UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: ~~September~~June 30, ~~2020~~

2021


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to


XEROX HOLDINGS CORPORATION
XEROX CORPORATION
(Exact Name of Registrant as specified in its charter)


New York	001-39013	83-3933743
New York	001-04471	16-0468020
(State or other jurisdiction of incorporation or organization)	(Commission File Number)	(IRS Employer Identification No.)

	P.O. Box 4505, 201 Merritt 7 Norwalk, Connecticut 06851-1056
	(Address of principal executive offices)

(203) ~~968-3000~~849-5216
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Xerox Holdings Corporation
Common Stock, $1 par value	XRX	New York Stock Exchange
Title of each class	Trading Symbol	Name of each exchange on which registered

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Xerox Holdings Corporation Yes ☒ No ☐ Xerox Corporation Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Xerox Holdings Corporation Yes ☒ No ☐ Xerox Corporation Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Xerox Holdings Corporation

Xerox Corporation

Large accelerated filer

☒

Large accelerated filer

☐

Accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☐

Non-accelerated filer

☒

Smaller reporting company

☐

Smaller reporting company

☐

Emerging growth company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Xerox Holdings Corporation o Xerox Corporation o

Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Xerox Holdings Corporation Yes ☐ No ☒ Xerox Corporation Yes ☐ No ☒



Class						Outstanding at ~~October~~July 31, ~~2020~~2021
Xerox Holdings Corporation Common Stock, $1 par value						~~198,384,932~~178,485,529 shares

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This document, and other written or oral statements made from time to time by management contain “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. The words “anticipate”, “believe”, “estimate”, “expect”, “intend”, “will”, “should”, “targeting”, “projecting”, “driving” and similar expressions, as they relate to us, our performance and/or our technology, are intended to identify forward-looking statements. These statements reflect management’s current beliefs, assumptions and expectations and are subject to a number of factors that may cause actual results to differ materially. Such factors include but are not limited to: the effects of the COVID-19 pandemic on our and our customers' businesses and the duration and extent to which this will impact our future results of operations and overall financial performance; our ability to address our business challenges in order to reverse revenue declines, reduce costs and increase productivity so that we can invest in and grow our business; our ability to attract and retain key personnel; changes in economic and political conditions, trade protection measures, licensing requirements and tax laws in the United States and in the foreign countries in which we do business; the imposition of new or incremental trade protection measures such as tariffs and import or export restrictions; changes in foreign currency exchange rates; our ability to successfully develop new products, technologies and service offerings and to protect our intellectual property rights; the risk that multi-year contracts with governmental entities could be terminated prior to the end of the contract term and that civil or criminal penalties and administrative sanctions could be imposed on us if we fail to comply with the terms of such contracts and applicable law; the risk that partners, subcontractors and software vendors will not perform in a timely, quality manner; actions of competitors and our ability to promptly and effectively react to changing technologies and customer expectations; our ability to obtain adequate pricing for our products and services and to maintain and improve cost efficiency of operations, including savings from restructuring actions; the risk that confidential and/or individually identifiable information of ours, our customers, clients and employees could be inadvertently disclosed or disclosed as a result of a breach of our security systems due to cyber attacks or other intentional acts; reliance on third parties, including subcontractors, for manufacturing of products and provision of services; the exit of the United Kingdom from the European Union; our ability to manage changes in the printing environment and expand equipment placements; interest rates, cost of borrowing and access to credit markets; funding requirements associated with our employee pension and retiree health benefit plans; the risk that our operations and products may not comply with applicable worldwide regulatory requirements, particularly environmental regulations and directives and anti-corruption laws; the outcome of litigation and regulatory proceedings to which we may be a party; any impacts resulting from the restructuring of our relationship with Fujifilm Holdings Corporation; and the shared services arrangements entered into by us as part of Project Own It. Additional risks that may affect Xerox’s operations and other factors that are set forth in the “Risk Factors” section, the “Legal Proceedings” section, the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and other sections of this combined Quarterly Report on Form 10-Q, Xerox Holdings Corporation’s and Xerox Corporation’s combined Quarterly Report on Form 10-Q for the ~~quarters~~quarter ended March 31, ~~2020 and June 30, 2020~~2021 and Xerox Holdings Corporation’s and Xerox Corporation’s combined ~~2019~~2020 Annual Report on Form 10-K, as well as in Xerox Holdings Corporation’s and Xerox Corporation’s Current Reports on Form 8-K filed with the Securities and Exchange Commission. These forward-looking statements speak only as of the date of this document or as of the date to which they refer, and Xerox assumes no obligation to update any forward-looking statements as a result of new information or future events or developments, except as required by law.

Throughout this combined Quarterly Report on Form 10-Q (combined Form 10-Q), 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. References to “Xerox Holdings Corporation” refer to the stand-alone parent company and do not include its subsidiaries. References to “Xerox Corporation” refer to the stand-alone company and do not include subsidiaries.

Xerox Holdings Corporation's primary direct operating subsidiary is Xerox and therefore Xerox reflects nearly all of Xerox Holdings' operations.

Xerox ~~2020~~2021 Form 10-Q

XEROX HOLDINGS CORPORATION

XEROX CORPORATION

FORM 10-Q

~~September~~June 30, ~~2020~~2021

TABLE OF CONTENTS


		Page
Part I — Financial Information
Item 1.	Financial Statements (Unaudited)	3
	Xerox Holdings Corporation Condensed Consolidated Statements of Income	3
	Xerox Holdings Corporation Condensed Consolidated Statements of Comprehensive Income (Loss)	4
	Xerox Holdings Corporation Condensed Consolidated Balance Sheets	5
	Xerox Holdings Corporation Condensed Consolidated Statements of Cash Flows	6
	Xerox Corporation Condensed Consolidated Statements of Income	7
	Xerox Corporation Condensed Consolidated Statements of Comprehensive Income (Loss)	8
	Xerox Corporation Condensed Consolidated Balance Sheets	9
	Xerox Corporation Condensed Consolidated Statements of Cash Flows	10
	Notes to Condensed Consolidated Financial Statements	11
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4140
	Capital Resources and Liquidity	6055
	Financial Risk Management	6359
	Non-GAAP Financial Measures	6460
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	6763
Item 4.	Controls and Procedures	6763
Part II — Other Information
Item 1.	Legal Proceedings	6864
Item 1A.	Risk Factors	6864
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	6864
Item 3.	Defaults Upon Senior Securities	6965
Item 4.	Mine Safety Disclosures	6965
Item 5.	Other Information	6965
Item 6.	Exhibits	7066
Signatures		7167
Exhibit Index		7268

For additional information about Xerox Holdings Corporation and Xerox Corporation and access to our Annual Reports to Shareholders and SEC filings, free of charge, please visit our website at www.xerox.com/investor. The content of our website is not incorporated by reference into this combined Form 10-Q unless expressly noted.

Xerox ~~2020~~2021 Form 10-Q

PART I — FINANCIAL INFORMATION

ITEM 1 — FINANCIAL STATEMENTS

XEROX HOLDINGS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Three Months Ended
September 30, Nine Months Ended
September 30,
(in millions, except per-share data) 2020 2019 2020 2019
Revenues
Sales $ 651 $ 784 $ 1,676 $ 2,308
Services, maintenance and rentals 1,061 1,335 3,246 4,130
Financing 55 60 170 184
Total Revenues 1,767 2,179 5,092 6,622
Costs and Expenses
Cost of sales 476 503 1,201 1,492
Cost of services, maintenance and rentals 611 771 1,875 2,398
Cost of financing 29 33 89 98
Research, development and engineering expenses 76 100 236 280
Selling, administrative and general expenses 444 510 1,411 1,573
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
Other expenses, net (15) (1) 15 76
Total Costs and Expenses 1,648 1,956 4,943 6,136
Income before Income Taxes and Equity Income 119 223 149 486
Income tax expense 29 66 36 106
Equity in net income of unconsolidated affiliates 0 1 2 5
Income from Continuing Operations 90 158 115 385
Income from discontinued operations, net of tax 0 64 0 157
Net Income 90 222 115 542
Less: Income from continuing operations attributable to noncontrolling interests 0 1 0 3
Less: Income from discontinued operations attributable to noncontrolling interests 0 0 0 4
Net Income Attributable to Xerox Holdings $ 90 $ 221 $ 115 $ 535
Amounts Attributable to Xerox Holdings:
Income from continuing operations $ 90 $ 157 $ 115 $ 382
Income from discontinued operations — 64 0 153
Net Income Attributable to Xerox Holdings $ 90 $ 221 $ 115 $ 535
Basic Earnings per Share:
Continuing operations $ 0.41 $ 0.70 $ 0.49 $ 1.66
Discontinued operations 0 0.29 0 0.68
Total Basic Earnings per Share $ 0.41 $ 0.99 $ 0.49 $ 2.34
Diluted Earnings per Share:
Continuing operations $ 0.41 $ 0.68 $ 0.49 $ 1.62
Discontinued operations 0 0.28 0 0.65
Total Diluted Earnings per Share $ 0.41 $ 0.96 $ 0.49 $ 2.27


	Three Months Ended June 30,				Six Months Ended June 30,
(in millions, except per-share data)	2021		2020		2021		2020
Revenues
Sales	$	670	$	460	$	1,272	$	1,025
Services, maintenance and rentals	1,067		949		2,120		2,185
Financing	56		56		111		115
Total Revenues	1,793		1,465		3,503		3,325
Costs and Expenses
Cost of sales	468		338		888		725
Cost of services, maintenance and rentals	658		533		1,309		1,264
Cost of financing	28		30		56		60
Research, development and engineering expenses	79		76		153		160
Selling, administrative and general expenses	434		426		882		967
Restructuring and related costs, net	12		3		29		44
Amortization of intangible assets	14		10		29		21
Transaction and related costs, net	0		7		0		24
Other expenses, net	1		7		5		30
Total Costs and Expenses	1,694		1,430		3,351		3,295
Income before Income Taxes and Equity Income	99		35		152		30
Income tax expense	9		8		23		7
Equity in net income of unconsolidated affiliates	1		0		1		2


Net Income	91		27		130		25
Less: Net income attributable to noncontrolling interests	0		0		0		0

Net Income Attributable to Xerox Holdings	$	91	$	27	$	130	$	25









Basic Earnings per Share	$	0.47	$	0.11	$	0.64	$	0.08





Diluted Earnings per Share	$	0.46	$	0.11	$	0.64	$	0.08

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

Xerox ~~2020~~2021 Form 10-Q

XEROX HOLDINGS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

Three Months Ended
September 30, Nine Months Ended
September 30,
(in millions) 2020 2019 2020 2019
Net Income $ 90 $ 222 $ 115 $ 542
Less: Income from continuing operations attributable to noncontrolling interests 0 1 0 3
Less: Income from discontinued operations attributable to noncontrolling interests 0 0 0 4
Net Income Attributable to Xerox Holdings 90 221 115 535
Other Comprehensive Income (Loss), Net(1)
Translation adjustments, net 179 (155) 7 (122)
Unrealized gains, net 1 1 4 3
Changes in defined benefit plans, net (92) (48) 42 (38)
Other Comprehensive Income (Loss), Net 88 (202) 53 (157)
Less: Other comprehensive income, net from continuing operations attributable to noncontrolling interests 0 1 0 1
Other Comprehensive Income (Loss), Net Attributable to Xerox Holdings 88 (203) 53 (158)
Comprehensive Income, Net 178 20 168 385
Less: Comprehensive income, net from continuing operations attributable to noncontrolling interests 0 2 0 4
Less: Comprehensive income, net from discontinued operations attributable to noncontrolling interests 0 0 0 4
Comprehensive Income, Net Attributable to Xerox Holdings $ 178 $ 18 $ 168 $ 377


	Three Months Ended June 30,				Six Months Ended June 30,
(in millions)	2021		2020		2021		2020
Net Income	$	91	$	27	$	130	$	25
Less: Net income attributable to noncontrolling interests	0		0		0		0

Net Income Attributable to Xerox Holdings	91		27		130		25

Other Comprehensive Income (Loss), Net(1)
Translation adjustments, net	54		25		3		(172)
Unrealized (losses) gains, net	0		(2)		(7)		3
Changes in defined benefit plans, net	16		80		71		134


Other Comprehensive Income (Loss), Net Attributable to Xerox Holdings	70		103		67		(35)




Comprehensive Income (Loss), Net Attributable to Xerox Holdings	$	161	$	130	$	197	$	(10)

_____________

(1) Refer to Note 1918 - Other Comprehensive Income (Loss) for gross components of Other comprehensive income (loss), net, reclassification adjustments out of Accumulated other comprehensive loss and related tax effects.

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

Xerox ~~2020~~2021 Form 10-Q

XEROX HOLDINGS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in millions, except share data in thousands) September 30,
2020 December 31,
2019
Assets
Cash and cash equivalents $ 3,242 $ 2,740
Accounts receivable (net of allowances of $63 and $55, respectively)(1)
895 1,236
Billed portion of finance receivables (net of allowances of $4 and $3, respectively)(1)
111 111
Finance receivables, net 1,066 1,158
Inventories 978 694
Other current assets 249 201
Total current assets 6,541 6,140
Finance receivables due after one year (net of allowances of $138 and $86, respectively)(1)
1,899 2,082
Equipment on operating leases, net 301 364
Land, buildings and equipment, net 412 426
Intangible assets, net 240 199
Goodwill 3,996 3,900
Deferred tax assets 573 598
Other long-term assets 1,390 1,338
Total Assets $ 15,352 $ 15,047
Liabilities and Equity
Short-term debt and current portion of long-term debt $ 1,218 $ 1,049
Accounts payable 1,018 1,053
Accrued compensation and benefits costs 276 349
Accrued expenses and other current liabilities 815 984
Total current liabilities 3,327 3,435
Long-term debt 3,836 3,233
Pension and other benefit liabilities 1,675 1,707
Post-retirement medical benefits 336 352
Other long-term liabilities 512 512
Total Liabilities 9,686 9,239
Commitments and Contingencies (See Note 21)
Convertible Preferred Stock 214 214
Common stock 214 215
Additional paid-in capital 2,719 2,782
Treasury stock, at cost (150) (76)
Retained earnings 6,258 6,312
Accumulated other comprehensive loss (3,593) (3,646)
Xerox Holdings shareholders’ equity 5,448 5,587
Noncontrolling interests 4 7
Total Equity 5,452 5,594
Total Liabilities and Equity $ 15,352 $ 15,047
Shares of common stock issued 213,964 214,621
Treasury stock (8,007) (2,031)
Shares of Common Stock Outstanding 205,957 212,590

~~_____________~~


(in millions, except share data in thousands)	June 30, 2021		December 31, 2020
Assets
Cash and cash equivalents	$	2,124	$	2,625
Accounts receivable (net of allowance of $68 and $69, respectively)	846		883
Billed portion of finance receivables (net of allowance of $3 and $4, respectively)	89		99
Finance receivables, net	1,057		1,082
Inventories	815		843

Other current assets	244		251
Total current assets	5,175		5,783
Finance receivables due after one year (net of allowance of $130 and $129, respectively)	1,971		1,984
Equipment on operating leases, net	271		296
Land, buildings and equipment, net	372		407

Intangible assets, net	230		237
Goodwill	4,104		4,071
Deferred tax assets	491		508
Other long-term assets	1,496		1,455
Total Assets	$	14,110	$	14,741
Liabilities and Equity
Short-term debt and current portion of long-term debt	$	642	$	394
Accounts payable	935		983
Accrued compensation and benefits costs	263		261


Accrued expenses and other current liabilities	851		840
Total current liabilities	2,691		2,478
Long-term debt	3,597		4,050
Pension and other benefit liabilities	1,436		1,566
Post-retirement medical benefits	340		340
Other long-term liabilities	537		497
Total Liabilities	8,601		8,931

Commitments and Contingencies (See Note 20)	0		0
Convertible Preferred Stock	214		214

Common stock	189		198

Additional paid-in capital	2,214		2,445
Treasury stock, at cost	(159)		0
Retained earnings	6,308		6,281
Accumulated other comprehensive loss	(3,265)		(3,332)
Xerox Holdings shareholders’ equity	5,287		5,592
Noncontrolling interests	8		4
Total Equity	5,295		5,596
Total Liabilities and Equity	$	14,110	$	14,741

Shares of common stock issued	188,817		198,386
Treasury stock	(6,641)		0
Shares of Common Stock Outstanding	182,176		198,386

~~(1) Allowances at September 30, 2020 determined in accordance with~~

~~ASU 2016-13~~
~~adopted effective January 1, 2020 - refer to Notes 2, 8 and 9 for additional information.~~

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

Xerox 2021 Form 10-Q 5

XEROX HOLDINGS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	Three Months Ended June 30,				Six Months Ended June 30,
(in millions)	2021		2020		2021		2020
Cash Flows from Operating Activities
Net Income	$	91	$	27	$	130	$	25


Adjustments required to reconcile Net income to Cash flows from operating activities
Depreciation and amortization	84		88		170		182
Provisions	14		21		34		101

Net gain on sales of businesses and assets	(1)		0		(1)		(1)

Stock-based compensation	14		13		30		24
Restructuring and asset impairment charges	4		(2)		25		27
Payments for restructurings	(22)		(17)		(49)		(52)
Defined benefit pension cost	(2)		13		(2)		37
Contributions to defined benefit pension plans	(34)		(31)		(69)		(64)
(Increase) decrease in accounts receivable and billed portion of finance receivables	(55)		262		37		428
Decrease (increase) in inventories	22		(99)		4		(225)
Increase in equipment on operating leases	(35)		(23)		(63)		(55)
(Increase) decrease in finance receivables	(25)		97		12		190
Decrease (increase) in other current and long-term assets	48		1		66		(15)
Decrease in accounts payable	(2)		(210)		(33)		(159)
Increase (decrease) in accrued compensation	1		(21)		(35)		(129)
Increase (decrease) in other current and long-term liabilities	127		(92)		92		(130)
Net change in income tax assets and liabilities	(4)		13		2		3
Net change in derivative assets and liabilities	(5)		(10)		(2)		(2)
Other operating, net	(6)		4		(17)		22


Net cash provided by operating activities	214		34		331		207
Cash Flows from Investing Activities
Cost of additions to land, buildings, equipment and software	(16)		(19)		(33)		(42)
Proceeds from sales of businesses and assets	1		0		1		2


Acquisitions, net of cash acquired	(37)		0		(37)		(193)


Other investing, net	(3)		1		(3)		1


Net cash used in investing activities	(55)		(18)		(72)		(232)
Cash Flows from Financing Activities

Proceeds from issuance of long-term debt	0		3		0		5
Payments on long-term debt	(114)		(313)		(209)		(313)
Dividends	(54)		(57)		(108)		(115)



Payments to acquire treasury stock, including fees	(251)		0		(413)		0



Other financing, net	(10)		(5)		(17)		(9)
Net cash used in financing activities	(429)		(372)		(747)		(432)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	12		5		0		(24)

Decrease in cash, cash equivalents and restricted cash	(258)		(351)		(488)		(481)
Cash, cash equivalents and restricted cash at beginning of period	2,461		2,665		2,691		2,795
Cash, Cash Equivalents and Restricted Cash at End of Period	$	2,203	$	2,314	$	2,203	$	2,314

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

Xerox ~~2020~~2021 Form 10-Q

~~XEROX HOLDINGS CORPORATION~~

~~CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)~~

Three Months Ended
September 30, Nine Months Ended
September 30,
(in millions) 2020 2019 2020 2019
Cash Flows from Operating Activities
Net income $ 90 $ 222 $ 115 $ 542
Income from discontinued operations, net of tax 0 (64) 0 (157)
Income from continuing operations 90 158 115 385
Adjustments required to reconcile Net income to Cash flows from operating activities
Depreciation and amortization 90 104 272 332
Provisions 23 16 124 58
Net gain on sales of businesses and assets (28) (19) (29) (20)
Stock-based compensation 8 11 32 41
Restructuring and asset impairment charges 20 8 47 80
Payments for restructurings (11) (17) (63) (71)
Defined benefit pension cost 9 21 46 89
Contributions to defined benefit pension plans (33) (37) (97) (107)
(Increase) decrease in accounts receivable and billed portion of finance receivables (96) 51 332 60
(Increase) decrease in inventories (49) 15 (274) 31
Increase in equipment on operating leases (31) (41) (86) (113)
Decrease in finance receivables 31 5 221 124
Decrease (increase) in other current and long-term assets 17 (14) 2 1
Increase (decrease) in accounts payable 90 22 (69) (24)
Decrease in accrued compensation (20) (16) (149) (99)
(Decrease) increase in other current and long-term liabilities (16) 26 (146) 19
Net change in income tax assets and liabilities 10 41 13 30
Net change in derivative assets and liabilities 1 5 (1) 15
Other operating, net 1 9 23 15
Net cash provided by operating activities of continuing operations 106 348 313 846
Net cash provided by operating activities of discontinued operations 0 8 0 49
Net cash provided by operating activities 106 356 313 895
Cash Flows from Investing Activities
Cost of additions to land, buildings, equipment and software (18) (17) (60) (48)
Proceeds from sales of businesses and assets 27 20 29 21
Acquisitions, net of cash acquired 0 0 (193) (42)
Other investing, net 0 1 1 1
Net cash provided by (used in) investing activities 9 4 (223) (68)
Cash Flows from Financing Activities
Net proceeds from short-term debt 1 0 1 0
Proceeds from issuance of long-term debt 1,849 2 1,854 7
Payments on long-term debt (773) 0 (1,086) (406)
Dividends (61) (61) (176) (183)
Payments to acquire treasury stock, including fees (150) (68) (150) (368)
Other financing, net (10) (10) (19) (33)
Net cash provided by (used in) financing activities 856 (137) 424 (983)
Effect of exchange rate changes on cash, cash equivalents and restricted cash 12 (20) (12) (13)
Increase (decrease) in cash, cash equivalents and restricted cash 983 203 502 (169)
Cash, cash equivalents and restricted cash at beginning of period 2,314 776 2,795 1,148
Cash, Cash Equivalents and Restricted Cash at End of Period(1)
$ 3,297 $ 979 $ 3,297 $ 979

~~_____________~~

~~(1)~~ ~~Balance at September 30, 2019 includes $1 associated with discontinued operations.~~6

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

~~Xerox 2020 Form 10-Q~~

XEROX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Three Months Ended
September 30, Nine Months Ended
September 30,
(in millions) 2020 2019 2020 2019
Revenues
Sales $ 651 $ 784 $ 1,676 $ 2,308
Services, maintenance and rentals 1,061 1,335 3,246 4,130
Financing 55 60 170 184
Total Revenues 1,767 2,179 5,092 6,622
Costs and Expenses
Cost of sales 476 503 1,201 1,492
Cost of services, maintenance and rentals 611 771 1,875 2,398
Cost of financing 29 33 89 98
Research, development and engineering expenses 76 100 236 280
Selling, administrative and general expenses 444 510 1,411 1,573
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
Other expenses, net (26) (1) 4 76
Total Costs and Expenses 1,637 1,956 4,932 6,136
Income before Income Taxes and Equity Income 130 223 160 486
Income tax expense 29 66 36 106
Equity in net income of unconsolidated affiliates 0 1 2 5
Income from Continuing Operations 101 158 126 385
Income from discontinued operations, net of tax 0 64 0 157
Net Income 101 222 126 542
Less: Income from continuing operations attributable to noncontrolling interests 0 1 0 3
Less: Income from discontinued operations attributable to noncontrolling interests 0 0 0 4
Net Income Attributable to Xerox $ 101 $ 221 $ 126 $ 535
Amounts Attributable to Xerox:
Net income from continuing operations $ 101 $ 157 $ 126 $ 382
Net income from discontinued operations 0 64 0 153
Net Income Attributable to Xerox $ 101 $ 221 $ 126 $ 535


	Three Months Ended June 30,				Six Months Ended June 30,
(in millions)	2021		2020		2021		2020
Revenues
Sales	$	670	$	460	$	1,272	$	1,025
Services, maintenance and rentals	1,067		949		2,120		2,185
Financing	56		56		111		115
Total Revenues	1,793		1,465		3,503		3,325
Costs and Expenses
Cost of sales	468		338		888		725
Cost of services, maintenance and rentals	658		533		1,309		1,264
Cost of financing	28		30		56		60
Research, development and engineering expenses	78		76		152		160
Selling, administrative and general expenses	430		426		877		967
Restructuring and related costs, net	12		3		29		44
Amortization of intangible assets	13		10		27		21
Transaction and related costs, net	0		7		0		24
Other expenses, net	2		7		6		30
Total Costs and Expenses	1,689		1,430		3,344		3,295
Income before Income Taxes and Equity Income	104		35		159		30
Income tax expense	9		8		23		7
Equity in net income of unconsolidated affiliates	1		0		1		2


Net Income	96		27		137		25
Less: Net income attributable to noncontrolling interests	0		0		0		0

Net Income Attributable to Xerox	$	96	$	27	$	137	$	25

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

Xerox ~~2020~~2021 Form 10-Q

XEROX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

Three Months Ended
September 30, Nine Months Ended
September 30,
(in millions) 2020 2019 2020 2019
Net Income $ 101 $ 222 $ 126 $ 542
Less: Income from continuing operations attributable to noncontrolling interests 0 1 0 3
Less: Income from discontinued operations attributable to noncontrolling interests 0 0 0 4
Net Income Attributable to Xerox 101 221 126 535
Other Comprehensive Income (Loss), Net(1)
Translation adjustments, net 179 (155) 7 (122)
Unrealized gains, net 1 1 4 3
Changes in defined benefit plans, net (92) (48) 42 (38)
Other Comprehensive Income (Loss), Net 88 (202) 53 (157)
Less: Other comprehensive income, net from continuing operations attributable to noncontrolling interests 0 1 0 1
Other Comprehensive Income (Loss), Net Attributable to Xerox 88 (203) 53 (158)
Comprehensive Income, Net 189 20 179 385
Less: Comprehensive income, net from continuing operations attributable to noncontrolling interests 0 2 0 4
Less: Comprehensive income, net from discontinued operations attributable to noncontrolling interests 0 0 0 4
Comprehensive Income, Net Attributable to Xerox $ 189 $ 18 $ 179 $ 377


	Three Months Ended June 30,				Six Months Ended June 30,
(in millions)	2021		2020		2021		2020
Net Income	$	96	$	27	$	137	$	25
Less: Net income attributable to noncontrolling interests	0		0		0		0

Net Income Attributable to Xerox	96		27		137		25

Other Comprehensive Income (Loss), Net(1)
Translation adjustments, net	54		25		3		(172)
Unrealized (losses) gains, net	0		(2)		(7)		3
Changes in defined benefit plans, net	16		80		71		134


Other Comprehensive Income (Loss), Net Attributable to Xerox	70		103		67		(35)




Comprehensive Income (Loss), Net Attributable to Xerox	$	166	$	130	$	204	$	(10)

_____________

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

Xerox ~~2020~~2021 Form 10-Q

XEROX CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in millions) September 30,
2020 December 31,
2019
Assets
Cash and cash equivalents $ 3,242 $ 2,740
Accounts receivable (net of allowances of $63 and $55, respectively)(1)
895 1,236
Billed portion of finance receivables (net of allowances of $4 and $3, respectively)(1)
111 111
Finance receivables, net 1,066 1,158
Inventories 978 694
Other current assets 257 201
Total current assets 6,549 6,140
Finance receivables due after one year (net of allowances of $138 and $86, respectively)(1)
1,899 2,082
Equipment on operating leases, net 301 364
Land, buildings and equipment, net 412 426
Intangible assets, net 240 199
Goodwill 3,996 3,900
Deferred tax assets 573 598
Other long-term assets 1,390 1,338
Total Assets $ 15,360 $ 15,047
Liabilities and Equity
Short-term debt and current portion of long-term debt $ 1,218 $ 1,049
Accounts payable 1,018 1,053
Accrued compensation and benefits costs 276 349
Accrued expenses and other current liabilities 741 918
Total current liabilities 3,253 3,369
Long-term debt 2,343 3,233
Pension and other benefit liabilities 1,675 1,707
Post-retirement medical benefits 336 352
Other long-term liabilities 512 512
Total Liabilities 8,119 9,173
Commitments and Contingencies (See Note 21)
Additional paid-in capital 4,859 3,266
Retained earnings 5,971 6,247
Accumulated other comprehensive loss (3,593) (3,646)
Xerox shareholders’ equity 7,237 5,867
Noncontrolling interests 4 7
Total Equity 7,241 5,874
Total Liabilities and Equity $ 15,360 $ 15,047

~~_____________~~


(in millions)	June 30, 2021		December 31, 2020
Assets
Cash and cash equivalents	$	2,124	$	2,625
Accounts receivable (net of allowance of $68 and $69, respectively)	846		883
Billed portion of finance receivables (net of allowance of $3 and $4, respectively)	89		99
Finance receivables, net	1,057		1,082
Inventories	815		843

Other current assets	250		251
Total current assets	5,181		5,783
Finance receivables due after one year (net of allowance of $130 and $129, respectively)	1,971		1,984
Equipment on operating leases, net	271		296
Land, buildings and equipment, net	372		407

Intangible assets, net	224		229
Goodwill	4,102		4,068
Deferred tax assets	491		508
Other long-term assets	1,492		1,455
Total Assets	$	14,104	$	14,730
Liabilities and Equity
Short-term debt and current portion of long-term debt	$	642	$	394
Accounts payable	935		983
Accrued compensation and benefits costs	263		261



Accrued expenses and other current liabilities	797		750
Total current liabilities	2,637		2,388
Long-term debt	2,103		2,557
Related party debt	1,494		0
Pension and other benefit liabilities	1,436		1,566
Post-retirement medical benefits	340		340
Other long-term liabilities	535		494
Total Liabilities	8,545		7,345

Commitments and Contingencies (See Note 20)	0		0



Additional paid-in capital	3,404		4,879

Retained earnings	5,412		5,834
Accumulated other comprehensive loss	(3,265)		(3,332)
Xerox shareholder's equity	5,551		7,381
Noncontrolling interests	8		4
Total Equity	5,559		7,385
Total Liabilities and Equity	$	14,104	$	14,730

~~(1) Allowances at September 30, 2020 determined in accordance with~~

~~ASU 2016-13~~
~~adopted effective January 1, 2020 - refer to Notes 2, 8 and 9 for additional information.~~

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

Xerox ~~2020~~2021 Form 10-Q

XEROX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Three Months Ended
September 30, Nine Months Ended
September 30,
(in millions) 2020 2019 2020 2019
Cash Flows from Operating Activities
Net Income $ 101 $ 222 $ 126 $ 542
Income from discontinued operations, net of tax 0 (64) 0 (157)
Income from continuing operations 101 158 126 385
Adjustments required to reconcile Net income to Cash flows from operating activities
Depreciation and amortization 90 104 272 332
Provisions 23 16 124 58
Net gain on sales of businesses and assets (28) (19) (29) (20)
Stock-based compensation 8 11 32 41
Restructuring and asset impairment charges 20 8 47 80
Payments for restructurings (11) (17) (63) (71)
Defined benefit pension cost 9 21 46 89
Contributions to defined benefit pension plans (33) (37) (97) (107)
(Increase) decrease in accounts receivable and billed portion of finance receivables (96) 51 332 60
(Increase) decrease in inventories (49) 15 (274) 31
Increase in equipment on operating leases (31) (41) (86) (113)
Decrease in finance receivables 31 5 221 124
Decrease (increase) in other current and long-term assets 17 (14) 2 1
Increase (decrease) in accounts payable 90 22 (69) (24)
Decrease in accrued compensation (20) (16) (149) (99)
(Decrease) increase in other current and long-term liabilities (27) 26 (157) 19
Net change in income tax assets and liabilities 10 41 13 30
Net change in derivative assets and liabilities 1 5 (1) 15
Other operating, net 1 9 23 15
Net cash provided by operating activities of continuing operations 106 348 313 846
Net cash provided by operating activities of discontinued operations 0 8 0 49
Net cash provided by operating activities 106 356 313 895
Cash Flows from Investing Activities
Cost of additions to land, buildings, equipment and software (18) (17) (60) (48)
Proceeds from sales of businesses and assets 27 20 29 21
Acquisitions, net of cash acquired 0 0 (193) (42)
Other investing, net 0 1 1 1
Net cash provided by (used in) investing activities 9 4 (223) (68)
Cash Flows from Financing Activities
Net proceeds from short-term debt 1 0 1 0
Proceeds from issuance of long-term debt 342 2 347 7
Payments on long-term debt (762) 0 (1,075) (406)
Dividends 0 (59) 0 (181)
Payments to acquire treasury stock, including fees 0 0 0 (300)
Contributions from parent 1,494 0 1,494 0
Distributions to parent (218) (73) (343) (73)
Other financing, net (1) (7) 0 (30)
Net cash provided by (used in) financing activities 856 (137) 424 (983)
Effect of exchange rate changes on cash, cash equivalents and restricted cash 12 (20) (12) (13)
Increase (decrease) in cash, cash equivalents and restricted cash 983 203 502 (169)
Cash, cash equivalents and restricted cash at beginning of period 2,314 776 2,795 1,148
Cash, Cash Equivalents and Restricted Cash at End of Period(1)
$ 3,297 $ 979 $ 3,297 $ 979

~~_____________~~


	Three Months Ended June 30,				Six Months Ended June 30,
(in millions)	2021		2020		2021		2020
Cash Flows from Operating Activities
Net Income	$	96	$	27	$	137	$	25


Adjustments required to reconcile Net income to Cash flows from operating activities
Depreciation and amortization	83		88		168		182
Provisions	14		21		34		101

Net gain on sales of businesses and assets	(1)		0		(1)		(1)

Stock-based compensation	14		13		30		24
Restructuring and asset impairment charges	4		(2)		25		27
Payments for restructurings	(22)		(17)		(49)		(52)
Defined benefit pension cost	(2)		13		(2)		37
Contributions to defined benefit pension plans	(34)		(31)		(69)		(64)
(Increase) decrease in accounts receivable and billed portion of finance receivables	(54)		262		38		428
Decrease (increase) in inventories	22		(99)		4		(225)
Increase in equipment on operating leases	(35)		(23)		(63)		(55)
(Increase) decrease in finance receivables	(25)		97		12		190
Decrease (increase) in other current and long-term assets	42		1		60		(15)
Decrease in accounts payable	(2)		(210)		(33)		(159)
Increase (decrease) in accrued compensation	1		(21)		(35)		(129)
Increase (decrease) in other current and long-term liabilities	128		(92)		92		(130)
Net change in income tax assets and liabilities	(4)		13		2		3
Net change in derivative assets and liabilities	(5)		(10)		(2)		(2)
Other operating, net	(6)		4		(17)		22


Net cash provided by operating activities	214		34		331		207
Cash Flows from Investing Activities
Cost of additions to land, buildings, equipment and software	(16)		(19)		(33)		(42)


Proceeds from sales of businesses and assets	1		0		1		2
Acquisitions, net of cash acquired	(37)		0		(37)		(193)


Other investing, net	0		1		0		1


Net cash used in investing activities	(52)		(18)		(69)		(232)
Cash Flows from Financing Activities

Proceeds from issuance of long-term debt	0		3		0		5
Payments on long-term debt	(114)		(313)		(209)		(313)






Distributions to parent	(322)		(67)		(542)		(125)



Other financing, net	4		5		1		1
Net cash used in financing activities	(432)		(372)		(750)		(432)

Effect of exchange rate changes on cash, cash equivalents and restricted cash	12		5		0		(24)

Decrease in cash, cash equivalents and restricted cash	(258)		(351)		(488)		(481)
Cash, cash equivalents and restricted cash at beginning of period	2,461		2,665		2,691		2,795
Cash, Cash Equivalents and Restricted Cash at End of Period	$	2,203	$	2,314	$	2,203	$	2,314

~~(1)~~

~~Balance at September 30, 2019 includes $1 associated with discontinued operations.~~

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

Xerox ~~2020~~2021 Form 10-Q

XEROX HOLDINGS CORPORATION

XEROX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except per-share data and where otherwise noted)

Note 1 – Basis of Presentation

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. References to "Xerox Holdings Corporation" refer to the stand-alone parent company and do not include its subsidiaries. References to "Xerox Corporation" refer to the stand-alone company and do not include its subsidiaries.

The accompanying unaudited Condensed Consolidated Financial Statements and footnotes represent the respective, consolidated results and financial results of Xerox Holdings and Xerox and all respective companies that each registrant directly or indirectly controls, either through majority ownership or otherwise. This is a combined report of Xerox Holdings and Xerox, which includes separate unaudited Condensed Consolidated Financial Statements for each registrant.

The accompanying unaudited Condensed Consolidated Financial Statements of both Xerox Holdings and Xerox have been prepared in accordance with the accounting policies described in the Combined ~~2019~~2020 Annual Report on Form 10-K ~~("2019~~(2020 Annual ~~Report")~~Report), except as noted herein, and the interim reporting requirements of Form 10-Q. Accordingly, certain information and note disclosures normally included in our annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted. You should read these Condensed Consolidated Financial Statements in conjunction with the Consolidated Financial Statements included in the Combined ~~2019~~2020 Annual Report.

In our opinion, all adjustments, which are necessary for a fair statement of financial position, operating results and cash flows for the interim periods presented, have been made. These adjustments consist of normal recurring items. Interim results of operations are not necessarily indicative of the results of the full year.

As of ~~September~~June 30, ~~2020,~~2021 we are seeing improvement in our financial results as regions and countries continue to progress in controlling the COVID-19 pandemic and businesses resume investments in new printing technology and increase their level of printing services as compared to the prior year. However, the pandemic continues to have varying and divergent impacts across various regions and countries and a high degree of economic uncertainty still remains. We expect the pandemic's effects will likely continue to impact our financial results over the remainder of the ~~outbreak of COVID-19 continues to unfold. As a result,~~year. Accordingly, many of our estimates and assumptions ~~have required~~continue to require an increased level of judgment and ~~carry a higher degree of variability and volatility. As~~may have to change in the future as events continue to evolve and additional information becomes ~~available, our estimates may change materially in the future.~~available.

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

Notes to the Condensed Consolidated Financial Statements reflect the activity for both Xerox Holdings and Xerox for all periods presented, unless otherwise noted.

Goodwill

Interim Impairment Evaluation

~~During~~We perform our annual Goodwill impairment testing in the fourth quarter ended June 30, 2020, we evaluated whether events or circumstances had changed such that it would indicate it is more likely than not that our Goodwill was impaired (trigger event). Factors considered in this evaluation included, among other things, the negative financial impacts from the COVID-19 pandemic on 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. Based on this assessment, we concluded that a trigger event had occurred related to Goodwill and we completed an interim quantitative evaluation of Goodwill.

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 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.

each year. After completing our ~~interim~~quantitative impairment review in the fourth quarter 2020, we concluded that Goodwill was not ~~impaired in~~impaired. Based on various forecast models, which we believe reflected the ~~second quarter because~~inherent uncertainty of the ~~Company’s~~future, we estimated that the excess of fair value ~~exceeded the~~over carrying value ~~as of June 30, 2020.~~

~~Xerox 2020 Form 10-Q~~

ranged between 15% and 20%.

During the ~~quarter~~six months ended ~~September~~June 30, ~~2020,~~2021, although business performance ~~improved,~~continued to improve, 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~~Goodwill was impaired as of ~~September~~June 30, ~~2020.~~2021. Based on our interim qualitative assessment as of ~~September~~June 30, ~~2020,~~2021, we determined that it was more-likely-than-not that the fair value of the Company was greater than the net book value and that we did not have a “triggering event” requiring a quantitative or Step 1 assessment of ~~goodwill.~~Goodwill. Our review of macroeconomic and industry considerations, as well as the Company's financial results for the ~~third quarter 2020,~~first half of 2021 and projections for the full year

Xerox 2021 Form 10-Q 11

2021, were consistent with the expectations and sensitivities assessed as part of our ~~interim~~ review performed in the ~~second~~fourth quarter 2020. Further, although our market capitalization remained below our net book value, the Company's market capitalization ~~did improve~~remained fairly constant in relation to book value during the ~~third~~second quarter ~~2020.~~2021.

Note 2 – Recent Accounting Pronouncements

Xerox Holdings and Xerox consider the applicability and impact of all Accounting Standards Updates (ASUs) issued by the Financial Accounting Standards Board (FASB). The ASUs listed below apply to both registrants. ASUs not listed below were assessed and determined to be not applicable to the Condensed Consolidated Financial Statements of either registrant.

Accounting Standard Updates to be Adopted:

Debt

In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40). This update simplifies the accounting for convertible instruments by reducing the number of accounting models available for convertible debt instruments and convertible preferred stock. This update also amends the guidance for the derivatives scope exception for contracts in an entity's own equity to reduce form-over-substance-based accounting conclusions and requires the application of the if-converted method for calculating diluted earnings per share. This update is effective for our fiscal year beginning January 1, 2022. We are currently evaluating the impact of the adoption of this standard on the Company’s consolidated financial statements and related disclosures.

Reference Rate Reform

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by the discontinuation of the London Interbank Offered Rate ~~(“LIBOR”)~~(LIBOR) or by another reference rate expected to be discontinued. ~~The amendments are~~In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope, which provided clarification guidance to ASU 2020-04. These ASUs were effective ~~for all entities as of~~commencing with our quarter ended March ~~12,~~31, 2020 through December 31, 2022. There has been no impact to date as a result of ASU 2020-04 ~~however~~or ASU 2021-01 and subsequent amendments on reference rate reform. However, we continue to evaluate potential future impacts that may result from the discontinuation of LIBOR or other reference rates as well as the accounting provided in this update on our financial condition, results of operations, and cash flows.

Accounting Standard Updates Adopted in 2021:

Income Taxes

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which was intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ~~This~~We adopted this update is effective for our fiscal year beginning January 1, 2021. ~~Although we continue to evaluate the effects of this update on our Consolidated Financial Statements, at this stage we do~~The adoption did not ~~expect the adoption~~have nor is expected to have a material impact on our results of operations, financial position or disclosures.

~~Xerox 2020 Form 10-Q~~

~~Accounting Standard Updates Adopted in 2020:~~

~~Leases~~

In April 2020, the FASB staff issued a question and answer (Q&A) document on the application of lease accounting guidance related to lease concessions provided as a result of the economic disruption caused by the COVID-19 pandemic (Topic 842 Q&A). Topic 842 Q&A provides interpretive guidance allowing companies the option to account for lease concessions related to the COVID-19 pandemic consistent with how those concessions would be accounted for under ASU 2016-02, Leases (Topic 842), as though enforceable rights and obligations for those concessions existed at the beginning of the contract (regardless of whether those enforceable rights and obligations for the concessions explicitly exist in the contract). This interpretive guidance was issued in order to reduce the costs and complexities of applying lease modification accounting under Topic 842 to leases impacted by the effects of the COVID-19 pandemic. This election is available for concessions related to the effects of the COVID-19 pandemic that do not result in a substantial increase in the rights of the lessor or the obligations of the lessee. We have elected to apply the interpretive guidance provided in Topic 842 Q&A to rent concessions related to the COVID-19 pandemic provided as a Lessor to our customers and as received as a Lessee.

Rent deferrals provided as a Lessor were primarily offered to customers with sales type lease receivables. We elected to account for the deferrals in the timing of lease payments as if there were no changes in the lease contracts. Under this approach, assuming that collectibility of future lease payments is still probable, the classification of the leases is not updated and we retain the balance of the deferral as a receivable and will settle that receivable at the revised payment date or dates. As of September 30, 2020, we approved payment deferrals of up to three months of approximately $33 or approximately 1% of our total finance receivable portfolio. The outstanding principal balance of receivables for customers with an approved payment deferral was approximately $337. Rent abatements to the extent provided were not material and were accounted for as write-offs as part of our normal bad debt reserve assessment.

With respect to rent deferrals and abatements received as a Lessee, we elected to account for the deferrals and abatements as a resolution of a contingency within the lease. Under this approach, we follow the resolution of a contingency model in ASC 842 without reclassifying the lease or updating the discount rate. We remeasure the remaining consideration in the contract, reallocate it to the lease and non-lease components as applicable, and remeasure the lease liability with an adjustment to the right-of-use asset for the same amount. If the total lease payments remain exactly the same, the lease cost remains unchanged. The impact of this election was not material to our financial condition, results of operations or cash flows, as no rent concessions provided to Xerox in the second or third quarters of 2020 were material, individually or in the aggregate.

~~Government Grants/Assistance~~

As a result of the significant increase in governmental assistance during 2020, we updated our significant accounting policies as summarized in Note 1 - Basis of Presentation and Summary of Significant Accounting Policies to the Consolidated Financial Statements included on Form 10-K for the year ended December 31, 2019, as follows for the accounting associated with government assistance.

Government grants related to income are recognized as a reduction of related expenses in the Condensed Consolidated Statements of Income when there is a reasonable assurance that the entity will comply with the conditions attached to the grant and that the grants will be received. The timing and pattern of recognition of government grants is made on a systematic basis over the periods in which the Company recognizes the related expenses or losses that the grants are intended to compensate.

~~Financial Instruments - Credit Losses~~

~~On January 1, 2020, we adopted~~ ~~ASU 2016-13~~, ~~Financial Instruments Credit Losses - Measurement of Credit Losses on Financial Instruments.~~ This update was issued by the FASB in June 2016, with additional updates and amendments being issued in 2018, 2019 and 2020 and requires measurement and recognition of expected credit losses for financial assets on an expected loss model rather than an incurred loss model. The update impacted financial assets including net investment in leases that are not accounted for at fair value through Net Income. The adoption of ASU 2016-13 primarily impacted the estimation of our Allowance for doubtful accounts for Accounts Receivable and Finance Receivables. The impact recorded on our initial adoption of ASU 2016-13 was not material as our previous methodology for assessing the adequacy of our Allowance for doubtful accounts for Finance Receivables, the larger component of our receivable reserves, incorporated an expected loss model and the methodology for both allowances included an assessment of current economic conditions. However, as previously disclosed, the future impact from this update is highly dependent on future economic conditions. Refer to Note 8 -

~~Xerox 2020 Form 10-Q~~

~~Accounts Receivable, Net and Note 9 - Finance Receivable, Net for additional discussion regarding the impacts from the adoption of this update during the first quarter 2020.~~

~~Intangibles - Internal-Use Software~~

~~On January 1, 2020, we adopted~~ ~~ASU 2018-15~~, ~~Intangibles - Goodwill and Other - Internal Use Software (Subtopic 350-40), Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract.~~ This update was issued by the FASB in August 2018 and aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The update provides criteria for determining which implementation costs to capitalize as an asset related to the service contract and which costs to expense. The capitalized implementation costs are required to be expensed over the term of the hosting arrangement. The update also clarifies the presentation requirements for reporting such costs in the entity’s financial statements. The adoption of ASU 2018-15 did not have a material impact on our financial condition, results of operations or cash flows as we had previously capitalized these implementation costs and such amounts were not material.

Other Updates

In ~~2020~~2021 and ~~2019,~~2020, the FASB also issued the following ASUs, which impact the Company but did not have or are not expected to have a material impact on our financial condition, results of operations or cash flows upon adoption. Those updates are as follows:

•Investments: ASU 2020-01, Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323) and Derivatives and Hedging (Topic 815). ~~This~~We adopted this update is effective for our fiscal year beginning January 1, 2021.

•~~Compensation - Stock Compensation and Revenue from Contracts with Customers:~~Equity Instruments: ASU ~~2019-08~~2021-04, Earnings Per Share (Topic ~~718)~~260), Debt—Modifications and ~~(Topic 606) Codification Improvements - Share-Based Consideration Payable to a Customer.~~Extinguishments (Subtopic470-50), Compensation—Stock Compensation(Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) Issuer’s Accounting for Certain Modifications

Xerox 2021 Form 10-Q 12

or Exchanges of Freestanding Equity-Classified Written Call Options). This update ~~was~~is effective for our fiscal year beginning January 1, ~~2020.~~2022.

•~~Collaborative Arrangements:~~Leases: ASU ~~2018-18~~2021-05, ~~(Topic 808) Clarifying the Interaction between Topic 808 and Topic 606.~~Leases - Certain Lease Payments with Variable Lease Payments (ASC 842). This update ~~was~~is effective for our fiscal year beginning January 1, ~~2020.~~2022.

•~~Fair Value Measurement:ASU 2018-13, (Topic 820) Disclosure Framework.~~ ~~This update was effective for our fiscal year beginning January 1, 2020.~~

~~Xerox 2020 Form 10-Q~~

Note 3 – Revenue

Revenues disaggregated by primary geographic markets, major product lines, and sales channels are as follows:

Three Months Ended
September 30, Nine Months Ended
September 30,
2020 2019 2020 2019
Primary geographical markets(1):
United States $ 1,062 $ 1,343 $ 3,101 $ 3,955
Europe 480 521 1,317 1,705
Canada 94 123 278 377
Other 131 192 396 585
Total Revenues $ 1,767 $ 2,179 $ 5,092 $ 6,622
Major product and services lines:
Equipment $ 419 $ 494 $ 1,054 $ 1,446
Supplies, paper and other sales 232 290 622 862
Maintenance agreements(2)
443 567 1,338 1,774
Service arrangements(3)
486 611 1,512 1,883
Rental and other 132 157 396 473
Financing 55 60 170 184
Total Revenues $ 1,767 $ 2,179 $ 5,092 $ 6,622
Sales channels:
Direct equipment lease(4)
$ 151 $ 200 $ 388 $ 484
Distributors & resellers(5)
245 301 604 949
Customer direct 255 283 684 875
Total Sales $ 651 $ 784 $ 1,676 $ 2,308


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Primary geographical markets(1):
United States	$	1,015	$	925	$	1,989	$	2,039
Europe	514		356		1,013		837
Canada	104		76		197		184
Other	160		108		304		265
Total Revenues	$	1,793	$	1,465	$	3,503	$	3,325

Major product and services lines:
Equipment	$	429	$	310	$	810	$	635
Supplies, paper and other sales	241		150		462		390
Maintenance agreements(2)	448		366		883		895
Service arrangements(3)	508		460		997		1,026
Rental and other	111		123		240		264
Financing	56		56		111		115

Total Revenues	$	1,793	$	1,465	$	3,503	$	3,325

Sales channels:

Direct equipment lease(4)	$	189	$	111	$	336	$	237
Distributors & resellers(5)	289		136		543		359
Customer direct	192		213		393		429
Total Sales	$	670	$	460	$	1,272	$	1,025

_____________

(1)Geographic area data is based upon the location of the subsidiary reporting the revenue.

(2)Includes revenues from maintenance agreements on sold equipment as well as revenues associated with service agreements sold through our channel partners as Xerox Partner Print Services (XPPS).

(3)Primarily includes revenues from our Managed Services offerings. Also includes revenues from embedded operating leases, which were not significant.

(4)Primarily reflects ~~direct~~ sales through bundled lease arrangements.

(5)Primarily reflects sales through our two-tier distribution channels.

Contract Assets and Liabilities: We normally do not have contract assets, which are primarily unbilled accounts receivable that are conditional on something other than the passage of time. Our contract liabilities, which represent billings in excess of revenue recognized, are primarily related to advanced billings for maintenance and other services to be performed and were approximately $129 and $130 ~~and $137~~ at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. The majority of the balance at ~~September~~June 30, ~~2020~~2021 is expected to be amortized to revenue over approximately the next 30 months.

Contract Costs: Incremental direct costs of obtaining a contract primarily include sales commissions paid to sales people and agents in connection with the placement of equipment with associated post sale services arrangements. These costs are deferred and amortized on the straight-line basis over the estimated contract term, ~~of the post sale services arrangement,~~ which is currently estimated to be approximately four years. We pay commensurate sales commissions upon customer renewals, therefore our amortization period is aligned to our initial contract term.

Xerox 2021 Form 10-Q 13

Incremental direct costs are as follows:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2020		2019		2020		2019			2021		2020		2021		2020
Incremental direct costs of obtaining a contract	Incremental direct costs of obtaining a contract	$	15	$	20	$	43	$	56	Incremental direct costs of obtaining a contract	$	17	$	13	$	30	$	28
Amortization of incremental direct costs	Amortization of incremental direct costs	19		23		60		66		Amortization of incremental direct costs	18		20		37		41

The balance of deferred incremental direct costs net of accumulated amortization at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019~~2020 was ~~$145~~$139 and ~~$163,~~$145, respectively. This amount is expected to be amortized over its estimated period of benefit, which we currently estimate to be approximately four years.

~~Xerox 2020 Form 10-Q~~

We may also incur costs associated with our services arrangements to generate or enhance resources and assets that will be used to satisfy our future performance obligations included in these arrangements. These costs are considered contract fulfillment costs and are amortized over the contractual service period of the arrangement to cost of services. In addition, we ~~also~~ provide inducements to certain customers in various forms, including contractual credits, which are capitalized and amortized as a reduction of revenue over the term of the contract. As of ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019~~2020 amounts deferred associated with contract fulfillment costs and inducements were ~~$12~~$16 and $13, respectively. The related amortization was $1$2 and $1 for the three months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively, and $3 and $4$2 for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively.

Equipment and software used in the fulfillment of service arrangements, and where the Company retains control, are capitalized and depreciated over the shorter of their useful life or the term of the contract if an asset is contract specific.

Note 4 – Lessor

Revenue from sales-type leases is presented on a gross basis when the ~~company~~Company enters into a lease to realize value from a product that it would otherwise sell in its ordinary course of business, whereas in transactions where the ~~company~~Company enters into a lease for the purpose of generating revenue by providing financing, the profit or loss, if any, is presented on a net basis. In addition, we have elected to account for sales tax and other similar taxes collected from a lessee as lessee costs and therefore we exclude these costs from contract consideration and variable consideration and present revenue net of these costs.

The components of lease income are as follows:


		Location in	Three Months Ended September 30,				Nine Months Ended September 30,						Three Months Ended June 30,				Six Months Ended June 30,
		Statements of Income	2020		2019		2020		2019			Location in Statements of Income	2021		2020		2021		2020
Revenue from sales type leases	Revenue from sales type leases	Sales	$	151	$	200	$	388	$	484	Revenue from sales type leases	Sales	$	189	$	111	$	336	$	237

Interest income on lease receivables	Interest income on lease receivables	Financing	55		60		170		184		Interest income on lease receivables	Financing	56		56		111		115

Lease income - operating leases	Lease income - operating leases	Services, maintenance and rentals	77		99		242		303		Lease income - operating leases	Services, maintenance and rentals	58		79		118		165
Variable lease income	Variable lease income	Services, maintenance and rentals	15		25		51		80		Variable lease income	Services, maintenance and rentals	16		14		31		36
Total Lease income	Total Lease income		$	298	$	384	$	851	$	1,051	Total Lease income		$	319	$	260	$	596	$	553

Profit at lease commencement on sales type leases was estimated to be ~~approximately $52~~$57 and ~~$86~~$42 for the three months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively, and ~~$138~~$101 and ~~$206~~$86 for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively.

Xerox ~~2020~~2021 Form 10-Q

1614

Note 5 – Acquisitions and Investments

Acquisition

In ~~2020,~~2021, Xerox continued its ~~focus~~strategy of focusing on further penetrating the small-to-medium sized business (SMB) market through acquisitions of local area resellers and partners (including multi-brand dealers). During the ~~first~~second quarter of ~~2020,~~2021, business acquisitions associated with this initiative totaled ~~$193,~~$37, net of cash acquired, and included ~~3 acquisitions in the U.K. for $171 (GBP 132 million) - Arena Group, Altodigital Networks and ITEC Connect, as well~~ an ~~acquisition~~office equipment dealer in Canada for approximately ~~$22 (CAD 29 million). These acquisitions are expected to expand Xerox's presence~~$30 and a document solutions provider in the ~~SMB market in both Western Europe and Canada.~~U.S. for approximately $7.

The operating results of these acquisitions are not material to our financial statements and are included within our results from the acquisition date. The purchase prices were all cash for 100% ownership of the acquired companies and were primarily allocated to Intangible assets, net (approximately ~~$70)~~$21) and Goodwill (approximately ~~$105)~~$18), with the remainder to tangible net assets. The allocations are based on preliminary management estimates, which continue to be reviewed, and are expected to be finalized by the ~~fourth quarter 2020~~end of 2021 and may include input and support from third-party valuations. Any adjustments to the preliminary allocations are not expected to be material.

~~Termination of Proposed Transaction with HP Inc.~~Joint Venture Formation

In ~~November 2019,~~May 2021, Xerox ~~Holdings commenced~~and the Victorian Government (AU) (VicGov) announced that they have partnered to launch Eloque, a ~~proposed business combination transaction with HP Inc. (HP). HP rejected our initial~~venture to commercialize new technology that will remotely monitor the structural health of critical infrastructure assets, such as road and subsequent proposals and refused to engage in mutual due diligence or negotiations. In January 2020, Xerox Holdings nominated a slate of directors to HP’s board to be voted on at HP’s 2020 annual meeting of stockholders and shortly thereafter, it launched a tender offer to acquire all outstanding shares of HP, as it intended to continue to pursuerailway bridges. Under the proposed business combination transaction. However, the ongoing COVID-19 pandemic and resulting macroeconomic and market turmoil created an environment that the company determined was not conducive to Xerox Holdings continuing an acquisition of HP. Accordingly, on March 31, 2020 Xerox Holdings withdrew its tender offer to acquire HP and terminated its proxy solicitation to nominate a slate of candidates to HP’s board of directors.

~~In 2020, Xerox Holdings had obtained $24 billion in financing commitments from several banks to support the cash portion~~terms of the ~~proposed business combination transaction~~agreement, Xerox contributed approximately $5 in cash, along with HP. On March 31, 2020, following the withdrawal of Xerox Holdings' tender offer to acquire HP, notice was provided to the banks of the immediate termination of the financing commitment. No termination penalties were paid astechnology and intellectual property for a ~~result of termination~~.

~~Note 6 – Divestitures~~

~~Sales of Ownership Interests in Fuji Xerox Co., Ltd. and Xerox International Partners~~

~~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~~controlling interest in ~~Fuji Xerox (FX), as well as~~ the ~~sale of its indirect 51% partnership~~entity, whereas VicGov contributed approximately $5 in cash, along with technology and intellectual property for a noncontrolling interest in ~~Xerox International Partners (XIP) (collectively~~ the ~~Sales).~~entity. As a result of Xerox’s controlling interest in the ~~Sales~~newly formed entity, beginning with the second quarter 2021, Xerox consolidated the new entity and the ~~related strategic shift in our business, the historical financial results of our equity method~~VicGov investment ~~in FX and our XIP business (which~~ was ~~consolidated) for the periods prior to the Sales are reflected~~reported as a ~~discontinued operation~~noncontrolling interest. The revenues and ~~as such, their~~expenses of the new entity post formation did not materially impact ~~is excluded from continuing operations for all periods presented.~~

~~Summarized financial information for our Discontinued operations is as follows:~~

Three Months Ended
September 30, Nine Months Ended
September 30,
2020 2019 2020 2019
Revenue $ 0 $ 21 $ 0 $ 73
Income from operations(1)
$ 0 $ 64 $ 0 $ 159
Gain on disposal 0 0 0 0
Income before income taxes 0 64 0 159
Income tax expense 0 0 0 2
Income from discontinued operations, net of tax 0 64 0 157
Income from discontinued operations attributable to noncontrolling interests, net of tax 0 0 0 4
Income from discontinued operations, attributable to Xerox Holdings, net of tax $ 0 $ 64 $ 0 $ 153

~~_____________~~

~~(1)Includes Equity in net income for FX of $57 and $132~~the Company’s reported results for the three ~~and nine~~ months ended ~~September~~June 30, ~~2019, respectively.~~

~~Xerox 2020 Form 10-Q~~

2021.

Note 76 – Supplementary Financial Information

Cash, Cash Equivalents and Restricted Cash

Cash, cash equivalents and restricted cash amounts were as follows:


	June 30, 2021		December 31, 2020
Cash and cash equivalents	$	2,124	$	2,625
Restricted cash
Litigation deposits in Brazil	44		42
Escrow and cash collections related to secured borrowing arrangements(1)	34		22
Other restricted cash	1		2
Total Restricted cash	79		66
Cash, cash equivalents and restricted cash	$	2,203	$	2,691

September 30,
2020 December 31,
2019
Cash and cash equivalents $ 3,242 $ 2,740
Restricted cash
    Litigation deposits in Brazil 39 55
    Other restricted cash 16 0
    Total Restricted cash 55 55
Cash, cash equivalents and restricted cash $ 3,297 $ 2,795
_____________

(1)Represents collections on finance receivables pledged for secured borrowings that will be remitted to lenders in the following month.

Restricted cash primarily relates to escrow cash deposits made in Brazil associated with ongoing ~~litigation.~~litigation as well as cash collections on finance receivables that were pledged for secured borrowings. As more fully discussed in Note 2120 - Contingencies and Litigation, various litigation matters in Brazil require us to make cash deposits to escrow as a condition of continuing the litigation. Restricted cash amounts are classified in our Condensed Consolidated Balance Sheets based on when the cash will be contractually or judicially released.

Restricted cash was reported in the Condensed Consolidated Balance Sheets as follows:


		September 30, 2020		December 31, 2019			June 30, 2021		December 31, 2020
Other current assets	Other current assets	$	16	$	0	Other current assets	$	35	$	23
Other long-term assets	Other long-term assets	39		55		Other long-term assets	44		43
Total Restricted cash	Total Restricted cash	$	55	$	55	Total Restricted cash	$	79	$	66

Xerox 2021 Form 10-Q 15

Supplemental Cash Flow Information

Summarized cash flow information is as follows:

Three Months Ended
September 30, Nine Months Ended
September 30,
2020 2019 2020 2019
Provision for receivables $ 17 $ 13 $ 104 $ 40
Provision for inventory 6 3 20 18
Provision for product warranty 3 3 6 10
Depreciation of buildings and equipment 21 24 64 77
Depreciation and obsolescence of equipment on operating leases 45 56 142 172
Amortization of internal use software 11 15 32 48
Amortization of acquired intangible assets 13 9 34 35
Amortization of customer contract costs(1)
20 24 63 70
Cost of additions to land, buildings and equipment 9 11 36 30
Cost of additions to internal use software 9 6 24 18
Common stock dividends - Xerox Holdings 57 57 165 172
Preferred stock dividends - Xerox Holdings 4 4 11 11
Repurchases related to stock-based compensation - Xerox Holdings 9 10 19 20


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Provision for receivables	$	4	$	13	$	15	$	87
Provision for inventory	10		8		19		14
Provision for product warranty	2		1		4		3
Depreciation of buildings and equipment	19		22		38		43
Depreciation and obsolescence of equipment on operating leases	41		46		83		97
Amortization of internal use software	10		10		20		21

Amortization of acquired intangible assets(1)	14		10		29		21
Amortization of customer contract costs(2)	20		21		40		43
Cost of additions to land, buildings and equipment	4		9		12		27
Cost of additions to internal use software	12		10		21		15
Common stock dividends - Xerox Holdings Corporation	51		54		101		108
Preferred stock dividends - Xerox Holdings Corporation	3		3		7		7



Repurchases related to stock-based compensation - Xerox Holdings Corporation	10		3		14		10

_____________

(1)Amortization of acquired intangible assets of Xerox was $13 and $27 for the three and six months ended June 30, 2021, respectively.

(2)Amortization of customer contract costs is reported in Decrease (increase) in other current and long-term assets in the Condensed Consolidated Statements of Cash Flows. Refer to Note 3 - Revenue - Contract Costs for additional ~~information~~information.

Fuji Xerox Technology Agreement (TA)

As previously disclosed, our TA with Fuji Xerox (now known as FUJIFILM Business Innovation Corp.) expired on ~~contract costs.~~March 31, 2021. The TA included a provision that allowed Fuji Xerox continued use of the Xerox brand trademark for two years after the date of termination of the TA as it transitions to a new brand in exchange for an upfront prepaid fixed royalty of $100. Fuji Xerox elected to continue its use of the Xerox brand trademark over the next two years and, therefore, made the upfront payment due under the TA of $100 in April 2021, which is included in Operating cash flows for the six month period ended June 30, 2021.

We expect to recognize the revenue associated with this extended brand license ratably over the two year transition period. Accordingly, any potential entry by Xerox for Xerographic products into the Fuji Xerox territory under the Xerox brand will be deferred to at least April 1, 2023. The product supply agreements with Fuji Xerox will continue to be effective despite the termination of the TA, and Fuji Xerox and Xerox will continue to operate as each other’s product supplier under existing or new purchase/supply agreements.

Xerox ~~2020~~2021 Form 10-Q

1816

Note 87 – Accounts Receivable, Net

Accounts receivable, net were as follows:


		September 30, 2020		December 31, 2019			June 30, 2021		December 31, 2020
Invoiced	Invoiced	$	731	$	980	Invoiced	$	695	$	735
Accrued(1)	Accrued(1)	227		311		Accrued(1)	219		217
Allowance for doubtful accounts	Allowance for doubtful accounts	(63)		(55)		Allowance for doubtful accounts	(68)		(69)
Accounts receivable, net	Accounts receivable, net	$	895	$	1,236	Accounts receivable, net	$	846	$	883

_____________

(1)Accrued receivables include amounts to be invoiced in the subsequent quarter for current services provided.

The allowance for doubtful accounts was as follows:

~~Balance at December 31, 2019~~


	2021		2020
Balance at December 31st	$	69	$	55
Provision	4		8
Charge-offs	(5)		(2)
Recoveries and other(1)	0		(1)
Balance at March 31st	$	68	$	60
Provision	1		9
Charge-offs	(2)		(8)
Recoveries and other(1)	1		(1)
Balance at June 30th	$	68	$	60

_____________

~~Provision~~

~~Charge-offs~~

~~(2)~~

~~Recoveries and other(1)~~

~~(1)~~

~~Balance at March 31, 2020~~

~~Provision~~

~~Charge-offs~~

~~(8)~~

~~Recoveries and other(1)~~

~~(1)~~

~~Balance at June 30, 2020~~

~~Provision~~

~~Charge-offs~~

~~(6)~~

~~Recoveries and other(1)~~

~~Balance at September 30, 2020~~

~~_____________~~

(1)Includes the impacts of foreign currency translation and adjustments to reserves necessary to reflect events of non-payment such as customer accommodations and contract terminations.

We perform ongoing credit evaluations of our customers and adjust credit limits based upon customer payment history and current creditworthiness. ~~Consistent with our adoption of ASU 2016-13 effective January 1, 2020 (refer to Note 2 - Recent Accounting Pronouncements), the~~The allowance for uncollectible accounts receivable is determined 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. Based on that assessment the allowance for doubtful accounts as a percent of gross accounts receivable was 7.4% at June 30, 2021 and 7.2% at December 31, 2020. The allowance for doubtful accounts as a percent of gross accounts receivable remains at an elevated level as compared to historical levels primarily as a result of the macroeconomic and market disruption caused by ~~COVID-19, the allowance for doubtful accounts as a percent of gross accounts receivable increased to 6.6% at September 30, 2020 from 4.3% at December 31, 2019.~~COVID-19.

Accounts Receivable Sales Arrangements

Accounts receivable sales arrangements are utilized in the normal course of business as part of our cash and liquidity management. The accounts receivable sold are generally short-term trade receivables with payment due dates of less than 60 days. We have one facility in Europe that enables us to sell accounts receivable associated with our distributor network on an ongoing basis, without recourse. Under this arrangement, we sell our entire interest in the related accounts receivable for cash and no portion of the payment is held back or deferred by the purchaser.

Of the accounts receivable sold and derecognized from our balance sheet, ~~$83~~$107 and ~~$165~~$136 remained uncollected as of ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.

Accounts receivable sales activity was as follows:

Three Months Ended
September 30, Nine Months Ended
September 30,
2020 2019 2020 2019
Accounts receivable sales(1)
$ 115 $ 67 $ 182 $ 265


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Accounts receivable sales(1)	$	125	$	14	$	232	$	67

_____________

(1)Losses on sales were not material. Customers may also enter into structured-payable arrangements that require us to sell our receivables from that customer to a third-party financial institution, which then makes payments to us to settle the customer's receivable. In these instances, we ensure the sale of the receivables are bankruptcy-remote and the payment made to us is without recourse. The activity associated with these arrangements is not reflected in this disclosure, as payments under these arrangements have not been material and these are customer directed arrangements.

Xerox ~~2020~~2021 Form 10-Q

1917

Note 98 - Finance Receivables, Net

Finance receivables include sales-type leases and installment loans arising from the marketing of our equipment. These receivables are typically collateralized by a security interest in the underlying assets.

Finance receivables, net were as follows:


		September 30, 2020		December 31, 2019			June 30, 2021		December 31, 2020
Gross receivables	Gross receivables	$	3,600	$	3,865	Gross receivables	$	3,640	$	3,691
Unearned income	Unearned income	(382)		(425)		Unearned income	(390)		(393)
Subtotal	Subtotal	3,218		3,440		Subtotal	3,250		3,298
Residual values	Residual values	0		0		Residual values	0		0
Allowance for doubtful accounts	Allowance for doubtful accounts	(142)		(89)		Allowance for doubtful accounts	(133)		(133)
Finance receivables, net	Finance receivables, net	3,076		3,351		Finance receivables, net	3,117		3,165
Less: Billed portion of finance receivables, net	Less: Billed portion of finance receivables, net	111		111		Less: Billed portion of finance receivables, net	89		99
Less: Current portion of finance receivables not billed, net	Less: Current portion of finance receivables not billed, net	1,066		1,158		Less: Current portion of finance receivables not billed, net	1,057		1,082
Finance receivables due after one year, net	Finance receivables due after one year, net	$	1,899	$	2,082	Finance receivables due after one year, net	$	1,971	$	1,984

Finance Receivables – Allowance for Credit Losses and Credit Quality

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

~~Consistent with our adoption of ASU 2016-13 effective January 1, 2020 (refer to Note 2 - Recent Accounting Pronouncements), the~~The allowance for credit losses is principally determined ~~principally~~ based on an assessment of origination year and past collection experience as well as consideration of current and future economic conditions and changes in our customer collection trends. Based on that assessment, ~~and primarily as a result of the macroeconomic and market turmoil caused by COVID-19,~~ the allowance for doubtful credit losses ~~increased to 4.4%~~as a percentage of gross finance receivables (net of unearned income) was 4.1% at ~~September~~June 30, ~~2020 from 2.6%~~2021 and 4.0% at December 31, ~~2019.~~2020. In ~~assessing~~determining the level of reserve required, ~~as of September 30, 2020,~~ we had to critically assess current and forecasted economic conditions in light of the COVID-19 pandemic to ensure we objectively included those expected impacts in the determination of our reserve. Our assessment also included a review of current portfolio credit metrics and the level of ~~reserves and~~ write-offs ~~we recorded on our receivable’s portfolio during~~incurred over the ~~credit crisis in 2008/09 as additional reference points to objectively determine~~past year of the ~~adequacy of our allowance.~~COVID-19 pandemic.

The allowance for doubtful accounts and provision for credit losses ~~represents an estimate~~represent estimates of the losses expected to be incurred from the Company's finance receivable portfolio. The level of the allowance is determined on a collective basis by applying projected loss rates to our different portfolios by country, which represent our portfolio segments. This is the level at which we develop and document our methodology to determine the allowance for credit losses. ~~This~~These projected loss rates are primarily based upon historical loss experience adjusted for judgments about the probable effects of relevant observable data including current and future economic conditions as well as delinquency trends, resolution rates, the aging of receivables, credit quality indicators and the financial health of specific customer classes or groups.

The allowance for doubtful finance receivables is inherently more difficult to estimate than the allowance for trade accounts receivable because the underlying lease portfolio has an average maturity, at any time, of approximately two to three years and contains past due billed amounts, as well as unbilled amounts. We consider all available information in our quarterly assessments of the adequacy of the allowance for doubtful accounts. We believe our estimates, including any qualitative adjustments, are reasonable and have considered all reasonably available information about past events, current conditions, and reasonable and supportable forecasts of future events and economic conditions. The identification of account-specific exposure is not a significant factor in establishing the allowance for doubtful finance receivables. Our policy and methodology used to establish our allowance for doubtful accounts has been consistently applied over all periods ~~presented, with the exception of the updates required as part of our adoption of ASU 2016-13 effective January 1, 2020.~~presented.

~~Since our~~Our allowance for doubtful finance receivables is effectively determined by geography, the risk characteristics in our finance receivable portfolio segments will generally be consistent with the risk factors associated with the economies of the countries/regions included in those geographies. Since EMEA is comprised of various countries and regional economies, the risk profile within that portfolio segment is somewhat more diversified due to the varying economic conditions among and within the countries. ~~Charge-offs~~

The bad debt provision of $2 for the second quarter 2021 included a reserve reduction of approximately $6 reflecting improvements in the ~~U.S.~~macroeconomic environment as well as lower write-offs. Actual write-offs incurred to date have lagged expectations but remain in line with our original projections over the life of the lease portfolio and ~~EMEA remained fairly~~

Xerox ~~2020~~2021 Form 10-Q

2018

~~steady during~~are consistent with future expectations regarding our estimated impacts from the COVID-19 pandemic. Despite improvement in the global economy, economies continue to recover from the impacts of the COVID-19 pandemic including the cessation of government support as well as labor, interest rate and inflation risks and the potential for higher taxes. As a result of these uncertainties, we continue to consider various adverse macroeconomic scenarios in our models. Accordingly, our reserves as a percent of receivables have remained fairly consistent subsequent to the first ~~second~~quarter 2020 when we recorded a charge of approximately $60 to initially record expected losses from the COVID-19 pandemic. We continue to monitor developments regarding the pandemic, including business reopenings and ~~third quarters of 2020~~mitigating government support actions as well as future economic conditions, and ~~as compared to the prior year. However, as reflected in our allowance for doubtful receivables, charge-offs are expected to increase over the remainder of the year and into 2021~~ as a result, ~~of the economic disruption related~~our reserves may need to ~~the COVID-19 pandemic.~~be updated in future periods.

Amounts disclosed below for the nine months ended and at September 30, 2020 reflect the adoption of ASU 2016-13 in January 2020. Amounts disclosed below for comparable periods in 2019 reflect superseded guidance. The allowance for doubtful accounts as well as the related investment in finance receivables were as follows:


											United States		Canada		EMEA(1)		Total
Balance at December 31, 2020										Balance at December 31, 2020	$	77	$	15	$	41	$	133
Provision										Provision	2		1		3		6
Charge-offs										Charge-offs	(2)		0		(1)		(3)
Recoveries and other(2)										Recoveries and other(2)	1		0		(2)		(1)
Balance at March 31, 2021										Balance at March 31, 2021	$	78	$	16	$	41	$	135
Provision										Provision	6		(1)		(3)		2
Charge-offs										Charge-offs	(3)		(1)		(1)		(5)
Recoveries and other(3)										Recoveries and other(3)	0		1		0		1
Balance at June 30, 2021										Balance at June 30, 2021	$	81	$	15	$	37	$	133

Finance receivables as of June 30, 2021 collectively evaluated for impairment (3)										Finance receivables as of June 30, 2021 collectively evaluated for impairment (3)	$	1,845	$	283	$	1,122	$	3,250
		United States		Canada(1)		EMEA(1)(2)		Total
Balance at December 31, 2019	Balance at December 31, 2019	$	59	$	11	$	19	$	89	Balance at December 31, 2019	$	59	$	10	$	20	$	89
Provision	Provision	35		6		25		66		Provision	35		6		25		66
Charge-offs	Charge-offs	(3)		(1)		(4)		(8)		Charge-offs	(3)		(1)		(4)		(8)
Recoveries and other(3)		0		(1)		0		(1)
Recoveries and other(2)										Recoveries and other(2)	0		0		(1)		(1)
Balance at March 31, 2020	Balance at March 31, 2020	$	91	$	15	$	40	$	146	Balance at March 31, 2020	$	91	$	15	$	40	$	146
Provision	Provision	3		1		0		4		Provision	3		1		0		4
Charge-offs	Charge-offs	(5)		(1)		(2)		(8)		Charge-offs	(5)		(1)		(2)		(8)
Recoveries and other(3)	Recoveries and other(3)	0		1		0		1		Recoveries and other(3)	0		1		0		1
Balance at June 30, 2020	Balance at June 30, 2020	$	89	$	16	$	38	$	143	Balance at June 30, 2020	$	89	$	16	$	38	$	143
Provision		6		0		3		9
Charge-offs		(6)		(2)		(5)		(13)
Recoveries and other(3)		0		1		2		3

Balance at September 30, 2020		$	89	$	15	$	38	$	142
Finance receivables as of September 30, 2020 collectively evaluated for impairment (4)		$	1,819	$	284	$	1,115	$	3,218

Balance at December 31, 2018		$	53	$	12	$	27	$	92
Provision		4		1		4		9
Charge-offs		(4)		(1)		(3)		(8)
Recoveries and other(3)		0		0		0		0
Balance at March 31, 2019		$	53	$	12	$	28	$	93
Provision		4		1		3		8
Charge-offs		(5)		(3)		(3)		(11)
Recoveries and other(3)		1		2		0		3
Balance at June 30, 2019		$	53	$	12	$	28	$	93
Provision		6		0		2		8
Charge-offs		(5)		(1)		(3)		(9)
Recoveries and other(3)		1		0		0		1

Balance at September 30, 2019		$	55	$	11	$	27	$	93
Finance receivables as of September 30, 2019 collectively evaluated for impairment(4)		$	1,900	$	324	$	1,157	$	3,381

Finance receivables as of June 30, 2020 collectively evaluated for impairment(3)										Finance receivables as of June 30, 2020 collectively evaluated for impairment(3)	$	1,824	$	289	$	1,100	$	3,213

_____________

(1)~~Prior year amounts have been recasted to include the Other geographic region, which was previously disclosed as a separate grouping, conforming to the current year's presentation.~~

~~(2)~~Includes developing market countries.

~~(3)~~(2)Includes the impacts of foreign currency translation and adjustments to reserves necessary to reflect events of non-payment such as customer accommodations and contract terminations.

~~(4)~~(3)Total Finance receivables exclude the allowance for credit losses of ~~$142~~$133 and ~~$93~~$143 at ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively.

In the U.S., customers are further evaluated by class based on the type of lease origination. The primary categories are direct, which primarily includes leases originated directly with end customers through bundled lease arrangements, and indirect, which ~~includes lease financing to end-user customers who purchased equipment we sold to distributors or resellers. Indirect also~~primarily includes leases originated through our XBS sales channel ~~which~~that utilizes a combination of internal and third party leasing in its lease arrangements with end customers. Indirect also includes lease financing to end-user customers who purchased equipment we sold to distributors or resellers.

Xerox 2021 Form 10-Q 19

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

•Low Credit Risk: This rating includes accounts with excellent to good business credit, asset quality and capacity to meet financial obligations. These customers are less susceptible to adverse effects due to shifts in economic conditions or changes in circumstance. The rating generally equates to a Standard & Poor's (S&P) rating of BBB- or better. Loss rates in this category in the normal course are generally less than 1%.

~~Xerox 2020 Form 10-Q~~

•Average Credit Risk: This rating includes accounts with average credit risk that are more susceptible to loss in the event of adverse business or economic conditions. This rating generally equates to a BB S&P rating. Although we experience higher loss rates associated with this customer class, we believe the risk is somewhat mitigated by the fact that our leases are fairly well dispersed across a large and diverse customer base. In addition, the higher loss rates are largely offset by the higher rates of return we obtain with such leases. Loss rates in this category in the normal course are generally in the range of 2% to 5%.

•High Credit Risk: This rating includes accounts that have marginal credit risk such that the customer’s ability to make repayment is impaired or may likely become impaired. We use numerous strategies to mitigate risk including higher rates of interest, prepayments, personal guarantees, etc. Accounts in this category include customers who were downgraded during the term of the lease from low and average credit risk evaluation when the lease was originated. Accordingly, there is a distinct possibility for a loss of principal and interest or customer default. The loss rates in this category in the normal course are generally in the range of 7% to 10%.

Credit quality indicators are updated at least annually, or more frequently to the extent required by economic conditions, and the credit quality of any given customer can change during the life of the portfolio.

Details about our finance receivables portfolio based on geography, origination year and credit quality indicators are as follows:


		September 30, 2020														December 31, 2019			June 30, 2021
		2020		2019		2018		2017		2016		Prior		Total Finance Receivables		Total Finance Receivables			2021		2020		2019		2018		2017		Prior		Total Finance Receivables
United States (Direct):
United States (Direct)																		United States (Direct)
Low Credit Risk	Low Credit Risk	$	117	$	160	$	144	$	87	$	48	$	7	$	563	$	640	Low Credit Risk	$	101	$	142	$	124	$	94	$	43	$	12	$	516
Average Credit Risk	Average Credit Risk	42		103		60		31		12		3		251		331		Average Credit Risk	42		45		73		36		15		4		215
High Credit Risk	High Credit Risk	65		47		29		16		6		3		166		132		High Credit Risk	41		81		36		20		9		3		190
Total	Total	$	224	$	310	$	233	$	134	$	66	$	13	$	980	$	1,103	Total	$	184	$	268	$	233	$	150	$	67	$	19	$	921

United States (Indirect):
United States (Indirect)																		United States (Indirect)
Low Credit Risk	Low Credit Risk	$	154	$	180	$	103	$	45	$	14	$	1	$	497	$	258	Low Credit Risk	$	119	$	166	$	121	$	60	$	21	$	2	$	489
Average Credit Risk	Average Credit Risk	86		110		73		35		9		1		314		445		Average Credit Risk	107		115		94		48		18		2		384
High Credit Risk	High Credit Risk	13		6		5		3		1		0		28		116		High Credit Risk	16		18		9		6		2		0		51
Total	Total	$	253	$	296	$	181	$	83	$	24	$	2	$	839	$	819	Total	$	242	$	299	$	224	$	114	$	41	$	4	$	924

Canada~~(1)~~	Canada~~(1)~~																	Canada~~(1)~~
Low Credit Risk	Low Credit Risk	$	24	$	34	$	26	$	11	$	8	$	2	$	105	$	163	Low Credit Risk	$	21	$	33	$	29	$	19	$	6	$	2	$	110
Average Credit Risk	Average Credit Risk	32		40		29		20		8		1		130		97		Average Credit Risk	21		41		34		20		11		3		130
High Credit Risk	High Credit Risk	13		11		10		12		3		0		49		66		High Credit Risk	5		15		8		8		6		1		43
Total	Total	$	69	$	85	$	65	$	43	$	19	$	3	$	284	$	326	Total	$	47	$	89	$	71	$	47	$	23	$	6	$	283

EMEA~~(2)~~(1)	EMEA~~(2)~~(1)																	EMEA~~(2)~~(1)
Low Credit Risk	Low Credit Risk	$	128	$	189	$	145	$	73	$	29	$	6	$	570	$	655	Low Credit Risk	$	123	$	170	$	148	$	102	$	41	$	12	$	596
Average Credit Risk	Average Credit Risk	108		164		117		60		22		4		475		479		Average Credit Risk	94		137		122		74		29		7		463
High Credit Risk	High Credit Risk	16		22		16		11		4		1		70		58		High Credit Risk	10		19		17		10		5		2		63
Total	Total	$	252	$	375	$	278	$	144	$	55	$	11	$	1,115	$	1,192	Total	$	227	$	326	$	287	$	186	$	75	$	21	$	1,122

Total Finance Receivables	Total Finance Receivables																	Total Finance Receivables
Low Credit Risk	Low Credit Risk	$	423	$	563	$	418	$	216	$	99	$	16	$	1,735	$	1,716	Low Credit Risk	$	364	$	511	$	422	$	275	$	111	$	28	$	1,711
Average Credit Risk	Average Credit Risk	268		417		279		146		51		9		1,170		1,352		Average Credit Risk	264		338		323		178		73		16		1,192
High Credit Risk	High Credit Risk	107		86		60		42		14		4		313		372		High Credit Risk	72		133		70		44		22		6		347
Total	Total	$	798	$	1,066	$	757	$	404	$	164	$	29	$	3,218	$	3,440	Total	$	700	$	982	$	815	$	497	$	206	$	50	$	3,250

Xerox 2021 Form 10-Q 20


	December 31, 2020
	2020		2019		2018		2017		2016		Prior		Total Finance Receivables
United States (Direct)
Low Credit Risk	$	164	$	151	$	128	$	71	$	32	$	4	$	550
Average Credit Risk	54		95		52		26		8		2		237
High Credit Risk	90		42		27		13		5		3		180
Total	$	308	$	288	$	207	$	110	$	45	$	9	$	967

United States (Indirect)
Low Credit Risk	$	193	$	140	$	79	$	33	$	7	$	0	$	452
Average Credit Risk	129		124		71		31		8		0		363
High Credit Risk	19		9		9		3		1		0		41
Total	$	341	$	273	$	159	$	67	$	16	$	0	$	856

Canada
Low Credit Risk	$	37	$	34	$	24	$	10	$	5	$	1	$	111
Average Credit Risk	46		39		26		17		6		1		135
High Credit Risk	18		10		10		10		3		0		51
Total	$	101	$	83	$	60	$	37	$	14	$	2	$	297

EMEA(1)
Low Credit Risk	$	197	$	177	$	131	$	62	$	20	$	4	$	591
Average Credit Risk	170		160		108		51		17		4		510
High Credit Risk	23		24		15		10		4		1		77
Total	$	390	$	361	$	254	$	123	$	41	$	9	$	1,178







Total Finance Receivables
Low Credit Risk	$	591	$	502	$	362	$	176	$	64	$	9	$	1,704
Average Credit Risk	399		418		257		125		39		7		1,245
High Credit Risk	150		85		61		36		13		4		349
Total	$	1,140	$	1,005	$	680	$	337	$	116	$	20	$	3,298

_____________

(1)~~Prior year amounts have been recasted to include the Other geographic region, which was previously disclosed as a separate grouping, conforming to the current year's presentation.~~

~~(2)~~Includes developing market countries.

Xerox ~~2020~~2021 Form 10-Q

2221

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

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

The aging of our billed finance receivables is as follows:


		September 30, 2020															June 30, 2021
		Current		31-90 Days Past Due		>90 Days Past Due		Total Billed		Unbilled		Total Finance Receivables		>90 Days and Accruing			Current		31-90 Days Past Due		>90 Days Past Due		Total Billed		Unbilled		Total Finance Receivables		>90 Days and Accruing
Direct	Direct	$	35	$	9	$	11	$	55	$	925	$	980	$	79	Direct	$	29	$	6	$	7	$	42	$	879	$	921	$	60
Indirect	Indirect	23		6		3		32		807		839		0		Indirect	20		4		3		27		897		924		0

Total United States	Total United States	58		15		14		87		1,732		1,819		79		Total United States	49		10		10		69		1,776		1,845		60
Canada(1)		7		2		1		10		274		284		19
Canada																Canada	6		2		0		8		275		283		12

EMEA(1)	EMEA(1)	12		3		3		18		1,097		1,115		37		EMEA(1)	11		2		2		15		1,107		1,122		17

Total	Total	$	77	$	20	$	18	$	115	$	3,103	$	3,218	$	135	Total	$	66	$	14	$	12	$	92	$	3,158	$	3,250	$	89

		December 31, 2019															December 31, 2020
		Current		31-90 Days Past Due		>90 Days Past Due		Total Billed		Unbilled		Total Finance Receivables		>90 Days and Accruing			Current		31-90 Days Past Due		>90 Days Past Due		Total Billed		Unbilled		Total Finance Receivables		>90 Days and Accruing
Direct	Direct	$	37	$	11	$	8	$	56	$	1,047	$	1,103	$	57	Direct	$	33	$	6	$	9	$	48	$	919	$	967	$	74
Indirect	Indirect	25		5		3		33		786		819		0		Indirect	21		4		3		28		828		856		0

Total United States	Total United States	62		16		11		89		1,833		1,922		57		Total United States	54		10		12		76		1,747		1,823		74
Canada(1)		8		2		1		11		315		326		17
Canada																Canada	8		2		0		10		287		297		12

EMEA(1)(2)		12		1		2		15		1,177		1,192		32
EMEA(1)																EMEA(1)	12		3		2		17		1,161		1,178		23

Total	Total	$	82	$	19	$	14	$	115	$	3,325	$	3,440	$	106	Total	$	74	$	15	$	14	$	103	$	3,195	$	3,298	$	109

_____________

(1)Includes developing market ~~countries.~~

~~(2)Prior year amounts have been recasted to include the Other geographic region, which was previously disclosed as a separate grouping, conforming to the current year's presentation.~~countries

Secured Borrowings and Collateral

In July 2020, we sold $355 of U.S. based finance receivables to a consolidated special purpose entity (SPE), which funded the purchase through a secured loan agreement with a financial institution. As of ~~September~~June 30, ~~2020~~2021 the SPE holds ~~$314~~$214 of total Finance receivables, net, which are included in our Condensed Consolidated Balance Sheet as collateral for the secured loan agreement.

In December 2020, we sold $610 of U.S. based finance receivables to a consolidated SPE, which funded the purchase through a secured loan agreement with a financial institution. As of June 30, 2021 the SPE holds $485 of total Finance receivables, net, which are included in our Condensed Consolidated Balance Sheet as collateral for the secured loan agreement.

Refer to Note 1312 - Debt, for additional information related to this arrangement including the related secured loan agreement.

Xerox 2021 Form 10-Q 22

Note 109 – Inventories and Equipment on Operating Leases, Net

The following is a summary of Inventories by major category:

September 30,
2020 December 31,
2019
Finished goods $ 823 $ 576
Work-in-process 48 47
Raw materials 107 71
Total Inventories $ 978 $ 694

~~Xerox 2020 Form 10-Q~~


	June 30, 2021		December 31, 2020
Finished goods	$	670	$	707
Work-in-process	49		43
Raw materials	96		93
Total Inventories	$	815	$	843

The transfer of equipment from our inventories to equipment subject to an operating lease is presented in our Condensed Consolidated Statements of Cash Flows in the operating activities section. Equipment on operating leases and similar arrangements consists of our equipment rented to customers and depreciated to estimated salvage value at the end of the lease term.

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


		September 30, 2020		December 31, 2019			June 30, 2021		December 31, 2020
Equipment on operating leases	Equipment on operating leases	$	1,388	$	1,443	Equipment on operating leases	$	1,321	$	1,376
Accumulated depreciation	Accumulated depreciation	(1,087)		(1,079)		Accumulated depreciation	(1,050)		(1,080)
Equipment on operating leases, net	Equipment on operating leases, net	$	301	$	364	Equipment on operating leases, net	$	271	$	296

Total contingent rentals on operating leases, consisting principally of usage charges in excess of minimum contracted amounts, were ~~$15~~$16 and ~~$25~~$14 for the three months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively and ~~$51~~$31 and ~~$80~~$36 for the ~~nine~~six months ended ~~September~~June 30, 2021 and 2020, ~~and 2019,~~ respectively.

~~Secured Borrowings and Collateral~~

In July 2020, we sold the rights to payments under operating leases with an equipment net book value of $10 to a consolidated SPE, which funded the purchase through a secured loan agreement with a financial institution. As of September 30, 2020 the SPE holds $9 of Equipment on operating leases, net, which are included in our Condensed Consolidated Balance Sheet as collateral for the secured loan agreement. Refer to Note 13 - Debt, for additional information related to this arrangement including the related secured loan agreement.

Note 1110 – Lessee

Operating Leases

We have operating leases for real estate and vehicles in our domestic and international operations and 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~~eleven years and a variety of renewal and/or termination options.

The components of lease expense are as follows:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2020		2019		2020		2019			2021		2020		2021		2020
Operating lease expense	Operating lease expense	$	29	$	31	$	85	$	97	Operating lease expense	$	27	$	28	$	54	$	56
Short-term lease expense	Short-term lease expense	5		6		15		16		Short-term lease expense	6		5		11		10
Variable lease expense(1)	Variable lease expense(1)	12		12		34		37		Variable lease expense(1)	11		10		23		22
Sublease income	Sublease income	(1)		0		(2)		(1)		Sublease income	(1)		(1)		(2)		(1)

Total Lease expense	Total Lease expense	$	45	$	49	$	132	$	149	Total Lease expense	$	43	$	42	$	86	$	87

_____________

(1)Variable lease expense is related to our leased real estate for offices and warehouses and primarily includes labor and operational costs as well as taxes and insurance.

Operating ~~leases right-of-use (ROU)~~lease ROU assets, net and operating lease liabilities were reported in the Condensed Consolidated Balance Sheets as follows:


		September 30, 2020		December 31, 2019			June 30, 2021		December 31, 2020
Other long-term assets	Other long-term assets	$	323	$	319	Other long-term assets	$	280	$	310

Accrued expenses and other current liabilities	Accrued expenses and other current liabilities	$	86	$	87	Accrued expenses and other current liabilities	$	79	$	83
Other long-term liabilities	Other long-term liabilities	264		260		Other long-term liabilities	223		250
Total Operating lease liabilities	Total Operating lease liabilities	$	350	$	347	Total Operating lease liabilities	$	302	$	333

Xerox ~~2020~~2021 Form 10-Q23

~~Supplemental information related to operating leases is as follows:~~

Three Months Ended
September 30, Nine Months Ended
September 30,
2020 2019 2020 2019
Cash paid for amounts included in the measurement of lease liabilities - Operating cash flows $ 31 $ 31 $ 89 $ 95
ROU assets obtained in exchange for new lease liabilities (1)
$ 17 $ 5 $ 73 $ 28
Weighted-average remaining lease term 5 years 4 years
Weighted-average discount rate 5.06 % 5.63 %

~~_____________~~

~~(1)Includes the impact of new leases as well as remeasurements and modifications to existing leases.~~

~~Finance Leases~~

Xerox has finance leases for equipment and related infrastructure within outsourced warehouse supply arrangements in the U.S. and Europe. The leases have varying maturities up to six years with a maximum expiration date through December 2026. As of September 30, 2020 the remaining lease obligation for all finance leases is $9, based on a weighted-average discount rate of 4.41%. The Right-of-use asset balance associated with these finance leases of $11 is included in Land, buildings and equipment, net in the Condensed Consolidated Balance Sheet.

Note 1211 – Restructuring Programs

We engage in restructuring actions ~~including~~through Project Own It as well as other transformation efforts in order to reduce our cost structure and realign it to the changing nature of our ~~business~~business. As part of our efforts to reduce costs, our restructuring actions may also include the off-shoring and/or outsourcing of certain operations, services and ~~to achieve operating efficiencies through a number of opportunities, including reduction of~~other functions, as well as reducing our real estate footprint.

During the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, we recorded net restructuring and asset impairment charges of ~~$47,~~$25, which included ~~$57~~$20 of severance costs related to headcount reductions of approximately ~~1,100~~400 employees worldwide, $2 of other contractual termination costs and $6$12 of asset impairment charges. These costs were partially offset by ~~$18~~$9 of net reversals, primarily resulting from changes in estimated reserves from prior period initiatives.

Information related to restructuring program activity is outlined below:


		Severance and Related Costs		Other Contractual Termination Costs(2)		Asset Impairments(3)		Total			Severance and Related Costs		Other Contractual Termination Costs(2)		Asset Impairments(3)		Total
Balance at December 31, 2019		$	66	$	4	$	0	$	70
Balance at December 31, 2020										Balance at December 31, 2020	$	78	$	4	$	0	$	82
Provision	Provision	32		1		2		35		Provision	14		1		10		25
Reversals	Reversals	(5)		0		(1)		(6)		Reversals	(4)		0		0		(4)
Net current period charges(1)	Net current period charges(1)	27		1		1		29		Net current period charges(1)	10		1		10		21
Charges against reserve and currency	Charges against reserve and currency	(36)		2		(1)		(35)		Charges against reserve and currency	(29)		(1)		(10)		(40)
Balance at March 31, 2020		$	57	$	7	$	0	$	64
Balance at March 31, 2021										Balance at March 31, 2021	$	59	$	4	$	0	$	63
Provision	Provision	7		0		0		7		Provision	6		1		2		9
Reversals	Reversals	(6)		(1)		(2)		(9)		Reversals	(3)		(1)		(1)		(5)
Net current period charges(1)	Net current period charges(1)	1		(1)		(2)		(2)		Net current period charges(1)	3		0		1		4
Charges against reserve and currency	Charges against reserve and currency	(14)		(1)		2		(13)		Charges against reserve and currency	(20)		(1)		(1)		(22)
Balance at June 30, 2020		$	44	$	5	$	0	$	49
Provision		18		1		4		23
Reversals		(2)		0		(1)		(3)
Net current period charges(1)		16		1		3		20
Charges against reserve and currency		(8)		(2)		(3)		(13)
Balance at September 30, 2020		$	52	$	4	$	0	$	56
Balance at June 30, 2021										Balance at June 30, 2021	$	42	$	3	$	0	$	45

______________

(1)Represents net amount recognized within the Condensed Consolidated Statements of Income for the period shown for restructuring and asset impairment charges.

(2)Primarily includes additional costs incurred upon the exit from our facilities including decommissioning costs and associated contractual termination costs. ~~Charges against reserve and currency for first quarter 2020 include a reclassification of $4 related to expected recovery from sublease.~~

(3)Primarily ~~related~~relates to the exit and abandonment of leased and owned facilities. The ~~charge includes~~charges include the accelerated write-off of $3$2 for leased ~~right-of-use~~ROU assets and $3$9 for owned assets upon exit from the facilities, net of any potential sublease income and other ~~recoveries.~~recoveries, including potential sales.

~~Xerox 2020 Form 10-Q~~

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


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2020		2019		2020		2019			2021		2020		2021		2020
Charges against reserve and currency	Charges against reserve and currency	$	(13)	$	(20)	$	(61)	$	(118)	Charges against reserve and currency	$	(22)	$	(13)	$	(62)	$	(48)

Effects of foreign currency and other non-cash items	Effects of foreign currency and other non-cash items	2		3		(2)		47		Effects of foreign currency and other non-cash items	0		(4)		13		(4)
Restructuring cash payments	Restructuring cash payments	$	(11)	$	(17)	$	(63)	$	(71)	Restructuring cash payments	$	(22)	$	(17)	$	(49)	$	(52)

In connection with our restructuring programs, we also incurred certain related costs as follows:

Three Months Ended
September 30, Nine Months Ended
September 30,
2020 2019 2020 2019
Retention related severance/bonuses(1)
$ (2) $ 11 $ 9 $ 31
Contractual severance costs(2)
0 3 4 41
Consulting and other costs(3)
2 5 4 24
Total $ 0 $ 19 $ 17 $ 96


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Retention related severance/bonuses(1)	$	3	$	4	$	(1)	$	11
Contractual severance costs	3		0		3		4
Consulting and other costs(2)	2		1		2		2
Total	$	8	$	5	$	4	$	17

_____________

(1)Includes retention related severance and bonuses for employees expected to continue working beyond their minimum notification period before termination. The credit for the six months ended June 30, 2021 reflects a change in estimate.

(2)Amounts for nine months ended September 30, 2019 include approximately $38 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.

~~(3)~~Represents professional support services associated with our business transformation initiatives.

Cash paid for restructuring related costs were approximately $3 and $8 for the three months ended June 30, 2021 and 2020, respectively, and $6 and $8 for the six months ended June 30, 2021 and 2020, respectively. The restructuring related costs reserve ~~as of September~~was $18 and $21 at June 30, 2021 and December 31, 2020, ~~was $33, which~~respectively. The balance at June 30, 2021 is expected to be paid over the next twelve ~~months, as compared to $37 at December 31, 2019.~~months.

Xerox 2021 Form 10-Q 24

Note 1312 – Debt

~~Senior Notes~~Xerox Holdings Corporation / Xerox Corporation Intercompany Loan

OnIn August 6, 2020, Xerox Holdings Corporation issued $550 of ~~5.000%~~5.00% Senior Notes due August 2025 (the "2025 Senior Notes") at par and $550 of ~~5.500%~~5.50% Senior Notes due August 2028 (the "2028 Senior Notes") at par resulting in aggregate net proceeds (after fees and expenses) of approximately $1,089. On August 24, 2020, Xerox Holdings Corporation issued an additional $200 of the 2025 Senior Notes at 100.75% of par and an additional $200 of the 2028 Senior Notes at 102.50% of par resulting in additional aggregate net proceeds (after premium, fees and expenses) of approximately $405 for total aggregate net proceeds from both issuances of approximately $1,494.

~~The Notes are fully and unconditionally guaranteed by Xerox Corporation.~~ In ~~addition,~~2020, the notes and the related guarantees were issued in a private placement only to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended, and have not been registered for sale under the Securities Act or any state securities laws. Interest on the 2025 and 2028 Senior Notes is payable semi-annually.

~~Debt issuance costs of approximately $13 were paid and deferred in connection with the issuance of the 2025 and 2028 Senior Notes and will be amortized over the term of the Senior Notes. The~~ net debt proceeds were contributed by Xerox Holdings Corporation to Xerox Corporation and ~~used to repay $362 aggregate principal amount of 3.500% senior notes of~~recorded as Additional paid-in capital by Xerox Corporation.

In February 2021, Xerox Holdings Corporation and Xerox Corporation ~~and $376 aggregate principal amount~~entered into an Intercompany Loan agreement for the net proceeds of ~~2.750% senior notes of~~$1,494 contributed by Xerox Holdings Corporation to Xerox Corporation in 2020. The intercompany loan, which ~~were both due~~did not involve the exchange of cash in ~~third quarter 2020.~~the current period, resulted in capitalization of the amount as Related Party Debt for Xerox Corporation. The amount was originally recorded as Additional paid-in capital in 2020 when the cash was contributed by Xerox Holdings Corporation.

The intercompany loan was established to mirror the terms included in Xerox Holdings Corporation’s 2025 and 2028 Senior Notes, including interest rates and payment dates. The intercompany interest expense also includes a ratable amount to reimburse Xerox Holdings Corporation ~~also used~~for its debt issuance costs and premium.

At June 30, 2021, the balance of the Intercompany Loan reported in Xerox Corporation’s Condensed Consolidated Balance Sheet was $1,494, which is net ~~proceeds to prepay a portion~~ of related debt issuance costs, and the ~~4.500% senior notes due~~intercompany interest payable was $30. Xerox Corporation’s interest expense for the three and six months ended June 30, 2021 ~~in October 2020 (Refer to Note 18 – Shareholder's Equity~~included $19 and $39, respectively, of ~~Xerox for additional information regarding the contribution and Note 22 - Subsequent Event for additional information regarding~~interest expense associated with this ~~prepayment).~~

~~Credit Facility~~

On July 31, 2020, Xerox and Xerox Holdings entered into Amendment No. 3 to the Credit Facility, which modified the financial covenants to require that, during a specified covenant modification period (which begins on the effective date of the Amendment and ends on the earlier of (1) December 31, 2021 and (2) the date on which Xerox delivers a written notice to the Administrative Agent electing to end such period (the “Financial Covenant Modification Period”), Xerox must maintain unrestricted cash (as defined in the Amendment) in an amount not less than $1.0 billion. Further, the Amendment relaxed the financial maintenance leverage covenant in the Credit Agreement by requiring that, during the Financial Covenant Modification Period, Xerox maintain a ratio of net debt

~~Xerox 2020 Form 10-Q~~

for borrowed money to consolidated EBITDA of not greater than 4.25:1.00 (with a cap on cash netting of $1.75 billion), in lieu of the 4.25:1.00 total debt for borrowed money to consolidated EBITDA ratio requirement applicable prior to the Amendment.Intercompany Loan.

Secured Borrowings and Collateral

In July 2020, we entered into a secured loan agreement with a financial institution where we sold $355 of U.S. based finance receivables and the rights to payments under operating leases with an equipment net book value of $10 to a special purpose entity (SPE). The purchase by the SPE was funded through an amortizing secured loan to the SPE from the financial institution of $340. The sale of the receivables to the SPE was structured as a "true sale at law," and we have received an opinion to that effect from outside legal counsel. However, the transaction was accounted for as a secured borrowing as we consolidate the SPE since we have both the power to direct the activities that most significantly impact the SPE's economic performance through our role as servicer of all the receivables held by the SPE, and the obligation through variable interests in the SPE to absorb losses or receive benefits that could potentially be significant to the SPE. As a result, the assets of the SPE are not available to satisfy any of our other obligations. Conversely, the credit holder of this SPE does not have legal recourse to the Company’s general credit.

~~The~~ debt has a variable interest rate based on LIBOR plus a spread (current rate of ~~1.73%~~1.67% at ~~September~~June 30, ~~2020) and~~2021).

In December 2020, we entered into a second secured loan agreement with a financial institution where we sold $610 of U.S. based finance receivables to an ~~expected life~~SPE. The purchase by the SPE was funded through an amortizing secured loan to the SPE from the financial institution of ~~less than three years with half projected to be repaid within the first year~~$500. The debt has a variable interest rate based on ~~collections~~the financial institution's cost of ~~the underlying portfolio~~funds plus a spread (current rate of receivables. We also entered into an interest rate hedge agreement to cap LIBOR over the life of the loan. The proceeds from this debt funded the cash used in May 2020 to repay the $313 aggregate principal amount of 2.80% Senior Notes due 2020 of Xerox Corporation.1.68% at June 30, 2021).

Below are the assets and liabilities held by the consolidated ~~SPE,~~SPEs, which are included in our Condensed Consolidated Balance ~~Sheet:~~Sheets. As a result of the above sales, the assets of the SPEs are not available to satisfy any of our other obligations. Conversely, the credit holders of these SPEs' borrowings do not have legal recourse to the Company’s general credit or other assets.


	September 30, 2020
~~Assets held by SPE~~
~~Finance receivables, net~~	$	~~132~~
~~Finance receivables due after one year, net~~	~~182~~
~~Equipment on operating leases, net~~	9
~~Total Assets~~	$	~~323~~
~~Liabilities held by SPE~~
~~Current portion of long-term debt, net(1)~~	$	~~158~~
~~Long term debt, net(2)~~	~~157~~
~~Total Liabilities~~	$	~~315~~


	June 30, 2021		December 31, 2020
Assets held by SPEs
Billed portion of finance receivables, net	$	24	$	28
Finance receivables, net	301		350
Finance receivables due after one year, net	374		510
Equipment on operating leases, net	5		8
Restricted cash(1)	34		22
Total Assets	$	738	$	918
Liabilities held by SPEs
Current portion of long-term debt, net(2)	$	344	$	394
Long term debt, net(2)	213		370
Total Liabilities	$	557	$	764

_____________

(1)~~Amounts net~~Restricted cash is included in Other current assets in our Condensed Consolidated Balance Sheet.

(2)Net of ~~unamortized~~ debt issuance costs of ~~$1.~~$2.

~~(2)~~Xerox 2021 Form 10-Q ~~Amounts net of unamortized debt issuance costs of $1.~~25

Interest Expense and Income

Interest expense and income were as follows:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2020		2019		2020		2019			2021		2020		2021		2020
Interest expense~~(1)~~(2)	Interest expense~~(1)~~(2)	$	59	$	60	$	158	$	179	Interest expense~~(1)~~(2)	$	52	$	48	$	104	$	99
Interest income~~(2)~~(3)	Interest income~~(2)~~(3)	56		62		182		193		Interest income~~(2)~~(3)	57		59		113		126

_____________

(1)Includes Cost of financing as well as non-financing interest expense that is included in Other expenses, net in the Condensed Consolidated Statements of Income.

(2)Interest expense of Xerox Corporation for the three and six months ended June 30, 2021 includes $19 and $39, respectively, of intercompany interest expense for the Xerox Holdings Corporation / Xerox Corporation Intercompany Loan.

(3)Includes Financing revenue as well as other interest income that is included in Other expenses, net in the Condensed Consolidated Statements of Income.

~~Xerox 2020 Form 10-Q~~

Note 1413 – Financial Instruments

Interest Rate Risk Management

We use interest rate swap and interest rate cap agreements to manage our interest rate exposure and to achieve a desired proportion of variable and fixed rate debt. These derivatives may be designated as fair value hedges or cash flow hedges depending on the nature of the risk being hedged.

~~Fair Value Hedges~~

~~During the first quarter 2020, we terminated our remaining pay variable/receive fixed~~ At June 30, 2021, there were no interest rate swaps with notional amounts of $200 and net asset fair value of $4 prior to termination. The swaps had been designated and accounted for as fair value hedges prior to termination. The swaps were structured to hedge the fair value of related debt by converting them from fixed rate instruments to variable rate instruments. NaN ineffective portion was recorded to earnings for the nine months ended September 30, 2020 prior to termination. The corresponding net fair value adjustment to the hedged debt of $(4) will be amortized to interest expense over the remaining term of the related notes.derivative contracts outstanding.

Foreign Exchange Risk Management

We are a global company and we are exposed to foreign currency exchange rate fluctuations in the normal course of our business. As a part of our foreign exchange risk management strategy, we use derivative instruments, primarily forward contracts and purchased option contracts, to hedge the following foreign currency exposures, thereby reducing volatility of earnings or protecting fair values of assets and liabilities:

•Foreign currency-denominated assets and liabilities

•Forecasted purchases and sales in foreign currency

•~~Foreign currency-denominated assets and liabilities~~

At ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, we had outstanding forward exchange and purchased option contracts with gross notional values of ~~$958~~$1,073 and ~~$1,091~~$1,161 respectively, with terms of less than 12 months. Approximately ~~80%~~81% of the contracts at ~~September~~June 30, ~~2020~~2021 mature within three months, 9%10% mature in three to six months and ~~11%~~9% in six to twelve months. The ~~associated currency~~decrease in hedge position from December 31, 2020 is primarily for GBP and YEN exposures ~~being hedged at September 30, 2020 were~~due to lower ~~by 12% as compared to our year-end currency exposures.~~requirements. There ~~has~~have not been any material ~~change~~changes in our hedging strategy.

Foreign Currency Cash Flow Hedges

We designate a portion of our foreign currency derivative contracts as cash flow hedges of our foreign currency-denominated inventory purchases, sales and expenses. The net (liability) asset ~~(liability)~~ fair value of these contracts were $1$(4) and ~~$(4)~~$2 as of ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.

Xerox 2021 Form 10-Q 26

Summary of Derivative Instruments Fair Value

The following table provides a summary of the fair value amounts of our derivative instruments:

Designation of Derivatives Balance Sheet Location September 30,
2020 December 31,
2019
Derivatives Designated as Hedging Instruments
Foreign exchange contracts - forwards Other current assets $ 3 $ 1
Accrued expenses and other current liabilities (2) (5)
Interest rate swaps Other long-term assets 0 1
Net designated derivative asset (liability) $ 1 $ (3)
Derivatives NOT Designated as Hedging Instruments
Foreign exchange contracts – forwards Other current assets $ 4 $ 1
Accrued expenses and other current liabilities (1) (3)
Net undesignated derivative asset (liability) $ 3 $ (2)
Summary of Derivatives Total Derivative assets $ 7 $ 3
Total Derivative liabilities (3) (8)
Net Derivative asset (liability) $ 4 $ (5)

~~Xerox 2020 Form 10-Q~~


Designation of Derivatives	Balance Sheet Location	June 30, 2021		December 31, 2020
Derivatives Designated as Hedging Instruments
Foreign exchange contracts - forwards	Other current assets	$	3	$	3
	Accrued expenses and other current liabilities	(7)		(2)
Foreign currency options	Other current assets	0		1



	Net designated derivative (liability) asset	$	(4)	$	2

Derivatives NOT Designated as Hedging Instruments
Foreign exchange contracts – forwards	Other current assets	$	2	$	3
	Accrued expenses and other current liabilities	(2)		(3)
	Net undesignated derivative liability	$	0	$	0

Summary of Derivatives	Total Derivative assets	$	5	$	7
	Total Derivative liabilities	(9)		(5)
	Net Derivative (liability) asset	$	(4)	$	2

Summary of Derivative Instruments Gains (Losses)

Derivative gains and (losses) affect the income statement based on whether such derivatives are designated as hedges of underlying exposures. The following is a summary of derivative gains (losses).

Designated Derivative Instruments Gains (Losses)

The following table provides a summary of gains (losses) on derivative instruments:

Three Months Ended
September 30, Nine Months Ended
September 30,
Gain (Loss) on Derivative Instruments 2020 2019 2020 2019
Fair Value Hedges - Interest Rate Contracts
Derivative (loss) gain recognized in interest expense $ 0 $ 0 $ (1) $ 4
Hedged item gain (loss) recognized in interest expense 0 0 1 (4)
Cash Flow Hedges - Foreign Exchange Forward Contracts and Options
Derivative gain recognized in OCI (effective portion) $ 1 $ 4 $ 5 $ 10
Derivative gain reclassified from AOCL to income - Cost of sales (effective portion) 0 3 1 6


	Three Months Ended June 30,				Six Months Ended June 30,
Gain (Loss) on Derivative Instruments	2021		2020		2021		2020
Fair Value Hedges - Interest Rate Contracts
Derivative loss recognized in interest expense	$	0	$	0	$	0	$	(1)
Hedged item gain recognized in interest expense	0		0		0		1

Cash Flow Hedges - Foreign Exchange Forward Contracts and Options
Derivative (loss) gain recognized in OCI (effective portion)	$	(2)	$	(3)	$	(12)	$	4
Derivative (loss) gain reclassified from AOCL to income - Cost of sales (effective portion)	(2)		2		(3)		1

During the three and ~~nine~~six months ended ~~September~~June 30, 2021 and 2020, ~~and 2019, no~~0 amount of ineffectiveness was recorded in the Condensed Consolidated Statements of Income for these designated cash flow hedges and all components of each derivative’s gain or (loss) were included in the assessment of hedge effectiveness. In addition, 0 amount was recorded for an underlying exposure that did not occur or was not expected to occur.

As of ~~September~~June 30, ~~2020,~~2021, a net after-tax ~~gain~~loss of $2$5 was recorded in Accumulated other comprehensive loss associated with our cash flow hedging activity. The entire balance is expected to be reclassified into net income within the next 12 months, providing an offsetting economic impact against the underlying anticipated transactions.

Non-Designated Derivative Instruments Gains (Losses)

Non-designated derivative instruments are primarily instruments used to hedge foreign currency-denominated assets and liabilities. They are not designated as hedges since there is a natural offset for the remeasurement of the underlying foreign currency-denominated asset or liability.

The following table provides a summary of gains and (losses) on non-designated derivative instruments:


Derivatives NOT Designated as Hedging Instruments	Derivatives NOT Designated as Hedging Instruments	Location of Derivative Gain	Three Months Ended September 30,				Nine Months Ended September 30,				Derivatives NOT Designated as Hedging Instruments	Location of Derivative (Loss) Gain	Three Months Ended June 30,				Six Months Ended June 30,
			2020		2019		2020		2019				2021		2020		2021		2020
Foreign exchange contracts – forwards	Foreign exchange contracts – forwards	Other expense – Currency gain, net	$	2	$	2	$	19	$	3	Foreign exchange contracts – forwards	Other expense – Currency (losses) gains, net	$	(4)	$	3	$	(22)	$	17

Xerox 2021 Form 10-Q 27

~~For the three and nine months ended September 30, 2020 currency~~Currency losses, net were $0$1 and ~~$4, respectively, and~~$2 for the three ~~and nine~~ months ended ~~September~~June 30, ~~2019 were~~2021 and 2020, respectively and $3 and $4 for six months ended June 30, 2021 and ~~$6,~~2020, respectively. Net currency gains and losses include the mark-to-market adjustments of the derivatives not designated as hedging instruments and the related cost of those derivatives as well as the remeasurement of foreign currency-denominated assets and liabilities and are included in Other expenses, net.

~~Xerox 2020 Form 10-Q~~

Note 1514 – Fair Value of Financial Assets and Liabilities

The following table represents assets and liabilities measured at fair value on a recurring basis. The basis for the measurement at fair value in all cases is Level 2 – Significant Other Observable Inputs.


		September 30, 2020		December 31, 2019			June 30, 2021		December 31, 2020
Assets	Assets					Assets
Foreign exchange contracts - forwards	Foreign exchange contracts - forwards	$	7	$	2	Foreign exchange contracts - forwards	$	5	$	6
Foreign currency options						Foreign currency options	0		1

Interest rate swaps		0		1

Deferred compensation investments in mutual funds		18		19
Deferred compensation plan investments in mutual funds						Deferred compensation plan investments in mutual funds	18		18
Total	Total	$	25	$	22	Total	$	23	$	25
Liabilities	Liabilities					Liabilities
Foreign exchange contracts - forwards	Foreign exchange contracts - forwards	$	3	$	8	Foreign exchange contracts - forwards	$	9	$	5

Deferred compensation plan liabilities	Deferred compensation plan liabilities	17		18		Deferred compensation plan liabilities	17		17
Total	Total	$	20	$	26	Total	$	26	$	22

We utilize the income approach to measure the fair value for our derivative assets and liabilities. The income approach uses pricing models that rely on market observable inputs such as yield curves, currency exchange rates and forward prices, and therefore are classified as Level 2.

Fair value for our deferred compensation plan investments in mutual funds is based on quoted market prices for those funds. Fair value for deferred compensation plan liabilities is based on the fair value of investments corresponding to employees’ investment selections.

Summary of Other Financial Assets and Liabilities

The estimated fair values of our other financial assets and liabilities were as follows:


	June 30, 2021				December 31, 2020
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Cash and cash equivalents	$	2,124	$	2,124	$	2,625	$	2,625
Accounts receivable, net	846		846		883		883
Short-term debt and current portion of long-term debt	642		652		394		396
Long-term Debt
Xerox Holdings Corporation	1,494		1,569		1,493		1,596
Xerox Corporation	1,890		1,996		2,187		2,298
Xerox - Other Subsidiaries(1)	213		213		370		372
Long-term debt	$	3,597	$	3,778	$	4,050	$	4,266

____________

September 30, 2020 December 31, 2019

Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
Cash and cash equivalents $ 3,242 $ 3,242 $ 2,740 $ 2,740
Accounts receivable, net 895 895 1,236 1,236
Short-term debt and current portion of long-term debt 1,218 1,240 1,049 1,054
Long-term debt 3,836 3,899 3,233 3,331
(1)Represents subsidiaries of Xerox Corporation

The fair value amounts for Cash and cash equivalents and Accounts receivable, net, approximate carrying amounts due to the short maturities of these instruments. The fair value of Short-term debt, including the current portion of long-term debt, and Long-term debt was estimated based on the current rates offered to us for debt of similar maturities (Level 2). The difference between the fair value and the carrying value represents the theoretical net premium or discount we would pay or receive to retire all debt at such date.

Xerox ~~2020~~2021 Form 10-Q

3028

Note 1615 – Employee Benefit Plans

The components of Net periodic benefit cost and other changes in plan assets and benefit obligations were as follows:

Three Months Ended September 30,
Pension Benefits
U.S. Plans Non-U.S. Plans Retiree Health
Components of Net Periodic Benefit Costs: 2020 2019 2020 2019 2020 2019
Service cost $ 0 $ 1 $ 5 $ 5 $ 1 $ 0
Interest cost 21 25 29 37 2 3
Expected return on plan assets (27) (26) (49) (56) 0 0
Recognized net actuarial loss (gain) 6 7 15 10 0 (1)
Amortization of prior service credit 0 0 (1) 0 (19) (19)
Recognized settlement loss 10 18 0 0 0 0
Defined benefit plans 10 25 (1) (4) (16) (17)
Defined contribution plans (10) 6 6 5 n/a n/a
Net Periodic Benefit Cost (Credit) 0 31 5 1 (16) (17)
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income (Loss):
Net actuarial loss (gain)(1)
77 135 0 0 0 (9)
Amortization of net actuarial (loss) gain (16) (25) (15) (10) 0 1
Amortization of net prior service credit 0 0 1 0 19 19
Total Recognized in Other Comprehensive Income (Loss)(2)
61 110 (14) (10) 19 11
Total Recognized in Net Periodic Benefit Cost (Credit) and Other Comprehensive Income (Loss) $ 61 $ 141 $ (9) $ (9) $ 3 $ (6)
Nine Months Ended September 30,
Pension Benefits
U.S. Plans Non-U.S. Plans Retiree Health
Components of Net Periodic Benefit Costs: 2020 2019 2020 2019 2020 2019
Service cost $ 1 $ 2 $ 15 $ 17 $ 2 $ 1
Interest cost 65 83 84 114 8 11
Expected return on plan assets (79) (77) (142) (174) 0 0
Recognized net actuarial loss (gain) 20 18 43 32 (1) (3)
Amortization of prior service credit (1) (1) (1) (1) (57) (57)
Recognized settlement loss 42 76 0 0 0 0
Recognized curtailment gain 0 0 (1) 0 0 0
Defined benefit plans 48 101 (2) (12) (48) (48)
Defined contribution plans 1 19 16 17 n/a n/a
Net Periodic Benefit Cost (Credit) 49 120 14 5 (48) (48)
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income (Loss):
Net actuarial (gain) loss(1)
(3) 171 0 0 (6) (9)
Amortization of net actuarial (loss) gain (62) (94) (43) (32) 1 3
Amortization of prior service credit 1 1 1 1 57 57
Total Recognized in Other Comprehensive Income (Loss)(2)
(64) 78 (42) (31) 52 51
Total Recognized in Net Periodic Benefit (Credit) Cost and Other Comprehensive Income (Loss) $ (15) $ 198 $ (28) $ (26) $ 4 $ 3


	Three Months Ended June 30,
	Pension Benefits
	U.S. Plans				Non-U.S. Plans				Retiree Health
Components of Net Periodic Benefit Costs:	2021		2020		2021		2020		2021		2020
Service cost	$	1	$	0	$	5	$	5	$	0	$	0
Interest cost	19		21		22		26		2		4
Expected return on plan assets	(27)		(26)		(52)		(46)		0		0
Recognized net actuarial loss (gain)	4		7		14		14		0		(1)
Amortization of prior service credit	(1)		(1)		0		0		(16)		(19)
Recognized settlement loss	13		13		0		0		0		0

Defined benefit plans	9		14		(11)		(1)		(14)		(16)
Defined contribution plans	0		6		5		5		n/a		n/a
Net Periodic Benefit Cost (Credit)	9		20		(6)		4		(14)		(16)

Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income (Loss):
Net actuarial (gain) loss (1)	(25)		(92)		0		0		2		(6)
Amortization of net actuarial (loss) gain	(17)		(20)		(14)		(14)		0		1
Amortization of net prior service credit	1		1		0		0		16		19

Total Recognized in Other Comprehensive Income (Loss)(2)	(41)		(111)		(14)		(14)		18		14
Total Recognized in Net Periodic Benefit (Credit) Cost and Other Comprehensive Income (Loss)	$	(32)	$	(91)	$	(20)	$	(10)	$	4	$	(2)

	Six Months Ended June 30,
	Pension Benefits
	U.S. Plans				Non-U.S. Plans				Retiree Health
Components of Net Periodic Benefit Costs:	2021		2020		2021		2020		2021		2020
Service cost	$	1	$	1	$	10	$	10	$	1	$	1
Interest cost	37		44		44		55		4		6
Expected return on plan assets	(55)		(52)		(104)		(93)		0		0
Recognized net actuarial loss (gain)	9		14		29		28		0		(1)
Amortization of prior service credit	(1)		(1)		0		0		(33)		(38)
Recognized settlement loss	28		32		0		0		0		0
Recognized curtailment gain	0		0		0		(1)		0		0
Defined benefit plans	19		38		(21)		(1)		(28)		(32)
Defined contribution plans	0		11		10		10		n/a		n/a
Net Periodic Benefit Cost (Credit)	19		49		(11)		9		(28)		(32)

Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income (Loss):
Net actuarial (gain) loss(1)	(69)		(80)		1		0		2		(6)
Amortization of net actuarial (loss) gain	(37)		(46)		(29)		(28)		0		1
Amortization of prior service credit	1		1		0		0		33		38

Total Recognized in Other Comprehensive Income (Loss)(2)	(105)		(125)		(28)		(28)		35		33
Total Recognized in Net Periodic Benefit (Credit) Cost and Other Comprehensive Income (Loss)	$	(86)	$	(76)	$	(39)	$	(19)	$	7	$	1

_____________

(1)The net actuarial (gain) loss for U.S. Plans primarily reflects (i) the remeasurement of our primary U.S. pension plans as a result of the payment of periodic settlements and (ii) adjustments for the actuarial valuation results based on the January 1st plan census data.

(2)Amounts represent the pre-tax effect included within Other Comprehensive Income (Loss). Refer to Note 1918 - Other Comprehensive Income (Loss) for related tax effects and the after-tax amounts.

Xerox ~~2020~~2021 Form 10-Q

3129

Contributions

The following table summarizes cash contributions to our defined benefit pension plans and retiree health benefit plans.

Nine Months Ended
September 30, Year Ended December 31,
2020 2019 Estimated 2020 2019
U.S. plans $ 18 $ 19 $ 25 $ 26
Non-U.S. plans 79 88 110 115
Total Pension $ 97 $ 107 $ 135 $ 141
Retiree Health $ 17 $ 22 $ 30 $ 30


	Six Months Ended June 30,				Year Ended December 31,
	2021		2020		Estimated 2021		2020
U.S. plans	$	12	$	12	$	25	$	35
Non-U.S. plans	57		52		105		104
Total Pension	$	69	$	64	$	130	$	139

Retiree Health	$	11	$	9	$	30	$	25

There are 0 mandatory contributions required in ~~2020~~2021 for our U.S. tax-qualified defined benefit plans to meet the minimum funding requirements.

Defined Contribution Plans

In the ~~third~~first quarter ~~2020,~~2021, the Company ~~temporarily~~ suspended and will not make its full year ~~2020~~2021 employer match/contribution for its U.S. based 401(k) saving plans for salaried employees. The suspension is expected to result in savings of approximately ~~$25~~$20 for the year ending December 31, ~~2020.~~

~~Xerox 2020 Form 10-Q~~

2021.

Note 1716 – Shareholders’ Equity of Xerox Holdings

(shares in thousands)

The shareholders' equity information presented below reflects the consolidated activity of Xerox Holdings.


	Common Stock(1)		Additional Paid-in Capital		Treasury Stock		Retained Earnings		AOCL(2)		Xerox Holdings Shareholders’ Equity		Non-controlling Interests		Total Equity
Balance at March 31, 2021	$	199	$	2,456	$	(162)	$	6,267	$	(3,335)	$	5,425	$	4	$	5,429

Comprehensive income, net	—		—		—		91		70		161		—		161
Cash dividends declared - common(3)	—		—		—		(47)		—		(47)		—		(47)
Cash dividends declared - preferred(4)	—		—		—		(3)		—		(3)		—		(3)


Stock option and incentive plans, net	0		5		—		—		—		5		—		5

Payments to acquire treasury stock, including fees	—		—		(251)		—		—		(251)		—		(251)
Cancellation of treasury stock	(10)		(244)		254		—		—		—		—		0
Investment from noncontrolling interests(5)	—		1		—		—		—		1		4		5
Other	—		(4)		—		—		—		(4)		—		(4)
Balance at June 30, 2021	$	189	$	2,214	$	(159)	$	6,308	$	(3,265)	$	5,287	$	8	$	5,295

Common Stock Additional Paid-in Capital Treasury Stock Retained Earnings
AOCL(1)
Xerox Holdings Shareholders’ Equity Non-controlling Interests
Total
Equity
Balance at June 30, 2020 $ 213 $ 2,722 $ 0 $ 6,223 $ (3,681) $ 5,477 $ 4 $ 5,481
Comprehensive income, net — — — 90 88 178 0 178
Cash dividends declared - common(2)
— — — (51) — (51) — (51)
Cash dividends declared - preferred(3)
— — — (4) — (4) — (4)
Stock option and incentive plans, net 1 (3) — — — (2) — (2)
Payments to acquire treasury stock, including fees — — (150) — — (150) — (150)
Balance at September 30, 2020 $ 214 $ 2,719 $ (150) $ 6,258 $ (3,593) $ 5,448 $ 4 $ 5,452

Common Stock Additional Paid-in Capital Treasury Stock Retained Earnings
AOCL(1)
Xerox Holdings Shareholders’ Equity Non- controlling Interests
Total
Equity
Balance at June 30, 2019 $ 225 $ 3,124 $ (131) $ 5,391 $ (3,647) $ 4,962 $ 30 $ 4,992
Comprehensive income (loss), net — — — 221 (203) 18 2 20
Cash dividends declared - common(2)
— — — (56) — (56) — (56)
Cash dividends declared - preferred(3)
— — — (4) — (4) — (4)
Stock option and incentive plans, net — 3 — — — 3 — 3
Payments to acquire treasury stock, including fees — — (68) — — (68) — (68)
Cancellation of treasury stock (4) (127) 131 — — — — 0
Distributions to noncontrolling interests — — — — — — (1) (1)
Balance at September 30, 2019 $ 221 $ 3,000 $ (68) $ 5,552 $ (3,850) $ 4,855 $ 31 $ 4,886


		Common Stock		Additional Paid-in Capital		Treasury Stock		Retained Earnings		AOCL(1)		Xerox Holdings Shareholders’ Equity		Non-controlling Interests		Total Equity			Common Stock(1)		Additional Paid-in Capital		Treasury Stock		Retained Earnings		AOCL(2)		Xerox Holdings Shareholders’ Equity		Non- controlling Interests		Total Equity
Balance at December 31, 2019		$	215	$	2,782	$	(76)	$	6,312	$	(3,646)	$	5,587	$	7	$	5,594
Balance at March 31, 2020																		Balance at March 31, 2020	$	213	$	2,712	$	0	$	6,252	$	(3,784)	$	5,393	$	7	$	5,400

Comprehensive income, net	Comprehensive income, net	—		—		—		115		53		168		0		168		Comprehensive income, net	—		—		—		27		103		130		—		130
Cash dividends declared - common~~(2)~~(3)	Cash dividends declared - common~~(2)~~(3)	—		—		—		(158)		—		(158)		—		(158)		Cash dividends declared - common~~(2)~~(3)	—		—		—		(53)		—		(53)		—		(53)
Cash dividends declared - preferred~~(3)~~(4)	Cash dividends declared - preferred~~(3)~~(4)	—		—		—		(11)		—		(11)		—		(11)		Cash dividends declared - preferred~~(3)~~(4)	—		—		—		(3)		—		(3)		—		(3)

Stock option and incentive plans, net	Stock option and incentive plans, net	1		11		—		—		—		12		—		12		Stock option and incentive plans, net	—		10		—		—		—		10		—		10

Payments to acquire treasury stock, including fees		—		—		(150)		—		—		(150)		—		(150)
Cancellation of treasury stock		(2)		(74)		76		—		—		—		—		0

Distributions to noncontrolling interests	Distributions to noncontrolling interests	—		—		—		—		—		—		(3)		(3)		Distributions to noncontrolling interests	—		—		—		—		—		—		(3)		(3)

Balance at September 30, 2020		$	214	$	2,719	$	(150)	$	6,258	$	(3,593)	$	5,448	$	4	$	5,452

Balance at June 30, 2020																		Balance at June 30, 2020	$	213	$	2,722	$	0	$	6,223	$	(3,681)	$	5,477	$	4	$	5,481

Xerox ~~2020~~2021 Form 10-Q

3330


	Common Stock(1)		Additional Paid-in Capital		Treasury Stock		Retained Earnings		AOCL(2)		Xerox Holdings Shareholders’ Equity		Non-controlling Interests		Total Equity
Balance at December 31, 2020	$	198	$	2,445	$	0	$	6,281	$	(3,332)	$	5,592	$	4	$	5,596

Comprehensive income, net	—		—		—		130		67		197		—		197
Cash dividends declared - common(3)	—		—		—		(96)		—		(96)		—		(96)
Cash dividends declared - preferred(4)	—		—		—		(7)		—		(7)		—		(7)


Stock option and incentive plans, net	1		16		—		—		—		17		—		17

Payments to acquire treasury stock, including fees	—		—		(413)		—		—		(413)		—		(413)
Cancellation of treasury stock	(10)		(244)		254		—		—		—		—		0
Investment from noncontrolling interests(5)	—		1		—		—		—		1		4		5
Other	—		(4)		—		—		—		(4)		—		(4)
Balance at June 30, 2021	$	189	$	2,214	$	(159)	$	6,308	$	(3,265)	$	5,287	$	8	$	5,295


		Common Stock		Additional Paid-in Capital		Treasury Stock		Retained Earnings		AOCL(1)		Xerox Holdings Shareholders’ Equity		Non- controlling Interests		Total Equity			Common Stock(1)		Additional Paid-in Capital		Treasury Stock		Retained Earnings		AOCL(2)		Xerox Holdings Shareholders’ Equity		Non- controlling Interests		Total Equity
Balance at December 31, 2018		$	232	$	3,321	$	(55)	$	5,072	$	(3,565)	$	5,005	$	34	$	5,039
Cumulative effect of change in accounting principle		—		—		—		127		(127)		—		—		0
Balance at December 31, 2019																		Balance at December 31, 2019	$	215	$	2,782	$	(76)	$	6,312	$	(3,646)	$	5,587	$	7	$	5,594

Comprehensive income (loss), net	Comprehensive income (loss), net	—		—		—		535		(158)		377		8		385		Comprehensive income (loss), net	—		—		—		25		(35)		(10)		—		(10)
Cash dividends declared - common~~(2)~~(3)	Cash dividends declared - common~~(2)~~(3)	—		—		—		(171)		—		(171)		—		(171)		Cash dividends declared - common~~(2)~~(3)	—		—		—		(107)		—		(107)		—		(107)
Cash dividends declared - preferred~~(3)~~(4)	Cash dividends declared - preferred~~(3)~~(4)	—		—		—		(11)		—		(11)		—		(11)		Cash dividends declared - preferred~~(3)~~(4)	—		—		—		(7)		—		(7)		—		(7)

Stock option and incentive plans, net	Stock option and incentive plans, net	—		23		—		—		—		23		—		23		Stock option and incentive plans, net	—		14		—		—		—		14		—		14

Payments to acquire treasury stock, including fees		—		—		(368)		—		—		(368)		—		(368)

Cancellation of treasury stock	Cancellation of treasury stock	(11)		(344)		355		—		—		—		—		0		Cancellation of treasury stock	(2)		(74)		76		—		—		—		—		0
Distributions to noncontrolling interests	Distributions to noncontrolling interests	—		—		—		—		—		—		(11)		(11)		Distributions to noncontrolling interests	—		—		—		—		—		—		(3)		(3)

Balance at September 30, 2019		$	221	$	3,000	$	(68)	$	5,552	$	(3,850)	$	4,855	$	31	$	4,886
Balance at June 30, 2020																		Balance at June 30, 2020	$	213	$	2,722	$	0	$	6,223	$	(3,681)	$	5,477	$	4	$	5,481

_____________

(1)Common Stock has a par value of $1 per share.

(2)Refer to Note 1918 - Other Comprehensive Income (Loss) for the components of AOCL.

~~(2)~~(3)Cash dividends declared on common stock for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019~~2020 were $0.25 per share, respectively, and ~~$0.75~~$0.50 per share, respectively.

~~(3)~~(4)Cash dividends declared on preferred stock for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019~~2020 were $20.00 per share, respectively, and ~~$60.00~~$40.00 per share, respectively.

(5)Refer to Note 5 - Acquisitions and Investments for additional information regarding this noncontrolling investment.

Treasury Stock

The following is a summary of the purchases of ~~common stock~~Common Stock during ~~2020:~~2021:


		Shares	Amount			Shares	Amount
Balance at December 31, 2019		2,031	$	76
Balance at December 31, 2020					Balance at December 31, 2020	0	$	0
Purchases(1)	Purchases(1)	8,007	150		Purchases(1)	17,067	413
Cancellations	Cancellations	(2,031)	(76)		Cancellations	(10,426)	(254)
Balance at September 30, 2020		8,007	$	150
Balance at June 30, 2021					Balance at June 30, 2021	6,641	$	159

_____________

(1)Includes associated fees.

Xerox 2021 Form 10-Q 31

Note 1817 – ~~Shareholders'~~Shareholder's Equity of Xerox

The ~~shareholders'~~shareholder's equity information presented below reflects the consolidated activity of Xerox.

Common Stock Additional Paid-in Capital Treasury Stock Retained Earnings
AOCL(1)
Xerox Shareholder's Equity Non-controlling Interests
Total
Equity
Balance at June 30, 2020 $ 0 $ 3,515 $ 0 $ 5,925 $ (3,681) $ 5,759 $ 4 $ 5,763
Comprehensive income, net — — — 101 88 189 — 189
Dividends declared to parent — — — (55) — (55) — (55)
Capital contributions from parent(2)
— 1,494 — — — 1,494 — 1,494
Transfers to parent — (150) — — — (150) — (150)
Balance at September 30, 2020 $ 0 $ 4,859 $ 0 $ 5,971 $ (3,593) $ 7,237 $ 4 $ 7,241


	Additional Paid-in Capital		Retained Earnings		AOCL(1)		Xerox Shareholder's Equity		Non- controlling Interests		Total Equity
Balance at March 31, 2021	$	3,351	$	5,674	$	(3,335)	$	5,690	$	4	$	5,694
Comprehensive income, net	—		96		70		166		—		166


Dividends declared to parent	—		(358)		—		(358)		—		(358)

Transfers from parent	52		—		—		52		—		52



Investment from noncontrolling interests(2)	1		—		—		1		4		5




Balance at June 30, 2021	$	3,404	$	5,412	$	(3,265)	$	5,551	$	8	$	5,559


	Additional Paid-in Capital		Retained Earnings		AOCL(1)		Xerox Shareholder's Equity		Non- controlling Interests		Total Equity
Balance at March 31, 2020	$	3,504	$	5,955	$	(3,784)	$	5,675	$	7	$	5,682

Comprehensive income, net	—		27		103		130		—		130



Dividends declared to parent	—		(57)		—		(57)		—		(57)
Transfers from parent	11		—		—		11		—		11




Distributions to noncontrolling interests	—		—		—		—		(3)		(3)

Balance at June 30, 2020	$	3,515	$	5,925	$	(3,681)	$	5,759	$	4	$	5,763


	Additional Paid-in Capital		Retained Earnings		AOCL(1)		Xerox Shareholder's Equity		Non- controlling Interests		Total Equity
Balance at December 31, 2020	$	4,879	$	5,834	$	(3,332)	$	7,381	$	4	$	7,385

Comprehensive income, net	—		137		67		204		—		204


Dividends declared to parent	—		(559)		—		(559)		—		(559)
Intercompany loan capitalization(3)	(1,494)		—		—		(1,494)		—		(1,494)
Transfers from parent	18		—		—		18		—		18



Investment from noncontrolling interests(2)	1		—		—		1		4		5





Balance at June 30, 2021	$	3,404	$	5,412	$	(3,265)	$	5,551	$	8	$	5,559

~~Xerox 2020 Form 10-Q~~


	Additional Paid-in Capital		Retained Earnings		AOCL(1)		Xerox Shareholder's Equity		Non- controlling Interests		Total Equity
Balance at December 31, 2019	$	3,266	$	6,247	$	(3,646)	$	5,867	$	7	$	5,874

Comprehensive income (loss), net	—		25		(35)		(10)		—		(10)


Dividends declared to parent	—		(347)		—		(347)		—		(347)
Transfers from parent	249		—		—		249		—		249






Distributions to noncontrolling interests	—		—		—		—		(3)		(3)

Balance at June 30, 2020	$	3,515	$	5,925	$	(3,681)	$	5,759	$	4	$	5,763

_____________

Common Stock Additional Paid-in Capital Treasury Stock Retained Earnings
AOCL(1)
Xerox Shareholders’ Equity Non- controlling Interests
Total
Equity
Balance at June 30, 2019 $ 225 $ 3,124 $ (131) $ 5,391 $ (3,647) $ 4,962 $ 30 $ 4,992
Comprehensive income (loss), net — — — 221 (203) 18 2 20
Dividends declared to parent — — — (58) (58) — (58)
Stock option and incentive plans, net — (2) — — — (2) — (2)
Cancellation of treasury stock (4) (127) 131 — — — — 0
Distributions to noncontrolling interests — — — — — — (1) (1)
Reorganization (221) 446 — — — 225 — 225
Balance at September 30, 2019 $ 0 $ 3,441 $ 0 $ 5,554 $ (3,850) $ 5,145 $ 31 $ 5,176

Common
Stock
Additional
Paid-in
Capital
Treasury Stock
Retained
Earnings
AOCL(1)
Xerox
Shareholder's
Equity
Non-controlling
Interests
Total
Equity
Balance at December 31, 2019 $ 0 $ 3,266 $ 0 $ 6,247 $ (3,646) $ 5,867 $ 7 $ 5,874
Comprehensive income, net — — — 126 53 179 — 179
Dividends declared to parent — — — (402) — (402) — (402)
Capital contributions from parent(2)
— 1,494 — — 1,494 — 1,494
Transfers from parent — 99 — — — 99 — 99
Distributions to noncontrolling interests — — — — — — (3) (3)
Balance at September 30, 2020 $ 0 $ 4,859 $ 0 $ 5,971 $ (3,593) $ 7,237 $ 4 $ 7,241

Common
Stock
Additional
Paid-in
Capital
Treasury Stock
Retained
Earnings
AOCL(1)
Xerox
Shareholders’
Equity
Non-
controlling
Interests
Total
Equity
Balance at December 31, 2018 $ 232 $ 3,321 $ (55) $ 5,072 $ (3,565) $ 5,005 $ 34 $ 5,039
Cumulative effect of change in accounting principle — — — 127 (127) — — 0
Comprehensive income (loss), net — — — 535 (158) 377 8 385
Cash dividends declared - common — — — (115) — (115) — (115)
Cash dividends declared - preferred — — — (7) — (7) — (7)
Dividends declared to parent — — — (58) — (58) — (58)
Stock option and incentive plans, net — 18 — — — 18 — 18
Payments to acquire treasury stock, including fees — — (300) — — (300) — (300)
Cancellation of treasury stock (11) (344) 355 — — — — 0
Distributions to noncontrolling interests — — — — — — (11) (11)
Reorganization (221) 446 — — — 225 — 225
Balance at September 30, 2019 $ 0 $ 3,441 $ 0 $ 5,554 $ (3,850) $ 5,145 $ 31 $ 5,176

~~_____________~~

(1)Refer to Note 1918 - Other Comprehensive Income (Loss) for the components of AOCL.

(2)~~Primarily represents the contribution of aggregate net debt proceeds received from Senior Note offerings in the third quarter 2020 from Xerox Holdings to Xerox Corporation.~~ Refer to Note 135 - ~~Debt~~Acquisitions and Investments for additional information regarding ~~the Senior~~this noncontrolling investment.

(3)Refer to Note ~~offerings.~~12 - Debt for information regarding capitalization of balance to Intercompany Loan with Xerox Holdings Corporation.

Xerox ~~2020~~2021 Form 10-Q

3532

Note 1918 - Other Comprehensive Income (Loss)

Other Comprehensive Income (Loss) is comprised of the following:

Three Months Ended
September 30, Nine Months Ended
September 30,
2020 2019 2020 2019
Pre-tax Net of Tax Pre-tax Net of Tax Pre-tax Net of Tax Pre-tax Net of Tax
Translation adjustments gains (losses) $ 176 $ 179 $ (153) $ (155) $ (2) $ 7 $ (121) $ (122)
Unrealized gains (losses)
Changes in fair value of cash flow hedges gains 1 1 4 4 5 4 10 8
Changes in cash flow hedges reclassed to earnings(1)
0 0 (3) (3) (1) 0 (6) (5)
Net Unrealized gains 1 1 1 1 4 4 4 3
Defined benefit plans (losses) gains
Net actuarial/prior service (losses) gains (77) (58) (126) (95) 9 6 (162) (122)
Prior service amortization(2)
(20) (15) (19) (14) (59) (44) (59) (44)
Actuarial loss amortization/settlement(2)
31 23 34 26 104 79 123 93
Fuji Xerox changes in defined benefit plans, net(3)
0 0 (3) (3) 0 0 (1) (1)
Other (losses) gains(4)
(42) (42) 38 38 1 1 36 36
Changes in defined benefit plans (losses) gains (108) (92) (76) (48) 55 42 (63) (38)
Other Comprehensive Income (Loss) 69 88 (228) (202) 57 53 (180) (157)
Less: Other comprehensive income attributable to noncontrolling interests 0 0 1 1 0 0 1 1
Other Comprehensive Income (Loss) Attributable to Xerox Holdings/Xerox $ 69 $ 88 $ (229) $ (203) $ 57 $ 53 $ (181) $ (158)


	Three Months Ended June 30,								Six Months Ended June 30,
	2021				2020				2021				2020
	Pre-tax		Net of Tax		Pre-tax		Net of Tax		Pre-tax		Net of Tax		Pre-tax		Net of Tax
Translation Adjustments Gains (Losses)	$	55	$	54	$	26	$	25	$	3	$	3	$	(178)	$	(172)
Unrealized (Losses) Gains
Changes in fair value of cash flow hedges (losses) gains	(2)		(1)		(3)		(1)		(12)		(9)		4		3
Changes in cash flow hedges reclassed to earnings(1)	2		1		(2)		(1)		3		2		(1)		0

Net Unrealized (Losses) Gains	0		0		(5)		(2)		(9)		(7)		3		3

Defined Benefit Plans Gains (Losses)
Net actuarial/prior service gains	23		17		98		73		66		49		86		64
Prior service amortization(2)	(17)		(13)		(20)		(15)		(34)		(25)		(39)		(29)
Actuarial loss amortization/settlement(2)	31		23		33		26		66		49		73		56

Other (losses) gains(3)	(11)		(11)		(4)		(4)		(2)		(2)		43		43
Changes in Defined Benefit Plans Gains	26		16		107		80		96		71		163		134



Other Comprehensive Income (Loss) Attributable to Xerox Holdings/Xerox	$	81	$	70	$	128	$	103	$	90	$	67	$	(12)	$	(35)

____________

(1)Reclassified to Cost of sales - refer to Note 1413 - Financial Instruments for additional information regarding our cash flow hedges.

(2)Reclassified to Total Net Periodic Benefit Cost - refer to Note 1615 - Employee Benefit Plans for additional information.

(3)~~Represents our share of Fuji Xerox's benefit plan changes.~~

~~(4)~~Primarily represents currency impact on cumulative amount of benefit plan net actuarial losses and prior service credits in AOCL.

Accumulated Other Comprehensive Loss (AOCL)

AOCL is comprised of the following:

September 30,
2020 December 31,
2019
Cumulative translation adjustments $ (1,954) $ (1,961)
Other unrealized gains (losses), net 2 (2)
Benefit plans net actuarial losses and prior service credits (1,641) (1,683)
Total Accumulated other comprehensive loss attributable to Xerox Holdings/Xerox $ (3,593) $ (3,646)


	June 30, 2021		December 31, 2020
Cumulative translation adjustments	$	(1,717)	$	(1,720)
Other unrealized (losses) gains, net	(5)		2
Benefit plans net actuarial losses and prior service credits	(1,543)		(1,614)
Total Accumulated Other Comprehensive Loss Attributable to Xerox Holdings/Xerox	$	(3,265)	$	(3,332)

Xerox ~~2020~~2021 Form 10-Q

3633

Note 2019 – Earnings per Share

(shares in thousands)

The following table sets forth the computation of basic and diluted earnings per share of Xerox Holdings Corporation's common ~~stock of Xerox Holdings:~~stock:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2020		2019		2020		2019			2021		2020		2021		2020
Basic Earnings per Share	Basic Earnings per Share									Basic Earnings per Share
Net Income from Continuing Operations Attributable to Xerox Holdings		$	90	$	157	$	115	$	382
Net Income Attributable to Xerox Holdings										Net Income Attributable to Xerox Holdings	$	91	$	27	$	130	$	25
Accrued dividends on preferred stock	Accrued dividends on preferred stock	(4)		(4)		(11)		(11)		Accrued dividends on preferred stock	(3)		(3)		(7)		(7)
Adjusted Net income from continuing operations available to common shareholders		86		153		104		371
Income from discontinued operations attributable to Xerox Holdings, net of tax		0		64		0		153

Adjusted Net income available to common shareholders	Adjusted Net income available to common shareholders	$	86	$	217	$	104	$	524	Adjusted Net income available to common shareholders	$	88	$	24	$	123	$	18

Weighted average common shares outstanding	Weighted average common shares outstanding	211,169		220,269		212,163		224,257		Weighted average common shares outstanding	187,009		212,949		191,433		212,852

Basic Earnings per Share:
Continuing operations		$	0.41	$	0.70	$	0.49	$	1.66
Discontinued operations		0		0.29		0		0.68

Basic Earnings per Share	Basic Earnings per Share	$	0.41	$	0.99	$	0.49	$	2.34	Basic Earnings per Share	$	0.47	$	0.11	$	0.64	$	0.08

Diluted Earnings per Share	Diluted Earnings per Share									Diluted Earnings per Share
Net Income from Continuing Operations Attributable to Xerox Holdings		$	90	$	157	$	115	$	382
Net Income Attributable to Xerox Holdings										Net Income Attributable to Xerox Holdings	$	91	$	27	$	130	$	25
Accrued dividends on preferred stock	Accrued dividends on preferred stock	(4)		0		(11)		0		Accrued dividends on preferred stock	(3)		(3)		(7)		(7)
Adjusted Net income from continuing operations available to common shareholders		86		157		104		382
Income from discontinued operations attributable to Xerox Holdings, net of tax		0		64		0		153

Adjusted Net income available to common shareholders	Adjusted Net income available to common shareholders	$	86	$	221	$	104	$	535	Adjusted Net income available to common shareholders	$	88	$	24	$	123	$	18

Weighted average common shares outstanding	Weighted average common shares outstanding	211,169		220,269		212,163		224,257		Weighted average common shares outstanding	187,009		212,949		191,433		212,852
Common shares issuable with respect to:	Common shares issuable with respect to:									Common shares issuable with respect to:
Stock options	Stock options	0		42		20		37		Stock options	0		0		0		30
Restricted stock and performance shares	Restricted stock and performance shares	1,538		4,014		2,600		4,429		Restricted stock and performance shares	2,012		2,618		2,096		3,132
Convertible preferred stock	Convertible preferred stock	0		6,742		0		6,742		Convertible preferred stock	0		0		0		0

Adjusted Weighted average common shares outstanding		212,707		231,067		214,783		235,465
Adjusted weighted average common shares outstanding										Adjusted weighted average common shares outstanding	189,021		215,567		193,529		216,014

Diluted Earnings per Share:
Continuing operations		$	0.41	$	0.68	$	0.49	$	1.62
Discontinued operations		0		0.28		0		0.65

Diluted Earnings per Share	Diluted Earnings per Share	$	0.41	$	0.96	$	0.49	$	2.27	Diluted Earnings per Share	$	0.46	$	0.11	$	0.64	$	0.08

The following securities were not included in the computation of diluted earnings per share as they were either contingently issuable shares or shares that if included would have been anti-dilutive:	The following securities were not included in the computation of diluted earnings per share as they were either contingently issuable shares or shares that if included would have been anti-dilutive:									The following securities were not included in the computation of diluted earnings per share as they were either contingently issuable shares or shares that if included would have been anti-dilutive:
Stock options	Stock options	808		841		788		847		Stock options	694		845		694		816
Restricted stock and performance shares	Restricted stock and performance shares	3,118		2,358		2,055		1,944		Restricted stock and performance shares	4,647		3,648		4,562		3,134
Convertible preferred stock	Convertible preferred stock	6,742		0		6,742		0		Convertible preferred stock	6,742		6,742		6,742		6,742
Total Anti-Dilutive Securities	Total Anti-Dilutive Securities	10,668		3,199		9,585		2,791		Total Anti-Dilutive Securities	12,083		11,235		11,998		10,692

Dividends per Common Share	Dividends per Common Share	$	0.25	$	0.25	$	0.75	$	0.75	Dividends per Common Share	$	0.25	$	0.25	$	0.50	$	0.50

Xerox ~~2020~~2021 Form 10-Q

3734

Note 2120 – Contingencies and Litigation

Legal Matters

We are involved in a variety of claims, lawsuits, investigations and proceedings concerning: securities law; governmental entity contracting; servicing and procurement law; intellectual property law; environmental law; employment law; the Employee Retirement Income Security Act (ERISA); and other laws and regulations. We determine whether an estimated loss from a contingency should be accrued by assessing whether a loss is deemed probable and can be reasonably estimated. We assess our potential liability by analyzing our litigation and regulatory matters using available information. We develop our views on estimated losses in consultation with outside counsel handling our defense in these matters, which involves an analysis of potential results, assuming a combination of litigation and settlement strategies. Should developments in any of these matters cause a change in our determination as to an unfavorable outcome and result in the need to recognize a material accrual, or should any of these matters result in a final adverse judgment or be settled for significant amounts, they could have a material adverse effect on our results of operations, cash flows and financial position in the period or periods in which such change in determination, judgment or settlement occurs.

Brazil Contingencies

Our Brazilian operations have received or been the subject of numerous governmental assessments related to indirect and other taxes. The tax matters principally relate to claims for taxes on the internal transfer of inventory, municipal service taxes on rentals and gross revenue taxes. We are disputing these tax matters and intend to vigorously defend our positions. Based on the opinion of legal counsel and current reserves for those matters deemed probable of loss, we do not believe that the ultimate resolution of these matters will materially impact our results of operations, financial position or cash flows. Below is a summary of our Brazilian tax contingencies:


		September 30, 2020		December 31, 2019			June 30, 2021		December 31, 2020
Tax contingency - unreserved	Tax contingency - unreserved	$	325	$	442	Tax contingency - unreserved	$	392	$	355
Escrow cash deposits	Escrow cash deposits	36		51		Escrow cash deposits	41		39
Surety bonds	Surety bonds	97		135		Surety bonds	112		112
Letters of credit	Letters of credit	69		91		Letters of credit	80		78
Liens on Brazilian assets	Liens on Brazilian assets	0		0		Liens on Brazilian assets	0		0

The ~~decrease~~increase in the unreserved portion of the tax contingency, inclusive of any related interest, was primarily related to ~~currency.~~currency and interest. With respect to the unreserved tax contingency, the majority has been assessed by management as being remote as to the likelihood of ultimately resulting in a loss to the Company. In connection with the above proceedings, customary local regulations may require us to make escrow cash deposits or post other security of up to half of the total amount in dispute, as well as, additional surety bonds and letters of credit, which include associated indexation. Generally, any escrowed amounts would be refundable and any liens on assets would be removed to the extent the matters are resolved in our favor. We are also involved in certain disputes with contract and former employees. Exposures related to labor matters are not material to the financial statements as of ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019.~~2020. We routinely assess all these matters as to the probability of ultimately incurring a liability against our Brazilian operations and record our best estimate of the ultimate loss in situations where we assess the likelihood of an ultimate loss as probable.

Litigation Against the Company

Pending Litigation Relating to the Fuji Transaction:

1.Ribbe v. Jacobson, et al.:

On April 11, 2019, Carmen Ribbe filed a putative derivative and class action stockholder complaint in the Supreme Court of the State of New York for New York County, naming as defendants Xerox, current Board members Joseph J. Echevarria, Cheryl Gordon Krongard, Keith Cozza, Giovanni G. Visentin, Jonathan Christodoro, Nicholas Graziano, and A. Scott Letier, and former Board members Jeffrey Jacobson, William Curt Hunter, Robert J. Keegan, Charles Prince, Ann N. Reese, Stephen H. Rusckowski, Gregory Q. Brown, and Sara Martinez Tucker. Plaintiff previously filed a putative shareholder derivative lawsuit on May 24, 2018 against certain of these defendants, as well as others, in the same court; that lawsuit was dismissed without prejudice on December 6, ~~2018.~~2018 ("Ribbe I"). The new complaint included putative derivative claims on behalf of Xerox for breach of fiduciary duty against the then members of the Xerox Board who approved Xerox’s entry into agreements to settle shareholder actions filed in 2018 in the same court against Xerox, its then directors, and FUJIFILM Holdings Corporation (“Fujifilm”) in connection with a proposed transaction announced in January 2018 to combine Xerox and Fuji Xerox (the “Fuji

Xerox 2021 Form 10-Q 35

Transaction”), including a consolidated putative class action, In re Xerox Corporation Consolidated Shareholder

~~Xerox 2020 Form 10-Q~~

Litigation (“XCCSL”), and actions filed by Darwin Deason, Deason v. Fujifilm Holdings Corp., et al. and Deason v. Xerox Corporation, et al., against the same defendants as well as, in the first Deason action, former Xerox Chief Executive Officer Ursula M. Burns (the "Fuji Transaction Shareholder Lawsuits"). Plaintiff alleged that the settlements ceded control of the Board and the Company to Darwin Deason and Carl C. Icahn without a vote by, or compensation to, other Xerox stockholders; improperly provided certain benefits and releases to the resigning and continuing directors; and subjected Xerox to potential breach of contract damages in an action by Fuji relating to Xerox’s termination of the proposed Fuji Transaction. Plaintiff also alleged that the current Board members breached their fiduciary duties by allegedly rejecting plaintiff’s January 14, 2019 shareholder demand on the Board to remedy harms arising from entry into the Deason and XCCSL settlements. The new complaint further included direct claims for breach of fiduciary duty on behalf of a putative class of current Xerox stockholders other than Mr. Deason, Mr. Icahn, and their affiliated entities (the “Ribbe Class”) against the defendants for causing Xerox to enter into the Deason and XCCSL settlements, which plaintiff alleged perpetuated control of Xerox by Mr. Icahn and Mr. Deason and denied the voting franchise of Xerox shareholders. Among other things, plaintiff sought damages in an unspecified amount for the alleged fiduciary breaches in favor of Xerox against defendants jointly and severally; rescission or reformation of the Deason and XCCSL settlements; restitution of funds paid to the resigning directors under the Deason settlement; an injunction against defendants’ engaging in the alleged wrongful practices and equitable relief affording the putative Ribbe Class the ability to determine the composition of the Board; costs and attorneys’ fees; and other further relief as the Court may deem proper.

Defendants accepted service of the complaint as of May 16, 2019. On June 4, 2019, the Court entered an order setting a briefing schedule for defendants’ motions to dismiss the complaint. On July 12, 2019, plaintiff filed a motion to preclude defendants from referencing in their motions to dismiss the formation of, or work by, the committee of the Board established to investigate plaintiff’s shareholder demand. On July 18, 2019, the Court denied plaintiff’s motion and adjourned sine die the deadline by which defendants must file any motions to dismiss the complaint.

On January 6, 2020, plaintiff filed his first amended complaint (“FAC”). The FAC includes many of plaintiff’s original allegations regarding the 2018 shareholder litigation and settlements, as well as additional allegations, including, among others, that the members of the Special Committee of the Board that investigated plaintiff’s demand lacked independence and wrongfully refused to pursue the claims in the demand; allegations that an agreement announced in November 2019 for, among other things, the sale by Xerox of its interest in Fuji Xerox to Fujifilm and dismissal of Fujifilm’s breach of contract lawsuit against Xerox (the “FX Sale Transaction”), was unfavorable to Xerox; and allegations about a potential acquisition by Xerox of HP similar to those in the Miami Firefighters derivative action described below. In addition to the claims in the April 11, 2019 complaint, the FAC adds as defendants Carl C. Icahn, Icahn Capital LP, and High River Limited Partnership (the “Icahn defendants”) and asserts claims against those defendants and the Board similar to those in Miami Firefighters relating to the Icahn defendants’ purchases of HP stock allegedly with knowledge of material nonpublic information concerning Xerox’s potential acquisition of HP. In addition to the relief sought in Ribbe’s prior complaint, the FAC seeks relief similar to that sought in Miami Firefighters relating to the Icahn defendants’ alleged purchases of HP stock.

On January 21, 2020, plaintiff in the Miami Firefighters action filed a motion seeking to intervene in Ribbe and to have stayed, or alternatively, severed and consolidated with the Miami Firefighters action, any claims first filed in Miami Firefighters and later asserted by Ribbe. At a conference held on February 25, 2020, the Court denied the motion to intervene without prejudice. On March 6, 2020, plaintiff in the Miami Firefighters action renewed its motion. On July 23, 2020, after hearing oral argument, the Court issued an order denying the motion and setting certain case deadlines.

Discovery ~~has~~ commenced. On August 7, 2020, Xerox, the director defendants, and the Icahn defendants filed separate motions to dismiss. On October 1, 2020, plaintiff filed a cross-motion seeking, among other relief, joinder of Xerox Holdings Corporation as a nominal defendant. Briefing on the motions to dismiss and plaintiff’s cross-motion was completed on October 16, 2020. On December 14, 2020, following oral argument, the Court issued a decision and order denying plaintiff’s cross-motion and granting defendants’ motions, dismissing the action in its entirety as to all defendants. Dismissal as to the Icahn defendants was conditioned on the filing of an affidavit, which the Icahn defendants filed on December 16, 2020, indicating whether defendant Icahn gained a profit or incurred a loss on purchases of HP stock during the relevant time period.

On January 13, 2021, plaintiff filed a notice of appeal of the December 14, 2020 dismissal order to the Appellate Division, First Department. Upon his application to the Appellate Division, plaintiff’s time to perfect the appeal of the December 14, 2020 dismissal order has been extended to September 13, 2021.

Xerox 2021 Form 10-Q 36

On April 7, 2021, plaintiff filed in the previously dismissed Ribbe I and XCCSL actions a motion seeking an award of attorneys’ fees of $1.5 and a service award of $10 thousand for benefits he allegedly obtained for Xerox and its stockholders. On June 4, 2021, the Court granted plaintiff’s fee application, in part, and awarded plaintiff attorneys’ fees in the amount of $125 thousand in the dismissed actions. The Court denied plaintiff’s request for a service award.

Xerox will vigorously defend against this matter. At this time, it is premature to make any conclusion regarding the probability of incurring material losses in this litigation. Should developments cause a change in our determination as to an unfavorable outcome, or result in a final adverse judgment or settlement, there could be a material adverse effect on our results of operations, cash flows and financial position in the period in which such change in determination, judgment, or settlement occurs.

~~Xerox 2020 Form 10-Q~~

2.Miami Firefighters’ Relief & Pension Fund v. Icahn, et al.:

On December 13, 2019, alleged shareholder Miami Firefighters’ Relief & Pension Fund (“Miami Firefighters”) filed a purported derivative complaint in New York State Supreme Court, New York County on behalf of Xerox Holdings Corporation ("Xerox Holdings") (as nominal defendant) against Carl Icahn and his affiliated entities High River Limited Partnership and Icahn Capital LP (the "Icahn defendants"), Xerox Holdings, and all current Xerox Holdings directors (the "Directors"). Plaintiff made no demand on the Board before bringing the action, but instead alleges that doing so would be futile because the Directors lack independence due to alleged direct or indirect relationships with Icahn. Among other things, the complaint alleges that Icahn controls and dominates Xerox Holdings and therefore owes a fiduciary duty of loyalty to Xerox Holdings, which he breached by acquiring HP stock at a time when he knew that Xerox Holdings was considering an offer to acquire HP or had knowledge of the "obvious merits" of such potential acquisition, and that the Icahn defendants’ holdings of HP common stock have risen in market value by approximately $128 since disclosure of the offer. The complaint includes four causes of action: breach of fiduciary duty of loyalty against the Icahn defendants; breach of contract against the Icahn defendants (for purchasing HP stock in violation of Icahn’s confidentiality agreement with Xerox Holdings); unjust enrichment against the Icahn defendants; and breach of fiduciary duty of loyalty against the Directors (for any consent to the Icahn defendants’ purchases of HP common stock while Xerox Holdings was considering acquiring HP). The complaint seeks a judgment of breach of fiduciary duties against the Icahn defendants and the Directors; a declaration that Icahn breached his confidentiality agreement with Xerox Holdings; a constructive trust on Icahn Capital and High River's investments in HP securities; disgorgement to Xerox Holdings of profits Icahn Capital and High River earned from trading in HP stock; payment of unspecified damages by the Directors for breaching fiduciary duties; and attorneys' fees, costs, and other relief the Court deems just and proper. On January 15, 2020, the Court entered an order granting plaintiff’s unopposed motion to consolidate with Miami Firefighters a similar action filed on December 26, 2019 by alleged shareholder Steven J. Reynolds against the same parties in the same court, and designating Miami Firefighters’ counsel as lead counsel in the consolidated action. On January 21, 2020, plaintiff filed a motion seeking to intervene in Ribbe v. Jacobson, et al., described above, and to have stayed, or alternatively, severed and consolidated with this action, any claims first filed in this action and later asserted by Ribbe. At a conference held on February 25, 2020, the Court denied the motion to intervene without prejudice. On March 6, 2020, plaintiff in the Miami Firefighters action renewed its motion. On July 23, 2020, after hearing oral argument, the Court issued an order denying the motion and setting certain case deadlines.

Discovery has commenced. On August 10, 2020, the Xerox defendants and the Icahn defendants filed separate motions to dismiss. Briefing on the motions was completed on October 21, 2020. On December 14, 2020, following oral argument, the Court issued a decision and order granting defendants’ motions and dismissing the action in its entirety as to all defendants. Dismissal as to the Icahn defendants was conditioned on the filing of an affidavit, which the Icahn defendants filed on December 16, 2020, indicating whether defendant Icahn gained a profit or incurred a loss on purchases of HP stock during the relevant time period.

On December 23, 2020, plaintiff filed a motion seeking discovery related to the Icahn defendants’ losses resulting from their investment in HP. The motion was fully briefed on January 7, 2021. On January 15, 2021, the Court issued a decision and order denying the motion.

Also on January 15, 2021, plaintiff filed a notice of appeal of the December 14, 2020 dismissal order to the Appellate Division, First Department. On January 20, 2021, plaintiff filed a notice of appeal of the January 15, 2021 order denying its motion for discovery to the Appellate Division, First Department. On July 15, 2021, plaintiff filed its brief in connection with the appeals of the December 14, 2020 dismissal order and the January 15, 2021 discovery order.

Xerox 2021 Form 10-Q 37

Xerox Holdings will vigorously defend against this matter. At this time, it is premature to make any conclusion regarding the probability of incurring material losses in this litigation. Should developments cause a change in our determination as to an unfavorable outcome, or result in a final adverse judgment or settlement, there could be a material adverse effect on our results of operations, cash flows and financial position in the period in which such change in determination, judgment, or settlement occurs.

Other Litigation

1.Xerox Holdings Corporation v. Factory Mutual Insurance Company and Related Actions:

On March 10, 2021, Xerox Holdings Corporation (“XHC”) filed a complaint for breach of contract and declaratory judgment against Factory Mutual Insurance Company in Rhode Island Superior Court, Providence County seeking insurance coverage for business interruption losses resulting from the coronavirus/COVID-19 pandemic. The complaint alleges that defendant agreed to provide XHC with up to $1 billion in per-occurrence coverage for losses resulting from pandemic-related loss or damage to certain real and other property, including business interruption loss resulting from insured property damage; that the pandemic had inflicted significant physical loss or damage to property of XHC and its direct and indirect customers; that XHC’s worldwide actual and projected losses through the end of 2020 totaled in excess of $300 (and is still increasing); and that following XHC’s timely and proper claim in March 2020 for coverage under the “all risk” commercial property insurance policy it had purchased from defendant, defendant improperly denied and rejected coverage for most of the claim. The complaint seeks a jury trial, a declaratory judgment against defendant declaring that Xerox is entitled to full coverage of costs and losses under defendant’s policy and declaring that defendant is required to pay for such costs and losses, subject to any applicable limits; damages in an amount to be determined at trial; consequential damages; attorneys’ fees and costs; pre- and post-judgment interest; and other relief the Court deems just and proper. Also on March 10, 2021, subsidiaries of XHC filed similar complaints and related requests for arbitration in Toronto, London, and Amsterdam (see below).

XHC consented to defendant’s request for an extension of its time in which to answer or otherwise respond to the complaint. The parties consented to assignment to the Court’s business calendar. At an initial conference on April 8, 2021, both parties informed the Court that they anticipate filing motions for judgment on the pleadings. On May 6, 2021, FMG filed its answer to the complaint. The parties thereafter agreed to stay all non-U.S. proceedings pending the outcome of the U.S. litigation.

a.Canadian action

On March 10, 2021, plaintiffs Xerox Canada Inc. and Xerox Canada Ltd. filed a Notice of Action against Factory Mutual Insurance Company in the Ontario Superior Court of Justice in Toronto. On April 9, 2021, plaintiffs filed their Statement of Claim. Plaintiffs must serve both filings by September 10, 2021.

The parties have executed a tolling agreement and will seek an order from the Court staying the action on consent.

b.UK action

On March 10, 2021, plaintiffs Concept Group Limited, Continua Limited, Xerox Limited, and Xerox UK Limited filed a Claim Form against F.M. Insurance Company Limited in the High Court of Justice, Commercial Court, in London. Also on March 10, 2021, plaintiffs submitted 2 Requests for Arbitration, which were withdrawn after the parties agreed on March 31, 2021 that both liability and quantum of plaintiffs’ claims would be litigated in the Commercial Court proceeding.

On May 20, 2021, the Court entered an order on consent of the parties for a stay of nine months and extensions of 11 and 14 months, respectively, of plaintiffs’ deadline to file and serve their Particulars of Claim and FMG’s deadline to file and serve its Defense.

c.Netherlands action

On March 10, 2021, plaintiffs Xerox Corporation and 20 of its European subsidiaries filed a Writ of Summons against FM Insurance Europe S.A. in the Amsterdam District Court. Also on March 10, 2021, plaintiffs submitted a Request for Arbitration, which was withdrawn after the parties agreed on April 12, 2021, that both liability and quantum of plaintiffs’ claims would be litigated in the District Court proceeding.

The parties are in the process of executing a tolling agreement to stay the District Court proceeding until full and final resolution of the U.S. litigation.

Xerox 2021 Form 10-Q 38

Guarantees

We have issued or provided approximately ~~$273~~$306 of guarantees as of ~~September~~June 30, ~~2020~~2021 in the form of letters of credit or surety bonds issued to i) support certain insurance programs; ii) support our obligations related to the Brazil contingencies; and iii) support certain contracts, primarily with public sector customers, which require us to provide a surety bond as a guarantee of our performance of contractual obligations.

In general, we would only be liable for the amount of these guarantees in the event we defaulted in performing our obligations under each contract; the probability of which we believe is remote. We believe that our capacity in the surety markets as well as under various credit arrangements (including our Credit Facility) is sufficient to allow us to respond to future requests for proposals that require such credit support.

~~Note 22 – Subsequent Event~~

~~In October 2020, we completed the early redemption of $750 of the $1,062 of 4.50% Senior Notes due May~~Xerox 2021 for $769 in cash consideration, which included a redemption premium of $19. The early redemption resulted in a net loss $18 (which included the write-off of debt carrying value adjustments) that was recorded in the fourth quarter 2020. After completion of the early redemption, approximately $312 of the 4.50% Senior Notes due May 2021 remain outstanding.

~~Xerox 2020~~ Form 10-Q

4039

ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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. References to "Xerox Holdings Corporation" refer to the stand-alone parent company and do not include its subsidiaries. References to "Xerox Corporation" refer to the stand-alone company and do not include its subsidiaries.

Currently, Xerox Holdings' ~~sole~~primary direct operating subsidiary is Xerox and ~~therefore~~ Xerox reflects ~~the entirety~~nearly all of Xerox Holdings' operations. Accordingly, the following MD&A ~~solely~~primarily focuses on the operations of Xerox and is intended to help the reader understand ~~the~~Xerox's business and its results of operations and financial ~~condition of Xerox.~~condition. 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~~this MD&A, references are made to various notes in the Condensed Consolidated Financial Statements which appear in Item 1 of this ~~form~~Quarterly Report on 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.

Xerox Holdings' other direct operating subsidiary is CareAR, Inc. (CareAR), an SaaS solutions provider, which was acquired in 2020. CareAR incurred $5 million and $7 million of costs and expenses for the three and six months ended June 30, 2021, respectively. Due to their immaterial nature, and for ease of discussion, CareAR's expenses are included in this discussion with Xerox's costs and expenses.

Currency Impact

To understand the trends in ~~our~~the business, we believe that it is helpful to analyze the impact of changes in the translation of foreign currencies into U.S. Dollars on revenue and expenses. We refer to this analysis as "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.

Xerox 2021 Form 10-Q 40

Impact of COVID-19 on Our Business Operations

In response to the COVID-19 pandemic, we ~~have prioritized~~continue to prioritize the health and safety of our employees, customers and partners toand support their needs so they can perform their work flawlessly, whether in the ~~current hybrid environment so work can~~office or a remote location.

During the second quarter 2021, our business continued to be ~~done flawlessly migrating between~~impacted by the ~~workplace and~~pandemic. However, we saw a continued gradual recovery of our revenues in the ~~home-office. While we continue to implement actions to mitigate~~quarter as businesses gained confidence in the ~~effects~~control 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~~as a result ~~we are not providing specific financial guidance at this time.~~

~~During~~invested in new printing technology and services. We continued to see a positive correlation between the ~~third quarter, corresponding with business reopenings,~~roll-out of vaccinations, the ~~rate~~return of ~~decline of equipment installations (including in areas~~employees to the office, and the gradual recovery of our ~~business~~page-volume driven post sale revenues. We expect 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 mademeasures 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,expand economic activity will result in a moderate economic improvement in 2021. However, in the ~~fourth quarter. However,~~near term, the ~~ongoing~~recovery may be uneven and affected by the emergence of new variants of the COVID-19 virus which could result in a resurgence of ~~the virus around the globe,~~cases in various countries 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.regions.

We have a strong balance sheet and sufficient liquidity, including approximately $2.1 billion of cash and cash equivalents and 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~~

savings, we have built a leaner and more flexible cost ~~structure, and have~~structure. We also ~~focused~~continue to focus 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~~continued 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~~

contributions. In addition, in response to the COVID-19 pandemic, various governments ~~have enacted or~~ continue to ~~contemplate~~employ 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 We recognized savings from the use of ~~approximately $35 million and $95 million, respectively, from these temporary~~such measures in the U.S., Canada and ~~Europe, including $28 million and $81 million, respectively, from various~~Europe. We continue to monitor government ~~assistance~~ programs and ~~$7 million and $14 million, respectively, from furlough programs. Through~~actions being implemented or expected to be implemented to counter 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~~economic 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.COVID-19 pandemic.

~~Savings~~The savings from government assistance were recorded as follows in the Condensed Consolidated Statements of Income:

(in millions) Three Months Ended September 30, 2020 Nine Months Ended September 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~~


(in millions)	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Cost of services, maintenance and rentals	$	6	$	40	$	13	$	40
Research, development and engineering expenses	—		1		—		1
Selling, administrative and general expenses	4		19		7		19
Total Estimated savings	$	10	$	60	$	20	$	60

Overview

~~Third~~Second Quarter ~~2020~~2021 Review

Total revenue of ~~$1.77~~$1.79 billion for ~~third~~second quarter 2021 increased 22.4% from second quarter 2020, ~~declined 18.9% from third quarter 2019,~~ including a ~~0.8-percentage~~4.3-percentage point favorable impact from currency. The ~~decrease~~increase in revenue reflected ~~a decrease~~an increase of ~~20.0%~~18.1% in Post sale revenue, including a ~~0.7-percentage~~4.3-percentage point favorable impact from currency and ~~a decrease~~an increase of ~~15.2%~~38.4% in Equipment sales revenue, including a ~~0.9-percentage~~4.4-percentage point favorable impact from currency.

Total revenue of ~~$5.09~~$3.50 billion for the ~~nine~~six months ended ~~September~~June 30, ~~2020 declined 23.1%~~2021 increased 5.4% as compared to the prior year period, including a ~~0.3-percentage~~3.3-percentage point ~~unfavorable~~favorable impact from currency. The ~~decrease~~increase in revenue reflected ~~a decrease~~an increase of ~~22.0%~~0.1% in Post sale revenue, including a ~~0.3-percentage~~3.1-percentage point ~~unfavorable~~favorable impact from currency and ~~a decrease~~an increase of ~~27.1%~~27.6% in Equipment sales revenue, ~~with no~~including a 3.7-percentage point favorable impact from currency.

The increase in revenue for the three and six months ended June 30, 2021 reflected the significant effect of the COVID-19 pandemic ~~significantly impacted our third quarter 2020 and~~in the respective prior year ~~to date revenues due to~~periods, which caused business closures and office building capacity restrictions that impacted our customers' purchasing decisions in 2020 and ~~caused~~drove 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.

Xerox 2021 Form 10-Q 41

Net income attributable to Xerox Holdings1 and adjusted21 Net income attributable to Xerox Holdings were as follows:


		Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended June 30,						Six Months Ended June 30,
(in millions)	(in millions)	2020		2019		B/(W)		2020		2019		B/(W)		(in millions)	2021		2020		B/(W)		2021		2020		B/(W)
Net income attributable to Xerox Holdings~~(1)~~	Net income attributable to Xerox Holdings~~(1)~~	$	90	$	157	$	(67)	$	115	$	382	$	(267)	Net income attributable to Xerox Holdings~~(1)~~	$	91	$	27	$	64	$	130	$	25	$	105
Adjusted(2) Net income attributable to Xerox Holdings		105		184		(79)		191		528		(337)
Adjusted(1) Net income attributable to Xerox Holdings														Adjusted(1) Net income attributable to Xerox Holdings	94		36		58		141		86		55

~~Third~~Second quarter ~~2020~~2021 Net income attributable to Xerox Holdings1 ~~decreased $67~~ increased $64 million as compared to ~~third~~second quarter ~~2019 reflecting~~2020 primarily due to higher revenues as compared to 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~~prior year period, as well as lower Transaction and related costs, net, non-service retirement-related costs and ~~Other expenses, net. Third~~the benefit from a change in tax law, which were partially offset by higher Restructuring and related costs, net, Amortization of intangible assets and non-financing interest expense. Second quarter ~~2020~~2021 Adjusted21 net income attributable to Xerox Holdings ~~decreased $79~~increased $58 million as compared to ~~third quarter 2019,~~the prior year, primarily reflecting higher revenues as well continued cost and expense reductions associated with our Project Own It transformation actions and lower ~~revenues,~~bad debt expense, which helped to improve operating income and margin. These benefits were ~~only~~ partially offset by ~~lower~~reduced temporary government assistance and furlough measures and higher freight costs ~~and expenses and lower Income tax~~as well as higher non-financing interest expense.

Net income attributable to Xerox Holdings1 for the ~~nine~~six months ended ~~September~~June 30, ~~2020 decreased $267~~2021 increased $105 million as compared to the prior year period ~~reflecting~~primarily due to higher revenues and lower bad debt expense, as the ~~impact~~prior year period included a $60 million incremental provision to cover estimated write-offs on our trade and finance receivable portfolio from ~~lower revenues, primarily associated with~~ the COVID-19 pandemic, ~~and higher~~as well as lower Transaction and related costs, net, ~~that were only partially offset by lower~~non-service retirement-related costs, ~~and expenses, including lower Income tax expense as well as lower~~ Restructuring and related costs, net and ~~Other expenses, net. In addition, Net income attributable to Xerox Holdings~~1 ~~for~~ the ~~nine months ended September 30, 2020 includes the first~~benefit from a change in tax law in second quarter ~~2020 impact~~2021. These benefits were partially offset by reduced temporary government assistance and furlough measures, as well as higher Amortization of ~~a $61 million increase in our bad debt provision reflecting the expected impact from the COVID-19 pandemic on our receivable portfolio.~~intangible assets and higher non-financing interest expense. Adjusted21 net income attributable to Xerox Holdings for the ~~nine~~six months ended ~~September~~June 30, ~~2020 decreased $337~~2021 increased $55 million as compared to the prior year, ~~period~~ primarily ~~reflecting~~due to higher revenues and lower ~~revenues, which~~bad debts expense. These benefits 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 Holdings~~1 ~~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~~reduced 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.~~measures as well higher non-financing interest expense.

~~Xerox 2020 Form 10-Q~~

Cash flows provided by operating activities ~~of continuing operations~~ for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 were ~~$313~~$331 million, as compared to ~~$846~~$207 million in the prior year period, ~~primarily reflecting~~which includes the receipt of an upfront prepaid fixed royalty from FUJIFILM Business Innovation Corp. (formerly Fuji Xerox) (FX) of $100 million, partially offset by a lower ~~net income, as result~~run-off of ~~the COVID-19 pandemic, as well as increased use of~~finance receivables and cash from working capital, net3, 2~~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~~six months ended ~~September~~June 30, ~~2020~~2021 was ~~$223~~$72 million ~~including~~reflecting capital expenditures of ~~$60~~$33 million and acquisitions of ~~$193~~$37 million. Cash ~~provided by~~used in financing activities for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 was ~~$424~~$747 million reflecting ~~proceeds of $1,507~~$413 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~~for repurchases of our Common Stock, payments of $209 million on secured borrowing arrangements and dividend payments of ~~$176~~$108 million.

~~2020~~2021 Outlook

AsWe continue to expect a ~~result of the uncertainty created by the COVID-19 pandemic,~~modest recovery in ~~the first quarter 2020 we withdrew our previously disclosed outlooks for~~2021 and expect full year ~~2020 revenue, earnings, operating~~total revenues to increase to at least $7.2 billion, or approximately 2.5%, excluding the impact of currency. We are confident in our ability to generate cash ~~flows~~ and plan to continue our 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 andpolicy of returning at least 50% of our annual free cash flow to shareholders, as disclosed in our 2020 Annual Report. We expect operating cash flows ~~from continuing operations, after~~to be approximately $600 million, with capital expenditures of approximately $100 million and plan to ~~shareholders. We expect to complete at least $150 million in~~opportunistically make share repurchases ~~during the remainder~~utilizing our remaining share repurchase authorization of ~~2020.~~approximately $88 million.

____________________________

(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)~~(2)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

~~Xerox 2020~~2021 Form 10-Q

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~~

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~~

Financial Review

Revenues

Three Months Ended
September 30, Nine Months Ended
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 %


	Three Months Ended June 30,								Six Months Ended June 30,								% of Total Revenue
(in millions)	2021		2020		% Change		CC % Change		2021		2020		% Change		CC % Change		2021		2020
Equipment sales	$	429	$	310	38.4	%	34.0	%	$	810	$	635	27.6	%	23.9	%	23	%	19	%
Post sale revenue	1,364		1,155		18.1	%	13.8	%	2,693		2,690		0.1	%	(3.0)	%	77	%	81	%
Total Revenue	$	1,793	$	1,465	22.4	%	18.1	%	$	3,503	$	3,325	5.4	%	2.1	%	100	%	100	%

Reconciliation to Condensed Consolidated Statements of Income:
Sales	$	670	$	460	45.7	%	40.7	%	$	1,272	$	1,025	24.1	%	20.6	%
Less: Supplies, paper and other sales	(241)		(150)		60.7	%	54.4	%	(462)		(390)		18.5	%	15.3	%

Equipment sales	$	429	$	310	38.4	%	34.0	%	$	810	$	635	27.6	%	23.9	%

Services, maintenance and rentals	$	1,067	$	949	12.4	%	8.3	%	$	2,120	$	2,185	(3.0)	%	(6.1)	%
Add: Supplies, paper and other sales	241		150		60.7	%	54.4	%	462		390		18.5	%	15.3	%
Add: Financing	56		56		—	%	(3.4)	%	111		115		(3.5)	%	(6.1)	%

Post sale revenue	$	1,364	$	1,155	18.1	%	13.8	%	$	2,693	$	2,690	0.1	%	(3.0)	%

Americas	$	1,133	$	990	14.4	%	12.7	%	$	2,209	$	2,229	(0.9)	%	(1.8)	%	63	%	67	%
EMEA	617		428		44.2	%	33.2	%	1,204		1,003		20.0	%	11.5	%	34	%	30	%
Other	43		47		(8.5)	%	(8.5)	%	90		93		(3.2)	%	(3.2)	%	3	%	3	%
Total Revenue(1)	$	1,793	$	1,465	22.4	%	18.1	%	$	3,503	$	3,325	5.4	%	2.1	%	100	%	100	%

_____________

CC - See "Currency Impact" section for a description of Constant Currency.

(1)Refer to the "Geographic Sales Channels and ~~Product~~Products and Offerings Definitions" section.

~~Total~~Second quarter 2021 total revenue ~~for the three months ended September 30, 2020 decreased 18.9%~~increased 22.4% as compared to ~~the third~~second quarter ~~2019,~~2020, including a ~~0.8-percentage~~4.3-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~~six months ended ~~September~~June 30, ~~2020 decreased 23.1%~~2021 increased 5.4% as compared to the prior year period, including a ~~0.3-percentage~~3.3-percentage point ~~unfavorable~~favorable impact from currency and an approximate ~~1.1-percentage~~0.7-percentage point favorable impact from recent partner dealer acquisitions.

The increase for both the three and six months ended June 30, 2021 reflected the significant effect of the COVID-19 pandemic ~~significantly impacted our revenue during 2020 due to~~in the prior year, which at that time caused business closures and office building capacity restrictions that ~~impacted our customers' purchasing decisions and caused~~drove lower printing volumes on our ~~devices.~~devices and impacted our customers' purchasing decisions. Business closures and limited office occupancy continue to affect our revenues. However, the ~~rate~~progress of ~~our revenue decline improved sequentially from~~vaccinations and the gradual reopening of workplaces in second quarter ~~as more businesses slowly reopened and more employees returned~~2021 have resulted in higher installations of Mid-range devices 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,near pre-pandemic levels, as well as a continued modest sequential increase in our page volumes (as compared to first quarter 2021). Improvements in total revenue for both the three and six months ended June 30, 2021 were partially offset by the impact of global freight disruptions and product supply constraints that started in the second quarter of 2021 (the result of market-wide shortages of computer chips and resins).

Geographically, revenue increased more significantly in our EMEA operations for both the three and six months ended June 30, 2021, partially due to the region's more expansive shutdown in the prior year and its larger ~~mix~~indirect channel business, which in the prior year experienced a significant reduction of ~~bundled contracts with fixed minimums. Our~~inventory purchases from channel partners seeking to protect their liquidity amidst market uncertainty. EMEA also benefited from a faster recovery of SMB businesses, while our North American operations include a ~~larger mix~~higher proportion of Education, State and Local government ~~education, healthcare~~ and ~~other large~~Enterprise customers ~~that have been less affected~~who are experiencing a slower pace of return to workplaces. Our EMEA revenues were also favorably impacted 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~~prior year acquisitions in the region.

Total revenue for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 reflected the following:

~~Xerox 2020 Form 10-Q~~

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 isare 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 primarily from our XBS ~~organization.~~ organization in the U.S.

Xerox 2021 Form 10-Q 43

For the three months ended ~~September~~June 30, ~~2020~~2021, Post sale revenue ~~decreased 20.0%~~increased 18.1% as compared to ~~the third~~second quarter ~~2019,~~2020, including a ~~0.7-percentage~~4.3-percentage point favorable impact from currency, while Post Sale ~~revenue decreased 22.0%~~revenues increased 0.1% for the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, including a ~~0.3-percentage~~3.1-percentage point ~~unfavorable~~favorable impact from currency. The ~~COVID-19 pandemic significantly impacted our~~increases in Post ~~sale~~Sale revenue ~~since March 2020, however, its impact on our Post sale revenue slightly moderated later in~~correspond with 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~~reopening of ~~our page volume declines. The decline in~~workplaces. 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 XeroxServices 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 generally 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~~three months ended ~~September~~June 30, ~~2020,~~2021, these revenues ~~decreased 21.4%~~increased 12.4% as compared to ~~the prior year period,~~second quarter 2020, including a ~~0.2-percentage~~4.1-percentage point ~~unfavorable~~favorable impact from ~~currency. The decline at constant~~ currency,1 ~~reflected~~ reflecting the impact of higher page volumes, corresponding with the reopening of workplaces, which more than offset the effect of a lower population of devices (which is partially associated with ~~continued lower Enterprise signings and~~ lower installs in prior periods), and ~~current~~an ongoing competitive price environment.

◦For the six months ended June 30, 2021, these revenues decreased 3.0% as compared to the prior year period, including a 3.1-percentage point favorable impact from currency, reflecting a lower population of devices (which is partially associated with lower installs in prior periods), an ongoing competitive price environment, and lower page volumes during first quarter 2021 (including a higher mix of lower average-page-volume products) ~~that are worse than pre-COVID-19 decline trends due to~~as business shutdowns only started at the ~~impact~~end of ~~business closures since March~~first quarter 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~~June 30, ~~2020,~~2021, these revenues ~~decreased 20.0%~~increased 60.7% as compared to ~~third~~second quarter ~~2019,~~2020, including a ~~0.2-percentage~~6.3-percentage point favorable impact from currency, ~~and reflected lower~~reflecting primarily higher supplies revenues ~~associated~~consistent with ~~lower page volume trends, slightly offset by~~the gradual reopening of workplaces which drove 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.demand.

◦For the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, these revenues ~~decreased 27.8%~~increased 18.5% as compared to the prior year period, including a ~~0.7-percentage~~3.2-percentage point ~~unfavorable~~favorable impact from currency, ~~and reflected lower~~reflecting primarily higher 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.revenues.

~~Xerox 2020 Form 10-Q~~

•Financing revenue is generated from financed equipment sale transactions. For the three months ended ~~September~~June 30, ~~2020,~~2021, these revenues ~~declined 8.3%~~were flat as compared to ~~third~~second quarter ~~2019,~~2020, including a ~~0.5-percentage~~3.4-percentage point favorable impact from currency, while Financing revenue for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 decreased ~~7.6%~~3.5%, including a ~~0.3-percentage~~2.6-percentage point ~~unfavorable~~favorable impact from currency. The decrease at constant currency ~~and~~1 reflected a ~~continued decline in the~~lower finance receivables balance due to lower equipment sales in prior periods. Our lease originations increased for both the three and six months ended June 30, 2021 as compared to the respective prior year periods, as well as on a sequential basis for the second quarter 2021 as compared to the first quarter 2021, due to a higher level of lease originations from our XBS sales unit as well as higher equipment sales.

____________

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

Xerox 2021 Form 10-Q 44

Equipment sales revenue


		Three Months Ended September 30,						Nine Months Ended September 30,						% of Equipment Sales			Three Months Ended June 30,						Six Months Ended June 30,						% of Equipment Sales
(in millions)	(in millions)	2020		2019		% Change	CC % Change	2020		2019		% Change	CC % Change	2020	2019	(in millions)	2021		2020		% Change	CC % Change	2021		2020		% Change	CC % Change	2021	2020
Entry	Entry	$	55	$	49	12.2%	11.6%	$	129	$	154	(16.2)%	(15.9)%	12%	11%	Entry	$	69	$	44	56.8%	54.0%	$	137	$	92	48.9%	44.5%	17%	15%
Mid-range	Mid-range	291		344		(15.4)%	(16.3)%	718		996		(27.9)%	(28.0)%	68%	69%	Mid-range	276		195		41.5%	37.0%	514		401		28.2%	24.8%	63%	63%
High-end	High-end	69		96		(28.1)%	(28.9)%	197		282		(30.1)%	(30.1)%	19%	19%	High-end	80		67		19.4%	14.4%	150		134		11.9%	8.3%	19%	21%
Other	Other	4		5		(20.0)%	(20.0)%	10		14		(28.6)%	(28.6)%	1%	1%	Other	4		4		—%	—%	9		8		12.5%	12.5%	1%	1%
Equipment sales	Equipment sales	$	419	$	494	(15.2)%	(16.1)%	$	1,054	$	1,446	(27.1)%	(27.1)%	100%	100%	Equipment sales	$	429	$	310	38.4%	34.0%	$	810	$	635	27.6%	23.9%	100%	100%

_____________

CC - See "Currency Impact" section for a description of Constant Currency.

Note: During first quarter 2021, we revised the classification of equipment sales revenue by category for our XBS sales unit. Refer to the Equipment Sales Revenue - Classification Update section, for the revision of prior periods based on the new classification.

Equipment sales revenue ~~decreased 15.2%~~increased 38.4% for the three months ended ~~September~~June 30, ~~2020~~2021 as compared to ~~third~~second quarter ~~2019,~~2020, including a ~~0.9-percentage~~4.4-percentage point favorable impact from currency ~~as well as~~partially offset by the impact of price declines of ~~approximately~~less than 5%, while for the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, Equipment sales revenue ~~decreased 27.1%,~~increased 27.6% as compared to the prior year period, ~~with no~~including a 3.7-percentage point favorable impact from currency ~~as well as~~partially offset by the impact of price declines of ~~approximately~~less than 5%. The increase is partially the result of a favorable compare to the three and six month ended June 30, 2020, when businesses were extensively shut down due to the COVID-19 ~~pandemic has significantly impacted our equipment~~pandemic. Equipment sales revenue ~~during 2020 as~~increased at a ~~result of business closures and office building capacity restrictions that impacted~~higher pace through our ~~customers' purchasing decisions and caused delayed installations. The pandemic affected our operations~~indirect channels, both in ~~March 2020 and throughout the second quarter 2020, however, as businesses reopened in certain geographical areas of~~ the U.S. and EMEA, as demand continued to increase with business reopenings. Sales of office-centric devices led the ~~impact~~increase of these revenues (as businesses re-open and prepare for a broader return to the office), while sales of high-end production systems, which demand larger capital investments, had a more moderate increase. Equipment sales were significantly impacted by global freight disruptions and product supply constraints (the result of market-wide shortages of computer chips and resins) which resulted in a backlog of orders at the end of the ~~pandemic on our equipment sales lessened compared to its impact in~~second quarter 2021 that increased over the first ~~half of 2020, resulting in sequential improvement in third~~ quarter ~~2020 in the rate of decline.~~2021 and was significantly above prior year and pre-pandemic levels. The ~~decline~~growth at constant currency1 reflected the following:

•Entry - The increase for the three months ended ~~September~~June 30, ~~2020,~~2021 as compared to ~~third~~second quarter ~~2019,~~2020, was ~~due to~~driven by higher ~~installs of lower-end~~demand for our printers and MFPs ~~(primarily black and white devices) in EMEA and~~ through our indirect channels in EMEA and the ~~U.S.,~~Americas, which resulted in ~~part associated with hybrid workplace promotions.~~markedly higher installations of Entry devices. While sales increased across this portfolio, we experienced an unfavorable mix from significantly higher sales of our lower-end black-and-white devices. The ~~decrease~~increase for the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021 as compared to the prior year period, was driven primarily ~~due to lower sales of devices~~by higher demand for our lower-end printers and MFPs 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~~Americas, as well as higher installs related to government deals in the ~~benefit~~developing regions of ~~large order deals~~EMEA, which resulted in markedly higher installations of Entry devices. While sales increased across this portfolio, we experienced an unfavorable mix from ~~Eurasia.~~significantly higher sales of our lower-end black-and-white devices.

•Mid-range - The ~~decrease~~increase for the three months ended ~~September~~June 30, ~~2020,~~2021 as compared to ~~third~~second quarter ~~2019,~~2020, was driven primarily by higher demand across geographies, consistent with the ~~COVID-19 pandemic and related office closures, which impacted sales~~gradual reopening 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,~~workplaces as well as ~~strong demand for~~improved activity from our ~~recently launched PrimeLink devices and our new generation of ConnectKey devices, provided a partial offset.~~indirect channels as they moderately eased their tight cash preservation measures to rebuild their inventories. The ~~decrease~~increase for the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021 as compared to the prior year period, was also driven primarily ~~driven~~ by higher demand across geographies, consistent with the ~~COVID-19 pandemic and related~~gradual reopening of workplaces, as compared to business shutdowns that reduced purchases of office ~~closures, which has more significantly impacted our sales through indirect channels~~devices in the ~~U.S. and Europe,~~prior year period, as ~~resellers in response to lower demand caused by the pandemic, have reduced their inventory purchases to manage liquidity, partially offset by strong~~well as higher demand for our ~~recently launched PrimeLink~~MFP devices and improved activity from our ~~new generation of ConnectKey devices.~~indirect channels.

•High-end - The ~~decrease~~increase for the three months ended ~~September~~June 30, ~~2020,~~2021 as compared to ~~third~~second quarter ~~2019,~~2020, primarily reflected ~~lower installs~~improvement in sales of devices in the lower-end of the range and to SMB customers, as well as sales of black-and-white systems corresponding with our customers' refresh cycles. Sales of larger color production engines, while higher than the second quarter 2020, had a more moderate increase, as a result of our ~~Versant entry-production color, Iridesse and iGen production presses, partially offset by higher installs of our cut-sheet inkjet systems.~~customers' delayed capital investment decisions as they assess their post-pandemic operational print requirements. 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 decreaseincrease for the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021 as compared to the prior year period, reflected primarily ~~reflected lower installs~~improvement in sales of ~~our Versant entry-production color~~devices in the lower-end of the range and ~~iGen production presses,~~to SMB customers, as well as ~~lower installs~~sales of black-and-white systems corresponding with our customers' refresh cycles, while sales of larger color production engines continued to be depressed as a result 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 incustomers' delayed capital investment decisions.

Xerox ~~2020~~2021 Form 10-Q

4945

~~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~~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~~non-Xerox branded products ~~shipped to~~installed by our XBS sales unit. Detail by product group (see Geographic Sales Channels and ~~Product~~Products and Offerings ~~Definitions)~~Definitions) is shown below.

Installs for the ~~third quarter 2019:~~three months ended June 30, 2021:

Entry

•~~9% decrease~~19% increase in color multifunction devices reflecting ~~lower~~higher installs of ConnectKey devices through our indirect channels primarily in EMEA, as well as in the ~~U.S. and in EMEA.~~Americas.

•~~52%~~63% increase in black-and-white multifunction devices reflecting higher activity primarily from low-end devices through 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~~EMEA and ~~hybrid workplace promotions.~~Latin America.

Mid-Range(1)

•~~21% decrease~~62% increase in mid-range color installs primarily reflecting ~~lower~~higher installs of ~~multifunction color devices partially offset by strong demand for~~ our recently launched new-generation of ConnectKey multi-function printers and our PrimeLink entry-production color ~~devices and our new generation of ConnectKey multi-function~~ devices.

•~~19% decrease~~36% increase in mid-range black-and-white ~~mid-range~~ installs reflecting ~~in part global market trends partially offset by strong demand for~~higher installs of our recently launched ~~PrimeLink light-production~~new-generation of ConnectKey multi-function devices and our ~~new generation of ConnectKey multi-function~~PrimeLink light-production devices.

High-End(1)

•~~38% decrease~~27% increase in high-end color installs primarily reflecting ~~primarily lower installs of~~growth from 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.~~devices.

•~~13% decrease~~47% increase in high-end black-and-white systems reflecting ~~lower~~higher installs of our Nuvera devices ~~along with market trends.~~related to cyclical account refreshes in the U.S.

Installs for the ~~nine~~six months ended ~~September~~June 30, ~~2020:~~2021:

Entry

•~~21% decrease~~13% increase in color multifunction devices reflecting ~~lower~~higher installs of ConnectKey devices through our indirect channels in EMEA and the ~~U.S. and in EMEA.~~Americas.

•~~15%~~80% increase in black-and-white multifunction devices reflecting higher activity primarily from ~~sales in the lower end of the portfolio~~low-end devices through indirect channels in ~~our~~the Americas, and from developing regions in EMEA, ~~partially offset by lower installs through our indirect channels in Latin America and the U.S.~~which included large order government deals.

Mid-Range(1)

•~~31% decrease~~35% increase in mid-range color installs primarily reflecting ~~lower~~higher installs of ~~multifunction color devices partially offset by strong demand for~~ our recently launched new-generation of ConnectKey multi-function printers and our PrimeLink entry-production color ~~devices and our new generation of ConnectKey multi-function~~ devices.

•~~26% decrease~~24% increase in mid-range black-and-white installs reflecting ~~in part global market trends partially offset by strong demand for~~higher installs of our recently launched ~~PrimeLink light-production~~new-generation of ConnectKey multi-function devices and our ~~new generation of ConnectKey multi-function~~PrimeLink light-production devices.

High-End(1)

•~~50% decrease~~36% increase in high-end color installs reflecting primarily growth from our lower-end Versant devices and our Iridesse systems partially offset by lower installs of our ~~lower-end Versant devices, along with lower installs of our Iridesse~~higher-end production ~~systems, partially offset by strong demand for our recently-launched Baltoro cut-sheet inkjet systems.~~presses.

•~~16% decrease~~33% increase in high-end black-and-white systems reflecting ~~lower~~higher installs of our Nuvera devices ~~along with market trends.~~related to cyclical account refreshes in the U.S.

_____________

(1)Mid-range and High-end color installations exclude ~~Fuji Xerox digital front-end sales; including Fuji Xerox~~FX digital front-end sales ~~for the three and nine months ended September 30,~~in 2020. When we include these sales in 2020, installs of Mid-range color devices ~~decreased 21%~~increased 63% and ~~31%~~35%, respectively, and High-end color systems ~~decreased 39%~~increased 25% and ~~50%~~34%, ~~respectively.~~respectively, for the three and six months ended June 30, 2021.

Xerox ~~2020~~2021 Form 10-Q

5046

Geographic Sales Channels and ~~Product~~Products 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,~~FX, 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+.

•

Equipment Sales Revenue - Classification Update

During first quarter 2021, we revised the classification of equipment sales revenue by category for our XBS sales unit to conform the classification of devices across 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.sales channels. The revision had no impact on reported total equipment sales revenue.


	2020 Equipment Sales Revenue As Reported
(in millions)	Q1		Q2		Q3		Q4		FY
Entry	$	40	$	34	$	55	$	59	$	188
Mid-range	218		209		291		325		1,043
High-end	64		64		69		115		312
Other	3		3		4		11		21
Equipment Sales Revenue	$	325	$	310	$	419	$	510	$	1,564


	Change
(in millions)	Q1		Q2		Q3		Q4		FY
Entry	$	8	$	10	$	11	$	11	$	40
Mid-range	(12)		(14)		(15)		(16)		(57)
High-end	3		3		3		4		13
Other	1		1		1		1		4
Equipment Sales Revenue	$	—	$	—	$	—	$	—	$	—


	2020 Equipment Sales Revenue As Revised
(in millions)	Q1		Q2		Q3		Q4		FY
Entry	$	48	$	44	$	66	$	70	$	228
Mid-range	206		195		276		309		986
High-end	67		67		72		119		325
Other	4		4		5		12		25
Equipment Sales Revenue	$	325	$	310	$	419	$	510	$	1,564

Xerox ~~2020~~2021 Form 10-Q

5147

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.


	Three Months Ended June 30,									Six Months Ended June 30,

(in millions)	2021			2020			B/(W)			2021			2020			B/(W)





Gross Profit	$	639		$	564		$	75		$	1,250		$	1,276		$	(26)
RD&E	79			76			(3)			153			160			7
SAG	434			426			(8)			882			967			85

Equipment Gross Margin	28.1		%	28.8		%	(0.7)		pts.	28.0		%	27.5		%	0.5		pts.
Post sale Gross Margin	38.1		%	41.1		%	(3.0)		pts.	38.0		%	40.9		%	(2.9)		pts.
Total Gross Margin	35.6		%	38.5		%	(2.9)		pts.	35.7		%	38.4		%	(2.7)		pts.
RD&E as a % of Revenue	4.4		%	5.2		%	0.8		pts.	4.4		%	4.8		%	0.4		pts.
SAG as a % of Revenue	24.2		%	29.1		%	4.9		pts.	25.2		%	29.1		%	3.9		pts.

Pre-tax Income	$	99		$	35		$	64		$	152		$	30		$	122
Pre-tax Income Margin	5.5		%	2.4		%	3.1		pts.	4.3		%	0.9		%	3.4		pts.

Adjusted(1) Operating Profit	$	126		$	62		$	64		$	215		$	149		$	66
Adjusted(1) Operating Margin	7.0		%	4.2		%	2.8		pts.	6.1		%	4.5		%	1.6		pts.

_____________

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

Pre-tax Income Margin

~~Third~~Second quarter ~~2020~~2021 pre-tax income margin of ~~6.7% decreased 3.5-percentage~~5.5% increased 3.1-percentage points as compared to ~~third~~second quarter ~~2019.~~2020. The ~~decrease~~increase primarily reflected the impact of ~~lower~~higher adjusted1 operating margin (see below)~~, of 4.6-percentage points, partially offset by~~ as well as lower ~~Other expenses, net,~~ Transaction and related costs, net and Other expenses, net, partially offset by higher Restructuring and related ~~costs.~~costs, net and Amortization of intangible assets.

Pre-tax income margin for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 of ~~2.9% decreased 4.4-percentage~~4.3% increased 3.4-percentage points as compared to the prior year period. The ~~decrease~~increase primarily reflected the impact of ~~lower~~higher adjusted1 operating margin (see below)~~, of 6.3-percentage points, partially offset by~~ as well as lower Restructuring and related costs, net, Transaction and related costs, net and Other expenses, ~~net.~~net, partially offset by higher Amortization of intangible assets.

Adjusted1 Operating Margin

~~Third~~Second quarter ~~2020~~2021 adjusted1operating margin of ~~7.4% decreased 4.6-percentage~~7.0% increased by 2.8-percentage points as compared to ~~third~~second quarter ~~2019~~2020, reflecting the impact of ~~lower~~higher revenues, primarily ~~as a result of~~due to the significant effect of the COVID-19 pandemic on our business ~~partially offset by~~during the prior year period, as well as cost and expense reductions associated with our Project Own It transformation actions ~~as well~~and additional savings from various other cost ~~reduction actions~~reductions 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~~(including 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~~contributions), and 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 affectedbad debt expenses. These favorable factors were partially offset by an approximate ~~1.0-percentage point unfavorable combined impact from~~$50 million reduction of temporary government assistance and furlough measures and higher ~~tariffs and transaction currency.~~freight costs.

Adjusted1operating margin for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 of ~~5.5% decreased 6.3-percentage~~6.1% increased by 1.6-percentage points as compared to the prior year period, reflecting an approximate 2.1-percentage point favorable impact from lower bad debt expense due to a higher provision in the prior year to reflect the expected impact ~~of lower~~to our trade and finance receivable portfolio from the COVID-19 pandemic. Additionally, higher revenues favorably impacted adjusted1 operating margin, primarily ~~as a result of~~due to 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~~during the ~~first quarter 2020, to reflect the expected impact to our customer base and related outstanding trade and finance receivable portfolio~~prior year period, as ~~a result of the economic disruption caused by the pandemic. These negative impacts were partially offset by~~well as cost and expense reductions associated with our Project Own It transformation actions ~~as well as~~and additional savings from various other cost ~~reduction actions~~reductions to mitigate the impact of the pandemic ~~including approximately $95 million from temporary government assistance~~

~~Xerox 2020 Form 10-Q~~

~~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~~(including 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~~contributions). These favorable factors were partially offset by an approximate ~~0.8-percentage point unfavorable combined impact from~~$40 million reduction of temporary government assistance and furlough measures and higher ~~tariffs and transaction currency.~~freight costs.

______________

(1)Refer to the Operating Income and Margin reconciliation table in the "Non-GAAP Financial Measures" section.

Xerox 2021 Form 10-Q 48

Gross Margin

~~Third~~Second quarter ~~2020~~2021 gross margin of ~~36.8%~~35.6% decreased ~~3.2-percentage~~by 2.9-percentage points as compared to ~~third~~second quarter ~~2019,~~2020, reflecting the impact of lower ~~revenues (including~~savings from ~~our higher margin post sale stream) primarily as a result of the significant effect of the COVID-19 pandemic due to business closures,~~temporary government assistance and furlough measures as well as higher freight costs and the impact of the ongoing competitive price ~~promotions,~~environment, partially offset by higher revenue and ~~an approximate 1.0-percentage point adverse combined~~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 reductions in discretionary spend such as the suspension of 401(k) matching contributions).

Gross margin for the six months ended June 30, 2021 of 35.7% decreased by 2.7-percentage points as compared to the prior year period, reflecting the impact of lower savings from ~~transaction currency~~temporary government assistance and furlough measures and the impact of the ongoing competitive price environment, as well as the impact of a lower mix of our higher-margin post sale stream and higher ~~tariffs.~~freight costs. 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~~(including reductions in discretionary spend such as the ~~use of contract employees and the temporary~~ suspension of 401(k) matching ~~contributions.~~contributions).

~~Gross~~Second quarter 2021 equipment gross margin of 28.1% decreased by 0.7-percentage points as compared to second quarter 2020, reflecting higher freight costs, the impact of targeted price promotions sales and the higher mix of sales from our EMEA channel, partially offset by higher revenue and a larger contribution from our mid-range product portfolio.

Equipment gross margin for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 of ~~37.8% decreased 2.0-percentage~~28.0% increased by 0.5-percentage points as compared to the prior year period, primarily reflecting ~~the impact of lower~~higher revenues ~~(including from our~~and favorable transaction currency, partially offset by higher ~~margin post sale stream) primarily as a result of the significant effect of the COVID-19 pandemic due to business closures,~~freight costs, 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~~and the ~~adverse~~ impact of targeted price ~~incentives, transaction currency and incremental tariff costs partially offset by the benefit of cost reductions from Project Own It.~~promotions.

~~Equipment~~Second quarter 2021 Post sale gross margin ~~for the nine months ended September 30, 2020~~ of ~~26.7%~~38.1% decreased ~~6.2-percentage~~by 3.0-percentage points as compared to ~~the prior year period,~~second quarter 2020, reflecting the impact of lower ~~revenues (primarily as a result of COVID-19 related business closures)~~savings from temporary government assistance and furlough measures, 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 and lower royalty revenues, partially offset by productivity and cost savings and restructuring savings associated with Project Own It transformation actions, as well as savings from ~~our~~the 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~~(including reductions in discretionary spend such as the ~~use of contract employees and the temporary~~ suspension of 401(k) matching ~~contributions.~~contributions).

Post sale gross margin for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 of ~~40.7%~~38.0% decreased ~~1.0-percentage~~by 2.9-percentage points as compared to the prior year period, reflecting the impact of lower ~~revenues (primarily as a result~~savings from temporary government assistance and furlough measures and the impact of ~~COVID-19 related business closures impacting page volumes) and~~the ongoing competitive price ~~erosion on contract renewals,~~environment, 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~~(including reductions in discretionary spend such as the ~~use of contract employees and the temporary~~ suspension of 401(k) matching ~~contributions.~~

~~Xerox 2020 Form 10-Q~~

contributions).

Research, Development and Engineering Expenses (RD&E)


		Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended June 30,						Six Months Ended June 30,
(in millions)	(in millions)	2020		2019		Change		2020		2019		Change		(in millions)	2021		2020		Change		2021		2020		Change
R&D	R&D	$	61	$	84	$	(23)	$	194	$	234	$	(40)	R&D	$	63	$	65	$	(2)	$	122	$	133	$	(11)
Sustaining engineering	Sustaining engineering	15		16		(1)		42		46		(4)		Sustaining engineering	16		11		5		31		27		4
Total RD&E Expenses	Total RD&E Expenses	$	76	$	100	$	(24)	$	236	$	280	$	(44)	Total RD&E Expenses	$	79	$	76	$	3	$	153	$	160	$	(7)

~~Third~~Second quarter ~~2020~~2021 RD&E as a percentage of revenue of ~~4.3%~~4.4% decreased by ~~0.3-percentage~~0.8-percentage points as compared to ~~third~~second quarter ~~2019, primarily due to the benefit~~2020, as a result of ~~cost reductions~~higher revenues that outpaced the ~~impact~~rate of ~~revenue declines.~~investments.

RD&E of ~~$76~~$79 million ~~decreased $24~~increased $3 million as compared to ~~third~~second quarter ~~2019~~2020 reflecting primarily investments in our innovation portfolio and higher compensation related accrual expenses (corresponding with higher expected operating results) partially offset by savings from ~~Project Own It that enhanced simplification~~restructuring and ~~rationalization in our core technology spend, and other temporary cost actions,~~productivity as well as ~~a favorable impact~~benefits from the timing of ~~investments, partially offset by higher spend in our innovation areas.~~program cycles.

RD&E as a percentage of revenue for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 of ~~4.6% increased~~4.4% decreased by 0.4-percentage points as compared to the prior year period, ~~primarily due to the impact~~as a result of ~~revenue declines~~higher revenues and Project Own It cost reductions, that outpaced the ~~benefit~~rate of ~~cost reductions.~~investments.

Xerox 2021 Form 10-Q 49

RD&E for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 of ~~$236~~$153 million decreased ~~$44~~$7 million as compared to the prior year period, primarily reflecting the benefits from the timing of program cycles, as well as 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~~investments in our innovation ~~areas.~~portfolio and higher compensation related accrual expenses (corresponding with higher expected operating results).

Selling, Administrative and General Expenses (SAG)

~~Third~~Second quarter ~~2020~~2021 SAG as a percentage of revenue of ~~25.1% increased by 1.7-percentage~~24.2% decreased 4.9-percentage points as compared to ~~third~~second quarter ~~2019,~~2020, primarily as a result of higher revenues and lower bad debt provision offsetting higher selling and administrative expenses.

Second quarter 2021 SAG of $434 million increased by $8 million as compared to second quarter 2020, including an approximate $15 million adverse impact from translation currency, partially offset by a $10 million benefit from a lower bad debt provision. The remaining increase reflected the impact of lower savings from temporary government assistance and furlough measures, as well as higher compensation related accrual expenses and other investments in the business corresponding with higher expected operating results, partially offset by productivity and cost savings from our Project Own It transformation actions and other cost reduction actions to mitigate the impact of the pandemic (including reductions in discretionary spend such as near-term targeted marketing programs and the suspension of 401(k) matching contributions).

SAG as a percentage of revenue for the six months ended June 30, 2021 of 25.2% decreased 3.9-percentage points as compared to the prior year period, primarily as a result of an approximate 2.1-percentage point favorable impact from lower bad debt expense due to a higher provision in the prior year to reflect the expected impact to our trade and finance receivable portfolio from the COVID-19 pandemic. The remaining decrease was primarily due to the impact of lower ~~revenues, partially offset by the benefits from~~expenses as a result of 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~~(including 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.~~contributions).

~~Third quarter 2020~~ SAG for the six months ended June 30, 2021 of ~~$444~~$882 million decreased by ~~$66~~$85 million as compared to ~~third quarter 2019,~~the prior year period, primarily reflecting lower bad debt expenses, as well as 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(including 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~~contributions), partially offset by an approximate $25 million adverse impact from translation currency, higher compensation related accrual expenses and other investments in the business corresponding with higher expected operating results, the impact of lower ~~compensation incentives consistent with lower sales~~savings from temporary government assistance and ~~operating results.~~furlough measures and higher expenses from prior year acquisitions.

~~SAG~~Our bad debt provision for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 of ~~$1,411~~$13 million decreased ~~$162~~by $74 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~~primarily due 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~~an approximate $60 million incremental provision to cover estimated write-offs 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~~receivable portfolio from the COVID-19 pandemic, as well as a reserve reduction, in ~~line with~~second quarter 2021, of approximately $6 million reflecting improvements in the macroeconomic environment as well as lower write-offs. Although actual write-offs incurred to date have lagged expectations, we believe our ~~models and consistent with~~current reserve position remains sufficient to cover expected future ~~expectations regarding~~losses that may result from future economic conditions. Despite the improvement in the global economy, economies continue to recover from the impacts of the COVID-19 pandemic including the cessation of government support as well as labor, interest rate and inflation risks and the potential for higher taxes. As a result of these uncertainties, we continue to consider various adverse macroeconomic scenarios in our models. Accordingly, our reserves as a percent of receivables have remained fairly consistent subsequent to the first quarter 2020 charge of approximately $60 million to initially record expected losses from the COVID-19 pandemic. We continue to

~~Xerox 2020 Form 10-Q~~

monitor developments regarding the pandemic, including business closures and reopenings and mitigating government support actions as well as future economic conditions, 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~~On a trailing twelve-month basis (TTM), bad debt expense ~~for~~was approximately 1.0% of total receivables, which is consistent with the ~~nine months ended September 30, 2020~~pre-pandemic trend and reflects the consistent level of ~~$103 million was $65 million higher compared~~reserves subsequent 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.charge.

Xerox 2021 Form 10-Q 50

Restructuring and Related Costs, Net

We incurred ~~restructuring~~Restructuring and related costs, net of ~~$20~~$12 million for the ~~third~~second quarter 2021~~2020,~~, as compared to $273 million for ~~third~~second quarter ~~2019,~~2020, and ~~$64~~$29 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021, as compared to ~~$176~~$44 million in the prior year ~~period~~.period. These costs were primarily related to the implementation of initiatives under our business transformation projects including Project Own It. The following is a breakdown of those costs:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
(in millions)	(in millions)	2020		2019		2020		2019		(in millions)	2021		2020		2021		2020
Restructuring and severance(1)		$	18	$	12	$	57	$	37
Severance(1)										Severance(1)	$	6	$	7	$	20	$	39
Asset impairments(2)	Asset impairments(2)	4		2		6		48		Asset impairments(2)	2		—		11		2
Other contractual termination costs(3)	Other contractual termination costs(3)	1		1		2		18		Other contractual termination costs(3)	1		—		2		1
Net reversals(4)	Net reversals(4)	(3)		(7)		(18)		(23)		Net reversals(4)	(5)		(9)		(8)		(15)
Restructuring and asset impairment costs	Restructuring and asset impairment costs	20		8		47		80		Restructuring and asset impairment costs	4		(2)		25		27
Retention related severance/bonuses(5)	Retention related severance/bonuses(5)	(2)		11		9		31		Retention related severance/bonuses(5)	3		4		(1)		11
Contractual severance costs(6)	Contractual severance costs(6)	—		3		4		41		Contractual severance costs(6)	3		—		3		4
Consulting and other costs(7)	Consulting and other costs(7)	2		5		4		24		Consulting and other costs(7)	2		1		2		2
Total	Total	$	20	$	27	$	64	$	176	Total	$	12	$	3	$	29	$	44

_____________

(1)Reflects headcount reductions of approximately ~~650~~50 and 150 employees worldwide ~~for the three months ended September 30,~~in second quarter 2021 and 2020, ~~and 2019,~~ respectively and ~~1,100~~400 and 450 employees worldwide for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively.

(2)Primarily related to the exit and abandonment of leased and owned facilities. The charge includes the accelerated write-off of $1 million in second quarter 2021, as compared to no write-offs in second quarter 2020 and $2 million fand $1 million orfor the ~~three~~six months ended ~~September~~June 30, 2021 and 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 $2no write-offs in second quarter 2021 and 2020, and $9 million and $0$1 million forfor the ~~three~~six months ended ~~September~~June 30, 2021 and 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.~~recoveries, including potential sales..

(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. The $1 million credit through the six months ended June 30, 2021, reflected a change in estimate.

(6)Amounts ~~for nine months ended September 30, 2019 include approximately $38 million for estimated~~primarily reflect severance and other related costs we ~~were~~are 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.~~Technologies.

(7)Represents professional support services associated with our business transformation initiatives.

~~Third~~Second quarter ~~2020~~2021 actions impacted several functional areas, with approximately 30% focused on gross margin improvements and approximately ~~65%~~70% focused on SAG ~~reductions and the remainder focused on RD&E optimization.~~reductions.

~~Third~~Second quarter ~~2019~~2020 actions impacted several functional areas, with approximately ~~50%~~10% focused on gross margin improvements and approximately ~~45%~~90% focused on SAG ~~reductions and the remainder focused on RD&E optimization.~~reductions.

The ~~restructuring~~Restructuring and related costs, net reserve balance as of ~~September~~June 30, ~~2020~~2021 for all programs was ~~$87~~$63 million, which is expected to be paid over the next twelve months.

Refer to Note 1211 - 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~~reflect costs from third party providers offor professional services associated with certain major and strategic M&A projects. There were no Transaction and related costs, net ~~were $18 million~~incurred during 2021. Transaction and related costs, net for the ~~nine~~three and six months ended ~~September~~June 30, 2020 were $7 million and$24 million, respectively, and primarily related to ~~costs from third party providers of~~legal and other professional ~~services~~costs associated with ~~certain strategic M&A projects including our~~the terminated proposal to acquire HP Inc.

~~Xerox 2020 Form 10-Q~~

Amortization of Intangible Assets

Amortization of intangible assets for the three and six months ended ~~September~~June 30, ~~2020~~2021 of ~~$13~~$14 million and $29 million, respectively, 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~~and $8 million as compared to the respective prior year ~~period as a result of the write-off of trade names in prior~~ periods, primarily related to intangible assets 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~~recent acquisitions.

Xerox 2021 Form 10-Q 51

Worldwide Employment

Worldwide employment was approximately ~~25,500~~24,000 as of ~~September~~June 30, ~~2020~~2021 and decreased by approximately ~~1,500~~1,1001 from December 31, ~~2019.~~2020. The reduction resulted from net attrition (attrition net of gross hires), of which a large portion is not expected to be ~~back filled,~~backfilled, as well as the impact of organizational changes.

_____________

(1)Decrease based on revised headcount at December 31, 2020 of 25,100 from 24,700 due to the change in definition of full-time equivalent employee.

Other Expenses, Net

Three Months Ended
September 30, Nine Months Ended
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.


	Three Months Ended June 30,				Six Months Ended June 30,
(in millions)	2021		2020		2021		2020
Non-financing interest expense	$	24	$	18	$	48	$	39
Interest income	(1)		(3)		(2)		(11)
Non-service retirement-related costs	(22)		(8)		(42)		(7)
Gains on sales of businesses and assets	(1)		—		(1)		(1)
Currency losses, net	1		2		3		4



Contract termination costs - IT services	—		—		—		3

All other expenses, net	—		(2)		(1)		3
Other expenses, net	$	1	$	7	$	5	$	30

Non-Financing Interest Expense

~~Third~~Second quarter ~~2020~~2021 non-financing interest expense of ~~$30~~$24 million was $3$6 million higher than ~~third~~second quarter ~~2019.~~2020. When combined with financing interest expense (Cost of financing), total interest expense ~~decreased~~increased by $1$4 million ~~from third~~as compared to second quarter ~~2019~~2020 primarily reflecting a ~~lower~~higher average debt balance inand average interest rate.

Non-financing interest expense for 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~~six months ended ~~September~~June 30, ~~2020 non-financing interest expense~~2021 of ~~$69~~$48 million was ~~$12~~$9 million ~~lower~~higher than the prior ~~year period.~~year. When combined with financing interest expense (Cost of financing), total interest expense ~~decreased~~increased by ~~$21~~$5 million from the prior year period ~~primarily~~ reflecting a ~~lower~~higher 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.and average interest rate.

Refer to Note 1312 - Debt in the Condensed Consolidated Financial Statements, for additional information regarding debt activity and the interest expense.

Interest Income

Interest income for the three and six months ended June 30, 2021 were $2 million and $9 million lower, respectively, than the respective prior year periods, primarily due to lower interest rates and a lower cash balance.

Non-Service Retirement-Related Costs

Non-service retirement-related costs for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020 decreased $11~~2021 were $14 million and ~~$41~~$35 million ~~respectively, compared to~~lower than the respective prior year periods, primarily driven by lower discount rates and higher expected returns on plan assets due to higher asset balances as well as lower losses from pension settlements in the ~~U.S and lower discount rates.~~U.S.

Refer to Note 1615 - Employee Benefit Plans in the Condensed Consolidated Financial Statements, for additional information regarding non-service retirement-related costs.

~~Xerox 2020 Form 10-Q~~

~~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~~Second quarter ~~2020~~2021 effective tax rate was ~~24.4%~~9.1%. On an adjusted1 basis, ~~third~~second quarter ~~2020~~2021 effective tax rate was ~~21.1%~~9.7%. ~~This~~Both rates include the benefit from a change in tax law, resulting in the remeasurement of deferred tax assets of approximately 16%. The adjusted1 effective tax rate was ~~higher~~lower than the U.S. federal statutory tax rate of 21% primarily due to the change in tax law, partially offset by state taxes and 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.~~earnings. The adjusted1 effective tax rate excludes the tax impacts associated with the following charges: Restructuring and related costs, net, 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 applicable) as described in our Non-GAAP Financial Measures section.

~~The~~Second quarter 2020 effective tax rate ~~for the nine months ended September 30, 2020~~ was ~~24.2%~~22.9%. On an adjusted1 basis, ~~the effective tax rate for the nine months ended September 30,~~second quarter 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 adjusted~~1 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%~~23.4%. 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.~~earnings partially offset by the impact from various non-deductible and discrete items on lower pre-tax income. The adjusted1 effective tax rate excludes the tax impacts associated with the following charges: Restructuring and related costs, net, Amortization of intangible assets, Transaction and related costs, net, ~~and~~ non-service retirement-related costs ~~as well as~~and other discrete, unusual or infrequent items (as applicable), as described in our Non-GAAP Financial Measures ~~section, which included~~section.

Xerox 2021 Form 10-Q 52

The effective tax rate for the six months ended June 30, 2021 was 15.1%. On an adjusted1 basis, the effective tax rate for the six months ended June 30, 2021 was 16.7%. Both rates include the benefit from a change in tax law, resulting in the remeasurement of deferred tax assets of approximately 10%. The adjusted1 effective tax was lower than the U.S. federal statutory tax rate of 21% primarily due to the change in the tax law, partially offset by state taxes and the geographical mix of earnings. The adjusted1 effective tax rate excludes the tax impacts associated with the following charges: Restructuring and related costs, net, Amortization of intangible assets, non-service retirement-related costs and other discrete, unusual or infrequent items (as applicable), as described in our Non-GAAP Financial Measures section.

The effective tax rate for the six months ended June 30, 2020 was 23.3%. On an adjusted1 basis, the effective tax rate for the six months ended June 30, 2020 was 27.0%. This rate was higher than the U.S. federal statutory tax rate of 21% primarily due to the impact of changes in our uncertain tax positions, state taxes and various non-deductible items partially offset by the ~~Tax Act.~~impact of tax law changes and other discrete items. The adjusted1 effective tax rate excludes the tax impacts associated with the following charges: Restructuring and related costs, net, 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 applicable), as described in our Non-GAAP Financial Measures section.

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.

~~Xerox 2020 Form 10-Q~~

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 andNote 6 - Divestitures, in the Condensed Consolidated Financial Statements for additional information regarding the sale of Fuji Xerox. Accordingly, our remaining investment~~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
September 30, Nine Months Ended
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 of unconsolidated affiliates for ~~Fuji Xerox~~the six months ended June 30, 2021 was $1 million, as compared to $2 million for ~~2019 is reported in Income from discontinued operations, net of tax.~~the six months ended June 30, 2020.

Net Income ~~from Continuing Operations~~

~~Third~~Second quarter ~~2020~~2021 Net income ~~from continuing operations~~ attributable to Xerox Holdings was ~~$90~~$91 million, or ~~$0.41~~$0.46 per diluted share and included the benefit from a change in tax law (see Income Taxes above). On an adjusted1 basis, Net income attributable to Xerox Holdings was $94 million, or $0.47 per diluted share. Second quarter 2021 adjustments to Net income included Restructuring and related costs, net, Amortization of intangible assets, and non-service retirement-related costs (see Non-GAAP Financial Measures).

Net income attributable to Xerox Holdings for the six months ended June 30, 2021 was $130 million, or $0.64 per diluted share and included the benefit from a change in tax law (see Income Taxes above). On an adjusted1 basis, Net income attributable to Xerox Holdings was $141 million, or $0.69 per diluted share. Adjustments to Net income for the six months ended June 30, 2021 included Restructuring and related costs, net, Amortization of intangible assets, and non-service retirement-related costs (see Non-GAAP Financial Measures).

Second quarter 2020 Net income attributable to Xerox Holdings was $27 million, or $0.11 per diluted share. On an adjusted1 basis, Net income ~~from continuing operations~~ attributable to Xerox Holdings was ~~$105~~$36 million, or ~~$0.48~~$0.15 per diluted share. ~~Third~~Second quarter 2020 adjustments to Net income ~~from continuing operations~~ included Restructuring and related costs, net, Amortization of intangible assets, Transaction and related costs, net ~~and~~as well as non-service retirement-related costs ~~as well as other discrete, unusual or infrequent items~~ (see Non-GAAP Financial ~~Measures)~~Measures).

Net income ~~from continuing operations~~ attributable to Xerox Holdings for the ~~nine~~six months ended ~~September~~June 30, 2020 was ~~$115~~$25 million, or ~~$0.49~~$0.08 per diluted share. On an adjusted1 basis, Net income ~~from continuing operations~~ attributable to Xerox Holdings was ~~$191~~$86 million, or ~~$0.84~~$0.36 per diluted ~~share and~~share. Both amounts included the ~~negative~~ impact of ~~a $61~~the approximately $60 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~~receivable portfolio ~~as a result of the economic disruption caused by~~from the COVID-19 pandemic. Adjustments to Net income ~~from continuing operations~~ for the ~~nine~~six months ended ~~September~~June 30, 2020 included Restructuring and related costs, net, Amortization of intangible assets, Transaction and related costs, net as well as non-service retirement-related costs ~~as well as~~and 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 adjusted~~Measures1 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 adjusted~~1 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 2019 - Earnings per Share (EPS) 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.

Xerox ~~2020~~2021 Form 10-Q

5853

~~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~~Second quarter ~~2020~~2021 Other Comprehensive Income, Net Attributable to Xerox ~~Holdings~~ was ~~$88~~$70 million and included the following: i) net translation adjustment gains of ~~$179~~$54 million reflecting the ~~significant~~ strengthening of our major foreign currencies against the U.S. ~~Dollar;~~Dollar during the quarter; and 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~~$16 million of net gains from the changes in defined benefit plans is primarily due to remeasurement and net actuarial gains as a result of higher discount rates. This compares to Other Comprehensive Income, Net Attributable to Xerox of $103 million for the ~~amortization and recognition~~second quarter 2020, which reflected the following: i) $80 million of net ~~actuarial losses~~gains from ~~AOCL~~1;the changes in defined benefit plans primarily due to remeasurement; ii) net translation adjustment gains of $7$25 million reflecting the strengthening of our major foreign currencies against the U.S. Dollar; and iii) $4$2 million of net unrealized ~~gains.~~losses.

Other Comprehensive Income, Net Attributable to Xerox for the six months ended June 30, 2021 was $67 million and included the following: i) $71 million of net gains from the changes in defined benefit plans primarily due to remeasurement in the second quarter of 2021 and net actuarial gains as a result of higher discount rates.; ii) net translation adjustment gains of $3 million reflecting the strengthening of the GBP and CAD that was only partially offset by the weakening of the EUR against the U.S. Dollar; and iii) $7 million of net unrealized losses. This compares to Other Comprehensive Loss, Net Attributable to Xerox ~~Holdings of $158 million~~ for the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020 of $35 million, which reflected the following: i) ~~$122 million of~~ net translation adjustment losses of $172 million reflecting the significant weakening of our major foreign currencies against the U.S. Dollar; ii) ~~$38~~$134 million of net ~~losses~~gains from the changes in defined benefit ~~plans;~~plans primarily due to remeasurement in the second quarter of 2020; and iii) $3 million of net unrealized gains.

Refer to Note 1918 - Other Comprehensive Income (Loss) in the Condensed Consolidated Financial Statements, for the components of Other Comprehensive Income (Loss), Note 1413 - Financial Instruments in the Condensed Consolidated Financial Statements, for additional information regarding unrealized (losses) gains, net, and Note 1615 - Employee Benefit Plans in the Condensed Consolidated Financial Statements, for additional information regarding net changes in our defined benefit plans.

~~_____________~~New Business Strategy

~~(1)AOCL - Accumulated other comprehensive loss.~~As disclosed in our 2020 Annual Report, in January 2021 we announced our intention to stand up our Software, Financing and Innovation businesses as separate units by 2022. At this stage, the operations and financial results for these units continue to be primarily managed by and reported in our “go-to-market” (GTM) sales channels. We have begun the process of reorganizing these new units from the GTM units but we have not progressed to the point where we have discrete and complete financial information for these new businesses. Accordingly, the chief operating decision maker (CODM) and management continue to manage the Company’s operations, including the products and services from these units, through the GTM sales channels and as result, we continue to have one operating and reportable segment.

We expect that the business and financial information for these new units, as well as the operational management of these businesses, will continue to be refined and improved during 2021. Accordingly, a reassessment of our operating segments may be required later in 2021.

Xerox ~~2020~~2021 Form 10-Q

5954

Capital Resources and Liquidity

Our financial results through ~~September~~June 30, ~~2020~~2021 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.~~restrictions. 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 most of 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~~June 30, ~~2020,~~2021, total cash, cash equivalents and restricted cash were ~~$3,297~~$2,203 million and, apart from the restricted cash of ~~$55~~$79 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,				Change			Six Months Ended June 30,				Change
(in millions)	(in millions)	2020		2019				(in millions)	2021		2020
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	Net cash provided by operating activities	313		895		(582)		Net cash provided by operating activities	$	331	$	207	$	124

Net cash used in investing activities	Net cash used in investing activities	(223)		(68)		(155)		Net cash used in investing activities	(72)		(232)		160

Net cash provided by (used in) financing activities		424		(983)		1,407
Net cash used in financing activities								Net cash used in financing activities	(747)		(432)		(315)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	Effect of exchange rate changes on cash, cash equivalents and restricted cash	(12)		(13)		1		Effect of exchange rate changes on cash, cash equivalents and restricted cash	—		(24)		24

Increase (decrease) in cash, cash equivalents and restricted cash		502		(169)		671
Decrease in cash, cash equivalents and restricted cash								Decrease in cash, cash equivalents and restricted cash	(488)		(481)		(7)
Cash, cash equivalents and restricted cash at beginning of period	Cash, cash equivalents and restricted cash at beginning of period	2,795		1,148		1,647		Cash, cash equivalents and restricted cash at beginning of period	2,691		2,795		(104)
Cash, Cash Equivalents and Restricted Cash at End of Period	Cash, Cash Equivalents and Restricted Cash at End of Period	$	3,297	$	979	$	2,318	Cash, Cash Equivalents and Restricted Cash at End of Period	$	2,203	$	2,314	$	(111)

Cash Flows from Operating Activities

Net cash provided by operating activities ~~of continuing operations~~ was ~~$313~~$331 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021. The ~~$533~~$124 million ~~decrease~~increase in operating cash from the prior year period was primarily due to the following:

•$~~495~~229 million ~~decrease~~increase from inventory primarily due to increased revenues as well as significant cash usage in ~~pre-tax income before depreciation and amortization, provisions, gain on sales~~2020 as inventory levels increased with the onset of ~~businesses and assets, restructuring and related costs and defined benefit pension costs.~~the COVID-19 pandemic.

•$~~305~~126 million ~~decrease~~increase 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~~the increase in spending ~~and~~as compared to the ~~year-over-year~~prior year partially offset by the timing of supplier and vendor payments.

~~Xerox 2020 Form 10-Q~~

•

$122 million increase from other current and long-term liabilities, reflecting higher accruals from the increased level of operations as compared to the prior year.

•$~~272~~100 million increase due to the receipt of an upfront prepaid fixed royalty from FX for their continued use of the Xerox brand trademark subsequent to the termination of our technology agreement with them.

•$94 million increase from accrued compensation primarily related to higher employee incentive accruals and year-over-year timing of employee incentive payments.

•$391 million decrease from accounts receivable primarily due to ~~lower revenue~~higher revenues as ~~well as~~compared to the prior year partially offset by the timing of collections.

•$~~124~~178 million ~~increase primarily related to~~decrease from a ~~higher level of~~lower net 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~~an increased level of direct lease originations from our XBS sales unit as ~~a result of lower pre-tax income.~~

•~~$47 million increase primarily due to lower restructuring and related costs~~well as ~~compared to the prior year.~~higher equipment sales.

Cash Flows from Investing Activities

Net cash used in investing activities was ~~$223~~$72 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021. The ~~$155~~$160 million change from the prior year period was primarily due to ~~four~~two acquisitions completed in the current year for ~~$193~~$37 million compared to ~~two~~four acquisitions in the prior year for ~~$42~~$193 million. Other investing, net includes $3 million of noncontrolling investments as part of our corporate venture capital fund.

Cash Flows from Financing Activities

Net cash ~~provided by~~used in financing activities was ~~$424~~$747 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021. The ~~$1,407~~$315 million increase in the use of 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~~413 million increase due to share ~~repurchases.~~repurchases in the current year compared to no share repurchases in the prior year.

Xerox 2021 Form 10-Q 55

•$99 million decrease from net debt activity primarily due to payments of $209 million on secured financing arrangements in the current year compared to payments of $313 million on Senior Notes in the prior year.

•~~$11~~Other financing, net includes the receipt of $5 million ~~increase from lower distributions~~for a noncontrolling investment in Eloque, a newly-formed joint venture for the remote monitoring of ~~noncontrolling interests.~~critical infrastructure assets, such as road and railway bridges.

Cash, Cash Equivalents and Restricted Cash

Refer to Note 76 - 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~~and 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~~eleven years and a variety of renewal and/or termination options. As of June 30, 2021 and December 31, 2020, total operating liabilities were $302 million and $333 million, respectively.

Refer to Note 1110 - 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)	(in millions)	September 30, 2020		December 31, 2019		(in millions)	June 30, 2021		December 31, 2020
Principal debt balance(1)		$	5,082	$	4,313
Net unamortized discount		(3)		(16)
Xerox Holdings Corporation						Xerox Holdings Corporation	$	1,500	$	1,500
Xerox Corporation						Xerox Corporation	2,200		2,200
Xerox - Other Subsidiaries(1)						Xerox - Other Subsidiaries(1)	559		767
Subtotal - Principal debt balance						Subtotal - Principal debt balance	4,259		4,467
Debt issuance costs	Debt issuance costs	(28)		(17)		Debt issuance costs
Xerox Holdings Corporation						Xerox Holdings Corporation	(12)		(13)
Xerox Corporation						Xerox Corporation	(9)		(11)
Xerox - Other Subsidiaries(1)						Xerox - Other Subsidiaries(1)	(2)		(3)
Subtotal - Debt issuance costs						Subtotal - Debt issuance costs	(23)		(27)
Net unamortized premium						Net unamortized premium	3		3
Fair value adjustments(2)	Fair value adjustments(2)					Fair value adjustments(2)
- terminated swaps	- terminated swaps	3		1		- terminated swaps	—		1
- current swaps		—		1

Total Debt	Total Debt	$	5,054	$	4,282	Total Debt	$	4,239	$	4,444

_____________

(1)~~Includes Notes Payable~~Represents secured debt issued by subsidiaries of ~~$2 million~~Xerox Corporation as part of ~~September 30, 2020. There were no Notes Payable as~~the securitization of ~~December 31, 2019.~~Finance Receivables - Refer to Note 12 - Debt in the Condensed Consolidated Financial Statements for additional information.

(2)Fair value adjustments normally 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,~~Refer to Note 12 - Debt in 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.~~

~~Xerox 2020 Form 10-Q~~

Condensed Consolidated Financial Statements for additional information regarding debt.

Finance Assets and Related Debt

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


(in millions)	(in millions)	September 30, 2020		December 31, 2019		(in millions)	June 30, 2021		December 31, 2020
Total finance receivables, net(1)	Total finance receivables, net(1)	$	3,076	$	3,351	Total finance receivables, net(1)	$	3,117	$	3,165
Equipment on operating leases, net	Equipment on operating leases, net	301		364		Equipment on operating leases, net	271		296
Total Finance Assets, net(2)	Total Finance Assets, net(2)	$	3,377	$	3,715	Total Finance Assets, net(2)	$	3,388	$	3,461

_____________

(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~~2020 includes ~~an increase~~a decrease of ~~$24~~$19 million due to currency.

Xerox 2021 Form 10-Q 56

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


(in millions)	June 30, 2021		December 31, 2020
Finance receivables debt(1)	$	2,728	$	2,769
Equipment on operating leases debt	237		259
Financing debt	2,965		3,028
Core debt	1,274		1,416
Total Debt	$	4,239	$	4,444

____________________________

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


	Three Months Ended June 30,				Six Months Ended June 30,
(in millions)	2021		2020		2021		2020
Estimated increase (decrease) to operating cash flows(1)	$	1	$	(58)	$	(26)	$	(136)

_____________

(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 87 - 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)	(in millions)	Amount(1)		(in millions)	Xerox Holdings Corporation		Xerox Corporation		Xerox - Other Subsidiaries(1)		Total
2020 Q4(2)		$	2
2021(3)		1,222
2021 Q3				2021 Q3	$	—	$	—	$	95	$	95
2021 Q4				2021 Q4	—		—		89		89
2022	2022	300		2022	—		300		293		593
2023	2023	1,158		2023	—		1,000		82		1,082
2024	2024	300		2024	—		300		—		300
2025	2025	750		2025	750		—		—		750
2026 and thereafter	2026 and thereafter	1,350		2026 and thereafter	750		600		—		1,350
Total(2)	Total(2)	$	5,082	Total(2)	$	1,500	$	2,200	$	559	$	4,259

_____________

(1)~~Includes fair value adjustments.~~

~~(2)Includes Notes Payable~~Represents secured debt issued by subsidiaries of ~~$2 million~~Xerox Corporation as part of ~~September 30, 2020.~~

~~(3)Includes $750 million~~securitization of ~~Senior Notes due May 2021 that were redeemed in October 2020.~~Finance Receivables - Refer to Note 2212 - ~~Subsequent Event~~Debt in the Condensed Consolidated Financial Statements for additional ~~information regarding the early redemption of these Senior Notes.~~information.

(2)Includes fair value adjustments.

Xerox ~~2020~~2021 Form 10-Q

6257

Treasury Stock

~~In the third quarter 2020~~ Xerox Holdings repurchased ~~8.0~~10.4 million shares of our common stock for an aggregate $251 million, including fees, in second quarter 2021. Xerox Holdings repurchased 17.1 million shares of our common stock for an aggregate cost of ~~$150~~$413 million, including fees, during the six months ended June 30, 2021. The cumulative total of shares repurchased by Xerox Holdings under the current share repurchase program is 41.8 million shares for an aggregate cost of $1,013 million, including fees. NoAs of June 30, 2021, the remaining 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.~~authorization, excluding fees and expenses, is approximately $88 million.

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~~it sustained some delays caused by the COVID-19 pandemic, ~~the transition~~and it is now expected to ~~extend into~~be finalized by the end of 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~~$925 million over the next 65 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~~We incurred net charges of approximately ~~$49~~$50 million and ~~$139~~$45 million during the three months ended June 30, 2021 and 2020, respectively, ~~associated with this arrangement.~~and approximately $100 million and $90 million for the six months ended June 30, 2021 and 2020. 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.

ServiceNow License Purchase

In June 2021, Xerox entered into a software services agreement with a system integrator that included Xerox's use of ServiceNow software licenses for a 5-year commitment of approximately $60 million. A portion of licenses obtained through this new arrangement are expected to be used by Xerox as part of a future project with the system integrator for the reengineering and restructure of Xerox's current global technical service force.

Shared Services Arrangement with Tata Consulting Services

In July 2021, Xerox entered into an arrangement with Tata Consulting Services (TCS), whereby TCS will provide business processing outsourcing services in support of our global finance organization. TCS will leverage their existing technology and make additional investments as required to consolidate, optimize and automate the supported services with the goal of providing improved service levels and cost savings. The arrangement is initially for 6 years with a total contract value of approximately $160 million. We can terminate the arrangement subject to payment of termination fees that decline over the term.

Xerox 2021 Form 10-Q 58

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, interest rate caps, 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 1413 – Financial Instruments in the Condensed Consolidated Financial Statements for further discussion and information on our financial risk management strategies.

Xerox ~~2020~~2021 Form 10-Q

6359

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~~second quarter ~~2020~~2021 presentation slides available at www.xerox.com/~~investor~~.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~~Income and ~~Earnings per share (EPS)~~EPS

•Effective ~~tax rate~~Tax Rate

The above measures were adjusted for the following items:

Restructuring and related ~~costs:~~costs, net: Restructuring and related costs, net 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~~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~~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~~these items, when applicable, given their discrete, unusual or infrequent nature and ~~their~~its impact on our results for ~~each period:~~the period.

•~~Contract termination costs - IT Services~~

•~~Impacts associated with the Tax Cuts and Jobs Act (the "Tax Act") enacted in December 2017~~

Xerox ~~2020~~2021 Form 10-Q

6460

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~~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~~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,									Three Months Ended June 30,								Six Months Ended June 30,
		2020				2019				2020				2019					2021				2020				2021				2020
(in millions, except per share amounts)	(in millions, except per share amounts)	Net Income		EPS		Net Income		EPS		Net Income		EPS		Net Income		EPS		(in millions, except per share amounts)	Net Income		EPS		Net Income		EPS		Net Income		EPS		Net Income		EPS
Reported(1)	Reported(1)	$	90	$	0.41	$	157	$	0.68	$	115	$	0.49	$	382	$	1.62	Reported(1)	$	91	$	0.46	$	27	$	0.11	$	130	$	0.64	$	25	$	0.08
Adjustments:	Adjustments:																	Adjustments:
Restructuring and related costs		20				27				64				176
Restructuring and related costs, net																		Restructuring and related costs, net	12				3				29				44
Amortization of intangible assets	Amortization of intangible assets	13				9				34				35				Amortization of intangible assets	14				10				29				21
Transaction and related costs, net	Transaction and related costs, net	(6)				4				18				8				Transaction and related costs, net	—				7				—				24
Non-service retirement-related costs	Non-service retirement-related costs	(13)				(2)				(20)				21				Non-service retirement-related costs	(22)				(8)				(42)				(7)
Contract termination costs - IT services	Contract termination costs - IT services	—				(8)				3				(8)				Contract termination costs - IT services	—				—				—				3

Income tax on adjustments(2)	Income tax on adjustments(2)	1				(7)				(23)				(55)				Income tax on adjustments(2)	(1)				(3)				(5)				(24)

Tax Act		—				4				—				(31)

Adjusted	Adjusted	$	105	$	0.48	$	184	$	0.80	$	191	$	0.84	$	528	$	2.24	Adjusted	$	94	$	0.47	$	36	$	0.15	$	141	$	0.69	$	86	$	0.36

Dividends on preferred stock used in adjusted EPS calculation(3)	Dividends on preferred stock used in adjusted EPS calculation(3)			$	4			$	—			$	11			$	—	Dividends on preferred stock used in adjusted EPS calculation(3)			$	3			$	3			$	7			$	7
Weighted average shares for adjusted EPS(3)	Weighted average shares for adjusted EPS(3)			213				231				215				235		Weighted average shares for adjusted EPS(3)			189				216				194				216
Fully diluted shares at September 30, 2020(4)				208
Fully diluted shares at June 30, 2021(4)																		Fully diluted shares at June 30, 2021(4)			184

____________________________

(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 2021 and 2020 ~~exclude~~ excludes 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~~includes the preferred stock dividend.

(4)Represents common shares outstanding at ~~September~~June 30, ~~2020~~2021 plus potential dilutive common shares as used for the calculation of adjusted diluted EPS for ~~the third quarter 2020.~~2021. The amount excludes shares associated with our Series A convertible preferred stock as they ~~are expected to be~~were anti-dilutive for ~~the year.~~2021.

Xerox ~~2020~~2021 Form 10-Q

6561

Effective Tax Rate reconciliation:


		Three Months Ended September 30,													Three Months Ended June 30,
		2020						2019							2021						2020
(in millions)	(in millions)	Pre-Tax Income		Income Tax Expense (Benefit)		Effective Tax Rate		Pre-Tax Income		Income Tax Expense (Benefit)		Effective Tax Rate		(in millions)	Pre-Tax Income		Income Tax Expense		Effective Tax Rate		Pre-Tax Income		Income Tax Expense		Effective Tax Rate
Reported(1)	Reported(1)	$	119	$	29	24.4	%	$	223	$	66	29.6	%	Reported(1)	$	99	$	9	9.1	%	$	35	$	8	22.9	%
Non-GAAP Adjustments(2)	Non-GAAP Adjustments(2)	14		(1)				30		7				Non-GAAP Adjustments(2)	4		1				12		3
Tax Act		—		—				—		(4)

Adjusted(3)	Adjusted(3)	$	133	$	28	21.1	%	$	253	$	69	27.3	%	Adjusted(3)	$	103	$	10	9.7	%	$	47	$	11	23.4	%

		Nine Months Ended September 30,													Six Months Ended June 30,
		2020						2019							2021						2020
(in millions)	(in millions)	Pre-Tax Income		Income Tax Expense		Effective Tax Rate		Pre-Tax Income		Income Tax Expense		Effective Tax Rate		(in millions)	Pre-Tax Income		Income Tax Expense		Effective Tax Rate		Pre-Tax Income		Income Tax Expense		Effective Tax Rate
Reported(1)	Reported(1)	$	149	$	36	24.2	%	$	486	$	106	21.8	%	Reported(1)	$	152	$	23	15.1	%	$	30	$	7	23.3	%
Non-GAAP Adjustments(2)	Non-GAAP Adjustments(2)	99		23				232		55				Non-GAAP Adjustments(2)	16		5				85		24
Tax Act		—		—				—		31

Adjusted(3)	Adjusted(3)	$	248	$	59	23.8	%	$	718	$	192	26.7	%	Adjusted(3)	$	168	$	28	16.7	%	$	115	$	31	27.0	%

____________________________

(1)Pre-tax income and income tax ~~expense from continuing operations.~~expense.

(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,													Three Months Ended June 30,
		2020						2019							2021						2020
(in millions)	(in millions)	Profit		Revenue		Margin		Profit		Revenue		Margin		(in millions)	Profit		Revenue		Margin		Profit		Revenue		Margin
Reported(1)	Reported(1)	$	119	$	1,767	6.7	%	$	223	$	2,179	10.2	%	Reported(1)	$	99	$	1,793	5.5	%	$	35	$	1,465	2.4	%
Adjustments:	Adjustments:													Adjustments:
Restructuring and related costs		20						27
Restructuring and related costs, net														Restructuring and related costs, net	12						3
Amortization of intangible assets	Amortization of intangible assets	13						9						Amortization of intangible assets	14						10
Transaction and related costs, net	Transaction and related costs, net	(6)						4						Transaction and related costs, net	—						7

Other expenses, net	Other expenses, net	(15)						(1)						Other expenses, net	1						7

Adjusted	Adjusted	$	131	$	1,767	7.4	%	$	262	$	2,179	12.0	%	Adjusted	$	126	$	1,793	7.0	%	$	62	$	1,465	4.2	%

		Nine Months Ended September 30,													Six Months Ended June 30,
		2020						2019							2021						2020
(in millions)	(in millions)	Profit		Revenue		Margin		Profit		Revenue		Margin		(in millions)	Profit		Revenue		Margin		Profit		Revenue		Margin
Reported(1)	Reported(1)	$	149	$	5,092	2.9	%	$	486	$	6,622	7.3	%	Reported(1)	$	152	$	3,503	4.3	%	$	30	$	3,325	0.9	%
Adjustments:	Adjustments:													Adjustments:
Restructuring and related costs		64						176
Restructuring and related costs, net														Restructuring and related costs, net	29						44
Amortization of intangible assets	Amortization of intangible assets	34						35						Amortization of intangible assets	29						21
Transaction and related costs, net	Transaction and related costs, net	18						8						Transaction and related costs, net	—						24

Other expenses, net	Other expenses, net	15						76						Other expenses, net	5						30
Adjusted	Adjusted	$	280	$	5,092	5.5	%	$	781	$	6,622	11.8	%	Adjusted	$	215	$	3,503	6.1	%	$	149	$	3,325	4.5	%

____________________________

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

Xerox ~~2020~~2021 Form 10-Q

6662

ITEM 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information set forth under the “Financial Risk Management” section of this Quarterly Report on Form 10-Q is hereby incorporated by reference in answer to this Item.

ITEM 4 — CONTROLS AND PROCEDURES

(a)Evaluation of Disclosure Controls and Procedures

Xerox Holdings Corporation

The management of Xerox Holdings Corporation evaluated, with the participation of its principal executive officer and principal financial officer, or persons performing similar functions, the effectiveness of its disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as of the end of the period covered by this report. Based on this evaluation, the principal executive officer and principal financial officer of Xerox Holdings Corporation have concluded that, as of the end of the period covered by this report, the disclosure controls and procedures of Xerox Holdings Corporation were effective to ensure that information that is required to be disclosed in the reports that is filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms relating to Xerox Holdings Corporation, including its consolidated subsidiaries, and was accumulated and communicated to the management of Xerox Holdings Corporation, including the principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Xerox Corporation

The management of Xerox Corporation evaluated, with the participation of its principal executive officer and principal financial officer, or persons performing similar functions, the effectiveness of its disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as of the end of the period covered by this report. Based on this evaluation, the principal executive officer and principal financial officer of Xerox Corporation have concluded that, as of the end of the period covered by this report, the disclosure controls and procedures of Xerox Corporation were effective to ensure that information that is required to be disclosed in the reports that is filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms relating to Xerox Corporation, including its consolidated subsidiaries, and was accumulated and communicated to the management of Xerox Corporation, including the principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

(b)Changes in Internal Controls

Xerox Holdings Corporation

As required by paragraph (d) of Rule 13a-15 under the Exchange Act, we evaluated changes in our internal control over financial reporting during the last fiscal quarter. There were no changes identified in our internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Xerox Corporation

Xerox ~~2020~~2021 Form 10-Q

6763

PART II — OTHER INFORMATION

ITEM 1 — LEGAL PROCEEDINGS

The information set forth under Note 2120 – Contingencies and Litigation in the Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q is incorporated by reference in answer to this item.

ITEM 1A — RISK FACTORS

Reference is made to the Risk Factors set forth in Part ~~II,~~I, Item 1A of the combined Xerox Holdings Corporation and Xerox Corporation Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 (“Second Quarter 2020 Form 10-Q Report”). The risk factors set forth in the Second Quarter 2020 Form 10-Q Report have been updated from the risk factors contained in our combined Annual Report on Form 10-K for the year ended December 31, ~~2019.~~2020.

ITEM 2 — UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a)Sales of Unregistered Securities during the Quarter ended ~~September~~June 30, ~~2020~~2021

During the quarter ended ~~September~~June 30, ~~2020,~~2021, Xerox Holdings Corporation issued the following securities in transactions that were not registered under the Securities Act of 1933, as amended (the Act).

Annual Director Fees:

(a)Securities issued on May 20, 2021: Xerox Holdings Corporation issued an aggregate of 120,399 shares - 107,770 deferred stock units (DSUs) and 12,629 restricted stock units (RSUs), representing the right to receive shares of Common Stock, par value $1 per share, at a future date. For 2021, the Board determined that both the cash portion and equity portion of the annual director fees would be paid in the form of equity.

(b)No underwriters participated. The shares were issued to each of the non-employee Directors of Xerox Holdings Corporation: Keith Cozza, Joseph J. Echevarria, Aris Kekedjian, Cheryl Gordon Krongard, Scott Letier, Nichelle Maynard-Elliott, Steven D. Miller, James L. Nelson and Margarita Paláu-Hernández.

(c)The DSUs and RSUs were issued at a deemed purchase price of $23.755 per DSU or RSU (aggregate price $2,860,078), based upon the market value on the date of issuance, in payment of the Annual Director's fees pursuant to Xerox Holdings Corporation's 2004 Equity Compensation Plan for Non-Employee Directors (as amended and restated in 2021 (the 2021 Restatement)).

(d)Exemption from registration under the Act was claimed based upon Section 4(2) as a sale by an issuer not involving a public offering.

Dividend Equivalent:

(a)Securities issued on ~~July 31, 2020:~~April 30, 2021: Xerox Holdings Corporation issued ~~2,827~~1,860 DSUs, representing the right to receive shares of Common Stock, par value $1 per share, at a future date.

(b)No underwriters participated. The shares were issued to each of the non-employee Directors of Xerox Holdings Corporation: Jonathan Christodoro, Keith Cozza, Joseph J. Echevarria, Nicholas Graziano, Cheryl Gordon Krongard and Scott Letier.

(c)The DSUs were issued at a deemed purchase price of ~~$15.35~~$24.30 per DSU (aggregate price ~~$43,394)~~$45,198), based upon the market value on the date of record, in payment of the dividend equivalents due to DSU holders pursuant to Xerox Holdings Corporation's 2004 Equity Compensation Plan for Non-Employee Directors (as amended and restated in 2019 (the 2019 Restatement)).

(d)Exemption from registration under the Act was claimed based upon Section 4(2) as a sale by an issuer not involving a public offering.

Xerox 2021 Form 10-Q 64

(b) Issuer Purchases of Equity Securities during the Quarter ended ~~September~~June 30, ~~2020~~2021

Repurchases of Xerox Holdings Corporation's Common Stock, par value $1 per share, include the following:

Board Authorized Share Repurchase Program:

Total Number of Shares Purchased
Average Price Paid per Share(1)
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(2)
Maximum Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs(2)
July 1 through 31 — $ — — $700,027,664
August 1 through 31 2,214,773 18.77 2,214,773 658,445,939
September 1 through 30 5,792,465 18.72 5,792,465 550,027,675
Total 8,007,238 8,007,238


	Total Number of Shares Purchased	Average Price Paid per Share(1)		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(2)	Maximum Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs(2)
April 1 through 30	3,722,224	$	24.65	3,722,224	$	246,457,419
May 1 through 31	3,525,437	23.86		3,525,437	162,335,166
June 1 through 30	3,115,061	23.93		3,115,061	87,806,339
Total	10,362,722			10,362,722

____________________________

(1)Exclusive of fees and ~~costs.~~expenses.

(2)Of the ~~$1.0~~$1.1 billion of share repurchase authority previously granted by Xerox Holdings Corporation's Board of Directors, exclusive of fees and expenses, approximately ~~$450~~$1,012 million has been used through ~~September~~June 30, ~~2020.~~2021. Repurchases may be made on the open market, or through derivative or negotiated contracts. Open-market repurchases will be made in compliance with the Securities and Exchange Commission's Rule 10b-18, and are subject to market conditions, as well as applicable legal and other considerations.

~~Xerox 2020 Form 10-Q~~

Repurchases Related to Stock Compensation Programs(1):

Total Number of Shares Purchased
Average Price Paid per Share(2)
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs
July 1 through 31 627,283 $ 15.17 n/a n/a
August 1 through 31 — — n/a n/a
September 1 through 30 — — n/a n/a
Total 627,283

Total Number of Shares Purchased

Average Price Paid per Share(2)

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

Maximum Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs

April 1 through 30

284,598

25.04

n/a

May 1 through 31

105,383

24.21

n/a

June 1 through 30

—

n/a

Total

389,981

____________________________

(1)These repurchases are made under a provision in our restricted stock compensation programs for the indirect repurchase of shares through a net-settlement feature upon the vesting of shares in order to satisfy minimum statutory tax-withholding requirements.

(2)Exclusive of fees and ~~costs.~~expenses.

ITEM 3 — DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4 — MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5 — OTHER INFORMATION

None.

Xerox ~~2020~~2021 Form 10-Q

6965

ITEM 6 — EXHIBITS


~~4.1~~3.1						Amendment ~~No. 3~~ to ~~Credit Agreement, dated as of July 31, 2020, among Xerox Corporation,~~ Xerox Holdings Corporation ~~certain Lenders signatory thereto,~~By-Laws effective July 22, 2021.
						Incorporated by reference to Exhibit 3(b) to Xerox Holdings Corporation’s and ~~Citibank, N.A.,~~Xerox Corporation’s combined Current Report on Form 8-K dated July 22, 2021.See SEC File Nos. 001-39013 and 001-04471 .
3.2						Xerox Holdings Corporation’s By-Laws as ~~administrative agent.~~amended July 22, 2021.
3.3						Xerox Corporation’s By-Laws as amended July 22, 2021.
4						Registration Rights Agreement dated April 29, 2021 between Xerox Holdings Corporation and the Icahn Group and the Deason Group.
						Incorporated by reference to Exhibit 4.1 to Xerox Holdings Corporation’s and Xerox Corporation’s ~~Current~~combined Quarterly Report on Form ~~8-K dated August~~10-Q for the quarter ended March 3 ~~2020.~~1 , 2021. See SEC File Nos. 001-39013 and 001-04471.
~~4.2~~10						~~Indenture dated August 6, 2020 among Xerox Holdings Corporation, Xerox Corporation and U.S. Bank National Association, as Trustee, with respect to~~ Xerox Holdings Corporation’s ~~5.000% Senior Notes due 2025.~~Amended and Restated Equity Compensation Plan for Non-Employee Directors (2021 Restatement).
						Incorporated by reference to Exhibit ~~4.1~~10.1 to Xerox Holdings ~~Corporation’s and Xerox~~ Corporation’s Current Report on Form 8-K dated ~~August 6, 2020.~~May 20, 2021. See SEC File No. 001-39013.
~~4.3~~						Indenture dated August 6, 2020 among Xerox Holdings Corporation, Xerox Corporation and U.S. Bank National Association, as Trustee, with respect to Xerox Holdings Corporation’s 5.500% Senior Notes due 2028.
						~~Incorporated by reference to Exhibit 4.2 to Xerox Holdings Corporation’s and Xerox Corporation’s Current Report on Form 8-K dated August 6, 2020.~~
31(a)(1)						Certification of Xerox Holdings Corporation CEO pursuant to Rule 13a-14(a) or Rule 15d-14(a).
31(a)(2)						Certification of Xerox Corporation CEO pursuant to Rule 13a-14(a) or Rule 15d-14(a).
31(b)(1)						Certification of Xerox Holdings Corporation CFO pursuant to Rule 13a-14(a) or Rule 15d-14(a).
31(b)(2)						Certification of Xerox Corporation CFO pursuant to Rule 13a-14(a) or Rule 15d-14(a).
32(a)						Certification of Xerox Holdings Corporation CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32(b)						Certification of Xerox Corporation CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101						The following financial information from Xerox Holdings Corporation and Xerox Corporation's combined Quarterly Report on Form 10-Q for the quarter ended ~~September~~June 30, ~~2020~~2021 was formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Xerox Holdings Corporation Condensed Consolidated Statements of Income, (ii) Xerox Holdings Corporation Condensed Consolidated Statements of Comprehensive Income (Loss), (iii) Xerox Holdings Corporation Condensed Consolidated Balance Sheets, (iv) Xerox Holdings Corporation Condensed Consolidated Statements of Cash Flows, (v) Xerox Corporation Condensed Consolidated Statements of Income, (vi) Xerox Corporation Condensed Consolidated Statements of Comprehensive Income (Loss), (vii) Xerox Corporation Condensed Consolidated Balance Sheets, (viii) Xerox Corporation Condensed Consolidated Statements of Cash Flows, and (ix) Notes to the Condensed Consolidated Financial Statements.
104						The cover page from this Quarterly Report on Form 10-Q, (formatted as Inline XBRL and contained in Exhibit 101).

Xerox ~~2020~~2021 Form 10-Q

7066

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, each registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signatures for each undersigned shall be deemed to relate only to matters having reference to such company and its subsidiaries.


XEROX HOLDINGS CORPORATION (Registrant)

By:			/S/ JOSEPH H. MANCINI, JR.
			Joseph H. Mancini, Jr. Vice President and Chief Accounting Officer (Principal Accounting Officer)

Date: ~~November~~August 4, ~~2020~~2021


XEROX CORPORATION (Registrant)

By:			/S/ JOSEPH H. MANCINI, JR.
			Joseph H. Mancini, Jr. Vice President and Chief Accounting Officer (Principal Accounting Officer)

Date: ~~November~~August 4, ~~2020~~2021

Xerox ~~2020~~2021 Form 10-Q

7167

EXHIBIT INDEX


~~4.1~~3.1						Amendment ~~No. 3~~ to ~~Credit Agreement, dated as of July 31, 2020, among Xerox Corporation,~~ Xerox Holdings Corporation ~~certain Lenders signatory thereto,~~By-Laws effective July 22, 2021.
						Incorporated by reference to Exhibit 3(b) to Xerox Holdings Corporation’s and ~~Citibank, N.A.,~~Xerox Corporation’s combined Current Report on Form 8-K dated July 22, 2021.See SEC File Nos. 001-39013 and 001-04471.
3.2						Xerox Holdings Corporation’s By-Laws as ~~administrative agent.~~amended July 22, 2021.
3.3						Xerox Corporation’s By-Laws as amended July 22, 2021.
4						Registration Rights Agreement dated April 29, 2021 between Xerox Holdings Corporation and the Icahn Group and the Deason Group.
						Incorporated by reference to Exhibit 4.1 to Xerox Holdings Corporation’s and Xerox Corporation’s ~~Current~~combined Quarterly Report on Form ~~8-K dated August~~10-Q for the quarter ended March 3 ~~2020.~~1 , 2021. See SEC File Nos. 001-39013 and 001-04471.
~~4.2~~10						~~Indenture dated August 6, 2020 among Xerox Holdings Corporation, Xerox Corporation and U.S. Bank National Association, as Trustee, with respect to~~ Xerox Holdings Corporation’s ~~5.000% Senior Notes due 2025.~~Amended and Restated Equity Compensation Plan for Non-Employee Directors (2021 Restatement).
						Incorporated by reference to Exhibit ~~4.1~~10.1 to Xerox Holdings ~~Corporation’s and Xerox~~ Corporation’s Current Report on Form 8-K dated ~~August 6, 2020.~~May 20, 2021. See SEC File No. 001-39013.
~~4.3~~						Indenture dated August 6, 2020 among Xerox Holdings Corporation, Xerox Corporation and U.S. Bank National Association, as Trustee, with respect to Xerox Holdings Corporation’s 5.500% Senior Notes due 2028.
						~~Incorporated by reference to Exhibit 4.2 to Xerox Holdings Corporation’s and Xerox Corporation’s Current Report on Form 8-K dated August 6, 2020.~~
31(a)(1)						Certification of Xerox Holdings Corporation CEO pursuant to Rule 13a-14(a) or Rule 15d-14(a).
31(a)(2)						Certification of Xerox Corporation CEO pursuant to Rule 13a-14(a) or Rule 15d-14(a).
31(b)(1)						Certification of Xerox Holdings Corporation CFO pursuant to Rule 13a-14(a) or Rule 15d-14(a).
31(b)(2)						Certification of Xerox Corporation CFO pursuant to Rule 13a-14(a) or Rule 15d-14(a).
32(a)						Certification of Xerox Holdings Corporation CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32(b)						Certification of Xerox Corporation CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101						The following financial information from Xerox Holdings Corporation and Xerox Corporation's combined Quarterly Report on Form 10-Q for the quarter ended ~~September~~June 30, ~~2020~~2021 was formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Xerox Holdings Corporation Condensed Consolidated Statements of Income, (ii) Xerox Holdings Corporation Condensed Consolidated Statements of Comprehensive Income (Loss), (iii) Xerox Holdings Corporation Condensed Consolidated Balance Sheets, (iv) Xerox Holdings Corporation Condensed Consolidated Statements of Cash Flows, (v) Xerox Corporation Condensed Consolidated Statements of Income, (vi) Xerox Corporation Condensed Consolidated Statements of Comprehensive Income (Loss), (vii) Xerox Corporation Condensed Consolidated Balance Sheets, (viii) Xerox Corporation Condensed Consolidated Statements of Cash Flows, and (ix) Notes to the Condensed Consolidated Financial Statements.
104						The cover page from this Quarterly Report on Form 10-Q, (formatted as Inline XBRL and contained in Exhibit 101).

Xerox ~~2020~~2021 Form 10-Q

7268


(in millions)	Three Months Ended September 30, 2020		Nine Months Ended September 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