Xerox Holdings Corp 10-Q

ITEM 1 — FINANCIAL STATEMENTS XEROX HOLDINGS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Three Months Ended September 30, Nine Months Ended September 30, (in millions, except per-share data) 2020 2019 2020 2019 Revenues Sales $ 651 $ 784 $ 1,676 $ 2,308 Services, maintenance and rentals 1,061 1,335 3,246 4,130 Financing 55 60 170 184 Total Revenues 1,767 2,179 5,092 6,622 Costs and Expenses Cost of sales 476 503 1,201 1,492 Cost of services, maintenance and rentals 611 771 1,875 2,398 Cost of financing 29 33 89 98 Research, development and engineering expenses 76 100 236 280 Selling, administrative and general expenses 444 510 1,411 1,573 Restructuring and related costs 20 27 64 176 Amortization of intangible assets 13 9 34 35 Transaction and related costs, net ( 6 ) 4 18 8 Other expenses, net ( 15 ) ( 1 ) 15 76 Total Costs and Expenses 1,648 1,956 4,943 6,136 Income before Income Taxes and Equity Income 119 223 149 486 Income tax expense 29 66 36 106 Equity in net income of unconsolidated affiliates — 1 2 5 Income from Continuing Operations 90 158 115 385 Income from discontinued operations, net of tax — 64 — 157 Net Income 90 222 115 542 Less: Income from continuing operations attributable to noncontrolling interests — 1 — 3 Less: Income from discontinued operations attributable to noncontrolling interests — — — 4 Net Income Attributable to Xerox Holdings $ 90 $ 221 $ 115 $ 535 Amounts Attributable to Xerox Holdings: Income from continuing operations $ 90 $ 157 $ 115 $ 382 Income from discontinued operations — 64 — 153 Net Income Attributable to Xerox Holdings $ 90 $ 221 $ 115 $ 535 Basic Earnings per Share: Continuing operations $ 0.41 $ 0.70 $ 0.49 $ 1.66 Discontinued operations — 0.29 — 0.68 Total Basic Earnings per Share $ 0.41 $ 0.99 $ 0.49 $ 2.34 Diluted Earnings per Share: Continuing operations $ 0.41 $ 0.68 $ 0.49 $ 1.62 Discontinued operations — 0.28 — 0.65 Total Diluted Earnings per Share $ 0.41 $ 0.96 $ 0.49 $ 2.27 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. Xerox 2020 Form 10-Q 3 XEROX HOLDINGS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) Three Months Ended September 30, Nine Months Ended September 30, (in millions) 2020 2019 2020 2019 Net Income $ 90 $ 222 $ 115 $ 542 Less: Income from continuing operations attributable to noncontrolling interests — 1 — 3 Less: Income from discontinued operations attributable to noncontrolling interests — — — 4 Net Income Attributable to Xerox Holdings 90 221 115 535 Other Comprehensive Income (Loss), Net (1) Translation adjustments, net 179 ( 155 ) 7 ( 122 ) Unrealized gains, net 1 1 4 3 Changes in defined benefit plans, net ( 92 ) ( 48 ) 42 ( 38 ) Other Comprehensive Income (Loss), Net 88 ( 202 ) 53 ( 157 ) Less: Other comprehensive income, net from continuing operations attributable to noncontrolling interests — 1 — 1 Other Comprehensive Income (Loss), Net Attributable to Xerox Holdings 88 ( 203 ) 53 ( 158 ) Comprehensive Income, Net 178 20 168 385 Less: Comprehensive income, net from continuing operations attributable to noncontrolling interests — 2 — 4 Less: Comprehensive income, net from discontinued operations attributable to noncontrolling interests — — — 4 Comprehensive Income, Net Attributable to Xerox Holdings $ 178 $ 18 $ 168 $ 377 _____________ (1) Refer to Note 19 - Other Comprehensive Income (Loss) for gross components of Other comprehensive income (loss), net, reclassification adjustments out of Accumulated other comprehensive loss and related tax effects. The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. Xerox 2020 Form 10-Q 4 XEROX HOLDINGS CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (in millions, except share data in thousands) September 30, 2020 December 31, 2019 Assets Cash and cash equivalents $ 3,242 $ 2,740 Accounts receivable (net of allowances of $ 63 and $ 55 , respectively) (1) 895 1,236 Billed portion of finance receivables (net of allowances of $ 4 and $ 3 , respectively) (1) 111 111 Finance receivables, net 1,066 1,158 Inventories 978 694 Other current assets 249 201 Total current assets 6,541 6,140 Finance receivables due after one year (net of allowances of $ 138 and $ 86 , respectively) (1) 1,899 2,082 Equipment on operating leases, net 301 364 Land, buildings and equipment, net 412 426 Intangible assets, net 240 199 Goodwill 3,996 3,900 Deferred tax assets 573 598 Other long-term assets 1,390 1,338 Total Assets $ 15,352 $ 15,047 Liabilities and Equity Short-term debt and current portion of long-term debt $ 1,218 $ 1,049 Accounts payable 1,018 1,053 Accrued compensation and benefits costs 276 349 Accrued expenses and other current liabilities 815 984 Total current liabilities 3,327 3,435 Long-term debt 3,836 3,233 Pension and other benefit liabilities 1,675 1,707 Post-retirement medical benefits 336 352 Other long-term liabilities 512 512 Total Liabilities 9,686 9,239 Commitments and Contingencies (See Note 21) Convertible Preferred Stock 214 214 Common stock 214 215 Additional paid-in capital 2,719 2,782 Treasury stock, at cost ( 150 ) ( 76 ) Retained earnings 6,258 6,312 Accumulated other comprehensive loss ( 3,593 ) ( 3,646 ) Xerox Holdings shareholders’ equity 5,448 5,587 Noncontrolling interests 4 7 Total Equity 5,452 5,594 Total Liabilities and Equity $ 15,352 $ 15,047 Shares of common stock issued 213,964 214,621 Treasury stock ( 8,007 ) ( 2,031 ) Shares of Common Stock Outstanding 205,957 212,590 _____________ (1) Allowances at September 30, 2020 determined in accordance with ASU 2016-13 adopted effective January 1, 2020 - refer to Notes 2, 8 and 9 for additional information. The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. Xerox 2020 Form 10-Q 5 XEROX HOLDINGS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Three Months Ended September 30, Nine Months Ended September 30, (in millions) 2020 2019 2020 2019 Cash Flows from Operating Activities Net income $ 90 $ 222 $ 115 $ 542 Income from discontinued operations, net of tax — ( 64 ) — ( 157 ) Income from continuing operations 90 158 115 385 Adjustments required to reconcile Net income to Cash flows from operating activities Depreciation and amortization 90 104 272 332 Provisions 23 16 124 58 Net gain on sales of businesses and assets ( 28 ) ( 19 ) ( 29 ) ( 20 ) Stock-based compensation 8 11 32 41 Restructuring and asset impairment charges 20 8 47 80 Payments for restructurings ( 11 ) ( 17 ) ( 63 ) ( 71 ) Defined benefit pension cost 9 21 46 89 Contributions to defined benefit pension plans ( 33 ) ( 37 ) ( 97 ) ( 107 ) (Increase) decrease in accounts receivable and billed portion of finance receivables ( 96 ) 51 332 60 (Increase) decrease in inventories ( 49 ) 15 ( 274 ) 31 Increase in equipment on operating leases ( 31 ) ( 41 ) ( 86 ) ( 113 ) Decrease in finance receivables 31 5 221 124 Decrease (increase) in other current and long-term assets 17 ( 14 ) 2 1 Increase (decrease) in accounts payable 90 22 ( 69 ) ( 24 ) Decrease in accrued compensation ( 20 ) ( 16 ) ( 149 ) ( 99 ) (Decrease) increase in other current and long-term liabilities ( 16 ) 26 ( 146 ) 19 Net change in income tax assets and liabilities 10 41 13 30 Net change in derivative assets and liabilities 1 5 ( 1 ) 15 Other operating, net 1 9 23 15 Net cash provided by operating activities of continuing operations 106 348 313 846 Net cash provided by operating activities of discontinued operations — 8 — 49 Net cash provided by operating activities 106 356 313 895 Cash Flows from Investing Activities Cost of additions to land, buildings, equipment and software ( 18 ) ( 17 ) ( 60 ) ( 48 ) Proceeds from sales of businesses and assets 27 20 29 21 Acquisitions, net of cash acquired — — ( 193 ) ( 42 ) Other investing, net — 1 1 1 Net cash provided by (used in) investing activities 9 4 ( 223 ) ( 68 ) Cash Flows from Financing Activities Net proceeds from short-term debt 1 — 1 — Proceeds from issuance of long-term debt 1,849 2 1,854 7 Payments on long-term debt ( 773 ) — ( 1,086 ) ( 406 ) Dividends ( 61 ) ( 61 ) ( 176 ) ( 183 ) Payments to acquire treasury stock, including fees ( 150 ) ( 68 ) ( 150 ) ( 368 ) Other financing, net ( 10 ) ( 10 ) ( 19 ) ( 33 ) Net cash provided by (used in) financing activities 856 ( 137 ) 424 ( 983 ) Effect of exchange rate changes on cash, cash equivalents and restricted cash 12 ( 20 ) ( 12 ) ( 13 ) Increase (decrease) in cash, cash equivalents and restricted cash 983 203 502 ( 169 ) Cash, cash equivalents and restricted cash at beginning of period 2,314 776 2,795 1,148 Cash, Cash Equivalents and Restricted Cash at End of Period (1) $ 3,297 $ 979 $ 3,297 $ 979 _____________ (1) Balance at September 30, 2019 includes $ 1 associated with discontinued operations. The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. Xerox 2020 Form 10-Q 6 XEROX CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Three Months Ended September 30, Nine Months Ended September 30, (in millions) 2020 2019 2020 2019 Revenues Sales $ 651 $ 784 $ 1,676 $ 2,308 Services, maintenance and rentals 1,061 1,335 3,246 4,130 Financing 55 60 170 184 Total Revenues 1,767 2,179 5,092 6,622 Costs and Expenses Cost of sales 476 503 1,201 1,492 Cost of services, maintenance and rentals 611 771 1,875 2,398 Cost of financing 29 33 89 98 Research, development and engineering expenses 76 100 236 280 Selling, administrative and general expenses 444 510 1,411 1,573 Restructuring and related costs 20 27 64 176 Amortization of intangible assets 13 9 34 35 Transaction and related costs, net ( 6 ) 4 18 8 Other expenses, net ( 26 ) ( 1 ) 4 76 Total Costs and Expenses 1,637 1,956 4,932 6,136 Income before Income Taxes and Equity Income 130 223 160 486 Income tax expense 29 66 36 106 Equity in net income of unconsolidated affiliates — 1 2 5 Income from Continuing Operations 101 158 126 385 Income from discontinued operations, net of tax — 64 — 157 Net Income 101 222 126 542 Less: Income from continuing operations attributable to noncontrolling interests — 1 — 3 Less: Income from discontinued operations attributable to noncontrolling interests — — — 4 Net Income Attributable to Xerox $ 101 $ 221 $ 126 $ 535 Amounts Attributable to Xerox: Net income from continuing operations $ 101 $ 157 $ 126 $ 382 Net income from discontinued operations — 64 — 153 Net Income Attributable to Xerox $ 101 $ 221 $ 126 $ 535 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. Xerox 2020 Form 10-Q 7 XEROX CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) Three Months Ended September 30, Nine Months Ended September 30, (in millions) 2020 2019 2020 2019 Net Income $ 101 $ 222 $ 126 $ 542 Less: Income from continuing operations attributable to noncontrolling interests — 1 — 3 Less: Income from discontinued operations attributable to noncontrolling interests — — — 4 Net Income Attributable to Xerox 101 221 126 535 Other Comprehensive Income (Loss), Net (1) Translation adjustments, net 179 ( 155 ) 7 ( 122 ) Unrealized gains, net 1 1 4 3 Changes in defined benefit plans, net ( 92 ) ( 48 ) 42 ( 38 ) Other Comprehensive Income (Loss), Net 88 ( 202 ) 53 ( 157 ) Less: Other comprehensive income, net from continuing operations attributable to noncontrolling interests — 1 — 1 Other Comprehensive Income (Loss), Net Attributable to Xerox 88 ( 203 ) 53 ( 158 ) Comprehensive Income, Net 189 20 179 385 Less: Comprehensive income, net from continuing operations attributable to noncontrolling interests — 2 — 4 Less: Comprehensive income, net from discontinued operations attributable to noncontrolling interests — — — 4 Comprehensive Income, Net Attributable to Xerox $ 189 $ 18 $ 179 $ 377 _____________ (1) Refer to Note 19 - Other Comprehensive Income (Loss) for gross components of Other comprehensive income (loss), net, reclassification adjustments out of Accumulated other comprehensive loss and related tax effects. The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. Xerox 2020 Form 10-Q 8 XEROX CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (in millions) September 30, 2020 December 31, 2019 Assets Cash and cash equivalents $ 3,242 $ 2,740 Accounts receivable (net of allowances of $ 63 and $ 55 , respectively) (1) 895 1,236 Billed portion of finance receivables (net of allowances of $ 4 and $ 3 , respectively) (1) 111 111 Finance receivables, net 1,066 1,158 Inventories 978 694 Other current assets 257 201 Total current assets 6,549 6,140 Finance receivables due after one year (net of allowances of $ 138 and $ 86 , respectively) (1) 1,899 2,082 Equipment on operating leases, net 301 364 Land, buildings and equipment, net 412 426 Intangible assets, net 240 199 Goodwill 3,996 3,900 Deferred tax assets 573 598 Other long-term assets 1,390 1,338 Total Assets $ 15,360 $ 15,047 Liabilities and Equity Short-term debt and current portion of long-term debt $ 1,218 $ 1,049 Accounts payable 1,018 1,053 Accrued compensation and benefits costs 276 349 Accrued expenses and other current liabilities 741 918 Total current liabilities 3,253 3,369 Long-term debt 2,343 3,233 Pension and other benefit liabilities 1,675 1,707 Post-retirement medical benefits 336 352 Other long-term liabilities 512 512 Total Liabilities 8,119 9,173 Commitments and Contingencies (See Note 21) Additional paid-in capital 4,859 3,266 Retained earnings 5,971 6,247 Accumulated other comprehensive loss ( 3,593 ) ( 3,646 ) Xerox shareholders’ equity 7,237 5,867 Noncontrolling interests 4 7 Total Equity 7,241 5,874 Total Liabilities and Equity $ 15,360 $ 15,047 _____________ (1) Allowances at September 30, 2020 determined in accordance with ASU 2016-13 adopted effective January 1, 2020 - refer to Notes 2, 8 and 9 for additional information. The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. Xerox 2020 Form 10-Q 9 XEROX CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Three Months Ended September 30, Nine Months Ended September 30, (in millions) 2020 2019 2020 2019 Cash Flows from Operating Activities Net Income $ 101 $ 222 $ 126 $ 542 Income from discontinued operations, net of tax — ( 64 ) — ( 157 ) Income from continuing operations 101 158 126 385 Adjustments required to reconcile Net income to Cash flows from operating activities Depreciation and amortization 90 104 272 332 Provisions 23 16 124 58 Net gain on sales of businesses and assets ( 28 ) ( 19 ) ( 29 ) ( 20 ) Stock-based compensation 8 11 32 41 Restructuring and asset impairment charges 20 8 47 80 Payments for restructurings ( 11 ) ( 17 ) ( 63 ) ( 71 ) Defined benefit pension cost 9 21 46 89 Contributions to defined benefit pension plans ( 33 ) ( 37 ) ( 97 ) ( 107 ) (Increase) decrease in accounts receivable and billed portion of finance receivables ( 96 ) 51 332 60 (Increase) decrease in inventories ( 49 ) 15 ( 274 ) 31 Increase in equipment on operating leases ( 31 ) ( 41 ) ( 86 ) ( 113 ) Decrease in finance receivables 31 5 221 124 Decrease (increase) in other current and long-term assets 17 ( 14 ) 2 1 Increase (decrease) in accounts payable 90 22 ( 69 ) ( 24 ) Decrease in accrued compensation ( 20 ) ( 16 ) ( 149 ) ( 99 ) (Decrease) increase in other current and long-term liabilities ( 27 ) 26 ( 157 ) 19 Net change in income tax assets and liabilities 10 41 13 30 Net change in derivative assets and liabilities 1 5 ( 1 ) 15 Other operating, net 1 9 23 15 Net cash provided by operating activities of continuing operations 106 348 313 846 Net cash provided by operating activities of discontinued operations — 8 — 49 Net cash provided by operating activities 106 356 313 895 Cash Flows from Investing Activities Cost of additions to land, buildings, equipment and software ( 18 ) ( 17 ) ( 60 ) ( 48 ) Proceeds from sales of businesses and assets 27 20 29 21 Acquisitions, net of cash acquired — — ( 193 ) ( 42 ) Other investing, net — 1 1 1 Net cash provided by (used in) investing activities 9 4 ( 223 ) ( 68 ) Cash Flows from Financing Activities Net proceeds from short-term debt 1 — 1 — Proceeds from issuance of long-term debt 342 2 347 7 Payments on long-term debt ( 762 ) — ( 1,075 ) ( 406 ) Dividends — ( 59 ) — ( 181 ) Payments to acquire treasury stock, including fees — — — ( 300 ) Contributions from parent 1,494 — 1,494 — Distributions to parent ( 218 ) ( 73 ) ( 343 ) ( 73 ) Other financing, net ( 1 ) ( 7 ) — ( 30 ) Net cash provided by (used in) financing activities 856 ( 137 ) 424 ( 983 ) Effect of exchange rate changes on cash, cash equivalents and restricted cash 12 ( 20 ) ( 12 ) ( 13 ) Increase (decrease) in cash, cash equivalents and restricted cash 983 203 502 ( 169 ) Cash, cash equivalents and restricted cash at beginning of period 2,314 776 2,795 1,148 Cash, Cash Equivalents and Restricted Cash at End of Period (1) $ 3,297 $ 979 $ 3,297 $ 979 _____________ (1) Balance at September 30, 2019 includes $ 1 associated with discontinued operations. The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. Xerox 2020 Form 10-Q 10 XEROX HOLDINGS CORPORATION XEROX CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (in millions, except per-share data and where otherwise noted) Note 1 – Basis of Presentation References to “Xerox Holdings” refer to Xerox Holdings Corporation and its consolidated subsidiaries while references to “Xerox” refer to Xerox Corporation and its consolidated subsidiaries. References herein to “we,” “us,” “our,” the “Company” refer collectively to both Xerox Holdings and Xerox unless the context suggests otherwise. The accompanying unaudited Condensed Consolidated Financial Statements and footnotes represent the respective, consolidated results and financial results of Xerox Holdings and Xerox and all respective companies that each registrant directly or indirectly controls, either through majority ownership or otherwise. This is a combined report of Xerox Holdings and Xerox, which includes separate unaudited Condensed Consolidated Financial Statements for each registrant. The accompanying unaudited Condensed Consolidated Financial Statements of both Xerox Holdings and Xerox have been prepared in accordance with the accounting policies described in the Combined 2019 Annual Report on Form 10-K ("2019 Annual Report"), except as noted herein, and the interim reporting requirements of Form 10-Q. Accordingly, certain information and note disclosures normally included in our annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. You should read these Condensed Consolidated Financial Statements in conjunction with the Consolidated Financial Statements included in the Combined 2019 Annual Report. In our opinion, all adjustments, which are necessary for a fair statement of financial position, operating results and cash flows for the interim periods presented, have been made. These adjustments consist of normal recurring items. Interim results of operations are not necessarily indicative of the results of the full year. As of September 30, 2020, the impact of the outbreak of COVID-19 continues to unfold. As a result, many of our estimates and assumptions have required increased judgment and carry a higher degree of variability and volatility. As events continue to evolve and additional information becomes available, our estimates may change materially in the future. For convenience and ease of reference, we refer to the financial statement caption “Income before Income Taxes and Equity Income” as “pre-tax income.” Notes to the Condensed Consolidated Financial Statements reflect the activity for both Xerox Holdings and Xerox for all periods presented, unless otherwise noted. Goodwill Interim Impairment Evaluation During the quarter ended June 30, 2020, we evaluated whether events or circumstances had changed such that it would indicate it is more likely than not that our Goodwill was impaired (trigger event). Factors considered in this evaluation included, among other things, the negative financial impacts from the COVID-19 pandemic on current and near-term future operations, the expected slower recovery during the latter half of 2020 as businesses return to their respective offices, as well as a sustained market capitalization below our book value. Based on this assessment, we concluded that a trigger event had occurred related to Goodwill and we completed an interim quantitative evaluation of Goodwill. As a result of limited market compares due to companies not providing guidance in this current economic environment, our interim quantitative evaluation of Goodwill was based on the income approach to estimate fair value. The income approach is based on the discounted cash flow method that uses the Company's estimates for future forecasted financial performance including revenues, operating expenses, and taxes, as well as working capital and capital asset requirements. Projected cash flows are then discounted to a present value employing a discount rate that properly accounts for the estimated market weighted-average cost of capital, as well as any risk unique to the subject cash flows. Our estimates regarding future forecasted cash flows accordingly reflected consideration of the continued negative financial impacts from the COVID-19 pandemic on our current and future operations as well expected recovery scenarios. After completing our interim impairment review, we concluded that Goodwill was not impaired in the second quarter because the Company’s estimated fair value exceeded the carrying value as of June 30, 2020. Xerox 2020 Form 10-Q 11 During the quarter ended September 30, 2020, although business performance improved, we determined that the continued negative impacts on our current operations resulting from the COVID-19 pandemic and the impacts expected on our future operations as well as a market capitalization that remains less than book value required us to qualitatively assess whether a triggering event had occurred and whether it was more likely than not that our goodwill was impaired as of September 30, 2020. Based on our interim qualitative assessment as of September 30, 2020, we determined that it was more-likely-than-not that the fair value of the Company was greater than the net book value and that we did not have a “triggering event” requiring a quantitative or Step 1 assessment of goodwill. Our review of macroeconomic and industry considerations, as well as the Company's financial results for the third quarter 2020, were consistent with the expectations and sensitivities assessed as part of our interim review performed in the second quarter 2020. Further, although our market capitalization remained below our net book value, the Company's market capitalization did improve in the third quarter 2020. If assumptions or estimates in the fair value calculations change or if future cash flows vary from what was expected, including those assumptions relating to the duration and severity of the financial impact from the COVID-19 pandemic, this may impact the impairment analysis and could reduce the underlying cash flows used to estimate fair values and result in a decline in fair value that may trigger future impairment charges. We normally assess goodwill for impairment during the fourth quarter and based on an updated evaluation of the impact of the events and factors noted in 2020 – macroeconomic, industry and company – we plan to utilize a quantitative model for the assessment of the recoverability of our goodwill balance. Note 2 – Recent Accounting Pronouncements Xerox Holdings and Xerox consider the applicability and impact of all Accounting Standards Updates (ASUs) issued by the Financial Accounting Standards Board (FASB). The ASUs listed below apply to both registrants. ASUs not listed below were assessed and determined to be not applicable to the Condensed Consolidated Financial Statements of either registrant. Accounting Standard Updates to be Adopted: Debt In August 2020, the FASB issued ASU 2020-06 , Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40). This update simplifies the accounting for convertible instruments by reducing the number of accounting models available for convertible debt instruments and convertible preferred stock. This update also amends the guidance for the derivatives scope exception for contracts in an entity's own equity to reduce form-over-substance-based accounting conclusions and requires the application of the if-converted method for calculating diluted earnings per share. This update is effective for our fiscal year beginning January 1, 2022. We are currently evaluating the impact of the adoption of this standard on the Company’s consolidated financial statements and related disclosures. Reference Rate Reform In March 2020, the FASB issued ASU 2020-04 , Reference Rate Reform (Topic 848), which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by the discontinuation of the London Interbank Offered Rate (“LIBOR”) or by another reference rate expected to be discontinued. The amendments are effective for all entities as of March 12, 2020 through December 31, 2022. There has been no impact to date as a result of ASU 2020-04, however we continue to evaluate potential future impacts that may result from the discontinuation of LIBOR or other reference rates as well as the accounting provided in this update on our financial condition, results of operations, and cash flows. Income Taxes In December 2019, the FASB issued ASU 2019-12 , Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which was intended to simplify various aspects related to accounting for income taxes . ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This update is effective for our fiscal year beginning January 1, 2021. Although we continue to evaluate the effects of this update on our Consolidated Financial Statements, at this stage we do not expect the adoption to have a material impact on our results of operations, financial position or disclosures. Xerox 2020 Form 10-Q 12 Accounting Standard Updates Adopted in 2020: Leases In April 2020, the FASB staff issued a question and answer (Q&A) document on the application of lease accounting guidance related to lease concessions provided as a result of the economic disruption caused by the COVID-19 pandemic (Topic 842 Q&A). Topic 842 Q&A provides interpretive guidance allowing companies the option to account for lease concessions related to the COVID-19 pandemic consistent with how those concessions would be accounted for under ASU 2016-02, Leases (Topic 842), as though enforceable rights and obligations for those concessions existed at the beginning of the contract (regardless of whether those enforceable rights and obligations for the concessions explicitly exist in the contract). This interpretive guidance was issued in order to reduce the costs and complexities of applying lease modification accounting under Topic 842 to leases impacted by the effects of the COVID-19 pandemic. This election is available for concessions related to the effects of the COVID-19 pandemic that do not result in a substantial increase in the rights of the lessor or the obligations of the lessee. We have elected to apply the interpretive guidance provided in Topic 842 Q&A to rent concessions related to the COVID-19 pandemic provided as a Lessor to our customers and as received as a Lessee. Rent deferrals provided as a Lessor were primarily offered to customers with sales type lease receivables. We elected to account for the deferrals in the timing of lease payments as if there were no changes in the lease contracts. Under this approach, assuming that collectibility of future lease payments is still probable, the classification of the leases is not updated and we retain the balance of the deferral as a receivable and will settle that receivable at the revised payment date or dates. As of September 30, 2020, we approved payment deferrals of up to three months of approximately $ 33 or approximately 1 % of our total finance receivable portfolio. The outstanding principal balance of receivables for customers with an approved payment deferral was approximately $ 337 . Rent abatements to the extent provided were not material and were accounted for as write-offs as part of our normal bad debt reserve assessment. With respect to rent deferrals and abatements received as a Lessee, we elected to account for the deferrals and abatements as a resolution of a contingency within the lease. Under this approach, we follow the resolution of a contingency model in ASC 842 without reclassifying the lease or updating the discount rate. We remeasure the remaining consideration in the contract, reallocate it to the lease and non-lease components as applicable, and remeasure the lease liability with an adjustment to the right-of-use asset for the same amount. If the total lease payments remain exactly the same, the lease cost remains unchanged. The impact of this election was not material to our financial condition, results of operations or cash flows, as no rent concessions provided to Xerox in the second or third quarters of 2020 were material, individually or in the aggregate. Government Grants/Assistance As a result of the significant increase in governmental assistance during 2020, we updated our significant accounting policies as summarized in Note 1 - Basis of Presentation and Summary of Significant Accounting Policies to the Consolidated Financial Statements included on Form 10-K for the year ended December 31, 2019, as follows for the accounting associated with government assistance. Government grants related to income are recognized as a reduction of related expenses in the Condensed Consolidated Statements of Income when there is a reasonable assurance that the entity will comply with the conditions attached to the grant and that the grants will be received. The timing and pattern of recognition of government grants is made on a systematic basis over the periods in which the Company recognizes the related expenses or losses that the grants are intended to compensate. Financial Instruments - Credit Losses On January 1, 2020, we adopted ASU 2016-13 , Financial Instruments Credit Losses - Measurement of Credit Losses on Financial Instruments. This update was issued by the FASB in June 2016, with additional updates and amendments being issued in 2018, 2019 and 2020 and requires measurement and recognition of expected credit losses for financial assets on an expected loss model rather than an incurred loss model. The update impacted financial assets including net investment in leases that are not accounted for at fair value through Net Income. The adoption of ASU 2016-13 primarily impacted the estimation of our Allowance for doubtful accounts for Accounts Receivable and Finance Receivables. The impact recorded on our initial adoption of ASU 2016-13 was not material as our previous methodology for assessing the adequacy of our Allowance for doubtful accounts for Finance Receivables, the larger component of our receivable reserves, incorporated an expected loss model and the methodology for both allowances included an assessment of current economic conditions. However, as previously disclosed, the future impact from this update is highly dependent on future economic conditions. Refer to Note 8 - Xerox 2020 Form 10-Q 13 Accounts Receivable, Net and Note 9 - Finance Receivable, Net for additional discussion regarding the impacts from the adoption of this update during the first quarter 2020. Intangibles - Internal-Use Software On January 1, 2020, we adopted ASU 2018-15 , Intangibles - Goodwill and Other - Internal Use Software (Subtopic 350-40), Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. This update was issued by the FASB in August 2018 and aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The update provides criteria for determining which implementation costs to capitalize as an asset related to the service contract and which costs to expense. The capitalized implementation costs are required to be expensed over the term of the hosting arrangement. The update also clarifies the presentation requirements for reporting such costs in the entity’s financial statements. The adoption of ASU 2018-15 did not have a material impact on our financial condition, results of operations or cash flows as we had previously capitalized these implementation costs and such amounts were not material. Other Updates In 2020 and 2019, the FASB also issued the following ASUs, which impact the Company but did not have or are not expected to have a material impact on our financial condition, results of operations or cash flows upon adoption. Those updates are as follows: • Investments: ASU 2020-01 , Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323) and Derivatives and Hedging (Topic 815). This update is effective for our fiscal year beginning January 1, 2021. • Compensation - Stock Compensation and Revenue from Contracts with Customers: ASU 2019-08 , (Topic 718) and (Topic 606) Codification Improvements - Share-Based Consideration Payable to a Customer. This update was effective for our fiscal year beginning January 1, 2020. • Collaborative Arrangements: ASU 2018-18 , (Topic 808) Clarifying the Interaction between Topic 808 and Topic 606. This update was effective for our fiscal year beginning January 1, 2020. • Fair Value Measurement: ASU 2018-13 , (Topic 820) Disclosure Framework. This update was effective for our fiscal year beginning January 1, 2020. Xerox 2020 Form 10-Q 14 Note 3 – Revenue Revenues disaggregated by primary geographic markets, major product lines, and sales channels are as follows: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Primary geographical markets (1) : United States $ 1,062 $ 1,343 $ 3,101 $ 3,955 Europe 480 521 1,317 1,705 Canada 94 123 278 377 Other 131 192 396 585 Total Revenues $ 1,767 $ 2,179 $ 5,092 $ 6,622 Major product and services lines: Equipment $ 419 $ 494 $ 1,054 $ 1,446 Supplies, paper and other sales 232 290 622 862 Maintenance agreements (2) 443 567 1,338 1,774 Service arrangements (3) 486 611 1,512 1,883 Rental and other 132 157 396 473 Financing 55 60 170 184 Total Revenues $ 1,767 $ 2,179 $ 5,092 $ 6,622 Sales channels: Direct equipment lease (4) $ 151 $ 200 $ 388 $ 484 Distributors & resellers (5) 245 301 604 949 Customer direct 255 283 684 875 Total Sales $ 651 $ 784 $ 1,676 $ 2,308 _____________ (1) Geographic area data is based upon the location of the subsidiary reporting the revenue. (2) Includes revenues from maintenance agreements on sold equipment as well as revenues associated with service agreements sold through our channel partners as Xerox Partner Print Services (XPPS). (3) Primarily includes revenues from our Managed Services offerings. Also includes revenues from embedded operating leases, which were not significant. (4) Primarily reflects direct sales through bundled lease arrangements. (5) Primarily reflects sales through our two-tier distribution channels. Contract Assets and Liabilities: We normally do not have contract assets, which are primarily unbilled accounts receivable that are conditional on something other than the passage of time. Our contract liabilities, which represent billings in excess of revenue recognized, are primarily related to advanced billings for maintenance and other services to be performed and were approximately $ 130 and $ 137 at September 30, 2020 and December 31, 2019, respectively. The balance at September 30, 2020 is expected to be amortized to revenue over approximately the next 30 months. Contract Costs: Incremental direct costs of obtaining a contract primarily include sales commissions paid to sales people and agents in connection with the placement of equipment with associated post sale services arrangements. These costs are deferred and amortized on the straight-line basis over the estimated contract term of the post sale services arrangement, which is currently estimated to be approximately four years . We pay commensurate sales commissions upon customer renewals, therefore our amortization period is aligned to our initial contract term. Incremental direct costs are as follows: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Incremental direct costs of obtaining a contract $ 15 $ 20 $ 43 $ 56 Amortization of incremental direct costs 19 23 60 66 The balance of deferred incremental direct costs net of accumulated amortization at September 30, 2020 and December 31, 2019 was $ 145 and $ 163 , respectively. This amount is expected to be amortized over its estimated period of benefit, which we currently estimate to be approximately four years . Xerox 2020 Form 10-Q 15 We may also incur costs associated with our services arrangements to generate or enhance resources and assets that will be used to satisfy our future performance obligations included in these arrangements. These costs are considered contract fulfillment costs and are amortized over the contractual service period of the arrangement to cost of services. In addition, we also provide inducements to certain customers in various forms, including contractual credits, which are capitalized and amortized as a reduction of revenue over the term of the contract. As of September 30, 2020 and December 31, 2019 amounts deferred associated with contract fulfillment costs and inducements were $ 12 and $ 13 , respectively. The related amortization was $ 1 and $ 1 for the three months ended September 30, 2020 and 2019, respectively, and $ 3 and $ 4 for the nine months ended September 30, 2020 and 2019, respectively. Equipment and software used in the fulfillment of service arrangements and where the Company retains control are capitalized and depreciated over the shorter of their useful life or the term of the contract if an asset is contract specific. Note 4 – Lessor Revenue from sales-type leases is presented on a gross basis when the company enters into a lease to realize value from a product that it would otherwise sell in its ordinary course of business, whereas in transactions where the company enters into a lease for the purpose of generating revenue by providing financing, the profit or loss, if any, is presented on a net basis. In addition, we have elected to account for sales tax and other similar taxes collected from a lessee as lessee costs and therefore we exclude these costs from contract consideration and variable consideration and present revenue net of these costs. The components of lease income are as follows: Location in Three Months Ended September 30, Nine Months Ended September 30, Statements of Income 2020 2019 2020 2019 Revenue from sales type leases Sales $ 151 $ 200 $ 388 $ 484 Interest income on lease receivables Financing 55 60 170 184 Lease income - operating leases Services, maintenance and rentals 77 99 242 303 Variable lease income Services, maintenance and rentals 15 25 51 80 Total Lease income $ 298 $ 384 $ 851 $ 1,051 Profit at lease commencement on sales type leases was estimated to be approximately $ 52 and $ 86 for the three months ended September 30, 2020 and 2019, respectively and $ 138 and $ 206 for the nine months ended September 30, 2020 and 2019, respectively. Xerox 2020 Form 10-Q 16 Note 5 – Acquisitions In 2020, Xerox continued its focus on further penetrating the small-to-medium sized business (SMB) market through acquisitions of local area resellers and partners (including multi-brand dealers). During the first quarter of 2020, business acquisitions associated with this initiative totaled $ 193 , net of cash acquired, and included three acquisitions in the U.K. for $ 171 (GBP 132 million) - Arena Group, Altodigital Networks and ITEC Connect, as well an acquisition in Canada for approximately $ 22 (CAD 29 million). These acquisitions are expected to expand Xerox's presence in the SMB market in both Western Europe and Canada. The operating results of these acquisitions are not material to our financial statements and are included within our results from the acquisition date. The purchase prices were all cash for 100 % ownership of the acquired companies and were primarily allocated to Intangible assets, net (approximately $ 70 ) and Goodwill (approximately $ 105 ), with the remainder to tangible net assets. The allocations are based on preliminary management estimates, which continue to be reviewed, and are expected to be finalized by the fourth quarter 2020 and may include input and support from third-party valuations. Any adjustments to the preliminary allocations are not expected to be material. Termination of Proposed Transaction with HP Inc. In November 2019, Xerox Holdings commenced a proposed business combination transaction with HP Inc. (HP). 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 and resulting macroeconomic and market turmoil created an environment that the company determined was not conducive to Xerox Holdings continuing an acquisition of HP. Accordingly, on March 31, 2020 Xerox Holdings withdrew its tender offer to acquire HP and terminated its proxy solicitation to nominate a slate of candidates to HP’s board of directors. In 2020, Xerox Holdings had obtained $ 24 billion in financing commitments from several banks to support the cash portion 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 . Note 6 – Divestitures Sales of Ownership Interests in Fuji Xerox Co., Ltd. and Xerox International Partners In November 2019, Xerox Holdings completed a series of transactions to restructure its relationship with FUJIFILM Holdings Corporation (FH), including the sale of its indirect 25 % equity interest in Fuji Xerox (FX), as well as the sale of its indirect 51 % partnership interest in Xerox International Partners (XIP) (collectively the Sales). As a result of the Sales and the related strategic shift in our business, the historical financial results of our equity method investment in FX and our XIP business (which was consolidated) for the periods prior to the Sales are reflected as a discontinued operation and as such, their impact is excluded from continuing operations for all periods presented. Summarized financial information for our Discontinued operations is as follows: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Revenue $ — $ 21 $ — $ 73 Income from operations (1) $ — $ 64 $ — $ 159 Gain on disposal — — — — Income before income taxes — 64 — 159 Income tax expense — — — 2 Income from discontinued operations, net of tax — 64 — 157 Income from discontinued operations attributable to noncontrolling interests, net of tax — — — 4 Income from discontinued operations, attributable to Xerox Holdings, net of tax $ — $ 64 $ — $ 153 _____________ (1) Includes Equity in net income for FX of $ 57 and $ 132 for the three and nine months ended September 30, 2019, respectively. Xerox 2020 Form 10-Q 17 Note 7 – Supplementary Financial Information Cash, Cash Equivalents and Restricted Cash Cash, cash equivalents and restricted cash amounts were as follows: September 30, 2020 December 31, 2019 Cash and cash equivalents $ 3,242 $ 2,740 Restricted cash Litigation deposits in Brazil 39 55 Other restricted cash 16 — Total Restricted cash 55 55 Cash, cash equivalents and restricted cash $ 3,297 $ 2,795 Restricted cash primarily relates to escrow cash deposits made in Brazil associated with ongoing litigation. As more fully discussed in Note 21 - Contingencies and Litigation, various litigation matters in Brazil require us to make cash deposits to escrow as a condition of continuing the litigation. Restricted cash amounts are classified in our Condensed Consolidated Balance Sheets based on when the cash will be contractually or judicially released. Restricted cash was reported in the Condensed Consolidated Balance Sheets as follows: September 30, 2020 December 31, 2019 Other current assets $ 16 $ — Other long-term assets 39 55 Total Restricted cash $ 55 $ 55 Supplemental Cash Flow Information Summarized cash flow information is as follows: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Provision for receivables $ 17 $ 13 $ 104 $ 40 Provision for inventory 6 3 20 18 Provision for product warranty 3 3 6 10 Depreciation of buildings and equipment 21 24 64 77 Depreciation and obsolescence of equipment on operating leases 45 56 142 172 Amortization of internal use software 11 15 32 48 Amortization of acquired intangible assets 13 9 34 35 Amortization of customer contract costs (1) 20 24 63 70 Cost of additions to land, buildings and equipment 9 11 36 30 Cost of additions to internal use software 9 6 24 18 Common stock dividends - Xerox Holdings 57 57 165 172 Preferred stock dividends - Xerox Holdings 4 4 11 11 Repurchases related to stock-based compensation - Xerox Holdings 9 10 19 20 _____________ (1) Amortization of customer contract costs is reported in Decrease (increase) in other current and long-term assets in the Condensed Consolidated Statements of Cash Flows. Refer to Note 3 - Revenue for additional information on contract costs. Xerox 2020 Form 10-Q 18 Note 8 – Accounts Receivable, Net Accounts receivable, net were as follows: September 30, 2020 December 31, 2019 Invoiced $ 731 $ 980 Accrued (1) 227 311 Allowance for doubtful accounts ( 63 ) ( 55 ) Accounts receivable, net $ 895 $ 1,236 _____________ (1) Accrued receivables include amounts to be invoiced in the subsequent quarter for current services provided. The allowance for doubtful accounts was as follows: Balance at December 31, 2019 $ 55 Provision 8 Charge-offs ( 2 ) Recoveries and other (1) ( 1 ) Balance at March 31, 2020 $ 60 Provision 9 Charge-offs ( 8 ) Recoveries and other (1) ( 1 ) Balance at June 30, 2020 $ 60 Provision 7 Charge-offs ( 6 ) Recoveries and other (1) 2 Balance at September 30, 2020 $ 63 _____________ (1) Includes the impacts of foreign currency translation and adjustments to reserves necessary to reflect events of non-payment such as customer accommodations and contract terminations. We perform ongoing credit evaluations of our customers and adjust credit limits based upon customer payment history and current creditworthiness. Consistent with our adoption of ASU 2016-13 effective January 1, 2020 (refer to Note 2 - Recent Accounting Pronouncements), the allowance for uncollectible accounts receivable is determined based on an assessment of past collection experience as well as consideration of current and future economic conditions and changes in our customer collection trends. Based on that assessment, and primarily as a result of the macroeconomic and market disruption caused by COVID-19, the allowance for doubtful accounts as a percent of gross accounts receivable increased to 6.6 % at September 30, 2020 from 4.3 % at December 31, 2019. Accounts Receivable Sales Arrangements Accounts receivable sales arrangements are utilized in the normal course of business as part of our cash and liquidity management. The accounts receivable sold are generally short-term trade receivables with payment due dates of less than 60 days. We have one facility in Europe that enables us to sell accounts receivable associated with our distributor network on an ongoing basis, without recourse. Under this arrangement, we sell our entire interest in the related accounts receivable for cash and no portion of the payment is held back or deferred by the purchaser. Of the accounts receivable sold and derecognized from our balance sheet, $ 83 and $ 165 remained uncollected as of September 30, 2020 and December 31, 2019, respectively. Accounts receivable sales activity was as follows: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Accounts receivable sales (1) $ 115 $ 67 $ 182 $ 265 ____________ _ (1) Losses on sales were not material. Customers may also enter into structured-payable arrangements that require us to sell our receivables from that customer to a third-party financial institution, which then makes payments to us to settle the customer's receivable. In these instances, we ensure the sale of the receivables are bankruptcy-remote and the payment made to us is without recourse. The activity associated with these arrangements is not reflected in this disclosure, as payments under these arrangements have not been material and these are customer directed arrangements. Xerox 2020 Form 10-Q 19 Note 9 - Finance Receivables, Net Finance receivables include sales-type leases and installment loans arising from the marketing of our equipment. These receivables are typically collateralized by a security interest in the underlying assets. Finance receivables, net were as follows: September 30, 2020 December 31, 2019 Gross receivables $ 3,600 $ 3,865 Unearned income ( 382 ) ( 425 ) Subtotal 3,218 3,440 Residual values — — Allowance for doubtful accounts ( 142 ) ( 89 ) Finance receivables, net 3,076 3,351 Less: Billed portion of finance receivables, net 111 111 Less: Current portion of finance receivables not billed, net 1,066 1,158 Finance receivables due after one year, net $ 1,899 $ 2,082 Finance Receivables – Allowance for Credit Losses and Credit Quality Our finance receivable portfolios are primarily in the U.S., Canada and EMEA. We generally establish customer credit limits and estimate the allowance for credit losses on a country or geographic basis. Customer credit limits are based upon an initial evaluation of the customer's credit quality and we adjust that limit accordingly based upon ongoing credit assessments of the customer, including payment history and changes in credit quality. Consistent with our adoption of ASU 2016-13 effective January 1, 2020 (refer to Note 2 - Recent Accounting Pronouncements), the allowance for credit losses is determined principally based on an assessment of origination year and past collection experience as well as consideration of current and future economic conditions and changes in our customer collection trends. Based on that assessment, and primarily as a result of the macroeconomic and market turmoil caused by COVID-19, the allowance for doubtful credit losses increased to 4.4 % of gross finance receivables (net of unearned income) at September 30, 2020 from 2.6 % at December 31, 2019. In assessing the level of reserve required as of September 30, 2020, we had to critically assess current and forecasted economic conditions in light of the COVID-19 pandemic to ensure we objectively included those expected impacts in the determination of our reserve. Our assessment also included current portfolio credit metrics and the level of reserves and write-offs we recorded on our receivable’s portfolio during the credit crisis in 2008/09 as additional reference points to objectively determine the adequacy of our allowance. The allowance for doubtful accounts and provision for credit losses represents an estimate of the losses expected to be incurred from the Company's finance receivable portfolio. The level of the allowance is determined on a collective basis by applying projected loss rates to our different portfolios by country, which represent our portfolio segments. This is the level at which we develop and document our methodology to determine the allowance for credit losses. This projected loss rates are primarily based upon historical loss experience adjusted for judgments about the probable effects of relevant observable data including current and future economic conditions as well as delinquency trends, resolution rates, the aging of receivables, credit quality indicators and the financial health of specific customer classes or groups. The allowance for doubtful finance receivables is inherently more difficult to estimate than the allowance for trade accounts receivable because the underlying lease portfolio has an average maturity, at any time, of approximately two to three years and contains past due billed amounts, as well as unbilled amounts. We consider all available information in our quarterly assessments of the adequacy of the allowance for doubtful accounts. We believe our estimates, including any qualitative adjustments, are reasonable and have considered all reasonably available information about past events, current conditions, and reasonable and supportable forecasts of future events and economic conditions. The identification of account-specific exposure is not a significant factor in establishing the allowance for doubtful finance receivables. Our policy and methodology used to establish our allowance for doubtful accounts has been consistently applied over all periods presented, with the exception of the updates required as part of our adoption of ASU 2016-13 effective January 1, 2020. Since our allowance for doubtful finance receivables is effectively determined by geography, the risk characteristics in our finance receivable portfolio segments will generally be consistent with the risk factors associated with the economies of the countries/regions included in those geographies. Since EMEA is comprised of various countries and regional economies, the risk profile within that portfolio segment is somewhat more diversified due to the varying economic conditions among and within the countries. Charge-offs in the U.S. and EMEA remained fairly Xerox 2020 Form 10-Q 20 steady during the first, second and third quarters of 2020 and as compared to the prior year. However, as reflected in our allowance for doubtful receivables, charge-offs are expected to increase over the remainder of the year and into 2021 as a result of the economic disruption related to the COVID-19 pandemic. Amounts disclosed below for the nine months ended and at September 30, 2020 reflect the adoption of ASU 2016-13 in January 2020. Amounts disclosed below for comparable periods in 2019 reflect superseded guidance. The allowance for doubtful accounts as well as the related investment in finance receivables were as follows: United States Canada (1) EMEA (1)(2) Total Balance at December 31, 2019 $ 59 $ 11 $ 19 $ 89 Provision 35 6 25 66 Charge-offs ( 3 ) ( 1 ) ( 4 ) ( 8 ) Recoveries and other (3) — ( 1 ) — ( 1 ) Balance at March 31, 2020 $ 91 $ 15 $ 40 $ 146 Provision 3 1 — 4 Charge-offs ( 5 ) ( 1 ) ( 2 ) ( 8 ) Recoveries and other (3) — 1 — 1 Balance at June 30, 2020 $ 89 $ 16 $ 38 $ 143 Provision 6 — 3 9 Charge-offs ( 6 ) ( 2 ) ( 5 ) ( 13 ) Recoveries and other (3) — 1 2 3 Balance at September 30, 2020 $ 89 $ 15 $ 38 $ 142 Finance receivables as of September 30, 2020 collectively evaluated for impairment (4) $ 1,819 $ 284 $ 1,115 $ 3,218 Balance at December 31, 2018 $ 53 $ 12 $ 27 $ 92 Provision 4 1 4 9 Charge-offs ( 4 ) ( 1 ) ( 3 ) ( 8 ) Recoveries and other (3) — — — — Balance at March 31, 2019 $ 53 $ 12 $ 28 $ 93 Provision 4 1 3 8 Charge-offs ( 5 ) ( 3 ) ( 3 ) ( 11 ) Recoveries and other (3) 1 2 — 3 Balance at June 30, 2019 $ 53 $ 12 $ 28 $ 93 Provision 6 — 2 8 Charge-offs ( 5 ) ( 1 ) ( 3 ) ( 9 ) Recoveries and other (3) 1 — — 1 Balance at September 30, 2019 $ 55 $ 11 $ 27 $ 93 Finance receivables as of September 30, 2019 collectively evaluated for impairment (4) $ 1,900 $ 324 $ 1,157 $ 3,381 _____________ (1) Prior year amounts have been recasted to include the Other geographic region, which was previously disclosed as a separate grouping, conforming to the current year's presentation. (2) Includes developing market countries. (3) Includes the impacts of foreign currency translation and adjustments to reserves necessary to reflect events of non-payment such as customer accommodations and contract terminations. (4) Total Finance receivables exclude the allowance for credit losses of $ 142 and $ 93 at September 30, 2020 and 2019, respectively. In the U.S., customers are further evaluated by class based on the type of lease origination. The primary categories are direct, which primarily includes leases originated directly with end customers through bundled lease arrangements, and indirect, which includes lease financing to end-user customers who purchased equipment we sold to distributors or resellers. Indirect also includes leases originated through our XBS sales channel, which utilizes a combination of internal and third party leasing in its lease arrangements with end customers. We evaluate our customers based on the following credit quality indicators: • Low Credit Risk: This rating includes accounts with excellent to good business credit, asset quality and capacity to meet financial obligations. These customers are less susceptible to adverse effects due to shifts in economic conditions or changes in circumstance. The rating generally equates to a Standard & Poor's (S&P) rating of BBB- or better. Loss rates in this category in the normal course are generally less than 1 %. Xerox 2020 Form 10-Q 21 • Average Credit Risk: This rating includes accounts with average credit risk that are more susceptible to loss in the event of adverse business or economic conditions. This rating generally equates to a BB S&P rating. Although we experience higher loss rates associated with this customer class, we believe the risk is somewhat mitigated by the fact that our leases are fairly well dispersed across a large and diverse customer base. In addition, the higher loss rates are largely offset by the higher rates of return we obtain with such leases. Loss rates in this category in the normal course are generally in the range of 2 % to 5 %. • High Credit Risk: This rating includes accounts that have marginal credit risk such that the customer’s ability to make repayment is impaired or may likely become impaired. We use numerous strategies to mitigate risk including higher rates of interest, prepayments, personal guarantees, etc. Accounts in this category include customers who were downgraded during the term of the lease from low and average credit risk evaluation when the lease was originated. Accordingly, there is a distinct possibility for a loss of principal and interest or customer default. The loss rates in this category in the normal course are generally in the range of 7 % to 10 %. Credit quality indicators are updated at least annually, or more frequently to the extent required by economic conditions, and the credit quality of any given customer can change during the life of the portfolio. Details about our finance receivables portfolio based on geography, origination year and credit quality indicators are as follows: September 30, 2020 December 31, 2019 2020 2019 2018 2017 2016 Prior Total Finance Receivables Total Finance Receivables United States (Direct): Low Credit Risk $ 117 $ 160 $ 144 $ 87 $ 48 $ 7 $ 563 $ 640 Average Credit Risk 42 103 60 31 12 3 251 331 High Credit Risk 65 47 29 16 6 3 166 132 Total $ 224 $ 310 $ 233 $ 134 $ 66 $ 13 $ 980 $ 1,103 United States (Indirect): Low Credit Risk $ 154 $ 180 $ 103 $ 45 $ 14 $ 1 $ 497 $ 258 Average Credit Risk 86 110 73 35 9 1 314 445 High Credit Risk 13 6 5 3 1 — 28 116 Total $ 253 $ 296 $ 181 $ 83 $ 24 $ 2 $ 839 $ 819 Canada (1) Low Credit Risk $ 24 $ 34 $ 26 $ 11 $ 8 $ 2 $ 105 $ 163 Average Credit Risk 32 40 29 20 8 1 130 97 High Credit Risk 13 11 10 12 3 — 49 66 Total $ 69 $ 85 $ 65 $ 43 $ 19 $ 3 $ 284 $ 326 EMEA (1)(2) Low Credit Risk $ 128 $ 189 $ 145 $ 73 $ 29 $ 6 $ 570 $ 655 Average Credit Risk 108 164 117 60 22 4 475 479 High Credit Risk 16 22 16 11 4 1 70 58 Total $ 252 $ 375 $ 278 $ 144 $ 55 $ 11 $ 1,115 $ 1,192 Total Finance Receivables Low Credit Risk $ 423 $ 563 $ 418 $ 216 $ 99 $ 16 $ 1,735 $ 1,716 Average Credit Risk 268 417 279 146 51 9 1,170 1,352 High Credit Risk 107 86 60 42 14 4 313 372 Total $ 798 $ 1,066 $ 757 $ 404 $ 164 $ 29 $ 3,218 $ 3,440 _____________ (1) Prior year amounts have been recasted to include the Other geographic region, which was previously disclosed as a separate grouping, conforming to the current year's presentation. (2) Includes developing market countries. Xerox 2020 Form 10-Q 22 The aging of our receivables portfolio is based upon the number of days an invoice is past due. Receivables that are more than 90 days past due are considered delinquent. Receivable losses are charged against the allowance when management believes the uncollectibility of the receivable is confirmed and is generally based on individual credit evaluations, results of collection efforts and specific circumstances of the customer. Subsequent recoveries, if any, are credited to the allowance. We generally continue to maintain equipment on lease and provide services to customers that have invoices for finance receivables that are 90 days or more past due and, as a result of the bundled nature of billings, we also continue to accrue interest on those receivables. However, interest revenue for such billings is only recognized if collectability is deemed reasonably assured. The aging of our billed finance receivables is as follows: September 30, 2020 Current 31-90 Days Past Due >90 Days Past Due Total Billed Unbilled Total Finance Receivables >90 Days and Accruing Direct $ 35 $ 9 $ 11 $ 55 $ 925 $ 980 $ 79 Indirect 23 6 3 32 807 839 — Total United States 58 15 14 87 1,732 1,819 79 Canada (1) 7 2 1 10 274 284 19 EMEA (1) 12 3 3 18 1,097 1,115 37 Total $ 77 $ 20 $ 18 $ 115 $ 3,103 $ 3,218 $ 135 December 31, 2019 Current 31-90 Days Past Due >90 Days Past Due Total Billed Unbilled Total Finance Receivables >90 Days and Accruing Direct $ 37 $ 11 $ 8 $ 56 $ 1,047 $ 1,103 $ 57 Indirect 25 5 3 33 786 819 — Total United States 62 16 11 89 1,833 1,922 57 Canada (1) 8 2 1 11 315 326 17 EMEA (1)(2) 12 1 2 15 1,177 1,192 32 Total $ 82 $ 19 $ 14 $ 115 $ 3,325 $ 3,440 $ 106 _____________ (1) Includes developing market countries. (2) Prior year amounts have been recasted to include the Other geographic region, which was previously disclosed as a separate grouping, conforming to the current year's presentation. Secured Borrowings and Collateral In July 2020, we sold $ 355 of U.S. based finance receivables to a consolidated special purpose entity (SPE), which funded the purchase through a secured loan agreement with a financial institution. As of September 30, 2020 the SPE holds $ 314 of total Finance receivables, net, which are included in our Condensed Consolidated Balance Sheet as collateral for the secured loan agreement. Refer to Note 13 - Debt, for additional information related to this arrangement including the related secured loan agreement. Note 10 – Inventories and Equipment on Operating Leases, Net The following is a summary of Inventories by major category: September 30, 2020 December 31, 2019 Finished goods $ 823 $ 576 Work-in-process 48 47 Raw materials 107 71 Total Inventories $ 978 $ 694 Xerox 2020 Form 10-Q 23 The transfer of equipment from our inventories to equipment subject to an operating lease is presented in our Condensed Consolidated Statements of Cash Flows in the operating activities section. Equipment on operating leases and similar arrangements consists of our equipment rented to customers and depreciated to estimated salvage value at the end of the lease term. Equipment on operating leases and the related accumulated depreciation were as follows: September 30, 2020 December 31, 2019 Equipment on operating leases $ 1,388 $ 1,443 Accumulated depreciation ( 1,087 ) ( 1,079 ) Equipment on operating leases, net $ 301 $ 364 Total contingent rentals on operating leases, consisting principally of usage charges in excess of minimum contracted amounts, were $ 15 and $ 25 for the three months ended September 30, 2020 and 2019, respectively, and $ 51 and $ 80 for the nine months ended September 30, 2020 and 2019, respectively. Secured Borrowings and Collateral In July 2020, we sold the rights to payments under operating leases with an equipment net book value of $ 10 to a consolidated SPE, which funded the purchase through a secured loan agreement with a financial institution. As of September 30, 2020 the SPE holds $ 9 of Equipment on operating leases, net, which are included in our Condensed Consolidated Balance Sheet as collateral for the secured loan agreement. Refer to Note 13 - Debt, for additional information related to this arrangement including the related secured loan agreement. Note 11 – Lessee Operating Leases We have operating leases for real estate and vehicles in our domestic and international operations and for certain equipment in our domestic operations. Additionally, we have identified embedded operating leases within certain supply chain contracts for warehouses, primarily within our domestic operations. Our leases have remaining terms of up to twelve years and a variety of renewal and/or termination options. The components of lease expense are as follows: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Operating lease expense $ 29 $ 31 $ 85 $ 97 Short-term lease expense 5 6 15 16 Variable lease expense (1) 12 12 34 37 Sublease income ( 1 ) — ( 2 ) ( 1 ) Total Lease expense $ 45 $ 49 $ 132 $ 149 _____________ (1) Variable lease expense is related to our leased real estate for offices and warehouses and primarily includes labor and operational costs as well as taxes and insurance. Operating leases right-of-use (ROU) assets, net and operating lease liabilities were reported in the Condensed Consolidated Balance Sheets as follows: September 30, 2020 December 31, 2019 Other long-term assets $ 323 $ 319 Accrued expenses and other current liabilities $ 86 $ 87 Other long-term liabilities 264 260 Total Operating lease liabilities $ 350 $ 347 Xerox 2020 Form 10-Q 24 Supplemental information related to operating leases is as follows: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Cash paid for amounts included in the measurement of lease liabilities - Operating cash flows $ 31 $ 31 $ 89 $ 95 ROU assets obtained in exchange for new lease liabilities (1) $ 17 $ 5 $ 73 $ 28 Weighted-average remaining lease term 5 years 4 years Weighted-average discount rate 5.06 % 5.63 % _____________ (1) Includes the impact of new leases as well as remeasurements and modifications to existing leases. Finance Leases Xerox has finance leases for equipment and related infrastructure within outsourced warehouse supply arrangements in the U.S. and Europe. The leases have varying maturities up to six years with a maximum expiration date through December 2026. As of September 30, 2020 the remaining lease obligation for all finance leases is $ 9 , based on a weighted-average discount rate of 4.41 %. The Right-of-use asset balance associated with these finance leases of $ 11 is included in Land, buildings and equipment, net in the Condensed Consolidated Balance Sheet. Note 12 – Restructuring Programs We engage in restructuring actions, including Project Own It, as well as other transformation efforts in order to reduce our cost structure and realign it to the changing nature of our business and to achieve operating efficiencies through a number of opportunities, including reduction of our real estate footprint. During the nine months ended September 30, 2020, we recorded net restructuring and asset impairment charges of $ 47 , which included $ 57 of severance costs related to headcount reductions of approximately 1,100 employees worldwide, $ 2 of other contractual termination costs and $ 6 of asset impairment charges. These costs were partially offset by $ 18 of net reversals, primarily resulting from changes in estimated reserves from prior period initiatives. Information related to restructuring program activity is outlined below: Severance and Related Costs Other Contractual Termination Costs (2) Asset Impairments (3) Total Balance at December 31, 2019 $ 66 $ 4 $ — $ 70 Provision 32 1 2 35 Reversals ( 5 ) — ( 1 ) ( 6 ) Net current period charges (1) 27 1 1 29 Charges against reserve and currency ( 36 ) 2 ( 1 ) ( 35 ) Balance at March 31, 2020 $ 57 $ 7 $ — $ 64 Provision 7 — — 7 Reversals ( 6 ) ( 1 ) ( 2 ) ( 9 ) Net current period charges (1) 1 ( 1 ) ( 2 ) ( 2 ) Charges against reserve and currency ( 14 ) ( 1 ) 2 ( 13 ) Balance at June 30, 2020 $ 44 $ 5 $ — $ 49 Provision 18 1 4 23 Reversals ( 2 ) — ( 1 ) ( 3 ) Net current period charges (1) 16 1 3 20 Charges against reserve and currency ( 8 ) ( 2 ) ( 3 ) ( 13 ) Balance at September 30, 2020 $ 52 $ 4 $ — $ 56 _____________ _ (1) Represents net amount recognized within the Condensed Consolidated Statements of Income for the period shown for restructuring and asset impairment charges. (2) Primarily includes additional costs incurred upon the exit from our facilities including decommissioning costs and associated contractual termination costs. Charges against reserve and currency for first quarter 2020 include a reclassification of $ 4 related to expected recovery from sublease. (3) Primarily related to the exit and abandonment of leased and owned facilities. The charge includes the accelerated write-off of $ 3 for leased right-of-use assets and $ 3 for owned assets upon exit from the facilities, net of any potential sublease income and other recoveries. Xerox 2020 Form 10-Q 25 The following table summarizes the reconciliation to the Condensed Consolidated Statements of Cash Flows: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Charges against reserve and currency $ ( 13 ) $ ( 20 ) $ ( 61 ) $ ( 118 ) Effects of foreign currency and other non-cash items 2 3 ( 2 ) 47 Restructuring cash payments $ ( 11 ) $ ( 17 ) $ ( 63 ) $ ( 71 ) In connection with our restructuring programs, we also incurred certain related costs as follows: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Retention related severance/bonuses (1) $ ( 2 ) $ 11 $ 9 $ 31 Contractual severance costs (2) — 3 4 41 Consulting and other costs (3) 2 5 4 24 Total $ — $ 19 $ 17 $ 96 ____________ _ (1) Includes retention related severance and bonuses for employees expected to continue working beyond their minimum notification period before termination. (2) Amounts for nine months ended September 30, 2019 include approximately $ 38 for estimated severance and other related costs we were contractually required to pay in connection with employees transferred as part of the shared service arrangement entered into with HCL Technologies in the first quarter 2019. (3) Represents professional support services associated with our business transformation initiatives. The restructuring related costs reserve as of September 30, 2020 was $ 33 , which is expected to be paid over the next twelve months, as compared to $ 37 at December 31, 2019. Note 13 – Debt Senior Notes On August 6, 2020, Xerox Holdings issued $ 550 of 5.000 % Senior Notes due August 2025 (the "2025 Senior Notes") at par and $ 550 of 5.500 % Senior Notes due August 2028 (the "2028 Senior Notes") at par resulting in aggregate net proceeds (after fees and expenses) of approximately $ 1,089 . On August 24, 2020, Xerox Holdings issued an additional $ 200 of the 2025 Senior Notes at 100.75 % of par and an additional $ 200 of the 2028 Senior Notes at 102.50 % of par resulting in additional aggregate net proceeds (after premium, fees and expenses) of approximately $ 405 for total aggregate net proceeds from both issuances of approximately $ 1,494 . The Notes are fully and unconditionally guaranteed by Xerox Corporation. In addition, the notes and the related guarantees were issued in a private placement only to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended, and have not been registered for sale under the Securities Act or any state securities laws. Interest on the 2025 and 2028 Senior Notes is payable semi-annually. Debt issuance costs of approximately $ 13 were paid and deferred in connection with the issuance of the 2025 and 2028 Senior Notes and will be amortized over the term of the Senior Notes. The net debt proceeds were contributed by Xerox Holdings to Xerox Corporation and used to repay $ 362 aggregate principal amount of 3.500 % senior notes of Xerox Corporation and $ 376 aggregate principal amount of 2.750 % senior notes of Xerox Corporation, which were both due in third quarter 2020. Xerox Corporation also used the balance of the net proceeds to prepay a portion of the 4.500 % senior notes due 2021 in October 2020 (Refer to Note 18 – Shareholder's Equity of Xerox for additional information regarding the contribution and Note 22 - Subsequent Event for additional information regarding this prepayment). Credit Facility On July 31, 2020, Xerox and Xerox Holdings entered into Amendment No. 3 to the Credit Facility, which modified the financial covenants to require that, during a specified covenant modification period (which begins on the effective date of the Amendment and ends on the earlier of (1) December 31, 2021 and (2) the date on which Xerox delivers a written notice to the Administrative Agent electing to end such period (the “Financial Covenant Modification Period”), Xerox must maintain unrestricted cash (as defined in the Amendment) in an amount not less than $ 1.0 billion. Further, the Amendment relaxed the financial maintenance leverage covenant in the Credit Agreement by requiring that, during the Financial Covenant Modification Period, Xerox maintain a ratio of net debt Xerox 2020 Form 10-Q 26 for borrowed money to consolidated EBITDA of not greater than 4.25 :1.00 (with a cap on cash netting of $ 1.75 billion), in lieu of the 4.25 :1.00 total debt for borrowed money to consolidated EBITDA ratio requirement applicable prior to the Amendment. Secured Borrowings and Collateral In July 2020, we entered into a secured loan agreement with a financial institution where we sold $ 355 of U.S. based finance receivables and the rights to payments under operating leases with an equipment net book value of $ 10 to a special purpose entity (SPE). The purchase by the SPE was funded through an amortizing secured loan to the SPE from the financial institution of $ 340 . The sale of the receivables to the SPE was structured as a "true sale at law," and we have received an opinion to that effect from outside legal counsel. However, the transaction was accounted for as a secured borrowing as we consolidate the SPE since we have both the power to direct the activities that most significantly impact the SPE's economic performance through our role as servicer of all the receivables held by the SPE, and the obligation through variable interests in the SPE to absorb losses or receive benefits that could potentially be significant to the SPE. As a result, the assets of the SPE are not available to satisfy any of our other obligations. Conversely, the credit holder of this SPE does not have legal recourse to the Company’s general credit. The debt has a variable interest rate based on LIBOR plus a spread (current rate of 1.73 % at September 30, 2020) and an expected life of less than three years with half projected to be repaid within the first year based on collections of the underlying portfolio of receivables. We also entered into an interest rate hedge agreement to cap LIBOR over the life of the loan. The proceeds from this debt funded the cash used in May 2020 to repay the $ 313 aggregate principal amount of 2.80 % Senior Notes due 2020 of Xerox Corporation. Below are the assets and liabilities held by the consolidated SPE, which are included in our Condensed Consolidated Balance Sheet: September 30, 2020 Assets held by SPE Finance receivables, net $ 132 Finance receivables due after one year, net 182 Equipment on operating leases, net 9 Total Assets $ 323 Liabilities held by SPE Current portion of long-term debt, net (1) $ 158 Long term debt, net (2) 157 Total Liabilities $ 315 ____________ _ (1) Amounts net of unamortized debt issuance costs of $ 1 . (2) Amounts net of unamortized debt issuance costs of $ 1 . Interest Expense and Income Interest expense and income were as follows: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Interest expense (1) $ 59 $ 60 $ 158 $ 179 Interest income (2) 56 62 182 193 ____________ _ (1) Includes Cost of financing as well as non-financing interest expense that is included in Other expenses, net in the Condensed Consolidated Statements of Income. (2) Includes Financing revenue as well as other interest income that is included in Other expenses, net in the Condensed Consolidated Statements of Income. Xerox 2020 Form 10-Q 27 Note 14 – Financial Instruments Interest Rate Risk Management We use interest rate swap agreements to manage our interest rate exposure and to achieve a desired proportion of variable and fixed rate debt. These derivatives may be designated as fair value hedges or cash flow hedges depending on the nature of the risk being hedged. Fair Value Hedges During the first quarter 2020, we terminated our remaining pay variable/receive fixed interest rate swaps with notional amounts of $ 200 and net asset fair value of $ 4 prior to termination. The swaps had been designated and accounted for as fair value hedges prior to termination. The swaps were structured to hedge the fair value of related debt by converting them from fixed rate instruments to variable rate instruments. No ineffective portion was recorded to earnings for the nine months ended September 30, 2020 prior to termination. The corresponding net fair value adjustment to the hedged debt of $( 4 ) will be amortized to interest expense over the remaining term of the related notes. Foreign Exchange Risk Management We are a global company and we are exposed to foreign currency exchange rate fluctuations in the normal course of our business. As a part of our foreign exchange risk management strategy, we use derivative instruments, primarily forward contracts and purchased option contracts, to hedge the following foreign currency exposures, thereby reducing volatility of earnings or protecting fair values of assets and liabilities: • Forecasted purchases and sales in foreign currency • Foreign currency-denominated assets and liabilities At September 30, 2020 and December 31, 2019, we had outstanding forward exchange and purchased option contracts with gross notional values of $ 958 and $ 1,091 respectively, with terms of less than 12 months. Approximately 80 % of the contracts at September 30, 2020 mature within three months, 9 % mature in three to six months and 11 % in six to twelve months. The associated currency exposures being hedged at September 30, 2020 were lower by 12 % as compared to our year-end currency exposures. There has not been any material change in our hedging strategy. Foreign Currency Cash Flow Hedges We designate a portion of our foreign currency derivative contracts as cash flow hedges of our foreign currency-denominated inventory purchases, sales and expenses. The net asset (liability) fair value of these contracts were $ 1 and $( 4 ) as of September 30, 2020 and December 31, 2019, respectively. Summary of Derivative Instruments Fair Value The following table provides a summary of the fair value amounts of our derivative instruments: Designation of Derivatives Balance Sheet Location September 30, 2020 December 31, 2019 Derivatives Designated as Hedging Instruments Foreign exchange contracts - forwards Other current assets $ 3 $ 1 Accrued expenses and other current liabilities ( 2 ) ( 5 ) Interest rate swaps Other long-term assets — 1 Net designated derivative asset (liability) $ 1 $ ( 3 ) Derivatives NOT Designated as Hedging Instruments Foreign exchange contracts – forwards Other current assets $ 4 $ 1 Accrued expenses and other current liabilities ( 1 ) ( 3 ) Net undesignated derivative asset (liability) $ 3 $ ( 2 ) Summary of Derivatives Total Derivative assets $ 7 $ 3 Total Derivative liabilities ( 3 ) ( 8 ) Net Derivative asset (liability) $ 4 $ ( 5 ) Xerox 2020 Form 10-Q 28 Summary of Derivative Instruments Gains (Losses) Derivative gains and (losses) affect the income statement based on whether such derivatives are designated as hedges of underlying exposures. The following is a summary of derivative gains (losses). Designated Derivative Instruments Gains (Losses) The following table provides a summary of gains (losses) on derivative instruments: Three Months Ended September 30, Nine Months Ended September 30, Gain (Loss) on Derivative Instruments 2020 2019 2020 2019 Fair Value Hedges - Interest Rate Contracts Derivative (loss) gain recognized in interest expense $ — $ — $ ( 1 ) $ 4 Hedged item gain (loss) recognized in interest expense — — 1 ( 4 ) Cash Flow Hedges - Foreign Exchange Forward Contracts and Options Derivative gain recognized in OCI (effective portion) $ 1 $ 4 $ 5 $ 10 Derivative gain reclassified from AOCL to income - Cost of sales (effective portion) — 3 1 6 During the three and nine months ended September 30, 2020 and 2019, no amount of ineffectiveness was recorded in the Condensed Consolidated Statements of Income for these designated cash flow hedges and all components of each derivative’s gain or (loss) were included in the assessment of hedge effectiveness. In addition, no amount was recorded for an underlying exposure that did not occur or was not expected to occur. As of September 30, 2020, a net after-tax gain of $ 2 was recorded in Accumulated other comprehensive loss associated with our cash flow hedging activity. The entire balance is expected to be reclassified into net income within the next 12 months, providing an offsetting economic impact against the underlying anticipated transactions. Non-Designated Derivative Instruments Gains (Losses) Non-designated derivative instruments are primarily instruments used to hedge foreign currency-denominated assets and liabilities. They are not designated as hedges since there is a natural offset for the remeasurement of the underlying foreign currency-denominated asset or liability. The following table provides a summary of gains and (losses) on non-designated derivative instruments: Derivatives NOT Designated as Hedging Instruments Location of Derivative Gain Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Foreign exchange contracts – forwards Other expense – Currency gain, net $ 2 $ 2 $ 19 $ 3 For the three and nine months ended September 30, 2020 currency losses, net were $ 0 and $ 4 , respectively, and for the three and nine months ended September 30, 2019 were $ 4 and $ 6 , respectively. Net currency gains and losses include the mark-to-market adjustments of the derivatives not designated as hedging instruments and the related cost of those derivatives as well as the remeasurement of foreign currency-denominated assets and liabilities and are included in Other expenses, net. Xerox 2020 Form 10-Q 29 Note 15 – Fair Value of Financial Assets and Liabilities The following table represents assets and liabilities measured at fair value on a recurring basis. The basis for the measurement at fair value in all cases is Level 2 – Significant Other Observable Inputs. September 30, 2020 December 31, 2019 Assets Foreign exchange contracts - forwards $ 7 $ 2 Interest rate swaps — 1 Deferred compensation investments in mutual funds 18 19 Total $ 25 $ 22 Liabilities Foreign exchange contracts - forwards $ 3 $ 8 Deferred compensation plan liabilities 17 18 Total $ 20 $ 26 We utilize the income approach to measure the fair value for our derivative assets and liabilities. The income approach uses pricing models that rely on market observable inputs such as yield curves, currency exchange rates and forward prices, and therefore are classified as Level 2. Fair value for our deferred compensation plan investments in mutual funds is based on quoted market prices for those funds. Fair value for deferred compensation plan liabilities is based on the fair value of investments corresponding to employees’ investment selections. Summary of Other Financial Assets and Liabilities The estimated fair values of our other financial assets and liabilities were as follows: September 30, 2020 December 31, 2019 Carrying Amount Fair Value Carrying Amount Fair Value Cash and cash equivalents $ 3,242 $ 3,242 $ 2,740 $ 2,740 Accounts receivable, net 895 895 1,236 1,236 Short-term debt and current portion of long-term debt 1,218 1,240 1,049 1,054 Long-term debt 3,836 3,899 3,233 3,331 The fair value amounts for Cash and cash equivalents and Accounts receivable, net, approximate carrying amounts due to the short maturities of these instruments. The fair value of Short-term debt, including the current portion of long-term debt, and Long-term debt was estimated based on the current rates offered to us for debt of similar maturities (Level 2). The difference between the fair value and the carrying value represents the theoretical net premium or discount we would pay or receive to retire all debt at such date. Xerox 2020 Form 10-Q 30 Note 16 – Employee Benefit Plans The components of Net periodic benefit cost and other changes in plan assets and benefit obligations were as follows: Three Months Ended September 30, Pension Benefits U.S. Plans Non-U.S. Plans Retiree Health Components of Net Periodic Benefit Costs: 2020 2019 2020 2019 2020 2019 Service cost $ — $ 1 $ 5 $ 5 $ 1 $ — Interest cost 21 25 29 37 2 3 Expected return on plan assets ( 27 ) ( 26 ) ( 49 ) ( 56 ) — — Recognized net actuarial loss (gain) 6 7 15 10 — ( 1 ) Amortization of prior service credit — — ( 1 ) — ( 19 ) ( 19 ) Recognized settlement loss 10 18 — — — — Defined benefit plans 10 25 ( 1 ) ( 4 ) ( 16 ) ( 17 ) Defined contribution plans ( 10 ) 6 6 5 n/a n/a Net Periodic Benefit Cost (Credit) — 31 5 1 ( 16 ) ( 17 ) Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income (Loss): Net actuarial loss (gain) (1) 77 135 — — — ( 9 ) Amortization of net actuarial (loss) gain ( 16 ) ( 25 ) ( 15 ) ( 10 ) — 1 Amortization of net prior service credit — — 1 — 19 19 Total Recognized in Other Comprehensive Income (Loss) (2) 61 110 ( 14 ) ( 10 ) 19 11 Total Recognized in Net Periodic Benefit Cost (Credit) and Other Comprehensive Income (Loss) $ 61 $ 141 $ ( 9 ) $ ( 9 ) $ 3 $ ( 6 ) Nine Months Ended September 30, Pension Benefits U.S. Plans Non-U.S. Plans Retiree Health Components of Net Periodic Benefit Costs: 2020 2019 2020 2019 2020 2019 Service cost $ 1 $ 2 $ 15 $ 17 $ 2 $ 1 Interest cost 65 83 84 114 8 11 Expected return on plan assets ( 79 ) ( 77 ) ( 142 ) ( 174 ) — — Recognized net actuarial loss (gain) 20 18 43 32 ( 1 ) ( 3 ) Amortization of prior service credit ( 1 ) ( 1 ) ( 1 ) ( 1 ) ( 57 ) ( 57 ) Recognized settlement loss 42 76 — — — — Recognized curtailment gain — — ( 1 ) — — — Defined benefit plans 48 101 ( 2 ) ( 12 ) ( 48 ) ( 48 ) Defined contribution plans 1 19 16 17 n/a n/a Net Periodic Benefit Cost (Credit) 49 120 14 5 ( 48 ) ( 48 ) Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income (Loss): Net actuarial (gain) loss (1) ( 3 ) 171 — — ( 6 ) ( 9 ) Amortization of net actuarial (loss) gain ( 62 ) ( 94 ) ( 43 ) ( 32 ) 1 3 Amortization of prior service credit 1 1 1 1 57 57 Total Recognized in Other Comprehensive Income (Loss) (2) ( 64 ) 78 ( 42 ) ( 31 ) 52 51 Total Recognized in Net Periodic Benefit (Credit) Cost and Other Comprehensive Income (Loss) $ ( 15 ) $ 198 $ ( 28 ) $ ( 26 ) $ 4 $ 3 _____________ (1) The net actuarial (gain) loss for U.S. Plans primarily reflects (i) the remeasurement of our primary U.S. pension plans as a result of the payment of periodic settlements and (ii) adjustments for the actuarial valuation results based on January 1st plan census data. (2) Amounts represent the pre-tax effect included within Other Comprehensive Income (Loss). Refer to Note 19 - Other Comprehensive Income (Loss) for related tax effects and the after-tax amounts. Xerox 2020 Form 10-Q 31 Contributions The following table summarizes cash contributions to our defined benefit pension plans and retiree health benefit plans. Nine Months Ended September 30, Year Ended December 31, 2020 2019 Estimated 2020 2019 U.S. plans $ 18 $ 19 $ 25 $ 26 Non-U.S. plans 79 88 110 115 Total Pension $ 97 $ 107 $ 135 $ 141 Retiree Health $ 17 $ 22 $ 30 $ 30 There are no mandatory contributions required in 2020 for our U.S. tax-qualified defined benefit plans to meet the minimum funding requirements. Defined Contribution Plans In the third quarter 2020, the Company temporarily suspended and will not make its full year 2020 employer match/contribution for its U.S. based 401(k) saving plans for salaried employees. The suspension is expected to result in savings of approximately $ 25 for the year ending December 31, 2020. Xerox 2020 Form 10-Q 32 Note 17 – Shareholders’ Equity of Xerox Holdings (shares in thousands) The shareholders' equity information presented below reflects the consolidated activity of Xerox Holdings. Common Stock Additional Paid-in Capital Treasury Stock Retained Earnings AOCL (1) Xerox Holdings Shareholders’ Equity Non-controlling Interests Total Equity Balance at June 30, 2020 $ 213 $ 2,722 $ — $ 6,223 $ ( 3,681 ) $ 5,477 $ 4 $ 5,481 Comprehensive income, net — — — 90 88 178 — 178 Cash dividends declared - common (2) — — — ( 51 ) — ( 51 ) — ( 51 ) Cash dividends declared - preferred (3) — — — ( 4 ) — ( 4 ) — ( 4 ) Stock option and incentive plans, net 1 ( 3 ) — — — ( 2 ) — ( 2 ) Payments to acquire treasury stock, including fees — — ( 150 ) — — ( 150 ) — ( 150 ) Balance at September 30, 2020 $ 214 $ 2,719 $ ( 150 ) $ 6,258 $ ( 3,593 ) $ 5,448 $ 4 $ 5,452 Common Stock Additional Paid-in Capital Treasury Stock Retained Earnings AOCL (1) Xerox Holdings Shareholders’ Equity Non- controlling Interests Total Equity Balance at June 30, 2019 $ 225 $ 3,124 $ ( 131 ) $ 5,391 $ ( 3,647 ) $ 4,962 $ 30 $ 4,992 Comprehensive income (loss), net — — — 221 ( 203 ) 18 2 20 Cash dividends declared - common (2) — — — ( 56 ) — ( 56 ) — ( 56 ) Cash dividends declared - preferred (3) — — — ( 4 ) — ( 4 ) — ( 4 ) Stock option and incentive plans, net — 3 — — — 3 — 3 Payments to acquire treasury stock, including fees — — ( 68 ) — — ( 68 ) — ( 68 ) Cancellation of treasury stock ( 4 ) ( 127 ) 131 — — — — — Distributions to noncontrolling interests — — — — — — ( 1 ) ( 1 ) Balance at September 30, 2019 $ 221 $ 3,000 $ ( 68 ) $ 5,552 $ ( 3,850 ) $ 4,855 $ 31 $ 4,886 Common Stock Additional Paid-in Capital Treasury Stock Retained Earnings AOCL (1) Xerox Holdings Shareholders’ Equity Non-controlling Interests Total Equity Balance at December 31, 2019 $ 215 $ 2,782 $ ( 76 ) $ 6,312 $ ( 3,646 ) $ 5,587 $ 7 $ 5,594 Comprehensive income, net — — — 115 53 168 — 168 Cash dividends declared - common (2) — — — ( 158 ) — ( 158 ) — ( 158 ) Cash dividends declared - preferred (3) — — — ( 11 ) — ( 11 ) — ( 11 ) Stock option and incentive plans, net 1 11 — — — 12 — 12 Payments to acquire treasury stock, including fees — — ( 150 ) — — ( 150 ) — ( 150 ) Cancellation of treasury stock ( 2 ) ( 74 ) 76 — — — — — Distributions to noncontrolling interests — — — — — — ( 3 ) ( 3 ) Balance at September 30, 2020 $ 214 $ 2,719 $ ( 150 ) $ 6,258 $ ( 3,593 ) $ 5,448 $ 4 $ 5,452 Xerox 2020 Form 10-Q 33 Common Stock Additional Paid-in Capital Treasury Stock Retained Earnings AOCL (1) Xerox Holdings Shareholders’ Equity Non- controlling Interests Total Equity Balance at December 31, 2018 $ 232 $ 3,321 $ ( 55 ) $ 5,072 $ ( 3,565 ) $ 5,005 $ 34 $ 5,039 Cumulative effect of change in accounting principle — — — 127 ( 127 ) — — — Comprehensive income (loss), net — — — 535 ( 158 ) 377 8 385 Cash dividends declared - common (2) — — — ( 171 ) — ( 171 ) — ( 171 ) Cash dividends declared - preferred (3) — — — ( 11 ) — ( 11 ) — ( 11 ) Stock option and incentive plans, net — 23 — — — 23 — 23 Payments to acquire treasury stock, including fees — — ( 368 ) — — ( 368 ) — ( 368 ) Cancellation of treasury stock ( 11 ) ( 344 ) 355 — — — — — Distributions to noncontrolling interests — — — — — — ( 11 ) ( 11 ) Balance at September 30, 2019 $ 221 $ 3,000 $ ( 68 ) $ 5,552 $ ( 3,850 ) $ 4,855 $ 31 $ 4,886 _____________ (1) Refer to Note 19 - Other Comprehensive Income (Loss) for the components of AOCL. (2) Cash dividends declared on common stock for the three and nine months ended September 30, 2020 and 2019 were $ 0.25 per share and $ 0.75 per share, respectively. (3) Cash dividends declared on preferred stock for the three and nine months ended September 30, 2020 and 2019 were $ 20.00 per share and $ 60.00 per share, respectively. Treasury Stock The following is a summary of the purchases of common stock during 2020: Shares Amount Balance at December 31, 2019 2,031 $ 76 Purchases (1) 8,007 150 Cancellations ( 2,031 ) ( 76 ) Balance at September 30, 2020 8,007 $ 150 _____________ (1) Includes associated fees. Note 18 – Shareholders' Equity of Xerox The shareholders' equity information presented below reflects the consolidated activity of Xerox. Common Stock Additional Paid-in Capital Treasury Stock Retained Earnings AOCL (1) Xerox Shareholder's Equity Non-controlling Interests Total Equity Balance at June 30, 2020 $ — $ 3,515 $ — $ 5,925 $ ( 3,681 ) $ 5,759 $ 4 $ 5,763 Comprehensive income, net — — — 101 88 189 — 189 Dividends declared to parent — — — ( 55 ) — ( 55 ) — ( 55 ) Capital contributions from parent (2) — 1,494 — — — 1,494 — 1,494 Transfers to parent — ( 150 ) — — — ( 150 ) — ( 150 ) Balance at September 30, 2020 $ — $ 4,859 $ — $ 5,971 $ ( 3,593 ) $ 7,237 $ 4 $ 7,241 Xerox 2020 Form 10-Q 34 Common Stock Additional Paid-in Capital Treasury Stock Retained Earnings AOCL (1) Xerox Shareholders’ Equity Non- controlling Interests Total Equity Balance at June 30, 2019 $ 225 $ 3,124 $ ( 131 ) $ 5,391 $ ( 3,647 ) $ 4,962 $ 30 $ 4,992 Comprehensive income (loss), net — — — 221 ( 203 ) 18 2 20 Dividends declared to parent — — — ( 58 ) ( 58 ) — ( 58 ) Stock option and incentive plans, net — ( 2 ) — — — ( 2 ) — ( 2 ) Cancellation of treasury stock ( 4 ) ( 127 ) 131 — — — — — Distributions to noncontrolling interests — — — — — — ( 1 ) ( 1 ) Reorganization ( 221 ) 446 — — — 225 — 225 Balance at September 30, 2019 $ — $ 3,441 $ — $ 5,554 $ ( 3,850 ) $ 5,145 $ 31 $ 5,176 Common Stock Additional Paid-in Capital Treasury Stock Retained Earnings AOCL (1) Xerox Shareholder's Equity Non-controlling Interests Total Equity Balance at December 31, 2019 $ — $ 3,266 $ — $ 6,247 $ ( 3,646 ) $ 5,867 $ 7 $ 5,874 Comprehensive income, net — — — 126 53 179 — 179 Dividends declared to parent — — — ( 402 ) — ( 402 ) — ( 402 ) Capital contributions from parent (2) — 1,494 — — 1,494 — 1,494 Transfers from parent — 99 — — — 99 — 99 Distributions to noncontrolling interests — — — — — — ( 3 ) ( 3 ) Balance at September 30, 2020 $ — $ 4,859 $ — $ 5,971 $ ( 3,593 ) $ 7,237 $ 4 $ 7,241 Common Stock Additional Paid-in Capital Treasury Stock Retained Earnings AOCL (1) Xerox Shareholders’ Equity Non- controlling Interests Total Equity Balance at December 31, 2018 $ 232 $ 3,321 $ ( 55 ) $ 5,072 $ ( 3,565 ) $ 5,005 $ 34 $ 5,039 Cumulative effect of change in accounting principle — — — 127 ( 127 ) — — — Comprehensive income (loss), net — — — 535 ( 158 ) 377 8 385 Cash dividends declared - common — — — ( 115 ) — ( 115 ) — ( 115 ) Cash dividends declared - preferred — — — ( 7 ) — ( 7 ) — ( 7 ) Dividends declared to parent — — — ( 58 ) — ( 58 ) — ( 58 ) Stock option and incentive plans, net — 18 — — — 18 — 18 Payments to acquire treasury stock, including fees — — ( 300 ) — — ( 300 ) — ( 300 ) Cancellation of treasury stock ( 11 ) ( 344 ) 355 — — — — — Distributions to noncontrolling interests — — — — — — ( 11 ) ( 11 ) Reorganization ( 221 ) 446 — — — 225 — 225 Balance at September 30, 2019 $ — $ 3,441 $ — $ 5,554 $ ( 3,850 ) $ 5,145 $ 31 $ 5,176 _____________ (1) Refer to Note 19 - Other Comprehensive Income (Loss) for the components of AOCL. (2) Primarily represents the contribution of aggregate net debt proceeds received from Senior Note offerings in the third quarter 2020 from Xerox Holdings to Xerox Corporation. Refer to Note 13 - Debt for additional information regarding the Senior Note offerings. Xerox 2020 Form 10-Q 35 Note 19 - Other Comprehensive Income (Loss) Other Comprehensive Income (Loss) is comprised of the following: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Pre-tax Net of Tax Pre-tax Net of Tax Pre-tax Net of Tax Pre-tax Net of Tax Translation adjustments gains (losses) $ 176 $ 179 $ ( 153 ) $ ( 155 ) $ ( 2 ) $ 7 $ ( 121 ) $ ( 122 ) Unrealized gains (losses) Changes in fair value of cash flow hedges gains 1 1 4 4 5 4 10 8 Changes in cash flow hedges reclassed to earnings (1) — — ( 3 ) ( 3 ) ( 1 ) — ( 6 ) ( 5 ) Net Unrealized gains 1 1 1 1 4 4 4 3 Defined benefit plans (losses) gains Net actuarial/prior service (losses) gains ( 77 ) ( 58 ) ( 126 ) ( 95 ) 9 6 ( 162 ) ( 122 ) Prior service amortization (2) ( 20 ) ( 15 ) ( 19 ) ( 14 ) ( 59 ) ( 44 ) ( 59 ) ( 44 ) Actuarial loss amortization/settlement (2) 31 23 34 26 104 79 123 93 Fuji Xerox changes in defined benefit plans, net (3) — — ( 3 ) ( 3 ) — — ( 1 ) ( 1 ) Other (losses) gains (4) ( 42 ) ( 42 ) 38 38 1 1 36 36 Changes in defined benefit plans (losses) gains ( 108 ) ( 92 ) ( 76 ) ( 48 ) 55 42 ( 63 ) ( 38 ) Other Comprehensive Income (Loss) 69 88 ( 228 ) ( 202 ) 57 53 ( 180 ) ( 157 ) Less: Other comprehensive income attributable to noncontrolling interests — — 1 1 — — 1 1 Other Comprehensive Income (Loss) Attributable to Xerox Holdings/Xerox $ 69 $ 88 $ ( 229 ) $ ( 203 ) $ 57 $ 53 $ ( 181 ) $ ( 158 ) ____________ (1) Reclassified to Cost of sales - refer to Note 14 - Financial Instruments for additional information regarding our cash flow hedges. (2) Reclassified to Total Net Periodic Benefit Cost - refer to Note 16 - Employee Benefit Plans for additional information. (3) Represents our share of Fuji Xerox's benefit plan changes. (4) Primarily represents currency impact on cumulative amount of benefit plan net actuarial losses and prior service credits in AOCL. Accumulated Other Comprehensive Loss (AOCL) AOCL is comprised of the following: September 30, 2020 December 31, 2019 Cumulative translation adjustments $ ( 1,954 ) $ ( 1,961 ) Other unrealized gains (losses), net 2 ( 2 ) Benefit plans net actuarial losses and prior service credits ( 1,641 ) ( 1,683 ) Total Accumulated other comprehensive loss attributable to Xerox Holdings/Xerox $ ( 3,593 ) $ ( 3,646 ) Xerox 2020 Form 10-Q 36 Note 20 – Earnings per Share (shares in thousands) The following table sets forth the computation of basic and diluted earnings per share of common stock of Xerox Holdings: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Basic Earnings per Share Net Income from Continuing Operations Attributable to Xerox Holdings $ 90 $ 157 $ 115 $ 382 Accrued dividends on preferred stock ( 4 ) ( 4 ) ( 11 ) ( 11 ) Adjusted Net income from continuing operations available to common shareholders 86 153 104 371 Income from discontinued operations attributable to Xerox Holdings, net of tax — 64 — 153 Adjusted Net income available to common shareholders $ 86 $ 217 $ 104 $ 524 Weighted average common shares outstanding 211,169 220,269 212,163 224,257 Basic Earnings per Share: Continuing operations $ 0.41 $ 0.70 $ 0.49 $ 1.66 Discontinued operations — 0.29 — 0.68 Basic Earnings per Share $ 0.41 $ 0.99 $ 0.49 $ 2.34 Diluted Earnings per Share Net Income from Continuing Operations Attributable to Xerox Holdings $ 90 $ 157 $ 115 $ 382 Accrued dividends on preferred stock ( 4 ) — ( 11 ) — Adjusted Net income from continuing operations available to common shareholders 86 157 104 382 Income from discontinued operations attributable to Xerox Holdings, net of tax — 64 — 153 Adjusted Net income available to common shareholders $ 86 $ 221 $ 104 $ 535 Weighted average common shares outstanding 211,169 220,269 212,163 224,257 Common shares issuable with respect to: Stock options — 42 20 37 Restricted stock and performance shares 1,538 4,014 2,600 4,429 Convertible preferred stock — 6,742 — 6,742 Adjusted Weighted average common shares outstanding 212,707 231,067 214,783 235,465 Diluted Earnings per Share: Continuing operations $ 0.41 $ 0.68 $ 0.49 $ 1.62 Discontinued operations — 0.28 — 0.65 Diluted Earnings per Share $ 0.41 $ 0.96 $ 0.49 $ 2.27 The following securities were not included in the computation of diluted earnings per share as they were either contingently issuable shares or shares that if included would have been anti-dilutive: Stock options 808 841 788 847 Restricted stock and performance shares 3,118 2,358 2,055 1,944 Convertible preferred stock 6,742 — 6,742 — Total Anti-Dilutive Securities 10,668 3,199 9,585 2,791 Dividends per Common Share $ 0.25 $ 0.25 $ 0.75 $ 0.75 Xerox 2020 Form 10-Q 37 Note 21 – Contingencies and Litigation Legal Matters We are involved in a variety of claims, lawsuits, investigations and proceedings concerning: securities law; governmental entity contracting; servicing and procurement law; intellectual property law; environmental law; employment law; the Employee Retirement Income Security Act (ERISA); and other laws and regulations. We determine whether an estimated loss from a contingency should be accrued by assessing whether a loss is deemed probable and can be reasonably estimated. We assess our potential liability by analyzing our litigation and regulatory matters using available information. We develop our views on estimated losses in consultation with outside counsel handling our defense in these matters, which involves an analysis of potential results, assuming a combination of litigation and settlement strategies. Should developments in any of these matters cause a change in our determination as to an unfavorable outcome and result in the need to recognize a material accrual, or should any of these matters result in a final adverse judgment or be settled for significant amounts, they could have a material adverse effect on our results of operations, cash flows and financial position in the period or periods in which such change in determination, judgment or settlement occurs. Brazil Contingencies Our Brazilian operations have received or been the subject of numerous governmental assessments related to indirect and other taxes. The tax matters principally relate to claims for taxes on the internal transfer of inventory, municipal service taxes on rentals and gross revenue taxes. We are disputing these tax matters and intend to vigorously defend our positions. Based on the opinion of legal counsel and current reserves for those matters deemed probable of loss, we do not believe that the ultimate resolution of these matters will materially impact our results of operations, financial position or cash flows. Below is a summary of our Brazilian tax contingencies: September 30, 2020 December 31, 2019 Tax contingency - unreserved $ 325 $ 442 Escrow cash deposits 36 51 Surety bonds 97 135 Letters of credit 69 91 Liens on Brazilian assets — — The decrease in the unreserved portion of the tax contingency, inclusive of any related interest, was primarily related to currency. With respect to the unreserved tax contingency, the majority has been assessed by management as being remote as to the likelihood of ultimately resulting in a loss to the Company. In connection with the above proceedings, customary local regulations may require us to make escrow cash deposits or post other security of up to half of the total amount in dispute, as well as, additional surety bonds and letters of credit, which include associated indexation. Generally, any escrowed amounts would be refundable and any liens on assets would be removed to the extent the matters are resolved in our favor. We are also involved in certain disputes with contract and former employees. Exposures related to labor matters are not material to the financial statements as of September 30, 2020 and December 31, 2019. We routinely assess all these matters as to the probability of ultimately incurring a liability against our Brazilian operations and record our best estimate of the ultimate loss in situations where we assess the likelihood of an ultimate loss as probable. Litigation Against the Company Pending Litigation Relating to the Fuji Transaction: 1. Ribbe v. Jacobson, et al.: On April 11, 2019, Carmen Ribbe filed a putative derivative and class action stockholder complaint in the Supreme Court of the State of New York for New York County, naming as defendants Xerox, current Board members Joseph J. Echevarria, Cheryl Gordon Krongard, Keith Cozza, Giovanni G. Visentin, Jonathan Christodoro, Nicholas Graziano, and A. Scott Letier, and former Board members Jeffrey Jacobson, William Curt Hunter, Robert J. Keegan, Charles Prince, Ann N. Reese, Stephen H. Rusckowski, Gregory Q. Brown, and Sara Martinez Tucker. Plaintiff previously filed a putative shareholder derivative lawsuit on May 24, 2018 against certain of these defendants, as well as others, in the same court; that lawsuit was dismissed without prejudice on December 6, 2018. The new complaint included putative derivative claims on behalf of Xerox for breach of fiduciary duty against the then members of the Xerox Board who approved Xerox’s entry into agreements to settle shareholder actions filed in 2018 in the same court against Xerox, its then directors, and FUJIFILM Holdings Corporation (“Fujifilm”) in connection with a proposed transaction announced in January 2018 to combine Xerox and Fuji Xerox (the “Fuji Transaction”), including a consolidated putative class action, In re Xerox Corporation Consolidated Shareholder Xerox 2020 Form 10-Q 38 Litigation (“XCCSL”) , and actions filed by Darwin Deason, Deason v. Fujifilm Holdings Corp., et al. and Deason v. Xerox Corporation, et al. , against the same defendants as well as, in the first Deason action, former Xerox Chief Executive Officer Ursula M. Burns (the "Fuji Transaction Shareholder Lawsuits"). Plaintiff alleged that the settlements ceded control of the Board and the Company to Darwin Deason and Carl C. Icahn without a vote by, or compensation to, other Xerox stockholders; improperly provided certain benefits and releases to the resigning and continuing directors; and subjected Xerox to potential breach of contract damages in an action by Fuji relating to Xerox’s termination of the proposed Fuji Transaction. Plaintiff also alleged that the current Board members breached their fiduciary duties by allegedly rejecting plaintiff’s January 14, 2019 shareholder demand on the Board to remedy harms arising from entry into the Deason and XCCSL settlements. The new complaint further included direct claims for breach of fiduciary duty on behalf of a putative class of current Xerox stockholders other than Mr. Deason, Mr. Icahn, and their affiliated entities (the “Ribbe Class”) against the defendants for causing Xerox to enter into the Deason and XCCSL settlements, which plaintiff alleged perpetuated control of Xerox by Mr. Icahn and Mr. Deason and denied the voting franchise of Xerox shareholders. Among other things, plaintiff sought damages in an unspecified amount for the alleged fiduciary breaches in favor of Xerox against defendants jointly and severally; rescission or reformation of the Deason and XCCSL settlements; restitution of funds paid to the resigning directors under the Deason settlement; an injunction against defendants’ engaging in the alleged wrongful practices and equitable relief affording the putative Ribbe Class the ability to determine the composition of the Board; costs and attorneys’ fees; and other further relief as the Court may deem proper. Defendants accepted service of the complaint as of May 16, 2019. On June 4, 2019, the Court entered an order setting a briefing schedule for defendants’ motions to dismiss the complaint. On July 12, 2019, plaintiff filed a motion to preclude defendants from referencing in their motions to dismiss the formation of, or work by, the committee of the Board established to investigate plaintiff’s shareholder demand. On July 18, 2019, the Court denied plaintiff’s motion and adjourned sine die the deadline by which defendants must file any motions to dismiss the complaint. On January 6, 2020, plaintiff filed his first amended complaint (“FAC”). The FAC includes many of plaintiff’s original allegations regarding the 2018 shareholder litigation and settlements, as well as additional allegations, including, among others, that the members of the Special Committee of the Board that investigated plaintiff’s demand lacked independence and wrongfully refused to pursue the claims in the demand; allegations that an agreement announced in November 2019 for, among other things, the sale by Xerox of its interest in Fuji Xerox to Fujifilm and dismissal of Fujifilm’s breach of contract lawsuit against Xerox (the “FX Sale Transaction”), was unfavorable to Xerox; and allegations about a potential acquisition by Xerox of HP similar to those in the Miami Firefighters derivative action described below. In addition to the claims in the April 11, 2019 complaint, the FAC adds as defendants Carl C. Icahn, Icahn Capital LP, and High River Limited Partnership (the “Icahn defendants”) and asserts claims against those defendants and the Board similar to those in Miami Firefighters relating to the Icahn defendants’ purchases of HP stock allegedly with knowledge of material nonpublic information concerning Xerox’s potential acquisition of HP. In addition to the relief sought in Ribbe’s prior complaint, the FAC seeks relief similar to that sought in Miami Firefighters relating to the Icahn defendants’ alleged purchases of HP stock. On January 21, 2020, plaintiff in the Miami Firefighters action filed a motion seeking to intervene in Ribbe and to have stayed, or alternatively, severed and consolidated with the Miami Firefighters action, any claims first filed in Miami Firefighters and later asserted by Ribbe. At a conference held on February 25, 2020, the Court denied the motion to intervene without prejudice. On March 6, 2020, plaintiff in the Miami Firefighters action renewed its motion. On July 23, 2020, after hearing oral argument, the Court issued an order denying the motion and setting certain case deadlines. Discovery has commenced. On August 7, 2020, Xerox, the director defendants, and the Icahn defendants filed separate motions to dismiss. On October 1, 2020, plaintiff filed a cross-motion seeking, among other relief, joinder of Xerox Holdings Corporation as a nominal defendant. Briefing on the motions to dismiss and plaintiff’s cross-motion was completed on October 16, 2020. Xerox will vigorously defend against this matter. At this time, it is premature to make any conclusion regarding the probability of incurring material losses in this litigation. Should developments cause a change in our determination as to an unfavorable outcome, or result in a final adverse judgment or settlement, there could be a material adverse effect on our results of operations, cash flows and financial position in the period in which such change in determination, judgment, or settlement occurs. Xerox 2020 Form 10-Q 39 2. Miami Firefighters’ Relief & Pension Fund v. Icahn, et al.: On December 13, 2019, alleged shareholder Miami Firefighters’ Relief & Pension Fund (“Miami Firefighters”) filed a purported derivative complaint in New York State Supreme Court, New York County on behalf of Xerox Holdings Corporation ("Xerox Holdings") (as nominal defendant) against Carl Icahn and his affiliated entities High River Limited Partnership and Icahn Capital LP (the "Icahn defendants"), Xerox Holdings, and all current Xerox Holdings directors (the "Directors"). Plaintiff made no demand on the Board before bringing the action, but instead alleges that doing so would be futile because the Directors lack independence due to alleged direct or indirect relationships with Icahn. Among other things, the complaint alleges that Icahn controls and dominates Xerox Holdings and therefore owes a fiduciary duty of loyalty to Xerox Holdings, which he breached by acquiring HP stock at a time when he knew that Xerox Holdings was considering an offer to acquire HP or had knowledge of the "obvious merits" of such potential acquisition, and that the Icahn defendants’ holdings of HP common stock have risen in market value by approximately $ 128 since disclosure of the offer. The complaint includes four causes of action: breach of fiduciary duty of loyalty against the Icahn defendants; breach of contract against the Icahn defendants (for purchasing HP stock in violation of Icahn’s confidentiality agreement with Xerox Holdings); unjust enrichment against the Icahn defendants; and breach of fiduciary duty of loyalty against the Directors (for any consent to the Icahn defendants’ purchases of HP common stock while Xerox Holdings was considering acquiring HP). The complaint seeks a judgment of breach of fiduciary duties against the Icahn defendants and the Directors; a declaration that Icahn breached his confidentiality agreement with Xerox Holdings; a constructive trust on Icahn Capital and High River's investments in HP securities; disgorgement to Xerox Holdings of profits Icahn Capital and High River earned from trading in HP stock; payment of unspecified damages by the Directors for breaching fiduciary duties; and attorneys' fees, costs, and other relief the Court deems just and proper. On January 15, 2020, the Court entered an order granting plaintiff’s unopposed motion to consolidate with Miami Firefighters a similar action filed on December 26, 2019 by alleged shareholder Steven J. Reynolds against the same parties in the same court, and designating Miami Firefighters’ counsel as lead counsel in the consolidated action. On January 21, 2020, plaintiff filed a motion seeking to intervene in Ribbe v. Jacobson, et al. , described above, and to have stayed, or alternatively, severed and consolidated with this action, any claims first filed in this action and later asserted by Ribbe. At a conference held on February 25, 2020, the Court denied the motion to intervene without prejudice. On March 6, 2020, plaintiff in the Miami Firefighters action renewed its motion. On July 23, 2020, after hearing oral argument, the Court issued an order denying the motion and setting certain case deadlines. Discovery has commenced. On August 10, 2020, the Xerox defendants and the Icahn defendants filed separate motions to dismiss. Briefing on the motions was completed on October 21, 2020. Xerox Holdings will vigorously defend against this matter. At this time, it is premature to make any conclusion regarding the probability of incurring material losses in this litigation. Should developments cause a change in our determination as to an unfavorable outcome, or result in a final adverse judgment or settlement, there could be a material adverse effect on our results of operations, cash flows and financial position in the period in which such change in determination, judgment, or settlement occurs. Guarantees We have issued or provided approximately $ 273 of guarantees as of September 30, 2020 in the form of letters of credit or surety bonds issued to i) support certain insurance programs; ii) support our obligations related to the Brazil contingencies; and iii) support certain contracts, primarily with public sector customers, which require us to provide a surety bond as a guarantee of our performance of contractual obligations. In general, we would only be liable for the amount of these guarantees in the event we defaulted in performing our obligations under each contract; the probability of which we believe is remote. We believe that our capacity in the surety markets as well as under various credit arrangements (including our Credit Facility) is sufficient to allow us to respond to future requests for proposals that require such credit support. Note 22 – Subsequent Event In October 2020, we completed the early redemption of $ 750 of the $ 1,062 of 4.50 % Senior Notes due May 2021, for $ 769 in cash consideration, which included a redemption premium of $ 19 . The early redemption resulted in a net loss $ 18 (which included the write-off of debt carrying value adjustments) that was recorded in the fourth quarter 2020. After completion of the early redemption, approximately $ 312 of the 4.50 % Senior Notes due May 2021 remain outstanding. Xerox 2020 Form 10-Q 40