What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-07-30 compared with 2020-05-07 · 375 added, 245 removed, 410 unchanged (60% of the section changed)

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

Throughout the 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.

Throughout the Management’s Discussion and Analysis (MD&A), references to “Xerox Holdings” refer to Xerox Holdings Corporation and its consolidated subsidiaries while references to “Xerox” refer to Xerox Corporation and its consolidated subsidiaries.

References herein to “we,” “us,” “our,” the “Company” refer collectively to both Xerox Holdings and Xerox unless the context suggests otherwise.

Currently, Xerox Holdings' sole direct subsidiary is Xerox and therefore Xerox reflects the entirety of Xerox Holdings' operations.

Accordingly, the following Management’s Discussion and Analysis (MD&A) solely focuses on the operations of Xerox and is intended to help the reader understand the results of operations and financial condition of Xerox.

Accordingly, the following MD&A solely focuses on the operations of Xerox and is intended to help the reader understand the results of operations and financial condition of Xerox.

The MD&A is provided as a supplement to, and should be read in conjunction with, the Condensed Consolidated Financial Statements and the accompanying notes.

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Impact of COVID-19 on Our Business Operations

The global COVID-19 health crisis significantly impacted our first quarter 2020 financial results due to business closures during the month of March that impacted our customers' purchasing decisions and caused delayed installations and lower printing volumes on our devices.

The third month of any quarter is typically our strongest, when the largest proportion of equipment is sold and profit is recorded, therefore our first quarter 2020 was significantly impacted by the ramping up of office closures in March which limited our ability to deliver and install equipment.

Further, as more businesses required employees to work from home the use of Xerox equipment declined, impacting our post sale revenue.

While we continue to implement actions to mitigate the effect of this crisis on our business and operations, the uncertainty around the duration and economic impact of this crisis, makes it difficult for the company to predict the full impact on our business operations and financial performance.

We have modeled the potential impacts on our business of several recovery scenarios.

Our base model assumes the greatest impact to our revenues from business closures to be during the second quarter, with an inflection point

late in that period, and a gradual recovery during the third quarter.

For the fourth quarter, we expect to get closer to

our planned levels for that period.

The most significant near-term impact from the crisis is on our equipment and unbundled supplies sales which are transactional in nature.

Sales are expected to decline significantly as businesses hold off or delay purchases during the closure period.

However, we expect this portion of the business to rebound in the second half as businesses reopen.

In response to the global COVID-19 pandemic crisis, we have prioritized the health and safety of our employees, customers and partners and continue to work to support their needs.

While we continue to implement actions to mitigate the effects of this crisis on our business and operations, the uncertainty around the duration and economic impact of this crisis, makes it difficult for the company to predict the full impact of the crisis on our business operations and financial performance.

We have modeled the potential impacts on our business of numerous recovery scenarios.

The most significant near-term impact from the crisis has been on our equipment and unbundled supplies sales which are transactional in nature.

Sales are expected to continue to decline significantly as businesses hold off or delay purchases during the closure period and until there is a more certain path to controlling the health pandemic and to economic recovery.

However, we expect this transactional portion of the business to begin to recover gradually in the second half as businesses reopen.

The impact on revenues from lower equipment and supply sales is somewhat mitigated by bundled services, which are more contractual in nature.

Our bundled services contracts, on average, include a minimum fixed charge and a significant variable component linked to print volumes.

The variable charges are impacted by our customers' employees not being in the office and using our equipment due to current lock-down restrictions, however, we expect the contractual relationship with our customers will enable us to ramp up quickly for them when businesses resume operations.

We expect that as closures are lifted, we will see more normalized trends emerge over the course of 2020.

The variable charges are impacted by our customers' employees not being in the office and using our equipment due to the current lock-down and capacity restrictions in office buildings as they reopen.

We expect that this contractual relationship will continue to enable us to be ready to ramp up and support our customers' needs as businesses resume operations.

The continued uncertainty around the spread and resurgence of the virus has changed our prior expectation for an inflection point following the second quarter.

While Europe, Canada and some areas of the U.S.

are reopening after controlling the rate of new infections, other areas in Latin America and parts of southern and western U.S.

are seeing surges that have forced the rollback of business reopenings and impacted their economies.

We experienced some signs of recovery, and a moderation in our rate of revenue declines during the month of June, however we expect that our business will continue to be impacted by the ongoing uncertainty.

Accordingly, we now expect a slower pace of gradual recovery in the second half of the year.

We have a strong balance sheet and sufficient liquidity, including access to our undrawn $1.8 billion revolver as well as to receivables securitization and capital markets.

Due to our Project Own It transformation, we have a more flexible cost structure, and have also focused our efforts on incremental actions to prioritize and preserve cash as we manage through this crisis.

These actions include the reduction of discretionary spend such as near term targeted marketing programs and the use of contract employees as well as compensation incentives consistent with lower sales and operating results.

Xerox 2020 Form 10-Q

First Quarter 2020 Review

Total revenue of $1.86 billion for first quarter 2020 declined 14.7% from first quarter 2019, including a 0.8-percentage point unfavorable impact from currency.

Government Assistance and Furlough Programs

In response to the COVID-19 pandemic crisis, various governments have enacted or continue to contemplate temporary measures to provide aid and economic stimulus directly to companies through cash grants and credits or indirectly through payments to temporarily furloughed employees.

On March 27, 2020, in response to the COVID-19 crisis, 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 also 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 second quarter 2020, we recognized savings of approximately $60 million from these temporary measures in the U.S., Canada and Europe, including $53 million from various government assistance programs and $7 million from furlough programs.

Through the use of these programs, we have thus far been able to provide an offset to our costs, without further use of cash, while maintaining our employee base and minimizing the financial impact to our employees.

There were no material impacts to our income tax expense in the second quarter 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.

The savings of approximately $60 million were recorded as follows in the Condensed Consolidated Statements of Income:

(in millions) Three Months Ended June 30, 2020

Cost of services, maintenance and rentals $ 40

Research, development and engineering expenses 1

Selling, administrative and general expenses 19

Total Estimated savings $ 60

Second Quarter 2020 Review

Total revenue of $1.47 billion for second quarter 2020 declined 35.3% from second quarter 2019, including a 0.7-percentage point unfavorable impact from currency.

The decrease in revenue reflected a decrease of 34.3% in Post sale revenue, including a 0.7-percentage point unfavorable impact from currency, and a decrease of 38.5% in Equipment sales revenue, including a 0.5-percentage point unfavorable impact from currency.

As previously noted, the economic disruption caused by the global COVID-19 health crisis significantly impacted our first quarter 2020 revenues due to business closures during the month of March that impacted our customers' purchasing decisions, and caused delayed installations and lower printing volumes on our devices.

Net (loss) income attributable to Xerox Holdings and adjusted 1 Net income attributable to Xerox Holdings were as follows:

Three Months Ended March 31,

(in millions) 2020 2019 B/(W)

Net (loss) income attributable to Xerox Holdings (1)

Total revenue of $3.33 billion for the six months ended June 30, 2020 declined 25.2% as compared to the prior year period, including a 0.8-percentage point unfavorable impact from currency.

The decrease in revenue reflected a decrease of 22.9% in Post sale revenue, including a 0.8-percentage point unfavorable impact from currency, and a decrease of 33.3% in Equipment sales revenue, including a 0.5-percentage point unfavorable impact from currency.

The global COVID-19 pandemic crisis significantly impacted our second quarter 2020 and year to date revenues due to business closures and office building capacity restrictions that began in the first quarter 2020, and continued into the second quarter 2020.

As a result, these closures and restrictions impacted our customers' purchasing decisions, and caused delayed installations and lower printing volumes on our devices, with the biggest impact in the first half occurring in the second quarter 2020.

Geographically, our European operations had larger revenue declines, partially due to a larger mix of sales through indirect channel partners which, in response to the lower demand caused by the crisis, reduced their inventory purchases to manage liquidity.

Our North American operations include a larger mix of government, education, healthcare and other large customers that were less affected by business closures than our SMB customers and, on average, our North American customers have contracts with a higher component of fixed charges.

Xerox 2020 Form 10-Q

Net income attributable to Xerox Holdings 1 and adjusted 2 Net income attributable to Xerox Holdings were as follows:

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

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

Net income attributable to Xerox Holdings (1)

$ 27 $ 141 $ (114) $ 25 $ 225 $ (200)

Adjusted (2) Net income attributable to Xerox Holdings

First quarter 2020 Net income attributable to Xerox Holdings decreased $86 million as compared to first quarter 2019 reflecting the impact from lower revenues, primarily associated with COVID-19 related business closures that were only partially offset by lower costs and expenses, as well as higher Transaction and related costs, net, and lower Income tax benefits.

In addition, first quarter 2020 included a $61 million increase in bad debt provision as a result of the expected impact from the COVID-19 health crisis on our receivable portfolio.

These impacts were only partially offset by lower Restructuring and Other expenses, net.

First quarter 2020 A djusted 1 net income attributable to Xerox Holdings decreased $108 million as compared to first quarter 2019, reflecting lower revenues, which were only partially offset by lower costs and expenses and lower income tax expense partially offset by the increased bad debt provision.

Cash flows provided by operating activities of continuing operations for the three months ended March 31, 2020 were $173 million, as compared to $222 million in the prior year period primarily reflecting lower net income, as result of the global COVID-19 health crisis, which was partially offset by improved working capital, net 3 .

Cash used in investing activities for the three months ended March 31, 2020 was $214 million including capital expenditures of $23 million and acquisitions of $193 million.

Cash used in financing activities for the three months ended March 31, 2020 was $60 million primarily reflecting dividend payments of $58 million.

As a result of the uncertainty created by the global COVID-19 health crisis, we are withdrawing our previously disclosed outlooks for full year 2020 revenue, earnings, operating cash flow and capital allocation as disclosed in our 2019 Annual Report.

36 186 (150) 86 344 (258)

Second quarter 2020 Net income attributable to Xerox Holdings decreased $114 million as compared to second quarter 2019 reflecting the impact from lower revenues primarily associated with the COVID-19 pandemic crisis that were only partially offset by lower costs and expenses including lower Income tax expense as well as lower Restructuring and related costs and Other expenses, net.

Second quarter 2020 A djusted 2 net income attributable to Xerox Holdings decreased $150 million as compared to second quarter 2019, reflecting lower revenues, which were only partially offset by lower costs and expenses and lower Income tax expense.

Net income attributable to Xerox Holdings for the six months ended June 30, 2020 decreased $200 million as compared to the prior year period reflecting the impact from lower revenues, primarily associated with the COVID-19 pandemic crisis, and higher Transaction and related costs, net, that were only partially offset by lower costs and expenses, including lower Income tax expense as well as lower Restructuring and related costs and Other expenses, net.

In addition, Net income attributable to Xerox Holdings for the six months ended June 30, 2020 includes the first quarter 2020 impact of a $61 million increase in bad debt provision reflecting of the expected impact from the COVID-19 pandemic crisis on our receivable portfolio.

A djusted 2 net income attributable to Xerox Holdings for the six months ended June 30, 2020 decreased $258 million as compared to the prior year period primarily reflecting lower revenues, which were only partially offset by lower costs and expenses including lower Income tax expense, partially offset by the increased bad debt provision.

Net income attributable to Xerox Holdings for the three and six months ended June 30, 2020 were both positively impacted by savings of approximately $60 million from temporary government assistance measures and furlough programs in the U.S., Canada and Europe.

Refer to the Government Assistance and Furlough Programs section for additional information.

Cash flows provided by operating activities of continuing operations for the six months ended June 30, 2020 were $207 million, as compared to $498 million in the prior year period primarily reflecting lower net income, as result of the COVID-19 pandemic crisis, partially offset by improved working capital, net 3 and decreases in finance assets.

Cash used in investing activities for the six months ended June 30, 2020 was $232 million including capital expenditures of $42 million and acquisitions of $193 million.

Cash used in financing activities for the six months ended June 30, 2020 was $432 million reflecting a payment of $313 million on Senior Notes and dividend payments of $115 million.

As a result of the uncertainty created by the COVID-19 pandemic crisis, in the first quarter 2020 we withdrew our previously disclosed outlooks for full year 2020 revenue, earnings, operating cash flow and capital allocation as disclosed in our 2019 Annual Report.

At this time, we remain committed to paying our dividend on common shares and our policy of returning at least 50% of operating cash flows, after capital expenditures, to shareholders.

We also expect to complete at least $300 million in share repurchases during the remainder of 2020.

____________________________

(1) Net (loss) income from continuing operations

(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.

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Actual results could differ from those estimates.

As discussed in our MD&A, during the first quarter 2020, the company was significantly impacted by the economic disruption caused by the COVID-19 health crisis.

This disruption required us to review all of our estimates to ensure we appropriately considered the impacts caused by the COVID-19 health crisis.

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 crisis.

This disruption required us to review the majority of our estimates to ensure we appropriately considered the impacts caused by the COVID-19 pandemic crisis.

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 health crisis remain uncertain, the Company’s estimates and assumptions may evolve as conditions change.

As the extent and duration of the impacts from the COVID-19 pandemic crisis remain uncertain, the Company’s estimates and assumptions may evolve as conditions change.

Revenue Recognition

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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 straightforward 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.

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 channel and geography.

However, the impacts from the COVID-19 economic disruption in the first quarter 2020 as well 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 particularly noted over the last two weeks of March and not solely rely on historical usage data.

As we progress into 2020, 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.

However, the impacts from the COVID-19 economic disruption in the first half of 2020 as well 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.

As we progress into the second half of 2020, 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, consistent with our adoption of ASU 2016-13 effective January 1, 2020 (refer to Note 2 - Recent Accounting Pronouncements), the allowance 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 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.

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 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 the first half of 2020, we had to critically assess current and forecasted economic conditions as a result 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.

Refer also to Selling, Administrative and General Expenses (SAG) 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 health crisis.

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 crisis.

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.

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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 the first quarter 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 health crisis.

During the first quarter 2020,

Xerox 2020 Form 10-Q

it was determined that no material adjustments were required to our valuation allowances at March 31, 2020.

Similar to other estimates during the first half of 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 crisis.

During the first half of 2020, it was determined that no material adjustments were required to our valuation allowances at June 30, 2020.

However, we will continue to monitor expected 2020 projections and their potential impact on our assessment regarding the recoverability of our deferred tax asset balances.

In response to the COVID-19 pandemic, many governments have enacted or are contemplating measures to provide aid and economic stimulus.

These measures may include deferring the due dates of tax payments or other changes to their income and non-income-based tax laws as well as providing direct government assistance through grants and forgivable loans.

The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was enacted on March 27, 2020 in the U.S., includes measures to assist companies, including temporary changes to income and non-income-based tax laws.

In the first quarter 2020, there were no material impacts, tax or pre-tax, to our condensed consolidated financial statements as it relates to these government based COVID-19 initiatives.

However, the Company is evaluating the impact of these various government assistance programs to determine if we qualify and the extent of potential support.

With respect to the CARES Act, we currently expect to benefit from the deferral of certain payroll taxes through the end of calendar year 2020.

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 first quarter 2020 we determined that the negative impacts as a result of the COVID-19 pandemic on our current operations and the impacts expected on our future operations as well as the significant decline in our market capitalization 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 March 31, 2020.

As disclosed in our 2019 Annual Report, our qualitative assessment of the recoverability of goodwill considers various macroeconomic, industry and market-specific and company-specific events and factors.

After assessing the totality of events and factors, if we determine that it is not more-likely-than-not that the fair value of the Company is less than its net book value, no further assessment is performed.

If we determine that it is more likely-than-not that the fair value of the Company is less than net book value, we move to a quantitative assessment or test of goodwill.

In addition to the factors previously noted, we also reviewed our previous forecasts and assumptions updated based on our current models, which are subject to various risks and uncertainties including:

(1) forecasted revenues, expenses and cash flows, including the duration and extent of impact to our business from the COVID-19 pandemic, (2) current discount rates, and (3) the reduction in our market capitalization.

Based on our interim qualitative assessment as of March 31, 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.

Although our assessment of the qualitative considerations clearly indicate that Xerox is and will be significantly impacted by the economic disruption caused by COVID-19 in 2020, based on a review of macroeconomic and industry considerations, business is expected to rebound towards the second half of the year and recover further in 2021 with the expectation of a return to normal trends by 2022.

The Company’s revised modeling for 2020 reflects this recovery pattern and that analysis is consistent with the review performed as part of our assessment of bad debt reserves for the first quarter 2020.

In addition, we believe we have sufficient liquidity to withstand the downturn and be in a positive position when businesses are expected to recover.

Further, although our market capitalization is currently below our net book value, we believe the implied premiums that would be indicated at net book value or at our estimated fair value are reasonable.

There is significant uncertainty regarding the economic disruption caused by the COVID-19 health crisis and its impacts on the global growth forecast, our industry, Xerox’s ability to recover in line with those considerations and our revised models for 2020 projections.

In addition, there is significant uncertainty regarding the timing of economies reopening and the impacts from government and central bank actions.

Notwithstanding these uncertainties, the above represents our best assessment of our current position.

We will continue to monitor developments in the second quarter 2020 including updates to our forecasted revenues, expenses and cash flow as well as our market capitalization and an update of our assessment and related estimates may be required in the future as the situation evolves.

If the extent and duration of the economic disruption caused by the pandemic is longer or more severe there could be a material impact to our revenues and expected cash flows and in turn the recoverability of our goodwill balance.

However, in the second quarter 2020, as a result of the continued negative financial impacts from the COVID-19 pandemic crisis 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 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 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 crisis 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 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 reporting date in light of the developing situation resulting from the COVID-19 pandemic crisis.

However, the determination of fair value includes assumptions that are subject to risk and uncertainty.

The discounted cash flow calculations are dependent on several subjective factors including the timing of future cash flows and the discount rate.

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 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.

We will continue to monitor developments in the third quarter 2020 including updates to our forecasted revenues, expenses and cash flow as well as our market capitalization and an update of our assessment and related estimates may be required in the future as the situation evolves.

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

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Three Months Ended

March 31, % of Total Revenue

(in millions) 2020 2019 % Change CC % Change 2020 2019

June 30, Six Months Ended

June 30, % of Total Revenue

(in millions) 2020 2019 % Change CC % Change 2020 2019 % Change CC % Change 2020 2019

Equipment sales $ 310 $ 504 (38.5) % (38.0) % $ 635 $ 952 (33.3) % (32.8) % 19 % 21 %

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Total Revenue $ 1,465 $ 2,263 (35.3) % (34.6) % $ 3,325 $ 4,443 (25.2) % (24.4) % 100 % 100 %

Reconciliation to Condensed Consolidated Statements of (Loss) Income:

Reconciliation to Condensed Consolidated Statements of Income:

Sales $ 460 $ 800 (42.5) % (41.8) % $ 1,025 $ 1,524 (32.7) % (32.0) %

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

Total revenue for the three months ended March 31, 2020 decreased 14.7%, as compared to the first quarter 2019, including a 0.8-percentage point unfavorable impact from currency and an approximate 0.8-percentage point favorable impact from recent partner dealer acquisitions.

The global COVID-19 pandemic crisis significantly impacted our first quarter 2020 revenues due to business closures during the month of March that impacted our customers' purchasing decisions, and caused delayed installations and lower printing volumes on our devices.

While the global pandemic affected our European and North American operations only in March, the impact to our financial performance is disproportionate, as a significant portion of our revenues and profits are typically earned during the last month of the quarter as a result of purchase patterns and relatively complex installations of printing solutions at our customers' sites.

Geographically, our European operations were more heavily impacted in the current quarter due to the earlier onset of the pandemic and subsequent business closures in the region that affected the entire month of March, while in North America, business shutdowns impacted our operations in the second part of the month only, consistent with the timing of the health crisis.

In addition, our North American operations include a larger mix of government and other large customers (including healthcare accounts) some of which are considered essential service providers or support the front lines of the fight against COVID-19 and were therefore less affected by business closures;

our European operations are also more heavily mixed to indirect channel partners which drastically lowered their purchases in March to manage their cash and inventories in response to the crisis.

First quarter 2020 total revenue reflected the following:

Total revenue for the three months ended June 30, 2020 decreased 35.3% as compared to the second quarter 2019, including a 0.7-percentage point unfavorable impact from currency and an approximate 1.0-percentage point favorable impact from recent partner dealer acquisitions, while total revenues for the six months ended June 30, 2020 decreased 25.2% as compared to the prior year period, including a 0.8-percentage point unfavorable impact from currency and an approximate 0.9-percentage point favorable impact from recent partner dealer acquisitions.

The global COVID-19 pandemic crisis significantly impacted our revenue in both the first and second quarters of 2020 due to business closures and office building capacity restrictions that impacted our customers' purchasing decisions and caused lower printing volumes on our devices.

Geographically, our European operations had larger revenue declines for both the three and six months ended June 30, 2020 due in part to the earlier onset of the pandemic.

In this region, larger revenue declines were partially due to a larger mix of sales through indirect channel partners which, in response to the lower demand caused by the crisis, reduced their inventory purchases to manage liquidity.

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

Post sale revenue

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Post sale revenue also includes transactional IT hardware sales and implementation services from our XBS organization.

For the three months ended March 31, 2020 Post sale revenue decreased 11.4% as compared to the first quarter 2019, including a 0.9-percentage point unfavorable impact from currency.

The global COVID-19

For the three months ended June 30, 2020 Post sale revenue decreased 34.3% as compared to the second quarter 2019, including a 0.7-percentage point unfavorable impact from currency, while Post Sale revenue

Xerox 2020 Form 10-Q

pandemic crisis significantly impacted our Post sale revenue during the first quarter 2020.

The decline at constant currency 1 reflected the following:

decreased 22.9% for the six months ended June 30, 2020, including a 0.8-percentage point unfavorable impact from currency.

The global COVID-19 pandemic crisis significantly impacted our Post sale revenue during the first half of 2020, however its impact on our Post sale revenue slightly moderated later in the second quarter, as businesses started to reopen in certain geographical areas in the U.S.

and Europe, resulting in a gradual moderation of our page volume declines.

The decline reflected the following:

• Services, maintenance and rentals revenue includes rental and maintenance revenue (including bundled supplies) as well as the post sale component of the document services revenue from our Xerox Services offerings.

These revenues decreased 11.3% as compared to the first quarter 2019, including a 0.8-percentage point unfavorable impact from currency.

The decline at constant currency 1 reflected a lower population of devices (which are 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) which are worse than recent decline trends due to the impact of business closures during the month of March associated with the COVID-19 crisis.

◦ For the three months ended June 30, 2020, these revenues decreased 32.3% as compared to the second quarter 2019, including a 0.7-percentage point unfavorable impact from currency.

The decline at constant currency 1 reflected a lower population of devices (which is partially associated with continued lower Enterprise signings and lower installs in prior and current periods), an ongoing competitive price environment, and lower page volumes (including a higher mix of lower average-page-volume products) that are worse than pre-COVID-19 decline trends due to the impact of business closures during the quarter.

While these revenues are contractual in nature, on average, our bundled services contracts include a minimum fixed charge and a significant variable component based on print volumes.

The rate of decline of these revenues slightly moderated later in the quarter as businesses started to reopen in certain geographical areas in the U.S.

◦ For the six months ended June 30, 2020, these revenues decreased 21.8% as compared to the prior year period, including a 0.7-percentage point unfavorable impact from currency.

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 slightly moderated late in the first half of 2020 as businesses started to reopen in certain geographical areas in the U.S.

• Supplies, paper and other sales includes unbundled supplies and other sales.

These revenues decreased 13.0% as compared to the first quarter 2019, including a 1.3-percentage point unfavorable impact from currency and reflected lower supplies revenues associated with lower page volume trends.

The decrease in supplies was significantly impacted by lower sales to indirect channels, which drastically lowered their purchases in March to manage their cash and inventories in response to the crisis.

◦ For the three months ended June 30, 2020, these revenues decreased 49.3% as compared to second quarter 2019, including a 1.2-percentage point unfavorable impact from currency and reflected lower supplies revenues associated with lower page volume trends.

The decrease in supplies was significantly impacted by lower sales to indirect channels, which in response to the lower demand caused by the crisis, reduced their inventory purchases to manage liquidity.

We expect that indirect channels will maintain low purchase levels and continue to reduce their inventories until there is a stable recovery in sales activity.

◦ For the six months ended June 30, 2020, these revenues decreased 31.8% as compared to the prior year period, including a 1.2-percentage point unfavorable impact from currency and reflected lower supplies revenues associated with lower page volume trends.

We expect that indirect channels will maintain low purchase levels and continue to reduce their inventories until there is a stable recovery in sales activity.

• Financing revenue is generated from financed equipment sale transactions.

The 6.3% decline in these revenues as compared to the first quarter 2019 reflected a continued decline in the finance receivables balance due to lower equipment sales in prior periods and included a 0.7-percentage point unfavorable impact from currency.

For the three months ended June 30, 2020, these revenues declined 8.2% as compared to second quarter 2019, including a 0.7-percentage point unfavorable impact from currency, while Financing revenue for the six months ended June 30, 2020 decreased 7.3%, including a 0.8-percentage point unfavorable impact and from currency and reflected a continued decline in the finance receivables balance due to lower equipment sales in prior periods.

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

Xerox 2020 Form 10-Q

Equipment sales revenue

Three Months Ended

March 31, % of Equipment Sales

(in millions) 2020 2019 % Change CC % Change 2020 2019

Three Months Ended June 30, Six Months Ended

June 30, % of Equipment Sales

(in millions) 2020 2019 %

CC % Change 2020 2019 % Change CC % Change 2020 2019

Entry $ 34 $ 52 (34.6)% (33.5)% $ 74 $ 105 (29.5)% (28.7)% 12% 11%

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

Equipment sales revenue decreased 27.5% for the three months ended March 31, 2020 as compared to the first quarter 2019, including a 0.5-percentage point unfavorable impact from currency.

The global COVID-19 pandemic crisis significantly impacted our equipment sales revenue during the first quarter 2020 as a result of business closures during the month of March that impacted our customers' purchasing decisions and caused delayed installations.

While the global pandemic affected our European and North American operations only in the last month of the quarter, the impact to our financial performance is disproportionate, as a significant portion of our revenues and profits are typically earned during that period.

Equipment sales revenue decreased 38.5% for the three months ended June 30, 2020 as compared to second quarter 2019, including a 0.5-percentage point unfavorable impact from currency as well as the impact of price declines of approximately 5%, while for the six months ended June 30, 2020, Equipment sales revenue decreased 33.3%, as compared to the prior year period, including a 0.5-percentage point unfavorable impact from currency as well as the impact of price decline of approximately 5%.

The global COVID-19 pandemic crisis significantly impacted our equipment sales revenue during the first half of 2020 as a result of business closures and office building capacity restrictions that impacted our customers' purchasing decisions and caused delayed installations.

The global pandemic affected our operations in March 2020 and throughout the second quarter 2020, however, its impact on our equipment sales lessened later in the second quarter, as businesses started to reopen in certain geographical areas of the U.S.

The decline at constant currency 1 reflected the following:

• Entry - The decrease was primarily due to lower sales of devices through our indirect channels in EMEA and the U.S.

partially affected by the COVID-19 crisis and partially offset by the benefit of large order deals from Eurasia that occurred earlier in the quarter.

• Mid-range - The decrease was driven by lower sales of devices partially as a result of the COVID-19 crisis, which more significantly affected our European operations due to the earlier timing of business closures in that region, and a heavier mix of businesses through indirect channel partners, who drastically lowered their purchases in March to manage their cash and inventories in response to the crisis.

In North America, the majority of the decrease came from our XBS and indirect channel organizations, which primarily serve SMB customers.

• High-end - The decrease reflected lower sales of production systems primarily from our EMEA operations impacted by competitive pressures in the market, partially offset by demand for our recently launched Baltoro

• Entry - The decrease for the three months ended June 30, 2020, as compared to second quarter 2019, was primarily due to lower sales of devices through our indirect channels in EMEA, Latin America and the U.S.

affected in part by the COVID-19 crisis and partially offset by higher sales of lower-end black-and-white devices associated with work-from-home promos and larger order deals from Eurasia.

The decrease for the six months ended June 30, 2020, as compared to the prior year period, was primarily due to lower sales of devices through our indirect channels in EMEA, Latin America and the U.S.

affected in part by the COVID-19 crisis and partially offset by the benefit of large order deals from Eurasia.

• Mid-range - The decrease for the three months ended June 30, 2020, as compared to second quarter 2019, was driven by lower sales of devices partially as a result of the COVID-19 crisis and related office closures, which impacted this group of products more due to their prevalence in office-team settings;

the decline was also more significant in our European operations due to a heavier mix of businesses through indirect channel partners, which, in response to lower demand caused by the crisis, reduced their inventory purchases to manage liquidity.

Higher sales to our government and healthcare customers in North America, as well as strong demand for our recently launched PrimeLink devices, provided a partial offset.

The decrease for the six months ended June 30, 2020, as compared to the prior year period, was driven by lower sales of devices partially as a result of the COVID-19 crisis and related office closures, which more significantly affected our European operations due to the earlier timing of business closures in that region, and a heavier mix of businesses through indirect channel partners, which, in response to lower demand caused by the crisis, reduced their inventory purchases to manage liquidity.

In North America, the majority of the decrease came from our XBS and indirect channel organizations, which primarily serve SMB customers, partially offset by strong demand for our recently launched PrimeLink devices.

• High-end - The decrease for the three months ended June 30, 2020, as compared to second quarter 2019, primarily reflected lower installs of our Versant entry-production color devices and lower installs in EMEA of our Iridesse production presses.

Sales of black and white presses for customers with transactional printing applications, and iGen systems grew during the quarter.

The decrease in our equipment sales revenue from production color systems was partially impacted by the COVID-19 crisis, particularly in our European operations, where the distribution of our Versant and Iridesse devices through indirect channels was affected by furlough adoptions and lower inventory purchases as dealers managed their liquidity.

The decrease for the six months ended June 30, 2020, as compared to the prior year period, primarily reflected lower installs of our Versant entry-production color devices, as well as lower installs of our Iridesse production presses in EMEA, which were partially offset by higher sales in EMEA of our iGen systems as well as 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 crisis, particularly in our European operations, where the distribution of our

Xerox 2020 Form 10-Q

Inkjet press and higher sales of our iGEN and Continuous Feed Color systems.

The COVID-19 pandemic affected our sales of high-end devices primarily in the lower end of the range, due to the impact on office closures and indirect distribution dealer activity, however, our revenues from our U.S.

Enterprise organization grew, as customers in this segment include certain government, education, healthcare and other essential businesses that are less impacted by the pandemic, and in some instances, had higher demand for products to support their response to the health crisis.

Versant and Iridesse devices through indirect channels was affected by furlough adoptions and lower inventory purchases as dealers managed their liquidity.

Total Installs

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Detail by product group (see Geographic Sales Channels and Product and Offerings Definitions) is shown below.

Installs for the second quarter 2019:

• 35% decrease in color multifunction devices reflecting lower installs of ConnectKey devices through our indirect channels in the U.S.

• 2% increase in black-and-white multifunction devices reflecting large order deals from Eurasia partially offset by lower activity from our U.S.

indirect channels.

• 9% decrease in black-and-white multifunction devices reflecting lower activity from North and Latin America, partially offset by higher activity from EMEA.

The declines are primarily driven by lower sales in the higher end of the portfolio partially offset by higher sales of low-end devices associated with large order deals from Eurasia and work-from-home promotions.

Mid-Range (1)

• 26% decrease in mid-range color installs primarily reflecting lower installs of multifunction color devices partially offset by strong demand for our recently launched PrimeLink light-production devices.

• 14% decrease in mid-range black-and-white reflecting in part global market trends.

• 52% decrease in high-end color installs reflecting primarily lower installs of our lower-end Versant production systems, along with lower installs of our Iridesse systems, partially offset by higher installs of our iGen and strong demand for our recently-launched Baltoro inkjet press.

• 46% decrease in mid-range color installs primarily reflecting lower installs of multifunction color devices partially offset by strong demand for our recently launched PrimeLink entry-production color devices.

• 42% decrease in mid-range black-and-white reflecting in part global market trends partially offset by strong demand for our recently launched PrimeLink light-production multi-function devices.

• 58% decrease in high-end color installs reflecting primarily lower installs of our lower-end Versant devices and of our Iridesse production systems.

• 2% increase in high-end black-and-white systems reflecting higher installs of our Nuvera offsetting market trends.

Installs for the six months ended June 30, 2020:

• 27% decrease in color multifunction devices reflecting lower installs of ConnectKey devices through our indirect channels in the U.S.

• 4% decrease in black-and-white multifunction devices reflecting lower activity from North and Latin America, partially offset by higher activity from EMEA.

The declines are primarily driven by lower sales in the higher end of the portfolio.

Mid-Range (1)

• 36% decrease in mid-range color installs primarily reflecting lower installs of multifunction color devices partially offset by strong demand for our recently launched PrimeLink entry-production color devices.

• 30% decrease in mid-range black-and-white reflecting in part global market trends partially offset by strong demand for our recently launched PrimeLink light-production multi-function devices.

• 55% decrease in high-end color installs reflecting primarily lower installs of our lower-end Versant devices, along with lower installs of our Iridesse production systems, partially offset by strong demand for our recently-launched Baltoro inkjet press.

• 18% decrease in high-end black-and-white systems reflecting in part global market trends.

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(1) Mid-range and High-end color installations exclude Fuji Xerox digital front-end sales;

including Fuji Xerox digital front-end sales Mid-range color devices decreased 26% and High-end color systems decreased 53%.

including Fuji Xerox digital front-end sales for the three and six months ended June 30, 2020 Mid-range color devices decreased 46% and 36%, respectively, and High-end color systems decreased 57% and 55%, respectively.

Xerox 2020 Form 10-Q

Geographic Sales Channels and Product and Offerings Definitions

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The following is a summary of key financial ratios used to assess our performance:

Three Months Ended March 31,

(in millions) 2020 2019 B/(W)

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

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

Gross Profit $ 564 $ 885 $ (321) $ 1,276 $ 1,762 $ (486)

RD&E 76 88 12 160 180 20

SAG 426 517 91 967 1,063 96

Equipment Gross Margin 28.8 % 28.8 % — pts.

27.5 % 32.0 % (4.5) pts.

Post sale Gross Margin 41.1 % 42.0 % (0.9) pts.

40.9 % 41.7 % (0.8) pts.

Total Gross Margin 38.5 % 39.1 % (0.6) pts.

38.4 % 39.7 % (1.3) pts.

RD&E as a % of Revenue 5.2 % 3.9 % (1.3) pts.

4.8 % 4.1 % (0.7) pts.

SAG as a % of Revenue 29.1 % 22.8 % (6.3) pts.

Pre-tax (Loss) Income $ (5) $ 73 $ (78)

Pre-tax (Loss) Income Margin (0.3) % 3.3 % (3.6) pts.

29.1 % 23.9 % (5.2) pts.

Pre-tax Income $ 35 $ 190 $ (155) $ 30 $ 263 $ (233)

Pre-tax Income Margin 2.4 % 8.4 % (6.0) pts.

0.9 % 5.9 % (5.0) pts.

Adjusted (1) Operating Profit

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4.2 % 12.4 % (8.2) pts.

4.5 % 11.7 % (7.2) pts.

____________ _

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

Pre-tax (Loss) Income Margin

First quarter 2020 pre-tax (loss) income margin of (0.3)% decreased 3.6-percentage points as compared to first quarter 2019.

The decrease primarily reflected the impact of lower adjusted 1 operating margin (see below), as well as higher Transaction and related costs, net, partially offset by lower Restructuring expenses and Other expenses, net.

Pre-tax Income Margin

Second quarter 2020 pre-tax income margin of 2.4% decreased 6.0-percentage points as compared to second quarter 2019.

The decrease primarily reflected the impact of lower adjusted 1 operating margin (see below), of 8.2-percentage points, partially offset by lower Restructuring and related, costs, and Other expenses, net.

Pre-tax income margin for the six months ended June 30, 2020 of 0.9% decreased 5.0-percentage points as compared to the prior year period.

The decrease primarily reflected the impact of lower adjusted 1 operating margin (see below), of 7.2-percentage points, partially offset by lower Restructuring and related costs and Other expenses, net.

Adjusted 1 Operating Margin

First quarter 2020 adjusted 1 operating margin of 4.7% decreased 6.3-percentage points as compared to first quarter 2019 primarily reflecting the impact of lower revenues primarily as a result of the significant effect of the COVID-19 health crisis on our business and a 3.3-percentage point unfavorable impact due to an increase in bad debt expense of $61 million to reflect the expected impact to our customer base and related outstanding trade and finance receivable portfolio as a result of the economic disruption caused by this health crisis.

These negative impacts were partially offset by cost and expense reductions associated with our Project Own It transformation actions as well as additional cost reduction actions, to mitigate the impact of the crisis.

Second quarter 2020 adjusted 1 operating margin of 4.2% decreased 8.2-percentage points as compared to second quarter 2019 reflecting the impact of lower revenues, primarily as a result of the significant effect of the COVID-19 pandemic crisis on our business, partially offset by cost and expense reductions associated with our Project Own It transformation actions as well additional savings from various cost reduction actions to mitigate the impact of the crisis, including approximately $60 million from temporary government assistance measures and furlough programs (see the Government Assistance and Furlough Programs section for further details) and other reductions in discretionary spend such as near term targeted marketing programs and the use of contract employees as well as compensation incentives consistent with lower sales and operating results.

Adjusted 1 operating margin for the six months ended June 30, 2020 of 4.5% decreased 7.2-percentage points as compared to prior year period reflecting the impact of lower revenues, primarily as a result of the significant effect of the COVID-19 pandemic crisis on our business and a 1.8-percentage point unfavorable impact due to an increase in bad debt expense of $61 million in the first quarter 2020, to reflect the expected impact to our customer base and related outstanding trade and finance receivable portfolio as a result of the economic disruption caused by this crisis.

These negative impacts were partially offset by cost and expense reductions associated with our Project Own It transformation actions as well as additional savings from various cost reduction actions to mitigate the impact of the crisis, including approximately $60 million from temporary government assistance measures and furlough programs in second quarter 2020 (see the Government Assistance and Furlough Programs section for further details) and other reductions in discretionary spend such as near term targeted marketing programs and the use of contract employees as well as compensation incentives consistent with lower sales and operating results.

______________

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

First quarter 2020 gross margin of 38.3% decreased 1.9-percentage points as compared to first quarter 2019, reflecting the impact of lower revenues (including from our higher margin post sale stream) primarily as a result of the significant effect of the COVID-19 health crisis due to business closures, as well as the impact of price reductions, transaction currency and tariffs, partially offset by the benefits from our Project Own It transformation actions.

Xerox 2020 Form 10-Q

Second quarter 2020 gross margin of 38.5% decreased 0.6-percentage points as compared to second quarter 2019, reflecting the impact of lower revenues (including from our higher margin post sale stream) primarily as a result of the significant effect of the COVID-19 crisis due to business closures, as well as the impact of price reductions, adverse transaction currency and 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 crisis, including savings of approximately $40 million from temporary government assistance measures and furlough programs.

Gross margin for the six months ended June 30, 2020 of 38.4% decreased 1.3-percentage points as compared to the prior year period, reflecting the impact of lower revenues (including from our higher margin post sale stream) primarily as a result of the significant effect of the COVID-19 due to business closures, as well as the impact of price reductions, adverse transaction currency and tariffs.

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.

First quarter 2020 equipment gross margin of 26.3% decreased 9.4-percentage points as compared to first quarter 2019, reflecting the impact of lower sales primarily as a result of COVID-19 related business closures that more pronouncedly affected our higher gross margin in SMB channels, causing an adverse mix.

The decline also reflected the impact of pricing incentives and incremental tariff costs partially offset by the benefits from our Project Own It transformation actions.

Xerox 2020 Form 10-Q

First quarter 2020 Post sale gross margin of 40.8% decreased 0.6-percentage points as compared to first quarter 2019, reflecting the impact of lower revenues (primarily as a result of COVID-19 related business closures) and pricing pressure on contract renewals, partially offset by productivity and restructuring savings associated with our Project Own It transformation actions.

Second quarter 2020 equipment gross margin of 28.8% was flat as compared to second quarter 2019, reflecting the benefit of cost reductions from our Project Own It, as well as a favorable mix of revenues due to the relatively smaller declines in our high-end category, which offset the pressure from lower revenues (primarily as a result of COVID-19 related business closures) and the adverse impact of transaction currency, incremental tariff costs and price incentives.

Equipment gross margin for the six months ended June 30, 2020 of 27.5% decreased 4.5-percentage points as compared to the prior year period, reflecting the impact of lower revenues (primarily as a result of COVID-19 related business closures) as well as the impact of incremental tariff costs, price incentives and adverse transaction currency, partially offset by the benefits from our Project Own It transformation actions.

Second quarter 2020 Post sale gross margin of 41.1% decreased 0.9-percentage points as compared to second quarter 2019, reflecting the impact of lower revenues (primarily as a result of COVID-19 related business closures) and pricing pressure on contract renewals, partially offset by productivity and restructuring savings associated with our Project Own It transformation actions, as well as savings from our additional cost reduction actions to mitigate

the impact of the crisis, including approximately $40 million of savings from temporary government assistance measures and furlough programs.

Post sale gross margin for the six months ended June 30, 2020 of 40.9% decreased 0.8-percentage points as compared to the prior year period, reflecting the impact of lower revenues (primarily as a result of COVID-19 related business closures) and pricing pressure on contract renewals, partially offset by productivity and restructuring savings associated with our Project Own It transformation actions, as well as savings from our additional cost reduction actions to mitigate the impact of the crisis, including approximately $40 million of savings from temporary government assistance measures and furlough programs.

Research, Development and Engineering Expenses (RD&E)

Three Months Ended

(in millions) 2020 2019 Change

June 30, Six Months Ended

(in millions) 2020 2019 Change 2020 2019 Change

R&D $ 65 $ 73 $ (8) $ 133 $ 150 $ (17)

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Total RD&E Expenses $ 76 $ 88 $ (12) $ 160 $ 180 $ (20)

First quarter 2020 RD&E as a percentage of revenue of 4.5% increased by 0.3-percentage points as compared to first quarter 2019, primarily due to the impact of revenue decline that outpaced the benefits of cost reductions.

RD&E of $84 million decreased $8 million as compared to first quarter 2019 partially reflecting timing of investments.

Second quarter 2020 RD&E as a percentage of revenue of 5.2% increased by 1.3-percentage points as compared to second quarter 2019, primarily due to the impact of revenue declines that outpaced the benefits of cost reductions.

RD&E of $76 million decreased $12 million as compared to second quarter 2019 reflecting savings from Project Own It and other temporary cost actions, as well as a favorable impact from the timing of investments, partially offset by higher spend in our innovation areas.

Xerox 2020 Form 10-Q

RD&E as a percentage of revenue for the six months ended June 30, 2020 of 4.8% increased by 0.7-percentage points as compared to the prior year period, primarily due to the impact of revenue declines that outpaced the benefits of cost reductions.

RD&E for the six months ended June 30, 2020 of $160 million decreased $20 million as compared to the prior year period, reflecting savings from Project Own It and other temporary cost actions, as well as a favorable impact from the timing of investments, partially offset by higher spend in our innovation areas.

Selling, Administrative and General Expenses (SAG)

SAG as a percentage of revenue of 29.1% increased by 4.1-percentage points as compared to first quarter 2019, including a 3.3-percentage point unfavorable impact due to an increase in bad debt expense of $61 million reflecting the economic disruption resulting from the COVID-19 health crisis.

The remainder of the increase is primarily driven by the effect of lower revenues, due to COVID-19 related business closures during the month of March that impacted our customers' purchasing decisions, and caused delayed installations and lower printing volumes on our devices.

These headwinds were partially offset by the benefit from productivity and restructuring associated with our Project Own It transformation actions and from additional cost reduction actions, including lower compensation incentives and targeted marketing expenses, to mitigate the impact of the crisis.

The global health crisis is expected to have a severe impact on economic activity and result in a significant contraction in the GDP’s of countries worldwide.

As a result, our bad debt provision of $74 million increased by $61 million as compared to first quarter 2019, primarily reflecting the expected impact to our customer base and related outstanding receivable portfolio as a result of the economic disruption caused by this health crisis.

Consistent with our expectations for our own business, our bad debt provision reflects a significant decrease in global GDPs in the second quarter 2020 followed by a recovery in the second half of 2020.

It also reflects estimated impacts from potential requests for payment deferrals and delayed payments as businesses recover from the worldwide lockdowns.

The majority of the increased provision is related to finance receivables due to their larger balance and longer-term nature.

The increased provision resulted in a bad debt expense of approximately 2.5 percent of total receivables on a trailing-twelve-month basis (TTM), as compared to recent trends of less than one percent in 2019.

Our estimates may be updated in future periods as we continue to monitor the development of this crisis, including expectations for lifting of business closures and mitigating government support actions.

SAG of $541 million decreased $5 million as compared to first quarter 2019, reflecting productivity and restructuring savings associated with our Project Own It transformation actions and from additional cost reduction actions, including lower compensation incentives and targeted marketing expenses, to mitigate the impact of the crisis.

Second quarter 2020 SAG as a percentage of revenue of 29.1% increased by 6.3-percentage points as compared to second quarter 2019, primarily due to the impact of lower revenues, partially offset by the benefits from productivity and restructuring associated with our Project Own It transformation actions, and savings from additional cost reduction actions to mitigate the impact of the crisis, including approximately $19 million from temporary government assistance measures and furlough programs, and other reductions in discretionary spend such as near term targeted marketing programs and the use of contract employees as well as compensation incentives consistent with lower sales and operating results.

During first quarter 2020, our bad debt provision was $61 million higher than the prior year period primarily reflecting the expected impact to our customer base and related outstanding receivable portfolio as a result of the economic disruption caused by the COVID-19 pandemic crisis.

During second quarter 2020, write-offs were in line with expectations and the current bad debt reserves for our trade and finance receivables portfolios were determined to be adequate and consistent with future expectations regarding the impacts from the COVID-19 pandemic crisis.

Accordingly, no incremental reserves were required and bad debt expense for second quarter 2020 of $13 million was effectively flat as compared to second quarter 2019.

Second quarter 2020 SAG of $426 million decreased by $91 million as compared to second quarter 2019, reflecting productivity and restructuring savings associated with our Project Own It transformation actions and from additional cost reduction actions, including lower compensation incentives and targeted marketing expenses, to mitigate the impact of the crisis.

SAG as a percentage of revenue for the six months ended June 30, 2020 of 29.1% increased by 5.2-percentage points as compared to the prior year period and included a 1.8-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 productivity and restructuring associated with our Project Own It transformation actions and savings from additional cost reduction actions to mitigate the impact of the crisis, including approximately $19 million from temporary government assistance measures and furlough programs, and other reductions in discretionary spend such as near term targeted marketing programs and the use of contract employees as well as compensation incentives consistent with lower sales and operating results.

Bad debt expense for the six months ended June 30, 2020 of $87 million was $62 million higher compared to the prior year period as a result of the increase in the bad debts provision recorded in first quarter 2020 as described above.

SAG for the six months ended June 30, 2020 of $967 million decreased $96 million as compared to the prior year period, reflecting productivity and restructuring savings associated with our Project Own It transformation actions and from additional cost reduction actions, including lower compensation incentives and targeted marketing expenses, to mitigate the impact of the crisis.

These savings were partially offset by the increase in bad debt expense as described above.

The majority of the increased provision is related to finance receivables due to their larger balance and longer-term nature.

We continue to monitor developments regarding this crisis, including expectations for lifting of business closures and mitigating government support actions and as a result our reserve estimates may need to be updated in future periods.

Bad debt expense of approximately 2.7 percent of total gross receivables on a trailing-twelve-month basis (TTM) reflects the significant increase in first quarter 2020 and remained high as compared to the 2019 trend of less than one percent.

Xerox 2020 Form 10-Q

Restructuring and Related Costs

We incurred restructuring and related costs of $41 million for the first quarter 2020 as compared to $112 million for first quarter 2019.

We incurred restructuring and related costs of $3 million for the second quarter 2020, as compared to $37 million for second quarter 2019, and $44 million for the six months ended June 30, 2020 as compared to $149 million in the prior year period .

These costs were primarily related to implementation of initiatives under our business transformation projects including Project Own It.

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Three Months Ended

June 30, Six Months Ended

(in millions) 2020 2019 2020 2019

Restructuring and severance (1)

$ 7 $ 13 $ 39 $ 25

Asset impairments (2)

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Net reversals (4)

(9) (8) (15) (16)

Restructuring and asset impairment costs (2) 18 27 72

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_____________

(1) Reflects headcount reductions of approximately 300 and 150 employees worldwide in three months ended March 31, 2020 and 2019, respectively.

(1) Reflects headcount reductions of approximately 150 employees worldwide for the three months ended June 30, 2020 and 2019, respectively, and 450 and 300 employees worldwide for the six months ended June 30, 2020 and 2019, respectively.

(2) Primarily related to the exit and abandonment of leased and owned facilities.

The charge includes the accelerated write-off of $1 million and $26 million for the three months ended March 31, 2020 and 2019 , respectively, for leased right-of-use assets and $1 million and $10 million for the three months ended March 31, 2020 and 2019 , respectively, for owned assets upon exit from the facility, net of any potential sublease income and other recoveries.

The charge includes the accelerated write-off of $0 million and $8 million f or the three months ended June 30, 2020 and 2019, respectively, and $1 million and $34 million f or the six months ended June 30, 2020 and 2019 , respectively, for leased right-of-use assets, as well as $0 million and $2 million f or the three months ended June 30, 2020 and 2019, respectively, and $1 million and $12 million for the six months ended June 30, 2020 and 2019 , respectively, for owned assets upon exit from the facilities, net of any potential sublease income and other recoveries.

(3) Primarily includes additional costs incurred upon the exit from our facilities including decommissioning costs and associated contractual termination costs.

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

First quarter 2020 actions impacted several functional areas, with approximately 40% focused on gross margin improvements, approximately 50% focused on SAG reductions and the remainder focused on RD&E optimization.

First quarter 2019 actions impacted several functional areas, with approximately 25% focused on gross margin improvements, approximately 70% focused on SAG reductions and the remainder focused on RD&E optimization.

The restructuring and related costs reserve balance as of March 31, 2020 for all programs was $113 million, which is expected to be paid over the next twelve months.

Second quarter 2020 actions impacted several functional areas, with approximately 10% focused on gross margin improvements and approximately 90% focused on SAG reductions.

Second quarter 2019 actions impacted several functional areas, with approximately 15% focused on gross margin improvements, approximately 80% focused on SAG reductions and the remainder focused on RD&E optimization.

The restructuring and related costs reserve balance as of June 30, 2020 for all programs was $94 million, which is expected to be paid over the next twelve months.

Refer to Note 12 - Restructuring Programs in the Condensed Consolidated Financial Statements for additional information regarding our restructuring programs.

Transaction and Related Costs, Net

We incurred $17 million of Transaction and related costs, net during first quarter 2020 primarily related to legal and other professional costs associated with our recently terminated proposal to acquire HP Inc.

(see the “Termination of Proposed Transaction with HP Inc.” section for further details).

We incurred $7 million and $24 million of Transaction and related costs, net for the three and six months ended June 30, 2020 primarily related to legal and other professional costs associated with certain strategic M&A projects including our terminated proposal to acquire HP Inc.

(see the Termination of Proposed Transaction with HP Inc.

section for further details).

Amortization of Intangible Assets

Amortization of intangible assets for the three months ended March 31, 2020 of $11 million decreased by $4 million as compared to the prior year period as a result of the write-off of trade names in prior periods associated with our realignment and consolidation of certain XBS sales units as part of Project Own It transformation actions.

Amortization of intangible assets for the six months ended June 30, 2020 of $21 million decreased by $5 million as compared to the prior year period as a result of the write-off of trade names in prior periods associated with our realignment and consolidation of certain XBS sales units as part of Project Own It transformation actions partially offset by intangible amortization associated with 2020 and 2019 acquisitions.

Xerox 2020 Form 10-Q

Worldwide Employment

Worldwide employment was approximately 26,300 as of March 31, 2020 and decreased by approximately 700 from December 31, 2019.

Worldwide employment was approximately 26,100 as of June 30, 2020 and decreased by approximately 900 from December 31, 2019.

The reduction resulted from net attrition (attrition net of gross hires), of which a large portion is not expected to be backfilled, as well as the impact of organizational changes.

Xerox 2020 Form 10-Q

Other Expenses, Net

Three Months Ended

June 30, Six Months Ended

(in millions) 2020 2019 2020 2019

5 unchanged sentences

Currency losses, net 2 — 4 2

Loss on sales of accounts receivable — 1

All other expenses, net (2) 5 3 6

1 unchanged sentence

Non-Financing Interest Expense

First quarter 2020 non-financing interest expense of $21 million was $7 million lower than first quarter 2019.

When combined with financing interest expense (Cost of financing), total interest expense decreased by $9 million from first quarter 2019 primarily due to a lower debt balance.

Second quarter 2020 non-financing interest expense of $18 million was $8 million lower than second quarter 2019.

When combined with financing interest expense (Cost of financing), total interest expense decreased by $11 million from second quarter 2019 primarily due to a lower debt balance.

For the six months ended June 30, 2020 non-financing interest expense of $39 million was $15 million lower than the prior year period.

When combined with financing interest expense (Cost of financing), total interest expense decreased by $20 million from the prior year period primarily due to a lower debt balance.

Refer to Note 13 - Debt in the Condensed Consolidated Financial Statements, for additional information regarding the interest expense.

Non-Service Retirement-Related Costs

Non-service retirement-related costs for the three months ended March 31, 2020 decreased $12 million compared to the prior year period, primarily driven by lower losses from pension settlements in the U.S.

Non-service retirement-related costs for the three and six months ended June 30, 2020 decreased $18 million and $30 million, respectively, compared to the prior year periods, primarily driven by lower losses from pension settlements in the U.S.

Refer to Note 16 - Employee Benefit Plans in the Condensed Consolidated Financial Statements, for additional information regarding non-service retirement-related costs.

Interest Income

First quarter 2020 interest income was $4 million higher than first quarter 2019, 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.

Interest income for the six months ended June 30, 2020 increased $4 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.

First quarter 2020 effective tax rate was 20.0%.

On an adjusted 1 basis, first quarter 2020 effective tax rate was 29.4%.

Second quarter 2020 effective tax rate was 22.9%.

On an adjusted 1 basis, second quarter 2020 effective tax rate was 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 as well as the increased impact from various non-deductible and discrete items on lower pre-tax income.

federal statutory tax rate of 21% primarily due to state taxes and the geographical mix of profits partially offset by the impact from various non-deductible and discrete items on lower pre-tax income.

The adjusted 1 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.

First quarter 2019 effective tax rate was (13.7)% and included a benefit of $35 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 adjusted 1 basis, first quarter 2019 effective tax rate was 26.3%.

The effective tax rate for the six months ended June 30, 2020 was 23.3%.

On an adjusted 1 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, various non-deductible items partially offset by the impact of tax law changes and other discrete items.

The adjusted 1 effective tax rate excludes the tax impacts associated with the following charges:

Restructuring and related costs, Amortization of

Xerox 2020 Form 10-Q

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.

Second quarter 2019 effective tax rate was 26.3%.

On an adjusted 1 basis, second quarter 2019 effective tax rate was 26.6%.

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 adjusted 1 effective tax rate excludes the tax impacts associated with the following charges:

Restructuring and related costs, Amortization of intangible assets and non-service retirement-related costs as well as other discrete, unusual or infrequent items as described in our Non-GAAP Financial Measures section, which included the impact of the Tax Act.

Restructuring and related costs, Amortization of intangible assets, Transaction and related costs, net and non-service retirement-related costs.

The effective tax rate for the six months ended June 30, 2019 was 15.2% and included a benefit of $35 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 adjusted 1 basis, the effective tax rate for the six months ended June 30, 2019 was 26.5%.

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 adjusted 1 effective tax rate excludes the tax impacts associated with the following charges:

Restructuring and related costs, Amortization of intangible assets, Transaction and related costs, net and non-service retirement-related costs as well as other discrete, unusual or infrequent items as described in our Non-GAAP Financial Measures section, which included the impact of the Tax Act.

Our effective tax rate is based on nonrecurring events as well as recurring factors, including the taxation of foreign income.

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(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

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Refer to Discontinued Operations below and Note 6 - Divestitures, in the Condensed Consolidated Financial Statements for additional information regarding the sale of Fuji Xerox.

Accordingly, our remaining investment in Affiliates, at Equity at March 31, 2020 largely consists of several minor investments in entities in the Middle East region.

Accordingly, our remaining investment in Affiliates, at Equity at June 30, 2020 largely consists of several minor investments in entities in the Middle East region.

Three Months Ended

June 30, Six Months Ended

(in millions) 2020 2019 2020 2019

Equity in net income of unconsolidated affiliates - Fuji Xerox (1)

$ — $ 32 $ — $ 75

Equity in net income of unconsolidated affiliates - continuing operations — 2 2 4

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(1) Equity in net income for Fuji Xerox for 2019 is reported in Income from discontinued operations, net of tax.

Net (Loss) Income from Continuing Operations

First quarter 2020 Net loss from continuing operations attributable to Xerox Holdings was $2 million, or $(0.03) per diluted share.

On an adjusted 1 basis, Net income from continuing operations attributable to Xerox Holdings was $50 million, or $0.21 per diluted share and included the impact of a $61 million pre-tax increase in bad debt expense (approximately $43 million after-tax) as compared to first quarter 2019, primarily reflecting the expected impact to our customer base and related outstanding receivable portfolio as a result of the economic disruption caused by the COVID-19 health crisis.

First quarter 2020 adjustments to net loss from continuing operations included 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.

First quarter 2019 Net income from continuing operations attributable to Xerox Holdings was $84 million, or $0.34 per diluted share.

On an adjusted 1 basis, Net income from continuing operations attributable to Xerox Holdings was $158 million, or $0.66 per diluted share and included adjustments for Restructuring and related costs, Amortization of intangible assets and non-service retirement-related costs, as well as other discrete, unusual or infrequent items as described in our Non-GAAP Financial Measures section.

Refer to Note 20 - (Loss) Earnings per Share in the Condensed Consolidated Financial Statements, for additional information regarding the calculation of basic and diluted earnings per share.

Net Income from Continuing Operations

Second quarter 2020 Net income from continuing operations attributable to Xerox Holdings was $27 million, or $0.11 per diluted share.

On an adjusted 1 basis, Net income from continuing operations attributable to Xerox Holdings was $36 million, or $0.15 per diluted share.

Second quarter 2020 adjustments to Net income from continuing operations included Restructuring and related costs, Amortization of intangible assets, Transaction and related costs, net and non-service retirement-related costs.

Net income from continuing operations attributable to Xerox Holdings for the six months ended June 30, 2020 was $25 million, or $0.08 per diluted share.

On an adjusted 1 basis, Net income from continuing operations attributable to Xerox Holdings was $86 million, or $0.36 per diluted share and included the negative impact of a $61 million pre-tax increase in bad debt expense (approximately $43 million after-tax) as compared to the prior year period, primarily reflecting the expected impact to our customer base and related outstanding receivable portfolio as a result of the economic disruption caused by the COVID-19 pandemic crisis.

Adjustments to Net income from continuing operations for the six months ended June 30, 2020 included Restructuring and related costs, Amortization of intangible assets, Transaction and related costs, net, non-service retirement-related costs, as well as other discrete, unusual or infrequent items as described in our Non-GAAP Financial Measures section.

Xerox 2020 Form 10-Q

Second quarter 2019 Net income from continuing operations attributable to Xerox Holdings was $141 million, or $0.60 per diluted share.

On an adjusted 1 basis, Net income from continuing operations attributable to Xerox Holdings was $186 million, or $0.79 per diluted share.

Second 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.

Net income from continuing operations attributable to Xerox Holdings for the six months ended June 30, 2019 was $225 million, or $0.94 per diluted share.

On an adjusted 1 basis, Net income from continuing operations attributable to Xerox Holdings was $344 million, or $1.45 per diluted share.

Adjustments to Net income from continuing operations for the six months ended June 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 as described in our Non-GAAP Financial Measures section.

Refer to Note 20 - Earnings per Share in the Condensed Consolidated Financial Statements, for additional information regarding the calculation of basic and diluted earnings per share.

_____________

(1) Refer to the Net (Loss) Income and EPS reconciliation table in the "Non-GAAP Financial Measures" section.

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

Discontinued Operations

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Refer to Note 6 - Divestitures in the Condensed Consolidated Financial Statements for additional information regarding discontinued operations.

Other Comprehensive (Loss) Income

First quarter 2020 Other Comprehensive Loss, Net Attributable to Xerox Holdings was $138 million and included the following:

Other Comprehensive Income (Loss)

Second quarter 2020 Other Comprehensive Income, Net Attributable to Xerox Holdings was $103 million and included the following:

ii) $80 million of net gains from the changes in defined benefit plans primarily due to remeasurement;

ii) net translation adjustment gains of $25 million reflecting the strengthening of our major foreign currencies against the U.S.

and iii) $2 million of net unrealized losses.

This compares to Other Comprehensive Income, Net Attributable to Xerox Holdings of $5 million for the second quarter 2019, which reflected the following:

iii) $9 million of net gains from the changes in defined benefit plans;

ii) $4 million of net translation adjustment losses;

and iii) no net unrealized gains or losses.

Other Comprehensive Loss, Net Attributable to Xerox Holdings for the six months ended June 30, 2020 was $35 million and included the following:

i) net translation adjustment losses of $172 million reflecting the significant weakening of our major foreign currencies against the U.S.

ii) $134 million of net gains from the changes in defined benefit plans primarily due to remeasurement in the second quarter;

and iii) $3 million of net unrealized gains.

This compares to Other Comprehensive Income, Net Attributable to Xerox Holdings of $45 million for the six months ended June 30, 2019, which reflected the following:

i) $33 million of net translation adjustment gains, reflecting the strengthening of our major foreign currencies against the U.S.

ii) $10 million of net gains from the changes in defined benefit plans;

and iii) $2 million of net unrealized gains.

This compares to Other Comprehensive Income, Net Attributable to Xerox Holdings of $40 million for the first quarter 2019, which reflected the following:

i) $37 million of net translation adjustment

Refer to Note 19 - Other Comprehensive Income (Loss) in the Condensed Consolidated Financial Statements, for the components of Other Comprehensive Income (Loss), Note 14 - Financial Instruments in the Condensed Consolidated Financial Statements, for additional information regarding unrealized (losses) gains, net, and Note 16 - Employee Benefit Plans in the Condensed Consolidated Financial Statements, for additional information regarding net changes in our defined benefit plans.

Xerox 2020 Form 10-Q

gains, reflecting the strengthening of our major foreign currencies against the U.S.

ii) $2 million of net unrealized gains;

and iii) $1 million of net gains from the changes in defined benefit plans.

Refer to Note 19 - Other Comprehensive (Loss) Income in the Condensed Consolidated Financial Statements, for the components of Other Comprehensive (Loss) Income, Note 14 - Financial Instruments in the Condensed Consolidated Financial Statements, for additional information regarding unrealized gains, net, and Note 16 - Employee Benefit Plans in the Condensed Consolidated Financial Statements, for additional information regarding net changes in our defined benefit plans.

Capital Resources and Liquidity

Our first quarter financial results were significantly impacted by COVID-19 related business closures during the month of March that impacted our customers' purchasing decisions and caused delayed installations and lower printing volumes on our devices.

However, we believe we have sufficient liquidity to manage the business through the economic disruption caused by this health crisis:

Our financial results through June 30, 2020 were significantly impacted by COVID-19 related business closures and office building capacity restrictions that impacted our customers' purchasing decisions and caused delayed installations and lower printing volumes on our devices.

However, we believe we have sufficient liquidity to manage the business through the economic disruption caused by this crisis:

• A majority of our business is contractually based and our bundled services contracts, on average, include not only a variable component linked to print volumes, but also a fixed minimum, which provides us with a continuing stream of operating cash flow.

• As of March 31, 2020, total cash, cash equivalents and restricted cash were $2,665 million and all but the restricted cash was readily accessible for use.

• As of June 30, 2020, total cash, cash equivalents and restricted cash were $2,314 million and, apart from the restricted cash of $42 million, was readily accessible for use.

• We have access to an undrawn $1.8 billion Credit Facility that matures in August 2022.

• We have expected debt maturities of approximately $1 billion coming due in 2020 and we expect to be able to utilize a combination of cash on hand, capital markets and securitization to manage those maturities during 2020.

• We expect to be able to utilize a combination of cash on hand, capital markets and securitization to manage debt maturities in 2020.

Refer to Note 22 - Subsequent Event in the Condensed Consolidated Financial Statements for additional information regarding a recent secured borrowing transaction.

• We have focused our efforts on incremental actions to prioritize and preserve cash as we manage through this crisis.

These actions include the reduction of discretionary spend, such as compensation incentives, near term targeted marketing spend and the use of contract employees.

These actions include the reduction of discretionary spend such as near term targeted marketing programs, the use of contract employees and compensation incentives consistent with lower sales and operating results, as well as the use of available temporary government assistance measures and furlough programs.

Cash Flow Analysis

The following summarizes our cash, cash equivalents and restricted cash:

Three Months Ended

March 31, Change

Six Months Ended

June 30, Change

(in millions) 2020 2019

8 unchanged sentences

Cash, Cash Equivalents and Restricted Cash at End of Period $ 2,314 $ 776 $ 1,538

$ 2,665 $ 786 $ 1,879

_____________

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

Cash Flows from Operating Activities

Net cash provided by operating activities of continuing operations was $173 million in first quarter 2020.

The $49 million decrease in operating cash from first quarter 2019 was primarily due to the following:

• $185 million decrease in pre-tax income before depreciation and amortization, restructuring and related costs and defined benefit pension costs.

Net cash provided by operating activities of continuing operations was $207 million for the six months ended June 30, 2020.

The $291 million decrease in operating cash from the prior year period was primarily due to the following:

• $356 million decrease in pre-tax income before depreciation and amortization, provisions, restructuring and related costs and defined benefit pension costs.

• $241 million decrease from higher levels of inventory primarily due to lower sales volume.

• $113 million decrease from lower accounts payable primarily due to decreased spending and the year-over-year timing of supplier and vendor payments.

• $112 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.

• $46 million decrease from accrued compensation primarily related to lower compensation costs and the year-over-year timing of payments.

• $18 million decrease in transaction and related costs due to payments of $4 million in first quarter 2020 compared to net insurance proceeds of $14 million in prior year.

Xerox 2020 Form 10-Q

• $15 million decrease in transaction and related costs primarily due to insurance proceeds received in the prior year.

• $419 million increase from accounts receivable primarily due to lower revenue.

• $86 million increase from accounts payable primarily due to the year-over-year timing of supplier and vendor payments partially offset by lower spending.

• $18 million increase primarily related to the current year settlements of EUR/GBP derivative contracts reflecting the significant movement in rates during March as well as $4 million related to the settlement of interest rate swaps.

• $12 million increase from finance receivables primarily related to a higher level of run-off due to lower originations.

• $88 million increase primarily related to a higher level of run-off due to lower originations of finance receivables of $71 million and lower equipment on operating leases of $17 million.

• $49 million increase due to the timing of payments associated with restructuring related costs of $9 million in the current year compared to $58 million in the prior year.

Xerox 2020 Form 10-Q

• $47 million increase from net taxes primarily due to lower payments in 2020 as a result of lower pre-tax income and government programs, enacted as part of the COVID-19 relief actions, that allow for the deferral of income tax payments to 2021.

Cash Flows from Investing Activities

Net cash used in investing activities was $214 million in first quarter 2020.

The $196 million change from first quarter 2019 was primarily due to four acquisitions completed in the current year.

These acquisitions of local resellers and multi-brand dealers expand our distribution capabilities to small-to-medium sized businesses in the U.K.

Net cash used in investing activities was $232 million for the six months ended June 30, 2020.

The $160 million change from from the prior year period was primarily due to four acquisitions completed in the current year for $193 million compared to two acquisitions in the prior year for $42 million.

Cash Flows from Financing Activities

Net cash used in financing activities was $60 million in first quarter 2020.

The $509 million decrease in the use of cash from first quarter 2019 was primarily due to the following:

• $404 million decrease from net debt activity primarily due to payments of $406 million on Senior Notes in prior year compared to no Senior Notes payments in the current period.

• $103 million decrease due to share repurchases in prior year compared to no share repurchases in the current period.

Net cash used in financing activities was $432 million for the six months ended June 30, 2020.

The $414 million decrease in the use of cash from the prior year period was primarily due to the following:

• $93 million decrease from net debt activity.

2020 reflects payment of $313 million on Senior Notes compared to prior year payments of $406 million on Senior Notes.

• $300 million decrease due to share repurchases in prior year compared to no share repurchases in the current year.

Cash, Cash Equivalents and Restricted Cash

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The following summarizes our debt:

(in millions) March 31, 2020 December 31, 2019

(in millions) June 30, 2020 December 31, 2019

Principal debt balance (1)

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_____________

(1) Includes no Notes Payable as of March 31, 2020 and December 31, 2019.

(1) Includes no Notes Payable as of June 30, 2020 and December 31, 2019, respectively.

(2) Fair value adjustments include the following:

2 unchanged sentences

Hedge accounting requires hedged debt instruments to be reported inclusive of any fair value adjustment.

Xerox 2020 Form 10-Q

Finance Assets and Related Debt

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

(in millions) March 31, 2020 December 31, 2019

(in millions) June 30, 2020 December 31, 2019

Total finance receivables, net (1)

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(2) The change from December 31, 2019 includes a decrease of $33 million due to currency.

Xerox 2020 Form 10-Q

Our lease contracts permit customers to pay for equipment over time rather than at the date of installation;

1 unchanged sentence

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.

Approximately 35% of our finance receivables, net balance include lease financing provided to end-user customers who purchased equipment we sold to distributors and resellers.

Based on this leverage, the following represents the breakdown of total debt between financing debt and core debt:

(in millions) March 31, 2020 December 31, 2019

(in millions) June 30, 2020 December 31, 2019

Finance receivables debt (1)

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____________________________

(1) Finance receivables debt is the basis for our calculation of "Cost of financing" expense in the Condensed Consolidated Statements of (Loss) Income.

(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

1 unchanged sentence

Three Months Ended

June 30, Six Months Ended

(in millions) 2020 2019 2020 2019

Estimated decrease to operating cash flows (1)

Estimated (decrease) increase to operating cash flows (1)

$ (58) $ 5 $ (136) $ —

_____________

(1) Represents the difference between current and prior period accounts receivable sales adjusted for the effects of currency.

The respective decrease for the three and six months ended June 30, 2020 reflects decreased sales activity in the channel.

Refer to Note 8 - Accounts Receivable, Net in the Condensed Consolidated Financial Statements for additional information regarding our accounts receivable sales arrangements.

Xerox 2020 Form 10-Q

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 in line with historical and projected cash flows and are spread over the next five years as follows:

Our principal debt maturities are spread over the next five years as follows:

(in millions) Amount (1)

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Treasury Stock

No shares of our common stock were repurchased by Xerox Holdings in the first quarter 2020.

Since Xerox Holdings’ Board of Directors authorized a $1.0 billion share repurchase program in July 2019, the cumulative total shares repurchased by Xerox Holdings is 9.1 million shares for an aggregate cost of $300 million, including fees, through March 31, 2020.

No additional shares of common stock have been repurchased since March 31, 2020, through our filing date, May 7, 2020.

No shares of our common stock were repurchased by Xerox Holdings during the six months ended June 30, 2020.

No additional shares of common stock have been repurchased since June 30, 2020, through our filing date, July 30, 2020.

Xerox 2020 Form 10-Q

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 is expected to continue in 2020 and 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.

This transition was expected to be completed during 2020, however, as a result of delays caused by the COVID-19 pandemic crisis, the transition is now expected to extend into 2021.

HCL is expected to make certain ongoing investments in software, tools and other technology to consolidate, optimize and automate the transferred functions with the goal of providing improved service levels and significant cost savings.

The shared services arrangement with HCL includes a remaining aggregate spending commitment of approximately $1.2 billion over the next 6 years.

However, we can terminate the arrangement at any time at our discretion, subject to payment of termination fees that decline over the term, or for cause.

During first quarter 2020, we incurred net charges of approximately $45 million associated with this arrangement.

The cost has been allocated to the various functional expense lines in the Condensed Consolidated Statements of (Loss) 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.

For the three and six months ended June 30, 2020, we incurred net charges of approximately $45 million and $90 million, respectively, associated with this arrangement.

The cost has been allocated to the various functional expense lines in the Condensed Consolidated Statements of Income based on an assessment of the nature and amount of the costs incurred for the various transferred functions prior to their transfer to HCL.

Termination of Proposed Transaction with HP Inc.

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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 global health 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

Xerox 2020 Form 10-Q

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

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 .

Financial Risk Management

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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.

Xerox 2020 Form 10-Q

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.

2 unchanged sentences

Refer to Note 14 – Financial Instruments in the Condensed Consolidated Financial Statements for further discussion and information on our financial risk management strategies.

Xerox 2020 Form 10-Q

Non-GAAP Financial Measures

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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 first quarter 2020 presentation slides available at www.xerox.com/investor .

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 second quarter 2020 presentation slides available at www.xerox.com/investor .

These non-GAAP financial measures should be viewed in addition to, and not as a substitute for, the Company’s reported results prepared in accordance with GAAP.

15 unchanged sentences

Transaction and related costs, net:

Transaction and related costs, net are expenses incurred in connection with i) our announced proposal to acquire HP Inc.

and ii) our planned transaction with Fujifilm/Fuji Xerox, which was terminated in May 2018, inclusive of costs related to litigation resulting from the terminated transaction and other shareholder actions.

The costs are primarily for third-party legal, accounting, consulting and other similar type professional services as well as potential legal settlements.

Transaction and related costs, net are costs and expenses primarily associated with certain strategic M&A projects including our announced proposal to acquire HP Inc., which was terminated in March 2020, and our planned transaction with Fujifilm/Fuji Xerox, which was terminated in May 2018.

These costs are primarily for third-party legal, accounting, consulting and other similar type professional services as well as potential legal settlements.

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.

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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.

Accordingly, we consider these elements of our periodic

Xerox 2020 Form 10-Q

retirement plan costs to be outside the operational performance of the business or legacy costs and not necessarily indicative of current or future cash flow requirements.

This approach is consistent with the classification of these costs as non-operating in other expenses, net.

Adjusted earnings will continue to include the service cost elements of our retirement costs, which is related to current employee service as well as the cost of our defined contribution plans.

Xerox 2020 Form 10-Q

Other discrete, unusual or infrequent items:

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Adjusted Operating Income and Margin

We calculate and utilize adjusted operating income and margin measures by adjusting our reported pre-tax (loss) income and margin amounts.

We calculate and utilize adjusted operating income and margin measures by adjusting our reported pre-tax income and margin amounts.

In addition to the costs and expenses noted as adjustments for our Adjusted Earnings measures, adjusted operating income and margin also exclude the remaining amounts included in Other expenses, net, which are primarily non-financing interest expense and certain other non-operating costs and expenses.

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However, these non-GAAP financial measures should be viewed in addition to, and not as a substitute for, the company’s reported results prepared in accordance with GAAP.

Our non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP measures and should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP.

Our 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.

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Xerox 2020 Form 10-Q

Net (Loss) Income and EPS reconciliation:

Three Months Ended March 31,

(in millions, except per share amounts) Net (Loss) Income EPS Net Income EPS

Net Income and EPS reconciliation:

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

2020 2019 2020 2019

(in millions, except per share amounts) Net Income EPS Net Income EPS Net Income EPS Net Income EPS

$ 27 $ 0.11 $ 141 $ 0.60 $ 25 $ 0.08 $ 225 $ 0.94

Restructuring and related costs 3 37 44 149

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Income tax on adjustments (2)

(3) (17) (24) (48)

Tax Act — — — (35)

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Dividends on preferred stock used in adjusted EPS calculation (3)

$ 3 $ — $ 7 $ —

Weighted average shares for adjusted EPS (3)

Fully diluted shares at March 31, 2020 (4)

216 235 216 237

(1) Net (loss) income and EPS from continuing operations attributable to Xerox Holdings.

Fully diluted shares at June 30, 2020 (4)

____________________________

(1) Net income and EPS from continuing operations attributable to Xerox Holdings.

(2) Refer to Effective Tax Rate reconciliation.

(3) Average shares for the calculation of adjusted diluted EPS for 2020 exclude 7 million shares associated with our Series A convertible preferred stock and therefore earnings include the preferred stock dividend.

In addition, adjusted diluted EPS shares for 2020 include 4 million shares for potential dilutive common shares, which are not included in the GAAP EPS calculation since it was a loss.

Average shares for the calculation of adjusted diluted EPS for 2019 exclude the preferred stock dividend and include 7 million shares associated with our Series A convertible preferred stock.

(4) Represents common shares outstanding at March 31, 2020 plus potential dilutive common shares as used for the calculation of adjusted diluted EPS for the first quarter 2020.

(4) Represents common shares outstanding at June 30, 2020 plus potential dilutive common shares as used for the calculation of adjusted diluted EPS for the second quarter 2020.

The amount excludes shares associated with our Series A convertible preferred stock as they are expected to be anti-dilutive for the year.

Effective Tax Rate reconciliation:

Three Months Ended March 31,

(in millions) Pre-Tax (Loss) Income Income Tax (Benefit) Expense Effective

Tax Rate Pre-Tax Income Income Tax (Benefit) Expense Effective

Three Months Ended June 30,

(in millions) Pre-Tax Income Income Tax Expense Effective

Tax Rate Pre-Tax Income Income Tax Expense Effective

$ 35 $ 8 22.9 % $ 190 $ 50 26.3 %

Non-GAAP Adjustments (2)

$ 47 $ 11 23.4 % $ 252 $ 67 26.6 %

Six Months Ended June 30,

(in millions) Pre-Tax Income Income Tax Expense Effective

Tax Rate Pre-Tax Income Income Tax Expense Effective

$ 30 $ 7 23.3 % $ 263 $ 40 15.2 %

Non-GAAP Adjustments (2)

Tax Act — — — 35

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____________________________

(1) Pre-tax (loss) income and income tax benefit from continuing operations.

(2) Refer to Net (Loss) Income and EPS reconciliation for details.

(3) The tax impact on Adjusted Pre-Tax Income is calculated under the same accounting principles applied to the Reported Pre-Tax (Loss) Income under ASC 740, which employs an annual effective tax rate method to the results.

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

(2) Refer to Net Income and EPS reconciliation for details.

(3) The tax impact on Adjusted Pre-Tax Income from continuing operations is calculated under the same accounting principles applied to the Reported Pre-Tax Income under ASC 740, which employs an annual effective tax rate method to the results.

Xerox 2020 Form 10-Q

Operating Income and Margin reconciliation:

Three Months Ended March 31,

(in millions) (Loss) Profit Revenue Margin Profit Revenue Margin

Three Months Ended June 30,

(in millions) Profit Revenue Margin Profit Revenue Margin

$ 35 $ 1,465 2.4 % $ 190 $ 2,263 8.4 %

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Adjusted $ 62 $ 1,465 4.2 % $ 280 $ 2,263 12.4 %

Six Months Ended June 30,

(in millions) Profit Revenue Margin Profit Revenue Margin

$ 30 $ 3,325 0.9 % $ 263 $ 4,443 5.9 %

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

Restructuring and related costs 44 149

Amortization of intangible assets 21 26

Transaction and related costs, net 24 4

Other expenses, net 30 77

Adjusted $ 149 $ 3,325 4.5 % $ 519 $ 4,443 11.7 %

____________________________

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

Xerox 2020 Form 10-Q

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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 2. Management’s Discussion and Analysis