings per Share

Diluted Earnings per Share:

Net income attributable to Xerox

Accrued dividends on preferred stock

Interest on convertible securities, net

Year Ended December 31,

2012

2011

2010

1,195

1,295

(24)

1,171

1,271

606

(21)

585

1,302,053

1,388,096

1,323,431

0.90

0.92

0.44

1,195

1,295

(24)

–

606

(21)

–

585

Adjusted Net Income Available to Common Shareholders

1,172

1,296

Weighted-average common shares outstanding

Common shares issuable with respect to:

Stock options

Restricted stock and performance shares

Convertible preferred stock

Convertible securities

1,302,053

1,388,096

1,323,431

4,335

20,804

–

1,992

9,727

16,993

26,966

1,992

13,497

13,800

–

Adjusted Weighted Average Common Shares Outstanding

1,329,184

1,443,774

1,350,728

Diluted Earnings per Share

0.88

0.90

0.43

The following securities were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive:

Stock options

Restricted stock and performance shares

Convertible preferred stock

Convertible securities

29,397

23,430

26,966

–

79,793

40,343

26,018

–

57,541

25,983

26,966

1,992

66,361

112,482

Dividends per common share

0.17

110

Reports of Management

Management’s Responsibility for Financial Statements

Our management is responsible for the integrity and objectivity of all
information presented in this annual report. The consolidated financial
statements were prepared in conformity with accounting principles
generally accepted in the United States of America and include
amounts based on management’s best estimates and judgments.
Management believes the consolidated financial statements fairly
reflect the form and substance of transactions and that the financial
statements fairly represent the Company’s financial position and results
of operations.

The Audit Committee of the Board of Directors, which is composed
solely of independent directors, meets regularly with the independent
auditors, PricewaterhouseCoopers LLP, the internal auditors and
representatives of management to review accounting, financial
reporting, internal control and audit matters, as well as the nature and
extent of the audit effort. The Audit Committee is responsible for the
engagement of the independent auditors. The independent auditors
and internal auditors have free access to the Audit Committee.

Management’s Report on Internal Control Over
Financial Reporting

Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term is
defined in the rules promulgated under the Securities Exchange
Act of 1934. Under the supervision and with the participation
of our management, including our principal executive, financial
and accounting officers, we have conducted an evaluation of the
effectiveness of our internal control over financial reporting based on
the framework in “Internal Control – Integrated Framework” issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.

Based on the above evaluation, management has concluded that our
internal control over financial reporting was effective as of December
31, 2012.

Ursula M. Burns
Chief Executive Officer

Luca Maestri
Chief Financial Officer

Gary R. Kabureck
Chief Accounting Officer

Xerox 2012 Annual Report

111

Report of Independent Registered Public Accounting Firm

A company’s internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes
those policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (iii)
provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company’s assets
that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.

PricewaterhouseCoopers LLP
Stamford, Connecticut
February 21, 2013

To the Board of Directors and Shareholders of Xerox
Corporation:

In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of income, comprehensive
income, cash flows and shareholders’ equity present fairly, in all
material respects, the financial position of Xerox Corporation and its
subsidiaries at December 31, 2012 and 2011, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 2012 in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion,
the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2012, based on
criteria established in Internal Control – Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Company’s management is responsible for
these financial statements, for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying
Management’s Report on Internal Control over Financial Reporting. Our
responsibility is to express opinions on these financial statements and
on the Company’s internal control over financial reporting based on
our integrated audits. We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements
are free of material misstatement and whether effective internal
control over financial reporting was maintained in all material respects.
Our audits of the financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists,
and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also included
performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis
for our opinions.

112

Quarterly Results of Operations (Unaudited)
(in millions, except per-share data)

2012

Revenues

Costs and Expenses

Income Before Income Taxes and Equity Income

Income tax expenses

Equity in net income of unconsolidated affiliates

Net Income

Less: Net income – noncontrolling interests

Net Income Attributable to Xerox

Basic Earnings per Share (1)

Diluted Earnings per Share (1)

2011

Revenues

Costs and Expenses

Income Before Income Taxes and Equity Income

Income tax expenses

Equity in net income of unconsolidated affiliates

Net Income

Less: Net income – noncontrolling interests

Net Income Attributable to Xerox

Basic Earnings per Share (1)

Diluted Earnings per Share (1)

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

Full
Year

$ 5,503

$ 5,541

$ 5,423

$ 5,923

$ 22,390

5,190

313

5,190

351

5,106

317

5,556

367

21,042

1,348

277

152

276

316

288

343

1,223

$ 269

$ 0.20

0.19

$ 309

$ 0.23

0.22

$ 282

$ 0.21

0.21

$ 335

$ 1,195

$ 0.26

0.90

0.26

0.88

$ 5,465

$ 5,614

$ 5,583

$ 5,964

$ 22,626

5,115

350

5,213

401

108

5,216

367

5,517

447

102

21,061

1,565

386

149

289

327

329

383

1,328

$ 281

$ 0.20

0.19

$ 319

$ 0.22

0.22

$ 320

$ 0.23

0.22

$ 375

$ 1,295

$ 0.27

0.92

0.26

0.90

(1) The sum of quarterly earnings per share may differ from the full-year amounts due to rounding, or in the case of diluted earnings per share, because securities that are anti-dilutive in certain

quarters may not be anti-dilutive on a full-year basis.

Xerox 2012 Annual Report

113

Five Years in Review
(in millions, except per-share data)

Per-Share Data

Income from continuing operations

Basic

Diluted

Earnings

Basic

Diluted

Common stock dividends declared

Operations

Revenues

Sales

Outsourcing, service and rentals

Finance income

Income from continuing operations

Income from continuing operations – Xerox

Net income

Net income – Xerox

Financial Position

Working capital

Total Assets

Consolidated Capitalization

Short-term debt and current portion of long-term debt

Long-term debt

Total Debt

Liability to subsidiary trust issuing preferred securities

Series A convertible preferred stock

Xerox shareholders’ equity

Noncontrolling interests

Total Consolidated Capitalization

Selected Data and Ratios

2012

2011

2010 (1)

2009

2008

0.90

0.92

0.88

0.90

0.88

0.17

0.92

0.90

0.17

0.44

0.43

0.44

0.43

0.17

0.56

0.26

0.55

0.26

0.56

0.55

0.17

0.26

0.17

$ 22,390

$ 22,626

$ 21,633

$ 15,179

$ 17,608

6,578

7,126

7,234

15,215

14,868

13,739

6,646

7,820

8,325

8,485

597

1,223

1,195

1,223

1,195

632

1,328

1,295

1,328

1,295

660

637

606

637

606

713

516

485

516

485

798

265

230

265

230

2,363

$ 1,531

2,222

$ 5,270

$ 2,700

30,015

30,116

30,600

24,032

22,447

1,042

7,447

8,489

–

349

1,545

7,088

8,633

–

349

1,370

7,237

8,607

650

349

988

8,276

9,264

649

–

1,610

6,774

8,384

648

–

11,521

11,876

12,006

7,050

6,238

143

149

153

141

120

$ 20,502

$ 21,007

$ 21,765

$ 17,104

$ 15,390

Common shareholders of record at year-end

39,397

41,982

43,383

44,792

46,541

Book value per common share

Year-end common stock market price

Employees at year-end

Gross margin

Sales gross margin

Outsourcing, service and rentals gross margin

Finance gross margin

(1) 2010 results include the acquisition of ACS

114

9.41

6.82

8.88

7.96

8.59

11.52

8.11

8.46

7.21

7.97

147,600

139,700

136,500

53,600

31.4%

33.7%

29.0%

66.8%

32.8%

34.1%

30.9%

63.4%

34.4%

34.5%

33.1%

62.7%

39.7%

33.9%

42.6%

62.0%

57,100

38.9%

33.7%

41.9%

61.8%

Performance Graph and Corporate Information

Comparison of Cumulative Five-Year Total Return

$150

$100

$50

2007

2008

2009

2010

2011

2012

Xerox Corporation

S&P 500 Index

S&P 500 Information Technology Index

Total Return to Shareholders

(Includes reinvestment of dividends)

2007

2008

2009

2010

2011

2012

Xerox Corporation

S&P 500 Index

S&P 500 Information Technology Index

$ 100.00

$ 49.97

$ 54.46

$ 75.46

$ 53.16

$ 46.59

$ 100.00

63.00

56.86

79.67

91.96

91.68

101.32

93.61

103.77

108.59

119.15

Year Ended December 31,

Source: Standard & Poor’s Investment Services
Notes: Graph assumes $100 invested on December 31, 2007 in Xerox Corp., the S&P 500 Index and the
S&P 500 Information Technology Index, respectively, and assumes dividends are reinvested.

Stock Exchange Information

Xerox common stock (XRX) is listed on the New York Stock Exchange and the Chicago Stock Exchange.

Xerox Common Stock Prices and Dividends

New York Stock Exchange composite prices *

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

2012

High

Low

Dividends Paid per Share

2011

High

Low

Dividends Paid per Share

* Price as of close of business

8.76

8.15

7.94

7.73

0.0425

6.94

0.0425

6.38

0.0425

$ 11.71

$ 10.88

$ 10.71

9.87

0.0425

9.40

0.0425

6.97

0.0425

7.39

6.23

0.0425

8.57

6.72

0.0425

Xerox 2012 Annual Report

115

Officers

Ursula M. Burns
Chairman and Chief Executive Officer

Lynn R. Blodgett
Executive Vice President
President, Xerox Services

James A. Firestone
Executive Vice President
President, Corporate Operations

Armando Zagalo de Lima
Executive Vice President
President, Xerox Technology

Don H. Liu
Senior Vice President
General Counsel and Secretary

Thomas J. Maddison
Senior Vice President
Chief Human Resources Officer

116

David Amoriell
Vice President
Chief Operating Officer,
Transportation, Central and Local Government
Xerox Services

Thomas Blodgett
Vice President
Chief Operating Officer, Europe
Xerox Services

David Bywater
Vice President
Chief Operating Officer, State Government
Xerox Services

Christa B. Carone
Vice President
Chief Marketing Officer

M. Stephen Cronin
Vice President
President, Large Enterprise Operations
Xerox Technology

Joseph H. Mancini Jr.
Vice President
Chief Accounting Officer

Ivy Thomas McKinney
Vice President
Deputy General Counsel and
Chief Ethics Officer

Shaun W. Pantling
Vice President
President, Europe Client Operations
Xerox Technology

Russell M. Peacock
Vice President
President, Global Technology and Delivery Group,
Global Imaging Systems and
Xerox Canada
Xerox Technology

Rhonda L. Seegal
Vice President
Treasurer

Richard M. Dastin
Vice President
President, Office and Solutions Business Group
Xerox Technology

Hervé Tessler
Vice President
President, Developing Markets Operations
Xerox Technology

Kathleen S. Fanning
Vice President
Vice President, Worldwide Tax

Michael R. Festa
Vice President
Chief Financial Officer
Xerox Services

Jacques H. Guers
Vice President
President, Xerox Europe
Xerox Technology

Connie Harvey
Vice President
Chief Operating Officer, Commercial Services
Xerox Services

Jeffrey Jacobson
Vice President
President, Global Graphic Communications
Operations
Xerox Technology

Kevin Kyser
Vice President
Chief Operating Officer,
Information Technology Outsourcing
Xerox Services

James H. Lesko
Vice President
Vice President, Investor Relations

Sophie V. Vandebroek
Vice President
Chief Technology Officer and
President, Xerox Innovation Group

Leslie F. Varon
Vice President
Vice President, Finance and Corporate Controller

Ann Vezina
Vice President
Chief Operating Officer,
Enterprise Business Process Outsourcing
Xerox Services

Kevin M. Warren
Vice President
President, U.S. Client Operations
Xerox Technology

Douraid Zaghouani
Vice President
President, Channel Partner Operations
Xerox Technology

Carol J. Zierhoffer
Vice President
Chief Information Officer

Douglas H. Marshall
Assistant Secretary

Carol A. McFate
Assistant Treasurer
Chief Investment Officer

FYI

Shareholder Information

For investor information, including
comprehensive earnings releases:
visit www.xerox.com/investor or call
888.979.8378.

For shareholder services: call
800.828.6396 (TDD: 800.368.0328)
or 781.575.3222; or write to
Computershare Trust Company, N.A.
P.O. Box 43078
Providence, RI 02940-3078;
or use email available
at www.computershare.com.

Annual Meeting

Tuesday, May 21, 2013, 9:00 a.m. EDT
Xerox Corporate Headquarters
45 Glover Avenue
Norwalk, CT 06856

Proxy material mailed on April 8, 2013
to shareholders of record as of March 25, 2013.

Investor Contacts

Jennifer Horsley
jennifer.horsley@xerox.com

Joseph Ketchum
joseph.ketchum@xerox.com

This annual report is also available online
at www.xerox.com/investor.

Electronic Delivery Enrollment

Xerox offers shareholders the convenience
of electronic delivery including:
Immediate receipt of the
Proxy Statement and Annual Report
Online proxy voting

Registered Shareholders visit
http://www.eTree.com/Xerox
You are a registered shareholder if you have
your stock certificate in your possession or
if the shares are being held by our transfer
agent, Computershare.

Beneficial Shareholders visit
http://enroll.icsdelivery.com/xrx
You are a beneficial shareholder if you
maintain your position in Xerox within
a brokerage account.

How to Reach Us

Xerox Corporation
45 Glover Avenue
Norwalk, CT 06856-4505
United States
203.968.3000
www.xerox.com

Xerox Europe
Riverview
Oxford Road
Uxbridge
Middlesex
United Kingdom
UB8 1HS
+44.1895.251133

Fuji Xerox Co., Ltd.
Tokyo Midtown West
9-7-3, Akasaka
Minato-ku, Tokyo 107-0052
Japan
+81.3.6271.5111

Products and Services
www.xerox.com or by phone:
800.ASK.XEROX (800.275.9376)

Additional Information

The Xerox Foundation
203.849.2478
Evelyn Shockley, Manager

Diversity Programs and EEO-1 Reports
585.423.6157
www.xerox.com/diversity

Minority and Women-Owned
Business Suppliers
585.423.3150
www.xerox.com/supplierdiversity

Ethics Helpline
866.XRX.0001 (866.979.0001) North America;
International numbers and
Web submission tool on www.xerox.com/ethics
email: ethics@xerox.com

Environment, Health and Safety
Progress Report
800.828.6571, prompts 1, 3
www.xerox.com/environment

Global Citizenship
www.xerox.com/citizenship
email: citizenship@xerox.com

Governance
www.xerox.com/governance

Questions from Students and Educators
email: nancy.dempsey@xerox.com

Xerox Innovation
www.xerox.com/innovation

Independent Auditors
PricewaterhouseCoopers LLP
300 Atlantic Street
Stamford, CT 06901
203.539.3000

•
•
Xerox Corporation

45 Glover Avenue

P.O. Box 4505

Norwalk, CT 06856-4505

United States

203.968.3000

www.xerox.com

©2013 Xerox Corporation. All rights reserved. Xerox®, Xerox and Design®, ColorQube®, DocuColor®, FreeFlow®, iGen®, iGen4®, Phaser®, WorkCentre®
and Xerox Nuvera® are trademarks of, or licensed to Xerox Corporation in the United States and/or other countries. BR6027

002CSN8251