What changed in this filing

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Item 1. Financial Statements

2020-11-04 compared with 2020-07-30 · 313 added, 181 removed, 1183 unchanged (29% of the section changed)

3 unchanged sentences

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

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

38 unchanged sentences

XEROX HOLDINGS CORPORATION

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

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

(in millions) 2020 2019 2020 2019

5 unchanged sentences

Translation adjustments, net 179 ( 155 ) 7 ( 122 )

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

Unrealized gains, net 1 1 4 3

Changes in defined benefit plans, net ( 92 ) ( 48 ) 42 ( 38 )

Other Comprehensive Income (Loss), Net 88 ( 202 ) 53 ( 157 )

Other comprehensive income, net from continuing operations attributable to noncontrolling interests — 1 — 1

Other Comprehensive Income (Loss), Net Attributable to Xerox Holdings 88 ( 203 ) 53 ( 158 )

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

Comprehensive Income, Net 178 20 168 385

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

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

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

Comprehensive Income, Net Attributable to Xerox Holdings $ 178 $ 18 $ 168 $ 377

_____________

4 unchanged sentences

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

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

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

2020 December 31,

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_____________

(1) Allowances at June 30, 2020 determined in accordance with ASU 2016-13 adopted effective January 1, 2020 - refer to Notes 2, 8 and 9 for additional information.

(1) Allowances at September 30, 2020 determined in accordance with ASU 2016-13 adopted effective January 1, 2020 - refer to Notes 2, 8 and 9 for additional information.

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

3 unchanged sentences

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

(in millions) 2020 2019 2020 2019

12 unchanged sentences

Contributions to defined benefit pension plans ( 33 ) ( 37 ) ( 97 ) ( 107 )

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

(Increase) decrease in accounts receivable and billed portion of finance receivables ( 96 ) 51 332 60

(Increase) decrease in inventories ( 49 ) 15 ( 274 ) 31

2 unchanged sentences

Decrease (increase) in other current and long-term assets 17 ( 14 ) 2 1

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

Increase (decrease) in accounts payable 90 22 ( 69 ) ( 24 )

Decrease in accrued compensation ( 20 ) ( 16 ) ( 149 ) ( 99 )

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

(Decrease) increase in other current and long-term liabilities ( 16 ) 26 ( 146 ) 19

Net change in income tax assets and liabilities 10 41 13 30

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Cost of additions to land, buildings, equipment and software ( 18 ) ( 17 ) ( 60 ) ( 48 )

Proceeds from sales of business and assets — — 2 1

Proceeds from sales of businesses and assets 27 20 29 21

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

Other investing, net — 1 1 1

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

Net cash provided by (used in) investing activities 9 4 ( 223 ) ( 68 )

Cash Flows from Financing Activities

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

Net proceeds from short-term debt 1 — 1 —

Proceeds from issuance of long-term debt 1,849 2 1,854 7

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Other financing, net ( 10 ) ( 10 ) ( 19 ) ( 33 )

Net cash used in financing activities ( 372 ) ( 277 ) ( 432 ) ( 846 )

Net cash provided by (used in) financing activities 856 ( 137 ) 424 ( 983 )

Effect of exchange rate changes on cash, cash equivalents and restricted cash 12 ( 20 ) ( 12 ) ( 13 )

Decrease in cash, cash equivalents and restricted cash ( 351 ) ( 10 ) ( 481 ) ( 372 )

Increase (decrease) in cash, cash equivalents and restricted cash 983 203 502 ( 169 )

Cash, cash equivalents and restricted cash at beginning of period 2,314 776 2,795 1,148

Cash, Cash Equivalents and Restricted Cash at End of Period (1)

$ 3,297 $ 979 $ 3,297 $ 979

_____________

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

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

3 unchanged sentences

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

(in millions) 2020 2019 2020 2019

30 unchanged sentences

XEROX CORPORATION

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

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

(in millions) 2020 2019 2020 2019

5 unchanged sentences

Translation adjustments, net 179 ( 155 ) 7 ( 122 )

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

Unrealized gains, net 1 1 4 3

Changes in defined benefit plans, net ( 92 ) ( 48 ) 42 ( 38 )

Other Comprehensive Income (Loss), Net 88 ( 202 ) 53 ( 157 )

Other comprehensive income, net from continuing operations attributable to noncontrolling interests — 1 — 1

Other Comprehensive Income (Loss), Net Attributable to Xerox 88 ( 203 ) 53 ( 158 )

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

Comprehensive Income, Net 189 20 179 385

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

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

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

Comprehensive Income, Net Attributable to Xerox $ 189 $ 18 $ 179 $ 377

_____________

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CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in millions) June 30,

(in millions) September 30,

2020 December 31,

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_____________

(1) Allowances at June 30, 2020 determined in accordance with ASU 2016-13 adopted effective January 1, 2020 - refer to Notes 2, 8 and 9 for additional information.

(1) Allowances at September 30, 2020 determined in accordance with ASU 2016-13 adopted effective January 1, 2020 - refer to Notes 2, 8 and 9 for additional information.

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

3 unchanged sentences

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

(in millions) 2020 2019 2020 2019

12 unchanged sentences

Contributions to defined benefit pension plans ( 33 ) ( 37 ) ( 97 ) ( 107 )

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

(Increase) decrease in accounts receivable and billed portion of finance receivables ( 96 ) 51 332 60

(Increase) decrease in inventories ( 49 ) 15 ( 274 ) 31

2 unchanged sentences

Decrease (increase) in other current and long-term assets 17 ( 14 ) 2 1

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

Increase (decrease) in accounts payable 90 22 ( 69 ) ( 24 )

Decrease in accrued compensation ( 20 ) ( 16 ) ( 149 ) ( 99 )

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

(Decrease) increase in other current and long-term liabilities ( 27 ) 26 ( 157 ) 19

Net change in income tax assets and liabilities 10 41 13 30

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Other investing, net — 1 1 1

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

Net cash provided by (used in) investing activities 9 4 ( 223 ) ( 68 )

Cash Flows from Financing Activities

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

Net proceeds from short-term debt 1 — 1 —

Proceeds from issuance of long-term debt 342 2 347 7

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Payments to acquire treasury stock, including fees — — — ( 300 )

Contributions from parent 1,494 — 1,494 —

Distributions to parent ( 218 ) ( 73 ) ( 343 ) ( 73 )

Other financing, net ( 1 ) ( 7 ) — ( 30 )

Net cash used in financing activities ( 372 ) ( 277 ) ( 432 ) ( 846 )

Net cash provided by (used in) financing activities 856 ( 137 ) 424 ( 983 )

Effect of exchange rate changes on cash, cash equivalents and restricted cash 12 ( 20 ) ( 12 ) ( 13 )

Decrease in cash, cash equivalents and restricted cash ( 351 ) ( 10 ) ( 481 ) ( 372 )

Increase (decrease) in cash, cash equivalents and restricted cash 983 203 502 ( 169 )

Cash, cash equivalents and restricted cash at beginning of period 2,314 776 2,795 1,148

Cash, Cash Equivalents and Restricted Cash at End of Period (1)

$ 3,297 $ 979 $ 3,297 $ 979

_____________

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

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

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

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

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

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

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

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

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Interim Impairment Evaluation

During the quarter ended June 30, 2020, we evaluated whether events or circumstances changed that would indicate it is more likely than not that our Goodwill was impaired (trigger event).

Factors considered in this evaluation included, among other things, the negative financial impacts from the COVID-19 pandemic crisis on current and near-term future operations, the expected slower recovery during the latter half of 2020 as businesses return to their respective offices, as well as a sustained market capitalization below our book value.

Based on this assessment, we concluded that a trigger event occurred related to Goodwill and completed an interim quantitative evaluation of Goodwill.

During the quarter ended June 30, 2020, we evaluated whether events or circumstances had changed such that it would indicate it is more likely than not that our Goodwill was impaired (trigger event).

Factors considered in this evaluation included, among other things, the negative financial impacts from the COVID-19 pandemic on current and near-term future operations, the expected slower recovery during the latter half of 2020 as businesses return to their respective offices, as well as a sustained market capitalization below our book value.

Based on this assessment, we concluded that a trigger event had occurred related to Goodwill and we completed an interim quantitative evaluation of Goodwill.

As a result of limited market compares due to companies not providing guidance in this current economic environment, our interim quantitative evaluation of Goodwill was based on the income approach to estimate fair value.

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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.

Our estimates regarding future forecasted cash flows accordingly reflected consideration of the continued negative financial impacts from the COVID-19 pandemic on our current and future operations as well expected recovery scenarios.

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

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

Xerox 2020 Form 10-Q

assumptions relating to the duration and severity of the financial impact from the COVID-19 pandemic crisis, this may impact the impairment analysis and could reduce the underlying cash flows used to estimate fair values and result in a decline in fair value that may trigger future impairment charges.

During the quarter ended September 30, 2020, although business performance improved, we determined that the continued negative impacts on our current operations resulting from the COVID-19 pandemic and the impacts expected on our future operations as well as a market capitalization that remains less than book value required us to qualitatively assess whether a triggering event had occurred and whether it was more likely than not that our goodwill was impaired as of September 30, 2020.

Based on our interim qualitative assessment as of September 30, 2020, we determined that it was more-likely-than-not that the fair value of the Company was greater than the net book value and that we did not have a “triggering event” requiring a quantitative or Step 1 assessment of goodwill.

Our review of macroeconomic and industry considerations, as well as the Company's financial results for the third quarter 2020, were consistent with the expectations and sensitivities assessed as part of our interim review performed in the second quarter 2020.

Further, although our market capitalization remained below our net book value, the Company's market capitalization did improve in the third quarter 2020.

If assumptions or estimates in the fair value calculations change or if future cash flows vary from what was expected, including those assumptions relating to the duration and severity of the financial impact from the COVID-19 pandemic, this may impact the impairment analysis and could reduce the underlying cash flows used to estimate fair values and result in a decline in fair value that may trigger future impairment charges.

We normally assess goodwill for impairment during the fourth quarter and based on an updated evaluation of the impact of the events and factors noted in 2020 – macroeconomic, industry and company – we plan to utilize a quantitative model for the assessment of the recoverability of our goodwill balance.

Note 2 – Recent Accounting Pronouncements

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Accounting Standard Updates to be Adopted:

In August 2020, the FASB issued ASU 2020-06 , Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40).

This update simplifies the accounting for convertible instruments by reducing the number of accounting models available for convertible debt instruments and convertible preferred stock.

This update also amends the guidance for the derivatives scope exception for contracts in an entity's own equity to reduce form-over-substance-based accounting conclusions and requires the application of the if-converted method for calculating diluted earnings per share.

This update is effective for our fiscal year beginning January 1, 2022.

We are currently evaluating the impact of the adoption of this standard on the Company’s consolidated financial statements and related disclosures.

Reference Rate Reform

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This update is effective for our fiscal year beginning January 1, 2021.

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

Although we continue to evaluate the effects of this update on our Consolidated Financial Statements, at this stage we do not expect the adoption to have a material impact on our results of operations, financial position or disclosures.

Xerox 2020 Form 10-Q

Accounting Standard Updates Adopted in 2020:

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This election is available for concessions related to the effects of the COVID-19 pandemic that do not result in a substantial increase in the rights of the lessor or the obligations of the lessee.

We have elected to apply the interpretive guidance provided in Topic 842 Q&A to rent concessions related to the COVID-19 pandemic as provided as a Lessor to our customers and as received as a Lessee.

We have elected to apply the interpretive guidance provided in Topic 842 Q&A to rent concessions related to the COVID-19 pandemic provided as a Lessor to our customers and as received as a Lessee.

Rent deferrals provided as a Lessor were primarily offered to customers with sales type lease receivables.

We elected to account for the deferral in the timing of lease payments as if there were no changes in the lease contract.

We elected to account for the deferrals in the timing of lease payments as if there were no changes in the lease contracts.

Under this approach, assuming that collectibility of future lease payments is still probable, the classification of the leases is not updated and we retain the balance of the deferral as a receivable and will settle that receivable at the revised payment date or dates.

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

As of September 30, 2020, we approved payment deferrals of up to three months of approximately $ 33 or approximately 1 % of our total finance receivable portfolio.

The outstanding principal balance of receivables for customers with an approved payment deferral was approximately $ 337 .

Rent abatements to the extent provided were not material and were accounted for as write-offs as part of our normal bad debt reserve assessment.

With respect to rent deferrals and abatements received as a Lessee, we elected to account for the deferral and abatements as a resolution of a contingency within the lease.

With respect to rent deferrals and abatements received as a Lessee, we elected to account for the deferrals and abatements as a resolution of a contingency within the lease.

Under this approach, we follow the resolution of a contingency model in ASC 842 without reclassifying the lease or updating the discount rate.

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If the total lease payments remain exactly the same, the lease cost remains unchanged.

The impact of this election was not material

Xerox 2020 Form 10-Q

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

The impact of this election was not material to our financial condition, results of operations or cash flows, as no rent concessions provided to Xerox in the second or third quarters of 2020 were material, individually or in the aggregate.

Government Grants/Assistance

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

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

Government grants related to income are recognized as a reduction of related expenses in the Condensed Consolidated Statements of Income when there is a reasonable assurance that the entity will comply with the conditions attached to the grant and that the grants will be received.

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However, as previously disclosed, the future impact from this update is highly dependent on future economic conditions.

Refer to Note 8 - Accounts Receivable, Net and Note 9 - Finance Receivable, Net for additional discussion regarding the impacts from the adoption of this update during the first quarter 2020.

Refer to Note 8 -

Xerox 2020 Form 10-Q

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

Intangibles - Internal-Use Software

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Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

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We normally do not have contract assets, which are primarily unbilled accounts receivable that are conditional on something other than the passage of time.

Our contract liabilities, which represent billings in excess of revenue recognized, are primarily related to advanced billings for maintenance and other services to be performed and were approximately $ 127 and $ 137 at June 30, 2020 and December 31, 2019, respectively.

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

Our contract liabilities, which represent billings in excess of revenue recognized, are primarily related to advanced billings for maintenance and other services to be performed and were approximately $ 130 and $ 137 at September 30, 2020 and December 31, 2019, respectively.

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

Contract Costs:

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Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

1 unchanged sentence

Amortization of incremental direct costs 19 23 60 66

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

The balance of deferred incremental direct costs net of accumulated amortization at September 30, 2020 and December 31, 2019 was $ 145 and $ 163 , respectively.

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

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In addition, we also provide inducements to certain customers in various forms, including contractual credits, which are capitalized and amortized as a reduction of revenue over the term of the contract.

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

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

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

The related amortization was $ 1 and $ 1 for the three months ended September 30, 2020 and 2019, respectively, and $ 3 and $ 4 for the nine months ended September 30, 2020 and 2019, respectively.

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

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Location in Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

Statements of Income 2020 2019 2020 2019

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Total Lease income $ 298 $ 384 $ 851 $ 1,051

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

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

Xerox 2020 Form 10-Q

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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 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.

However, the ongoing COVID-19 pandemic and resulting macroeconomic and market turmoil created an environment that the company determined was not conducive to Xerox Holdings continuing an acquisition of HP.

Accordingly, on March 31, 2020 Xerox Holdings withdrew its tender offer to acquire HP and terminated its proxy solicitation to nominate a slate of candidates to HP’s board of directors.

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Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

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_____________

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

(1) Includes Equity in net income for FX of $ 57 and $ 132 for the three and nine months ended September 30, 2019, respectively.

Xerox 2020 Form 10-Q

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

September 30,

2020 December 31,

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

September 30,

2020 December 31,

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Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

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Accounts receivable, net were as follows:

September 30,

2020 December 31,

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Balance at June 30, 2020 $ 60

Charge-offs ( 6 )

Recoveries and other (1)

Balance at September 30, 2020 $ 63

_____________

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Consistent with our adoption of ASU 2016-13 effective January 1, 2020 (refer to Note 2 - Recent Accounting Pronouncements), the allowance for uncollectible accounts receivable is determined based on an assessment of past collection experience as well as consideration of current and future economic conditions and changes in our customer collection trends.

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

Based on that assessment, and primarily as a result of the macroeconomic and market disruption caused by COVID-19, the allowance for doubtful accounts as a percent of gross accounts receivable increased to 6.6 % at September 30, 2020 from 4.3 % at December 31, 2019.

Accounts Receivable Sales Arrangements

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Under this arrangement, we sell our entire interest in the related accounts receivable for cash and no portion of the payment is held back or deferred by the purchaser.

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

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

Accounts receivable sales activity was as follows:

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

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Finance receivables, net were as follows:

September 30,

2020 December 31,

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Consistent with our adoption of ASU 2016-13 effective January 1, 2020 (refer to Note 2 - Recent Accounting Pronouncements), the allowance for credit losses is determined principally based on an assessment of origination year and past collection experience as well as consideration of current and future economic conditions and changes in our customer collection trends.

Based on that assessment, and primarily as a result of the macroeconomic and market turmoil caused by COVID-19, the allowance for doubtful credit losses increased to 4.5 % of gross finance receivables (net of unearned income) at June 30, 2020 from 2.6 % at December 31, 2019.

In assessing the level of reserve required as of June 30,2020, we had to critically assess current and forecasted economic conditions in light of the COVID-19 pandemic crisis to ensure we objectively included those expected impacts in the determination of our reserve.

Based on that assessment, and primarily as a result of the macroeconomic and market turmoil caused by COVID-19, the allowance for doubtful credit losses increased to 4.4 % of gross finance receivables (net of unearned income) at September 30, 2020 from 2.6 % at December 31, 2019.

In assessing the level of reserve required as of September 30, 2020, we had to critically assess current and forecasted economic conditions in light of the COVID-19 pandemic to ensure we objectively included those expected impacts in the determination of our reserve.

Our assessment also included current portfolio credit metrics and the level of reserves and write-offs we recorded on our receivable’s portfolio during the credit crisis in 2008/09 as additional reference points to objectively determine the adequacy of our allowance.

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Charge-offs in the U.S.

and EMEA remained steady

and EMEA remained fairly

Xerox 2020 Form 10-Q

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

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

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

steady during the first, second and third quarters of 2020 and as compared to the prior year.

However, as reflected in our allowance for doubtful receivables, charge-offs are expected to increase over the remainder of the year and into 2021 as a result of the economic disruption related to the COVID-19 pandemic.

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

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

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

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

Provision 6 — 3 9

Charge-offs ( 6 ) ( 2 ) ( 5 ) ( 13 )

Recoveries and other (3)

Balance at September 30, 2020 $ 89 $ 15 $ 38 $ 142

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

$ 1,819 $ 284 $ 1,115 $ 3,218

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

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

Provision 6 — 2 8

Charge-offs ( 5 ) ( 1 ) ( 3 ) ( 9 )

Recoveries and other (3)

Balance at September 30, 2019 $ 55 $ 11 $ 27 $ 93

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

$ 1,900 $ 324 $ 1,157 $ 3,381

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

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

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

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

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Loss rates in this category in the normal course are generally less than 1 %.

Xerox 2020 Form 10-Q

• Average Credit Risk:

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We use numerous strategies to mitigate risk including higher rates of interest, prepayments, personal guarantees, etc.

Accounts in this category include

Xerox 2020 Form 10-Q

customers who were downgraded during the term of the lease from low and average credit risk evaluation when the lease was originated.

Accounts in this category include customers who were downgraded during the term of the lease from low and average credit risk evaluation when the lease was originated.

Accordingly, there is a distinct possibility for a loss of principal and interest or customer default.

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

June 30, 2020 December 31, 2019

September 30, 2020 December 31, 2019

2020 2019 2018 2017 2016 Prior Total

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(2) Includes developing market countries.

Xerox 2020 Form 10-Q

The aging of our receivables portfolio is based upon the number of days an invoice is past due.

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However, interest revenue for such billings is only recognized if collectability is deemed reasonably assured.

Xerox 2020 Form 10-Q

The aging of our billed finance receivables is as follows:

June 30, 2020

September 30, 2020

Current 31-90

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

Secured Borrowings and Collateral

In July 2020, we sold $ 355 of U.S.

based finance receivables to a consolidated special purpose entity (SPE), which funded the purchase through a secured loan agreement with a financial institution.

As of September 30, 2020 the SPE holds $ 314 of total Finance receivables, net, which are included in our Condensed Consolidated Balance Sheet as collateral for the secured loan agreement.

Refer to Note 13 - Debt, for additional information related to this arrangement including the related secured loan agreement.

Note 10 – Inventories and Equipment on Operating Leases, Net

The following is a summary of Inventories by major category:

September 30,

2020 December 31,

3 unchanged sentences

Total Inventories $ 978 $ 694

Xerox 2020 Form 10-Q

The transfer of equipment from our inventories to equipment subject to an operating lease is presented in our Condensed Consolidated Statements of Cash Flows in the operating activities section.

1 unchanged sentence

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

September 30,

2020 December 31,

2 unchanged sentences

Equipment on operating leases, net $ 301 $ 364

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

Xerox 2020 Form 10-Q

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

Secured Borrowings and Collateral

In July 2020, we sold the rights to payments under operating leases with an equipment net book value of $ 10 to a consolidated SPE, which funded the purchase through a secured loan agreement with a financial institution.

As of September 30, 2020 the SPE holds $ 9 of Equipment on operating leases, net, which are included in our Condensed Consolidated Balance Sheet as collateral for the secured loan agreement.

Refer to Note 13 - Debt, for additional information related to this arrangement including the related secured loan agreement.

Note 11 – Lessee

2 unchanged sentences

Additionally, we have identified embedded operating leases within certain supply chain contracts for warehouses, primarily within our domestic operations.

Our leases have remaining terms of up to ten years and a variety of renewal and/or termination options.

Our leases have remaining terms of up to twelve years and a variety of renewal and/or termination options.

The components of lease expense are as follows:

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

7 unchanged sentences

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

September 30,

2020 December 31,

3 unchanged sentences

Total Operating lease liabilities $ 350 $ 347

Xerox 2020 Form 10-Q

Supplemental information related to operating leases is as follows:

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

8 unchanged sentences

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

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

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

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

As of September 30, 2020 the remaining lease obligation for all finance leases is $ 9 , based on a weighted-average discount rate of 4.41 %.

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

Xerox 2020 Form 10-Q

Note 12 – Restructuring Programs

We engage in restructuring actions, including Project Own It, as well as other transformation efforts in order to reduce our cost structure and realign it to the changing nature of our business and to achieve operating efficiencies through a number of opportunities, including reduction of our real estate footprint.

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

During the nine months ended September 30, 2020, we recorded net restructuring and asset impairment charges of $ 47 , which included $ 57 of severance costs related to headcount reductions of approximately 1,100 employees worldwide, $ 2 of other contractual termination costs and $ 6 of asset impairment charges.

These costs were partially offset by $ 18 of net reversals, primarily resulting from changes in estimated reserves from prior period initiatives.

16 unchanged sentences

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

Provision 18 1 4 23

Reversals ( 2 ) — ( 1 ) ( 3 )

Net current period charges (1)

Charges against reserve and currency ( 8 ) ( 2 ) ( 3 ) ( 13 )

Balance at September 30, 2020 $ 52 $ 4 $ — $ 56

_____________ _

1 unchanged sentence

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

Charges for first quarter 2020 include a reclassification of $ 4 related to expected recovery from sublease.

Charges against reserve and currency for first quarter 2020 include a reclassification of $ 4 related to expected recovery from sublease.

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

The charge includes the accelerated write-off of $ 3 for leased right-of-use assets and $ 3 for owned assets upon exit from the facilities, net of any potential sublease income and other recoveries.

Xerox 2020 Form 10-Q

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

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

4 unchanged sentences

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

6 unchanged sentences

(1) Includes retention related severance and bonuses for employees expected to continue working beyond their minimum notification period before termination.

(2) Amounts reflect estimated severance and other related costs we were contractually required to pay in connection with employees transferred as part of the shared service arrangement entered into with HCL Technologies in the first quarter 2019.

(2) Amounts for nine months ended September 30, 2019 include approximately $ 38 for estimated severance and other related costs we were contractually required to pay in connection with employees transferred as part of the shared service arrangement entered into with HCL Technologies in the first quarter 2019.

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

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

Xerox 2020 Form 10-Q

The restructuring related costs reserve as of September 30, 2020 was $ 33 , which is expected to be paid over the next twelve months, as compared to $ 37 at December 31, 2019.

Note 13 – Debt

On August 6, 2020, Xerox Holdings issued $ 550 of 5.000 % Senior Notes due August 2025 (the "2025 Senior Notes") at par and $ 550 of 5.500 % Senior Notes due August 2028 (the "2028 Senior Notes") at par resulting in aggregate net proceeds (after fees and expenses) of approximately $ 1,089 .

On August 24, 2020, Xerox Holdings issued an additional $ 200 of the 2025 Senior Notes at 100.75 % of par and an additional $ 200 of the 2028 Senior Notes at 102.50 % of par resulting in additional aggregate net proceeds (after premium, fees and expenses) of approximately $ 405 for total aggregate net proceeds from both issuances of approximately $ 1,494 .

The Notes are fully and unconditionally guaranteed by Xerox Corporation.

In addition, the notes and the related guarantees were issued in a private placement only to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended, and have not been registered for sale under the Securities Act or any state securities laws.

Interest on the 2025 and 2028 Senior Notes is payable semi-annually.

Debt issuance costs of approximately $ 13 were paid and deferred in connection with the issuance of the 2025 and 2028 Senior Notes and will be amortized over the term of the Senior Notes.

The net debt proceeds were contributed by Xerox Holdings to Xerox Corporation and used to repay $ 362 aggregate principal amount of 3.500 % senior notes of Xerox Corporation and $ 376 aggregate principal amount of 2.750 % senior notes of Xerox Corporation, which were both due in third quarter 2020.

Xerox Corporation also used the balance of the net proceeds to prepay a portion of the 4.500 % senior notes due 2021 in October 2020 (Refer to Note 18 – Shareholder's Equity of Xerox for additional information regarding the contribution and Note 22 - Subsequent Event for additional information regarding this prepayment).

Credit Facility

On July 31, 2020, Xerox and Xerox Holdings entered into Amendment No.

3 to the Credit Facility, which modified the financial covenants to require that, during a specified covenant modification period (which begins on the effective date of the Amendment and ends on the earlier of (1) December 31, 2021 and (2) the date on which Xerox delivers a written notice to the Administrative Agent electing to end such period (the “Financial Covenant Modification Period”), Xerox must maintain unrestricted cash (as defined in the Amendment) in an amount not less than $ 1.0 billion.

Further, the Amendment relaxed the financial maintenance leverage covenant in the Credit Agreement by requiring that, during the Financial Covenant Modification Period, Xerox maintain a ratio of net debt

Xerox 2020 Form 10-Q

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

Secured Borrowings and Collateral

In July 2020, we entered into a secured loan agreement with a financial institution where we sold $ 355 of U.S.

based finance receivables and the rights to payments under operating leases with an equipment net book value of $ 10 to a special purpose entity (SPE).

The purchase by the SPE was funded through an amortizing secured loan to the SPE from the financial institution of $ 340 .

The sale of the receivables to the SPE was structured as a "true sale at law," and we have received an opinion to that effect from outside legal counsel.

However, the transaction was accounted for as a secured borrowing as we consolidate the SPE since we have both the power to direct the activities that most significantly impact the SPE's economic performance through our role as servicer of all the receivables held by the SPE, and the obligation through variable interests in the SPE to absorb losses or receive benefits that could potentially be significant to the SPE.

As a result, the assets of the SPE are not available to satisfy any of our other obligations.

Conversely, the credit holder of this SPE does not have legal recourse to the Company’s general credit.

The debt has a variable interest rate based on LIBOR plus a spread (current rate of 1.73 % at September 30, 2020) and an expected life of less than three years with half projected to be repaid within the first year based on collections of the underlying portfolio of receivables.

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

The proceeds from this debt funded the cash used in May 2020 to repay the $ 313 aggregate principal amount of 2.80 % Senior Notes due 2020 of Xerox Corporation.

Below are the assets and liabilities held by the consolidated SPE, which are included in our Condensed Consolidated Balance Sheet:

September 30,

Assets held by SPE

Finance receivables, net $ 132

Finance receivables due after one year, net 182

Equipment on operating leases, net 9

Total Assets $ 323

Liabilities held by SPE

Current portion of long-term debt, net (1)

Long term debt, net (2)

Total Liabilities $ 315

____________ _

(1) Amounts net of unamortized debt issuance costs of $ 1 .

(2) Amounts net of unamortized debt issuance costs of $ 1 .

Interest Expense and Income

1 unchanged sentence

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

6 unchanged sentences

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

Xerox 2020 Form 10-Q

Note 14 – Financial Instruments

6 unchanged sentences

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

No ineffective portion was recorded to earnings for the six months ended June 30, 2020 prior to termination.

No ineffective portion was recorded to earnings for the nine months ended September 30, 2020 prior to termination.

The corresponding net fair value adjustment to the hedged debt of $( 4 ) will be amortized to interest expense over the remaining term of the related notes.

4 unchanged sentences

• Foreign currency-denominated assets and liabilities

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

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

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

At September 30, 2020 and December 31, 2019, we had outstanding forward exchange and purchased option contracts with gross notional values of $ 958 and $ 1,091 respectively, with terms of less than 12 months.

Approximately 80 % of the contracts at September 30, 2020 mature within three months, 9 % mature in three to six months and 11 % in six to twelve months.

The associated currency exposures being hedged at September 30, 2020 were lower by 12 % as compared to our year-end currency exposures.

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

1 unchanged sentence

We designate a portion of our foreign currency derivative contracts as cash flow hedges of our foreign currency-denominated inventory purchases, sales and expenses.

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

Xerox 2020 Form 10-Q

The net asset (liability) fair value of these contracts were $ 1 and $( 4 ) as of September 30, 2020 and December 31, 2019, respectively.

Summary of Derivative Instruments Fair Value

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

Designation of Derivatives Balance Sheet Location June 30,

Designation of Derivatives Balance Sheet Location September 30,

2020 December 31,

11 unchanged sentences

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

Xerox 2020 Form 10-Q

Summary of Derivative Instruments Gains (Losses)

4 unchanged sentences

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

Gain (Loss) on Derivative Instruments 2020 2019 2020 2019

Fair Value Hedges - Interest Rate Contracts

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

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

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

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

Cash Flow Hedges - Foreign Exchange Forward Contracts and Options

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

Derivative gain recognized in OCI (effective portion) $ 1 $ 4 $ 5 $ 10

Derivative gain reclassified from AOCL to income - Cost of sales (effective portion) — 3 1 6

During the three and six months ended June 30, 2020 and 2019, no amount of ineffectiveness was recorded in the Condensed Consolidated Statements of Income for these designated cash flow hedges and all components of each derivative’s gain or (loss) were included in the assessment of hedge effectiveness.

During the three and nine months ended September 30, 2020 and 2019, no amount of ineffectiveness was recorded in the Condensed Consolidated Statements of Income for these designated cash flow hedges and all components of each derivative’s gain or (loss) were included in the assessment of hedge effectiveness.

In addition, no amount was recorded for an underlying exposure that did not occur or was not expected to occur.

As of June 30, 2020, a net after-tax gain of $ 1 was recorded in Accumulated other comprehensive loss associated with our cash flow hedging activity.

As of September 30, 2020, a net after-tax gain of $ 2 was recorded in Accumulated other comprehensive loss associated with our cash flow hedging activity.

The entire balance is expected to be reclassified into net income within the next 12 months, providing an offsetting economic impact against the underlying anticipated transactions.

4 unchanged sentences

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

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

Foreign exchange contracts – forwards Other expense – Currency gain, net $ 2 $ 2 $ 19 $ 3

Xerox 2020 Form 10-Q

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

For the three and nine months ended September 30, 2020 currency losses, net were $ 0 and $ 4 , respectively, and for the three and nine months ended September 30, 2019 were $ 4 and $ 6 , respectively.

Net currency gains and losses include the mark-to-market adjustments of the derivatives not designated as hedging instruments and the related cost of those derivatives as well as the remeasurement of foreign currency-denominated assets and liabilities and are included in Other expenses, net.

Xerox 2020 Form 10-Q

Note 15 – Fair Value of Financial Assets and Liabilities

1 unchanged sentence

The basis for the measurement at fair value in all cases is Level 2 – Significant Other Observable Inputs.

September 30,

2020 December 31,

12 unchanged sentences

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

June 30, 2020 December 31, 2019

September 30, 2020 December 31, 2019

Cash and cash equivalents $ 3,242 $ 3,242 $ 2,740 $ 2,740

8 unchanged sentences

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

Three Months Ended June 30,

Three Months Ended September 30,

Pension Benefits

13 unchanged sentences

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

Net actuarial (gain) loss (1)

Net actuarial loss (gain) (1)

77 135 — — — ( 9 )

3 unchanged sentences

61 110 ( 14 ) ( 10 ) 19 11

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

Six Months Ended June 30,

Total Recognized in Net Periodic Benefit Cost (Credit) and Other Comprehensive Income (Loss) $ 61 $ 141 $ ( 9 ) $ ( 9 ) $ 3 $ ( 6 )

Nine Months Ended September 30,

Pension Benefits

11 unchanged sentences

Defined benefit plans 48 101 ( 2 ) ( 12 ) ( 48 ) ( 48 )

Defined contribution plans (1)

11 13 10 12 n/a n/a

Defined contribution plans 1 19 16 17 n/a n/a

Net Periodic Benefit Cost (Credit) 49 120 14 5 ( 48 ) ( 48 )

16 unchanged sentences

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

Six Months Ended June 30, Year Ended December 31,

Nine Months Ended

September 30, Year Ended December 31,

2020 2019 Estimated 2020 2019

5 unchanged sentences

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

Defined Contribution Plans

In the third quarter 2020, the Company temporarily suspended and will not make its full year 2020 employer match/contribution for its U.S.

based 401(k) saving plans for salaried employees.

The suspension is expected to result in savings of approximately $ 25 for the year ending December 31, 2020.

Xerox 2020 Form 10-Q

Note 17 – Shareholders’ Equity of Xerox Holdings

2 unchanged sentences

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

Xerox Holdings Shareholders’ Equity Non-controlling Interests Total Equity

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

Xerox Holdings Shareholders’ Equity Non-controlling Interests Total

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

Comprehensive income, net — — — 90 88 178 — 178

4 unchanged sentences

Stock option and incentive plans, net 1 ( 3 ) — — — ( 2 ) — ( 2 )

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

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

Payments to acquire treasury stock, including fees — — ( 150 ) — — ( 150 ) — ( 150 )

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

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

Xerox Holdings Shareholders’ Equity Non- controlling Interests Total Equity

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

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

Xerox Holdings Shareholders’ Equity Non- controlling Interests Total

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

Comprehensive income (loss), net — — — 221 ( 203 ) 18 2 20

Cash dividends declared - common (2)

6 unchanged sentences

Distributions to noncontrolling interests — — — — — — ( 1 ) ( 1 )

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

Xerox 2020 Form 10-Q

Balance at September 30, 2019 $ 221 $ 3,000 $ ( 68 ) $ 5,552 $ ( 3,850 ) $ 4,855 $ 31 $ 4,886

Treasury Stock Retained

3 unchanged sentences

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

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

Comprehensive income, net — — — 115 53 168 — 168

Cash dividends declared - common (2)

3 unchanged sentences

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

Payments to acquire treasury stock, including fees — — ( 150 ) — — ( 150 ) — ( 150 )

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

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

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

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

Xerox 2020 Form 10-Q

Treasury Stock Retained

3 unchanged sentences

Cumulative effect of change in accounting principle — — — 127 ( 127 ) — — —

Comprehensive income, net — — — 314 45 359 6 365

Comprehensive income (loss), net — — — 535 ( 158 ) 377 8 385

Cash dividends declared - common (2)

6 unchanged sentences

Distributions to noncontrolling interests — — — — — — ( 11 ) ( 11 )

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

Balance at September 30, 2019 $ 221 $ 3,000 $ ( 68 ) $ 5,552 $ ( 3,850 ) $ 4,855 $ 31 $ 4,886

_____________

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

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

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

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

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

Treasury Stock

4 unchanged sentences

Cancellations ( 2,031 ) ( 76 )

Balance at June 30, 2020 — $ —

Balance at September 30, 2020 8,007 $ 150

_____________

(1) Includes associated fees.

Xerox 2020 Form 10-Q

Note 18 – Shareholders' Equity of Xerox

1 unchanged sentence

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

Xerox Shareholders’ Equity Non-controlling Interests Total Equity

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

Xerox Shareholder's Equity Non-controlling Interests Total

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

Comprehensive income, net — — — 101 88 189 — 189

Dividends declared to parent — — — ( 55 ) — ( 55 ) — ( 55 )

Transfers from parent — 11 — — — 11 — 11

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

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

Capital contributions from parent (2)

— 1,494 — — — 1,494 — 1,494

Transfers to parent — ( 150 ) — — — ( 150 ) — ( 150 )

Balance at September 30, 2020 $ — $ 4,859 $ — $ 5,971 $ ( 3,593 ) $ 7,237 $ 4 $ 7,241

Xerox 2020 Form 10-Q

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

Xerox Shareholders’ Equity Non- controlling Interests Total Equity

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

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

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

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

Xerox Shareholders’ Equity Non- controlling Interests Total

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

Comprehensive income (loss), net — — — 221 ( 203 ) 18 2 20

Dividends declared to parent — — — ( 58 ) ( 58 ) — ( 58 )

Stock option and incentive plans, net — ( 2 ) — — — ( 2 ) — ( 2 )

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

Cancellation of treasury stock ( 4 ) ( 127 ) 131 — — — — —

Distributions to noncontrolling interests — — — — — — ( 1 ) ( 1 )

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

Reorganization ( 221 ) 446 — — — 225 — 225

Balance at September 30, 2019 $ — $ 3,441 $ — $ 5,554 $ ( 3,850 ) $ 5,145 $ 31 $ 5,176

Treasury Stock Retained

Shareholders’

Non-controlling

Shareholder's

Equity Non-controlling

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

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

Comprehensive income, net — — — 126 53 179 — 179

Dividends declared to parent — — — ( 402 ) — ( 402 ) — ( 402 )

Capital contributions from parent (2)

— 1,494 — — 1,494 — 1,494

Transfers from parent — 99 — — — 99 — 99

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

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

Balance at September 30, 2020 $ — $ 4,859 $ — $ 5,971 $ ( 3,593 ) $ 7,237 $ 4 $ 7,241

Treasury Stock Retained

2 unchanged sentences

Cumulative effect of change in accounting principle — — — 127 ( 127 ) — — —

Comprehensive income, net — — — 314 45 359 6 365

Comprehensive income (loss), net — — — 535 ( 158 ) 377 8 385

Cash dividends declared - common — — — ( 115 ) — ( 115 ) — ( 115 )

Cash dividends declared - preferred — — — ( 7 ) — ( 7 ) — ( 7 )

Dividends declared to parent — — — ( 58 ) — ( 58 ) — ( 58 )

Stock option and incentive plans, net — 18 — — — 18 — 18

2 unchanged sentences

Distributions to noncontrolling interests — — — — — — ( 11 ) ( 11 )

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

Reorganization ( 221 ) 446 — — — 225 — 225

Balance at September 30, 2019 $ — $ 3,441 $ — $ 5,554 $ ( 3,850 ) $ 5,145 $ 31 $ 5,176

_____________

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

(2) Primarily represents the contribution of aggregate net debt proceeds received from Senior Note offerings in the third quarter 2020 from Xerox Holdings to Xerox Corporation.

Refer to Note 13 - Debt for additional information regarding the Senior Note offerings.

Xerox 2020 Form 10-Q

2 unchanged sentences

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

1 unchanged sentence

Translation adjustments gains (losses) $ 176 $ 179 $ ( 153 ) $ ( 155 ) $ ( 2 ) $ 7 $ ( 121 ) $ ( 122 )

Unrealized (losses) gains

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

Unrealized gains (losses)

Changes in fair value of cash flow hedges gains 1 1 4 4 5 4 10 8

Changes in cash flow hedges reclassed to earnings (1)

— — ( 3 ) ( 3 ) ( 1 ) — ( 6 ) ( 5 )

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

Defined benefit plans gains (losses)

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

Net Unrealized gains 1 1 1 1 4 4 4 3

Defined benefit plans (losses) gains

Net actuarial/prior service (losses) gains ( 77 ) ( 58 ) ( 126 ) ( 95 ) 9 6 ( 162 ) ( 122 )

Prior service amortization (2)

6 unchanged sentences

( 42 ) ( 42 ) 38 38 1 1 36 36

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

Changes in defined benefit plans (losses) gains ( 108 ) ( 92 ) ( 76 ) ( 48 ) 55 42 ( 63 ) ( 38 )

Other Comprehensive Income (Loss) 69 88 ( 228 ) ( 202 ) 57 53 ( 180 ) ( 157 )

Other comprehensive income attributable to noncontrolling interests — — 1 1 — — 1 1

Other Comprehensive Income (Loss) Attributable to Xerox Holdings/Xerox $ 69 $ 88 $ ( 229 ) $ ( 203 ) $ 57 $ 53 $ ( 181 ) $ ( 158 )

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AOCL is comprised of the following:

September 30,

2020 December 31,

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Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

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Below is a summary of our Brazilian tax contingencies:

September 30,

2020 December 31,

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We are also involved in certain disputes with contract and former employees.

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

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

We routinely assess all these matters as to the probability of ultimately incurring a liability against our Brazilian operations and record our best estimate of the ultimate loss in situations where we assess the likelihood of an ultimate loss as probable.

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and Deason v.

Xerox Corporation, et al., against the same defendants as well as, in the first Deason action, former Xerox Chief Executive Officer Ursula M.

Xerox Corporation, et al.

, against the same defendants as well as, in the first Deason action, former Xerox Chief Executive Officer Ursula M.

Burns (the "Fuji Transaction Shareholder Lawsuits").

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

Discovery has commenced.

On August 7, 2020, Xerox, the director defendants, and the Icahn defendants filed separate motions to dismiss.

On October 1, 2020, plaintiff filed a cross-motion seeking, among other relief, joinder of Xerox Holdings Corporation as a nominal defendant.

Briefing on the motions to dismiss and plaintiff’s cross-motion was completed on October 16, 2020.

Xerox will vigorously defend against this matter.

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Should developments cause a change in our determination as to an unfavorable outcome, or result in a final adverse judgment or settlement, there could be a material adverse effect on our results of operations, cash flows and financial position in the period in which such change in determination, judgment, or settlement occurs.

Xerox 2020 Form 10-Q

Miami Firefighters’ Relief & Pension Fund v.

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On December 13, 2019, alleged shareholder Miami Firefighters’ Relief & Pension Fund (“Miami Firefighters”) filed a purported derivative complaint in New York State Supreme Court, New York County on behalf of Xerox Holdings Corporation ("Xerox Holdings") (as nominal defendant) against Carl Icahn and his affiliated entities High River Limited Partnership and Icahn Capital LP (the "Icahn defendants"), Xerox Holdings, and all current Xerox Holdings directors (the "Directors").

Plaintiff made no demand on the Board before bringing the action, but instead alleges that doing so would be futile because the Directors lack independence due to alleged direct or indirect relationships

Xerox 2020 Form 10-Q

Among other things, the complaint alleges that Icahn controls and dominates Xerox Holdings and therefore owes a fiduciary duty of loyalty to Xerox Holdings, which he breached by acquiring HP stock at a time when he knew that Xerox Holdings was considering an offer to acquire HP or had knowledge of the "obvious merits" of such potential acquisition, and that the Icahn defendants’ holdings of HP common stock have risen in market value by approximately $ 128 since disclosure of the offer.

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On January 21, 2020, plaintiff filed a motion seeking to intervene in Ribbe v.

Jacobson , et al., described above, and to have stayed, or alternatively, severed and consolidated with this action, any claims first filed in this action and later asserted by Ribbe.

Jacobson, et al.

, described above, and to have stayed, or alternatively, severed and consolidated with this action, any claims first filed in this action and later asserted by Ribbe.

At a conference held on February 25, 2020, the Court denied the motion to intervene without prejudice.

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

Discovery has commenced.

On August 10, 2020, the Xerox defendants and the Icahn defendants filed separate motions to dismiss.

Briefing on the motions was completed on October 21, 2020.

Xerox Holdings will vigorously defend against this matter.

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We have issued or provided approximately $ 290 of guarantees as of June 30, 2020 in the form of letters of credit or surety bonds issued to i) support certain insurance programs;

We have issued or provided approximately $ 273 of guarantees as of September 30, 2020 in the form of letters of credit or surety bonds issued to i) support certain insurance programs;

ii) support our obligations related to the Brazil contingencies;

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Note 22 – Subsequent Event

Secured Borrowings and Collateral

In July 2020, we entered into a secured loan agreement with a financial institution where we sold $ 355 of U.S.

based finance receivables and the rights to payments under operating leases with an equipment net book value of $ 10 to a special purpose entity (SPE).

The purchase by the SPE was funded through an amortizing secured loan to the SPE from the financial institution of $ 340 .

The sale of the receivables to the SPE was structured as a "true sale at law," and we have received an opinion to that effect from outside legal counsel.

As a result, the assets of the SPE are not available to satisfy any of our other obligations.

Conversely, the credit holder of this SPE does not have legal recourse to the Company’s general credit.

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

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

In October 2020, we completed the early redemption of $ 750 of the $ 1,062 of 4.50 % Senior Notes due May 2021, for $ 769 in cash consideration, which included a redemption premium of $ 19 .

The early redemption resulted in a net loss $ 18 (which included the write-off of debt carrying value adjustments) that was recorded in the fourth quarter 2020.

After completion of the early redemption, approximately $ 312 of the 4.50 % Senior Notes due May 2021 remain outstanding.

Xerox 2020 Form 10-Q

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

What changed 10-Q

Item 1. Financial Statements