What changed in this filing

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Item 1. Financial Statements

2020-07-30 compared with 2020-05-07 · 378 added, 195 removed, 986 unchanged (37% of the section changed)

1 unchanged sentence

XEROX HOLDINGS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF (LOSS) INCOME (UNAUDITED)

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Three Months Ended

June 30, Six Months Ended

(in millions, except per-share data) 2020 2019 2020 2019

14 unchanged sentences

Total Costs and Expenses 1,430 2,073 3,295 4,180

(Loss) Income before Income Taxes and Equity Income ( 5 ) 73

Income tax benefit ( 1 ) ( 10 )

Income before Income Taxes and Equity Income 35 190 30 263

Income tax expense 8 50 7 40

Equity in net income of unconsolidated affiliates — 2 2 4

(Loss) Income from Continuing Operations ( 2 ) 85

Income from Continuing Operations 27 142 25 227

Income from discontinued operations, net of tax — 42 — 93

Net (Loss) Income ( 2 ) 136

Net Income 27 184 25 320

Income from continuing operations attributable to noncontrolling interests — 1 — 2

Income from discontinued operations attributable to noncontrolling interests — 2 — 4

Net (Loss) Income Attributable to Xerox Holdings $ ( 2 ) $ 133

Net Income Attributable to Xerox Holdings $ 27 $ 181 $ 25 $ 314

Amounts Attributable to Xerox Holdings:

(Loss) Income from continuing operations $ ( 2 ) $ 84

Income from continuing operations $ 27 $ 141 $ 25 $ 225

Income from discontinued operations — 40 — 89

Net (Loss) Income Attributable to Xerox Holdings $ ( 2 ) $ 133

Basic (Loss) Earnings per Share:

Net Income Attributable to Xerox Holdings $ 27 $ 181 $ 25 $ 314

Basic Earnings per Share:

Continuing operations $ 0.11 $ 0.62 $ 0.08 $ 0.97

Discontinued operations — 0.17 — 0.39

Total Basic (Loss) Earnings per Share $ ( 0.03 ) $ 0.57

Diluted (Loss) Earnings per Share:

Total Basic Earnings per Share $ 0.11 $ 0.79 $ 0.08 $ 1.36

Diluted Earnings per Share:

Continuing operations $ 0.11 $ 0.60 $ 0.08 $ 0.94

Discontinued operations — 0.17 — 0.38

Total Diluted (Loss) Earnings per Share $ ( 0.03 ) $ 0.55

Total Diluted Earnings per Share $ 0.11 $ 0.77 $ 0.08 $ 1.32

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

1 unchanged sentence

XEROX HOLDINGS CORPORATION

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

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

Three Months Ended

June 30, Six Months Ended

(in millions) 2020 2019 2020 2019

Net (Loss) Income $ ( 2 ) $ 136

Net Income $ 27 $ 184 $ 25 $ 320

Income from continuing operations attributable to noncontrolling interests — 1 — 2

Income from discontinued operations attributable to noncontrolling interests — 2 — 4

Net (Loss) Income Attributable to Xerox Holdings ( 2 ) 133

Other Comprehensive (Loss) Income, Net (1)

Net Income Attributable to Xerox Holdings 27 181 25 314

Other Comprehensive Income (Loss), Net (1)

Translation adjustments, net 25 ( 4 ) ( 172 ) 33

Unrealized gains, net 5 2

Unrealized (losses) gains, net ( 2 ) — 3 2

Changes in defined benefit plans, net 80 9 134 10

Other Comprehensive (Loss) Income, Net Attributable to Xerox Holdings ( 138 ) 40

Comprehensive (Loss) Income, Net ( 140 ) 176

Other Comprehensive Income (Loss), Net Attributable to Xerox Holdings 103 5 ( 35 ) 45

Comprehensive Income (Loss), Net 130 189 ( 10 ) 365

Comprehensive income, net from continuing operations attributable to noncontrolling interests — 1 — 2

Comprehensive income, net from discontinued operations attributable to noncontrolling interests — 2 — 4

Comprehensive (Loss) Income, Net Attributable to Xerox Holdings $ ( 140 ) $ 173

Comprehensive Income (Loss), Net Attributable to Xerox Holdings $ 130 $ 186 $ ( 10 ) $ 359

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(1) Refer to Note 19 - Other Comprehensive (Loss) Income for gross components of Other comprehensive (loss) income, net, reclassification adjustments out of Accumulated other comprehensive loss and related tax effects.

(1) Refer to Note 19 - 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.

2 unchanged sentences

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in millions, except share data in thousands) March 31,

(in millions, except share data in thousands) June 30,

2020 December 31,

40 unchanged sentences

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(1) Allowances at March 31, 2020 determined in accordance with ASU 2016-13 adopted effective January 1, 2020 - refer to Notes 2, 8 and 9 for additional information.

(1) Allowances at June 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.

3 unchanged sentences

Three Months Ended

June 30, Six Months Ended

(in millions) 2020 2019 2020 2019

Cash Flows from Operating Activities

Net (Loss) Income $ ( 2 ) $ 136

Net income $ 27 $ 184 $ 25 $ 320

Income from discontinued operations, net of tax — ( 42 ) — ( 93 )

(Loss) income from continuing operations ( 2 ) 85

Adjustments required to reconcile Net (loss) income to Cash flows from operating activities

Income from continuing operations 27 142 25 227

Adjustments required to reconcile Net income to Cash flows from operating activities

Depreciation and amortization 88 110 182 228

6 unchanged sentences

Contributions to defined benefit pension plans ( 31 ) ( 36 ) ( 64 ) ( 70 )

Decrease in accounts receivable and billed portion of finance receivables 166 38

Increase in inventories ( 126 ) ( 48 )

Decrease (increase) in accounts receivable and billed portion of finance receivables 262 ( 29 ) 428 9

(Increase) decrease in inventories ( 99 ) 64 ( 225 ) 16

Increase in equipment on operating leases ( 23 ) ( 42 ) ( 55 ) ( 72 )

Decrease in finance receivables 97 38 190 119

Increase in other current and long-term assets ( 16 ) ( 2 )

Increase (decrease) in accounts payable 51 ( 32 )

Decrease (increase) in other current and long-term assets 1 17 ( 15 ) 15

Decrease in accounts payable ( 210 ) ( 14 ) ( 159 ) ( 46 )

Decrease in accrued compensation ( 21 ) ( 10 ) ( 129 ) ( 83 )

(Decrease) increase in other current and long-term liabilities ( 38 ) 47

Decrease in other current and long-term liabilities ( 92 ) ( 54 ) ( 130 ) ( 7 )

Net change in income tax assets and liabilities 13 10 3 ( 11 )

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Cost of additions to land, buildings, equipment and software ( 19 ) ( 16 ) ( 42 ) ( 31 )

Proceeds from sales of businesses and assets 2 1

Proceeds from sales of business and assets — — 2 1

Acquisitions, net of cash acquired — ( 38 ) ( 193 ) ( 42 )

Other investing, net 1 — 1 —

Net cash used in investing activities ( 18 ) ( 54 ) ( 232 ) ( 72 )

Cash Flows from Financing Activities

Net proceeds on short-term debt — 2

Net payments on short-term debt — ( 2 ) — —

Proceeds from issuance of long-term debt 3 3 5 5

8 unchanged sentences

Cash, Cash Equivalents and Restricted Cash at End of Period $ 2,314 $ 776 $ 2,314 $ 776

$ 2,665 $ 786

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(1) Balance at March 31, 2019 includes $ 1 associated with discontinued operations.

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

1 unchanged sentence

XEROX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF (LOSS) INCOME (UNAUDITED)

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Three Months Ended

June 30, Six Months Ended

(in millions) 2020 2019 2020 2019

14 unchanged sentences

Total Costs and Expenses 1,430 2,073 3,295 4,180

(Loss) Income before Income Taxes and Equity Income ( 5 ) 73

Income tax benefit ( 1 ) ( 10 )

Income before Income Taxes and Equity Income 35 190 30 263

Income tax expense 8 50 7 40

Equity in net income of unconsolidated affiliates — 2 2 4

(Loss) Income from Continuing Operations ( 2 ) 85

Income from Continuing Operations 27 142 25 227

Income from discontinued operations, net of tax — 42 — 93

Net (Loss) Income ( 2 ) 136

Net Income 27 184 25 320

Income from continuing operations attributable to noncontrolling interests — 1 — 2

Income from discontinued operations attributable to noncontrolling interests — 2 — 4

Net (Loss) Income Attributable to Xerox $ ( 2 ) $ 133

Net Income Attributable to Xerox $ 27 $ 181 $ 25 $ 314

Amounts Attributable to Xerox:

Net (loss) income from continuing operations $ ( 2 ) $ 84

Net income from continuing operations $ 27 $ 141 $ 25 $ 225

Net income from discontinued operations — 40 — 89

Net (Loss) Income Attributable to Xerox $ ( 2 ) $ 133

Net Income Attributable to Xerox $ 27 $ 181 $ 25 $ 314

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

1 unchanged sentence

XEROX CORPORATION

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

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

Three Months Ended

June 30, Six Months Ended

(in millions) 2020 2019 2020 2019

Net (Loss) Income $ ( 2 ) $ 136

Net Income $ 27 $ 184 $ 25 $ 320

Income from continuing operations attributable to noncontrolling interests — 1 — 2

Income from discontinued operations attributable to noncontrolling interests — 2 — 4

Net (Loss) Income Attributable to Xerox ( 2 ) 133

Other Comprehensive (Loss) Income, Net (1)

Net Income Attributable to Xerox 27 181 25 314

Other Comprehensive Income (Loss), Net (1)

Translation adjustments, net 25 ( 4 ) ( 172 ) 33

Unrealized gains, net 5 2

Unrealized (losses) gains, net ( 2 ) — 3 2

Changes in defined benefit plans, net 80 9 134 10

Other Comprehensive (Loss) Income, Net Attributable to Xerox ( 138 ) 40

Comprehensive (Loss) Income, Net ( 140 ) 176

Other Comprehensive Income (Loss), Net Attributable to Xerox 103 5 ( 35 ) 45

Comprehensive Income (Loss), Net 130 189 ( 10 ) 365

Comprehensive income, net from continuing operations attributable to noncontrolling interests — 1 — 2

Comprehensive income, net from discontinued operations attributable to noncontrolling interests — 2 — 4

Comprehensive (Loss) Income, Net Attributable to Xerox $ ( 140 ) $ 173

Comprehensive Income (Loss), Net Attributable to Xerox $ 130 $ 186 $ ( 10 ) $ 359

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

2 unchanged sentences

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in millions) March 31,

(in millions) June 30,

2020 December 31,

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_____________

(1) Allowances at March 31, 2020 determined in accordance with ASU 2016-13 adopted effective January 1, 2020 - refer to Notes 2, 8 and 9 for additional information.

(1) Allowances at June 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.

3 unchanged sentences

Three Months Ended

June 30, Six Months Ended

(in millions) 2020 2019 2020 2019

Cash Flows from Operating Activities

Net (Loss) Income $ ( 2 ) $ 136

Net Income $ 27 $ 184 $ 25 $ 320

Income from discontinued operations, net of tax — ( 42 ) — ( 93 )

(Loss) income from continuing operations ( 2 ) 85

Adjustments required to reconcile Net (loss) income to Cash flows from operating activities

Income from continuing operations 27 142 25 227

Adjustments required to reconcile Net income to Cash flows from operating activities

Depreciation and amortization 88 110 182 228

6 unchanged sentences

Contributions to defined benefit pension plans ( 31 ) ( 36 ) ( 64 ) ( 70 )

Decrease in accounts receivable and billed portion of finance receivables 166 38

Increase in inventories ( 126 ) ( 48 )

Decrease (increase) in accounts receivable and billed portion of finance receivables 262 ( 29 ) 428 9

(Increase) decrease in inventories ( 99 ) 64 ( 225 ) 16

Increase in equipment on operating leases ( 23 ) ( 42 ) ( 55 ) ( 72 )

Decrease in finance receivables 97 38 190 119

Increase in other current and long-term assets ( 16 ) ( 2 )

Increase (decrease) in accounts payable 51 ( 32 )

Decrease (increase) in other current and long-term assets 1 17 ( 15 ) 15

Decrease in accounts payable ( 210 ) ( 14 ) ( 159 ) ( 46 )

Decrease in accrued compensation ( 21 ) ( 10 ) ( 129 ) ( 83 )

(Decrease) increase in other current and long-term liabilities ( 38 ) 47

Decrease in other current and long-term liabilities ( 92 ) ( 54 ) ( 130 ) ( 7 )

Net change in income tax assets and liabilities 13 10 3 ( 11 )

8 unchanged sentences

Acquisitions, net of cash acquired — ( 38 ) ( 193 ) ( 42 )

Other investing, net 1 — 1 —

Net cash used in investing activities ( 18 ) ( 54 ) ( 232 ) ( 72 )

Cash Flows from Financing Activities

Net proceeds on short-term debt — 2

Net payments on short-term debt — ( 2 ) — —

Proceeds from issuance of long-term debt 3 3 5 5

9 unchanged sentences

Cash, Cash Equivalents and Restricted Cash at End of Period $ 2,314 $ 776 $ 2,314 $ 776

$ 2,665 $ 786

_____________

(1) Balance at March 31, 2019 includes $ 1 associated with discontinued operations.

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

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Interim results of operations are not necessarily indicative of the results of the full year.

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

As of June 30, 2020, the impact of the outbreak of COVID-19 continues to unfold.

As a result, many of our estimates and assumptions required increased judgment and carry a higher degree of variability and volatility.

As events continue to evolve and additional information becomes available, our estimates may change materially in the future.

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

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

Interim Impairment Evaluation

During the quarter ended June 30, 2020, we evaluated whether events or circumstances changed that 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 crisis 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 occurred related to Goodwill and 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 crisis on our current and future operations as well expected recovery scenarios.

After completing our interim impairment review, we concluded that Goodwill was not impaired in the second quarter because the Company’s estimated fair value exceeded the carrying value as of June 30, 2020.

If assumptions or estimates in the fair value calculations change or if future cash flows vary from what was expected, including those

Xerox 2020 Form 10-Q

assumptions relating to the duration and severity of the financial impact from the COVID-19 pandemic crisis, 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.

Note 2 – Recent Accounting Pronouncements

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We are currently in the process of evaluating the effects on our Consolidated Financial Statements.

Xerox 2020 Form 10-Q

Accounting Standard Updates Adopted in 2020:

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 as 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 deferral in the timing of lease payments as if there were no changes in the lease contract.

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 June 30, 2020, we approved payment deferrals of up to three months of approximately $ 30 or less than 1 % of our total finance receivable portfolio.

The outstanding principal balance of receivables for customers with an approved payment deferral was approximately $ 320 .

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 deferral 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

Xerox 2020 Form 10-Q

to our financial condition, results of operations or cash flows, as no rent concessions provided to Xerox in the second quarter of 2020 were material, individually or in the aggregate.

Government Grants/Assistance

As a result of the significant increase in governmental assistance during the second quarter of 2020, we have 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

32 unchanged sentences

Three Months Ended

June 30, Six Months Ended

2020 2019 2020 2019

Primary geographical markets (1) :

8 unchanged sentences

Maintenance agreements (2)

366 609 895 1,207

Service arrangements (3)

460 637 1,026 1,272

Rental and other 123 156 264 316

3 unchanged sentences

Direct equipment lease (4)

$ 111 $ 150 $ 237 $ 284

Distributors & resellers (5)

136 333 359 648

Customer direct 213 317 429 592

9 unchanged sentences

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 $ 133 and $ 137 at March 31, 2020 and December 31, 2019, respectively.

The balance at March 31, 2020 is expected to be amortized to revenue over approximately the next 30 months.

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 $ 127 and $ 137 at June 30, 2020 and December 31, 2019, respectively.

The balance at June 30, 2020 is expected to be amortized to revenue over approximately the next 30 months.

Contract Costs:

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Three Months Ended

June 30, Six Months Ended

2020 2019 2020 2019

Incremental direct costs of obtaining a contract $ 13 $ 18 $ 28 $ 36

Amortization of incremental direct costs 20 20 41 43

The balance of deferred incremental direct costs net of accumulated amortization at March 31, 2020 and December 31, 2019 was $ 154 and $ 163 , respectively.

The balance of deferred incremental direct costs net of accumulated amortization at June 30, 2020 and December 31, 2019 was $ 148 and $ 163 , respectively.

This amount is expected to be amortized over its estimated period of benefit, which we currently estimate to be approximately four years .

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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 March 31, 2020 and December 31, 2019 amounts deferred associated with contract fulfillment costs and inducements were $ 13 and $ 13 , respectively and the related amortization was $ 1 and $ 1 for the three months ended March 31, 2020 and 2019, respectively.

As of June 30, 2020 and December 31, 2019 amounts deferred associated with contract fulfillment costs and inducements were $ 12 and $ 13 , respectively.

The related amortization was $ 1 and $ 2 for the three months ended June 30, 2020 and 2019, respectively, and $ 2 and $ 3 for the six months ended June 30, 2020 and 2019, 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.

3 unchanged sentences

The components of lease income are as follows:

Location in Statements of (Loss) Income Three Months Ended

Location in Three Months Ended

June 30, Six Months Ended

Statements of Income 2020 2019 2020 2019

Revenue from sales type leases Sales $ 111 $ 150 $ 237 $ 284

3 unchanged sentences

Total Lease income $ 260 $ 339 $ 553 $ 667

Profit at lease commencement on sales type leases was estimated to be approximately $ 43 and $58 for the three months ended March 31, 2020 and 2019, respectively.

Profit at lease commencement on sales type leases was estimated to be approximately $ 42 and $ 55 for the three months ended June 30, 2020 and 2019, respectively and $ 86 and $ 120 for the six months ended June 30, 2020 and 2019, respectively.

Xerox 2020 Form 10-Q

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Any adjustments to the preliminary allocations are not expected to be material.

Proposed Transaction with HP Inc.

Termination of Proposed Transaction with HP Inc.

In November 2019, Xerox Holdings commenced a proposed business combination transaction with HP Inc.

HP rejected the initial as well as subsequent proposals by Xerox Holdings and refused to engage in mutual due diligence or negotiations.

Xerox Holdings nominated a slate of directors to HP's Board of Directors and initiated a tender offer to directly acquire HP shares.

As a result of the ongoing global health crisis and resulting macroeconomic and market turmoil caused by the COVID-19 health crisis, Xerox Holdings determined that the current environment was not conducive to continuing its pursuit of a proposed business combination with HP.

Accordingly, on March 31, 2020, Xerox Holdings withdrew its tender offer to acquire HP and will no longer seek to nominate a slate of directors to HP’s Board of Directors.

HP rejected our initial 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 pursue the proposed business combination transaction.

However, the ongoing COVID-19 pandemic crisis and resulting macroeconomic and market turmoil created an environment that the company determined to not be conducive to Xerox Holdings continuing its pursuit of 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 of the proposed business combination transaction 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 or other fees were paid as a result of termination.

No termination penalties were paid as a result of termination .

Note 6 – Divestitures

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Three Months Ended

June 30, Six Months Ended

2020 2019 2020 2019

Revenue $ — $ 26 $ — $ 52

Income from operations (1)

$ — $ 42 $ — $ 95

Gain on disposal — — — —

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(1) Includes Equity in net income for FX of $ 43 for the three months ended March 31, 2019.

(1) Includes Equity in net income for FX of $ 32 and $ 75 for the three and six months ended June 30, 2019, respectively.

Xerox 2020 Form 10-Q

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Three Months Ended

June 30, Six Months Ended

2020 2019 2020 2019

Provision for receivables $ 13 $ 13 $ 87 $ 27

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(1) Amortization of customer contract costs is reported in Increase in other current and long-term assets in the Condensed Consolidated Statements of Cash Flows.

(1) 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 for additional information on contract costs.

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Balance at March 31, 2020 $ 60

Charge-offs ( 8 )

Recoveries and other (1)

Balance at June 30, 2020 $ 60

_____________

2 unchanged sentences

Consistent with our adoption of ASU 2016-13 effective January 1, 2020 (refer to Note 2 - Recent Accounting Pronouncements), 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, and primarily as a result of the macroeconomic and market turmoil caused by COVID-19, the allowance for doubtful accounts as a percent of gross accounts receivable increased to 5.4 % at March 31, 2020 from 4.3 % at December 31, 2019.

Based on that assessment, and primarily as a result of the macroeconomic and market turmoil caused by COVID-19, the allowance for doubtful accounts as a percent of gross accounts receivable increased to 7.1 % at June 30, 2020 from 4.3 % at December 31, 2019.

Accounts Receivable Sales Arrangements

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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, $ 87 and $ 165 remained uncollected as of March 31, 2020 and December 31, 2019, respectively.

Of the accounts receivable sold and derecognized from our balance sheet, $ 26 and $ 165 remained uncollected as of June 30, 2020 and December 31, 2019, respectively.

Accounts receivable sales activity was as follows:

Three Months Ended

June 30, Six Months Ended

2020 2019 2020 2019

Accounts receivable sales (1)

Loss on sales of accounts receivable — 1

$ 14 $ 110 $ 67 $ 198

____________ _

(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.

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Consistent with our adoption of ASU 2016-13 effective January 1, 2020 (refer to Note 2 - Recent Accounting Pronouncements), the allowance for credit losses is 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 % of gross finance receivables (net of unearned income) at March 31, 2020 from 2.6 % at December 31, 2019.

In assessing the level of reserve in first quarter 2020, we had to critically assess current and forecasted economic conditions in light of the COVID-19 health crisis to ensure we objectively included those expected impacts in the determination of our reserve.

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 4.5 % of gross finance receivables (net of unearned income) at June 30, 2020 from 2.6 % at December 31, 2019.

In assessing the level of reserve required as of June 30,2020, we had to critically assess current and forecasted economic conditions in light of the COVID-19 pandemic crisis 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.

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Xerox 2020 Form 10-Q

as compared to the prior year.

However, in both instances the charge-offs are prior to the anticipated economic disruption from the COVID-19 health crisis, which is expected to impact write-off trends over the next year and a half.

Amounts disclosed below for the three months ended and at March 31, 2020 reflect the adoption of ASU 2016-13 in January 2020.

between the first and second quarter and as compared to the prior year.

However, in all instances the charge-offs are prior to the anticipated write-offs expected from the economic disruption related to the COVID-19 pandemic crisis, which is expected to impact write-off trends over the next year and a half.

Amounts disclosed below for the six months ended and at June 30, 2020 reflect the adoption of ASU 2016-13 in January 2020.

Amounts disclosed below for comparable periods in 2019 reflect superseded guidance.

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Balance at March 31, 2020 $ 91 $ 15 $ 40 $ 146

Finance receivables as of March 31, 2020 collectively evaluated for impairment (4)

Provision 3 1 — 4

Charge-offs ( 5 ) ( 1 ) ( 2 ) ( 8 )

Recoveries and other (2)

Balance at June 30, 2020 $ 89 $ 16 $ 38 $ 143

Finance receivables as of June 30, 2020 collectively evaluated for impairment (4)

$ 1,824 $ 289 $ 1,100 $ 3,213

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Balance at March 31, 2019 $ 53 $ 12 $ 28 $ 93

Finance receivables as of March 31, 2019 collectively evaluated for impairment (4)

Provision 4 1 3 8

Charge-offs ( 5 ) ( 3 ) ( 3 ) ( 11 )

Recoveries and other (2)

Balance at June 30, 2019 $ 53 $ 12 $ 28 $ 93

Finance receivables as of June 30, 2019 collectively evaluated for impairment (4)

$ 1,885 $ 336 $ 1,221 $ 3,442

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(3) 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) Total Finance receivables exclude the allowance for credit losses of $ 146 and $ 93 at March 31, 2020 and 2019, respectively.

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

In the U.S., customers are further evaluated by class based on the type of lease origination.

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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.

Accounts in this category include

Xerox 2020 Form 10-Q

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.

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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.

Xerox 2020 Form 10-Q

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

March 31, 2020 December 31, 2019

June 30, 2020 December 31, 2019

2020 2019 2018 2017 2016 Prior Total

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The aging of our billed finance receivables is as follows:

March 31, 2020

June 30, 2020

Current 31-90

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Equipment on operating leases, net $ 312 $ 364

Total contingent rentals on operating leases, consisting principally of usage charges in excess of minimum contracted amounts, were $ 22 and $ 27 for the three months ended March 31, 2020 and 2019, respectively.

Total contingent rentals on operating leases, consisting principally of usage charges in excess of minimum contracted amounts, were $ 14 and $ 28 for the three months ended June 30, 2020 and 2019, respectively, and $ 36 and $ 55 for the six months ended June 30, 2020 and 2019, respectively.

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Three Months Ended

June 30, Six Months Ended

2020 2019 2020 2019

Operating lease expense $ 28 $ 33 $ 56 $ 66

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Variable lease expense (1)

Sublease income ( 1 ) ( 1 ) ( 1 ) ( 1 )

Total Lease expense $ 42 $ 49 $ 87 $ 100

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Three Months Ended

June 30, Six Months Ended

2020 2019 2020 2019

Cash paid for amounts included in the measurement of lease liabilities - Operating cash flows $ 29 $ 32 $ 58 $ 64

ROU assets obtained in exchange for new lease liabilities (1)

$ 29 $ 14 $ 56 $ 23

Weighted-average remaining lease term 5 years 4 years

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Finance Leases

Xerox has one finance lease for equipment and related infrastructure within an outsourced warehouse supply arrangement in the U.S.

The lease expires in December 2026 and has a remaining lease obligation of $ 10 as of March 31, 2020 based on a discount rate of 4.53 %.

The Right-of-use asset balance associated with this finance lease of $ 11 is included in Land, buildings and equipment, net in the Condensed Consolidated Balance Sheet.

Xerox has finance leases for equipment and related infrastructure within outsourced warehouse supply arrangements in the U.S.

The leases have varying maturities up to 6 years with a maximum expiration date through December 2026.

As of June 30, 2020 the remaining lease obligation for all finance leases is $ 11 , based on a weighted-average discount rate of 4.39 %.

The Right-of-use asset balance associated with these finance leases of $ 12 is included in Land, buildings and equipment, net in the Condensed Consolidated Balance Sheet.

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We engage in restructuring actions, including 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 and to achieve operating efficiencies through a number of opportunities including reduction of our real estate footprint.

During the three months ended March 31, 2020, we recorded net restructuring and asset impairment charges of $ 29 , which included $ 32 of severance costs related to headcount reductions of approximately 300 employees worldwide, $ 1 of other contractual termination costs and $ 2 of asset impairment charges.

During the six months ended June 30, 2020, we recorded net restructuring and asset impairment charges of $ 27 , which included $ 39 of severance costs related to headcount reductions of approximately 450 employees worldwide, $ 1 of other contractual termination costs and $ 2 of asset impairment charges.

These costs were partially offset by $ 15 of net reversals, primarily resulting from changes in estimated reserves from prior period initiatives.

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Balance at March 31, 2020 $ 57 $ 7 $ — $ 64

Provision 7 — — 7

Reversals ( 6 ) ( 1 ) ( 2 ) ( 9 )

Net current period charges (1)

1 ( 1 ) ( 2 ) ( 2 )

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

Charges against reserve and currency ( 14 ) ( 1 ) 2 ( 13 )

Balance at June 30, 2020 $ 44 $ 5 $ — $ 49

_____________ _

(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.

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Three Months Ended

June 30, Six Months Ended

2020 2019 2020 2019

Charges against reserve and currency $ ( 13 ) $ ( 29 ) $ ( 48 ) $ ( 98 )

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Three Months Ended

June 30, Six Months Ended

2020 2019 2020 2019

Retention related severance/bonuses (1)

$ 4 $ 11 $ 11 $ 20

Contractual severance costs (2)

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

The restructuring related costs reserve as of March 31, 2020 was $ 49 , which is expected to be paid over the next twelve months, as compared to $ 37 at December 31, 2019.

The restructuring related costs reserve as of June 30, 2020 was $ 46 , which is expected to be paid over the next twelve months, as compared to $ 37 at December 31, 2019.

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Three Months Ended

June 30, Six Months Ended

2020 2019 2020 2019

Interest expense (1)

$ 48 $ 59 $ 99 $ 119

Interest income (2)

59 64 126 131

(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 (Loss) Income.

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

____________ _

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

Note 14 – Financial Instruments

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The swaps were structured to hedge the fair value of related debt by converting them from fixed rate instruments to variable rate instruments.

No ineffective portion was recorded to earnings for the three months ended March 31, 2020 prior to termination.

No ineffective portion was recorded to earnings for the six months ended June 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.

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• Foreign currency-denominated assets and liabilities

At March 31, 2020 and December 31, 2019, we had outstanding forward exchange and purchased option contracts with gross notional values of $ 1,131 and $ 1,091 respectively, with terms of less than 12 months.

Approximately 81 % of the contracts at March 31, 2020 mature within three months, 9 % mature in three to six months and 10 % in six to twelve months.

The associated currency exposures being hedged at March 31, 2020 were materially consistent with our year-end currency exposures.

At June 30, 2020 and December 31, 2019, we had outstanding forward exchange and purchased option contracts with gross notional values of $ 885 and $ 1,091 respectively, with terms of less than 12 months.

Approximately 87 % of the contracts at June 30, 2020 mature within three months, 9 % mature in three to six months and 4 % in six to twelve months.

The associated currency exposures being hedged at June 30, 2020 were lower by 20 % as compared to our year-end currency exposures.

There has not been any material change in our hedging strategy.

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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 asset (liability) fair value of these contracts were $ 3 and $( 4 ) as of March 31, 2020 and December 31, 2019, respectively.

The net asset (liability) fair value of these contracts were $ 0 and $( 4 ) as of June 30, 2020 and December 31, 2019, respectively.

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

Designation of Derivatives Balance Sheet Location March 31,

Designation of Derivatives Balance Sheet Location June 30,

2020 December 31,

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Accrued expenses and other current liabilities ( 1 ) ( 3 )

Net undesignated derivative liability $ ( 5 ) $ ( 2 )

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

Summary of Derivatives Total Derivative assets $ 6 $ 3

Total Derivative liabilities ( 2 ) ( 8 )

Net Derivative liability $ ( 2 ) $ ( 5 )

Net Derivative asset (liability) $ 4 $ ( 5 )

Summary of Derivative Instruments Gains (Losses)

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Three Months Ended

June 30, Six Months Ended

Gain (Loss) on Derivative Instruments 2020 2019 2020 2019

Fair Value Hedges - Interest Rate Contracts

Derivative (loss) gain recognized in interest expense $ ( 1 ) $ 2

Hedged item gain (loss) recognized in interest expense 1 ( 2 )

Derivative gain (loss) recognized in interest expense $ — $ 2 $ ( 1 ) $ 4

Hedged item (loss) gain recognized in interest expense — ( 2 ) 1 ( 4 )

Cash Flow Hedges - Foreign Exchange Forward Contracts and Options

Derivative gain recognized in OCI (effective portion) $ 7 $ 3

Derivative (loss) gain reclassified from AOCL to income - Cost of sales (effective portion) ( 1 ) 1

During the three months ended March 31, 2020 and 2019, no amount of ineffectiveness was recorded in the Condensed Consolidated Statements of (Loss) 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.

Derivative (loss) gain recognized in OCI (effective portion) $ ( 3 ) $ 3 $ 4 $ 6

Derivative gain reclassified from AOCL to income - Cost of sales (effective portion) 2 2 1 3

During the three and six months ended June 30, 2020 and 2019, no 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, no amount was recorded for an underlying exposure that did not occur or was not expected to occur.

As of March 31, 2020, a net after-tax gain of $ 3 was recorded in Accumulated other comprehensive loss associated with our cash flow hedging activity.

As of June 30, 2020, a net after-tax gain of $ 1 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.

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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 (losses) on non-designated derivative instruments:

Derivatives NOT Designated as Hedging Instruments Three Months Ended

Location of Derivative Gain (Loss) 2020 2019

Foreign exchange contracts – forwards Other expense – Currency gain (loss), net $ 14 $ ( 5 )

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

Derivatives NOT Designated as Hedging Instruments Location of Derivative Gain Three Months Ended

June 30, Six Months Ended

2020 2019 2020 2019

Foreign exchange contracts – forwards Other expense – Currency gain, net $ 2 $ 6 $ 17 $ 1

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For the three months ended March 31, 2020 and 2019 currency losses, net were $ 2 and $ 2 , respectively.

For the three and six months ended June 30, 2020 currency losses, net were $ 2 and $ 4 , respectively, and for the three and six months ended June 30, 2019 were $ 0 and $ 2 , 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.

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

March 31, 2020 December 31, 2019

June 30, 2020 December 31, 2019

Cash and cash equivalents $ 2,272 $ 2,272 $ 2,740 $ 2,740

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

Three Months Ended March 31,

Three Months Ended June 30,

Pension Benefits

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Recognized settlement loss 13 27 — — — —

Recognized curtailment gain — — ( 1 ) — — —

Defined benefit plans 14 36 ( 1 ) ( 4 ) ( 16 ) ( 15 )

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Net Periodic Benefit Cost (Credit) 20 41 4 2 ( 16 ) ( 15 )

Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive (Loss) Income:

Net actuarial loss (1)

Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income (Loss):

Net actuarial (gain) loss (1)

( 92 ) 21 — — ( 6 ) —

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Amortization of net prior service credit 1 1 — 1 19 19

Total Recognized in Other Comprehensive (Loss) Income (2)

Total Recognized in Other Comprehensive Income (Loss) (2)

( 111 ) ( 11 ) ( 14 ) ( 11 ) 14 20

Total Recognized in Net Periodic Benefit Cost and Other Comprehensive (Loss) Income $ 15 $ 27 $ ( 9 ) $ ( 8 ) $ 3 $ 4

Total Recognized in Net Periodic Benefit (Credit) Cost and Other Comprehensive Income (Loss) $ ( 91 ) $ 30 $ ( 10 ) $ ( 9 ) $ ( 2 ) $ 5

Six Months Ended June 30,

Pension Benefits

Plans Non-U.S.

Plans Retiree Health

Components of Net Periodic Benefit Costs:

2020 2019 2020 2019 2020 2019

(1) The net actuarial loss for U.S.

Plans primarily reflects the remeasurement of our primary U.S.

pension plans as a result of the payment of periodic settlements.

(2) Amounts represent the pre-tax effect included within Other Comprehensive (Loss) Income.

Refer to Note 19 - Other Comprehensive (Loss) Income for related tax effects and the after-tax amounts.

Service cost $ 1 $ 1 $ 10 $ 12 $ 1 $ 1

Interest cost 44 58 55 77 6 8

Expected return on plan assets ( 52 ) ( 51 ) ( 93 ) ( 118 ) — —

Recognized net actuarial loss (gain) 14 11 28 22 ( 1 ) ( 2 )

Amortization of prior service credit ( 1 ) ( 1 ) — ( 1 ) ( 38 ) ( 38 )

Recognized settlement loss 32 58 — — — —

Recognized curtailment gain — — ( 1 ) — — —

Defined benefit plans 38 76 ( 1 ) ( 8 ) ( 32 ) ( 31 )

Defined contribution plans (1)

11 13 10 12 n/a n/a

Net Periodic Benefit Cost (Credit) 49 89 9 4 ( 32 ) ( 31 )

Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income (Loss):

Net actuarial (gain) loss (1)

( 80 ) 36 — — ( 6 ) —

Amortization of net actuarial (loss) gain ( 46 ) ( 69 ) ( 28 ) ( 22 ) 1 2

Amortization of prior service credit 1 1 — 1 38 38

Total Recognized in Other Comprehensive Income (Loss) (2)

( 125 ) ( 32 ) ( 28 ) ( 21 ) 33 40

Total Recognized in Net Periodic Benefit (Credit) Cost and Other Comprehensive Income (Loss) $ ( 76 ) $ 57 $ ( 19 ) $ ( 17 ) $ 1 $ 9

_____________

(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 January 1st plan census data.

(2) Amounts represent the pre-tax effect included within Other Comprehensive Income (Loss).

Refer to Note 19 - Other Comprehensive Income (Loss) for related tax effects and the after-tax amounts.

Xerox 2020 Form 10-Q

Contributions

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

Three Months Ended March 31, Year Ended December 31,

Six Months Ended June 30, Year Ended December 31,

2020 2019 Estimated 2020 2019

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tax-qualified defined benefit plans to meet the minimum funding requirements.

Xerox 2020 Form 10-Q

Note 17 – Shareholders’ Equity of Xerox Holdings

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

Common Stock Additional Paid-in Capital Treasury Stock Retained Earnings AOCL (1)

Xerox Holdings Shareholders’ Equity Non-controlling Interests Total Equity

Balance at March 31, 2020 $ 213 $ 2,712 $ — $ 6,252 $ ( 3,784 ) $ 5,393 $ 7 $ 5,400

Comprehensive income, net — — — 27 103 130 — 130

Cash dividends declared - common (2)

— — — ( 53 ) — ( 53 ) — ( 53 )

Cash dividends declared - preferred (3)

— — — ( 3 ) — ( 3 ) — ( 3 )

Stock option and incentive plans, net — 10 — — — 10 — 10

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

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

Common Stock Additional Paid-in Capital Treasury Stock Retained Earnings AOCL (1)

Xerox Holdings Shareholders’ Equity Non- controlling Interests Total Equity

Balance at March 31, 2019 $ 230 $ 3,282 $ ( 103 ) $ 5,270 $ ( 3,652 ) $ 5,027 $ 36 $ 5,063

Comprehensive income, net — — — 181 5 186 3 189

Cash dividends declared - common (2)

— — — ( 57 ) — ( 57 ) — ( 57 )

Cash dividends declared - preferred (3)

— — — ( 3 ) — ( 3 ) — ( 3 )

Stock option and incentive plans, net — 6 — — — 6 — 6

Payments to acquire treasury stock, including fees — — ( 197 ) — — ( 197 ) — ( 197 )

Cancellation of treasury stock ( 5 ) ( 164 ) 169 — — — — —

Distributions to noncontrolling interests — — — — — — ( 9 ) ( 9 )

Balance at June 30, 2019 $ 225 $ 3,124 $ ( 131 ) $ 5,391 $ ( 3,647 ) $ 4,962 $ 30 $ 4,992

Xerox 2020 Form 10-Q

Treasury Stock Retained

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Balance at December 31, 2019 $ 215 $ 2,782 $ ( 76 ) $ 6,312 $ ( 3,646 ) $ 5,587 $ 7 $ 5,594

Comprehensive loss, net — — — ( 2 ) ( 138 ) ( 140 ) — ( 140 )

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

Cash dividends declared - common (2)

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Cancellation of treasury stock ( 2 ) ( 74 ) 76 — — — — —

Balance at March 31, 2020 $ 213 $ 2,712 $ — $ 6,252 $ ( 3,784 ) $ 5,393 $ 7 $ 5,400

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

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

Treasury Stock Retained

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Distributions to noncontrolling interests — — — — — — ( 10 ) ( 10 )

Balance at March 31, 2019 $ 230 $ 3,282 $ ( 103 ) $ 5,270 $ ( 3,652 ) $ 5,027 $ 36 $ 5,063

Balance at June 30, 2019 $ 225 $ 3,124 $ ( 131 ) $ 5,391 $ ( 3,647 ) $ 4,962 $ 30 $ 4,992

_____________

(1) Refer to Note 19 - Other Comprehensive (Loss) Income for the components of AOCL.

(2) Cash dividends declared on common stock for the three months ended March 31, 2020 and 2019 were $ 0.25 per share.

(3) Cash dividends declared on preferred stock for the three months ended March 31, 2020 and 2019 were $ 20.00 per share.

(1) Refer to Note 19 - Other Comprehensive Income (Loss) for the components of AOCL.

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

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

Treasury Stock

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Cancellations ( 2,031 ) ( 76 )

Balance at March 31, 2020 — $ —

Balance at June 30, 2020 — $ —

_____________

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Note 18 – Shareholders’ Equity of Xerox

(shares in thousands)

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

Common Stock Additional Paid-in Capital Treasury Stock Retained Earnings AOCL (1)

Xerox Shareholders’ 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

Common Stock Additional Paid-in Capital Treasury Stock Retained Earnings AOCL (1)

Xerox Shareholders’ Equity Non- controlling Interests Total Equity

Balance at March 31, 2019 $ 230 $ 3,282 $ ( 103 ) $ 5,270 $ ( 3,652 ) $ 5,027 $ 36 $ 5,063

Comprehensive income, net — — — 181 5 186 3 189

Cash dividends declared - common — — — ( 57 ) — ( 57 ) — ( 57 )

Cash dividends declared - preferred — — — ( 3 ) — ( 3 ) — ( 3 )

Stock option and incentive plans, net — 6 — — — 6 — 6

Payments to acquire treasury stock, including fees — — ( 197 ) — — ( 197 ) — ( 197 )

Cancellation of treasury stock ( 5 ) ( 164 ) 169 — — — — —

Distributions to noncontrolling interests — — — — — — ( 9 ) ( 9 )

Balance at June 30, 2019 $ 225 $ 3,124 $ ( 131 ) $ 5,391 $ ( 3,647 ) $ 4,962 $ 30 $ 4,992

Treasury Stock Retained

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Balance at December 31, 2019 $ — $ 3,266 $ — $ 6,247 $ ( 3,646 ) $ 5,867 $ 7 $ 5,874

Comprehensive loss, net — — — ( 2 ) ( 138 ) ( 140 ) — ( 140 )

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

Dividends declared to parent — — — ( 347 ) — ( 347 ) — ( 347 )

Transfers from parent — 249 — — — 249 — 249

Balance at March 31, 2020 $ — $ 3,504 $ — $ 5,955 $ ( 3,784 ) $ 5,675 $ 7 $ 5,682

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

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

Treasury Stock Retained

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Distributions to noncontrolling interests — — — — — — ( 10 ) ( 10 )

Balance at March 31, 2019 $ 230 $ 3,282 $ ( 103 ) $ 5,270 $ ( 3,652 ) $ 5,027 $ 36 $ 5,063

Balance at June 30, 2019 $ 225 $ 3,124 $ ( 131 ) $ 5,391 $ ( 3,647 ) $ 4,962 $ 30 $ 4,992

_____________

(1) Refer to Note 19 - Other Comprehensive (Loss) Income for the components of AOCL.

(1) Refer to Note 19 - Other Comprehensive Income (Loss) for the components of AOCL.

Xerox 2020 Form 10-Q

Note 19 - Other Comprehensive (Loss) Income

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

Note 19 - Other Comprehensive Income (Loss)

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

Three Months Ended

Pre-tax Net of Tax Pre-tax Net of Tax

Translation adjustments (losses) gains $ ( 204 ) $ ( 197 ) $ 37 $ 37

Unrealized gains (losses)

Changes in fair value of cash flow hedges gains 7 4 3 3

June 30, Six Months Ended

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) $ 26 $ 25 $ ( 5 ) $ ( 4 ) $ ( 178 ) $ ( 172 ) $ 32 $ 33

Unrealized (losses) gains

Changes in fair value of cash flow hedges (losses) gains ( 3 ) ( 1 ) 3 1 4 3 6 4

Changes in cash flow hedges reclassed to earnings (1)

( 2 ) ( 1 ) ( 2 ) ( 1 ) ( 1 ) — ( 3 ) ( 2 )

Net Unrealized gains 8 5 2 2

Defined benefit plans (losses) gains

Net actuarial/prior service losses ( 12 ) ( 9 ) ( 15 ) ( 12 )

Net Unrealized (losses) gains ( 5 ) ( 2 ) 1 — 3 3 3 2

Defined benefit plans gains (losses)

Net actuarial/prior service gains (losses) 98 73 ( 21 ) ( 15 ) 86 64 ( 36 ) ( 27 )

Prior service amortization (2)

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Actuarial loss amortization/settlement (2)

33 26 44 33 73 56 89 67

Fuji Xerox changes in defined benefit plans, net (3)

Other gains (losses) (4)

— — ( 7 ) ( 7 ) — — 2 2

Other (losses) gains (4)

( 4 ) ( 4 ) 14 14 43 43 ( 2 ) ( 2 )

Changes in defined benefit plans gains 107 80 9 9 163 134 13 10

Other Comprehensive (Loss) Income Attributable to Xerox Holdings/Xerox $ ( 140 ) $ ( 138 ) $ 43 $ 40

Other Comprehensive Income (Loss) Attributable to Xerox Holdings/Xerox $ 128 $ 103 $ 5 $ 5 $ ( 12 ) $ ( 35 ) $ 48 $ 45

(1) Reclassified to Cost of sales - refer to Note 14 - Financial Instruments for additional information regarding our cash flow hedges.

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Xerox 2020 Form 10-Q

Note 20 – (Loss) Earnings per Share

Note 20 – Earnings per Share

(shares in thousands)

The following table sets forth the computation of basic and diluted (loss) earnings per share of common stock of Xerox Holdings:

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

Three Months Ended

Basic (Loss) Earnings per Share

Net (Loss) Income from Continuing Operations Attributable to Xerox Holdings $ ( 2 ) $ 84

June 30, Six Months Ended

2020 2019 2020 2019

Basic Earnings per Share

Net Income from Continuing Operations Attributable to Xerox Holdings $ 27 $ 141 $ 25 $ 225

Accrued dividends on preferred stock ( 3 ) ( 3 ) ( 7 ) ( 7 )

Adjusted Net (loss) income from continuing operations available to common shareholders ( 6 ) 80

Adjusted Net income from continuing operations available to common shareholders 24 138 18 218

Income from discontinued operations attributable to Xerox Holdings, net of tax — 40 — 89

Adjusted Net (loss) income available to common shareholders $ ( 6 ) $ 129

Adjusted Net income available to common shareholders $ 24 $ 178 $ 18 $ 307

Weighted average common shares outstanding 212,949 223,606 212,852 226,040

Basic (Loss) Earnings per Share:

Basic Earnings per Share:

Continuing operations $ 0.11 $ 0.62 $ 0.08 $ 0.97

Discontinued operations — 0.17 — 0.39

Basic (Loss) Earnings per Share $ ( 0.03 ) $ 0.57

Diluted (Loss) Earnings per Share

Net (Loss) Income from Continuing Operations Attributable to Xerox Holdings $ ( 2 ) $ 84

Basic Earnings per Share $ 0.11 $ 0.79 $ 0.08 $ 1.36

Diluted Earnings per Share

Net Income from Continuing Operations Attributable to Xerox Holdings $ 27 $ 141 $ 25 $ 225

Accrued dividends on preferred stock ( 3 ) — ( 7 ) ( 7 )

Adjusted Net (loss) income from continuing operations available to common shareholders ( 6 ) 80

Adjusted Net income from continuing operations available to common shareholders 24 141 18 218

Income from discontinued operations attributable to Xerox Holdings, net of tax — 40 — 89

Adjusted Net (loss) income available to common shareholders $ ( 6 ) $ 129

Adjusted Net income available to common shareholders $ 24 $ 181 $ 18 $ 307

Weighted average common shares outstanding 212,949 223,606 212,852 226,040

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Adjusted Weighted average common shares outstanding 215,567 235,279 216,014 230,710

Diluted (Loss) Earnings per Share:

Diluted Earnings per Share:

Continuing operations $ 0.11 $ 0.60 $ 0.08 $ 0.94

Discontinued operations — 0.17 — 0.38

Diluted (Loss) Earnings per Share $ ( 0.03 ) $ 0.55

Diluted Earnings per Share $ 0.11 $ 0.77 $ 0.08 $ 1.32

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:

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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 March 31, 2020 and December 31, 2019.

Exposures related to labor matters are not material to the financial statements as of June 30, 2020 and December 31, 2019.

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.

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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 Gregory Q.

Brown, Joseph J.

Echevarria, Cheryl Gordon Krongard, Sara Martinez Tucker, Keith Cozza, Giovanni G.

Echevarria, Cheryl Gordon Krongard, Keith Cozza, Giovanni G.

Visentin, Jonathan Christodoro, Nicholas Graziano, and A.

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Keegan, Charles Prince, Ann N.

Reese, and Stephen H.

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.

The new complaint included putative derivative claims on behalf of Xerox for breach of fiduciary duty against the members of the Xerox Board who approved Xerox’s entry into agreements to settle the Deason and In re Xerox Corporation Consolidated Shareholder Litigation (“XCCSL”) actions (described above).

Plaintiff alleges that the settlements ceded control of the Board and the Company to Darwin Deason and Carl C.

Icahn without a vote by, or

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

Xerox 2020 Form 10-Q

compensation to, other Xerox stockholders;

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 alleges 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.

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.

Icahn, and their affiliated entities (the “Ribbe Class”) against the defendants for causing Xerox to enter into the Deason and XCCSL settlements, which plaintiff alleges perpetuated control of Xerox by 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 seeks damages in an unspecified amount for the alleged fiduciary breaches in favor of Xerox against defendants jointly and severally;

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;

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On March 6, 2020, plaintiff in the Miami Firefighters action renewed its motion.

Briefing has not yet concluded.

On July 23, 2020, after hearing oral argument, the Court issued an order denying the motion and setting certain case deadlines.

Xerox will vigorously defend against this matter.

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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

Xerox 2020 Form 10-Q

value by approximately $128 since disclosure of the offer.

The complaint includes four causes of action:

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On March 6, 2020, plaintiff in the Miami Firefighters action renewed its motion.

Briefing has not yet concluded.

On July 23, 2020, after hearing oral argument, the Court issued an order denying the motion and setting certain case deadlines.

Xerox Holdings will vigorously defend against this matter.

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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.

We have issued or provided approximately $ 294 of guarantees as of March 31, 2020 in the form of letters of credit or surety bonds issued to i) support certain insurance programs;

We have issued or provided approximately $ 290 of guarantees as of June 30, 2020 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;

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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

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 (initial rate of 1.76 %) and an expected life of less than three years with half projected to be repaid within the first year based on collections of the underlying portfolio of receivables.

We also entered into an interest rate hedge agreement to cap LIBOR over the life of the loan.

Xerox 2020 Form 10-Q

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements