Non-GAAP Financial Measures

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

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

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

Adjusted Earnings Measures

To better understand the trends in our business and the impact of the ACS acquisition, we believe it is necessary to adjust the following amounts determined in accordance with GAAP to exclude the effects of the certain items as well as their related income tax effects:

• Net income and Earnings per share (“EPS”),
• Pre-tax income (loss) margin, and
• Effective tax rate.

The above have been adjusted for the following items:

• Restructuring and asset impairment charges (including those incurred by Fuji Xerox): Restructuring and asset impairment charges consist of costs primarily related to severance and benefits for employees terminated pursuant to formal restructuring and workforce reduction plans. We exclude these charges because we believe that these historical costs do not reflect expected future operating expenses and do not contribute to a meaningful evaluation of our current or past operating performance. In addition, such charges are inconsistent in amount and frequency. Such charges are expected to yield future benefits and savings with respect to our operational performance.
• Acquisition-related costs: We incurred significant expenses in connection with our acquisition of ACS which we generally would not have otherwise incurred in the periods presented as a part of our continuing operations. Acquisition-related costs include transaction and integration costs, which represent external incremental costs directly related to completing the acquisition and the integration of ACS and Xerox. We believe it is useful for investors to understand the effects of these costs on our total operating expenses.
• Amortization of intangible assets: The amortization of intangible assets is driven by our acquisition activity which can vary in size, nature and timing as compared to other companies within our industry and from period to period. Accordingly, due to the incomparability of acquisition activity among companies and from period to period, we believe exclusion of the amortization associated with intangible assets acquired through our acquisitions allows investors to better compare and understand our results. The use of intangible assets contributed to our revenues earned during the periods presented and will contribute to our future period revenues as well. Amortization of intangible assets will recur in future periods.
• Other discrete, unusual or infrequent costs and expenses: In addition, we have also excluded the following items given the discrete, unusual or infrequent nature of these items on our results of operations:
  • – 2010 (1) loss on early extinguishment of debt; (2) ACS shareholders litigation settlement; (3) Venezuela devaluation and (4) Medicare subsidy tax law change (income tax effect only); and
  • – 2008 (1) provision for litigation matters; (2) equipment write-off and (3) settlement of unrecognized tax benefits.

We believe the exclusion of these items allows investors to better understand and analyze the results for the period as compared to prior periods as well as expected trends in our business.

See “Net Income” and “Income Taxes” sections in the MD&A for the reconciliation of these Non-GAAP measures for net Income/Earnings per share and the Effective tax rate, respectively, to the most directly comparable measures calculated and presented in accordance with GAAP.

The following is a reconciliation of the Non-GAAP measure of Operating margin to Pre-tax income margin, which is the most directly comparable measure calculated and presented in accordance with GAAP.

(in millions)	As Reported 2010	As Reported 2009	Pro-forma 2009(1)	As Reported 2008	10 vs. 09 Change	Pro-forma Change	09 vs. 08 Change
Total Revenues	$21,633	$15,179	$21,082	$17,608	43%	3%	(14)%
Pre-tax Income	815	627	1,267	(79)	30%	(36)%	*
Adjustments:
Xerox restructuring charge	483	(8)	(8)	429
Acquisition-related costs	77	72	104	—
Amortization of intangible assets	312	60	60	54
Equipment write-off	—	—	—	39
Other expenses, net(2)	389	285	382	1,033
Adjusted Operating Income	$2,076	$1,036	$1,805	$1,476	100%	15%	(30)%
Pre-tax Income (Loss) Margin	3.8%	4.1%	6.0%	(0.4)%	(0.3) pts	(2.2) pts	4.5 pts
Adjusted Operating Margin	9.6%	6.8%	8.6%	8.4%	2.8 pts	1.0 pts	(1.6) pts

Pro-forma Basis

To better understand the trends in our business, we discuss our 2010 operating results by comparing them against adjusted 2009 results which include ACS historical results for the comparable period. Accordingly, we have included ACS’s 2009 estimated results for the comparable period February 6, 2009 through December 31, 2009 in our reported 2009 results. We refer to comparisons against these adjusted 2009 results as “pro-forma” basis comparisons. ACS 2009 historical results have been adjusted to reflect fair value adjustments related to property, equipment and computer software as well as customer contract costs. In addition, adjustments were made for deferred revenue, exited businesses and other material non-recurring costs associated with the acquisition. We believe comparisons on a pro-forma basis are more meaningful than the actual comparisons, given the size and nature of the ACS acquisition. We believe the pro-forma basis comparisons allow investors to have better understanding and additional perspective of the expected trends in our business as well as the impact of the ACS acquisition on the Company’s operations.

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

Total Xerox

	Year Ended December 31,
(in millions)	As Reported 2010	As Reported 2009	Pro-forma 2009(1)	Change	Pro-forma Change
Revenue:
Equipment sales	$3,857	$3,550	$3,550	9%	9%
Supplies, paper and other	3,377	3,096	3,234	9%	4%
Sales	7,234	6,646	6,784	9%	7%
Service, outsourcing and rentals	13,739	7,820	13,585	76%	1%
Finance income	660	713	713	(7)%	(7)%
Total Revenues	$21,633	$15,179	$21,082	43%	3%
Service, outsourcing and rentals	$13,739	$7,820	$13,585	76%	1%
Add: Finance income	660	713	713
Add: Supplies, paper and other sales	3,377	3,096	3,234
Annuity Revenue	$17,776	$11,629	$17,532	53%	1%
Gross Profit:
Sales	$2,493	$2,251	$2,269
Service, outsourcing and rentals	4,544	3,332	4,585
Finance income	414	442	442
Total	$7,451	$6,025	$7,296
Gross Margin:
Sales	34.5%	33.9%	33.4%	0.6 pts	1.1 pts
Service, outsourcing and rentals	33.1%	42.6%	33.8%	(9.5) pts	(0.7) pts
Finance income	62.7%	62.0%	62.0%	0.7 pts	0.7 pts
Total	34.4%	39.7%	34.6%	(5.3) pts	(0.2) pts
RD&E	$781	$840	$840
RD&E% Revenue	3.6%	5.5%	4.0%	(1.9) pts	(0.4) pts
SAG	$4,594	$4,149	$4,651
SAG% Revenue	21.2%	27.3%	22.1%	(6.1) pts	(0.9) pts

 

Services Segment

	Year Ended December 31,
(in millions)	As Reported 2010	As Reported 2009	Pro-forma 2009(1)	Change	Pro-forma Change
Document outsourcing	$3,297	$3,382	$3,382	(3)%	(3)%
Business processing outsourcing	5,112	94	4,751	*	8%
Information technology outsourcing	1,249	—	1,246	*	—%
Less: Intra-segment eliminations	(21)	—	—	*	*
Total Revenue – Services	$9,637	$3,476	$9,379	177%	3%
Segment Profit – Services	$1,132	$231	$1,008	390%	12%
Segment Margin – Services	11.7%	6.6%	10.7%	5.1 pts	1.0 pts