What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-04 compared with 2020-07-30 · 336 added, 304 removed, 481 unchanged (57% of the section changed)

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Impact of COVID-19 on Our Business Operations

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 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.

In response to the COVID-19 pandemic, we have prioritized the health and safety of our employees, customers and partners to support their needs in the current hybrid environment so work can be done flawlessly migrating between the workplace and the home-office.

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

As a result, we are not providing specific financial guidance at this time.

During the third quarter, corresponding with business reopenings, the rate of decline of equipment installations (including in areas of our business that support our hybrid workplace initiatives) improved, as did printed-page volumes.

These operational improvements resulted in a moderation of our rate of revenue decline during the third quarter as compared to the second quarter, which gives us confidence in the resilience and readiness of our business to recover as progress is made to control the pandemic and as businesses and economies reopen.

We have modeled the impacts on our business of numerous recovery scenarios and expect to deliver positive earnings and operating cash flows from continuing operations, after capital expenditures, in the fourth quarter.

However, the ongoing resurgence of the virus around the globe, and the impact it is having in forcing new restrictions and lockdowns, leads us to anticipate that our revenues will continue to decline significantly as compared to the prior year, as businesses hold off or delay purchases until there is a more certain path to controlling the pandemic and to economic recovery.

During the current year, the most significant impact from the pandemic has been on sales of our equipment and unbundled supplies.

However, due to their transactional nature, these revenues experienced the largest recovery during the third quarter and we expect that they will continue to fluctuate and gradually improve concurrent with business reopenings.

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

The variable charges are impacted by our customers' employees not being in the office using our equipment due to lock-downs or capacity restrictions in office buildings.

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

We have a strong balance sheet and sufficient liquidity, including access to our undrawn $1.8 billion revolver.

We further strengthened our liquidity by refinancing our 2020 debt maturities in the third quarter 2020 and early-redeeming a portion of our 2021 debt maturities in October with the proceeds from the issuance of new senior unsecured notes and from a finance receivables securitization.

With our Project Own It transformation and cost

Xerox 2020 Form 10-Q

savings, we built a more flexible cost structure, and have also focused our efforts on incremental actions to prioritize and preserve cash as we manage through the pandemic.

These actions include the use of available temporary government assistance measures and furlough programs, and the reduction of discretionary spend such as near-term targeted marketing programs, the use of contract employees, and the temporary suspension of 401(k) matching contributions, as well as lower compensation incentives consistent with lower sales and operating results.

Government Assistance and Furlough Programs

In response to the COVID-19 pandemic 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.

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

On March 27, 2020, in response to the COVID-19 pandemic, the U.S.

government enacted the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act").

In addition to including temporary changes to income and non-income-based tax laws, the CARES Act also provides refundable employee retention credits and defers the requirement to remit the employer-paid portion of social security payroll taxes.

In addition to including temporary changes to income and non-income-based tax laws, the CARES Act provides refundable employee retention credits and defers the requirement to remit the employer-paid portion of social security payroll taxes.

Similar pay protection programs were enacted in Canada and Europe that primarily provide direct grants to companies to cover the salary and wages of employees (retained or temporarily furloughed).

During 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;

During the three and nine months ended September 30, 2020, we recognized savings of approximately $35 million and $95 million, respectively, from these temporary measures in the U.S., Canada and Europe, including $28 million and $81 million, respectively, from various government assistance programs and $7 million and $14 million, respectively, from furlough programs.

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

There were no material impacts to our income tax expense in the second or third quarters of 2020 as a result of the temporary changes included in the CARES Act and we expect to defer payment of the employer-paid portion of social security payroll taxes through the end of calendar year 2020;

however, this deferral will be reduced by employee retention credits as earned during 2020.

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

Savings were recorded as follows in the Condensed Consolidated Statements of Income:

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

Cost of sales $ 1 $ 1

Cost of services, maintenance and rentals 25 65

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Total Estimated savings $ 35 $ 95

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.

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

Third Quarter 2020 Review

Total revenue of $1.77 billion for third quarter 2020 declined 18.9% from third quarter 2019, including a 0.8-percentage point favorable impact from currency.

The decrease in revenue reflected a decrease of 20.0% in Post sale revenue, including a 0.7-percentage point favorable impact from currency and a decrease of 15.2% in Equipment sales revenue, including a 0.9-percentage point favorable impact from currency.

Total revenue of $5.09 billion for the nine months ended September 30, 2020 declined 23.1% as compared to the prior year period, including a 0.3-percentage point unfavorable impact from currency.

The decrease in revenue reflected a decrease of 22.0% in Post sale revenue, including a 0.3-percentage point unfavorable impact from currency, and a decrease of 27.1% in Equipment sales revenue, with no impact from currency.

The COVID-19 pandemic significantly impacted our third quarter 2020 and year to date revenues due to business closures and office building capacity restrictions that impacted our customers' purchasing decisions, and caused lower printing volumes on our devices.

The biggest impact from the pandemic occurred in the second quarter 2020, while, the rate of decline of our revenues improved sequentially in third quarter 2020, as more businesses reopened and more employees returned to the workplace.

Geographically, revenue declines were similar in both of our go-to-market regions for the year.

The improvements in third quarter 2020 revenues grew the most sequentially, from second quarter 2020, in our EMEA Operations, primarily as a result of wider reopenings of workplaces and economies over the summer in the region, and higher installation of devices associated with our hybrid workplace promotions.

EMEA revenues were also more favorably impacted by recent acquisitions in the region.

The decrease of revenues in third quarter 2020 from our Americas Organization also improved sequentially as a result of business reopenings, primarily in our SMB and indirect channels, while the sequential recovery of Large Enterprise revenues in the region was smaller due to the more restricted reopening of large office buildings, as well as a larger mix of bundled contracts with fixed minimums.

Our North American operations include a larger mix of government, education, healthcare and other large customers that have been less affected by business closures than our SMB customers.

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

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

Three Months Ended September 30, Nine Months Ended September 30,

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

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105 184 (79) 191 528 (337)

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.

Third quarter 2020 Net income attributable to Xerox Holdings 1 decreased $67 million as compared to third quarter 2019 reflecting the impact from lower revenues primarily associated with the COVID-19 pandemic that were only partially offset by lower costs and expenses including lower Income tax expense as well as lower Transaction and related costs, net and Other expenses, net.

Third quarter 2020 A djusted 2 net income attributable to Xerox Holdings decreased $79 million as compared to third quarter 2019, reflecting lower revenues, which were only partially offset by lower costs and expenses and lower Income tax expense.

Net income attributable to Xerox Holdings 1 for the nine months ended September 30, 2020 decreased $267 million as compared to the prior year period reflecting the impact from lower revenues, primarily associated with the COVID-19 pandemic, and higher Transaction and related costs, net, that were only partially offset by lower costs and expenses, including lower Income tax expense as well as lower Restructuring and related costs and Other expenses, net.

In addition, Net income attributable to Xerox Holdings 1 for the nine months ended September 30, 2020 includes the first quarter 2020 impact of a $61 million increase in our bad debt provision reflecting the expected impact from the COVID-19 pandemic on our receivable portfolio.

A djusted 2 net income attributable to Xerox Holdings for the nine months ended September 30, 2020 decreased $337 million as compared to the prior year period primarily reflecting lower revenues, which were only partially offset by lower costs and expenses including lower Income tax expense, partially offset by the increased bad debt provision.

Net income attributable to Xerox Holdings 1 for the three and nine months ended September 30, 2020 were both positively impacted by savings of approximately $35 million and $95 million, respectively, from 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.

Xerox 2020 Form 10-Q

Cash flows provided by operating activities of continuing operations for the nine months ended September 30, 2020 were $313 million, as compared to $846 million in the prior year period primarily reflecting lower net income, as result of the COVID-19 pandemic, as well as increased use of working capital, net 3, partially offset by decreases in finance assets and lower payments for taxes due to lower pre-tax income.

Cash used in investing activities for the nine months ended September 30, 2020 was $223 million including capital expenditures of $60 million and acquisitions of $193 million.

Cash provided by financing activities for the nine months ended September 30, 2020 was $424 million reflecting proceeds of $1,507 million from the issuance of Senior Notes and $340 million from a secured financing arrangement, partially offset by payments of $1,051 million on Senior Notes, $150 million on repurchases of our Common Stock and dividend payments of $176 million.

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

At this time, we remain committed to delivering positive earnings and operating cash flows from continuing operations, after capital expenditures, in the fourth quarter.

We also remain committed to paying our current dividend on common shares and returning at least 50% of operating cash flows from continuing operations, after capital expenditures, to shareholders.

We expect to complete at least $150 million in share repurchases during the remainder of 2020.

____________________________

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(3) Working capital, net reflects Accounts receivable, net, Inventories and Accounts payable.

Xerox 2020 Form 10-Q

Critical Accounting Policies and Estimates

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Actual results could differ from those estimates.

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

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

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

The following is a discussion of several key estimates with respect to revenue recognition, allowance for doubtful accounts and credit losses, income taxes and goodwill.

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

Revenue Recognition

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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 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.

However, the impacts from the COVID-19 economic disruption that began in March 2020, as well as the related shutdowns of some of our customers, required us to further review our estimation process for the variable component to ensure we properly and objectively captured the impacts of the decline in volumes and not solely rely on historical usage data.

We will continue to assess the usage data of our customers to ensure we properly adjust historical averages and recognize revenue consistent with those revised usage patterns and ultimately what is invoiced to the customer.

Allowance for Doubtful Accounts and Credit Losses

As disclosed in Notes 8 – Accounts Receivable, Net and Note 9 - Finance Receivables, Net, in the Condensed Consolidated Financial Statements consistent with our adoption of ASU 2016-13 effective January 1, 2020 (refer to Note 2 - Recent Accounting Pronouncements in the Condensed Consolidated Financial Statements), the allowance 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.

Xerox 2020 Form 10-Q

for doubtful accounts and credit losses is based on an assessment of past collection experience as well as consideration of current and future economic conditions and changes in our customer collection trends.

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

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

Refer also to the Selling, Administrative and General Expenses (SAG) section for additional discussion regarding the incremental bad debt provision recorded in the first quarter 2020 primarily related to the economic impact of the COVID-19 pandemic 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.

Xerox 2020 Form 10-Q

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.

Similar to other estimates during 2020, we needed to determine if any change in valuation allowances was required based on the rapid change in the economic environment and the expected changes in our financial projections for 2020 resulting from the impacts of the COVID-19 pandemic.

Our effective tax rate for the nine months ended September 30, 2020 included an approximate 5-percentage point impact for additional valuation allowances, which were primarily the result of the negative impacts of the COVID-19 pandemic.

We expect to continue to review projections and their potential impact on our assessment regarding the recoverability of our deferred tax asset balances in the fourth quarter 2020 and new or additions to existing valuation allowances may be required.

We perform our annual Goodwill impairment testing in the fourth quarter of each year.

During the fourth quarter 2019 impairment testing, our estimated fair value of the Company was significantly in excess of our net book value.

However, in the second quarter 2020, as a result of the continued negative financial impacts from the COVID-19 pandemic 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.

However, in the second quarter 2020, as a result of the continued negative financial impacts from the COVID-19 pandemic on our current and near-term future operations, the expected slower recovery during the latter half of 2020 as businesses return to their respective offices, as well as a sustained market capitalization below our book value, we determined there was a triggering event requiring an interim quantitative evaluation of Goodwill.

In prior years' quantitative tests we estimated the fair value of the entity by weighting the results of the income approach (discounted cash flow methodology) and market approach.

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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 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.

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

Xerox 2020 Form 10-Q

level of cash flows.

Lastly, although our estimates of the fair value of the entity were in excess of our market capitalization, we believe the implied premiums that would be indicated at net book value or at our estimated fair values are reasonable.

In performing its assessment, the Company believes it has made reasonable estimates based on the facts and circumstances that were available as of the 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.

In performing its assessment, the Company believes it has made reasonable estimates based on the facts and circumstances that were available as of the second quarter reporting date in light of the developing situation resulting from the COVID-19 pandemic.

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

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

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

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

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

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

As part of that quantitative assessment, we expect to monitor developments regarding the COVID-19 pandemic, including its impact to our forecasted revenues, expenses and cash flow, as well as our market capitalization.

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

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Three Months Ended

June 30, Six Months Ended

June 30, % of Total Revenue

September 30, Nine Months Ended

September 30, % of Total Revenue

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

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

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:

Total revenue for the three months ended September 30, 2020 decreased 18.9% as compared to the third quarter 2019, including a 0.8-percentage point favorable impact from currency and an approximate 1.4-percentage point favorable impact from recent partner dealer acquisitions, while total revenue for the nine months ended September 30, 2020 decreased 23.1% as compared to the prior year period, including a 0.3-percentage point unfavorable impact from currency and an approximate 1.1-percentage point favorable impact from recent partner dealer acquisitions.

The COVID-19 pandemic significantly impacted our revenue during 2020 due to business closures and office building capacity restrictions that impacted our customers' purchasing decisions and caused lower printing volumes on our devices.

However, the rate of our revenue decline improved sequentially from second quarter, as more businesses slowly reopened and more employees returned to the workplace.

Geographically, revenue declines were similar in both of our go-to-market regions for the nine months ended September 30, 2020, while revenue growth in third quarter 2020 from our EMEA Operations improved the most sequentially, primarily as a result of wider reopenings of workplaces and economies over the summer in the region, and higher installation of devices associated with our hybrid workplace promotions.

EMEA revenues were also more favorably impacted by recent acquisitions in the region.

Our North American operations include a larger mix of government, education, healthcare and other large customers that have been less affected by business closures than our SMB customers.

Our Latin American Operations had the largest revenue declines, consistent with the extensive lockdowns and the economic crisis throughout the region.

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

Xerox 2020 Form 10-Q

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 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

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:

For the three months ended September 30, 2020 Post sale revenue decreased 20.0% as compared to the third quarter 2019, including a 0.7-percentage point favorable impact from currency, while Post Sale revenue decreased 22.0% for the nine months ended September 30, 2020, including a 0.3-percentage point unfavorable impact from currency.

The COVID-19 pandemic significantly impacted our Post sale revenue since March 2020, however, its impact on our Post sale revenue slightly moderated later in the second quarter and continued to moderate during the third quarter, as business reopenings in certain geographical areas in the U.S.

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

The decline in Post sale revenue reflected the following:

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

◦ For the three months ended 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.

◦ For the three months ended September 30, 2020, these revenues decreased 20.5% as compared to the third quarter 2019, including a 0.8-percentage point favorable impact from currency.

The decline at constant 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.

The rate of decline of these revenues moderated during the quarter compared to the prior quarter as businesses reopened in certain geographical areas in the U.S.

◦ For the nine months ended September 30, 2020, these revenues decreased 21.4% as compared to the prior year period, including a 0.2-percentage point unfavorable impact from currency.

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.

The rate of decline of these revenues began to slightly moderate late in the first half of 2020, and continued to moderate during the third quarter 2020, as businesses started to reopen in certain geographical areas in the U.S.

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

◦ 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.

◦ For the three months ended September 30, 2020, these revenues decreased 20.0% as compared to third quarter 2019, including a 0.2-percentage point favorable impact from currency and reflected lower supplies revenues associated with lower page volume trends, slightly offset by higher IT revenues from our XBS channel and from recently acquired IT dealers outside of the U.S.

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

We expect that such resellers will maintain low purchase levels and lower inventories until there is a stable recovery in sales activity.

◦ For the nine months ended September 30, 2020, these revenues decreased 27.8% as compared to the prior year period, including a 0.7-percentage point unfavorable impact from currency and reflected lower supplies revenues associated with lower page volume trends, slightly offset by higher IT revenues from our XBS channel and from recently acquired IT dealers outside of the U.S.

We expect that such resellers will maintain low purchase levels and lower inventories until there is a stable recovery in sales activity.

Xerox 2020 Form 10-Q

• Financing revenue is generated from financed equipment sale transactions.

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.

For the three months ended September 30, 2020, these revenues declined 8.3% as compared to third quarter 2019, including a 0.5-percentage point favorable impact from currency, while Financing revenue for the nine months ended September 30, 2020 decreased 7.6%, including a 0.3-percentage point unfavorable impact from currency and reflected a continued decline in the finance receivables balance due to lower equipment sales in prior periods.

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

Xerox 2020 Form 10-Q

Equipment sales revenue

Three Months Ended June 30, Six Months Ended

June 30, % of Equipment Sales

Three Months Ended September 30, Nine Months Ended

September 30, % of Equipment Sales

(in millions) 2020 2019 %

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

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.

Equipment sales revenue decreased 15.2% for the three months ended September 30, 2020 as compared to third quarter 2019, including a 0.9-percentage point favorable impact from currency as well as the impact of price declines of approximately 5%, while for the nine months ended September 30, 2020, Equipment sales revenue decreased 27.1%, as compared to the prior year period, with no impact from currency, as well as the impact of price declines of approximately 5%.

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

The pandemic affected our operations in March 2020 and throughout the second quarter 2020, however, as businesses reopened in certain geographical areas of the U.S.

and EMEA the impact of the pandemic on our equipment sales lessened compared to its impact in the first half of 2020, resulting in sequential improvement in third quarter 2020 in the rate of decline.

The decline at constant currency 1 reflected the following:

• 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

• Entry - The increase for the three months ended September 30, 2020, as compared to third quarter 2019, was due to higher installs of lower-end printers and MFPs (primarily black and white devices) in EMEA and through our indirect channels in the U.S., in part associated with hybrid workplace promotions.

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

affected primarily by the COVID-19 pandemic and partially offset by higher installs of black and white devices in EMEA as well as the benefit of large order deals from Eurasia.

• Mid-range - The decrease for the three months ended September 30, 2020, as compared to third quarter 2019, was driven primarily by the COVID-19 pandemic and related office closures, which impacted sales of this group of products more due to their prevalence in office-team settings.

Higher sales to our government and education sector customers in North America, as well as strong demand for our recently launched PrimeLink devices and our new generation of ConnectKey devices, provided a partial offset.

The decrease for the nine months ended September 30, 2020, as compared to the prior year period, was primarily driven by the COVID-19 pandemic and related office closures, which has more significantly impacted our sales through indirect channels in the U.S.

and Europe, as resellers in response to lower demand caused by the pandemic, have reduced their inventory purchases to manage liquidity, partially offset by strong demand for our recently launched PrimeLink devices and our new generation of ConnectKey devices.

• High-end - The decrease for the three months ended September 30, 2020, as compared to third quarter 2019, primarily reflected lower installs of our Versant entry-production color, Iridesse and iGen production presses, partially offset by higher installs of our cut-sheet inkjet systems.

The decrease in our equipment sales revenue from production color systems was partially impacted by the COVID-19 pandemic, particularly affecting installs of our Versant and Iridesse systems due to their higher mix to the SMB segment where production printing applications depend on business reopening activity.

The decrease for the nine months ended September 30, 2020, as compared to the prior year period, primarily reflected lower installs of our Versant entry-production color and iGen production presses, as well as lower installs of our Iridesse production presses in EMEA, which were partially offset by demand for our recently launched Baltoro Inkjet press.

The decrease in our equipment sales revenue from production color systems was partially impacted by the COVID-19 pandemic, primarily in

Xerox 2020 Form 10-Q

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

our European operations, where the distribution of our Iridesse systems through indirect channels was affected by furlough adoptions and lower inventory purchases as dealers managed their liquidity.

Total Installs

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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:

Installs for the third quarter 2019:

• 9% decrease in color multifunction devices reflecting lower installs of ConnectKey devices through our indirect channels in the U.S.

• 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.

• 52% increase in black-and-white multifunction devices reflecting higher activity primarily from indirect channels in the U.S.

and developing regions in EMEA.

The increase is primarily driven by higher sales of low-end devices associated with large order deals from Eurasia and hybrid workplace promotions.

Mid-Range (1)

• 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:

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

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

• 38% decrease in high-end color installs reflecting primarily lower installs of our lower-end Versant devices and of our Iridesse and iGen production systems, partially offset by higher installs of our Baltoro cut-sheet inkjet systems.

• 13% decrease in high-end black-and-white systems reflecting lower installs of our Nuvera devices along with market trends.

Installs for the nine months ended September 30, 2020:

• 21% 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.

• 15% increase in black-and-white multifunction devices reflecting higher activity primarily from sales in the lower end of the portfolio through indirect channels in our developing regions in EMEA, partially offset by lower installs through our indirect channels in Latin America and the U.S.

Mid-Range (1)

• 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.

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

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

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

• 16% decrease in high-end black-and-white systems reflecting lower installs of our Nuvera devices along with market trends.

_____________

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

including Fuji Xerox digital front-end sales for the three and 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.

including Fuji Xerox digital front-end sales for the three and nine months ended September 30, 2020 Mid-range color devices decreased 21% and 31%, respectively, and High-end color systems decreased 39% and 50%, respectively.

Xerox 2020 Form 10-Q

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

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

Three Months Ended September 30, Nine Months Ended September 30,

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

23 unchanged sentences

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.

Third quarter 2020 pre-tax income margin of 6.7% decreased 3.5-percentage points as compared to third quarter 2019.

The decrease primarily reflected the impact of lower adjusted 1 operating margin (see below), of 4.6-percentage points, partially offset by lower Other expenses, net, Transaction and related, costs, net and Restructuring and related costs.

Pre-tax income margin for the nine months ended September 30, 2020 of 2.9% decreased 4.4-percentage points as compared to the prior year period.

The decrease primarily reflected the impact of lower adjusted 1 operating margin (see below), of 6.3-percentage points, partially offset by lower Restructuring and related costs and Other expenses, net.

Adjusted 1 Operating Margin

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.

Third quarter 2020 adjusted 1 operating margin of 7.4% decreased 4.6-percentage points as compared to third quarter 2019 reflecting the impact of lower revenues, primarily as a result of the significant effect of the COVID-19 pandemic on our business, partially offset by cost and expense reductions associated with our Project Own It transformation actions as well additional savings from various cost reduction actions to mitigate the impact of the pandemic, including approximately $35 million from temporary government assistance measures and furlough programs (see the Government Assistance and Furlough Programs section for further details) and other reductions in discretionary spend such as near-term targeted marketing programs and the use of contract employees and the temporary suspension of 401(k) matching contributions for the year 2020, as well as lower compensation incentives consistent with lower sales and operating results.

The suspension of the 401(k) matching contribution in the third quarter 2020 resulted in a 0.7-percentage point benefit from the reversal in the third quarter 2020 of the accrual through the second quarter 2020.

The decrease was also affected by an approximate 1.0-percentage point unfavorable combined impact from higher tariffs and transaction currency.

Adjusted 1 operating margin for the nine months ended September 30, 2020 of 5.5% decreased 6.3-percentage points as compared to prior year period reflecting the impact of lower revenues, primarily as a result of the significant effect of the COVID-19 pandemic on our business and a 1.2-percentage point unfavorable impact due to an increase in bad debt expense of $61 million in the first quarter 2020, to reflect the expected impact to our customer base and related outstanding trade and finance receivable portfolio as a result of the economic disruption caused by the pandemic.

Xerox 2020 Form 10-Q

measures and furlough programs in the second and third quarters of 2020 (see the Government Assistance and Furlough Programs section for further details) and other reductions in discretionary spend such as near-term targeted marketing programs and the use of contract employees and the temporary suspension of 401(k) matching contributions for the year 2020, as well as lower compensation incentives consistent with lower sales and operating results.

The decrease was also affected by an approximate 0.8-percentage point unfavorable combined impact from higher tariffs and transaction currency.

______________

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

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.

Third quarter 2020 gross margin of 36.8% decreased 3.2-percentage points as compared to third quarter 2019, reflecting the impact of lower revenues (including from our higher margin post sale stream) primarily as a result of the significant effect of the COVID-19 pandemic due to business closures, as well as price promotions, and an approximate 1.0-percentage point adverse combined impact from transaction currency and higher tariffs.

These headwinds were partially offset by the cost savings from our Project Own It transformation actions, as well as the additional cost reduction actions to mitigate the impact of the pandemic, including savings of approximately $26 million from temporary government assistance measures and furlough programs and other reductions in discretionary spend such as the use of contract employees and the temporary suspension of 401(k) matching contributions.

Gross margin for the nine months ended September 30, 2020 of 37.8% decreased 2.0-percentage points as compared to the prior year period, reflecting the impact of lower revenues (including from our higher margin post sale stream) primarily as a result of the significant effect of the COVID-19 pandemic due to business closures, as well as price promotions, and an approximate 0.8-percentage point adverse combined impact from transaction currency and higher tariffs.

These headwinds were partially offset by the benefits from our Project Own It transformation actions, as well as additional cost reduction actions to mitigate the impact of the pandemic, including savings of approximately $66 million from temporary government assistance measures and furlough programs and other reductions in discretionary spend such as the use of contract employees and the temporary suspension of 401(k) matching contributions.

Gross margins are expected to continue to be negatively impacted in future periods as a result of an increase in the cost of our imported products due to higher import tariffs.

We currently estimate an approximate $30 million cost impact from these higher tariffs for the full year 2020.

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.

Third quarter 2020 equipment gross margin of 25.5% decreased 9.0-percentage points as compared to third quarter 2019, reflecting the pressure from lower revenues (primarily as a result of COVID-19 related business closures) and an unfavorable mix of growth in low-end devices as well as the adverse impact of price incentives, transaction currency and incremental tariff costs partially offset by the benefit of cost reductions from Project Own It.

Equipment gross margin for the nine months ended September 30, 2020 of 26.7% decreased 6.2-percentage points as compared to the prior year period, reflecting the impact of lower revenues (primarily as a result of COVID-19 related business closures) as well as the adverse impact of price incentives, transaction currency and incremental tariff costs partially offset by the benefit of cost reductions from Project Own It.

Third quarter 2020 Post sale gross margin of 40.3% decreased 1.3-percentage points as compared to third quarter 2019, reflecting the impact of lower revenues (primarily as a result of COVID-19 related business closures impacting page volumes) and price erosion on contract renewals, partially offset by productivity and cost savings and restructuring savings associated with Project Own It transformation actions, as well as savings from our additional cost reduction actions to mitigate the impact of the pandemic, including approximately $25 million of savings from temporary government assistance measures and furlough programs and other reductions in discretionary spend such as the use of contract employees and the temporary suspension of 401(k) matching contributions.

Post sale gross margin for the nine months ended September 30, 2020 of 40.7% decreased 1.0-percentage points as compared to the prior year period, reflecting the impact of lower revenues (primarily as a result of COVID-19 related business closures impacting page volumes) and price erosion on contract renewals, partially offset by productivity and cost savings and restructuring savings associated with Project Own It transformation actions, as well as savings from our additional cost reduction actions to mitigate the impact of the pandemic, including approximately $65 million of savings from temporary government assistance measures and furlough programs and other reductions in discretionary spend such as the use of contract employees and the temporary suspension of 401(k) matching contributions.

Xerox 2020 Form 10-Q

Research, Development and Engineering Expenses (RD&E)

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

(in millions) 2020 2019 Change 2020 2019 Change

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Total RD&E Expenses $ 76 $ 100 $ (24) $ 236 $ 280 $ (44)

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.

Third quarter 2020 RD&E as a percentage of revenue of 4.3% decreased by 0.3-percentage points as compared to third quarter 2019, primarily due to the benefit of cost reductions that outpaced the impact of revenue declines.

RD&E of $76 million decreased $24 million as compared to third quarter 2019 reflecting savings from Project Own It that enhanced simplification and rationalization in our core technology spend, and other temporary cost actions, as well as a favorable impact from the timing of investments, partially offset by higher spend in our innovation areas.

RD&E as a percentage of revenue for the nine months ended September 30, 2020 of 4.6% increased by 0.4-percentage points as compared to the prior year period, primarily due to the impact of revenue declines that outpaced the benefit of cost reductions.

RD&E for the nine months ended September 30, 2020 of $236 million decreased $44 million as compared to the prior year period, reflecting savings from Project Own It that enhanced simplification and rationalization in our core technology spend, and other temporary cost actions, as well as a favorable impact from the timing of investments, partially offset by higher spend in our innovation areas.

Selling, Administrative and General Expenses (SAG)

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.

Third quarter 2020 SAG as a percentage of revenue of 25.1% increased by 1.7-percentage points as compared to third quarter 2019, primarily due to the impact of lower revenues, partially offset by the benefits from cost savings and restructuring associated with our Project Own It transformation actions, and savings from additional cost reduction actions to mitigate the impact of the pandemic, including approximately $9 million from temporary government assistance measures and furlough programs, and other reductions in discretionary spend such as near-term targeted marketing programs, the use of contract employees and the temporary suspension of 401(k) matching contributions, as well as lower compensation incentives consistent with lower sales and operating results.

Third quarter 2020 SAG of $444 million decreased by $66 million as compared to third quarter 2019, reflecting cost savings and restructuring savings associated with our Project Own It transformation actions and from additional cost reduction actions to mitigate the impact of the pandemic, as described above, partially offset by expenses from recent acquisitions.

SAG as a percentage of revenue for the nine months ended September 30, 2020 of 27.7% increased by 3.9-percentage points as compared to the prior year period and included a 1.2-percentage point unfavorable impact due to the increase in bad debt expense of $61 million in the first quarter 2020, as compared to the prior year period.

The increase also reflected the impact of lower revenues, partially offset by the benefits from cost savings and restructuring associated with our Project Own It transformation actions and savings from additional cost reduction actions to mitigate the impact of the pandemic, including approximately $28 million from temporary government assistance measures and furlough programs, and other reductions in discretionary spend such as near-term targeted marketing programs and the use of contract employees and the temporary suspension of the 401(k) matching contributions, as well as lower compensation incentives consistent with lower sales and operating results.

SAG for the nine months ended September 30, 2020 of $1,411 million decreased $162 million as compared to the prior year period, reflecting cost savings and restructuring savings associated with our Project Own It transformation actions and from additional cost reduction actions to mitigate the impact of the pandemic, as noted above.

These savings were partially offset by the increase in bad debt expense as described above, as well as expenses from recent acquisitions.

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

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

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.

During the second and third quarters 2020, write-offs as well as the bad debt reserves for our trade and finance receivables portfolios were in line with our models and consistent with future expectations regarding the impacts from the COVID-19 pandemic.

We continue to

Xerox 2020 Form 10-Q

monitor developments regarding the pandemic, including business closures and mitigating government support actions and as a result our reserves may need to be updated in future periods.

Bad debt expense for third quarter 2020 of $16 million was $3 million higher as compared to third quarter 2019, while bad debt expense for the nine months ended September 30, 2020 of $103 million was $65 million higher compared to the prior year period as a result of the increase in the bad debts provision recorded in first quarter 2020 as described above.

Bad debt expense of approximately 2.7 percent of total gross receivables on a trailing-twelve-month basis (TTM) remained higher than the 2019 trend of less than one percent, reflecting the significant increase in first quarter 2020.

Restructuring and Related Costs

We incurred restructuring and related costs of $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 .

We incurred restructuring and related costs of $20 million for the third quarter 2020, as compared to $27 million for third quarter 2019, and $64 million for the nine months ended September 30, 2020 as compared to $176 million in the prior year period .

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

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Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

(in millions) 2020 2019 2020 2019

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_____________

(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.

(1) Reflects headcount reductions of approximately 650 and 150 employees worldwide for the three months ended September 30, 2020 and 2019, respectively, and 1,100 and 450 employees worldwide for the nine months ended September 30, 2020 and 2019, respectively.

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

The charge includes the accelerated write-off of $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.

The charge includes the accelerated write-off of $2 million f or the three months ended September 30, 2020 and 2019, respectively, and $3 million and $36 million f or the nine months ended September 30, 2020 and 2019 , respectively, for leased right-of-use assets, as well as $2 million and $0 million f or the three months ended September 30, 2020 and 2019, respectively, and $3 million and $12 million for the nine months ended September 30, 2020 and 2019 , respectively, for owned assets upon exit from the facilities, net of any potential sublease income and other recoveries.

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

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

(6) 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.

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

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

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.

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

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

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

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

Transaction and Related Costs, Net

We 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 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.

We recognized a credit of $(6) million for the three months ended September 30, 2020 for Transaction and related costs, net, primarily related to adjustments to costs from third party providers of professional services associated with certain strategic M&A projects.

Transaction and related costs, net were $18 million for the nine months ended September 30, 2020 primarily related to costs from third party providers of professional services associated with certain strategic M&A projects including our terminated proposal to acquire HP Inc.

Xerox 2020 Form 10-Q

Amortization of Intangible Assets

Amortization of intangible assets for the three months ended September 30, 2020 of $13 million increased by $4 million, primarily due to the impact from 2020 partner dealer acquisitions, while Amortization of intangible assets for the nine months ended September 30, 2020 of $34 million decreased by $1 million as compared to the prior year period as a result of the write-off of trade names in prior periods associated with our realignment and consolidation of certain XBS sales units as part of Project Own It transformation actions, partially offset by intangible amortization associated with 2020 and 2019 acquisitions.

Worldwide Employment

Worldwide employment was approximately 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.

Worldwide employment was approximately 25,500 as of September 30, 2020 and decreased by approximately 1,500 from December 31, 2019.

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

Other Expenses, Net

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

(in millions) 2020 2019 2020 2019

Non-financing interest expense (1)

$ 30 $ 27 $ 69 $ 81

Non-service retirement-related costs (13) (2) (20) 21

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Gains on sales of businesses and assets (28) (19) (29) (20)

Litigation matters (1) (8) (1) (8)

Contract termination costs - IT services — (8) 3 (8)

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Other expenses, net $ (15) $ (1) $ 15 $ 76

_____________

(1) Includes interest expense of $11 million that is attributable to Senior Notes issued by Xerox Holdings.

Refer to Note 13 - Debt in the Condensed Consolidated Financial Statements for additional information regarding debt activity in 2020.

Non-Financing Interest Expense

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.

Third quarter 2020 non-financing interest expense of $30 million was $3 million higher than third quarter 2019.

When combined with financing interest expense (Cost of financing), total interest expense decreased by $1 million from third quarter 2019 primarily reflecting a lower average debt balance in the third quarter as the impact from the incremental $770 million of net new senior unsecured debt was only partially reflected in the quarter.

For the nine months ended September 30, 2020 non-financing interest expense of $69 million was $12 million lower than the prior year period.

When combined with financing interest expense (Cost of financing), total interest expense decreased by $21 million from the prior year period primarily reflecting a lower average debt balance as the impact from the incremental $770 million of net new senior unsecured debt was only partially reflected in the third quarter 2020.

In October 2020, the Company completed the early redemption of $750 million of Senior Notes due May 2021.

Refer to Note 22 - Subsequent Event in the Condensed Consolidated Financial Statements for additional information.

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

Non-Service Retirement-Related Costs

Non-service retirement-related costs for the three and 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.

Non-service retirement-related costs for the three and nine months ended September 30, 2020 decreased $11 million and $41 million, respectively, compared to the prior year periods, primarily driven by lower losses from pension settlements in the U.S and lower discount rates.

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

Xerox 2020 Form 10-Q

Interest Income

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.

Interest income for the nine months ended September 30, 2020 increased $3 million compared to the prior year period, primarily reflecting interest on a higher cash balance as a result of cash proceeds received from the sales of our indirect 25% equity interest in Fuji Xerox Co., Ltd.

(FX) and indirect 51% partnership interest in Xerox International Partners (XIP) completed in fourth quarter 2019, partially offset by lower market interest rates.

Second quarter 2020 effective tax rate was 22.9%.

On an adjusted 1 basis, second quarter 2020 effective tax rate was 23.4%.

Gains on Sales of Businesses and Assets

Gains on the sales of businesses and assets increased $9 million for the three and nine months ended September 30, 2020, respectively, as compared to both prior year periods reflecting higher proceeds from sales of non-core business assets.

Litigation Matters

Litigation matters increased $7 million for the three and nine months ended September 30, 2020, respectively, as compared to both prior year periods, reflecting the favorable resolution of certain litigation matters in third quarter 2019.

Contract Termination Costs - IT Services

Contract termination costs - IT services increased $8 million and $11 million for the three and nine months ended September 30, 2020, respectively, as compared to both prior year periods, reflecting an adjustment in 2019 to a $43 million penalty recorded in fourth quarter 2018, associated with the termination of an IT services arrangement.

Third quarter 2020 effective tax rate was 24.4%.

On an adjusted 1 basis, third quarter 2020 effective tax rate was 21.1%.

This rate was higher than the U.S.

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

federal statutory tax rate of 21% primarily due to state taxes, the geographical mix of profits which includes non-deductible items on lower pre-tax income and an increase in deferred tax asset valuation allowances partially offset by the impact from various tax law changes.

The 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.

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%.

The effective tax rate for the nine months ended September 30, 2020 was 24.2%.

On an adjusted 1 basis, the effective tax rate for the nine months ended September 30, 2020 was 23.8%.

This rate was higher than the U.S.

federal statutory tax rate of 21% primarily due to 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%.

Third quarter 2019 effective tax rate was 29.6%.

On an adjusted 1 basis, third quarter 2019 effective tax rate was 27.3%.

These rates were higher than the U.S.

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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.

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.

The effective tax rate for the nine months ended September 30, 2019 was 21.8% and included a benefit of $31 million related to the January 2019 finalization of regulations that govern the repatriation tax from the 2017 Tax Cuts and Jobs Act (the Tax Act).

On an adjusted 1 basis, the effective tax rate for the nine months ended September 30, 2019 was 26.7%.

This rate was higher than the U.S.

federal statutory tax rate of 21% primarily due to state taxes and the geographical mix of profits.

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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 June 30, 2020 largely consists of several minor investments in entities in the Middle East region.

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

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

(in millions) 2020 2019 2020 2019

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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.

Third quarter 2020 Net income from continuing operations attributable to Xerox Holdings was $90 million, or $0.41 per diluted share.

On an adjusted 1 basis, Net income from continuing operations attributable to Xerox Holdings was $105 million, or $0.48 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.

Third quarter 2020 adjustments to Net income from continuing operations included Restructuring and related costs, Amortization of intangible assets, Transaction and related costs, net and non-service retirement-related costs as well as other discrete, unusual or infrequent items (see Non-GAAP Financial Measures).

Net income from continuing operations attributable to Xerox Holdings for the nine months ended September 30, 2020 was $115 million, or $0.49 per diluted share.

On an adjusted 1 basis, Net income from continuing operations attributable to Xerox Holdings was $191 million, or $0.84 per diluted share and included the negative impact of a $61 million pre-tax increase in bad debt expense (approximately $43 million after-tax) as compared to the prior year period, primarily reflecting the expected impact to our customer base and related outstanding receivables portfolio as a result of the economic disruption caused by the COVID-19 pandemic.

Adjustments to Net income from continuing operations for the nine months ended September 30, 2020 included Restructuring and related costs, Amortization of intangible assets, Transaction and related costs, net, non-service retirement-related costs, as well as other discrete, unusual or infrequent items (see Non-GAAP Financial Measures).

Third quarter 2019 Net income from continuing operations attributable to Xerox Holdings was $157 million, or $0.68 per diluted share.

On an adjusted 1 basis, Net income from continuing operations attributable to Xerox Holdings was $184 million, or $0.80 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.

Third quarter 2019 adjustments to Net income from continuing operations included Restructuring and related costs, Amortization of intangible assets, Transaction and related costs, net and non-service retirement-related costs as well as other discrete, unusual or infrequent items (see Non-GAAP Financial Measures).

Net income from continuing operations attributable to Xerox Holdings for the nine months ended September 30, 2019 was $382 million, or $1.62 per diluted share.

On an adjusted 1 basis, Net income from continuing operations attributable to Xerox Holdings was $528 million, or $2.24 per diluted share.

Adjustments to Net income from continuing operations for the 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.

Adjustments to Net income from continuing operations for the nine months ended September 30, 2019 included Restructuring and related costs, Amortization of intangible assets, Transaction and related costs, net and non-service retirement-related costs, as well as other discrete, unusual or infrequent items (see Non-GAAP Financial Measures).

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

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

Xerox 2020 Form 10-Q

Discontinued Operations

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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;

Third quarter 2020 Other Comprehensive Income, Net Attributable to Xerox Holdings was $88 million and included the following:

i) net translation adjustment gains of $179 million reflecting the significant strengthening of our major foreign currencies against the U.S.

ii) $1 million of net unrealized gains;

and iii) $92 million of net losses from the changes in defined benefit plans primarily due to net actuarial losses as a result of lower discount rates in the U.S and the negative impacts from currency, partially offset by settlements.

This compares to Other Comprehensive Loss, Net Attributable to Xerox Holdings of $203 million for the third quarter 2019, which reflected the following:

i) $155 million of net translation adjustment losses reflecting the significant weakening of our major foreign currencies against the U.S.

ii) $48 million of net losses from the changes in defined benefit plans primarily due to net actuarial losses as a result of lower discount rates in the U.S., partially offset by settlements and the positive impacts from currency;

and iii) $1 million net unrealized gains.

Other Comprehensive Income, Net Attributable to Xerox Holdings for the nine months ended September 30, 2020 was $53 million and included the following:

i) $42 million of net gains from the changes in defined benefit plans is primarily due to the amortization and recognition of net actuarial losses from AOCL 1 ;

ii) net translation adjustment gains of $7 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) $4 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;

This compares to Other Comprehensive Loss, Net Attributable to Xerox Holdings of $158 million for the nine months ended September 30, 2019, which reflected the following:

i) $122 million of net translation adjustment losses, reflecting the significant weakening of our major foreign currencies against the U.S.

ii) $38 million of net losses from the changes in defined benefit plans;

and iii) $3 million of net unrealized gains.

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

_____________

(1) AOCL - Accumulated other comprehensive loss.

Xerox 2020 Form 10-Q

Capital Resources and Liquidity

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:

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

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

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

• As of 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.

• As of September 30, 2020, total cash, cash equivalents and restricted cash were $3,297 million and, apart from the restricted cash of $55 million, was readily accessible for use.

In October 2020, we completed the early redemption of $750 million of the approximately $1,062 million Senior Notes due in May 2021 from cash on hand.

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

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

• 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 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.

In connection with the issuance of our $1.5 billion of new Senior Notes, we amended the Credit Facility debt covenants to consider our level of cash on hand as part of our principal debt balance.

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

• We have utilized a combination of capital markets financing and securitization to refinance all 2020 debt maturities and a portion of our 2021 debt maturities, significantly reducing our near-term debt commitments and improving our liquidity.

Refer to Note 22 - Subsequent Event in the Condensed Consolidated Financial Statements for additional information regarding the early redemption of a portion of the Senior Notes due 2021.

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

These actions include the use of available temporary government assistance measures and furlough programs and the reduction of discretionary spend such as near-term targeted marketing programs, the use of contract employees and the temporary suspension of 401(k) matching contributions, as well as lower compensation incentives consistent with lower sales and operating results.

Cash Flow Analysis

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

Six Months Ended

June 30, Change

Nine Months Ended

September 30, Change

(in millions) 2020 2019

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

Net cash used in financing activities (432) (846) 414

Net cash provided by (used in) financing activities 424 (983) 1,407

Effect of exchange rate changes on cash, cash equivalents and restricted cash (12) (13) 1

Decrease in cash, cash equivalents and restricted cash (481) (372) (109)

Increase (decrease) in cash, cash equivalents and restricted cash 502 (169) 671

Cash, cash equivalents and restricted cash at beginning of period 2,795 1,148 1,647

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Cash Flows from Operating Activities

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

Net cash provided by operating activities of continuing operations was $313 million for the nine months ended September 30, 2020.

The $533 million decrease in operating cash from the prior year period was primarily due to the following:

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

• $495 million decrease in pre-tax income before depreciation and amortization, provisions, gain on sales of businesses and assets, restructuring and related costs and defined benefit pension costs.

• $305 million decrease from higher levels of inventory primarily due to lower sales volume.

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

• $125 million decrease in other current and long-term liabilities, reflecting lower accruals, particularly incentive-related payments associated with our indirect channel partners and decreases in deferred revenue reflecting lower sales activity.

• $50 million decrease from accrued compensation primarily related to lower compensation costs and the year-over-year timing of payments.

• $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.

• $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.

• $45 million decrease from lower accounts payable primarily due to decreased spending and the year-over-year timing of supplier and vendor payments.

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.

• $272 million increase from accounts receivable primarily due to lower revenue as well as timing of collections.

• $124 million increase primarily related to a higher level of run-off due to lower originations of finance receivables of $97 million and lower equipment on operating leases of $27 million.

• $53 million increase from net taxes primarily due to lower payments in 2020 as a result of lower pre-tax income.

• $47 million increase primarily due to lower restructuring and related costs as compared to the prior year.

Cash Flows from Investing Activities

Net cash used in investing activities was $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.

Net cash used in investing activities was $223 million for the nine months ended September 30, 2020.

The $155 million change from the prior year period was primarily due to four acquisitions completed in the current year for $193 million compared to two acquisitions in the prior year for $42 million.

Cash Flows from Financing Activities

Net cash 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.

Net cash provided by financing activities was $424 million for the nine months ended September 30, 2020.

The $1,407 million increase in cash from the prior year period was primarily due to the following:

• $1,168 million increase from net debt activity.

2020 reflects proceeds of $1,507 million from a Senior Notes offering and $340 million from a secured financing arrangement offset by payments of $1,051 million on Senior Notes, $22 million on the secured financing arrangement and $13 million of deferred debt issuance costs.

2019 reflects payments of $406 million on Senior Notes.

• $218 million increase due to share repurchases.

• $11 million increase from lower distributions of noncontrolling interests.

Cash, Cash Equivalents and Restricted Cash

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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.

Refer to Note 11 - Lessee in the Condensed Consolidated Financial Statements for additional information regarding our leases accounted under lessee accounting.

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The following summarizes our debt:

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

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

Principal debt balance (1)

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_____________

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

(1) Includes Notes Payable of $2 million as of September 30, 2020.

There were no Notes Payable as of December 31, 2019.

(2) Fair value adjustments include the following:

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

Credit Rating Downgrade

In August, the Company's $1.0 billion Senior Notes due 2023 were downgraded by S&P and, pursuant to the terms of the Notes, the coupon rate on the Notes increased by 0.25% from 4.125% to 4.375% per annum.

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) June 30, 2020 December 31, 2019

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

Total finance receivables, net (1)

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(1) Includes (i) Billed portion of finance receivables, net, (ii) Finance receivables, net and (iii) Finance receivables due after one year, net as included in our Condensed Consolidated Balance Sheets.

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

Xerox 2020 Form 10-Q

(2) The change from December 31, 2019 includes an increase of $24 million due to currency.

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

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

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

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

Finance receivables debt (1)

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Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

(in millions) 2020 2019 2020 2019

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

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

$ 54 $ (33) $ (86) $ (33)

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(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.

The increase for the three months ended September 30, 2020 reflects increased sales activity in the channel.

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

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(in millions) Amount (1)

2020 Q3 $ 738

2026 and thereafter 1,350

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(1) Includes fair value adjustments.

Treasury Stock

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

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

(2) Includes Notes Payable of $2 million as of September 30, 2020.

(3) Includes $750 million of Senior Notes due May 2021 that were redeemed in October 2020.

Refer to Note 22 - Subsequent Event in the Condensed Consolidated Financial Statements for additional information regarding the early redemption of these Senior Notes.

Xerox 2020 Form 10-Q

Treasury Stock

In the third quarter 2020 Xerox Holdings repurchased 8.0 million shares of our common stock for an aggregate cost of $150 million, including fees.

No share repurchases were made in the first or second quarter of 2020.

We expect to repurchase an additional $150 million of our common stock in the fourth quarter 2020.

Shared Services Arrangement with HCL Technologies

In March 2019, as part of Project Own It, Xerox entered into a shared services arrangement with HCL Technologies (HCL) pursuant to which we transitioned certain global administrative and support functions, including, among others, selected information technology and finance functions (excluding accounting), from Xerox to HCL.

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

In March 2019, as part of Project Own It, Xerox entered into a shared services arrangement with HCL Technologies

(HCL) pursuant to which we transitioned certain global administrative and support functions, including, among others, selected information technology and finance functions (excluding accounting), from Xerox to HCL.

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

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

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

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

For the three and nine months ended September 30, 2020, we incurred net charges of approximately $49 million and $139 million, respectively, associated with this arrangement.

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

Termination of Proposed Transaction with HP Inc.

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

HP rejected our initial and subsequent proposals and refused to engage in mutual due diligence or negotiations.

In January 2020, Xerox Holdings nominated a slate of directors to HP’s board to be voted on at HP’s 2020 annual meeting of stockholders and shortly thereafter, it launched a tender offer to acquire all outstanding shares of HP, as it intended to continue to pursue the proposed business combination transaction.

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

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

In 2020, Xerox Holdings had obtained $24 billion in financing commitments from several banks to support the cash portion of the proposed business combination transaction with HP.

On March 31, 2020, following the withdrawal of Xerox Holdings' tender offer to acquire HP, notice was provided to the banks of the immediate termination of the financing commitment.

No termination penalties 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.

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.

We do not believe there is significant risk of loss in the event of non-performance by the counterparties associated with these instruments because these transactions are executed with a diversified group of major financial institutions.

Further, our policy is to deal with counterparties having a minimum investment grade or better credit rating.

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

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

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Transaction and related costs, net:

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.

Transaction and related costs, net are costs and expenses primarily associated with certain strategic M&A projects.

These costs are primarily for third-party legal, accounting, consulting and other similar type professional services as well as potential legal settlements that may arise in connection with those M&A transactions.

These costs are considered incremental to our normal operating charges and were incurred or are expected to be incurred solely as a result of the planned transactions.

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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

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.

Accordingly, we consider these elements of our periodic retirement plan costs to be outside the operational performance of the business or legacy costs and not necessarily indicative of current or future cash flow requirements.

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

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

Xerox 2020 Form 10-Q

We believe the exclusion of these items allows investors to better understand and analyze the results for the period as compared to prior periods and expected future trends in our business.

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A reconciliation of these non-GAAP financial measures and the most directly comparable measures calculated and presented in accordance with GAAP are set forth on the following tables:

Xerox 2020 Form 10-Q

Net Income and EPS reconciliation:

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

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

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213 231 215 235

Fully diluted shares at June 30, 2020 (4)

Fully diluted shares at September 30, 2020 (4)

____________________________

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

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

(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.

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

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

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

Xerox 2020 Form 10-Q

Effective Tax Rate reconciliation:

Three Months Ended June 30,

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

Tax Rate Pre-Tax Income Income Tax Expense Effective

Three Months Ended September 30,

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

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

$ 119 $ 29 24.4 % $ 223 $ 66 29.6 %

Non-GAAP Adjustments (2)

Tax Act — — — (4)

$ 133 $ 28 21.1 % $ 253 $ 69 27.3 %

Six Months Ended June 30,

Nine Months Ended September 30,

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

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(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 June 30,

Three Months Ended September 30,

(in millions) Profit Revenue Margin Profit Revenue Margin

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

Six Months Ended June 30,

Nine Months Ended September 30,

(in millions) Profit Revenue Margin Profit Revenue Margin

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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