Shareholder Letter

Fellow Shareholders,

At Xerox, we’re here to help our customers be more successful by harnessing the potential of services and technologies for the promise of a better world. That’s a grand statement. Let me explain. We take very complex business processes and challenges, create solutions and make them appear simple to the people who need them. We use innovation smartly and strategically to help the world tackle some daunting and complex tasks.

It’s a noble mission and part of the Xerox heritage. It may surprise you to know that the man who invented xerography 75 years ago had the same objective.

In 1938, a patent attorney named Chester Carlson created an easier way to duplicate information on paper. After spending countless hours in the New York Public Library hand-writing copies of materials he needed, he was determined to find a way “to make office work a little more productive and a little less tedious.” His invention, later named xerography, gave birth to Xerox and revolutionized how information is shared, ultimately simplifying how office work gets done.

Seventy-five years later, Chester’s vision lives on in every aspect of today’s Xerox and has led us on a journey to innovate ways to simplify complex and tedious work.

To that end, today’s Xerox provides not only the world-class document technology you would expect, but also a deep and broad array of business process, document and information technology outsourcing services you might not expect.

As we expand further into business services, chances are very good that Xerox is touching your life every day. If you drive toll roads or park in municipal parking, we probably handle the transaction. If you apply for a mortgage or call for help with your mobile device or file a medical claim or pay bills, we probably handle those transactions, too. That’s because we work behind the scenes – in both the public and private sector – to make sure things work smoothly in hundreds of different ways.

And, as remarkable as our evolution has been, there is so much more that we will do in the future for our customers, shareholders, employees and communities around the world. At Xerox, there’s inspiration and innovation around every corner, and we’re on a mission to move it forward another 75 years.

Results in 2013

For Xerox, 2013 was another year of steady progress – a year in which we continued to evolve our business model, improve operational efficiency, invest in growth and win in the global marketplace. All while delivering value to you.

Here’s a summary of how we performed:

  • Net income of $1.2 billion; adjusted net income of $1.4 billion.1
  • GAAP earnings per share from continuing operations of 93 cents.
  • Adjusted earnings per share of $1.09, which compares to $1.021 in 2012.
  • Total revenue of $21.4 billion, down 1 percent or 2 percent in constant currency1 from 2012.
    • Total Services revenue of $11.9 billion, up 3 percent.
    • Total Document Technology revenue of $8.9 billion, down 6 percent.
  • Operating margin of 8.9 percent.1
  • Operating cash flow of $2.4 billion.

At the same time, we continued to take steps to build shareholder value. In 2013, we returned nearly $1 billion to you through $700 million of share repurchases and almost $300 million in dividends. Last year we increased our common stock dividend by 35 percent and just recently announced another 9 percent increase starting in April 2014.

Nonetheless, our results were impacted by the effect of lower revenues and operating margins stemming from challenges in several of our businesses and a sluggish world economy. We are tackling these obstacles head on and we are confident our profit improvement plans will position us for long-term growth.

Differentiating and delivering

The numbers don’t tell the entire story. In 2013, we took aggressive action to boost future profitability and we made some critical strategic bets that are differentiating Xerox in the marketplace and increasing the value we bring to our customers.

Here’s a snapshot of the progress we made:

New clients, new markets. Xerox is known for world-class innovation and service. Our investments in innovation have generated new services and products and have led us to engage with new clients and new markets around the globe. We have invested in those businesses that are aligned with our core strengths and market opportunities like transportation, healthcare, education, graphic communications and customer care.

In doing so, we successfully supported the launch of new health insurance exchanges in a half dozen states, helping them comply with the U.S. Affordable Care Act. We simplified services in government healthcare with Enterprise, our next generation Medicaid Management Information System, which helps states manage their Medicaid programs and prevent fraud and abuse. And, we rolled out smart parking solutions in Malaysia and Texas, as well as our real-time analytics-based technology – Merge® – that addresses parking challenges in car-centric cities like Los Angeles.

We launched our next generation managed print services, paving the way for future growth with new workflow and digital automation for today’s connected world. Our managed print services have been awarded highest honors for global market leadership by industry analyst firms, a distinction that validates the strength of our document outsourcing business.

And, we saw investments in Europe begin to yield benefits with growth in our European Services business. We will keep up the pace in Europe and build on investments we have made in Asia to grow our Services business there.

In addition, key metrics are trending well: in Services, total contract signings were up 21 percent for the full year; new business signings were up 5 percent; the contract renewal rate in our business process and IT outsourcing businesses was 92 percent; and in Document Technology, we had good product install growth in key segments and retained our leadership in worldwide market share.

Our shift to a Services-led company is ongoing and requires us to constantly enhance our offerings and deliver unique solutions to our customers. In 2014, we will continue to invest in growing vertical markets and in expanding internationally so that we can extend our reach to more customers around the world.

Targeted acquisitions, strategic partnerships. During 2013, we added to our capabilities through acquisitions and partnerships, something we’ll continue to expand in 2014.

In Services, we made our portfolio stronger by adding service offerings in areas that complement our strengths, such as e-learning solutions for pharmacists, cloud-based finance and accounting services, and software that simplifies pension administration. In our Document Technology business we acquired Impika to advance our presence in the high-growth production inkjet segment and added distribution capacity in the U.S. And we’re off to a fast start in 2014 with the acquisition of the European customer care services company, Invoco, and a healthy pipeline of other potential deals.

We also partnered with technology companies like HCL and Cognizant to deliver best-in-class expertise in engineering and software development.

World-class products, revolutionary innovation. To further support the customer experience, we continued to develop and deploy relevant products in 2013, like our multifunction printers enabled with ConnectKey® technology, which have seen sales of more than 200,000 units so far. We also had our best year ever for sales of our iGen® family of production color printers – including a mega-win with one of the world leaders in personalized photo products and services.

We are benefiting from innovation as we have shifted our investments to reflect today’s Xerox. We are stretching the boundaries of what is possible in digital printing of course, but we’re also creating agile business processes, transforming data into decisions, making personalization pervasive and enabling the sustainable and mobile enterprise. We have hundreds of scientists, engineers and researchers around the world, not only making our current offerings better, but also working closely with clients to identify problems and find simple ways to solve them.

As a proof point, last year, Xerox was awarded 1,168 U.S. patents. We hold about 12,100 active U.S. patents and, together with our research partner Fuji Xerox, we continue to invest over $1 billion a year in research and development.

Big data, powerful analytics. As the amount and types of data continue to grow exponentially, so too does the potential to revolutionize the decision-making process.

We are using the power of analytics to extract value from proprietary data and transfer that value to clients. In doing so, we are delivering real answers to today’s pressing issues.

In 2013, we made significant strides in enhancing our use of data and analytics for customer care and education. For example, we are providing our customer care agents with innovative call center technology to give them easier access to information to address customer needs more efficiently. And, with our IgniteTM software, which electronically grades exams and produces analytic feedback to improve learning, we are allowing teachers to customize education based on a student’s progress.

Good business, good citizenship. More than ever, our story involves the commitment to innovate for a better world. We are focused on creating services and technologies that reduce the impact on the environment and showcase sustainable innovation. We are committed to helping improve working conditions across the industry’s supply chain. And we continue to invest in our communities through initiatives like our Community Involvement Program and the Xerox Foundation.

In 2013, we were named one of the world’s most ethical companies by Ethisphere Magazine; one of the best technology stocks by CRN.com; No. 3 in FORTUNE magazine’s most admired companies in the computer industry; one of the top IT innovators by InformationWeek 500; and the U.S. Environmental Protection Agency and others recognized Xerox for our work on climate change.

I’m grateful that we are being noticed for our contributions, but our work in corporate responsibility and global citizenship is never-ending. There is always more to do.

Higher value, solid returns. We implemented a number of cost management and productivity improvement initiatives across the business in 2013. The good news is they enabled us to hold our expenses down while we made additional investments to better serve our customers, increase our competitiveness and put us on solid footing as we enter 2014.

In Services, we are well under way in implementing a five-plank strategy that includes not only cost initiatives but also active portfolio management to drive growth and direct investments toward our higher-margin, more differentiated offerings. We expect successful implementation of our five-plank strategy will result in higher revenue growth, margin expansion and a healthy cash flow driven by our recurring revenue business model and increased competitiveness.

Our Document Technology business is performing well with stabilized revenue declines, a strong market position and good profitability and cash flow. We will continue to nurture this resilient business in ways that maintain market leadership while boosting our bottom line.

Building on 75 years of innovation

As I think about what’s ahead, I’m incredibly optimistic about what Xerox will deliver. Consider this: when xerography was invented, little did we know that the underlying reason for that very first image would drive 75 years of innovation, business process simplification and sustained success for our company.

The core of our story is based on the premise that we live in an age when technology is producing transformative change, enabling businesses big and small to accomplish more than could have been dreamed possible decades ago. At Xerox, we are in a strong position to capitalize on market opportunities and deliver on our commitment to create value for all our stakeholders.

Here’s why:

  • Our Services business serves as a beacon for our path forward;
  • our Document Technology business is the fuel that allows growth;
  • our culture of innovation permits us to think big;
  • we are committed to delivering earnings expansion; and
  • we are managing our cash in a way that’s building value for you for years to come.

Chester Carlson was on to something 75 years ago. And, today at Xerox, we continue to believe our purpose is to simplify how work gets done. When we do just that in smart, innovative ways, we’ll help the world work a little better... for the next 75 years.

This is a journey we’re committed to. Thank you for your continued support.

Ursula M. Burns Signature

Ursula M. Burns

Chairman and Chief Executive Officer

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

Financial Measures

Financial Measures

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

    Note: 2009 through 2012 have been restated to reflect the 2013 disposition of our North American (Canada and U.S.) and Western European Paper business as Discontinued Operations.

Non-GAAP Measures

Adjusted Earnings Per Share (EPS) Year Ended December 31,
2013 2012 2011 2010 2009
(in millions; except per share amounts) Net Income EPS Net Income EPS Net Income Net Income Net Income
As Reported(1) $1,185 $0.93 $1,184 $0.87 $1,274 $591 $478
Adjustments:
Amortization of intangible assets 205 0.16 203 0.15 248 194 38
Loss on early extinguishment of debt 20 10
Xerox and Fuji Xerox restructuring charge 355 41
ACS acquisition-related costs 58 49
ACS shareholders’ litigation settlement 36
Venezuela devaluation costs 21
Medicare subsidy tax law change 16
205 0.16 203 0.15 268 690 128
Adjusted $1,390 $1.09 $1,387 $1.02 $1,542 $1,281 $606
Weighted average shares for adjusted EPS(2) 1,274 1,356
  1. (1) Net income and EPS from continuing operations attributable to Xerox.
  2. (2) Average shares for the calculation of adjusted EPS include 27 million shares associated with the Series A convertible preferred stock and therefore the related quarterly dividend was excluded.
Operating Margin (in millions) Year Ended December 31,
2013 2012 2011 2010 2009
Total Revenues(1) $21,435 $21,737 $21,900 $20,872 $14,376
Pre-tax Income(1) $1,312 $1,332 $1,535 $793 $616
Adjustments:
Amortization of intangible assets 332 328 398 312 60
Xerox restructuring charge 116 154 32 483 (8)
Curtailment gain (107)
ACS acquisition-related costs 77 72
Other expenses, net 150 261 326 392 289
Adjusted Operating Income $1,910 $2,075 $2,184 $2,057 $1,029
Pre-tax Income Margin 6.1% 6.1% 7.0% 3.8% 4.3%
Adjusted Operating Margin 8.9% 9.5% 10.0% 9.9% 7.2%
  1. (1) Revenue and Profit from continuing operations attributable to Xerox.

Constant Currency
To better understand trends in our business, we believe that it is helpful to adjust revenue to exclude the impact of changes in the translation of foreign currencies into U.S. dollars. We refer to this adjusted revenue as “constant currency.” Currencies for developing market countries (Latin America, Brazil, Middle East, India, Eurasia and Central-Eastern Europe) that we operate in are reported at actual exchange rates for both actual and constant revenue growth rates because (1) these countries historically have had volatile currency and inflationary environments and (2) our subsidiaries in these countries have historically taken pricing actions to mitigate the impact of inflation and devaluation. Management believes the constant currency measure provides investors an additional perspective on revenue trends. Currency impact can be determined as the difference between actual growth rates and constant currency growth rates.

Note: 2009 through 2012 have been restated to reflect the 2013 disposition of our North American (Canada and U.S.) and Western European Paper business as Discontinued Operations.

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