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    UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _________________________________________________ FORM 10-K _________________________________________________ (Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: December 31, 2014 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from: ______ to: _______ Commission File Number 001-04471 _________________________________________________ XEROX CORPORATION (Exact Name of Registrant as specified in its charter) _________________________________________________ New York 16-0468020 (State of incorporation) (IRS Employer Identification No.) P.O. Box 4505, 45 Glover Avenue, Norwalk, Connecticut 06856-4505 (203) 968-3000 (Address of principal executive offices) (Registrants telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, $1 par value New York Stock Exchange Chicago Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None ____________________________ Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Indicate by a check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No The aggregate market value of the voting stock of the registrant held by non-affiliates as of June 30, 2014 was $14,345,220,956. Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date: Class Outstanding at January 31, 2015 Common Stock, $1 par value 1,112,199,705 DOCUMENTS INCORPORATED BY REFERENCE Portions of the following document are incorporated herein by reference: Document Part of Form 10-K in which Incorporated III Xerox Corporation Notice of 2015 Annual Meeting of Shareholders and Proxy Statement (to be filed no later than 120 days after the close of the fiscal year covered by this report on Form 10-K)


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    FORWARD-LOOKING STATEMENTS From time to time, we and our representatives may provide information, whether orally or in writing, including certain statements in this Annual Report on Form 10-K, which are deemed to be "forward-looking" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Litigation Reform Act"). These forward-looking statements and other information are based on our beliefs as well as assumptions made by us using information currently available. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “will,” “should” and similar expressions, as they relate to us, are intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended or using other similar expressions. We do not intend to update these forward-looking statements, except as required by law. In accordance with the provisions of the Litigation Reform Act, we are making investors aware that such forward- looking statements, because they relate to future events, are by their very nature subject to many important factors that could cause actual results to differ materially from those contemplated by the forward-looking statements contained in this Annual Report on Form 10-K, any exhibits to this Form 10-K and other public statements we make. Such factors include, but are not limited to: changes in economic conditions, political conditions, trade protection measures, licensing requirements and tax matters in the United States and in the foreign countries in which we do business; changes in foreign currency exchange rates; our ability to successfully develop new products, technologies and service offerings and to protect our intellectual property rights; the risk that multi-year contracts with governmental entities could be terminated prior to the end of the contract term and that civil or criminal penalties and administrative sanctions could be imposed on us if we fail to comply with the terms of such contacts and applicable law; the risk that our bids do not accurately estimate the resources and costs required to implement and service very complex, multi-year governmental and commercial contracts, often in advance of the final determination of the full scope and design of such contracts or as a result of the scope of such contracts being changed during the life of such contracts; the risk that subcontractors, software vendors and utility and network providers will not perform in a timely, quality manner; service interruptions; actions of competitors and our ability to promptly and effectively react to changing technologies and customer expectations; our ability to obtain adequate pricing for our products and services and to maintain and improve cost efficiency of operations, including savings from restructuring actions and the relocation of our service delivery centers; the risk that individually identifiable information of customers, clients and employees could be inadvertently disclosed or disclosed as a result of a breach of our security systems; the risk in the hiring and retention of qualified personnel; the risk that unexpected costs will be incurred; our ability to recover capital investments; the risk that our Services business could be adversely affected if we are unsuccessful in managing the start-up of new contracts; the collectibility of our receivables for unbilled services associated with very large, multi-year contracts; reliance on third parties, including subcontractors, for manufacturing of products and provision of services; our ability to expand equipment placements; interest rates, cost of borrowing and access to credit markets; the risk that our products may not comply with applicable worldwide regulatory requirements, particularly environmental regulations and directives; the outcome of litigation and regulatory proceedings to which we may be a party; and other factors that are set forth in the “Risk Factors” section, the “Legal Proceedings” section, the “Management's Discussion and Analysis of Financial Condition and Results of Operations” section and other sections of this Annual Report on Form 10-K, as well as in our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. On December 18, 2014, Xerox Corporation announced that it had entered into an agreement to sell its Information Technology Outsourcing (“ITO”) business to Atos S.E. The transaction is subject to customary closing conditions and regulatory approval and is expected to close in the first half of 2015. As a result of the pending sale of the ITO business and having met applicable accounting requirements, Xerox is reporting the ITO business as a discontinued operation. The forward looking statements contained in this report are subject to the risk that the sale of the ITO business may not occur on the terms, within the time frame and/or in the manner previously disclosed, if at all.


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    XEROX CORPORATION FORM 10-K DECEMBER 31, 2014 TABLE OF CONTENTS Page Part I Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Item 4. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Part II Item 5. Market for the Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . 58 Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125 Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125 Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125 Part III Item 10. Directors, Executive Officers and Corporate Governance. . . . . . . . . . . . . . . . . . . . . . . 126 Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127 Item 13. Certain Relationships, Related Transactions and Director Independence . . . . . . . . . . 127 Item 14. Principal Auditor Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127 Part IV Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128 Signatures .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129 Schedule II Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130 Index of Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131


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    PART I ITEM 1. BUSINESS Xerox is the world's leading enterprise for business process and document management solutions. 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. We are a leader across large, diverse and growing markets estimated at nearly $650 billion. The global business process outsourcing market is very broad, encompassing multi-industry business processes as well as industry- specific business processes, and our addressable market is estimated at almost $300 billion. The document management market is estimated at roughly $100 billion and is comprised of the document systems, software, solutions and services that our customers have relied upon for years to help run their businesses and reduce their costs. Xerox led the establishment of the managed print services market, and continues today as the industry leader in this expanding market segment. The global information technology outsourcing market segments where we participate are estimated to be roughly $250 billion in aggregate. Market estimates are derived from third-party forecasts produced by firms such as Gartner and Nelson Hall, and from our internal assumptions. The following are some additional insights into these business areas: Business Process Outsourcing (BPO): We are the largest diversified business process outsourcing company worldwide, with an expertise in managing transaction-intensive processes. This includes services that support enterprises through multi-industry offerings such as customer care, transaction processing, finance and accounting, and human resources, as well as industry-focused offerings in areas such as healthcare, transportation, financial services, retail and telecommunications. Document Technology and Document Outsourcing (DO): Our document technology products and solutions support the work processes of our customers by providing them with an efficient, cost effective printing and communications infrastructure. Our DO service offerings help customers ranging from small businesses to global enterprises optimize their use of document systems and also their related document workflow and business processes. Information Technology Outsourcing (ITO): Our specialty is the design, development and delivery of flexible IT solutions, mapped to each client's needs and standards. Our secure data centers, help desks and managed storage facilities around the world provide a reliable IT infrastructure to our clients. On December 18, 2014, we announced an agreement to sell our ITO business to Atos SE (Atos). Atos is a leading international IT services company. The transaction is subject to customary closing conditions and regulatory approval and is expected to close in the first half of 2015. As a result of this pending transaction and having met applicable accounting requirements, we reported the ITO business as held for sale and a discontinued operation at December 31, 2014 and reclassified its results from the Services segment to Discontinued Operations. Subsequent to the closing of this transaction, Xerox will no longer directly market stand-alone IT services. Atos will provide IT services to our current BPO customers and will support much of Xerox's internal IT requirements. They will also be part of a broad network of IT providers with whom we can partner to provide world-class IT services as part of our future BPO offerings. This transaction is part of our ongoing portfolio management strategy and enables Xerox to increase our focus on our leading BPO and DO solutions where we can deliver the most value and expertise to our clients. Our Strategy and Business Model Our strategy is to apply technology and innovation to transform the way people work and live, and to create sustained shareholder value through growth in business services and continued leadership in document technology. We also create value through expanding margins and profits as well as a balanced capital allocation strategy that returns cash to shareholders, while investing for growth and competitive advantage. To accomplish this, we have established the following strategic priorities: 1


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    Leverage Brand Strength and Market Position We have a strong and valuable brand that continues to be ranked in the top percentile of the most valuable global brands. Well-recognized and respected, our brand is associated worldwide with delivering innovative solutions, and industry-leading business process and document management services and technology. Xerox has a broad, diverse set of offerings in Services and a strong, well-positioned product portfolio in Document Technology. We are strengthening our market positions by constantly evaluating our businesses and focusing our investments in areas where we have an advantage, and where the greatest market opportunities exist. We expect to accomplish this by targeting acquisitions and investing in businesses that will enhance our Services offerings and capabilities, capitalize on our deep industry expertise and expand services globally, while maintaining our Document Technology leadership in attractive market segments. Geographically, our footprint spans more than 180 countries and allows us to serve customers of all sizes to deliver superior technology and services regardless of complexity or number of customer locations. Profitably Grow Services in Attractive Markets Over half of our revenue was derived from business services in 2014. The business services markets have attractive market growth rates of mid-single digits or above and we believe we can grow our Services revenue at or above the market growth rates over time through both organic and inorganic growth. Across our business, we serve industry verticals where we have deep expertise resulting from years of experience, strong customer relationships, global scale and renowned innovation. Capitalizing on the opportunities that these strengths provide will continue to be key to our growth. We are also focusing on international markets for Services growth. Currently, our BPO revenues are largely derived from services provided to customers in the U.S. By leveraging our existing global presence and customer relationships, we are actively expanding our BPO services internationally, and we will also grow globally through acquisitions. Lead in Document Technology We are focused on maintaining our leadership position in the Document Technology market and continuing to innovate around our software, hardware and services offerings. For example, in 2014 we expanded the software and application capabilities of Xerox® ConnectKey®, a major new software and solutions capability we launched in 2013, and also broadened the number of devices that are enabled with this capability. In 2014, we expanded our product portfolio by introducing over twenty new devices and also launched over twenty new workflow and software solutions. These include products and solutions in the growing graphic communications market, and expanding upon our investments in the production inkjet market and further building upon our 2013 Impika acquisition. Continuing to bring innovative new products and solutions to market while also enhancing existing products and solutions will enable us to sustain our Document Technology market leadership. Innovate to Differentiate Our Offerings Differentiating our offerings is key to our strategy. A critical role of our research is to envision the future and define new research and competency areas for that future. We direct our research & development (R&D) investments to areas such as data analytics, business process automation, and improving the quality and reducing the environmental impact of digital printing. The proportion of our annual U.S. patent filings related to software, solutions and analytics oriented capabilities has increased each of the last five years and they represented almost forty percent of our filings in 2014. We are investing in attractive markets, such as healthcare, to create differentiation. In addition, our acquisitions target companies providing new capabilities and offering access to adjacent services, solutions and technologies. We expect this will deliver incremental value for our customers and drive profitable revenue growth for our business. Drive Operational Excellence Across Our Businesses Our operational excellence model leverages our global delivery capabilities, production model, incentive-based compensation process, proprietary systems and financial discipline to deliver increased productivity and lower costs for our customers and for our own business. Margin expansion is a key priority within Services and an overall opportunity for Xerox that we will achieve through specific initiatives aimed at improving our cost structure and portfolio mix. As markets shift, we undertake restructuring to optimize our workforce and facilities to best align our resources with the growth areas of our business, and to maximize profitability and cash flow in businesses that are declining. In Services, we realigned our delivery resources into global capability organizations in order to maximize Xerox 2014 Annual Report 2


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    our global scale and ensure service delivery excellence across our BPO offerings. We also have initiatives underway to continue improving our software platform implementation capability, which includes establishing strategic partnerships to supplement our internal capabilities. With our ongoing efforts and targeted initiatives in both Services and Document Technology, we look to maintain or increase our profitability and overall competitive positioning. Engage, Develop and Support Our People Our Services and Document Technology offerings and know-how are a powerful combination, and are supported by a talented global workforce focused on delivering value to our customers. We continue to nurture and develop our employees’ talents by investing in processes and systems to equip them with modern tools that will make it easier for them to perform their jobs more effectively and manage their careers, and by providing them opportunities for growth and development throughout their careers. Annuity-Based Business Model and Shareholder-Centered Capital Allocation Our business is based on an annuity model that provides significant recurring revenue and cash generation. In 2014, 84 percent of our total revenue was annuity-based; this includes contracted services, equipment maintenance, consumable 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. We remain committed to using our strong cash flow to deliver shareholder returns now and in the future through a balanced capital allocation strategy that includes share repurchase, acquisitions and dividends. Acquisitions and Divestitures The following is a summary of our acquisitions and divestitures in 2014. Additional details can be found in Note 3 - Acquisitions and Note 4 - Divestitures, in the Consolidated Financial Statements. Services Acquisitions and Divestiture In the Services segment, consistent with our strategy to expand our offerings and geographic reach through acquisitions and to actively manage our product portfolio, we acquired or divested the following companies: Invoco Holding GmbH (Invoco), a German-based customer care services provider. Smart Data Consulting, a New York-based provider of hosted and on-site e-discovery services. ISG Holdings, Inc. (ISG), a provider of bill review software and services and managed care programs for the workers compensation industry which are offered through two subsidiaries; California-based StrataCare and Florida-based Bunch CareSolutions. Consilience Software, Inc. (Consilience), an Austin-based company providing case management and workflow automation software to the public sector. The learning services unit of Seattle-based Intrepid Learning Solutions (closed January 2015). Truckload Management Services (TMS) business was divested. This was a non-core business that provided document capture and submission solutions as well as campaign management, media buying and digital marketing services to the long haul trucking and transportation industry. Document Technology and Other Acquisitions and Divestiture: In the Document Technology segment, consistent with our strategy to expand distribution to under-penetrated markets, we acquired Las Vegas, NV based Elan Office Systems and Birmingham, Alabama based Stewart of Alabama. Within the Other segment, we completed the closure of Xerox Audio Visual Solutions, Inc. (XAV), a non-core audio visual business within our Global Imaging Systems subsidiary (GIS). XAV provided audio visual equipment and services to enterprise and government customers. 3


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    Innovation and Research Xerox has a rich heritage of innovation, and innovation continues to be a core strength of the Company as well as a competitive differentiator. Our aim is to create value for our customers, our shareholders, and our people by driving innovation in key areas. Our investments in innovation align with our growth opportunities in areas like business process services, color printing and customized communication. Our research efforts can be categorized under four themes: 1. Usable Analytics - Transform big data into useful information resulting in better business decisions: Competitive advantage can be achieved by better utilizing available and real-time information. Today, information resides in an ever increasing universe of servers, repositories and formats. The vast majority of information is unstructured, including text, images, voice and videos. One key research area is making sense of unstructured information using natural language processing and semantic analysis. A second major research area focuses on developing proprietary methods for prescriptive analytics applied to business processes. Here, we seek to better manage very large data systems in order to extract business insights and use those insights to provide our clients with actionable recommendations. Tailoring these methods to various vertical applications leads to new customer value propositions. 2. Agile Enterprise - Create simple, automated and touch-less business processes resulting in lower cost, higher quality and increased agility: Businesses require agility in order to quickly respond to market changes and new business requirements. To enable greater business process agility, our research goals are to simplify, automate and enable business processes on the cloud via flexible platforms that run on robust and scalable infrastructures. Automation of business processes benefits from our research on image, video and natural language processing as well as machine learning. Application of these methods to business processes enables technology to perform tasks that today are performed manually, thus allowing workers to focus on higher level tasks. 3. Personalization @ Scale - Augment humans by providing secure, real-time, context-aware personalized products, solutions and services: Whether talking about business correspondence, personal communication, manufactured items or an information service, personalization increases the value to the recipient. Our research leads to technologies that improve the efficiency, economics and relevance of business services, such as customer care, benefits and educational services. Our proprietary printing technologies give us a strong platform to research and develop methods that create affordable, ubiquitous color printing. We also research how to expand the application of digital printing to cover new applications such as packaging and printing directly on end-use products. 4. Sustainable Enterprise & Society - Enhance the environmental and societal benefits of our offerings: Global demand for energy, and the environmental consequences of products used by enterprises and consumers, have elevated customer interest in sustainable solutions. Our research develops technologies that minimize the environmental impact of document systems and business processes. We seek opportunities to utilize processes and components that minimize life-cycle footprint and waste, and create zero bioaccumulation. We also actively seek to incorporate bio-based materials into our printing consumables. To help our customers optimize their operations, research is creating new enterprise-wide energy optimization tools, and user sustainability feedback systems. Global Research Centers We have four global research centers, each with a unique area of focus. They are places where creativity and entrepreneurship are truly valued. Our leadership has empowered employees to deliver leading-edge research and high-impact innovations that make a difference to our clients and the world. Our research centers are: Palo Alto Research Center (PARC): A wholly-owned subsidiary of Xerox located in Silicon Valley and Webster NY, PARC provides Xerox commercial and government clients with R&D and open innovation services. PARC scientists have deep technological expertise in big data analytics, intelligent sensing, computer vision, networking, printed electronics, energy, and digital design and manufacturing. In 2014 we consolidated our Webster research center operations into PARC. Xerox Research Center of Canada (XRCC): Located in Mississauga, Ontario, Canada, XRCC is our materials research center that focuses on imaging and consumable materials. These include toners, inks and smart materials for our Document Technology business, as well as materials for digital manufacturing. Xerox 2014 Annual Report 4 4


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    Xerox Research Center Europe (XRCE): Located in Grenoble, France, XRCE research aims to differentiate Xerox business process service offerings by simplifying them and making them more automated, intelligent and agile. The center combines its world-class expertise in imaging, text and data analytics, with insights from its ethnographic studies to create and design innovative and disruptive technology. Xerox Research Center India (XRCI): Located in Bangalore, India, XRCI explores, develops, and incubates innovative solutions and services for our global customers, with a special focus on emerging markets. Investment in R&D is critical for competitiveness in our fast-paced markets. We have aligned our R&D investment portfolio with our growth initiatives, including enhancing customer value by building on our business process services leadership and accelerating our color leadership. One of the ways that we maintain our market leadership is through strategic coordination of our R&D with Fuji Xerox (an equity investment in which we maintain a 25 percent ownership interest). Our total research, development and engineering expenses (RD&E), which includes sustaining engineering expenses for hardware engineering and software development after we launch a product, totaled $577 million in 2014, $603 million in 2013 and $655 million in 2012. Fuji Xerox R&D expenses were $654 million in 2014, $724 million in 2013 and $860 million in 2012. Segment Information Our reportable segments are Services, Document Technology and Other. We present operating segment financial information in Note 2 - Segment Reporting in the Consolidated Financial Statements, which we incorporate by reference here. We have a broad and diverse base of customers by both geography and industry, ranging from small and midsize businesses (SMBs) to graphic communications companies, governmental entities, educational institutions and Fortune 1000 corporate accounts. None of our business segments depends upon a single customer, or a few customers, the loss of which would have a material adverse effect on our business. Revenues by Business Segment Our Services segment is the largest segment, with $10,584 million in revenue in 2014, representing 54 percent of total revenue. Note that Services segment revenue excludes ITO revenue due to ITO being reported as a discontinued operation as a result of the pending sale of this business to Atos. The Document Technology segment contributed $8,358 million in revenue, representing 43 percent of total revenue. The Other segment contributed $598 million in revenue, representing 3 percent of total revenue. Services Segment We provide comprehensive business services in global markets across all major industries and government agencies. These services help our clients simplify the way work gets done, providing them more time and resources to allocate to their core operations, enabling them to respond rapidly to changing technologies and reducing expenses associated with their business processes. Our Services segment currently comprises two types of service offerings: Business Process Outsourcing (BPO) and Document Outsourcing (DO). This segment no longer includes Information Technology Outsourcing (ITO) as a result of the previously referenced announcement about our agreement to sell our ITO business to Atos and the reclassification of the business to Discontinued Operations in 2014. Selling the ITO business gives us the opportunity to bring greater focus to our BPO and DO businesses where we are competitively positioned and can truly differentiate through our domain knowledge, industry expertise and innovation. Following the close of the transaction, we will have an ongoing relationship with Atos to provide IT services to our current BPO customers. Business Process Outsourcing BPO represented 68 percent of our total Services segment revenue in 2014. We are the largest diversified business process outsourcing company worldwide, with expertise in managing transaction-intensive processes. We provide multi-industry offerings such as customer care, transaction processing, finance and accounting, and human resources, as well as industry focused offerings in areas such as healthcare, transportation, financial services, retail and telecommunications. We bring our BPO solutions to market through Industry Business Groups and we deliver our solutions to our customers through Global Capability Organizations. 5


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    Industry Business Groups To enable deep client engagement and to optimize cross-selling of our broad portfolio of services solutions, we have organized our go-to-market resources into six global industry business groups. The industry groups have primary responsibility for client relationships and sales, developing industry thought leadership and industry specific solutions, and ensuring service delivery meets client requirements. The industry business groups are as follows: Commercial Healthcare: We have innovative solutions and subject matter expertise across the healthcare ecosystem including providers, payers, employers and government agencies. We help these customers focus on delivering better, more accessible and more affordable healthcare, which leads to better health and wellness for their constituencies. In the commercial segment of the market, we primarily serve the following constituencies: Healthcare Payer and Pharma: We deliver administrative efficiencies to our healthcare payer and pharmaceutical clients through scalable and flexible transactional business solutions, which encompass our global delivery model and domestic payer service centers. We support the top 20 U.S. commercial health plans, touching nearly two-thirds of the insured population in the U.S. Healthcare Provider Solutions: We serve hospitals, doctors and other care providers, including every large health system in the U.S., with contracts in all 50 states. Our services help our clients improve access to patient data, achieve tighter regulatory compliance, realize greater operational efficiencies, reduce administrative costs and provide better health outcomes. Commercial Industries - High Tech and Communications, Financial Services, and Industrial, Retail and Hospitality: We have deep expertise, targeted business process solutions, and a large, diverse client base in a broad range of commercial industries including communications and media, high tech and software, banking and capital markets, insurance, manufacturing, automotive, travel and leisure, food and beverage, transportation and logistics and others. Public Sector: We provide services to many constituencies across the public sector space. This includes services uniquely focused on Transportation related entities as well as our broad portfolio of BPO solutions to all governmental entities. Transportation Services: We provide revenue-generating solutions for our government clients in over 35 countries. Our services include public transit and fare collection, electronic toll collection, parking management, photo enforcement and commercial vehicle operations. We create simple and reliable processes for operators and government agencies, and we are differentiated by the breadth of our offerings and innovative technology. State, Local and Federal Government Services: We support our government clients with services targeting key agencies within federal, state, county and municipal governments including Health and Human Services, Veterans Administration, Treasury, Safety and Justice, and Government Administration. Our competitive advantage is our depth of agency-specific expertise and we have the scale required to deliver and manage programs at all levels of government. Our services span benefits collection and disbursement and electronic payment cards, tax and revenue systems, eligibility systems and services, unclaimed property services, and a broad range of other business process services. Government Healthcare: We provide administrative and care management solutions to state Medicaid programs and federally-funded U.S. government healthcare programs. We provide a broad range of innovative solutions to 36 states and the District of Columbia, which includes providing Health Insurance Exchange support services. Our services include processing Medicaid claims, pharmacy benefits management, clinical program management, supporting health information exchanges, eligibility application processing and determination, management of long-term care programs, delivering public and private health insurance exchange services and care and quality management. Global Capability Organizations To leverage our global scale and ensure service delivery excellence across our BPO offerings, we have organized our delivery resources into six global capability groups. The capability organizations have primary responsibility for implementing new client contracts and delivering service excellence to existing clients, best practice identification to Xerox 2014 Annual Report 6


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    improve cost competitiveness and innovating and implementing our next generation offerings. The global capability groups are as follows: Customer Care: Our teams across the globe provide expertise in customer service, technical support, sales, collections and other services via multiple channels including phone, SMS, chat, interactive voice response, social networks and email. Transaction Processing: We have a broad array of transaction processing capabilities across many different client types. These broad capabilities include data entry, scanning, image processing, enrollment processing, claims processing, high volume offsite print and mail services, file indexing and others. Human Resources Services: Our capabilities cover a wide range of HR outsourcing services including health, pension and retirement administration and outsourcing, private healthcare exchanges, employee service centers, learning solutions and welfare services, global mobility and relocation, payroll and others. Finance and Accounting: We serve clients in many industries by managing their critical finance, accounting and procurement processes. Our services span corporate finance and decision support, prepaid cards, payment processing, loan and banking process support, and student loan servicing. Communication and Marketing Services: We provide end-to-end outsourcing for content design, creation, marketing, fulfillment and distribution services that help clients communicate with their customers and employees more effectively. We deliver communications through print and multimedia channels, including SMS, web, email and mobile media. Consulting and Analytics Services: Our consulting services help clients identify and capture strategic opportunities in their businesses often in conjunction with the deployment of BPO services such as those defined above. Our analytics capabilities provide clients with deep business insights on an ongoing basis, as an add-on or embedded service offering in conjunction with BPO contracts. Document Outsourcing We are the industry leader in document outsourcing services. We help companies optimize their printing infrastructure and simplify their communication and business processes so that they can grow revenue, reduce costs and operate more efficiently. Document Outsourcing represented 32 percent of our total Services segment revenue in 2014. Our two primary offerings within Document Outsourcing are Managed Print Services (MPS) and Centralized Print Services (CPS). The MPS offering targets clients ranging from large, global enterprises to mid-size and small businesses and governmental entities, while the CPS offering targets the on-demand, production printing, publishing and mailroom operations needs of governments, large enterprises and mid-size businesses. We provide the most comprehensive portfolio of MPS services in the industry and are recognized as an industry leader by several major analyst firms, including Gartner, IDC, Quocirca, Info Trends and Forrester. As the market leader in MPS, Xerox helps clients cut costs, increase productivity and meet their environmental sustainability goals while supporting their mobile and security needs. Xerox® MPS complements and provides opportunities to expand existing BPO services. Within BPO and other accounts, Xerox® MPS helps to automate workflow and enhance employee productivity. In 2013 we launched our next generation MPS and CPS offerings, which were built upon a three stage approach: Assess and Optimize: We use best-in-class tools and processes to create a baseline of a client's current spend, then we design a solution that reduces costs and supports sustainability goals. We assess both the office and production environments to create a holistic view of the client's printing needs. Secure and Integrate: We ensure that everything in our clients’ optimized print environment is connected to their IT environment in a secure and compliant way. We activate solutions for enhanced security, printing from mobile devices and streamlining the IT environment by managing print servers and print queues. 7


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    Automate and Simplify: With the right technology in place and securely integrated into our clients' IT environment, we improve employee productivity through automating paper-based processes by digitizing paper documents and leveraging content management, thus creating better workflows and reducing print. In 2014 we continued to innovate and expand upon the solutions within the three stage approach to increase mobility, security, efficiency and productivity. Significant new enhancements launched in 2014 include the following: Xerox Document Analytics Service: Analyzes how and why documents are printed and uses that intelligence to digitize content and change the way information is accessed and utilized. Xerox Secure Print Manager Suite: Effectively integrates print information security into existing IT infrastructure. Xerox Workflow Assessment Services: Demonstrates how documents move within an organization and provides insights to create more efficient processes. Xerox Digital Alternatives: A simple desktop and mobile technology that automates paper-based workflows. Allows users to easily sign, annotate, share, save and read documents from one interface thus increasing productivity across the enterprise. Xerox ePublishing Services: Provides a digital file output suitable for multiple types of mobile devices and computer displays. Includes built-in analytics tools to measure and collect valuable usage data. Xerox Print Awareness Tool: Patented system that actively encourages workers to be more environmentally responsible. Information Technology Outsourcing We provide ITO services across all industries and have developed deep expertise in several key verticals including Healthcare, Retail, Manufacturing, Financial Services and Public Sector. Our ITO services include managed IT services, end user computing and IT solutions like cloud services, utility computing and desktop virtualization. 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. As a result of the pending sale of the ITO business to Atos and having met applicable accounting requirements, this business is being reported as a discontinued operation for financial reporting purposes. Subsequent to the closing of the ITO sale to Atos, Xerox will no longer directly market stand-alone IT services. Document Technology Segment Document Technology includes the sale of products and supplies, as well as the associated technical service and financing of those products (which are not related to document outsourcing contracts). Our Document Technology business is centered around strategic product groups that share common technology, manufacturing and product platforms. The strategic product groups are: Entry, Mid-Range and High-End. In 2013 we launched Xerox® ConnectKey® technology, a software system and set of solutions embedded in many of our Entry and Mid-Range multifunction printers (MFP's). To further enhance the platform, in September 2014 we launched ConnectKey version 1.5, which provides even more mobility, security and cloud access, to support the growing productivity needs for today’s SMB and professional users. Additionally, we enabled ConnectKey 1.5 into four new multifunction printers (MFPs) - including the WorkCentre 3655 Mono and WorkCentre 6655 Color A4/letter MFPs, and the WorkCentre 5945 Mono and WorkCentre 7970 Color A3 MFPs. Entry Entry comprises desktop monochrome and color printers and multifunction printers ranging from small personal devices to workgroup printers and MFPs that serve the needs of office workgroups. Entry products represented 20 percent of our total Document Technology segment revenue in 2014 and are sold to customers in all segments from SMB to enterprise, principally through a global network of reseller partners and service providers as well as through our direct sales force. In 2014, we continued to build on our position in the market: Expanded our ConnectKey 1.5 technology into more A4 MFP devices to respond to customer needs for smaller, lower cost devices that maintain network access and solution compatibility. Xerox 2014 Annual Report 8


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    Upgraded the functionality of many of our existing products to be more efficient and cost effective to deploy in conjunction with our managed services offerings. Launched twelve new products, primarily in the second half of the year, that help our customers optimize their print infrastructure. In color, we launched the 36 page per minute (ppm) WorkCentre® 6655 A4 MFP which expanded our ConnectKey technology into this important product class. In monochrome, we launched several MFPs ranging from the compact WorkCentre® 3215, 3225 and 3025 A4 MFPs to the WorkCentre® 4265 A4 MFP, which is a 55 ppm desktop capable MFP with available finishing and high capacity input tray options optimized for demanding workgroups where space is a premium. We also launched several Phaser® Monochrome printers, which offer increased productivity for work teams with new and enhanced features including wireless connectivity, automatic two-sided printing, mobile printing, and higher output speeds and paper input capacity. Mid-Range Mid-Range comprises products for enterprises of all sizes. These products are sold through dedicated Xerox branded partners, our direct sales force, indirect multi-branded channel partners and resellers worldwide. Our Mid- Range products represented 57 percent of our total Document Technology segment revenue in 2014. We are a leader in this product segment and offer a wide range of multifunction printers, copiers, digital printing presses and light production devices, and solutions that deliver flexibility and advanced features. In 2014 we continued to innovate and expand upon the ConnectKey® platform that was initially launched in 2013. We increased the number of ConnectKey® enabled devices and continued expanding the security, workflow and software application capabilities to enable superior print quality, mobility and security solutions, and cost control. For example, we introduced Xerox Secure Access Version 5.0, a print management solution, which is a modular, software-only solution allowing customers to use authentication features at a lower cost. We also added new features to our Xerox Mobile Print Solution 3.0 that offer greater convenience, increased security and greater flexibility in print job submission. Additionally, we launched Xerox App Studio 2.0, enabling new ConnectKey apps to provide scanning to and printing from cloud repositories such as Microsoft Office 365, Dropbox and DocuShare. Customers can also use an app to print from their own URL - whether contained in a firewall or the cloud - creating a convenient, easy-to-use 'print-on-demand' environment. Overall, we launched seven new devices in the second half of 2014 which included the 70 ppm WorkCentre® 7970 Color A3 MFP and the 55 ppm WorkCentre 5945/5955 Monochrome A3 MFP. We also launched the 70 ppm Xerox® Color C60/C70 Printer light production devices, which include updated EFI and FreeFlow print controllers that enhance productivity, reduce time intensive tasks and deliver high impact and vibrant images. High-End Our High-End digital color and monochrome solutions are designed for customers in the graphic communications industry and large enterprises with high-volume printing requirements. Our High-End products comprised 23 percent of our total Document Technology segment revenue in 2014. Our High-End solutions enable full-color, on- demand printing of a wide range of applications, including variable data for personalized content and 1:1 marketing. During 2014, a significant initiative in the High-End segment was the continued development and growth of our portfolio of workflow software offerings. Workflow automation is essential to our customers’ success, and our workflow platforms are an outstanding complement to our world-class hardware offerings. We launched updates to all of our major workflow components including FreeFlow® Core, FreeFlow® Digital Publisher, FreeFlow Variable Information Suite, IntegratedPLUS Automated Finishing and IntegratedPLUS Automated Color Management. Within the High-End hardware portfolio, in 2014 we continued the integration and growth of our production inkjet business, led by the Impika inkjet platforms as well as the Xerox® CiPress Production Inkjet Systems. The newest Impika offering is the Impika® eVolution, which joins the Impika® Compact and Impika® Reference in the Impika portfolio. These presses utilize proprietary, aqueous inkjet technology, and print at speeds as fast as 832 feet (254 meters) per minute, producing a wide range of commercial and industrial print applications. The CiPress platform is based on Xerox solid ink technology, and provides unique value as the industry’s only waterless production inkjet printing system. While production inkjet is an important and growing segment, we currently remain the worldwide leader in the cut- sheet production color and monochrome industry segments. In 2014, our most significant new product was the 9


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    Xerox® Versant™ 2100 Press. The 2100 enables full color printing at speeds up to 100 pages per minute, with outstanding Ultra HD Resolution print quality. The press also incorporates a wide range of automated tools, including the Production Accurate Registration and the Xerox® Automated Color Quality Suite. These unique features allow our customers to achieve increased performance, higher quality and better results. Along with the new Versant 2100 Press, in 2014 we delivered a number of feature enhancements across our entire cut sheet line which includes the Xerox iGen™, Xerox Color Presses, Xerox Nuvera™, DocuTech™ and DocuPrint™ series, and Xerox® Wide Format IJP 2000. Other Segment The Other segment includes paper sales in our developing market countries, wide-format systems, licensing revenue, Global Imaging Systems network integration solutions and non-allocated corporate items, including Other expenses, net. Paper comprised approximately one-third of the revenues in the Other segment in 2014, which is roughly the same as in 2013. Geographic Information Our global presence is one of our core strengths. Overall, 33 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 2014, our revenues by geography were as follows: U.S. - $13,041 million (67 percent of total revenue), Europe - $4,428 million (23 percent of total revenue), and Other areas - $2,071 million (10 percent of total revenue). Revenues by geography are based on the location of the unit reporting the revenue and include export sales. Patents, Trademarks and Licenses Xerox and its subsidiaries were awarded 1,114 U.S. utility patents in 2014. On that basis, we rank 30th 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 1,950 U.S. utility patents in 2014. Our patent portfolio evolves as new patents are awarded to us and as older patents expire. As of December 31, 2014, we held almost 12,600 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 2014 we added 11 new agreements to our portfolio of patent-licensing and sale agreements, and Xerox and its subsidiaries were licensor or seller in 7 of the agreements. We are also a party to a number of cross-licensing agreements with companies that hold substantial patent portfolios, including Canon, Microsoft, IBM, Hewlett-Packard, Oce, Sharp, Samsung, Seiko Epson, Toshiba TEC and R.R. Donnelley. These agreements vary in subject matter, scope, compensation, significance and time. In the U.S., we own more than 450 U.S. trademarks, either registered or applied for. These trademarks have a perpetual life, subject to renewal every 10 years. We vigorously enforce and protect our trademarks. Marketing and Distribution We operate in over 180 countries, providing the industry's broadest portfolio of document technology, services and software, and the most diverse array of business processes outsourcing solutions, through a variety of distribution channels around the world. We manage our business based on the principal segments described earlier. We have organized the marketing, selling and distribution of our products and services by geography, channel type and line of business. We go to market with a services-led approach and sell our products and services directly to customers through our world-wide sales force and through a network of independent agents, dealers, value-added resellers, systems integrators and the Web. In addition, our wholly-owned subsidiary, Global Imaging Systems (GIS), an office technology dealer which is comprised of regional core companies in the U.S., sells document management and network integration systems and services. We continued to expand our distribution to small and mid-size businesses in 2014 through GIS's acquisition of two companies. Xerox 2014 Annual Report 10


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    Our brand is a valuable resource and continues to be ranked in the top percentile of the most valuable global brands. In Europe, Africa, the Middle East and parts of Asia, we distribute our products through Xerox Limited, a company established under the laws of England, as well as through related non-U.S. companies. Xerox Limited enters into distribution agreements with unaffiliated third parties to distribute our products in many of the countries located in these regions, and previously entered into agreements with unaffiliated third parties who distribute our products in Sudan. Sudan, among others, has been designated as a state sponsor of terrorism by the U.S. Department of State and is subject to U.S. economic sanctions. We maintain an export and sanctions compliance program, and believe that we have been and are in compliance with U.S. laws and government regulations for Sudan. We have no assets, liabilities or operations in Sudan other than liabilities under the distribution agreements. After observing required prior notice periods, Xerox Limited terminated its distribution agreements with distributors servicing Sudan in August 2006. Now, Xerox has only legacy obligations to third parties, such as providing spare parts and supplies to these third parties. In 2014, total Xerox revenues of $19.5 billion included less than $10 thousand attributable to Sudan. Competition Although we encounter competition in all areas of our business, we are the leader -- or among the leaders -- in each of our principal business segments. We compete on the basis of technology, performance, price, quality, reliability, brand, distribution and customer service and support. In the Services business, our larger competitors include Accenture, Aon, Computer Sciences Corporation, Convergys, Genpact, Hewlett-Packard, IBM and Teletech. In addition, we compete with in-house departments that perform the functions that could be outsourced to us. In the Document Technology business, our larger competitors include Canon, Hewlett-Packard, Konica Minolta, Lexmark and Ricoh. Our brand recognition, positive reputation for business process and document management expertise, innovative technology and service delivery excellence are our competitive advantages. These advantages, combined with our breadth of product offerings, global distribution channels and customer relationships, position us as a strong competitor going forward. Global Employment Globally, we have approximately 147,500 direct employees, including approximately 5,300 sales professionals, approximately 10,200 technical service employees and approximately 102,300 employees serving our customers through on-site operations or off-site delivery centers. Approximately 9,800 of these employees are associated with the ITO business and are expected to transition to Atos upon closure of the sale of the ITO business. Customer Financing We finance a large portion of our direct channel customer purchases of Xerox equipment through bundled lease agreements. Financing facilitates customer acquisition of Xerox technology and enhances our value proposition, while providing Xerox an attractive gross margin and a reasonable return on our investment in this business. Additionally, because we primarily finance our own products and have a long history of providing financing to our customers, we are able to minimize much of the risk normally associated with a finance business. Because our lease contracts permit customers to pay for equipment over time rather than at the date of installation, we maintain a certain level of debt to support our investment in these lease contracts. We fund our customer financing activity through a combination of cash generated from operations, cash on hand, proceeds from capital market offerings and on occasion the sale of selected finance receivables. There were no finance receivable sales in 2014. At December 31, 2014, we had $4.3 billion of finance receivables and $0.5 billion of equipment on operating leases, or Total Finance assets of $4.8 billion. We maintain an assumed 7:1 leverage ratio of debt to equity as compared to our Finance assets, which results in the majority of our $7.7 billion of debt being allocated to our financing business. Refer to "Customer Financing Activities" in the Capital Resources and Liquidity section of Management's Discussion and Analysis included in Item 7 of this 2014 Form 10-K, which is incorporated here by reference, for additional information. 11


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    Manufacturing and Supply Our manufacturing and distribution facilities are located around the world. The Company's largest manufacturing site is in Webster, N.Y., where we produce the Xerox® iGen and Nuvera systems, components, EA Toner, consumables, fusers, photoreceptors, and other products. Our other primary manufacturing operations are located in: Dundalk, Ireland, for our High-End production products and consumables; Wilsonville, OR, for solid ink consumable supplies and components for our mid-range and entry products; and Aubagne, France, for Impika aqueous-ink production ink-jet systems. We also have a facility in Venray, Netherlands, that provides supplies manufacturing and supply chain management for the Eastern Hemisphere. Our master supply agreement with Flextronics, a global electronics manufacturing services company, to outsource portions of manufacturing for our mid-range and entry businesses, continues through December 2015 (exclusive of extension rights). We also acquire products from various third parties in order to increase the breadth of our product portfolio and meet channel requirements. We have arrangements with Fuji Xerox under which we purchase and sell products, some of which are the result of mutual research and development agreements. Refer to Note 9 - Investments in Affiliates, at Equity in the Consolidated Financial Statements, which is incorporated here by reference, for additional information regarding our relationship with Fuji Xerox. Services Global Production Model Our global services production model is one of our key competitive advantages. We have approximately 130 Strategic Delivery Centers located around the world, including India, Philippines, Jamaica, Mexico, Guatemala, Colombia, Brazil, Chile, Argentina, Ireland, Spain, Poland and Romania. These locations are comprised of Customer Care Centers, Mega IT Data Centers, Finance and Accounting Centers, Resource Centers and Document Process Centers. Our global production model is enabled by the use of proprietary technology, which allows us to securely distribute client transactions within data privacy limits across a global workforce. This global production model allows us to make the most of lower-cost production locations, consistent methodology and processes, and time zone advantages. Approximately 15 of these centers are associated with the ITO business and are expected to be transferred to Atos upon closure of the sale of the ITO business. Fuji Xerox Fuji Xerox is an unconsolidated entity in which we own a 25 percent interest, and FUJIFILM Holdings Corporation (FujiFilm) owns a 75 percent interest. Fuji Xerox develops, manufactures and distributes document processing products in Japan, China, Hong Kong, other areas of the Pacific Rim, Australia and New Zealand. We retain significant rights as a minority shareholder. Our technology licensing agreements with Fuji Xerox ensure that the two companies retain uninterrupted access to each other's portfolio of patents, technology and products. International Operations The financial measures by geographical area for 2014, 2013 and 2012 that are included in Note 2 - Segment Reporting in the Consolidated Financial Statements, are incorporated here by reference. See also the risk factor entitled “Our business, results of operations and financial condition may be negatively impacted by economic conditions abroad, including local economies, political environments, fluctuating foreign currencies and shifting regulatory schemes” in Part I, Item 1A included herein. Backlog Backlog, or the value of unfilled orders, is not a meaningful indicator of future business prospects because of the significant proportion of our revenue that follows contract signing and/or equipment installation, the large volume of products we deliver from shelf inventories and the shortening of product life cycles. Seasonality Our revenues are affected by such factors as the introduction of new products, the length of sales cycles and the seasonality of technology purchases and services unit volumes. These factors have historically resulted in lower revenues, operating profits and operating cash flows in the first quarter and the third quarter. Xerox 2014 Annual Report 12


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    Other Information Xerox is a New York corporation, organized in 1906, and our principal executive offices are located at 45 Glover Avenue, P.O. Box 4505, Norwalk, Connecticut 06856-4505. Our telephone number is (203) 968-3000. In the Investor Information section of our Internet website, you will find our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to these reports. We make these documents available as soon as we can after we have filed them with, or furnished them to, the U.S. Securities and Exchange Commission. Our Internet address is www.xerox.com. ITEM 1A. RISK FACTORS Our business, results of operations and financial condition may be negatively impacted by conditions abroad, including local economics, political environments, fluctuating foreign currencies and shifting regulatory schemes. A significant portion of our revenue is generated from operations outside the United States. In addition, we maintain significant operations and acquire or manufacture many of our products and/or their components outside the United States. Our future revenues, costs and results of operations could be significantly affected by changes in foreign currency exchange rates - particularly the Japanese Yen to U.S. Dollar and Japanese Yen to Euro exchange rates, as well as by a number of other factors, including changes in economic conditions from country to country, changes in a country's political conditions, trade protection measures, licensing requirements, local tax issues, capitalization and other related legal matters. We generally hedge foreign currency denominated assets, liabilities and anticipated transactions primarily through the use of currency derivative contracts. The use of derivative contracts is intended to mitigate or reduce transactional level volatility in the results of foreign operations, but does not completely eliminate volatility. We do not hedge the translation effect of international revenues and expenses, which are denominated in currencies other than our U.S. parent functional currency, within our consolidated financial statements. If our future revenues, costs and results of operations are significantly affected by economic conditions abroad and we are unable to effectively hedge these risks, they could materially adversely affect our results of operations and financial condition. If we fail to successfully develop new products, technologies and service offerings and protect our intellectual property rights, we may be unable to retain current customers and gain new customers and our revenues would decline. The process of developing new high technology products and solutions is inherently complex and uncertain. It requires accurate anticipation of customers' changing needs and emerging technological trends. We must make long-term investments and commit significant resources before knowing whether these investments will eventually result in products that achieve customer acceptance and generate the revenues required to provide desired returns. In developing these new technologies and products, we rely upon patent, copyright, trademark and trade secret laws in the United States and similar laws in other countries, and agreements with our employees, customers, suppliers and other parties, to establish and maintain our intellectual property rights in technology and products used in our operations. However, the laws of certain countries may not protect our proprietary rights to the same extent as the laws of the United States and we may be unable to protect our proprietary technology adequately against unauthorized third-party copying or use, which could adversely affect our competitive position. In addition, some of our products rely on technologies developed by third parties. We may not be able to obtain or to continue to obtain licenses and technologies from these third parties at all or on reasonable terms, or such third parties may demand cross-licenses to our intellectual property. It is also possible that our intellectual property rights could be challenged, invalidated or circumvented, allowing others to use our intellectual property to our competitive detriment. We also must ensure that all of our products comply with existing and newly enacted regulatory requirements in the countries in which they are sold, particularly European Union environmental directives. If we fail to accurately anticipate and meet our customers' needs through the development of new products, technologies and service offerings or if we fail to adequately protect our intellectual property rights or if our new products are not widely accepted or if our current or future products fail to meet applicable worldwide regulatory requirements, we could lose market share and customers to our competitors and that could materially adversely affect our results of operations and financial condition. 13


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    Our government contracts are subject to termination rights, audits and investigations, which, if exercised, could negatively impact our reputation and reduce our ability to compete for new contracts. A significant portion of our revenues is derived from contracts with U.S. federal, state and local governments and their agencies, as well as international governments and their agencies. Government entities typically finance projects through appropriated funds. While these projects are often planned and executed as multi-year projects, government entities usually reserve the right to change the scope of or terminate these projects for lack of approved funding and/or at their convenience. Changes in government or political developments, including budget deficits, shortfalls or uncertainties, government spending reductions (e.g., Congressional sequestration of funds under the Budget Control Act of 2011) or other debt or funding constraints, such as those recently experienced in the United States and Europe, could result in lower governmental sales and in our projects being reduced in price or scope or terminated altogether, which also could limit our recovery of incurred costs, reimbursable expenses and profits on work completed prior to the termination. Additionally, government contracts are generally subject to audits and investigations by government agencies. If the government finds that we inappropriately charged any costs to a contract, the costs are not reimbursable or, if already reimbursed, the cost must be refunded to the government. If the government discovers improper or illegal activities or contractual non-compliance in the course of audits or investigations, we may be subject to various civil and criminal penalties and administrative sanctions, which may include termination of contracts, forfeiture of profits, suspension of payments, fines and suspensions or debarment from doing business with the government. Any resulting penalties or sanctions could have a material adverse effect on our business, financial condition, results of operations and cash flows. Further, the negative publicity that arises from findings in such audits, investigations or the penalties or sanctions therefore could have an adverse effect on our reputation in the industry and reduce our ability to compete for new contracts and may also have a material adverse effect on our business, financial condition, results of operations and cash flow. We derive significant revenue and profit from commercial and federal government contracts awarded through competitive bidding processes, including renewals, which can impose substantial costs on us, and we will not achieve revenue and profit objectives if we fail to accurately and effectively bid on such projects. Many of these contracts are extremely complex and require the investment of significant resources in order to prepare accurate bids and proposals. Competitive bidding imposes substantial costs and presents a number of risks, including: (i) the substantial cost and managerial time and effort that we spend to prepare bids and proposals for contracts that may or may not be awarded to us; (ii) the need to estimate accurately the resources and costs that will be required to implement and service any contracts we are awarded, sometimes in advance of the final determination of their full scope and design; (iii) the expense and delay that may arise if our competitors protest or challenge awards made to us pursuant to competitive bidding, and the risk that such protests or challenges could result in the requirement to resubmit bids, and in the termination, reduction, or modification of the awarded contracts; and (iv) the opportunity cost of not bidding on and winning other contracts we might otherwise pursue. Adverse events or developments in any of these bidding risks and uncertainties could materially and negatively impact our business, financial condition, results of operations and cash flow. For our services contracts, we rely to a significant extent on third-party providers, such as subcontractors, a relatively small number of primary software vendors, utility providers and network providers; if they cannot deliver or perform as expected or if our relationships with them are terminated or otherwise change, our business, results of operations and financial condition could be materially adversely affected. Our ability to service our customers and clients and deliver and implement solutions depends to a large extent on third-party providers such as subcontractors, a relatively small number of primary software vendors and utility providers and network providers meeting their obligations to us and our expectations in a timely, quality manner. Our business, revenues, profitability and cash flows could be materially and adversely affected and we might incur significant additional liabilities if these third-party providers do not meet these obligations or our or our clients' expectations or if they terminate or refuse to renew their relationships with us or were to offer their products to us with less advantageous prices and other terms than we previously had. In addition, a number of our facilities are located in jurisdictions outside of the United States where the provision of utility services, including electricity and water, may not be consistently reliable and, while there are backup systems in many of our operating facilities, an extended outage of utility or network services could have a material adverse effect on our operations, revenues, cash flow and profitability. Xerox 2014 Annual Report 14


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    We face significant competition and our failure to compete successfully could adversely affect our results of operations and financial condition. We operate in an environment of significant competition, driven by rapid technological developments, changes in industry standards, and demands of customers to become more efficient. Our competitors range from large international companies to relatively small firms. Some of the large international companies have significant financial resources and compete with us globally to provide document processing products and services and/or business process services in each of the markets we serve. We compete primarily on the basis of technology, performance, price, quality, reliability, brand, distribution and customer service and support. Our success in future performance is largely dependent upon our ability to compete successfully in the markets we currently serve, to promptly and effectively react to changing technologies and customer expectations and to expand into additional market segments. To remain competitive, we must develop services, applications and new products; periodically enhance our existing offerings; and attract and retain key personnel and management. If we are unable to compete successfully, we could lose market share and important customers to our competitors and that could materially adversely affect our results of operations and financial condition. Our profitability is dependent upon our ability to obtain adequate pricing for our products and services and to improve our cost structure. Our success depends on our ability to obtain adequate pricing for our services and products and that will provide a reasonable return to our shareholders. Depending on competitive market factors, future prices we obtain for our services and products may decline from previous levels. In addition, pricing actions to offset the effect of currency devaluations may not prove sufficient to offset further devaluations or may not hold in the face of customer resistance and/or competition. If we are unable to obtain adequate pricing for our services and products, it could materially adversely affect our results of operations and financial condition. In addition, our services contracts are increasingly requiring tighter timelines for implementation as well as more stringent service level metrics. This makes the bidding process for new contracts much more difficult and requires us to adequately consider these requirements in the pricing of our services. We continually review our operations with a view towards reducing our cost structure, including reducing our employee base, exiting certain businesses, improving process and system efficiencies and outsourcing some internal functions. We from time to time engage in restructuring actions to reduce our cost structure. If we are unable to continue to maintain our cost base at or below the current level and maintain process and systems changes resulting from prior restructuring actions, it could materially adversely affect our results of operations and financial condition. In addition, in order to continually meet the service requirements of our customers, which often includes 24/7 service, and to optimize our employee cost base, we often locate our delivery service centers in lower-cost locations, including several developing countries. Concentrating our delivery service centers in these locations presents a number of operational risks, many of which are beyond our control, including the risks of political instability, natural disasters, safety and security risks, labor disruptions and rising labor rates. These risks could impair our ability to effectively provide services to our customers and keep our costs aligned to our associated revenues and market requirements. Our ability to sustain and improve profit margins is dependent on a number of factors, including our ability to continue to improve the cost efficiency of our operations through such programs as Lean Six Sigma, the level of pricing pressures on our services and products, the proportion of high-end as opposed to low-end equipment sales (product mix), the trend in our post-sale revenue growth and our ability to successfully complete information technology initiatives. If any of these factors adversely materialize or if we are unable to achieve and maintain productivity improvements through design efficiency, supplier and manufacturing cost improvements and information technology initiatives, our ability to offset labor cost inflation, potential materials cost increases and competitive price pressures would be impaired, all of which could materially adversely affect our results of operations and financial condition. 15


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    We are subject to laws of the United States and foreign jurisdictions relating to individually identifiable information, and failure to comply with those laws, whether or not inadvertent, could subject us to legal actions and negatively impact our operations. We receive, process, transmit and store information relating to identifiable individuals, both in our role as a service and technology provider and as an employer. As a result, we are subject to numerous United States (both federal and state) and foreign jurisdiction laws and regulations designed to protect individually identifiable information, including the Health Insurance Portability and Accountability Act of 1996 (HIPAA) and the HIPAA regulations governing, among other things, the privacy, security and electronic transmission of individually identifiable health information, and the European Union Directive on Data Protection (Directive 95/46/EC). Other United States (both federal and state) and foreign jurisdiction laws apply to our processing of individually identifiable information and these laws have been subject to frequent changes, and new legislation in this area may be enacted at any time. Changes to existing laws, introduction of new laws in this area, or failure to comply with existing laws that are applicable to us may subject us to, among other things, additional costs or changes to our business practices, liability for monetary damages, fines and/or criminal prosecution, unfavorable publicity, restrictions on our ability to obtain and process information and allegations by our customers and clients that we have not performed our contractual obligations, any of which may have a material adverse effect on our profitability and cash flow. We are subject to breaches of our security systems and service interruptions which could expose us to liability, impair our reputation or temporarily render us unable to fulfill our service obligations under our contracts. We have implemented security systems with the intent of maintaining the physical security of our facilities and protecting our customers', clients' and suppliers' confidential information and information related to identifiable individuals against unauthorized access through our information systems or by other electronic transmission or through the misdirection, theft or loss of physical media. These include, for example, the appropriate encryption of information. Despite such efforts, we are subject to breach of security systems which may result in unauthorized access to our facilities and/or the information we are trying to protect. Because the techniques used to obtain unauthorized access are constantly changing and becoming increasingly more sophisticated and often are not recognized until launched against a target, we may be unable to anticipate these techniques or implement sufficient preventative measures. If unauthorized parties gain physical access to one of our facilities or electronic access to our information systems or such information is misdirected, lost or stolen during transmission or transport, any theft or misuse of such information could result in, among other things, unfavorable publicity, governmental inquiry and oversight, difficulty in marketing our services, allegations by our customers and clients that we have not performed our contractual obligations, litigation by affected parties and possible financial obligations for damages related to the theft or misuse of such information, any of which could have a material adverse effect on our profitability and cash flow. We also maintain various systems and data centers for our customers. Often these systems and data centers must be maintained worldwide and on a 24/7 basis. Although we endeavor to ensure that there is adequate back- up and maintenance of these systems and centers, we could experience service interruptions that could result in curtailed operations and loss of customers, which would reduce our revenue and profits in addition to impairing our reputation. Our ability to recover capital investments in connection with our contracts is subject to risk. In order to attract and retain large outsourcing contracts, we sometimes make significant capital investments to enable us to perform our services under the contracts, such as purchases of information technology equipment and costs incurred to develop and implement software. The net book value of such assets recorded, including a portion of our intangible assets, could be impaired, and our earnings and cash flow could be materially adversely affected in the event of the early termination of all or a part of such a contract or a reduction in volumes and services thereunder for reasons such as a customer's or client's merger or acquisition, divestiture of assets or businesses, business failure or deterioration, or a customer's or client's exercise of contract termination rights. Our services business could be adversely affected if we are unsuccessful in managing the start-up of new contracts. In order for our services business to continue its growth, we must successfully manage the start-up of services related to new contracts. If a client is not satisfied with the quality of work performed by us or a subcontractor, or with the type of services or solutions delivered, then we could incur additional costs to address the situation, the profitability of that work might be impaired and the client's dissatisfaction with our services could damage our ability to obtain additional work from that client or obtain new work from other potential clients. In particular, clients who are not satisfied might seek to terminate existing contracts prior to their scheduled expiration date, which may result in Xerox 2014 Annual Report 16


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    our inability to fully recover our up-front investments. In addition, clients could direct future business to our competitors. We could also trigger contractual credits to clients or a contractual default. Failure to properly transition new clients to our systems, properly budget transition costs or accurately estimate new contract operational costs could result in delays in our contract performance, trigger service level penalties, impair fixed or intangible assets or result in contract profit margins that do not meet our expectations or our historical profit margins. In addition, we incur significant expenditures for the development and construction of system software platforms needed to support our clients' needs. Our failure to fully understand client requirements or implement the appropriate operating systems or databases or solutions which enable the use of other supporting software may delay the project and result in cost overruns or potential impairment of the related software platforms. If we are unable to collect our receivables for unbilled services, our results of operations, financial condition and cash flows could be adversely affected. The profitability of certain of our large services contracts depends on our ability to successfully obtain payment from our clients of the amounts they owe us for work performed. Actual losses on client balances could differ from current estimates and, as a result, may require adjustment of our receivables for unbilled services. Our receivables include long-term contracts and over the course of a long-term contract, our customers' financial condition may change such that their ability to pay their obligations, and our ability to collect our fees for services rendered, is adversely affected. Additionally, we may perform work for the federal, state and local governments, with respect to which we must file requests for equitable adjustment or claims with the proper agency to seek recovery in whole or in part, for out-of-scope work directed or caused by the government customer in support of its project, and the amounts of such recoveries may not meet our expectations or cover our costs. Macroeconomic conditions could result in financial difficulties, including limited access to the credit markets, insolvency or bankruptcy, for our clients and, as a result, could cause clients to delay payments to us, request modifications to their payment arrangements that could increase our receivables balance, or default on their payment obligations to us. Timely collection of client balances also depends on our ability to complete our contractual commitments (for example, achieve specified milestones in percentage-of-completion contracts) and bill and collect our contracted revenues. If we are unable to meet our contractual requirements, we might experience delays in collection of and/or be unable to collect our client balances, and if this occurs, our results of operations and cash flows could be adversely affected. In addition, if we experience an increase in the time to bill and collect for our services, our cash flows could be adversely affected. We have outsourced a significant portion of our overall worldwide manufacturing operations and increasingly are relying on third-party manufacturers, subcontractors and external suppliers. We have outsourced a significant portion of our overall worldwide manufacturing operations to third parties and various service providers. To the extent that we rely on third-party manufacturing relationships, we face the risk that those manufacturers may not be able to develop manufacturing methods appropriate for our products, they may not be able to quickly respond to changes in customer demand for our products, they may not be able to obtain supplies and materials necessary for the manufacturing process, they may experience labor shortages and/or disruptions, manufacturing costs could be higher than planned and the reliability of our products could decline. If any of these risks were to be realized, and assuming similar third-party manufacturing relationships could not be established, we could experience interruptions in supply or increases in costs that might result in our being unable to meet customer demand for our products, damage our relationships with our customers and reduce our market share, all of which could materially adversely affect our results of operations and financial condition. In addition, in our services business we may partner with other parties, including software and hardware vendors, to provide the complex solutions required by our customers. Therefore, our ability to deliver the solutions and provide the services required by our customers is dependent on our and our partners' ability to meet our customers' requirements and schedules. If we or our partners fail to deliver services or products as required and on time, our ability to complete the contract may be adversely affected, which may have an adverse impact on our revenue and profits. We need to successfully manage changes in the printing environment and market because our operating results may be negatively impacted by lower equipment placements and usage trends. The printing market and environment is changing significantly as a result of new technologies, shifts in customer preferences in office printing and the expansion of new printing markets. Examples include mobile printing, color printing, continuous feed inkjet printing and the expansion of the market for entry products (A4 printers) and high- end products (B1/B2 printers). A significant part of our strategy and ultimate success in this changing market is our ability to develop and market technology that produces products and services that meet these changes. Our future 17


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    success in executing on this strategy depends on our ability to make the investments and commit the necessary resources in this highly competitive market. If we are unable to develop and market advanced and competitive technologies, it may negatively impact expansion of our worldwide equipment placements, as well as sales of services and supplies occurring after the initial equipment placement (post sale revenue) in the key growth markets of digital printing, color and multifunction systems. We expect that revenue growth can be further enhanced through our document management and consulting services in the areas of personalized and product life cycle communications, enterprise managed print services and document content and imaging. The ability to achieve growth in our equipment placements is subject to the successful implementation of our initiatives to provide advanced systems, industry-oriented global solutions and services for major customers, improve direct and indirect sales productivity and expand and successfully manage our indirect distribution channels in the face of global competition and pricing pressures. Our ability to increase post sale revenue is largely dependent on our ability to increase the volume of pages printed, the mix and price of color pages, equipment utilization and color adoption, as well as our ability to retain a high level of supplies sales in unbundled contracts. Equipment placements typically occur through leases with original terms of three to five years. There will be a lag between the increase in equipment placements and an increase in post sale revenues. In addition, with respect to our indirect distribution channels, many of our partners may sell competing products, further increasing the need to successfully manage our relationships with our partners to ensure they meet our specific sale and distribution requirements for equipment placements and post sale revenues. If we are unable to maintain a consistent trend of revenue growth, it could materially adversely affect our results of operations and financial condition. Our ability to fund our customer financing activities at economically competitive levels depends on our ability to borrow and the cost of borrowing in the credit markets. The long-term viability and profitability of our customer financing activities is dependent, in part, on our ability to borrow and the cost of borrowing in the credit markets. This ability and cost, in turn, is dependent on our credit ratings and is subject to credit market volatility. We primarily fund our customer financing activity through a combination of cash generated from operations, cash on hand, capital market offerings, sales and securitizations of finance receivables and commercial paper borrowings. Our ability to continue to offer customer financing and be successful in the placement of equipment with customers is largely dependent on our ability to obtain funding at a reasonable cost. If we are unable to continue to offer customer financing, it could materially adversely affect our results of operations and financial condition. Our ability to deliver services could be impaired if we are unable to hire or retain qualified personnel in certain areas of our business, which could result in decreased revenues or additional costs. At times, we have experienced difficulties in hiring personnel with the desired levels of training or experience. In regard to the labor-intensive business of the Company, quality service and adequate internal controls depend on our ability to retain employees and manage personnel turnover. An increase in the employee turnover rate or our inability to recruit and retain qualified personnel could increase recruiting and training costs and potentially decrease revenues or decrease our operating effectiveness and productivity. We may not be able to continue to hire, train and retain a sufficient number of qualified personnel to adequately staff new client projects. Additionally, we need to identify managerial personnel in emerging markets and lower-cost locations where the depth of skilled employees is often limited and competition for these resources is intense. If we are unable to develop and retain these managerial employees with leadership capabilities our ability to successfully manage our business units could be impaired. Our significant debt could adversely affect our financial health and pose challenges for conducting our business. We have and will continue to have a significant amount of debt and other obligations, the majority of which support our customer financing activities. Our substantial debt and other obligations could have important consequences. For example, it could (i) increase our vulnerability to general adverse economic and industry conditions; (ii) limit our ability to obtain additional financing for future working capital, capital expenditures, acquisitions and other general corporate requirements; (iii) increase our vulnerability to interest rate fluctuations because a portion of our debt has variable interest rates; (iv) require us to dedicate a substantial portion of our cash flows from operations to service debt and other obligations thereby reducing the availability of our cash flows from operations for other purposes; (v) limit our flexibility in planning for, or reacting to, changes in our businesses and the industries in which we operate; (vi) place us at a competitive disadvantage compared to our competitors that have less debt; and (vii) become due and payable upon a change in control. If new debt is added to our current debt levels, these related risks could increase. Xerox 2014 Annual Report 18


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    We need to maintain adequate liquidity in order to meet our operating cash flow requirements, repay maturing debt and meet other financial obligations, such as payment of dividends to the extent declared by our Board of Directors. If we fail to comply with the covenants contained in our various borrowing agreements, it may adversely affect our liquidity, results of operations and financial condition. Our liquidity is a function of our ability to successfully generate cash flows from a combination of efficient operations and continuing operating improvements, access to capital markets and funding from third parties. We believe our liquidity (including operating and other cash flows that we expect to generate) will be sufficient to meet operating requirements as they occur; however, our ability to maintain sufficient liquidity going forward depends on our ability to generate cash from operations and access to the capital markets and funding from third parties, all of which are subject to the general liquidity of and on-going changes in the credit markets as well as general economic, financial, competitive, legislative, regulatory and other market factors that are beyond our control. The Credit Facility contains financial maintenance covenants, including maximum leverage (debt for borrowed money divided by consolidated EBITDA, as defined) and a minimum interest coverage ratio (consolidated EBITDA divided by consolidated interest expense, as defined). At December 31, 2014, we were in full compliance with the covenants and other provisions of the Credit Facility. Failure to comply with material provisions or covenants in the Credit Facility could have a material adverse effect on our liquidity, results of operations and financial condition. Our business, results of operations and financial condition may be negatively impacted by legal and regulatory matters. We have various contingent liabilities that are not reflected on our balance sheet, including those arising as a result of being involved in a variety of claims, lawsuits, investigations and proceedings concerning: securities law; governmental entity contracting, servicing and procurement laws; intellectual property law; environmental law; employment law; the Employee Retirement Income Security Act (ERISA); and other laws and regulations, as discussed in the “Contingencies” note in the Consolidated Financial Statements. Should developments in any of these matters cause a change in our determination as to an unfavorable outcome and result in the need to recognize a material accrual or materially increase an existing accrual, or should any of these matters result in a final adverse judgment or be settled for significant amounts above any existing accruals, it could have a material adverse effect on our results of operations, cash flows and financial position in the period or periods in which such change in determination, judgment or settlement occurs. Our operations and our products are subject to environmental regulations in each of the jurisdictions in which we conduct our business and sell our products. Some of our manufacturing operations use, and some of our products contain, substances that are regulated in various jurisdictions. For example, various countries and jurisdictions have adopted or are expected to adopt restrictions on the types and amounts of chemicals that may be present in electronic equipment or other items that we use or sell. If we do not comply with applicable rules and regulations in connection with the use of such substances and the sale of products containing such substances, then we could be subject to liability and could be prohibited from selling our products in their existing forms, which could have a material adverse effect on our results of operations and financial condition. Further, various countries and jurisdictions have adopted or are expected to adopt, programs that make producers of electrical goods, including computers and printers, responsible for certain labeling, collection, recycling, treatment and disposal of these recovered products. If we are unable to collect, recycle, treat and dispose of our products in a cost-effective manner and in accordance with applicable requirements, it could materially adversely affect our results of operations and financial condition. Other potentially relevant initiatives throughout the world include proposals for more extensive chemical registration requirements and/or possible bans on the use of certain chemicals, various efforts to limit energy use in products and other environmentally related programs impacting products and operations, such as those associated with climate change accords, agreements and regulations. For example, the European Union's Energy-Related Products Directive (ERP) has led to the adoption of “implementing measures” or "voluntary agreements" that require certain classes of products to achieve certain design and/or performance standards, in connection with energy use and potentially other environmental parameters and impacts. A number of our products are already required to comply with ERP requirements and further regulations are being developed by the EU authorities. Another example is the European Union “REACH” Regulation (Registration, Evaluation, Authorization and Restriction of Chemicals), a broad initiative that requires parties throughout the supply chain to register, assess and disclose information regarding many chemicals in their products. Depending on the types, applications, forms and uses of chemical substances in various products, REACH could lead to restrictions and/or bans on certain chemical usage. Xerox continues its efforts toward monitoring and evaluating the applicability of these and numerous other regulatory initiatives in an effort to develop compliance strategies. As these and similar initiatives and programs become regulatory requirements throughout the world and/or are adopted as public or private 19


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    procurement requirements, we must comply or potentially face market access limitations that could have a material adverse effect on our operations and financial condition. Similarly, environmentally driven procurement requirements voluntarily adopted by customers in the marketplace (e.g., U.S. EPA EnergyStar) are constantly evolving and becoming more stringent, presenting further market access challenges if our products fail to comply. ITEM 1B. UNRESOLVED STAFF COMMENTS None ITEM 2. PROPERTIES We own several manufacturing, engineering and research facilities and lease other facilities. Our principal manufacturing and engineering facilities, located in New York, California, Oklahoma, Oregon, Canada, U.K., Ireland and the Netherlands, are used primarily by the Document Technology segment. Our principal research facilities are located in California, New York, Canada, France and India. The research activities in our principal research centers benefit all of our operating segments. We lease and own several facilities worldwide to support our Services segment with larger concentrations of space in Texas, Kentucky, New Jersey, California, Mexico, Guatemala, Philippines, Jamaica, Romania and India. Our Corporate Headquarters is a leased facility located in Norwalk, Connecticut. As a result of implementing our restructuring programs (refer to Note 11 - Restructuring and Asset Impairment Charges in the Consolidated Financial Statements, which is incorporated here by reference) as well as various productivity initiatives, several leased and owned properties became surplus. We are obligated to maintain our leased surplus properties through required contractual periods. We have disposed or subleased certain of these properties and are actively pursuing the successful disposition of remaining surplus properties. In December 2014 we announced an agreement to sell our Information Technology Outsourcing (ITO) business to Atos SE (Atos). The transaction is subject to customary closing conditions and regulatory approval and is expected to close in the first half of 2015. As part of the announcement, 9,800 Xerox employees, located in 330 facilities in 45 countries, will be transferring to Atos. However, a substantial number of these facilities are customer sites not leased or owned by Xerox. The following is the expected impact of the ITO divestiture on Xerox's worldwide property portfolio. ITO occupies about 1.3 million square feet out of 2.8 million square feet in 61 primarily owned or leased buildings. There are an additional 84 owned or leased buildings in which ITO has 21 or less employees in each building. These properties are part of the due diligence/closing process and appropriate actions will be agreed and taken to transfer some properties to the buyer; the buyer will exit some properties and relocate to their property portfolio; and some properties will be shared. We also own or lease numerous facilities globally, which house general offices, sales offices, service locations, data centers, call centers and distributions centers. It is our opinion that our properties have been well maintained, are in sound operating condition and contain all the necessary equipment and facilities to perform their functions. We believe that our current facilities are suitable and adequate for our current businesses. ITEM 3. LEGAL PROCEEDINGS The information set forth under Note 18 "Contingencies and Litigation" in the Consolidated Financial Statements is incorporated here by reference. ITEM 4. MINE SAFETY DISCLOSURES Not applicable. Xerox 2014 Annual Report 20


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    Part II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Stock Exchange Information Xerox common stock (XRX) is listed on the New York Stock Exchange and the Chicago Stock Exchange. Xerox Common Stock Prices and Dividends First Second Third Fourth New York Stock Exchange composite prices * Quarter Quarter Quarter Quarter 2014 High $ 12.44 $ 12.92 $ 14.05 $ 14.32 Low 10.30 11.06 12.20 12.21 Dividends declared per share 0.0625 0.0625 0.0625 0.0625 2013 High $ 8.76 $ 9.49 $ 10.51 $ 12.23 Low 7.11 8.33 9.23 9.61 Dividends declared per share 0.0575 0.0575 0.0575 0.0575 _____________ * Price as of close of business. In January 2015, the Board of Directors approved an increase in the Company's quarterly cash dividend from 6.25 cents per share to 7.00 cents per share, beginning with the dividend payable on April 30, 2015. Common Shareholders of Record See Item 6 - Selected Financial Data, Five Years in Review, Common Shareholders of Record at Year-End, which is incorporated here by reference. PERFORMANCE GRAPH 21


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    Total Return To Shareholders Year Ended December 31, (Includes reinvestment of dividends) 2009 2010 2011 2012 2013 2014 Xerox Corporation $ 100.00 $ 138.56 $ 97.62 $ 85.56 $ 156.26 $ 181.51 S&P 500 Index 100.00 115.06 117.49 136.30 180.44 205.14 S&P 500 Information Technology Index 100.00 110.19 112.85 129.57 166.41 199.89 Source: Standard & Poor's Investment Services Notes: Graph assumes $100 invested on December 31, 2009 in Xerox, the S&P 500 Index and the S&P 500 Information Technology Index, respectively, and assumes dividends are reinvested. SALES OF UNREGISTERED SECURITIES DURING THE QUARTER ENDED DECEMBER 31, 2014 During the quarter ended December 31, 2014, Registrant issued the following securities in transactions that were not registered under the Securities Act of 1933, as amended (the “Act”). Dividend Equivalent (a) Securities issued on October 31, 2014: Registrant issued 3,105 deferred stock units (DSUs), representing the right to receive shares of Common stock, par value $1 per share, at a future date. (b) No underwriters participated. The shares were issued to each of the non-employee Directors of Registrant: Richard J. Harrington, William Curt Hunter, Robert J. Keegan, Charles Prince, Ann N. Reese, Sara Martinez Tucker and Mary Agnes Wilderotter. (c) The DSUs were issued at a deemed purchase price of $13.24 per DSU (aggregate price $41,110), based upon the market value of our Common Stock on the date of record, in payment of the dividend equivalents due to DSU holders pursuant to Registrant’s 2004 Equity Compensation Plan for Non-Employee Directors. (d) Exemption from registration under the Act was claimed based upon Section 4(2) as a sale by an issuer not involving a public offering. Issuer Purchases of Equity Securities During the Quarter Ended December 31, 2014 Repurchases of Xerox Common Stock, par value $1 per share include the following: Board Authorized Share Repurchase Program: Total Number of Maximum Approximate Shares Purchased Dollar Value of Shares Total Number of as Part of Publicly That May Yet Be Shares Average Price Announced Plans or Purchased Under the Purchased Paid per Share(1) Programs(2) Plans or Programs(2) October 1 through 31 10,801,000 $ 12.84 10,801,000 $ 246,259,695 November 1 through 30 7,200,000 13.35 7,200,000 1,650,139,158 December 1 through 31 7,609,500 13.85 7,609,500 1,544,724,362 Total 25,610,500 25,610,500 _____________ (1) Exclusive of fees and costs. (2) In November 2014, the Board of Directors authorized an additional $1.5 billion in share repurchase. Of the cumulative $8.0 billion of share repurchase authority granted by our Board of Directors, exclusive of fees and expenses, approximately $6.5 billion has been used through December 31, 2014. Repurchases may be made on the open market, or through derivative or negotiated transactions. Open-market repurchases will be made in compliance with the Securities and Exchange Commission’s Rule 10b-18, and are subject to market conditions, as well as applicable legal and other considerations. Xerox 2014 Annual Report 22


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    Repurchases Related to Stock Compensation Programs(1): Maximum Number Total Number of Shares (or Approximate Dollar Value) Total Number of Purchased as Part of of Shares That May Yet Be Shares Average Price Publicly Announced Purchased under the Plans or Purchased Paid per Share(2) Plans or Programs Programs October 1 through 31 16,696 $ 13.08 n/a n/a November 1 through 30 — — n/a n/a December 1 through 31 — — n/a n/a Total 16,696 ______________ (1) These repurchases are made under a provision in our stock-based compensation programs and represent the indirect repurchase of shares through a net-settlement feature upon the vesting of shares in order to satisfy minimum statutory tax-withholding requirements. (2) Exclusive of fees and costs. 23


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    ITEM 6. SELECTED FINANCIAL DATA FIVE YEARS IN REVIEW (in millions, except per-share data) 2014 2013 (1) 2012(1) 2011(1) 2010(1),(2) Per-Share Data Income from continuing operations Basic $ 0.92 $ 0.91 $ 0.87 $ 0.86 $ 0.39 Diluted 0.90 0.89 0.85 0.84 0.39 Earnings Basic 0.82 0.93 0.90 0.92 0.44 Diluted 0.81 0.91 0.88 0.90 0.43 Common stock dividends declared 0.25 0.23 0.17 0.17 0.17 Operations Revenues $ 19,540 $ 20,006 $ 20,421 $ 20,638 $ 19,650 Sales 5,288 5,582 5,827 6,265 6,297 Outsourcing, maintenance and rentals 13,865 13,941 13,997 13,741 12,693 Financing 387 483 597 632 660 Income from continuing operations 1,107 1,159 1,180 1,252 575 Income from continuing operations - Xerox 1,084 1,139 1,152 1,219 544 Net income 992 1,179 1,223 1,328 637 Net income - Xerox 969 1,159 1,195 1,295 606 Financial Position Working capital $ 2,798 $ 2,825 $ 2,363 $ 1,531 $ 2,222 Total Assets 27,658 29,036 30,015 30,116 30,600 Consolidated Capitalization Short-term debt and current portion of long-term debt $ 1,427 $ 1,117 $ 1,042 $ 1,545 $ 1,370 Long-term debt 6,314 6,904 7,447 7,088 7,237 Total Debt(3) 7,741 8,021 8,489 8,633 8,607 Liability to subsidiary trust issuing preferred securities — — — — 650 Series A convertible preferred stock 349 349 349 349 349 Xerox shareholders' equity 10,634 12,300 11,521 11,876 12,006 Noncontrolling interests 75 119 143 149 153 Total Consolidated Capitalization $ 18,799 $ 20,789 $ 20,502 $ 21,007 $ 21,765 Selected Data and Ratios Common shareholders of record at year-end 35,307 37,552 39,397 41,982 43,383 Book value per common share $ 9.52 $ 10.35 $ 9.41 $ 8.88 $ 8.59 Year-end common stock market price $ 13.86 $ 12.17 $ 6.82 $ 7.96 $ 11.52 Employees at year-end 147,500 143,100 147,600 139,700 136,500 Gross margin 32.0% 32.4% 33.2% 34.5% 36.4% Sales gross margin 38.2% 36.4% 36.5% 36.8% 37.7% Outsourcing, maintenance and rentals gross margin 28.7% 29.6% 30.4% 32.2% 34.4% Finance gross margin 63.8% 66.3% 66.8% 63.4% 62.7% ___________ (1) Income Statement items have been revised for all periods to reflect our Discontinued Operations. Refer to Note 4 - Divestitures in our Consolidated Financial Statements, which is incorporated here by reference, for additional information. (2) 2010 results include the acquisition of ACS as of February 5, 2010. (3) Includes capital lease obligations. Xerox 2014 Annual Report 24


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    ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management’s Discussion and Analysis (MD&A) is intended to help the reader understand the results of operations and financial condition of Xerox Corporation. MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and the accompanying notes. Throughout the MD&A, we refer to various notes to our Consolidated Financial Statements which appear in Item 8 of this 2014 Form 10-K, and the information contained in such notes is incorporated by reference into the MD&A in the places where such references are made. Throughout this document, references to “we,” “our,” the “Company,” and “Xerox” refer to Xerox Corporation and its subsidiaries. References to “Xerox Corporation” refer to the stand-alone parent company and do not include its subsidiaries. Executive Overview With revenues of $19.5 billion, we are the world's leading global enterprise for business process and document management solutions. 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. Headquartered in Norwalk, Connecticut, the 147,500 people of Xerox serve customers in more than 180 countries providing business services, printing equipment and software for commercial and government organizations. In 2014, 33% of our revenue was generated outside the U.S. We are a leader across large, diverse and growing markets estimated at over $650 billion. The global business process outsourcing market is very broad, encompassing multi-industry business processes as well as industry- specific business processes, and our addressable market is estimated at almost $300 billion. The document management market is estimated at roughly $100 billion and is comprised of the document systems, software, solutions and services that our customers have relied upon for years to help run their businesses and reduce their costs. The remaining market is the global information technology outsourcing market segment, which is estimated to be roughly $250 billion in aggregate - see the following paragraph. On December 18, 2014, we announced an agreement to sell our Information Technology Outsourcing (ITO) business to Atos SE (Atos). The transaction is subject to customary closing conditions and regulatory approval and is expected to close in the first half of 2015. As a result of this pending transaction and having met applicable accounting requirements, in 2014 we reported the ITO business as a Discontinued Operation and reclassified its results from the Services segment to Discontinued Operations. Subsequent to the closing of this transaction, Xerox will no longer directly market stand-alone IT services. This transaction is part of our on-going effort to evolve our portfolio in line with our business and financial strategy. It gives us the opportunity to make further investments and acquisitions in our remaining Services business - strengthening our competitive positioning and supporting our global expansion goals. Refer to Note 4 - Divestitures in our Consolidated Financial Statements for additional information regarding Discontinued Operations. We organize our business around two main reportable segments: Services and Document Technology. Our Services segment is comprised of business process outsourcing (BPO) and document outsourcing (DO) services. In 2014 we focused on improving our cost infrastructure and evolving our Services portfolio to enable increased revenue growth and margin expansion. Revenue from Services grew 1% in 2014, reflecting growth in both service offerings, BPO and DO, and represented 54% of our total revenues. Revenue growth was below the prior year growth rate of 2% and our longer-term expectations of mid-to-high single digit growth; however, we did deliver improvements in revenue growth and profit margin through the year. Services signings in 2014 declined by 13% but were up 20% year-over-year in fourth quarter 2014. During 2014, we implemented initiatives to improve our go-to-market effectiveness, software platform implementation and global service delivery capabilities. Across our services portfolio, the diversity of our offerings and the differentiated solutions we provide, enable us to deliver greater value to our customers. 25


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    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 2014 we focused on maintaining our market leadership in Document Technology as well as continuing to reduce our cost base. This strategy included expanding the software and application capabilities of Xerox® ConnectKey®, a major new software and solutions capability we launched in 2013. In 2014 we broadened the number of devices that are enabled with this capability and grew our indirect sales channels to expand our reach to small and mid-sized businesses (SMB). Document Technology revenues declined 6% in 2014, in line with expectations. Annuity-Based Business Model In 2014, 84% of our total revenue was annuity-based, which 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: Services signings, which reflects the 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 where a renewal decision was made during the period. Services pipeline growth, which measures the increase in new business opportunities. Installations of printers and multifunction printers as well as the number of machines in the field (MIF) and the page volume and mix of pages printed on color devices, where available. Acquisitions Consistent with our strategy to enhance our Services offerings and global presence and to expand our distribution capabilities in Document Technology, we completed several acquisitions during 2014. Refer to Acquisitions and Divestitures section in Item 1. Business in this Form 10-K as well as Note 3 - Acquisitions in our Consolidated Financial Statements for additional information regarding our 2014 acquisitions. Financial Overview Total revenue of $19.5 billion in 2014 declined 2% from the prior year. Services segment revenues increased 1%, reflecting growth in both of our Services offerings - BPO and DO. Services segment margin of 9.0% decreased 1.1- percentage points from 2013, reflecting a decline in gross margin of 1.1-percentage points as productivity improvements and restructuring benefits were not enough to offset higher expenses in our government healthcare business and the run-off of high margin contracts. Document Technology segment revenues declined 6%, reflecting weakness in developing markets, timing of new product introductions, lower financing revenues, price declines, and the continued migration of customers to Xerox managed print services, which is included in our Services segment. These declines were partially offset by the benefits from refreshes across our product portfolio and improving high- end product revenues. Document Technology segment margin of 13.7% increased 2.9-percentage points from 2013, reflecting ongoing benefits from productivity and restructuring actions as well as favorable benefits from transaction currency, pension costs and bad debt expense. 2014 Net income from continuing operations attributable to Xerox was $1,084 million and included $196 million of after-tax amortization of intangible assets. Net income for 2014 reflects the margin decline in the Services segment primarily due to higher costs associated with investments to mature our healthcare medicaid platform and the operational performance of our government healthcare business as well as revenue declines in Document Technology. These impacts were partially offset by productivity improvements and cost reductions from restructuring actions as well as favorable benefits from transaction currency, pension costs and bad debt expense. Net income from continuing operations attributable to Xerox for 2013 was $1,139 million and included $189 million of after-tax amortization of intangible assets. Xerox 2014 Annual Report 26


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    Cash flow from operations was $2.1 billion in 2014 as compared to $2.4 billion in 2013. The decrease in cash was primarily due to the impacts from the prior year finance receivables sales and higher pension contributions. These decreases were partially offset by working capital improvements (accounts receivable, inventory and accounts payable), lower contract spending and lower income tax payments. Cash used in investing activities of $703 million primarily reflects capital expenditures of $452 million and acquisitions of $340 million partially offset by proceeds from the sale of businesses and assets of $80 million. Cash used in financing activities was $1.6 billion, which primarily reflects $1.1 billion for stock repurchases, $175 million of net payments on debt and $313 million for dividends. We reported a net loss from discontinued operations in 2014 of $115 million primarily related to the loss on the pending disposal of the ITO business as previously noted. Refer to Note 4 - Divestitures in our Consolidated Financial Statements for additional information regarding discontinued operations. 2015 Outlook We expect total revenues to be flat in 2015, excluding the impact of currency. We expect currency to have about a 3 to 4 percentage point negative impact on total revenues in 2015, reflecting the significant weakening of our major foreign currencies against the U.S. dollar. Earnings in 2015 are likewise expected to be negatively impacted by translation currency as well as higher pension costs. In our Services business, we expect revenue growth between 2 and 4%, excluding the impact of currency, with revenue growth improving through the year. Revenue growth is expected to be driven by portfolio management, global expansion, sales investments to acquire new customers and increase our revenue with current customers and additional acquisitions which increase our service capabilities and global footprint. Services margins are expected to improve approximately 0.5-percentage points in 2015 as we continue to focus on portfolio mix as well as productivity and cost improvements. In our Document Technology business, we expect revenue to decline 4 to 5%, excluding the impact of currency, reflecting improvements from second half 2014 product launches and moderation of the negative impact from prior period finance receivable sales. We also expect to capitalize on growth opportunities in the most advantaged segments of the market including color, high-end graphic communications and SMB markets. Margins in Document Technology are expected to be in the range of 11 to 13%, down from the 2014 margin of 13.7%, reflecting higher pension costs and negative impacts from translation currency partially offset by our continued focus on productivity and cost improvements. Our capital allocation plan for 2015 includes the following: Share repurchase – we plan to spend about $1 billion on share repurchases. Acquisitions – we expect to spend up to $900 million. In keeping with our portfolio management strategy, we are focusing on acquiring companies that will expand our capabilities in attractive services areas as well as extend our global reach in Services. Despite the increased capital allocation for acquisitions, we will maintain the disciplined approach we have established for evaluating and completing acquisitions. Debt – we are comfortable with our leverage position and expect to end the year with debt about flat at $7.7 billion. Dividends - we recently announced a 12% increase in the quarterly dividend to 7 cents per share effective with our April 30th dividend. This will result in common dividends of just over $300 million in 2015, which is only modestly higher than the prior year as share repurchases effectively self-fund the increase. 27


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    Currency Impact To understand the trends in our business, we believe that it is helpful to analyze the impact of changes in the translation of foreign currencies into U.S. Dollars on revenue and expenses. We refer to this analysis as “currency impact” or “the impact from currency.” 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 33% 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 flat in 2014 and 1% weaker in 2013, each compared to the prior year. As a result, the foreign currency translation had no impact on revenue in 2014 and a 1% positive impact on revenue in 2013. During the fourth quarter 2014 and through January 2015, the U.S. Dollar strengthened significantly against our major foreign currencies. Foreign currency translation had no impact on our revenue during the first three quarters of 2014 but resulted in a 2-percentage point negative impact in the fourth quarter 2014. Our major foreign currencies continued to weaken in January 2015 - declines since December 31, 2014 include the Euro by 7%, the Canadian Dollar by 9% and the Pound Sterling by 3%. As result of this continued weakening, we expect currency to have about a 3 to 4 percentage point negative impact on full-year 2015 revenues, assuming rates at the end of January 2015. 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, and Services - Percentage-of-Completion Xerox 2014 Annual Report 28


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    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 technology products, supplies and services to end-user customers. Sales to distributors and resellers are generally recognized as revenue when products are sold to such distributors and resellers. Distributors and resellers participate in various rebate, price-protection, cooperative marketing and other programs, and we record provisions and allowances for these programs as a reduction to revenue when the sales occur. Similarly, we also record estimates for sales returns and other discounts and allowances when the sales occur. We consider various factors, including a review of specific transactions and programs, historical experience and market and economic conditions when calculating these provisions and allowances. Approximately 11% of our revenues 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 revenues were recognized using the POC accounting method. Although not significant to total Services revenue, the POC methodology is normally applied to certain of our larger and longer term outsourcing contracts involving system development and implementation services, primarily in government healthcare and certain government transportation contracts. In addition, we had unbilled receivables totaling $360 and $345 at December 31, 2014 and 2013, respectively, representing revenues recognized but not yet billable under the terms of our POC contracts. The POC accounting methodology involves recognizing probable and reasonably estimable revenue using the percentage of services completed based on a current cumulative cost incurred to estimated total cost basis and a reasonably consistent profit margin over the period. Due to the long-term nature of these arrangements, developing the estimates of cost often requires significant judgment. Factors that must be considered in estimating the progress of work completed and ultimate cost of the projects include, but are not limited to, the availability of labor and labor productivity, the nature and complexity of the work to be performed and the impact of delayed performance. If changes occur in delivery, productivity or other factors used in developing the estimates of costs or revenues, we revise our cost and revenue estimates, which may result in increases or decreases in revenues and costs. Such revisions are reflected in income in the period in which the facts that give rise to that revision become known. We perform ongoing profitability analysis of our POC services contracts in order to determine whether the latest estimates require updating. Key factors reviewed by the company to estimate the future costs to complete each contract are future labor costs, future product costs, expected productivity efficiencies, achievement of contracted milestones and performance goals as well as potential penalties for milestone and system implementation delays. If at any time our estimates indicate the POC contract will be unprofitable, the entire estimated loss for the remainder of the contract is recorded immediately in cost of services and results in the contract being recorded at a zero profit margin with recognition of an equal amount of revenues and costs. Allowance for Doubtful Accounts and Credit Losses We continuously monitor collections and payments from our customers and maintain a provision for estimated credit losses based upon our historical experience adjusted for current conditions. We recorded bad debt provisions of $53 million, $120 million and $119 million in SAG expenses in our Consolidated Statements of Income for the years ended December 31, 2014, 2013 and 2012, respectively. Bad debt provisions declined in 2014 reflecting improved trends in write-offs throughout the year as well as a continued disciplined credit process. Reserves, as a percentage of trade and finance receivables, were 3.1% at December 31, 2014, as compared to 3.4% and 3.3% at December 31, 2013 and 2012. 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. 29


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    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, 2014, our reserve for doubtful accounts ranged from 3.1% to 3.4% of gross receivables. Holding all assumptions constant, a 0.5-percentage point increase or decrease in the reserve from the December 31, 2014 rate of 3.1% would change the 2014 provision by approximately $36 million. Refer to Note 5 - Accounts Receivables, Net and Note 6 - Finance Receivables, Net in the Consolidated Financial Statements for additional information regarding our allowance for doubtful accounts. Pension Plan Assumptions We sponsor defined benefit pension plans in various forms in several countries covering employees who meet eligibility requirements. Several statistical and other factors that attempt to anticipate future events are used in calculating the expense, liability and asset values related to our defined benefit pension plans. These factors include assumptions we make about the expected return on plan assets, discount rate, lump-sum settlement rates, the rate of future compensation increases and mortality. Differences between these assumptions and actual experiences are reported as net actuarial gains and losses and are subject to amortization to net periodic benefit cost over future periods. Over the past several years, we have amended several of our major defined benefit pension plans to freeze current benefits and eliminate benefit accruals for future service. The freeze of current benefits is the primary driver of the reduction in pension service costs since 2012. In certain plans we are required by law or statute to continue to reflect salary increases and inflation in determining the benefit obligation related to prior service. Cumulative net actuarial losses for our defined benefit pension plans of $3.3 billion as of December 31, 2014 increased by $924 million from December 31, 2013, reflecting the increase in our benefit obligations as a result of lower discount rates and changes in U.S. mortality assumptions partially offset by actual asset returns exceeding expected returns and settlement losses in the U.S. In October 2014, the Society of Actuaries issued new mortality tables and a mortality improvement scale specifically intended for use in estimating retirement plan liabilities for U.S. plans. The new tables reflect a longer life expectancy for retirees than projected in past tables, which accordingly resulted in an increase to our U.S. defined benefit plan obligations. The total actuarial loss at December 31, 2014 is subject to offsetting gains or losses in the future due to changes in actuarial assumptions and will be recognized in future periods through amortization or settlement losses. We used a consolidated weighted average expected rate of return on plan assets of 6.7% for 2014, 6.7% for 2013 and 6.9% for 2012, on a worldwide basis. During 2014, the actual return on plan assets was $1,297 million as compared to an expected return of $632 million. When estimating the 2015 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 2015 is 6.0%. The decline in the 2015 rate reflects the increased investment in fixed income securities as we reposition our investment portfolios in light of the freeze of plan benefits. Another significant assumption affecting our defined benefit pension obligations and the net periodic benefit cost is the rate that we use to discount our future anticipated benefit obligations. In the U.S. and the U.K., which comprise approximately 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, 2014 and to calculate our 2015 expense was 3.4%; the rate used to calculate our obligations as of December 31, 2013 and our 2014 expense was 4.4%. The weighted average discount rate we used to measure our retiree health obligation as of December 31, 2014 and to calculate our 2015 expense was 3.8%; the rate used to calculate our obligation at December 31, 2013 and our 2014 expense was 4.5%. Holding all other assumptions constant, a 0.25% increase or decrease in the discount rate would change the 2015 projected net periodic pension cost by approximately $30 million. Likewise, a 0.25% increase or decrease in the expected return on plan assets would change the 2015 projected net periodic pension cost by $18 million. One of the most significant and volatile elements of our net periodic defined benefit pension plan expense is settlement losses. Our primary domestic plans allow participants the option of settling their vested benefits through the receipt of a lump-sum payment. Xerox 2014 Annual Report 30


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    We have elected to apply settlement accounting to these plans 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 $3.3 billion at December 31, 2014, of which the U.S. primary domestic plans represented approximately $1,149 million. The pro rata factor is computed as the percentage reduction in the projected benefit obligation due to the settlement of a participant's vested benefit. Settlement accounting is only applied when the event of settlement occurs - i.e. the lump-sum payment is made. Since settlement is dependent on an employee's decision and election, the level of settlements and the associated losses can fluctuate significantly period to period. In 2014, settlement losses associated with our primary domestic pension plans amounted to $51 million. Currently, on average, approximately $100 million of plan settlements will result in settlement losses of approximately $25 million. During the three years ended December 31, 2014, U.S. plan settlements were $250 million, $838 million and $481 million, respectively. The following is a summary of our benefit plan costs and funding for the three years ended December 31, 2014 as well as estimated amounts for 2015: Estimated Actual (in millions) 2015 2014 2013 2012 Defined benefit pension plans(1) $ 62 $ 31 $ 105 $ 218 U.S. settlement losses 164 51 162 82 Defined contribution plans (2) 101 102 89 61 Retiree health benefit plans 16 3 1 11 Total Benefit Plan Expense $ 343 $ 187 $ 357 $ 372 ___________ (1) Excludes U.S. settlement losses. (2) Excludes an estimated $7 million for 2015; and $8 million, $7 million and $2 million for the three years ended December 31, 2014, respectively, related to our ITO business, which is held for sale and reported as a discontinued operation at December 31, 2014. Refer to Note 4 - Divestitures for additional information regarding this pending sale. Our estimated 2015 defined benefit pension plan cost is expected to be approximately $144 million higher than 2014, primarily driven by higher projected U.S. settlement losses of $113 million and higher amortization of actuarial losses. These increases are primarily the result of lower discount rates and lump-sum settlement rates. Benefit plan costs are included in several income statement components based on the related underlying employee costs. Estimated Actual (in millions) 2015 2014 2013 2012 Defined benefit pension plans: Cash $ 340 $ 284 $ 230 $ 364 Stock — — — 130 Total 340 284 230 494 Defined contribution plans (1) 101 102 89 61 Retiree health benefit plans 71 70 77 84 Total Benefit Plan Funding $ 512 $ 456 $ 396 $ 639 ___________ (1) Excludes an estimated $7 million for 2015; and $8 million, $7 million and $2 million for the three years ended December 31, 2014, respectively, related to our ITO business, which is held for sale and reported as a discontinued operation at December 31, 2014. Refer to Note 4 - Divestitures for additional information regarding this pending sale. The increase in contributions to our worldwide defined benefit pension plans in 2015, largely in the U.S., is to gradually address the underfunded liability in the U.S. Refer to Note 16 - Employee Benefit Plans in the Consolidated Financial Statements for additional information regarding defined benefit pension plan assumptions, expense and funding. Income Taxes We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgments are required in determining the consolidated provision for income taxes. Our provision is based on nonrecurring events as well as recurring factors, including the taxation of foreign income. In addition, our provision will change based on discrete or other nonrecurring events such as audit settlements, tax law changes, changes in valuation allowances, etc., that may not be predictable. 31


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    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 $(20) million, $2 million and $(9) million for the years ended December 31, 2014, 2013 and 2012, respectively. There were other decreases to our valuation allowance, including the effects of currency, of $56 million, $42 million and $14 million for the years ended December 31, 2014, 2013 and 2012, 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 $3.4 billion and $3.4 billion had valuation allowances of $538 million and $614 million at December 31, 2014 and 2013, respectively. We are subject to ongoing tax examinations and assessments in various jurisdictions. Accordingly, we may incur additional tax expense based upon our assessment of the more-likely-than-not outcomes of such matters. In addition, when applicable, we adjust the previously recorded tax expense to reflect examination results. Our ongoing assessments of the more-likely-than-not outcomes of the examinations and related tax positions require judgment and can materially increase or decrease our effective tax rate, as well as impact our operating results. Unrecognized tax benefits were $240 million, $267 million and $201 million at December 31, 2014, 2013 and 2012, respectively. Refer to Note 17 - Income and Other Taxes in the Consolidated Financial Statements for additional information regarding deferred income taxes and unrecognized tax benefits. Business Combinations and Goodwill The accounting for business combinations requires the use of significant estimates and assumptions in the determination of the fair value of assets acquired and liabilities assumed in order to properly allocate purchase price consideration between assets that are depreciated and amortized from goodwill. Our estimates of the fair values of assets and liabilities acquired are based upon assumptions believed to be reasonable, and when appropriate, include assistance from independent third-party valuation firms. Refer to Note 3 - Acquisitions in the Consolidated Financial Statements for additional information regarding the allocation of the purchase price consideration for our acquisitions. As a result of our acquisition of Affiliated Computer Services, Inc. (ACS) in 2010, as well as other acquisitions including GIS, we have a significant amount of goodwill. Goodwill at December 31, 2014 was $8.8 billion. Goodwill is not amortized but rather is tested for impairment annually or more frequently if an event or circumstance indicates that an impairment may have been incurred. Events or circumstances that might indicate an interim evaluation is warranted include, among other things, unexpected adverse business conditions, macro and reporting unit specific economic factors, supply costs, unanticipated competitive activities and acts by governments and courts. Application of the annual goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units and the assessment - qualitatively or quantitatively - of the fair value of each reporting unit against its carrying value. At December 31, 2014, $6.5 billion and $2.3 billion of goodwill was allocated to reporting units within our Services and Document Technology segments, respectively. Our Services segment is comprised of five reporting units while our Document Technology segment is comprised of one reporting unit for a total of six reporting units with goodwill balances. Our annual impairment test of goodwill was performed in the fourth quarter of 2014. Consistent with 2013, we elected to utilize a quantitative assessment of the recoverability of our goodwill balances for each of our reporting units. In our quantitative test, we estimate the fair value of each reporting unit by weighting the results from the income approach (discounted cash flow methodology) and market approach. These valuation approaches require significant judgment and consider a number of factors that include, but are not limited to, expected future cash flows, growth rates and discount rates, and comparable multiples from publicly traded companies in our industry and require us to make certain assumptions and estimates regarding the current economic environment, industry factors and the future profitability of our businesses. Xerox 2014 Annual Report 32


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    When performing our discounted cash flow analysis for each reporting unit, we incorporate the use of projected financial information and discount rates that are developed using market participant-based assumptions. The cash- flow projections are based on three-year financial forecasts developed by management that include revenue and expense projections, capital spending trends, and investment in working capital to support anticipated revenue growth or other changes in the business. The selected discount rates consider the risk and nature of the respective reporting units' cash flows and an appropriate capital structure and rates of return that market participants would require to invest their capital in our reporting units. In performing our 2014 impairment test, the following were the 3-year compounded assumptions for Document Technology and the five reporting units within our Services segment with respect to revenue, operating income and margins, which formed the basis for estimating future cash flows used in the discounted cash flow model: Document Technology - revenue decline in 2015 moderating in 2016-2017, operating income growth: flat-1%, and operating margin: 10%-11% - as we continue to manage costs as a result of an expected decline in revenues. Services - revenue growth: 5%-6%, operating income growth: 10%-12%, and operating margin: 10%-12% - as we benefit from recurring revenue and strong renewals while improving the mix of services and improving the performance of our government healthcare business as well as restructuring the businesses to achieve operating margin growth. We believe these assumptions are appropriate and reflect our forecasted long-term business model, giving appropriate consideration to our historical results as well as the current economic environment and markets that we serve. The average discount rate applied to our projected cash flows was approximately 9.5%, 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. When performing our market approach for each reporting unit, we rely specifically on the guideline public company method. Our guideline public company method incorporates revenues and earnings multiples from publicly traded companies with operations and other characteristics similar to each reporting unit. The selected multiples consider each reporting unit’s relative growth, profitability, size and risk relative to the selected publicly traded companies. After completing our annual impairment reviews for each reporting unit in the fourth quarter of 2014 and 2013, we concluded that goodwill was not impaired in either of these years. In 2014, no reporting unit had an excess of fair value over carrying value of less than 20%. Our impairment assessment methodology includes the use of outside valuation experts and the inclusion of factors and assumptions related to third-party market participants. In connection with the announced sale of the ITO business in the fourth quarter 2014, since that business comprised a portion of several reporting units, we tested the retained goodwill of those reporting units for impairment and concluded that the goodwill remaining was not impaired since the fair values of those reporting units exceeded their carrying values. Refer to Note 4 - Divestitures in the Consolidated Financial Statements for additional information regarding the ITO disposition as well as Note 10 - Goodwill and Intangible Assets, Net in the Consolidated Financial Statements for additional information regarding goodwill by reportable segment. 33


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    Revenue Results Summary Total Revenue Revenue for the three years ended December 31, 2014 was as follows: Revenues Change Percent of Total Revenue (in millions) 2014 2013 2012 2014 2013 2014 2013 2012 Equipment sales $ 3,104 $ 3,358 $ 3,476 (8)% (3)% 16% 17% 17% Annuity revenue 16,436 16,648 16,945 (1)% (2)% 84% 83% 83% Total Revenue $ 19,540 $ 20,006 $ 20,421 (2)% (2)% 100% 100% 100% Reconciliation to Consolidated Statements of Income: Sales $ 5,288 $ 5,582 $ 5,827 Less: Supplies, paper and other sales (2,184) (2,224) (2,351) Equipment Sales $ 3,104 $ 3,358 $ 3,476 (8)% (3)% 16% 17% 17% Outsourcing, maintenance and rentals $ 13,865 $ 13,941 $ 13,997 (1)% —% 71% 70% 69% Add: Supplies, paper and other sales 2,184 2,224 2,351 (2)% (5)% 11% 11% 11% Add: Financing 387 483 597 (20)% (19)% 2% 2% 3% Annuity Revenue $ 16,436 $ 16,648 $ 16,945 (1)% (2)% 84% 83% 83% Revenue 2014 Total revenues decreased 2% compared to the prior year with no impact from currency. Total revenues included the following: Annuity revenue decreased 1% compared to prior year with no impact from currency. Annuity revenue is comprised of the following: Outsourcing, maintenance and rentals revenue includes outsourcing revenue within our Services segment and maintenance revenue (including bundled supplies) and rental revenue, both primarily within our Document Technology segment. Revenues of $13,865 million decreased 1% from the prior year with a 1- percentage point negative impact from currency. The decrease was due to a decline in the Document Technology segment partially offset by growth in outsourcing revenue within our Services segment. Supplies, paper and other sales includes unbundled supplies and other sales, primarily within our Document Technology segment. Revenues of $2,184 million decreased 2% from the prior year with no impact from currency. The decrease was primarily driven by moderately lower supplies demand and a decline in other sales revenue. Financing revenue is generated from financed sale transactions primarily within our Document Technology segment. Financing revenues decreased 20% from the prior year due primarily to $40 million in pre-tax gains on finance receivable sales in the second half of 2013 as well as a lower finance receivable balance mostly as a result of prior period sales of finance receivables and lower originations due to decreased equipment sales. Refer to the discussion on Sales of Finance Receivable in the Capital Resources and Liquidity section as well as Note 6 - Finance Receivables, Net in the Consolidated Financial Statements for additional information. Equipment sales revenue is reported primarily within our Document Technology segment and the Document Outsourcing business within our Services segment. Equipment sales revenue decreased 8% from the prior year, including a 1-percentage point negative impact from currency. Lower installs across the majority of our product groupings, lower sales in entry products due to product launch timing and overall price declines that were at the low-end of our historical 5% to 10% range contributed to the decline. Equipment sales were also impacted by lower sales in developing markets, and particularly lower sales in Russia due to economic instability. Xerox 2014 Annual Report 34


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    Revenue 2013 Total revenues decreased 2% compared to the prior year and included 1-percentage point positive impact from currency. Total revenues included the following: Annuity revenue decreased 2% compared to prior year with no impact from currency. Annuity revenue is comprised of the following: Outsourcing, maintenance and rentals revenue includes outsourcing revenue within our Services segment and technical service revenue (including bundled supplies) and rental revenue, both primarily within our Document Technology segment. Revenues of $13,941 million remained flat from the prior year and included a 1-percentage point positive impact from currency. This was primarily driven by growth in our Services segment offset by a decline in maintenance revenue due to moderately lower page volumes and revenue per page. Supplies, paper and other sales includes unbundled supplies and other sales, primarily within our Document Technology segment. Revenues of $2,224 million decreased 5% from the prior year with no impact from currency. The decrease was primarily driven by a reduction in channel supplies inventories in the U.S. and developing markets, moderately lower supplies and paper demand, and lower licensing sales. Financing revenue is generated from financed sale transactions primarily within our Document Technology segment. Financing revenues decreased 19% from the prior year reflecting a lower balance of finance receivables as a result of prior period sales of receivables and lower originations due to decreased equipment sales. Financing revenues in 2013 include gains of $40 million from the sales of finance receivables as compared to $44 million in 2012. Refer to the discussion on Sales of Finance Receivable in the Capital Resources and Liquidity section as well as Note 6 - Finance Receivables, Net in the Consolidated Financial Statements for additional information. Equipment sales revenue is reported primarily within our Document Technology segment and the Document Outsourcing business within our Services segment. Equipment sales revenue decreased 3% from the prior year, including a 1-percentage point positive impact from currency. Benefits from new product introductions and a positive mix impact were more than offset by lower sales in developing markets and price declines ranging from 5% to 10%, which is consistent with prior years. An analysis of the change in revenue for each business segment is included in the “Operations Review of Segment Revenue and Profit” section. Costs, Expenses and Other Income Summary of Key Financial Ratios Year Ended December 31, Change 2014 2013 2012 2014 2013 Total Gross Margin 32.0% 32.4% 33.2% (0.4) pts (0.8) pts RD&E as a % of Revenue 3.0% 3.0% 3.2% — pts (0.2) pts SAG as a % of Revenue 19.4% 20.4% 20.3% (1.0) pts 0.1 pts Operating Margin(1) 9.6% 9.0% 9.7% 0.6 pts (0.7) pts Pre-tax Income Margin 6.2% 6.2% 6.3% — pts (0.1) pts Operating Margin Operating margin1 for the year ended December 31, 2014 of 9.6% increased 0.6-percentage points as compared to 2013. The increase was driven primarily by a 1.0-percentage point improvement in SAG as a percent of revenue partially offset by a decline in gross margin of 0.4-percentage points. The operating margin improvement reflects restructuring savings and productivity improvements, continued benefits from currency on yen based purchases and lower bad debt expense. As anticipated, operating margin also benefited from lower year-over-year pension expense and settlement losses (collectively referred to as "pension expense"). We anticipate pension expense will increase in 2015 as a result of expected changes in the discount rate and the estimated impact it will have on settlement losses. Refer to the discussion on Pension Plan Assumptions in the Application of Critical accounting Policies section as well as Note 16 - Employee Benefit Plans in the Consolidated Financial Statements for additional information. Services margins decreased in 2014 due to higher government healthcare platform expenses, including net non-cash impairment charges, as well as platform and resource investments across the Services segment and the continued run-off of the student loan business. 35


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    The operating margin1 for the year ended December 31, 2013 of 9.0% decreased 0.7-percentage points as compared to 2012. The decline was driven primarily by a decline in gross margin of 0.8-percentage points partially offset by a moderate improvement in operating expenses as a percent of revenue. The operating margin decline reflects continued pressure on Services margins from higher healthcare platform expenses and the run-off of the student loan business, as well as from higher pension settlement costs impacting Document Technology. _____________ (1) See the "Non-GAAP Financial Measures" section for an explanation of the Operating Margin non-GAAP financial measure. Gross Margins Total Gross Margin Total gross margin for year ended December 31, 2014 of 32.0% decreased 0.4-percentage points as compared to 2013. The decrease was driven by margin declines within the Services segment as well as the impact of a higher proportion of our revenue from Services (which historically has a lower gross margin than Document Technology) partially offset by a higher gross margin within the Document Technology segment. Gross margin for year ended December 31, 2013 of 32.4% decreased 0.8-percentage points as compared to 2012. The decrease was driven by margin declines within the Services segment as well as the continued increase in services revenue as a percent of total revenue. Services Gross Margin Services gross margin for the year ended December 31, 2014 decreased 1.1-percentage points as compared to 2013. The decrease is primarily due to higher expenses associated with our public sector and government healthcare businesses, including costs for the Medicaid and Health Insurance Exchange (HIX) platforms, the anticipated run-off of our student loan business and price declines that were consistent with prior periods. These impacts were only partially offset by productivity improvements and restructuring benefits. Services gross margin for the year ended December 31, 2013 decreased 0.7-percentage points as compared to 2012. The decrease is primarily due to revenue mix in the segment, the run-off of our student loan business, lower volumes in some areas of the business and higher healthcare platform costs. These impacts were only partially offset by productivity improvements and restructuring benefits. Document Technology Gross Margin Document Technology gross margin for the year ended December 31, 2014 increased by 1.5-percentage points as compared to 2013. The increase, driven by cost productivity and restructuring savings, favorable transaction currency on our Yen-based purchases, lower pension expense and favorable revenue mix, was partially offset by moderate price declines and the impact of the prior year finance receivable gain. Document Technology gross margin for the year ended December 31, 2013 increased by 0.1-percentage points as compared to 2012. The increase was driven by cost productivities and favorable transaction currency on our Yen- based purchases, which more than offset the impact of price declines and mix. Research, Development and Engineering Expenses (RD&E) Year Ended December 31, Change (in millions) 2014 2013 2012 2014 2013 R&D $ 445 $ 481 $ 545 $ (36) $ (64) Sustaining engineering 132 122 110 10 12 Total RD&E Expenses $ 577 $ 603 $ 655 $ (26) $ (52) R&D Investment by Fuji Xerox(1) $ 654 $ 724 $ 860 $ (70) $ (136) ______________ (1) Fluctuation in Fuji Xerox R&D was primarily due to changes in foreign exchange rates. RD&E as a percent of revenue for the year ended December 31, 2014 of 3.0% remained flat, reflecting the impact of restructuring and productivity improvements and a higher mix of Services revenue (which historically has a lower RD&E as a percentage of revenue), offset by increased investments in Services RD&E and the overall total company revenue decline. RD&E of $577 million for the year ended December 31, 2014, was $26 million lower than 2013 reflecting the impact of restructuring and productivity improvements. Xerox 2014 Annual Report 36


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    Innovation is one of our core strengths and we continue to invest at levels that enhance this core strength, particularly in services, color and software. During 2014 we managed our investments in R&D to align with growth opportunities in areas like business services, color printing and customized communication. Our R&D is also strategically coordinated with Fuji Xerox. RD&E as a percent of revenue for the year ended December 31, 2013 of 3.0% decreased 0.2-percentage points. The decrease was driven by the higher mix of Services revenue (which historically has a lower RD&E as a percentage of revenue) lower spending and productivity improvements. RD&E of $603 million for the year ended December 31, 2013, was $52 million lower, reflecting the impact of restructuring and productivity improvements. Selling, Administrative and General Expenses (SAG) SAG as a percent of revenue of 19.4% decreased 1.0-percentage point for the year ended December 31, 2014. The decrease was driven by the higher mix of Services revenue (which historically has lower SAG as a percentage of revenue), restructuring and productivity improvements, and lower pension and bad debt expense. The net reduction in SAG spending exceeded the overall revenue decline on a percentage basis. SAG expenses of $3,788 million for the year ended December 31, 2014 were $285 million lower than the prior year period. The decrease in SAG expense reflects the following: $125 million decrease in selling expenses. $93 million decrease in general and administrative expenses. $67 million decrease in bad debt expenses to $53 million, reflecting the favorable trend in write-offs and recoveries experienced throughout the year. Full year 2014 bad debt expense remained less than one percent of receivables. SAG as a percent of revenue of 20.4% increased 0.1-percentage points for the year ended December 31, 2013. SAG expenses of $4,073 million for the year ended December 31, 2013 was $68 million lower than the prior year period. The SAG expense decrease reflects the following: $52 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. $17 million decrease in general and administrative expenses as restructuring savings and productivity improvements were partially offset by the impact of acquisitions and increased consulting costs. $1 million increase in bad debt expense to $120 million. Restructuring and Asset Impairment Charges During the year ended December 31, 2014, we recorded net restructuring and asset impairment charges of $128 million ($91 million after-tax). Approximately 30% of the charges were related to our Services segment, 59% to our Document Technology segment, and 11% to our Other segment and included the following: $143 million of severance costs related to headcount reductions of approximately 4,000 employees globally. The actions impacted several functional areas, with approximately 53% of the costs focused on gross margin improvements, 42% on SAG and 5% on the optimization of RD&E investments. $5 million for lease termination costs primarily reflecting continued optimization of our worldwide operating locations. $7 million of asset impairment losses. The above charges were partially offset by $27 million of net reversals for changes in estimated reserves from prior period initiatives. We expect 2015 pre-tax savings of approximately $100 million from our 2014 restructuring actions. During the year ended December 31, 2013, we recorded net restructuring and asset impairment charges of $115 million ($82 million after-tax). Approximately 33% of the charges were related to our Services segment and 67% to our Document Technology segment and included the following: 37


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    $141 million of severance costs related to headcount reductions of approximately 4,800 employees globally. The actions impacted several functional areas, with approximately 65% of the costs focused on gross margin improvements, 34% on SAG and 1% on the optimization of RD&E investments. $2 million for lease termination costs primarily reflecting continued optimization of our worldwide operating locations. $1 million of asset impairment losses. The above charges were partially offset by $29 million of net reversals for changes in estimated reserves from prior period initiatives. Restructuring Summary The restructuring reserve balance as of December 31, 2014 for all programs was $97 million, of which approximately $94 million is expected to be spent over the next twelve months. In the first quarter 2015, we expect to incur additional restructuring charges of approximately $0.02 per diluted share for actions and initiatives that have not yet been finalized. Refer to Note 11 - Restructuring and Asset Impairment Charges in the Consolidated Financial Statements for additional information regarding our restructuring programs. Amortization of Intangible Assets During the year ended December 31, 2014, we recorded $315 million of expense related to the amortization of intangible assets, which is $10 million higher than the prior year reflecting an increase in acquisitions in 2014. During the year ended December 31, 2013, we recorded $305 million of expense related to the amortization of intangible assets, which was $4 million higher than the prior year reflecting the increase in acquisitions in 2012. Refer to Note 10 - Goodwill and Intangible assets, Net in the Consolidated Financial Statements for additional information regarding our intangible assets. Worldwide Employment Worldwide employment of approximately 147,500 as of December 31, 2014 increased by approximately 4,400 from December 31, 2013, due primarily to the impact of acquisitions and seasonal fluctuations in Services, partially offset by restructuring actions and productivity improvements. Total headcount includes approximately 9,800 employees who are expected to transfer to Atos upon closure of the sale of our ITO business. Worldwide employment was approximately 143,100 and 147,600 at December 2013 and 2012, respectively. Other Expenses, Net Year Ended December 31, (in millions) 2014 2013 2012 Non-financing interest expense $ 237 $ 240 $ 229 Interest income (10) (11) (13) (Gains) losses on sales of businesses and assets (50) (64) 2 Currency losses (gains), net 5 (7) 3 Litigation matters 11 (34) (1) Loss on sales of accounts receivables 15 17 21 Deferred compensation investment gains (7) (15) (10) All other expenses, net 31 20 26 Total Other Expenses, Net $ 232 $ 146 $ 257 Note: With the exception of Deferred compensation investment gains, all items comprising Other Expense, Net are reported in the Other segment. Deferred compensation investment gains are reported in the Services segment as an offset to the associated compensation expense - see below. Xerox 2014 Annual Report 38


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    Non-Financing Interest Expense: Non-financing interest expense for the year ended December 31, 2014 of $237 million was $3 million lower than prior year primarily due to the benefit of lower borrowing costs achieved as a result of refinancing existing debt. When non-financing interest expense is combined with financing interest expense (cost of financing), total company interest expense declined by $26 million from the prior year, primarily driven by a lower total average debt balance and lower average cost of debt. Non-financing interest expense for the year ended December 31, 2013 of $240 million was $11 million higher than prior year primarily due to a higher average cost of debt. When non-financing interest expense is combined with financing interest expense (cost of financing), total company interest expense declined by $24 million from the prior year, primarily driven by a lower total average debt balance partially offset by a higher average cost of debt. Refer to Note 13 - Debt in the Consolidated Financial Statements for additional information regarding our allocation of interest expense. (Gains) Losses on Sales of Businesses and Assets: The 2014 gains on sales of businesses and assets was primarily related to the sales of surplus properties with $39 million related to sales in Latin America and $8 million related to a sale in the U.S. The 2013 gains on sales of businesses and assets include the following transactions: A $29 million gain on the $32.5 million cash sale of a portion of our Wilsonville, Oregon product design, engineering and chemistry group and related assets that were surplus to our needs. A $23 million gain on the sale of a surplus facility in the U.S. An $8 million gain on the sale of a surplus facility in Latin America. Currency Losses (Gains), Net: Currency losses (gains) primarily result from the re-measurement of foreign currency-denominated assets and liabilities, the cost of hedging foreign currency-denominated assets and liabilities and the mark-to-market of foreign exchange contracts utilized to hedge those foreign currency-denominated assets and liabilities. 2014 currency losses are primarily related to significant volatility in exchange rates in Russia in the fourth quarter. Litigation Matters: 2014 litigation matters reflect probable losses and reserves for various legal matters partially offset by the favorable resolution of our securities litigation matter. Litigation matters for 2013 primarily reflect the benefit resulting from a reserve reduction associated with litigation developments. Refer to Note 18 - Contingencies and Litigation, in the Consolidated Financial Statements for additional information regarding litigation against the Company. Loss on Sales of Accounts Receivables: Represents the loss incurred on our sales of accounts receivables. Refer to Sales of Accounts Receivables section below and Note 5 - Accounts Receivables, Net in the Consolidated Financial Statements for additional information regarding our sales of receivables. Deferred Compensation Investment 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. Income Taxes The 2014 effective tax rate was 21.5% or 24.9% on an adjusted basis1. The adjusted tax rate for 2014 was lower than the U.S. statutory tax rate primarily due to a net benefit of approximately 2.4% resulting from the redetermination of certain unrecognized tax positions upon conclusion of several audits, 2.5% from foreign tax credits resulting from actual and anticipated dividends from our foreign subsidiaries, 1.1% from the retroactive impact from the U.S. Tax Increase Prevention Act of 2014, and 1.0% from the reversal of a valuation allowance on deferred tax assets associated with capital losses as well as the geographical mix of profits. The 2013 effective tax rate was 20.4% or 23.8% on an adjusted basis1. The adjusted tax rate for 2013 was lower than the U.S. statutory tax rate primarily due to foreign tax credits resulting from actual and anticipated dividends from our foreign subsidiaries, the geographical mix of income and the retroactive tax benefits from the American Taxpayer Relief Act of 2012 tax law change of approximately $19 million. These benefits were partially offset by the 39


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    discrete impact of $12 million for the U.K. corporate income tax rate reduction and the corresponding adjustment to our U.K. deferred tax assets. The 2012 effective tax rate was 19.9% or 23.4% on an adjusted basis1. The adjusted tax rate for 2012 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 similar impact on deferred tax assets from the 2012 reduction in the U.K. corporate income tax rate. 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 2014 includes a benefit of 9.6-percentage points from these non-U.S. operations. Refer to Note 17 - Income and Other Taxes, in the Consolidated Financial Statements for additional information regarding the geographic mix of income before taxes and the related impacts on our effective tax rate. Our effective tax rate is based on nonrecurring events as well as recurring factors, including the taxation of foreign income. In addition, our effective tax rate will change based on discrete or other nonrecurring events (e.g. audit settlements, tax law changes, changes in valuation allowances, etc.) that may not be predictable. Excluding the effects of intangibles amortization and other discrete items, we anticipate that our adjusted effective tax rate will be approximately 25% to 27% for 2015. _____________ (1) See the "Non-GAAP Financial Measures" section for an explanation of the adjusted effective tax rate non-GAAP financial measure. Equity in Net Income of Unconsolidated Affiliates Year Ended December 31, (in millions) 2014 2013 2012 Total equity in net income of unconsolidated affiliates $ 160 $ 169 $ 152 Fuji Xerox after-tax restructuring costs 3 9 16 Equity in net income of unconsolidated affiliates primarily reflects our 25% share of Fuji Xerox. Refer to Note 9 - Investment in Affiliates, at Equity, in the Consolidated Financial Statements for additional information regarding our investment in Fuji Xerox. Net Income From Continuing Operations Net income from continuing operations attributable to Xerox for the year ended December 31, 2014 was $1,084 million, or $0.90 per diluted share. On an adjusted basis1, net income attributable to Xerox was $1,280 million, or $1.07 per diluted share, and included adjustments for the amortization of intangible assets. The increase in earnings per diluted share reflects a lower average share count as a result of share repurchases over the last three years. Net income from continuing operations attributable to Xerox for the year ended December 31, 2013 was $1,139 million, or $0.89 per diluted share. On an adjusted basis1, net income attributable to Xerox was $1,328 million, or $1.04 per diluted share, and included adjustments for the amortization of intangible assets. Net income from continuing operations attributable to Xerox for the year ended December 31, 2012 was $1,152 million, or $0.85 per diluted share. On an adjusted basis1, net income attributable to Xerox was $1,338 million, or $0.99 per diluted share, and included adjustments for the amortization of intangible assets. _____________ (1) See the "Non-GAAP Financial Measures" section for a reconciliation of reported net income from continuing operations to adjusted net income. Discontinued Operations Refer to Note 4 - Divestitures in the Consolidated Financial Statements for additional information regarding Discontinued Operations. Xerox 2014 Annual Report 40


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    Other Comprehensive (Loss) Income Other comprehensive loss attributable to Xerox was $1,380 million in 2014 as compared to income of $448 million in 2013. The decrease of $1,828 million from 2013 is primarily the result of losses of $662 million from changes in our defined benefit plans in 2014 as compared to gains of $632 million in 2013. The benefit plan losses in 2014 are primarily due to a decrease in the discount rates used to measure our benefit obligations in 2014 as compared to an increase in rates in 2013. (Refer to our discussion of Pension Plan Assumptions in the Application of Critical Accounting Policies section of the MD&A as well as Note 16 - Employee Benefit Plans in the Consolidated Financial Statements for additional information). The remainder of the year-over-year decrease in other comprehensive income is related to the $549 million increase in losses from the translation of our foreign currency denominated net assets as a result of the increased weakening in 2014 of our major foreign currencies as compared to the U.S. Dollar. 2013 Other comprehensive income attributable to Xerox of $448 million increased $959 million from 2012. The increase was primarily the result of gains associated with our defined benefit plans due to an increase in the discount rates used to measure our benefit obligations (Refer to our discussion of Pension Plan Assumptions in the Application of Critical Accounting Policies section of the MD&A as well as Note 16 - Employee Benefit Plans in the Consolidated Financial Statements for additional information). These gains were partially offset by losses from the translation of our foreign currency-denominated net assets in 2013 as compared to translation gains in 2012. The translation losses are the result of the weakening of our major foreign currencies against the U.S. Dollar in 2013 as compared to a strengthening of those same currencies in 2012. 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, 2014 were as follows: % of Total Segment Profit Segment (in millions) Total Revenue Revenue (Loss) Margin 2014 Services $ 10,584 54% $ 956 9.0 % Document Technology 8,358 43% 1,149 13.7 % Other 598 3% (272) (45.5)% Total $ 19,540 100% $ 1,833 9.4 % 2013 Services $ 10,479 52% $ 1,055 10.1 % Document Technology 8,908 45% 964 10.8 % Other 619 3% (217) (35.1)% Total $ 20,006 100% $ 1,802 9.0 % 2012 Services $ 10,271 50% $ 1,091 10.6 % Document Technology 9,462 46% 1,065 11.3 % Other 688 4% (254) (36.9)% Total $ 20,421 100% $ 1,902 9.3 % 41


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    Note: The above table has been revised to reflect the reclassification of the ITO business to Discontinued Operations. Segment profit associated with the ITO business reclassified from the Services segment to Discontinued Operations was $107 million, $100 million and $82 million for 2014, 2013 and 2012, respectively. Services Segment Our Services segment is comprised of two service offerings: Business Process Outsourcing (BPO) and Document Outsourcing (DO). Services segment revenues for the three years ended December 31, 2014 were as follows: Revenue Change (in millions) 2014 2013 2012 2014 2013 Business processing outsourcing $ 7,304 $ 7,244 $ 7,162 1% 1% Document outsourcing 3,388 3,337 3,210 2% 4% Less: Intra-segment elimination (108) (102) (101) 6% 1% Total Services Revenue $ 10,584 $ 10,479 $ 10,271 1% 2% __________ Note: The above table has been revised to reflect the reclassification of the ITO business to Discontinued Operations. Additionally, 2013 and 2012 BPO revenues have been revised to conform to the 2014 presentation of revenues. Revenue 2014 Services revenue of $10,584 million increased 1% with no impact from currency. BPO revenue increased 1% and represented 68% of total Services revenue. Growth from acquisitions along with organic growth in commercial healthcare and litigation services as well as growth internationally were partially offset by declines in portions of customer care. In addition, the anticipated declines in the student loan business and the Texas Medicaid contract termination had a combined 2.6-percentage point negative impact on BPO revenue growth and a 1.8-percentage point negative impact on total Services revenue. These negative year-over-year impacts are expected to end in the second half of 2015. In 2014, BPO revenue mix across the major business areas was as follows: Commercial - 45%; Government and Transportation - 25%; Commercial Healthcare - 18%; and Government Healthcare - 12%. DO revenue increased 2% and represented 32% of total Services revenue. The increase in DO revenue was primarily driven by growth in our partner print services offerings offset by declines in Europe and other markets due to contract run-off and new contract ramp timing. Segment Margin 2014 Services segment margin of 9.0% decreased 1.1-percentage points from the prior year due primarily to a 1.1- percentage point decline in gross margin, as margin improvements in DO, commercial healthcare, human resources and commercial European businesses were more than offset by decreased margin in government healthcare and government and transportation. Productivity improvements and restructuring benefits were insufficient to offset higher expenses associated with our government healthcare Medicaid and Health Insurance Exchange (HIX) platforms, net non-cash impairment charges for the HIX platform, higher compensation expenses, the anticipated run-off of the student loan business and price declines consistent with prior years. The gross margin decline was partially offset by improvements in SAG reflecting restructuring benefits. Metrics Pipeline Our total Services sales pipeline at December 31, 2014 declined 5% over the prior year. The pipeline has been adjusted to remove the ITO business and to reflect the realignment of our Services go-to-market resources into industry focused business groups. Additionally, the pipeline qualification criteria has been revised. The sales pipeline includes the Total Contract Value (TCV) of new business opportunities that potentially could be contracted within the next six months and excludes business opportunities with estimated annual recurring revenue in excess of $100 million. Xerox 2014 Annual Report 42


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    Signings Signings are defined as estimated future revenues from contracts signed during the period, including renewals of existing contracts. Signings were as follows: Signings were as follows: Year Ended December 31, (in billions) 2014 2013 2012(1) BPO $ 7.6 $ 8.9 $ 6.5 DO 3.0 3.3 2.9 Total Signings $ 10.6 $ 12.2 $ 9.4 _________ (1) The 2012 BPO and DO signings have been revised to reflect the transfer of our Communication & Marketing Services (CMS) business from DO to BPO in 2013. Services signings were an estimated $10.6 billion in TCV for 2014 and decreased 13% compared to the prior year. The decrease was driven by a lower level of renewal decision opportunities and lower new business signings which were partially impacted by customer decision delays and a decrease in the average contract length. New business annual recurring revenue (ARR) and non-recurring revenue (NRR) decreased 13% compared to the prior year. Services signings were an estimated $12.2 billion in TCV for 2013 and increased 29% compared to the prior year. The increase was driven by new business and higher renewals. Note: The above DO signings amount represents Enterprise signings only and does not include signings from our partner print services offerings, which is driving the revenue growth in DO. TCV is the estimated total contractual revenue related to future contracts in the pipeline or signed contracts, as applicable. Renewal rate (BPO 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. Our 2014 renewal rate of 82% was moderately below our target range of 85%-90% and 11-percentage points lower than 2013. Excluding the Texas Medicaid contract loss our renewal rate was 91% for the year. Our 2013 renewal rate of 93% was above our target range of 85%-90% and 8-percentage points higher than 2012. Revenue 2013 Services revenue of $10,479 million increased 2% with no impact from currency. BPO revenue increased 1% and represented 68% of total Services revenue. Growth in healthcare, human resources and state government businesses were partially offset by lower volumes in portions of our commercial BPO business and the run-off of our government student loan business. DO revenue increased 4% and represented 32% of total Services revenue. The increase in DO revenue was primarily driven by growth in our partner print services offerings as well as higher equipment sales. Segment Margin 2013 Services segment margin of 10.1% decreased 0.5-percentage points from the prior year primarily due to a decrease in gross margin as increased productivity improvements and restructuring benefits were more than offset by the run-off of the student loan business, higher healthcare platform expenses, the impact of price declines, which were consistent with prior years, and lower volumes. The gross margin decline was partially offset by SAG improvements reflecting restructuring benefits as well as lower compensation-related expenses. 43


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    Document Technology Segment Our Document Technology segment includes the sale of products and supplies, as well as the associated maintenance and financing of those products. Revenue Year Ended December 31, Change (in millions) 2014 2013 2012 2014 2013 Equipment sales $ 2,482 $ 2,727 $ 2,879 (9)% (5)% Annuity revenue 5,876 6,181 6,583 (5)% (6)% Total Revenue $ 8,358 $ 8,908 $ 9,462 (6)% (6)% Revenue 2014 Document Technology revenue of $8,358 million decreased 6%, with no impact from currency. Document Technology revenues exclude Document Outsourcing. Inclusive of Document Outsourcing, 2014 aggregate document-related revenue decreased 4% from 2013, with no impact from currency. Total revenues include the following: Equipment sales revenue decreased 9% with no impact from currency. The decrease in equipment sales reflects weakness in entry products due to product launch timing, the continued migration of customers to our growing partner print services offering (included in our Services segment), weakness in developing markets due to economic instability and, price declines of approximately 5%. 2013 benefited from the ConnectKey mid- range product launch, and the refresh cycle for several large accounts. Equipment sales in 2014 were negatively impacted by lower sales in Russia due to economic instability. Annuity revenue decreased by 5%, with no impact from currency. The decrease reflects a modest decline in total pages, weakness in developing markets and entry products due to product launch timing, a continued decline in financing revenue as a result of prior period sales of finance receivables and lower receivables balance due to lower originations. The overall decrease in Financing revenue from prior year contributed 1- percentage point to the Annuity revenue decline and 1-percentage point impact to the overall Document Technology revenue decline. Annuity revenue was also impacted by the continued migration of customers to our partner print services offerings (included in our Services segment). Total digital page volumes declined 4% despite a 2% increase in digital MIF. Document Technology revenue mix was 20% entry, 57% mid-range and 23% high-end. Segment Margin 2014 Document Technology segment margin of 13.7% increased 2.9-percentage points from prior year. The increase was primarily driven by a 1.5-percentage point increase in gross margin as the benefits from restructuring and productivity, lower pension expense, and favorable currency on Yen-based purchases and revenue mix more than offset moderate price declines and the impact of lower financing revenues. SAG decreased as a percent of revenue as lower pension and bad debt expense as well as benefits from restructuring and productivity improvements more than offset the impact of overall lower revenues. Total revenue for Document Technology is expected to decline 4 to 5% in 2015, excluding the impact of currency, as projected declines in black-and-white printing are only partially offset by growth in color printing and in the graphic communications and SMB markets. The expected 2015 revenue decline for the Document Technology segment is consistent with the trend we have experienced for this segment over the past three years as we continue to transform the Company from a technology-based equipment company to a document outsourcing services-based entity and customers continue to migrate their business to more services-based offerings. These services-based offerings are reported within our Services segment. This business is also heavily impacted by price and page declines, which are secular declines being experienced across the industry. Although annual revenue declines are expected to continue in 2015, we believe the declines in revenues will moderate in future years. We expect to manage the profitability impact of any revenue declines through measures to improve productivity and reduce costs and expenses. Xerox 2014 Annual Report 44


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    Installs 2014 Entry We launched a total of twelve new Entry products in 2014, with a majority of them not available until late in the third quarter and early in the fourth quarter. The benefits of these launches and other Entry go-to-market investments are still ramping, and trends in color printers and multifunction devices are improving. Higher declines in Eurasia due to economic instability are partially offsetting these improvements. 7% decrease in color multifunction devices Entry color printers flat 23% decrease in entry black-and-white multifunction devices driven by declines in all geographies. Mid-Range 1% increase in installs of mid-range color devices reflects benefits from the newly launched WorkCentre 7970 and entry production devices partially offset by timing of large account sales 13% decrease in installs of mid-range black-and-white devices is consistent with overall market declines High-End 7% decrease in installs of high-end color systems. Excluding Fuji Xerox growth in digital front-end (DFE) sales, high-end color installs increased 6% with growth in iGen and the new Versant product. 13% decrease in installs of high-end black-and-white systems, reflecting continued declines in the overall market. 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 2013 Document Technology revenue of $8,908 million decreased 6%, with no impact from currency. Total revenues include the following: 5% decrease in equipment sales revenue, with a 1-percentage point positive impact from currency. Equipment sales benefited from our 2013 mid-range product refresh, growth and acquisitions in the small and mid-size business market and increased demand for color digital production presses. These benefits were more than offset by the continued migration of customers to managed print services and our growing partner print services offerings (included in our Services segment), weakness in developing markets and price declines, which were in the historical 5% to 10% range. 6% decrease in annuity revenue, with no impact from currency driven by a modest decline in total pages, the reduction in channel supplies inventory levels, lower sales in developing markets and a decline in financing revenue as a result of prior period sales of finance receivables and lower originations. Annuity revenue was also impacted by the continued migration of customers to our partner print services offerings (included in our Services segment). Total digital page volumes declined 2% despite a 3% increase in digital MIF. Document Technology revenue mix was 21% entry, 58% mid-range and 21% high-end. Segment Margin 2013 Document Technology segment margin of 10.8% decreased 0.5-percentage points from prior year. The decline was primarily driven by an increase in SAG as a percent of revenue due to the overall impact of lower revenue and higher pension settlement losses which were only partially offset by restructuring savings, productivity improvements and lower compensation-related expenses. Installs 2013 Entry 24% increase in color multifunction devices driven by demand for the recently introduced WorkCentre® 6605, WorkCentre® 6015 and ColorQube® 8700/8900 5% increase in color printers driven by demand for the Phaser® 6600 family of products as well as an increase in sales to OEM partners. 20% decrease in entry black-and-white multifunction devices driven by declines in all geographies. 45


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    Mid-Range 8% increase in installs of mid-range color devices driven by demand for the ConnectKey® enabled products. 3% decrease in installs of mid-range black-and-white devices. High-End 43% increase in installs of high-end color systems driven by growth in the sale of digital front-ends (DFE's) to Fuji Xerox, as well as strong customer demand for the Color J75 Press and iGen® as we continue to strengthen our market leadership in the Production Color segment. High-end color installs increased 7%, excluding the DFE sales to Fuji Xerox. 8% decrease in installs of high-end black-and-white systems, reflecting continued declines in the overall market. Other Segment Revenue 2014 Other segment revenue of $598 million decreased 3%, with no impact from currency, due to lower licensing and patent sale revenues as well as lower wide format systems revenue. Total paper revenue (all within developing markets) comprised approximately one-third of the Other segment revenue. Segment Loss 2014 Other segment loss of $272 million, increased $55 million from the prior year, primarily driven by lower gains from the sale of surplus properties, increased currency losses, higher legal reserves and lower licensing and patent revenues. Non-financing interest expense as well as all Other expenses, net (excluding deferred compensation investment gains and losses) are reported within the Other segment. Revenue 2013 Other segment revenue of $619 million decreased 10%, with no impact from currency, due to lower wide format systems revenue, lower sales of electronic presentation systems, lower developing market paper sales and lower licensing revenue. Total paper revenue (all within developing markets) comprised approximately one-third of the Other segment revenue. Segment Loss 2013 Other segment loss of $217 million, was $37 million lower than the prior year, primarily driven by gains on the sale of businesses and assets, partially offset by lower revenues. Non-financing interest expense as well as all Other expenses, net (excluding deferred compensation investment gains) are reported within the Other segment. Xerox 2014 Annual Report 46


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    Discontinued Operations Detailed below are the revised results for the Services, Document Technology, Other and Total Segment by quarter for 2014 and 2013 as well as for the full-year 2012 as a result of Discontinued Operations in 2014. These revisions reflect the pending sale of our ITO business as well as other smaller divestitures. Refer to Note 4 - Divestitures in the Consolidated Financial Statements for additional information regarding Discontinued Operations. 2014 (in millions) Q1 Q2 Q3 Q4 Full Year Revenues Services $ 2,585 $ 2,651 $ 2,623 $ 2,725 10,584 Document Technology 2,044 2,126 2,029 2,159 8,358 Other 142 164 143 149 598 Total Revenues $ 4,771 $ 4,941 $ 4,795 $ 5,033 $ 19,540 Segment Profit (Loss) Services $ 222 $ 226 $ 240 $ 268 956 Document Technology 249 306 284 310 1,149 Other (50) (75) (82) (65) (272) Total Segment Profit $ 421 $ 457 $ 442 $ 513 $ 1,833 Segment Margin Services 8.6 % 8.5 % 9.1 % 9.8 % 9.0 % Document Technology 12.2 % 14.4 % 14.0 % 14.4 % 13.7 % Other (35.2)% (45.7)% (57.3)% (43.6)% (45.5)% Total Segment Margin 8.8 % 9.2 % 9.2 % 10.2 % 9.4 % 2012 2013 (in millions) Full Year Q1 Q2 Q3 Q4 Full Year Revenues Services $ 10,271 $ 2,584 $ 2,613 $ 2,596 $ 2,686 $ 10,479 Document Technology 9,462 2,135 2,263 2,159 2,351 8,908 Other 688 138 166 145 170 619 Total Revenues $ 20,421 $ 4,857 $ 5,042 $ 4,900 $ 5,207 $ 20,006 Segment Profit (Loss) Services $ 1,091 $ 250 $ 276 $ 268 $ 261 $ 1,055 Document Technology 1,065 186 245 260 273 964 Other (254) (68) (61) (54) (34) (217) Total Segment Profit $ 1,902 $ 368 $ 460 $ 474 $ 500 $ 1,802 Segment Margin Services 10.6 % 9.7 % 10.6 % 10.3 % 9.7 % 10.1 % Document Technology 11.3 % 8.7 % 10.8 % 12.0 % 11.6 % 10.8 % Other (36.9)% (49.3)% (36.7)% (37.2)% (20.0)% (35.1)% Total Segment Margin 9.3 % 7.6 % 9.1 % 9.7 % 9.6 % 9.0 % 47

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