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MarketScreener Homepage  >  Equities  >  Nyse  >  Xerox Holdings Corporation    XRX

XEROX HOLDINGS CORPORATION

(XRX)
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XEROX : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

11/04/2020 | 04:41pm EST
Throughout the Management's Discussion and Analysis (MD&A), references to "Xerox
Holdings" refer to Xerox Holdings Corporation and its consolidated subsidiaries
while references to "Xerox" refer to Xerox Corporation and its consolidated
subsidiaries. References herein to "we," "us," "our," the "Company" refer
collectively to both Xerox Holdings and Xerox unless the context suggests
otherwise.
Currently, Xerox Holdings' sole direct subsidiary is Xerox and therefore Xerox
reflects the entirety of Xerox Holdings' operations. Accordingly, the following
MD&A solely focuses on the operations of Xerox and is intended to help the
reader understand the results of operations and financial condition of Xerox.
The MD&A is provided as a supplement to, and should be read in conjunction with,
the Condensed Consolidated Financial Statements and the accompanying notes.
Throughout the MD&A, references are made to various notes in the Condensed
Consolidated Financial Statements which appear in Item 1 of this form 10-Q, and
the information contained in such notes is incorporated by reference into the
MD&A in the places where such references are made.
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 "constant
currency", "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. We do not hedge the translation effect of revenues or expenses
denominated in currencies where the local currency is the functional currency.
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.
Impact of COVID-19 on Our Business Operations
In response to the COVID-19 pandemic, we have prioritized the health and safety
of our employees, customers and partners to support their needs in the current
hybrid environment so work can be done flawlessly migrating between the
workplace and the home-office. While we continue to implement actions to
mitigate the effects of the pandemic on our business and operations, the
uncertainty around its trajectory, duration and economic impact make it
difficult for the company to predict its full impact on our business operations
and financial performance. As a result, we are not providing specific financial
guidance at this time.
During the third quarter, corresponding with business reopenings, the rate of
decline of equipment installations (including in areas of our business that
support our hybrid workplace initiatives) improved, as did printed-page volumes.
These operational improvements resulted in a moderation of our rate of revenue
decline during the third quarter as compared to the second quarter, which gives
us confidence in the resilience and readiness of our business to recover as
progress is made to control the pandemic and as businesses and economies reopen.
We have modeled the impacts on our business of numerous recovery scenarios and
expect to deliver positive earnings and operating cash flows from continuing
operations, after capital expenditures, in the fourth quarter. However, the
ongoing resurgence of the virus around the globe, and the impact it is having in
forcing new restrictions and lockdowns, leads us to anticipate that our revenues
will continue to decline significantly as compared to the prior year, as
businesses hold off or delay purchases until there is a more certain path to
controlling the pandemic and to economic recovery.
During the current year, the most significant impact from the pandemic has been
on sales of our equipment and unbundled supplies. However, due to their
transactional nature, these revenues experienced the largest recovery during the
third quarter and we expect that they will continue to fluctuate and gradually
improve concurrent with business reopenings. Our bundled services contracts, on
average, include a minimum fixed charge and a significant variable component
based on print volumes. The variable charges are impacted by our customers'
employees not being in the office using our equipment due to lock-downs or
capacity restrictions in office buildings. We expect that this contractual
relationship will continue to enable us to ramp up and support our customers'
needs as businesses resume operations.
We have a strong balance sheet and sufficient liquidity, including access to our
undrawn $1.8 billion revolver. We further strengthened our liquidity by
refinancing our 2020 debt maturities in the third quarter 2020 and
early-redeeming a portion of our 2021 debt maturities in October with the
proceeds from the issuance of new senior unsecured notes and from a finance
receivables securitization. With our Project Own It transformation and cost
                                                            Xerox 2020 Form 

10-Q

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savings, we built a more flexible cost structure, and have also focused our
efforts on incremental actions to prioritize and preserve cash as we manage
through the pandemic. These actions include the use of available temporary
government assistance measures and furlough programs, and the reduction of
discretionary spend such as near-term targeted marketing programs, the use of
contract employees, and the temporary suspension of 401(k) matching
contributions, as well as lower compensation incentives consistent with lower
sales and operating results.
Government Assistance and Furlough Programs
In response to the COVID-19 pandemic, various governments have enacted or
continue to contemplate temporary measures to provide aid and economic stimulus
directly to companies through cash grants and credits or indirectly through
payments to temporarily furloughed employees.
On March 27, 2020, in response to the COVID-19 pandemic, the U.S. government
enacted the Coronavirus Aid, Relief, and Economic Security Act (the "CARES
Act"). In addition to including temporary changes to income and non-income-based
tax laws, the CARES Act provides refundable employee retention credits and
defers the requirement to remit the employer-paid portion of social security
payroll taxes. Similar pay protection programs were enacted in Canada and Europe
that primarily provide direct grants to companies to cover the salary and wages
of employees (retained or temporarily furloughed). During the three and nine
months ended September 30, 2020, we recognized savings of approximately $35
million and $95 million, respectively, from these temporary measures in the
U.S., Canada and Europe, including $28 million and $81 million, respectively,
from various government assistance programs and $7 million and $14 million,
respectively, from furlough programs. Through the use of these programs, we have
thus far been able to provide an offset to our costs, without further use of
cash, while largely maintaining our employee base and minimizing the financial
impact to our employees.
There were no material impacts to our income tax expense in the second or third
quarters of 2020 as a result of the temporary changes included in the CARES Act
and we expect to defer payment of the employer-paid portion of social security
payroll taxes through the end of calendar year 2020; however, this deferral will
be reduced by employee retention credits as earned during 2020.
Savings were recorded as follows in the Condensed Consolidated Statements of
Income:
                                                                     Three Months           Nine Months
                                                                   Ended September        Ended September
(in millions)                                                          30, 2020               30, 2020
Cost of sales                                                      $           1          $           1
Cost of services, maintenance and rentals                                     25                     65
Research, development and engineering expenses                                 -                      1
Selling, administrative and general expenses                                   9                     28
Total Estimated savings                                            $          35          $          95



                                                            Xerox 2020 Form 10-Q
                                       42
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Overview

Third Quarter 2020 Review
Total revenue of $1.77 billion for third quarter 2020 declined 18.9% from third
quarter 2019, including a 0.8-percentage point favorable impact from currency.
The decrease in revenue reflected a decrease of 20.0% in Post sale revenue,
including a 0.7-percentage point favorable impact from currency and a decrease
of 15.2% in Equipment sales revenue, including a 0.9-percentage point favorable
impact from currency.
Total revenue of $5.09 billion for the nine months ended September 30, 2020
declined 23.1% as compared to the prior year period, including a 0.3-percentage
point unfavorable impact from currency. The decrease in revenue reflected a
decrease of 22.0% in Post sale revenue, including a 0.3-percentage point
unfavorable impact from currency, and a decrease of 27.1% in Equipment sales
revenue, with no impact from currency.
The COVID-19 pandemic significantly impacted our third quarter 2020 and year to
date revenues due to business closures and office building capacity restrictions
that impacted our customers' purchasing decisions, and caused lower printing
volumes on our devices. The biggest impact from the pandemic occurred in the
second quarter 2020, while, the rate of decline of our revenues improved
sequentially in third quarter 2020, as more businesses reopened and more
employees returned to the workplace. Geographically, revenue declines were
similar in both of our go-to-market regions for the year. The improvements in
third quarter 2020 revenues grew the most sequentially, from second quarter
2020, in our EMEA Operations, primarily as a result of wider reopenings of
workplaces and economies over the summer in the region, and higher installation
of devices associated with our hybrid workplace promotions. EMEA revenues were
also more favorably impacted by recent acquisitions in the region. The decrease
of revenues in third quarter 2020 from our Americas Organization also improved
sequentially as a result of business reopenings, primarily in our SMB and
indirect channels, while the sequential recovery of Large Enterprise revenues in
the region was smaller due to the more restricted reopening of large office
buildings, as well as a larger mix of bundled contracts with fixed minimums. Our
North American operations include a larger mix of government, education,
healthcare and other large customers that have been less affected by business
closures than our SMB customers.
Net income attributable to Xerox Holdings1 and adjusted2 Net income attributable
to Xerox Holdings were as follows:
                                          Three Months Ended September 30,                        Nine Months Ended September 30,
(in millions)                          2020               2019            B/(W)              2020               2019              B/(W)
Net income attributable to
Xerox Holdings(1)                  $       90$   157$   (67)$      115$    382$   (267)
Adjusted(2) Net income
attributable to Xerox
Holdings                                  105              184              (79)                191               528              (337)


Third quarter 2020 Net income attributable to Xerox Holdings1 decreased $67
million as compared to third quarter 2019 reflecting the impact from lower
revenues primarily associated with the COVID-19 pandemic that were only
partially offset by lower costs and expenses including lower Income tax expense
as well as lower Transaction and related costs, net and Other expenses, net.
Third quarter 2020 Adjusted2 net income attributable to Xerox Holdings decreased
$79 million as compared to third quarter 2019, reflecting lower revenues, which
were only partially offset by lower costs and expenses and lower Income tax
expense.
Net income attributable to Xerox Holdings1 for the nine months ended September
30, 2020 decreased $267 million as compared to the prior year period reflecting
the impact from lower revenues, primarily associated with the COVID-19 pandemic,
and higher Transaction and related costs, net, that were only partially offset
by lower costs and expenses, including lower Income tax expense as well as lower
Restructuring and related costs and Other expenses, net. In addition, Net income
attributable to Xerox Holdings1 for the nine months ended September 30, 2020
includes the first quarter 2020 impact of a $61 million increase in our bad debt
provision reflecting the expected impact from the COVID-19 pandemic on our
receivable portfolio. Adjusted2 net income attributable to Xerox Holdings for
the nine months ended September 30, 2020 decreased $337 million as compared to
the prior year period primarily reflecting lower revenues, which were only
partially offset by lower costs and expenses including lower Income tax expense,
partially offset by the increased bad debt provision.
Net income attributable to Xerox Holdings1 for the three and nine months ended
September 30, 2020 were both positively impacted by savings of approximately $35
million and $95 million, respectively, from temporary government assistance
measures and furlough programs in the U.S., Canada and Europe. Refer to the
Government Assistance and Furlough Programs section for additional information.
                                                            Xerox 2020 Form 

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                                       43
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Cash flows provided by operating activities of continuing operations for the
nine months ended September 30, 2020 were $313 million, as compared to $846
million in the prior year period primarily reflecting lower net income, as
result of the COVID-19 pandemic, as well as increased use of working capital,
net3, partially offset by decreases in finance assets and lower payments for
taxes due to lower pre-tax income. Cash used in investing activities for the
nine months ended September 30, 2020 was $223 million including capital
expenditures of $60 million and acquisitions of $193 million. Cash provided by
financing activities for the nine months ended September 30, 2020 was $424
million reflecting proceeds of $1,507 million from the issuance of Senior Notes
and $340 million from a secured financing arrangement, partially offset by
payments of $1,051 million on Senior Notes, $150 million on repurchases of our
Common Stock and dividend payments of $176 million.
2020 Outlook
As a result of the uncertainty created by the COVID-19 pandemic, in the first
quarter 2020 we withdrew our previously disclosed outlooks for full year 2020
revenue, earnings, operating cash flows and capital allocation as disclosed in
our 2019 Annual Report. At this time, we remain committed to delivering positive
earnings and operating cash flows from continuing operations, after capital
expenditures, in the fourth quarter. We also remain committed to paying our
current dividend on common shares and returning at least 50% of operating cash
flows from continuing operations, after capital expenditures, to shareholders.
We expect to complete at least $150 million in share repurchases during the
remainder of 2020.
____________________________
(1)Net income from continuing operations attributable to Xerox Holdings.
(2)See the "Non-GAAP Financial Measures" section for an explanation of the
non-GAAP financial measure.
(3)Working capital, net reflects Accounts receivable, net, Inventories and
Accounts payable.
Critical Accounting Policies and Estimates
Management's Discussion and Analysis of our financial condition and results of
operations (MD&A) is based on the Condensed Consolidated Financial Statements
and accompanying notes that have been prepared in accordance with GAAP. The
preparation of these financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
As discussed in our MD&A, during the first half of 2020 the company was
significantly impacted by the economic disruption caused by the COVID-19
pandemic. This disruption required us to review the majority of our estimates to
ensure we appropriately considered the impacts caused by the COVID-19 pandemic.
The following is a discussion of several key estimates with respect to revenue
recognition, allowance for doubtful accounts and credit losses, income taxes and
goodwill. As the extent and duration of the impacts from the COVID-19 pandemic
remain uncertain, the Company's estimates and assumptions may evolve as
conditions change.
Revenue Recognition
As disclosed in our 2019 Annual Report, revenues associated with our service
arrangements - maintenance and document management - are generally recognized as
maintenance and printing services are rendered, which is generally on the basis
of the number of images produced. Accordingly, this recognition methodology
requires us to estimate customer usage at the end of a period since the customer
is typically not invoiced for that usage until the following period. Normally
this estimation process is straight-forward and objective based on our
significant history with different types of customers and device usage as well
as the fact that a majority of our devices have connectivity to Xerox so we can
remotely read and collect usage data. In addition, as disclosed in our 2019
Annual report, our service arrangements normally include a minimum volume charge
together with a variable charge, so the estimation process is limited to the
variable component, which will vary based on the channel and geography. However,
the impacts from the COVID-19 economic disruption that began in March 2020, as
well as the related shutdowns of some of our customers, required us to further
review our estimation process for the variable component to ensure we properly
and objectively captured the impacts of the decline in volumes and not solely
rely on historical usage data. We will continue to assess the usage data of our
customers to ensure we properly adjust historical averages and recognize revenue
consistent with those revised usage patterns and ultimately what is invoiced to
the customer.
Allowance for Doubtful Accounts and Credit Losses
As disclosed in Notes 8 - Accounts Receivable, Net and Note 9 - Finance
Receivables, Net, in the Condensed Consolidated Financial Statements consistent
with our adoption of ASU 2016-13 effective January 1, 2020 (refer to Note 2 -
Recent Accounting Pronouncements in the Condensed Consolidated Financial
Statements), the allowance
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for doubtful accounts and credit losses is based on an assessment of past
collection experience as well as consideration of current and future economic
conditions and changes in our customer collection trends. In assessing the level
of reserve in 2020, we had to critically assess current and forecasted economic
conditions as a result of the COVID-19 pandemic to ensure we objectively
included those expected impacts in the determination of our reserve. Our
assessment also included current portfolio credit metrics and the level of
reserves and write-offs we recorded on our receivable's portfolio during the
credit crisis in 2008/09 as additional reference points to objectively determine
the adequacy of our allowance. Refer also to the Selling, Administrative and
General Expenses (SAG) section for additional discussion regarding the
incremental bad debt provision recorded in the first quarter 2020 primarily
related to the economic impact of the COVID-19 pandemic.
Income Taxes
As disclosed in our 2019 Annual Report, we record the estimated future tax
effects of temporary differences between the tax bases of assets and liabilities
and the amounts reported, as well as net operating loss and tax credit
carryforwards. Deferred tax assets are assessed for realizability and, where
applicable, a valuation allowance is recorded to reduce the total deferred tax
asset to an amount that will, more-likely-than-not, be realized in the future.
We apply judgment in assessing the realizability of these deferred tax assets
and the need for any valuation allowances. In determining the amount of deferred
tax assets that are more-likely-than-not to be realized, we considered
historical profitability, projected future taxable income, the expected timing
of the reversals of existing temporary difference and tax planning strategies.
Similar to other estimates during 2020, we needed to determine if any change in
valuation allowances was required based on the rapid change in the economic
environment and the expected changes in our financial projections for 2020
resulting from the impacts of the COVID-19 pandemic. Our effective tax rate for
the nine months ended September 30, 2020 included an approximate 5-percentage
point impact for additional valuation allowances, which were primarily the
result of the negative impacts of the COVID-19 pandemic. We expect to continue
to review projections and their potential impact on our assessment regarding the
recoverability of our deferred tax asset balances in the fourth quarter 2020 and
new or additions to existing valuation allowances may be required.
Goodwill
We perform our annual Goodwill impairment testing in the fourth quarter of each
year. During the fourth quarter 2019 impairment testing, our estimated fair
value of the Company was significantly in excess of our net book value. However,
in the second quarter 2020, as a result of the continued negative financial
impacts from the COVID-19 pandemic on our current and near-term future
operations, the expected slower recovery during the latter half of 2020 as
businesses return to their respective offices, as well as a sustained market
capitalization below our book value, we determined there was a triggering event
requiring an interim quantitative evaluation of Goodwill.
In prior years' quantitative tests we estimated the fair value of the entity by
weighting the results of the income approach (discounted cash flow methodology)
and market approach. However, as a result of limited market compares due to
companies not providing guidance in this current economic environment, our
interim quantitative evaluation of goodwill was based on the income approach to
estimate fair value. The income approach, which we believe provides a result
that is equally or more representative of fair value in the current
circumstances, is based on the discounted cash flow method that uses the
Company's estimates for future forecasted financial performance including
revenues, operating expenses, and taxes, as well as working capital and capital
asset requirements. Projected cash flows are then discounted to a present value
employing a discount rate that properly accounts for the estimated market
weighted-average cost of capital, as well as any risk unique to the subject cash
flows. Our estimates regarding future forecasted cash flows accordingly
reflected consideration of the continued negative financial impacts from the
COVID-19 pandemic on our current and future operations as well expected recovery
scenarios.
After completing our interim impairment review, we concluded that Goodwill was
not impaired and, based on various forecast models and related sensitivity
analysis, which we believe reflect the inherent uncertainty of the future, the
excess of fair value over carrying value ranged between 10 and 20 percent. We
believe the discount rate applied in our cases was an appropriate risk adjusted
cost of capital and considers the current lower debt interest rates in the
market. Although our internal forecasts clearly indicate that Xerox is and will
be significantly impacted by the economic disruption caused by the COVID-19
pandemic in 2020, based on a review of macroeconomic and industry
considerations, the business is expected to continue to recover in the second
half of the year and recover further still in 2021 with the expectation of a
return to normal trends by 2022. In addition, consistent with our historical
results, we believe we have the ability, within a relevant range, to offset
potential further delays in the recovery of our revenue base with cost
reductions and productivity improvements to help manage and maintain our
projected
                                                            Xerox 2020 Form 

10-Q

                                       45
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level of cash flows. Lastly, although our estimates of the fair value of the
entity were in excess of our market capitalization, we believe the implied
premiums that would be indicated at net book value or at our estimated fair
values are reasonable. In performing its assessment, the Company believes it has
made reasonable estimates based on the facts and circumstances that were
available as of the second quarter reporting date in light of the developing
situation resulting from the COVID-19 pandemic.
In the third quarter 2020, although business performance improved, we determined
that the continued negative impacts on our current operations resulting from the
COVID-19 pandemic and the impacts expected on our future operations as well as a
market capitalization that remains less than book value required us to
qualitatively assess whether a triggering event had occurred and whether it was
more likely than not that our goodwill was impaired as of September 30, 2020.
Based on our interim qualitative assessment as of September 30, 2020, we
determined that it was more-likely-than-not that the fair value of the Company
was greater than net book value and that we did not have a "triggering event"
requiring a quantitative or Step 1 assessment of goodwill. Our review of
macroeconomic and industry considerations, as well as the Company's financial
results for the third quarter 2020 were all consistent with expectations and
sensitivities assessed as part of our quantitative review performed in the
second quarter 2020. Further, although our market capitalization remained below
our net book value, the Company's market capitalization did improve in the third
quarter 2020.
If assumptions or estimates in the fair value calculations change or if future
cash flows vary from what was expected, including those assumptions relating to
the duration and severity of the financial impact from the COVID-19 pandemic,
this may impact the impairment analysis and could reduce the underlying cash
flows used to estimate fair values and result in a decline in fair value that
may trigger future impairment charges. We normally assess goodwill for
impairment during the fourth quarter and based on the events and factors noted
in 2020 - macroeconomic, industry and company - we plan to utilize a
quantitative model for the assessment of the recoverability of our goodwill
balance. As part of that quantitative assessment, we expect to monitor
developments regarding the COVID-19 pandemic, including its impact to our
forecasted revenues, expenses and cash flow, as well as our market
capitalization. If the extent and duration of the economic disruption caused by
the pandemic is longer or more severe than currently estimated there could be a
material impact to our revenues and expected cash flows which in turn could
negatively impact the recoverability of our Goodwill balance.





                                                            Xerox 2020 Form 10-Q
                                       46
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Financial Review
Revenues
                               Three Months Ended                                                                Nine Months Ended
                                  September 30,                                                                    September 30,                                                                % of Total Revenue
(in millions)                 2020                2019            % Change            CC % Change              2020               2019            % Change            CC % Change             2020              2019
Equipment sales         $      419$   494               (15.2) %               (16.1) %       $    1,054$ 1,446               (27.1) %               (27.1) %             21  %            22  %
Post sale revenue            1,348               1,685               (20.0) %               (20.7) %            4,038            5,176               (22.0) %               (21.7) %             79  %            78  %
Total Revenue           $    1,767$ 2,179               (18.9) %               (19.7) %       $    5,092$ 6,622               (23.1) %               (22.8) %            100  %           100  %

Reconciliation to Condensed Consolidated Statements of Income: Sales

                   $      651$   784               (17.0) %               (17.7) %       $    1,676$ 2,308               (27.4) %               (27.1) %
Less: Supplies,
paper and other
sales                         (232)               (290)              (20.0) %               (20.2) %             (622)            (862)              (27.8) %               (27.1) %

Equipment sales         $      419$   494               (15.2) %               (16.1) %       $    1,054$ 1,446               (27.1) %               (27.1) %

Services,
maintenance and
rentals                 $    1,061$ 1,335               (20.5) %               (21.3) %       $    3,246$ 4,130               (21.4) %               (21.2) %
Add: Supplies,
paper and other
sales                          232                 290               (20.0) %               (20.2) %              622              862               (27.8) %               (27.1) %
Add: Financing                  55                  60                (8.3) %                (8.8) %              170              184                (7.6) %                (7.3) %

Post sale revenue       $    1,348$ 1,685               (20.0) %               (20.7) %       $    4,038$ 5,176               (22.0) %               (21.7) %

Americas$    1,152$ 1,488               (22.6) %               (22.2) %       $    3,381$ 4,402               (23.2) %               (22.8) %             66  %            67  %
EMEA                           568                 640               (11.3) %               (14.6) %            1,571            2,061               (23.8) %               (23.8) %             31  %            31  %
Other                           47                  51                (7.8) %                (7.8) %              140              159               (11.9) %               (11.9) %              3  %             2  %
Total Revenue(1)        $    1,767$ 2,179               (18.9) %               (19.7) %       $    5,092$ 6,622               (23.1) %               (22.8) %            100  %           100  %

Memo:
Xerox Services          $      661$   829               (20.3) %               (21.3) %       $    2,041$ 2,535               (19.5) %               (19.2) %             40  %            38  %


_____________
CC - See "Currency Impact" section for a description of Constant Currency.
(1)Refer to the "Geographic Sales Channels and Product and Offerings
Definitions" section.
Total revenue for the three months ended September 30, 2020 decreased 18.9% as
compared to the third quarter 2019, including a 0.8-percentage point favorable
impact from currency and an approximate 1.4-percentage point favorable impact
from recent partner dealer acquisitions, while total revenue for the nine months
ended September 30, 2020 decreased 23.1% as compared to the prior year period,
including a 0.3-percentage point unfavorable impact from currency and an
approximate 1.1-percentage point favorable impact from recent partner dealer
acquisitions.
The COVID-19 pandemic significantly impacted our revenue during 2020 due to
business closures and office building capacity restrictions that impacted our
customers' purchasing decisions and caused lower printing volumes on our
devices. However, the rate of our revenue decline improved sequentially from
second quarter, as more businesses slowly reopened and more employees returned
to the workplace. Geographically, revenue declines were similar in both of our
go-to-market regions for the nine months ended September 30, 2020, while revenue
growth in third quarter 2020 from our EMEA Operations improved the most
sequentially, primarily as a result of wider reopenings of workplaces and
economies over the summer in the region, and higher installation of devices
associated with our hybrid workplace promotions. EMEA revenues were also more
favorably impacted by recent acquisitions in the region. The decrease of
revenues in third quarter 2020 from our Americas Organization also improved
sequentially as a result of business reopenings, primarily in our SMB and
indirect channels, while the sequential recovery of Large Enterprise revenues in
the region was smaller due to the more restricted reopening of large office
buildings, as well as a larger mix of bundled contracts with fixed minimums. Our
North American operations include a larger mix of government, education,
healthcare and other large customers that have been less affected by business
closures than our SMB customers. Our Latin American Operations had the largest
revenue declines, consistent with the extensive lockdowns and the economic
crisis throughout the region. Total revenue for the three and nine months ended
September 30, 2020 reflected the following:
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Post sale revenue
Post sale revenue primarily reflects contracted services, equipment maintenance,
supplies and financing. These revenues are associated not only with the
population of devices in the field, which is affected by installs and removals,
but also by the page volumes generated from the usage of such devices and the
revenue per printed page. Post sale revenue also includes transactional IT
hardware sales and implementation services from our XBS organization. For the
three months ended September 30, 2020 Post sale revenue decreased 20.0% as
compared to the third quarter 2019, including a 0.7-percentage point favorable
impact from currency, while Post Sale revenue decreased 22.0% for the nine
months ended September 30, 2020, including a 0.3-percentage point unfavorable
impact from currency. The COVID-19 pandemic significantly impacted our Post sale
revenue since March 2020, however, its impact on our Post sale revenue slightly
moderated later in the second quarter and continued to moderate during the third
quarter, as business reopenings in certain geographical areas in the U.S. and
Europe resulted in a gradual moderation of our page volume declines. The decline
in Post sale revenue reflected the following:
•Services, maintenance and rentals revenue includes rental and maintenance
revenue (including bundled supplies) as well as the post sale component of the
document services revenue from our Xerox Services offerings.
•For the three months ended September 30, 2020, these revenues decreased 20.5%
as compared to the third quarter 2019, including a 0.8-percentage point
favorable impact from currency. The decline at constant currency1 reflected a
lower population of devices (which is partially associated with continued lower
Enterprise signings and lower installs in prior and current periods), an ongoing
competitive price environment, and lower page volumes (including a higher mix of
lower average-page-volume products) that are worse than pre-COVID-19 decline
trends due to the impact of business closures during the quarter. While these
revenues are contractual in nature, on average, our bundled services contracts
include a minimum fixed charge and a significant variable component based on
print volumes. The rate of decline of these revenues moderated during the
quarter compared to the prior quarter as businesses reopened in certain
geographical areas in the U.S. and EMEA.
•For the nine months ended September 30, 2020, these revenues decreased 21.4% as
compared to the prior year period, including a 0.2-percentage point unfavorable
impact from currency. The decline at constant currency1 reflected a lower
population of devices (which is partially associated with continued lower
Enterprise signings and lower installs in prior and current periods), an ongoing
competitive price environment, and lower page volumes (including a higher mix of
lower average-page-volume products) that are worse than pre-COVID-19 decline
trends due to the impact of business closures since March 2020. While these
revenues are contractual in nature, on average, our bundled services contracts
include a minimum fixed charge and a significant variable component based on
print volumes. The rate of decline of these revenues began to slightly moderate
late in the first half of 2020, and continued to moderate during the third
quarter 2020, as businesses started to reopen in certain geographical areas in
the U.S. and EMEA.
•Supplies, paper and other sales includes unbundled supplies and other sales.
•For the three months ended September 30, 2020, these revenues decreased 20.0%
as compared to third quarter 2019, including a 0.2-percentage point favorable
impact from currency and reflected lower supplies revenues associated with lower
page volume trends, slightly offset by higher IT revenues from our XBS channel
and from recently acquired IT dealers outside of the U.S. The decrease in
supplies was significantly impacted by lower sales through indirect channels, as
resellers, in response to the lower demand caused by the pandemic, reduced their
inventory purchases to manage liquidity. We expect that such resellers will
maintain low purchase levels and lower inventories until there is a stable
recovery in sales activity.
•For the nine months ended September 30, 2020, these revenues decreased 27.8% as
compared to the prior year period, including a 0.7-percentage point unfavorable
impact from currency and reflected lower supplies revenues associated with lower
page volume trends, slightly offset by higher IT revenues from our XBS channel
and from recently acquired IT dealers outside of the U.S. The decrease in
supplies was significantly impacted by lower sales through indirect channels, as
resellers, in response to the lower demand caused by the pandemic, reduced their
inventory purchases to manage liquidity. We expect that such resellers will
maintain low purchase levels and lower inventories until there is a stable
recovery in sales activity.
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•Financing revenue is generated from financed equipment sale transactions. For
the three months ended September 30, 2020, these revenues declined 8.3% as
compared to third quarter 2019, including a 0.5-percentage point favorable
impact from currency, while Financing revenue for the nine months ended
September 30, 2020 decreased 7.6%, including a 0.3-percentage point unfavorable
impact from currency and reflected a continued decline in the finance
receivables balance due to lower equipment sales in prior periods.
____________
(1)See the "Non-GAAP Financial Measures" section for an explanation of the
non-GAAP financial measure.
Equipment sales revenue
                               Three Months Ended                                                       Nine Months Ended
                                 September 30,                                                            September 30,                                                              % of Equipment Sales
                                                                %
(in millions)                 2020             2019           Change          CC % Change             2020               2019           % Change          CC % Change            2020                    2019
Entry                      $     55$  49            12.2%              11.6%            $      129$   154            (16.2)%            (15.9)%               12%                    11%
Mid-range                       291            344           (15.4)%            (16.3)%                  718              996            (27.9)%            (28.0)%               68%                    69%
High-end                         69             96           (28.1)%            (28.9)%                  197              282            (30.1)%            (30.1)%               19%                    19%
Other                             4              5           (20.0)%            (20.0)%                   10               14            (28.6)%            (28.6)%               1%                      1%
Equipment sales            $    419$ 494           (15.2)%            (16.1)%           $    1,054$ 1,446            (27.1)%            (27.1)%              100%                    100%


_____________
CC - See "Currency Impact" section for a description of Constant Currency.
Equipment sales revenue decreased 15.2% for the three months ended September 30,
2020 as compared to third quarter 2019, including a 0.9-percentage point
favorable impact from currency as well as the impact of price declines of
approximately 5%, while for the nine months ended September 30, 2020, Equipment
sales revenue decreased 27.1%, as compared to the prior year period, with no
impact from currency, as well as the impact of price declines of approximately
5%. The COVID-19 pandemic has significantly impacted our equipment sales revenue
during 2020 as a result of business closures and office building capacity
restrictions that impacted our customers' purchasing decisions and caused
delayed installations. The pandemic affected our operations in March 2020 and
throughout the second quarter 2020, however, as businesses reopened in certain
geographical areas of the U.S. and EMEA the impact of the pandemic on our
equipment sales lessened compared to its impact in the first half of 2020,
resulting in sequential improvement in third quarter 2020 in the rate of
decline. The decline at constant currency1 reflected the following:
•Entry - The increase for the three months ended September 30, 2020, as compared
to third quarter 2019, was due to higher installs of lower-end printers and MFPs
(primarily black and white devices) in EMEA and through our indirect channels in
the U.S., in part associated with hybrid workplace promotions. The decrease for
the nine months ended September 30, 2020, as compared to the prior year period,
was primarily due to lower sales of devices through our indirect channels in
EMEA, Latin America and the U.S. affected primarily by the COVID-19 pandemic and
partially offset by higher installs of black and white devices in EMEA as well
as the benefit of large order deals from Eurasia.
•Mid-range - The decrease for the three months ended September 30, 2020, as
compared to third quarter 2019, was driven primarily by the COVID-19 pandemic
and related office closures, which impacted sales of this group of products more
due to their prevalence in office-team settings. Higher sales to our government
and education sector customers in North America, as well as strong demand for
our recently launched PrimeLink devices and our new generation of ConnectKey
devices, provided a partial offset. The decrease for the nine months ended
September 30, 2020, as compared to the prior year period, was primarily driven
by the COVID-19 pandemic and related office closures, which has more
significantly impacted our sales through indirect channels in the U.S. and
Europe, as resellers in response to lower demand caused by the pandemic, have
reduced their inventory purchases to manage liquidity, partially offset by
strong demand for our recently launched PrimeLink devices and our new generation
of ConnectKey devices.
•High-end - The decrease for the three months ended September 30, 2020, as
compared to third quarter 2019, primarily reflected lower installs of our
Versant entry-production color, Iridesse and iGen production presses, partially
offset by higher installs of our cut-sheet inkjet systems. The decrease in our
equipment sales revenue from production color systems was partially impacted by
the COVID-19 pandemic, particularly affecting installs of our Versant and
Iridesse systems due to their higher mix to the SMB segment where production
printing applications depend on business reopening activity. The decrease for
the nine months ended September 30, 2020, as compared to the prior year period,
primarily reflected lower installs of our Versant entry-production color and
iGen production presses, as well as lower installs of our Iridesse production
presses in EMEA, which were partially offset by demand for our recently launched
Baltoro Inkjet press. The decrease in our equipment sales revenue from
production color systems was partially impacted by the COVID-19 pandemic,
primarily in
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our European operations, where the distribution of our Iridesse systems through
indirect channels was affected by furlough adoptions and lower inventory
purchases as dealers managed their liquidity.
Total Installs
Installs reflect new placement of devices only (i.e., measure does not take into
account removal of devices which may occur as a result of contract renewals or
cancellations). Revenue associated with equipment installations may be reflected
up-front in Equipment sales or over time either through rental income or as part
of our Xerox Services revenues (which are both reported within our Post sale
revenues), depending on the terms and conditions of our agreements with
customers. Installs include activity from Xerox Services and Xerox-branded
products shipped to our XBS sales unit. Detail by product group (see Geographic
Sales Channels and Product and Offerings Definitions) is shown below.
Installs for the third quarter 2019:
Entry
•9% decrease in color multifunction devices reflecting lower installs of
ConnectKey devices through our indirect channels in the U.S. and in EMEA.
•52% increase in black-and-white multifunction devices reflecting higher
activity primarily from indirect channels in the U.S. and developing regions in
EMEA. The increase is primarily driven by higher sales of low-end devices
associated with large order deals from Eurasia and hybrid workplace promotions.
Mid-Range(1)
•21% decrease in mid-range color installs primarily reflecting lower installs of
multifunction color devices partially offset by strong demand for our recently
launched PrimeLink entry-production color devices and our new generation of
ConnectKey multi-function devices.
•19% decrease in black-and-white mid-range installs reflecting in part global
market trends partially offset by strong demand for our recently launched
PrimeLink light-production devices and our new generation of ConnectKey
multi-function devices.
High-End(1)
•38% decrease in high-end color installs reflecting primarily lower installs of
our lower-end Versant devices and of our Iridesse and iGen production systems,
partially offset by higher installs of our Baltoro cut-sheet inkjet systems.
•13% decrease in high-end black-and-white systems reflecting lower installs of
our Nuvera devices along with market trends.
Installs for the nine months ended September 30, 2020:
Entry
•21% decrease in color multifunction devices reflecting lower installs of
ConnectKey devices through our indirect channels in the U.S. and in EMEA.
•15% increase in black-and-white multifunction devices reflecting higher
activity primarily from sales in the lower end of the portfolio through indirect
channels in our developing regions in EMEA, partially offset by lower installs
through our indirect channels in Latin America and the U.S.
Mid-Range(1)
•31% decrease in mid-range color installs primarily reflecting lower installs of
multifunction color devices partially offset by strong demand for our recently
launched PrimeLink entry-production color devices and our new generation of
ConnectKey multi-function devices.
•26% decrease in mid-range black-and-white reflecting in part global market
trends partially offset by strong demand for our recently launched PrimeLink
light-production multi-function devices and our new generation of ConnectKey
multi-function devices.
High-End(1)
•50% decrease in high-end color installs reflecting primarily lower installs of
our lower-end Versant devices, along with lower installs of our Iridesse
production systems, partially offset by strong demand for our recently-launched
Baltoro cut-sheet inkjet systems.
•16% decrease in high-end black-and-white systems reflecting lower installs of
our Nuvera devices along with market trends.
_____________
(1)Mid-range and High-end color installations exclude Fuji Xerox digital
front-end sales; including Fuji Xerox digital front-end sales for the three and
nine months ended September 30, 2020 Mid-range color devices decreased 21% and
31%, respectively, and High-end color systems decreased 39% and 50%,
respectively.
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Geographic Sales Channels and Product and Offerings Definitions
Our business is aligned to a geographic focus and is primarily organized on the
basis of go-to-market sales channels, which are structured to serve a range of
customers for our products and services. In 2019 we changed our geographic
structure to create a more streamlined, flatter and more effective organization,
as follows:
•Americas, which includes our sales channels in the U.S. and Canada, as well as
Mexico, and Central and South America.
•EMEA, which includes our sales channels in Europe, the Middle East, Africa and
India.
•Other, primarily includes sales to and royalties from Fuji Xerox, and our
licensing revenue.
Our products and offerings include:
•"Entry", which includes A4 devices and desktop printers. Prices in this product
group can range from approximately $150 to $3,000.
•"Mid-Range", which includes A3 Office and Light Production devices that
generally serve workgroup environments in mid to large enterprises. Prices in
this product group can range from approximately $2,000 to $75,000+.
•"High-End", which includes production printing and publishing systems that
generally serve the graphic communications marketplace and large enterprises.
Prices for these systems can range from approximately $30,000 to $1,000,000+.
•Xerox Services, includes solutions and services that span from managing print
to automating processes to managing content. Our primary offerings are
Intelligent Workplace Services (IWS), as well as Digital and Cloud Print
Services (including centralized print services) and Communication and Marketing
Solutions.
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Costs, Expenses and Other Income
Summary of Key Financial Ratios
The following is a summary of key financial ratios used to assess our
performance:
                                                  Three Months Ended September 30,                              Nine Months Ended September 30,

(in millions)                               2020              2019                B/(W)                  2020                2019                B/(W)

Gross Profit                           $      651$  872$ (221)$     1,927$ 2,634$ (707)
RD&E                                           76              100              24                          236               280              44
SAG                                           444              510              66                        1,411             1,573             162

Equipment Gross Margin                       25.5   %         34.5  %         (9.0)   pts.                 26.7   %          32.9  %         (6.2)   pts.
Post sale Gross Margin                       40.3   %         41.6  %         (1.3)   pts.                 40.7   %          41.7  %         (1.0)   pts.
Total Gross Margin                           36.8   %         40.0  %         (3.2)   pts.                 37.8   %          39.8  %         (2.0)   pts.
RD&E as a % of Revenue                        4.3   %          4.6  %          0.3    pts.                  4.6   %           4.2  %         (0.4)   pts.
SAG as a % of Revenue                        25.1   %         23.4  %         (1.7)   pts.                 27.7   %          23.8  %         (3.9)   pts.

Pre-tax Income                         $      119$  223$ (104)$       149$   486$ (337)
Pre-tax Income Margin                         6.7   %         10.2  %         (3.5)   pts.                  2.9   %           7.3  %         (4.4)   pts.

Adjusted(1) Operating Profit           $      131$  262$ (131)$       280$   781$ (501)
Adjusted(1) Operating Margin                  7.4   %         12.0  %         (4.6)   pts.                  5.5   %          11.8  %         (6.3)   pts.


_____________
(1)See the "Non-GAAP Financial Measures" section for an explanation of the
non-GAAP financial measure.
Pre-tax Income Margin
Third quarter 2020 pre-tax income margin of 6.7% decreased 3.5-percentage points
as compared to third quarter 2019. The decrease primarily reflected the impact
of lower adjusted1 operating margin (see below), of 4.6-percentage points,
partially offset by lower Other expenses, net, Transaction and related, costs,
net and Restructuring and related costs.
Pre-tax income margin for the nine months ended September 30, 2020 of 2.9%
decreased 4.4-percentage points as compared to the prior year period. The
decrease primarily reflected the impact of lower adjusted1 operating margin (see
below), of 6.3-percentage points, partially offset by lower Restructuring and
related costs and Other expenses, net.
Adjusted1 Operating Margin
Third quarter 2020 adjusted1 operating margin of 7.4% decreased 4.6-percentage
points as compared to third quarter 2019 reflecting the impact of lower
revenues, primarily as a result of the significant effect of the COVID-19
pandemic on our business, partially offset by cost and expense reductions
associated with our Project Own It transformation actions as well additional
savings from various cost reduction actions to mitigate the impact of the
pandemic, including approximately $35 million from temporary government
assistance measures and furlough programs (see the Government Assistance and
Furlough Programs section for further details) and other reductions in
discretionary spend such as near-term targeted marketing programs and the use of
contract employees and the temporary suspension of 401(k) matching contributions
for the year 2020, as well as lower compensation incentives consistent with
lower sales and operating results. The suspension of the 401(k) matching
contribution in the third quarter 2020 resulted in a 0.7-percentage point
benefit from the reversal in the third quarter 2020 of the accrual through the
second quarter 2020. The decrease was also affected by an approximate
1.0-percentage point unfavorable combined impact from higher tariffs and
transaction currency.
Adjusted1 operating margin for the nine months ended September 30, 2020 of 5.5%
decreased 6.3-percentage points as compared to prior year period reflecting the
impact of lower revenues, primarily as a result of the significant effect of the
COVID-19 pandemic on our business and a 1.2-percentage point unfavorable impact
due to an increase in bad debt expense of $61 million in the first quarter 2020,
to reflect the expected impact to our customer base and related outstanding
trade and finance receivable portfolio as a result of the economic disruption
caused by the pandemic. These negative impacts were partially offset by cost and
expense reductions associated with our Project Own It transformation actions as
well as additional savings from various cost reduction actions to mitigate the
impact of the pandemic, including approximately $95 million from temporary
government assistance
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measures and furlough programs in the second and third quarters of 2020 (see the
Government Assistance and Furlough Programs section for further details) and
other reductions in discretionary spend such as near-term targeted marketing
programs and the use of contract employees and the temporary suspension of
401(k) matching contributions for the year 2020, as well as lower compensation
incentives consistent with lower sales and operating results. The decrease was
also affected by an approximate 0.8-percentage point unfavorable combined impact
from higher tariffs and transaction currency.
______________
(1)Refer to the Operating Income and Margin reconciliation table in the
"Non-GAAP Financial Measures" section.
Gross Margin
Third quarter 2020 gross margin of 36.8% decreased 3.2-percentage points as
compared to third quarter 2019, reflecting the impact of lower revenues
(including from our higher margin post sale stream) primarily as a result of the
significant effect of the COVID-19 pandemic due to business closures, as well as
price promotions, and an approximate 1.0-percentage point adverse combined
impact from transaction currency and higher tariffs. These headwinds were
partially offset by the cost savings from our Project Own It transformation
actions, as well as the additional cost reduction actions to mitigate the impact
of the pandemic, including savings of approximately $26 million from temporary
government assistance measures and furlough programs and other reductions in
discretionary spend such as the use of contract employees and the temporary
suspension of 401(k) matching contributions.
Gross margin for the nine months ended September 30, 2020 of 37.8% decreased
2.0-percentage points as compared to the prior year period, reflecting the
impact of lower revenues (including from our higher margin post sale stream)
primarily as a result of the significant effect of the COVID-19 pandemic due to
business closures, as well as price promotions, and an approximate
0.8-percentage point adverse combined impact from transaction currency and
higher tariffs. These headwinds were partially offset by the benefits from our
Project Own It transformation actions, as well as additional cost reduction
actions to mitigate the impact of the pandemic, including savings of
approximately $66 million from temporary government assistance measures and
furlough programs and other reductions in discretionary spend such as the use of
contract employees and the temporary suspension of 401(k) matching
contributions.
Gross margins are expected to continue to be negatively impacted in future
periods as a result of an increase in the cost of our imported products due to
higher import tariffs. We currently estimate an approximate $30 million cost
impact from these higher tariffs for the full year 2020.
Third quarter 2020 equipment gross margin of 25.5% decreased 9.0-percentage
points as compared to third quarter 2019, reflecting the pressure from lower
revenues (primarily as a result of COVID-19 related business closures) and an
unfavorable mix of growth in low-end devices as well as the adverse impact of
price incentives, transaction currency and incremental tariff costs partially
offset by the benefit of cost reductions from Project Own It.
Equipment gross margin for the nine months ended September 30, 2020 of 26.7%
decreased 6.2-percentage points as compared to the prior year period, reflecting
the impact of lower revenues (primarily as a result of COVID-19 related business
closures) as well as the adverse impact of price incentives, transaction
currency and incremental tariff costs partially offset by the benefit of cost
reductions from Project Own It.
Third quarter 2020 Post sale gross margin of 40.3% decreased 1.3-percentage
points as compared to third quarter 2019, reflecting the impact of lower
revenues (primarily as a result of COVID-19 related business closures impacting
page volumes) and price erosion on contract renewals, partially offset by
productivity and cost savings and restructuring savings associated with Project
Own It transformation actions, as well as savings from our additional cost
reduction actions to mitigate the impact of the pandemic, including
approximately $25 million of savings from temporary government assistance
measures and furlough programs and other reductions in discretionary spend such
as the use of contract employees and the temporary suspension of 401(k) matching
contributions.
Post sale gross margin for the nine months ended September 30, 2020 of 40.7%
decreased 1.0-percentage points as compared to the prior year period, reflecting
the impact of lower revenues (primarily as a result of COVID-19 related business
closures impacting page volumes) and price erosion on contract renewals,
partially offset by productivity and cost savings and restructuring savings
associated with Project Own It transformation actions, as well as savings from
our additional cost reduction actions to mitigate the impact of the pandemic,
including approximately $65 million of savings from temporary government
assistance measures and furlough programs and other reductions in discretionary
spend such as the use of contract employees and the temporary suspension of
401(k) matching contributions.
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Research, Development and Engineering Expenses (RD&E)

                                 Three Months Ended                    Nine Months Ended
                                    September 30,                        September 30,
(in millions)                2020         2019       Change       2020        2019       Change
R&D                      $   61$  84$  (23)$   194$ 234$  (40)
Sustaining engineering       15             16          (1)          42         46          (4)
Total RD&E Expenses      $   76$ 100$  (24)$   236$ 280$  (44)


Third quarter 2020 RD&E as a percentage of revenue of 4.3% decreased by
0.3-percentage points as compared to third quarter 2019, primarily due to the
benefit of cost reductions that outpaced the impact of revenue declines.
RD&E of $76 million decreased $24 million as compared to third quarter 2019
reflecting savings from Project Own It that enhanced simplification and
rationalization in our core technology spend, and other temporary cost actions,
as well as a favorable impact from the timing of investments, partially offset
by higher spend in our innovation areas.
RD&E as a percentage of revenue for the nine months ended September 30, 2020 of
4.6% increased by 0.4-percentage points as compared to the prior year period,
primarily due to the impact of revenue declines that outpaced the benefit of
cost reductions.
RD&E for the nine months ended September 30, 2020 of $236 million decreased $44
million as compared to the prior year period, reflecting savings from Project
Own It that enhanced simplification and rationalization in our core technology
spend, and other temporary cost actions, as well as a favorable impact from the
timing of investments, partially offset by higher spend in our innovation areas.
Selling, Administrative and General Expenses (SAG)
Third quarter 2020 SAG as a percentage of revenue of 25.1% increased by
1.7-percentage points as compared to third quarter 2019, primarily due to the
impact of lower revenues, partially offset by the benefits from cost savings and
restructuring associated with our Project Own It transformation actions, and
savings from additional cost reduction actions to mitigate the impact of the
pandemic, including approximately $9 million from temporary government
assistance measures and furlough programs, and other reductions in discretionary
spend such as near-term targeted marketing programs, the use of contract
employees and the temporary suspension of 401(k) matching contributions, as well
as lower compensation incentives consistent with lower sales and operating
results.
Third quarter 2020 SAG of $444 million decreased by $66 million as compared to
third quarter 2019, reflecting cost savings and restructuring savings associated
with our Project Own It transformation actions and from additional cost
reduction actions to mitigate the impact of the pandemic, as described above,
partially offset by expenses from recent acquisitions.
SAG as a percentage of revenue for the nine months ended September 30, 2020 of
27.7% increased by 3.9-percentage points as compared to the prior year period
and included a 1.2-percentage point unfavorable impact due to the increase in
bad debt expense of $61 million in the first quarter 2020, as compared to the
prior year period. The increase also reflected the impact of lower revenues,
partially offset by the benefits from cost savings and restructuring associated
with our Project Own It transformation actions and savings from additional cost
reduction actions to mitigate the impact of the pandemic, including
approximately $28 million from temporary government assistance measures and
furlough programs, and other reductions in discretionary spend such as near-term
targeted marketing programs and the use of contract employees and the temporary
suspension of the 401(k) matching contributions, as well as lower compensation
incentives consistent with lower sales and operating results.
SAG for the nine months ended September 30, 2020 of $1,411 million decreased
$162 million as compared to the prior year period, reflecting cost savings and
restructuring savings associated with our Project Own It transformation actions
and from additional cost reduction actions to mitigate the impact of the
pandemic, as noted above. These savings were partially offset by the increase in
bad debt expense as described above, as well as expenses from recent
acquisitions.
During first quarter 2020, our bad debt provision was $61 million higher than
the prior year period, primarily reflecting the expected impact on our customer
base and related outstanding receivables portfolio as a result of the economic
disruption caused by the COVID-19 pandemic. The majority of the increased
provision is related to finance receivables due to their larger balance and
longer-term nature. During the second and third quarters 2020, write-offs as
well as the bad debt reserves for our trade and finance receivables portfolios
were in line with our models and consistent with future expectations regarding
the impacts from the COVID-19 pandemic. We continue to
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monitor developments regarding the pandemic, including business closures and
mitigating government support actions and as a result our reserves may need to
be updated in future periods. Bad debt expense for third quarter 2020 of $16
million was $3 million higher as compared to third quarter 2019, while bad debt
expense for the nine months ended September 30, 2020 of $103 million was $65
million higher compared to the prior year period as a result of the increase in
the bad debts provision recorded in first quarter 2020 as described above. Bad
debt expense of approximately 2.7 percent of total gross receivables on a
trailing-twelve-month basis (TTM) remained higher than the 2019 trend of less
than one percent, reflecting the significant increase in first quarter 2020.
Restructuring and Related Costs
We incurred restructuring and related costs of $20 million for the third quarter
2020, as compared to $27 million for third quarter 2019, and $64 million for the
nine months ended September 30, 2020 as compared to $176 million in the prior
year period. These costs were primarily related to implementation of initiatives
under our business transformation projects including Project Own It. The
following is a breakdown of those costs:
                                                                Three Months Ended                      Nine Months Ended
                                                                   September 30,                          September 30,
(in millions)                                                 2020                2019               2020                2019
Restructuring and severance(1)                           $        18

$ 12$ 57$ 37 Asset impairments(2)

                                               4                  2                   6                 48
Other contractual termination costs(3)                             1                  1                   2                 18
Net reversals(4)                                                  (3)                (7)                (18)               (23)
Restructuring and asset impairment costs                          20                  8                  47                 80
Retention related severance/bonuses(5)                            (2)                11                   9                 31
Contractual severance costs(6)                                     -                  3                   4                 41
Consulting and other costs(7)                                      2                  5                   4                 24
Total                                                    $        20$      27$       64$     176


_____________
(1)Reflects headcount reductions of approximately 650 and 150 employees
worldwide for the three months ended September 30, 2020 and 2019, respectively,
and 1,100 and 450 employees worldwide for the nine months ended September 30,
2020 and 2019, respectively.
(2)Primarily related to the exit and abandonment of leased and owned facilities.
The charge includes the accelerated write-off of $2 million for the three months
ended September 30, 2020 and 2019, respectively, and $3 million and $36 million
for the nine months ended September 30, 2020 and 2019, respectively, for leased
right-of-use assets, as well as $2 million and $0 million for the three months
ended September 30, 2020 and 2019, respectively, and $3 million and $12 million
for the nine months ended September 30, 2020 and 2019, respectively, for owned
assets upon exit from the facilities, net of any potential sublease income and
other recoveries.
(3)Primarily includes additional costs incurred upon the exit from our
facilities including decommissioning costs and associated contractual
termination costs.
(4)Reflects net reversals for changes in estimated reserves from prior period
initiatives.
(5)Includes retention related severance and bonuses for employees expected to
continue working beyond their minimum notification period before termination.
(6)Amounts for nine months ended September 30, 2019 include approximately $38
million for estimated severance and other related costs we were contractually
required to pay in connection with employees transferred as part of the shared
service arrangement entered into with HCL Technologies in the first quarter
2019.
(7)Represents professional support services associated with our business
transformation initiatives.
Third quarter 2020 actions impacted several functional areas, with
approximately 30% focused on gross margin improvements,
approximately 65% focused on SAG reductions and the remainder focused on RD&E
optimization.
Third quarter 2019 actions impacted several functional areas, with approximately
50% focused on gross margin improvements, approximately 45% focused on SAG
reductions and the remainder focused on RD&E optimization.
The restructuring and related costs reserve balance as of September 30, 2020 for
all programs was $87 million, which is expected to be paid over the next twelve
months.
Refer to Note 12 - Restructuring Programs in the Condensed Consolidated
Financial Statements for additional information regarding our restructuring
programs.
Transaction and Related Costs, Net
We recognized a credit of $(6) million for the three months ended September 30,
2020 for Transaction and related costs, net, primarily related to adjustments to
costs from third party providers of professional services associated with
certain strategic M&A projects. Transaction and related costs, net were $18
million for the nine months ended September 30, 2020 primarily related to costs
from third party providers of professional services associated with certain
strategic M&A projects including our terminated proposal to acquire HP Inc.
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Amortization of Intangible Assets
Amortization of intangible assets for the three months ended September 30, 2020
of $13 million increased by $4 million, primarily due to the impact from 2020
partner dealer acquisitions, while Amortization of intangible assets for the
nine months ended September 30, 2020 of $34 million decreased by $1 million as
compared to the prior year period as a result of the write-off of trade names in
prior periods associated with our realignment and consolidation of certain XBS
sales units as part of Project Own It transformation actions, partially offset
by intangible amortization associated with 2020 and 2019 acquisitions.
Worldwide Employment
Worldwide employment was approximately 25,500 as of September 30, 2020 and
decreased by approximately 1,500 from December 31, 2019. The reduction resulted
from net attrition (attrition net of gross hires), of which a large portion is
not expected to be back filled, as well as the impact of organizational changes.
Other Expenses, Net
                                                                 Three Months Ended                      Nine Months Ended
                                                                    September 30,                          September 30,
(in millions)                                                  2020               2019                2020                2019
Non-financing interest expense(1)                          $       30

$ 27$ 69$ 81 Non-service retirement-related costs

                              (13)               (2)                 (20)                21
Interest income                                                    (1)               (2)                 (12)                (9)
Gains on sales of businesses and assets                           (28)              (19)                 (29)               (20)
Litigation matters                                                 (1)               (8)                  (1)                (8)
Contract termination costs - IT services                            -                (8)                   3                 (8)
Currency losses, net                                                -                 4                    4                  6

All other expenses, net                                            (2)                7                    1                 13
Other expenses, net                                        $      (15)$     (1)$        15$      76


_____________
(1)Includes interest expense of $11 million that is attributable to Senior Notes
issued by Xerox Holdings. Refer to Note 13 - Debt in the Condensed Consolidated
Financial Statements for additional information regarding debt activity in 2020.
Non-Financing Interest Expense
Third quarter 2020 non-financing interest expense of $30 million was $3 million
higher than third quarter 2019. When combined with financing interest expense
(Cost of financing), total interest expense decreased by $1 million from third
quarter 2019 primarily reflecting a lower average debt balance in the third
quarter as the impact from the incremental $770 million of net new senior
unsecured debt was only partially reflected in the quarter.
For the nine months ended September 30, 2020 non-financing interest expense of
$69 million was $12 million lower than the prior year period. When combined with
financing interest expense (Cost of financing), total interest expense decreased
by $21 million from the prior year period primarily reflecting a lower average
debt balance as the impact from the incremental $770 million of net new senior
unsecured debt was only partially reflected in the third quarter 2020.
In October 2020, the Company completed the early redemption of $750 million of
Senior Notes due May 2021. Refer to Note 22 - Subsequent Event in the Condensed
Consolidated Financial Statements for additional information.
Refer to Note 13 - Debt in the Condensed Consolidated Financial Statements, for
additional information regarding debt activity and the interest expense.
Non-Service Retirement-Related Costs
Non-service retirement-related costs for the three and nine months ended
September 30, 2020 decreased $11 million and $41 million, respectively, compared
to the prior year periods, primarily driven by lower losses from pension
settlements in the U.S and lower discount rates.
Refer to Note 16 - Employee Benefit Plans in the Condensed Consolidated
Financial Statements, for additional information regarding non-service
retirement-related costs.
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Interest Income
Interest income for the nine months ended September 30, 2020 increased $3
million compared to the prior year period, primarily reflecting interest on a
higher cash balance as a result of cash proceeds received from the sales of our
indirect 25% equity interest in Fuji Xerox Co., Ltd. (FX) and indirect 51%
partnership interest in Xerox International Partners (XIP) completed in fourth
quarter 2019, partially offset by lower market interest rates.
Gains on Sales of Businesses and Assets
Gains on the sales of businesses and assets increased $9 million for the three
and nine months ended September 30, 2020, respectively, as compared to both
prior year periods reflecting higher proceeds from sales of non-core business
assets.
Litigation Matters
Litigation matters increased $7 million for the three and nine months ended
September 30, 2020, respectively, as compared to both prior year periods,
reflecting the favorable resolution of certain litigation matters in third
quarter 2019.
Contract Termination Costs - IT Services
Contract termination costs - IT services increased $8 million and $11 million
for the three and nine months ended September 30, 2020, respectively, as
compared to both prior year periods, reflecting an adjustment in 2019 to a $43
million penalty recorded in fourth quarter 2018, associated with the termination
of an IT services arrangement.
Income Taxes
Third quarter 2020 effective tax rate was 24.4%. On an adjusted1 basis, third
quarter 2020 effective tax rate was 21.1%. This rate was higher than the U.S.
federal statutory tax rate of 21% primarily due to state taxes, the geographical
mix of profits which includes non-deductible items on lower pre-tax income and
an increase in deferred tax asset valuation allowances partially offset by the
impact from various tax law changes. The adjusted1 effective tax rate excludes
the tax impacts associated with the following charges: Restructuring and related
costs, Amortization of intangible assets, Transaction and related costs, net as
well as non-service retirement-related costs and other discrete, unusual or
infrequent items as described in our Non-GAAP Financial Measures section.
The effective tax rate for the nine months ended September 30, 2020 was 24.2%.
On an adjusted1 basis, the effective tax rate for the nine months ended
September 30, 2020 was 23.8%. This rate was higher than the U.S. federal
statutory tax rate of 21% primarily due to state taxes, the geographical mix of
profits which includes non-deductible items on lower pre-tax income and an
increase in deferred tax asset valuation allowances partially offset by a
benefit of approximately 6.0% for the impact from various tax law changes. The
adjusted1 effective tax rate excludes the tax impacts associated with the
following charges: Restructuring and related costs, Amortization of intangible
assets, Transaction and related costs, net as well as non-service
retirement-related costs and other discrete, unusual or infrequent items as
described in our Non-GAAP Financial Measures section.
Third quarter 2019 effective tax rate was 29.6%. On an adjusted1 basis, third
quarter 2019 effective tax rate was 27.3%. These rates were higher than the U.S.
federal statutory tax rate of 21% primarily due to state taxes and the
geographical mix of profits. The adjusted1 effective tax rate excludes the tax
impacts associated with the following charges: Restructuring and related costs,
Amortization of intangible assets, Transaction and related costs, net as well as
non-service retirement-related costs and other discrete, unusual or infrequent
items as described in our Non-GAAP Financial Measures section.
The effective tax rate for the nine months ended September 30, 2019 was 21.8%
and included a benefit of $31 million related to the January 2019 finalization
of regulations that govern the repatriation tax from the 2017 Tax Cuts and Jobs
Act (the Tax Act). On an adjusted1 basis, the effective tax rate for the nine
months ended September 30, 2019 was 26.7%. This rate was higher than the U.S.
federal statutory tax rate of 21% primarily due to state taxes and the
geographical mix of profits. The adjusted1 effective tax rate excludes the tax
impacts associated with the following charges: Restructuring and related costs,
Amortization of intangible assets, Transaction and related costs, net and
non-service retirement-related costs as well as other discrete, unusual or
infrequent items as described in our Non-GAAP Financial Measures section, which
included the impact of the Tax Act.
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 that may not
be predictable.
_____________
(1)Refer to the Effective Tax Rate reconciliation table in the "Non-GAAP
Financial Measures" section.
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Equity in Net Income of Unconsolidated Affiliates
In November 2019, Xerox Holdings sold its remaining indirect 25% equity interest
in Fuji Xerox, which had been previously accounted for as an equity method
investment. Refer to Discontinued Operations below and Note 6 - Divestitures, in
the Condensed Consolidated Financial Statements for additional information
regarding the sale of Fuji Xerox. Accordingly, our remaining investment in
Affiliates, at Equity at September 30, 2020 largely consists of several minor
investments in entities in the Middle East region.
                                                              Three Months Ended                       Nine Months Ended
                                                                 September 30,                           September 30,
(in millions)                                               2020                2019                2020                2019
Equity in net income of unconsolidated
affiliates - Fuji Xerox(1)                             $         -          $      57          $         -          $     132
Equity in net income of unconsolidated
affiliates - continuing operations                               -                  1                    2                  5
Total Equity in net income of unconsolidated
affiliates                                             $         -          

$ 58 $ 2 $ 137


Fuji Xerox after-tax restructuring and other
charges                                                $         -          $       -          $         -          $      19


_____________
(1)  Equity in net income for Fuji Xerox for 2019 is reported in Income from
discontinued operations, net of tax.
Net Income from Continuing Operations
Third quarter 2020 Net income from continuing operations attributable to Xerox
Holdings was $90 million, or $0.41 per diluted share. On an adjusted1 basis, Net
income from continuing operations attributable to Xerox Holdings was $105
million, or $0.48 per diluted share. Third quarter 2020 adjustments to Net
income from continuing operations included Restructuring and related costs,
Amortization of intangible assets, Transaction and related costs, net and
non-service retirement-related costs as well as other discrete, unusual or
infrequent items (see Non-GAAP Financial Measures).
Net income from continuing operations attributable to Xerox Holdings for the
nine months ended September 30, 2020 was $115 million, or $0.49 per diluted
share. On an adjusted1 basis, Net income from continuing operations attributable
to Xerox Holdings was $191 million, or $0.84 per diluted share and included the
negative impact of a $61 million pre-tax increase in bad debt expense
(approximately $43 million after-tax) as compared to the prior year period,
primarily reflecting the expected impact to our customer base and related
outstanding receivables portfolio as a result of the economic disruption caused
by the COVID-19 pandemic. Adjustments to Net income from continuing operations
for the nine months ended September 30, 2020 included Restructuring and related
costs, Amortization of intangible assets, Transaction and related costs, net,
non-service retirement-related costs, as well as other discrete, unusual or
infrequent items (see Non-GAAP Financial Measures).
Third quarter 2019 Net income from continuing operations attributable to Xerox
Holdings was $157 million, or $0.68 per diluted share. On an adjusted1 basis,
Net income from continuing operations attributable to Xerox Holdings was $184
million, or $0.80 per diluted share. Third quarter 2019 adjustments to Net
income from continuing operations included Restructuring and related costs,
Amortization of intangible assets, Transaction and related costs, net and
non-service retirement-related costs as well as other discrete, unusual or
infrequent items (see Non-GAAP Financial Measures).
Net income from continuing operations attributable to Xerox Holdings for the
nine months ended September 30, 2019 was $382 million, or $1.62 per diluted
share. On an adjusted1 basis, Net income from continuing operations attributable
to Xerox Holdings was $528 million, or $2.24 per diluted share. Adjustments to
Net income from continuing operations for the nine months ended September 30,
2019 included Restructuring and related costs, Amortization of intangible
assets, Transaction and related costs, net and non-service retirement-related
costs, as well as other discrete, unusual or infrequent items (see Non-GAAP
Financial Measures).
Refer to Note 20 - Earnings per Share in the Condensed Consolidated Financial
Statements, for additional information regarding the calculation of basic and
diluted earnings per share.
_____________
(1)Refer to the Net Income and EPS reconciliation table in the "Non-GAAP
Financial Measures" section.
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Discontinued Operations
In November 2019, Xerox Holdings completed a series of transactions to
restructure its relationship with FUJIFILM Holdings Corporation (FH), including
the sale of its indirect 25% equity interest in Fuji Xerox Co., Ltd. (FX) for
approximately $2.2 billion as well as the sale of its indirect 51% partnership
interest in Xerox International Partners (XIP) for approximately $23 million
(collectively the Sales). As a result of the Sales and the related strategic
shift in our business, the historical financial results of our equity method
investment in FX and our XIP business (which was consolidated) for the periods
prior to the Sales are reflected as a discontinued operation and as such, their
impact is excluded from continuing operations for all periods presented.
Refer to Note 6 - Divestitures in the Condensed Consolidated Financial
Statements for additional information regarding discontinued operations.
Other Comprehensive Income (Loss)
Third quarter 2020 Other Comprehensive Income, Net Attributable to Xerox
Holdings was $88 million and included the following: i) net translation
adjustment gains of $179 million reflecting the significant strengthening of our
major foreign currencies against the U.S. Dollar; ii) $1 million of net
unrealized gains; and iii) $92 million of net losses from the changes in defined
benefit plans primarily due to net actuarial losses as a result of lower
discount rates in the U.S and the negative impacts from currency, partially
offset by settlements. This compares to Other Comprehensive Loss, Net
Attributable to Xerox Holdings of $203 million for the third quarter 2019, which
reflected the following: i) $155 million of net translation adjustment losses
reflecting the significant weakening of our major foreign currencies against the
U.S. Dollar; ii) $48 million of net losses from the changes in defined benefit
plans primarily due to net actuarial losses as a result of lower discount rates
in the U.S., partially offset by settlements and the positive impacts from
currency; and iii) $1 million net unrealized gains.
Other Comprehensive Income, Net Attributable to Xerox Holdings for the nine
months ended September 30, 2020 was $53 million and included the following: i)
$42 million of net gains from the changes in defined benefit plans is primarily
due to the amortization and recognition of net actuarial losses from AOCL1; ii)
net translation adjustment gains of $7 million reflecting the strengthening of
our major foreign currencies against the U.S. Dollar; and iii) $4 million of net
unrealized gains. This compares to Other Comprehensive Loss, Net Attributable to
Xerox Holdings of $158 million for the nine months ended September 30, 2019,
which reflected the following: i) $122 million of net translation adjustment
losses, reflecting the significant weakening of our major foreign currencies
against the U.S. Dollar; ii) $38 million of net losses from the changes in
defined benefit plans; and iii) $3 million of net unrealized gains.
Refer to Note 19 - Other Comprehensive Income (Loss) in the Condensed
Consolidated Financial Statements, for the components of Other Comprehensive
Income (Loss), Note 14 - Financial Instruments in the Condensed Consolidated
Financial Statements, for additional information regarding unrealized (losses)
gains, net, and Note 16 - Employee Benefit Plans in the Condensed Consolidated
Financial Statements, for additional information regarding net changes in our
defined benefit plans.
_____________
(1)AOCL - Accumulated other comprehensive loss.
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Capital Resources and Liquidity
Our financial results through September 30, 2020 were significantly impacted by
COVID-19 related business closures and office building capacity restrictions
that impacted our customers' purchasing decisions and caused delayed
installations and lower printing volumes on our devices. However, we believe we
have sufficient liquidity to manage the business through the economic disruption
caused by this pandemic:
•A majority of our business is contractually based and our bundled services
contracts, on average, include not only a variable component linked to print
volumes, but also a fixed minimum, which provides us with a continuing stream of
operating cash flow.
•As of September 30, 2020, total cash, cash equivalents and restricted cash were
$3,297 million and, apart from the restricted cash of $55 million, was readily
accessible for use. In October 2020, we completed the early redemption of $750
million of the approximately $1,062 million Senior Notes due in May 2021 from
cash on hand. Refer to Note 13 - Debt in the Condensed Consolidated Financial
Statements for additional information.
•We have access to an undrawn $1.8 billion Credit Facility that matures in
August 2022. In connection with the issuance of our $1.5 billion of new Senior
Notes, we amended the Credit Facility debt covenants to consider our level of
cash on hand as part of our principal debt balance. Refer to Note 13 - Debt in
the Condensed Consolidated Financial Statements for additional information.
•We have utilized a combination of capital markets financing and securitization
to refinance all 2020 debt maturities and a portion of our 2021 debt maturities,
significantly reducing our near-term debt commitments and improving our
liquidity. Refer to Note 22 - Subsequent Event in the Condensed Consolidated
Financial Statements for additional information regarding the early redemption
of a portion of the Senior Notes due 2021.
•We have focused our efforts on incremental actions to prioritize and preserve
cash as we manage through the pandemic. These actions include the use of
available temporary government assistance measures and furlough programs and the
reduction of discretionary spend such as near-term targeted marketing programs,
the use of contract employees and the temporary suspension of 401(k) matching
contributions, as well as lower compensation incentives consistent with lower
sales and operating results.
Cash Flow Analysis
The following summarizes our cash, cash equivalents and restricted cash:
                                                                      Nine Months Ended
                                                                        September 30,
(in millions)                                                    2020                    2019                 Change
Net cash provided by operating activities of
continuing operations                                     $        313$        846$      (533)
Net cash provided by operating activities of
discontinued operations                                              -                        49                  (49)
Net cash provided by operating activities                          313                       895                 (582)

Net cash used in investing activities                             (223)                      (68)                (155)

Net cash provided by (used in) financing activities                424                      (983)               1,407
Effect of exchange rate changes on cash, cash
equivalents and restricted cash                                    (12)                      (13)                   1

Increase (decrease) in cash, cash equivalents and
restricted cash                                                    502                      (169)                 671
Cash, cash equivalents and restricted cash at
beginning of period                                              2,795                     1,148                1,647
Cash, Cash Equivalents and Restricted Cash at End
of Period                                                 $      3,297

$ 979$ 2,318



Cash Flows from Operating Activities
Net cash provided by operating activities of continuing operations was $313
million for the nine months ended September 30, 2020. The $533 million decrease
in operating cash from the prior year period was primarily due to the following:
•$495 million decrease in pre-tax income before depreciation and amortization,
provisions, gain on sales of businesses and assets, restructuring and related
costs and defined benefit pension costs.
•$305 million decrease from higher levels of inventory primarily due to lower
sales volume.
•$125 million decrease in other current and long-term liabilities, reflecting
lower accruals, particularly incentive-related payments associated with our
indirect channel partners and decreases in deferred revenue reflecting lower
sales activity.
•$50 million decrease from accrued compensation primarily related to lower
compensation costs and the year-over-year timing of payments.
•$45 million decrease from lower accounts payable primarily due to decreased
spending and the year-over-year timing of supplier and vendor payments.
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•$272 million increase from accounts receivable primarily due to lower revenue
as well as timing of collections.
•$124 million increase primarily related to a higher level of run-off due to
lower originations of finance receivables of $97 million and lower equipment on
operating leases of $27 million.
•$53 million increase from net taxes primarily due to lower payments in 2020 as
a result of lower pre-tax income.
•$47 million increase primarily due to lower restructuring and related costs as
compared to the prior year.
Cash Flows from Investing Activities
Net cash used in investing activities was $223 million for the nine months ended
September 30, 2020. The $155 million change from the prior year period was
primarily due to four acquisitions completed in the current year for $193
million compared to two acquisitions in the prior year for $42 million.
Cash Flows from Financing Activities
Net cash provided by financing activities was $424 million for the nine months
ended September 30, 2020. The $1,407 million increase in cash from the prior
year period was primarily due to the following:
•$1,168 million increase from net debt activity. 2020 reflects proceeds of
$1,507 million from a Senior Notes offering and $340 million from a secured
financing arrangement offset by payments of $1,051 million on Senior Notes, $22
million on the secured financing arrangement and $13 million of deferred debt
issuance costs. 2019 reflects payments of $406 million on Senior Notes.
•$218 million increase due to share repurchases.
•$11 million increase from lower distributions of noncontrolling interests.
Cash, Cash Equivalents and Restricted Cash
Refer to Note 7 - Supplementary Financial Information in the Condensed
Consolidated Financial Statements for additional information regarding Cash,
cash equivalents and restricted cash.
Operating Leases
We have operating leases for real estate and vehicles in our domestic and
international operations as well as for certain equipment in our domestic
operations. Additionally, we have identified embedded operating leases within
certain supply chain contracts for warehouses, primarily within our domestic
operations. Our leases have remaining terms of up to twelve years and a variety
of renewal and/or termination options.
Refer to Note 11 - Lessee in the Condensed Consolidated Financial Statements for
additional information regarding our leases accounted under lessee accounting.
Debt and Customer Financing Activities
The following summarizes our debt:
(in millions)                     September 30, 2020       December 31, 2019
Principal debt balance(1)        $             5,082      $            4,313
Net unamortized discount                          (3)                    (16)
Debt issuance costs                              (28)                    (17)
Fair value adjustments(2)
   - terminated swaps                              3                       1
   - current swaps                                 -                       1
Total Debt                       $             5,054      $            4,282


_____________
(1)Includes Notes Payable of $2 million as of September 30, 2020. There were no
Notes Payable as of December 31, 2019.
(2)Fair value adjustments include the following: (i) fair value adjustments to
debt associated with terminated interest rate swaps, which are being amortized
to interest expense over the remaining term of the related notes; and (ii)
changes in fair value of hedged debt obligations attributable to movements in
benchmark interest rates. Hedge accounting requires hedged debt instruments to
be reported inclusive of any fair value adjustment.
Credit Rating Downgrade
In August, the Company's $1.0 billion Senior Notes due 2023 were downgraded by
S&P and, pursuant to the terms of the Notes, the coupon rate on the Notes
increased by 0.25% from 4.125% to 4.375% per annum.
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Finance Assets and Related Debt
The following represents our total finance assets, net associated with our lease
and finance operations:
(in millions)                            September 30, 2020       December 31, 2019
Total finance receivables, net(1)       $             3,076      $          

3,351

Equipment on operating leases, net                      301                     364
Total Finance Assets, net(2)            $             3,377      $            3,715


_____________
(1)Includes (i) Billed portion of finance receivables, net, (ii) Finance
receivables, net and (iii) Finance receivables due after one year, net as
included in our Condensed Consolidated Balance Sheets.
(2)The change from December 31, 2019 includes an increase of $24 million due to
currency.
Our lease contracts permit customers to pay for equipment over time rather than
at the date of installation; therefore, we maintain a certain level of debt
(that we refer to as financing debt) to support our investment in these lease
contracts, which are reflected in total finance assets, net. For this financing
aspect of our business, we maintain an assumed 7:1 leverage ratio of debt to
equity as compared to our finance assets. Based on this leverage, the following
represents the breakdown of total debt between financing debt and core debt:
(in millions)                              September 30, 2020       December 31, 2019
Finance receivables debt(1)               $             2,692      $        

2,932

Equipment on operating leases debt                        263                     319
Financing debt                                          2,955                   3,251
Core debt                                               2,099                   1,031
Total Debt                                $             5,054      $            4,282

____________________________

(1)Finance receivables debt is the basis for our calculation of "Cost of financing" expense in the Condensed Consolidated Statements of Income. Sales of Accounts Receivable Activity related to sales of accounts receivable is as follows:

                                                    Three Months Ended                    Nine Months Ended
                                                      September 30,                         September 30,
(in millions)                                     2020              2019               2020                2019
Estimated increase (decrease) to operating
cash flows(1)                                 $      54$    (33)$      (86)$     (33)


_____________
(1)Represents the difference between current and prior period accounts
receivable sales adjusted for the effects of currency. The increase for the
three months ended September 30, 2020 reflects increased sales activity in the
channel.
Refer to Note 8 - Accounts Receivable, Net in the Condensed Consolidated
Financial Statements for additional information regarding our accounts
receivable sales arrangements.
Liquidity and Financial Flexibility
We manage our worldwide liquidity using internal cash management practices,
which are subject to i) the statutes, regulations and practices of each of the
local jurisdictions in which we operate, ii) the legal requirements of the
agreements to which we are a party and iii) the policies and cooperation of the
financial institutions we utilize to maintain and provide cash management
services.
Our principal debt maturities are spread over the next five years as follows:
(in millions)             Amount(1)
2020 Q4(2)               $        2
2021(3)                       1,222
2022                            300
2023                          1,158
2024                            300
2025                            750
2026 and thereafter           1,350
Total                    $    5,082


_____________
(1)Includes fair value adjustments.
(2)Includes Notes Payable of $2 million as of September 30, 2020.
(3)Includes $750 million of Senior Notes due May 2021 that were redeemed in
October 2020. Refer to Note 22 - Subsequent Event in the Condensed Consolidated
Financial Statements for additional information regarding the early redemption
of these Senior Notes.
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                                       62
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Treasury Stock
In the third quarter 2020 Xerox Holdings repurchased 8.0 million shares of our
common stock for an aggregate cost of $150 million, including fees. No share
repurchases were made in the first or second quarter of 2020. We expect to
repurchase an additional $150 million of our common stock in the fourth quarter
2020.
Shared Services Arrangement with HCL Technologies
In March 2019, as part of Project Own It, Xerox entered into a shared services
arrangement with HCL Technologies
(HCL) pursuant to which we transitioned certain global administrative and
support functions, including, among others, selected information technology and
finance functions (excluding accounting), from Xerox to HCL. This transition was
expected to be completed during 2020, however, as a result of delays caused by
the COVID-19 pandemic, the transition is now expected to extend into 2021. HCL
is expected to make certain ongoing investments in software, tools and other
technology to consolidate, optimize and automate the transferred functions with
the goal of providing improved service levels and significant cost savings. The
shared services arrangement with HCL includes a remaining aggregate spending
commitment of approximately $1.2 billion over the next 6 years. However, we can
terminate the arrangement at any time at our discretion, subject to payment of
termination fees that decline over the term, or for cause.
For the three and nine months ended September 30, 2020, we incurred net charges
of approximately $49 million and $139 million, respectively, associated with
this arrangement. The cost has been allocated to the various functional expense
lines in the Condensed Consolidated Statements of Income based on an assessment
of the nature and amount of the costs incurred for the various transferred
functions prior to their transfer to HCL.
Financial Risk Management
We are exposed to market risk from foreign currency exchange rates and interest
rates, which could affect operating results, financial position and cash flows.
We manage our exposure to these market risks through our regular operating and
financing activities and, when appropriate, through the use of derivative
financial instruments. We utilize derivative financial instruments to hedge
economic exposures, as well as to reduce earnings and cash flow volatility
resulting from shifts in market rates. We enter into limited types of derivative
contracts, including interest rate swap agreements, foreign currency spot,
forward and swap contracts and net purchased foreign currency options to manage
interest rate and foreign currency exposures. Our primary foreign currency
market exposures include the Japanese Yen, Euro and U.K. Pound Sterling. The
fair market values of all our derivative contracts change with fluctuations in
interest rates and/or currency exchange rates and are designed so that any
changes in their values are offset by changes in the values of the underlying
exposures. Derivative financial instruments are held solely as risk management
tools and not for trading or speculative purposes. The related cash flow impacts
of all of our derivative activities are reflected as cash flows from operating
activities.
We are required to recognize all derivative instruments as either assets or
liabilities at fair value in the balance sheet. As permitted, certain of these
derivative contracts have been designated for hedge accounting treatment.
Certain of our derivatives that do not qualify for hedge accounting are
effective as economic hedges. These derivative contracts are likewise required
to be recognized each period at fair value and therefore do result in some level
of volatility. The level of volatility will vary with the type and amount of
derivative hedges outstanding, as well as fluctuations in the currency and
interest rate markets during the period. The related cash flow impacts of all of
our derivative activities are reflected as cash flows from operating activities.
By their nature, all derivative instruments involve, to varying degrees,
elements of market and credit risk. The market risk associated with these
instruments resulting from currency exchange and interest rate movements is
expected to offset the market risk of the underlying transactions, assets and
liabilities being hedged. We do not believe there is significant risk of loss in
the event of non-performance by the counterparties associated with these
instruments because these transactions are executed with a diversified group of
major financial institutions. Further, our policy is to deal with counterparties
having a minimum investment grade or better credit rating. Credit risk is
managed through the continuous monitoring of exposures to such counterparties.
The current market events have not required us to materially modify or change
our financial risk management strategies with respect to our exposures to
interest rate and foreign currency risk. Refer to Note 14 - Financial
Instruments in the Condensed Consolidated Financial Statements for further
discussion and information on our financial risk management strategies.
                                                            Xerox 2020 Form 

10-Q

                                       63
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Non-GAAP Financial Measures
We have reported our financial results in accordance with generally accepted
accounting principles (GAAP). In addition, we have discussed our financial
results using the non-GAAP measures described below. We believe these non-GAAP
measures allow investors to better understand the trends in our business and to
better understand and compare our results. Accordingly, we believe it is
necessary to adjust several reported amounts, determined in accordance with
GAAP, to exclude the effects of certain items as well as their related income
tax effects.
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 as well as in the third quarter 2020 presentation slides
available at www.xerox.com/investor.
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.
Adjusted Earnings Measures
•Net income and Earnings per share (EPS)
•Effective tax rate
The above measures were adjusted for the following items:
Restructuring and related costs: Restructuring and related costs include
restructuring and asset impairment charges as well as costs associated with our
transformation programs beyond those normally included in restructuring and
asset impairment charges. Restructuring consists of costs primarily related to
severance and benefits paid to employees pursuant to formal restructuring and
workforce reduction plans. Asset impairment includes costs incurred for those
assets sold, abandoned or made obsolete as a result of our restructuring
actions, exiting from a business or other strategic business changes. Additional
costs for our transformation programs are primarily related to the
implementation of strategic actions and initiatives and include third-party
professional service costs as well as one-time incremental costs. All of these
costs can vary significantly in terms of amount and frequency based on the
nature of the actions as well as the changing needs of the business.
Accordingly, due to that significant variability, we will exclude these charges
since we do not believe they provide meaningful insight into our current or past
operating performance nor do we believe they are reflective of our expected
future operating expenses as such charges are expected to yield future benefits
and savings with respect to our operational performance.
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. 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.
Transaction and related costs, net: Transaction and related costs, net are costs
and expenses primarily associated with certain strategic M&A projects. These
costs are primarily for third-party legal, accounting, consulting and other
similar type professional services as well as potential legal settlements that
may arise in connection with those M&A transactions. These costs are considered
incremental to our normal operating charges and were incurred or are expected to
be incurred solely as a result of the planned transactions. Accordingly, we are
excluding these expenses from our Adjusted Earnings Measures in order to
evaluate our performance on a comparable basis.
Non-service retirement-related costs: Our defined benefit pension and retiree
health costs include several elements impacted by changes in plan assets and
obligations that are primarily driven by changes in the debt and equity markets
as well as those that are predominantly legacy in nature and related to
employees who are no longer providing current service to the company (e.g.
retirees and ex-employees). These elements include (i) interest cost, (ii)
expected return on plan assets, (iii) amortization of prior plan amendments,
(iv) amortized actuarial gains/losses and (v) the impacts of any plan
settlements/curtailments. Accordingly, we consider these elements of our
periodic retirement plan costs to be outside the operational performance of the
business or legacy costs and not necessarily indicative of current or future
cash flow requirements. This approach is consistent with the classification of
these costs as non-operating in other expenses, net. Adjusted earnings will
continue to include the service cost elements of our retirement costs, which is
related to current employee service as well as the cost of our defined
contribution plans.
Other discrete, unusual or infrequent items: We excluded the following items
given their discrete, unusual or infrequent nature and their impact on our
results for each period:
•Contract termination costs - IT Services
•Impacts associated with the Tax Cuts and Jobs Act (the "Tax Act") enacted in
December 2017
                                                            Xerox 2020 Form 10-Q
                                       64
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We believe the exclusion of these items allows investors to better understand
and analyze the results for the period as compared to prior periods and expected
future trends in our business.
Adjusted Operating Income and Margin
We calculate and utilize adjusted operating income and margin measures by
adjusting our reported pre-tax income and margin amounts. In addition to the
costs and expenses noted as adjustments for our Adjusted Earnings measures,
adjusted operating income and margin also exclude the remaining amounts included
in Other expenses, net, which are primarily non-financing interest expense and
certain other non-operating costs and expenses. We exclude these amounts in
order to evaluate our current and past operating performance and to better
understand the expected future trends in our business.
Constant Currency (CC)
Refer to "Currency Impact" for a discussion of this measure and its use in our
analysis of revenue growth.
Summary
Management believes that all of these non-GAAP financial measures provide an
additional means of analyzing the current period's results against the
corresponding prior period's 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
Condensed Consolidated Financial Statements prepared in accordance with GAAP.
Our management regularly uses our supplemental non-GAAP financial measures
internally to understand, manage and evaluate our business and make operating
decisions. These non-GAAP measures are among the primary factors management uses
in planning for and forecasting future periods. Compensation of our executives
is based in part on the performance of our business based on these non-GAAP
measures.
A reconciliation of these non-GAAP financial measures and the most directly
comparable measures calculated and presented in accordance with GAAP are set
forth on the following tables:
Net Income and EPS reconciliation:
                                                            Three Months Ended September 30,                                            Nine Months Ended September 30,
                                                       2020                                  2019                                  2020                                 2019
(in millions, except per share
amounts)                                    Net  Income            EPS            Net  Income            EPS            Net  Income            EPS           Net Income            EPS
Reported(1)                               $         90          $ 0.41$        157$ 0.68$        115$ 0.49$      382$ 1.62
Adjustments:
Restructuring and related costs                     20                                    27                                    64                                 176
Amortization of intangible assets                   13                                     9                                    34                                  35
Transaction and related costs, net                  (6)                                    4                                    18                                   8
Non-service retirement-related
costs                                              (13)                                   (2)                                  (20)                                 21
Contract termination costs - IT
services                                             -                                    (8)                                    3                                  (8)

Income tax on adjustments(2)                         1                                    (7)                                  (23)                                (55)

Tax Act                                              -                                     4                                     -                                 (31)
Adjusted                                  $        105$ 0.48
    $        184$ 0.80$        191$ 0.84$      528$ 2.24
Dividends on preferred stock used
in adjusted EPS calculation(3)                                  $    4                                $    -                                $   11                              $    -
Weighted average shares for
adjusted EPS(3)                                                    213                                   231                                   215                                 235
Fully diluted shares at
September 30, 2020(4)                                              208


____________________________

(1)Net income and EPS from continuing operations attributable to Xerox Holdings.
(2)Refer to Effective Tax Rate reconciliation.
(3)Average shares for the calculation of adjusted diluted EPS for 2020 exclude 7
million shares associated with our Series A convertible preferred stock and
therefore earnings include the preferred stock dividend. Average shares for the
calculation of adjusted diluted EPS for 2019 include 7 million shares associated
with our Series A convertible preferred stock and therefore exclude the
preferred stock dividend.
(4)Represents common shares outstanding at September 30, 2020 plus potential
dilutive common shares as used for the calculation of adjusted diluted EPS for
the third quarter 2020. The amount excludes shares associated with our Series A
convertible preferred stock as they are expected to be anti-dilutive for the
year.
                                                            Xerox 2020 Form 10-Q
                                       65
--------------------------------------------------------------------------------

Effective Tax Rate reconciliation:

                                                                                        Three Months Ended September 30,
                                                                    2020                                                                2019
                                          Pre-Tax          Income Tax Expense           Effective             Pre-Tax             Income Tax               Effective
(in millions)                              Income              (Benefit)                Tax Rate               Income          Expense (Benefit)           Tax Rate
Reported(1)                             $     119          $            29                    24.4  %       $     223          $           66                    29.6  %
Non-GAAP Adjustments(2)                        14                       (1)                                        30                       7
Tax Act                                         -                        -                                          -                      (4)
Adjusted(3)                             $     133          $            28                    21.1  %       $     253          $           69                    27.3  %

                                                                                        Nine Months Ended September 30,
                                                                    2020                                                                2019
                                          Pre-Tax                                       Effective             Pre-Tax             Income Tax               Effective
(in millions)                              Income          Income Tax Expense           Tax Rate               Income               Expense                Tax Rate
Reported(1)                             $     149          $            36                    24.2  %       $     486          $          106                    21.8  %
Non-GAAP Adjustments(2)                        99                       23                                        232                      55
Tax Act                                         -                        -                                          -                      31
Adjusted(3)                             $     248          $            59                    23.8  %       $     718          $          192                    26.7  %

____________________________

(1)Pre-tax income and income tax expense from continuing operations.
(2)Refer to Net Income and EPS reconciliation for details.
(3)The tax impact on Adjusted Pre-Tax Income from continuing operations is
calculated under the same accounting principles applied to the Reported Pre-Tax
Income under ASC 740, which employs an annual effective tax rate method to the
results.
Operating Income and Margin reconciliation:
                                                              Three Months Ended September 30,
                                                          2020                                    2019
(in millions)                               Profit          Revenue      Margin      Profit      Revenue      Margin
Reported(1)                             $   119$ 1,767        6.7  %    $  223$ 2,179       10.2  %
Adjustments:
Restructuring and related costs              20                                         27
Amortization of intangible assets            13                                          9
Transaction and related costs, net           (6)                                         4

Other expenses, net                         (15)                                        (1)

Adjusted                                $   131$ 1,767        7.4  %    $  262$ 2,179       12.0  %

                                                               Nine Months Ended September 30,
                                                          2020                                    2019
(in millions)                               Profit          Revenue      Margin      Profit      Revenue      Margin
Reported(1)                             $   149$ 5,092        2.9  %    $  486$ 6,622        7.3  %
Adjustments:
Restructuring and related costs              64                                        176
Amortization of intangible assets            34                                         35
Transaction and related costs, net           18                                          8

Other expenses, net                          15                                         76
Adjusted                                $   280$ 5,092        5.5  %    $  781$ 6,622       11.8  %

____________________________

(1)Pre-Tax Income and Revenue from continuing operations.

                                                            Xerox 2020 Form 

10-Q

                                       66

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