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Item 2. Management’s Discussion and Analysis

ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
 Throughout the Management’s Discussion and Analysis (MD&A), references to “Xerox Holdings” refer to Xerox Holdings Corporation and its consolidated subsidiaries while references to “Xerox” refer to Xerox Corporation and its consolidated subsidiaries. References herein to “we,” “us,” “our,” the “Company” refer collectively to both Xerox Holdings and Xerox unless the context suggests otherwise. 
 Currently, Xerox Holdings' sole direct subsidiary is Xerox and therefore Xerox reflects the entirety of Xerox Holdings' operations. Accordingly, the following MD&A solely focuses on the operations of Xerox and is intended to help the reader understand the results of operations and financial condition of Xerox. The MD&A is provided as a supplement to, and should be read in conjunction with, the Condensed Consolidated Financial Statements and the accompanying notes. Throughout the MD&A, references are made to various notes in the Condensed Consolidated Financial Statements which appear in Item 1 of this form 10-Q, and the information contained in such notes is incorporated by reference into the MD&A in the places where such references are made. 
 Currency Impact 
 To understand the trends in our business, we believe that it is helpful to analyze the impact of changes in the translation of foreign currencies into U.S. Dollars on revenue and expenses. We refer to this analysis as "constant currency", “currency impact” or “the impact from currency.” This impact is calculated by translating current period activity in local currency using the comparable prior year period's currency translation rate. This impact is calculated for all countries where the functional currency is the local country currency. We do not hedge the translation effect of revenues or expenses denominated in currencies where the local currency is the functional currency. Management believes the constant currency measure provides investors an additional perspective on revenue trends. Currency impact can be determined as the difference between actual growth rates and constant currency growth rates. 
 Impact of COVID-19 on Our Business Operations 
 In response to the COVID-19 pandemic, we have prioritized the health and safety of our employees, customers and partners to support their needs in the current hybrid environment so work can be done flawlessly migrating between the workplace and the home-office. While we continue to implement actions to mitigate the effects of the pandemic on our business and operations, the uncertainty around its trajectory, duration and economic impact make it difficult for the company to predict its full impact on our business operations and financial performance. As a result, we are not providing specific financial guidance at this time. 
 During the third quarter, corresponding with business reopenings, the rate of decline of equipment installations (including in areas of our business that support our hybrid workplace initiatives) improved, as did printed-page volumes. These operational improvements resulted in a moderation of our rate of revenue decline during the third quarter as compared to the second quarter, which gives us confidence in the resilience and readiness of our business to recover as progress is made to control the pandemic and as businesses and economies reopen. We have modeled the impacts on our business of numerous recovery scenarios and expect to deliver positive earnings and operating cash flows from continuing operations, after capital expenditures, in the fourth quarter. However, the ongoing resurgence of the virus around the globe, and the impact it is having in forcing new restrictions and lockdowns, leads us to anticipate that our revenues will continue to decline significantly as compared to the prior year, as businesses hold off or delay purchases until there is a more certain path to controlling the pandemic and to economic recovery. 
 During the current year, the most significant impact from the pandemic has been on sales of our equipment and unbundled supplies. However, due to their transactional nature, these revenues experienced the largest recovery during the third quarter and we expect that they will continue to fluctuate and gradually improve concurrent with business reopenings. Our bundled services contracts, on average, include a minimum fixed charge and a significant variable component based on print volumes. The variable charges are impacted by our customers' employees not being in the office using our equipment due to lock-downs or capacity restrictions in office buildings. We expect that this contractual relationship will continue to enable us to ramp up and support our customers' needs as businesses resume operations. 
 We have a strong balance sheet and sufficient liquidity, including access to our undrawn $1.8 billion revolver. We further strengthened our liquidity by refinancing our 2020 debt maturities in the third quarter 2020 and early-redeeming a portion of our 2021 debt maturities in October with the proceeds from the issuance of new senior unsecured notes and from a finance receivables securitization. With our Project Own It transformation and cost 
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 savings, we built a more flexible cost structure, and have also focused our efforts on incremental actions to prioritize and preserve cash as we manage through the pandemic. These actions include the use of available temporary government assistance measures and furlough programs, and the reduction of discretionary spend such as near-term targeted marketing programs, the use of contract employees, and the temporary suspension of 401(k) matching contributions, as well as lower compensation incentives consistent with lower sales and operating results. 
 Government Assistance and Furlough Programs 
 In response to the COVID-19 pandemic, various governments have enacted or continue to contemplate temporary measures to provide aid and economic stimulus directly to companies through cash grants and credits or indirectly through payments to temporarily furloughed employees. 
 On March 27, 2020, in response to the COVID-19 pandemic, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). In addition to including temporary changes to income and non-income-based tax laws, the CARES Act provides refundable employee retention credits and defers the requirement to remit the employer-paid portion of social security payroll taxes. Similar pay protection programs were enacted in Canada and Europe that primarily provide direct grants to companies to cover the salary and wages of employees (retained or temporarily furloughed). During the three and nine months ended September 30, 2020, we recognized savings of approximately $35 million and $95 million, respectively, from these temporary measures in the U.S., Canada and Europe, including $28 million and $81 million, respectively, from various government assistance programs and $7 million and $14 million, respectively, from furlough programs. Through the use of these programs, we have thus far been able to provide an offset to our costs, without further use of cash, while largely maintaining our employee base and minimizing the financial impact to our employees. 
 There were no material impacts to our income tax expense in the second or third quarters of 2020 as a result of the temporary changes included in the CARES Act and we expect to defer payment of the employer-paid portion of social security payroll taxes through the end of calendar year 2020; however, this deferral will be reduced by employee retention credits as earned during 2020. 
 Savings were recorded as follows in the Condensed Consolidated Statements of Income: 
 
 (in millions) Three Months Ended September 30, 2020 Nine Months Ended September 30, 2020 
 Cost of sales $ 1 $ 1 
 Cost of services, maintenance and rentals 25 65 
 Research, development and engineering expenses — 1 
 Selling, administrative and general expenses 9 28 
 Total Estimated savings $ 35 $ 95 

 
 
 Xerox 2020 Form 10-Q 
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 Overview 
 Third Quarter 2020 Review 
 Total revenue of $1.77 billion for third quarter 2020 declined 18.9% from third quarter 2019, including a 0.8-percentage point favorable impact from currency. The decrease in revenue reflected a decrease of 20.0% in Post sale revenue, including a 0.7-percentage point favorable impact from currency and a decrease of 15.2% in Equipment sales revenue, including a 0.9-percentage point favorable impact from currency. 
 Total revenue of $5.09 billion for the nine months ended September 30, 2020 declined 23.1% as compared to the prior year period, including a 0.3-percentage point unfavorable impact from currency. The decrease in revenue reflected a decrease of 22.0% in Post sale revenue, including a 0.3-percentage point unfavorable impact from currency, and a decrease of 27.1% in Equipment sales revenue, with no impact from currency. 
 The COVID-19 pandemic significantly impacted our third quarter 2020 and year to date revenues due to business closures and office building capacity restrictions that impacted our customers' purchasing decisions, and caused lower printing volumes on our devices. The biggest impact from the pandemic occurred in the second quarter 2020, while, the rate of decline of our revenues improved sequentially in third quarter 2020, as more businesses reopened and more employees returned to the workplace. Geographically, revenue declines were similar in both of our go-to-market regions for the year. The improvements in third quarter 2020 revenues grew the most sequentially, from second quarter 2020, in our EMEA Operations, primarily as a result of wider reopenings of workplaces and economies over the summer in the region, and higher installation of devices associated with our hybrid workplace promotions. EMEA revenues were also more favorably impacted by recent acquisitions in the region. The decrease of revenues in third quarter 2020 from our Americas Organization also improved sequentially as a result of business reopenings, primarily in our SMB and indirect channels, while the sequential recovery of Large Enterprise revenues in the region was smaller due to the more restricted reopening of large office buildings, as well as a larger mix of bundled contracts with fixed minimums. Our North American operations include a larger mix of government, education, healthcare and other large customers that have been less affected by business closures than our SMB customers. 
 Net income attributable to Xerox Holdings 1 and adjusted 2 Net income attributable to Xerox Holdings were as follows: 
 
 Three Months Ended September 30, Nine Months Ended September 30, 
 (in millions) 2020 2019 B/(W) 2020 2019 B/(W) 
 Net income attributable to Xerox Holdings (1) 
 $ 90 $ 157 $ (67) $ 115 $ 382 $ (267) 
 Adjusted (2) Net income attributable to Xerox Holdings 
 105 184 (79) 191 528 (337) 

 Third quarter 2020 Net income attributable to Xerox Holdings 1 decreased $67 million as compared to third quarter 2019 reflecting the impact from lower revenues primarily associated with the COVID-19 pandemic that were only partially offset by lower costs and expenses including lower Income tax expense as well as lower Transaction and related costs, net and Other expenses, net. Third quarter 2020 A djusted 2 net income attributable to Xerox Holdings decreased $79 million as compared to third quarter 2019, reflecting lower revenues, which were only partially offset by lower costs and expenses and lower Income tax expense. 
 Net income attributable to Xerox Holdings 1 for the nine months ended September 30, 2020 decreased $267 million as compared to the prior year period reflecting the impact from lower revenues, primarily associated with the COVID-19 pandemic, and higher Transaction and related costs, net, that were only partially offset by lower costs and expenses, including lower Income tax expense as well as lower Restructuring and related costs and Other expenses, net. In addition, Net income attributable to Xerox Holdings 1 for the nine months ended September 30, 2020 includes the first quarter 2020 impact of a $61 million increase in our bad debt provision reflecting the expected impact from the COVID-19 pandemic on our receivable portfolio. A djusted 2 net income attributable to Xerox Holdings for the nine months ended September 30, 2020 decreased $337 million as compared to the prior year period primarily reflecting lower revenues, which were only partially offset by lower costs and expenses including lower Income tax expense, partially offset by the increased bad debt provision. 
 Net income attributable to Xerox Holdings 1 for the three and nine months ended September 30, 2020 were both positively impacted by savings of approximately $35 million and $95 million, respectively, from temporary government assistance measures and furlough programs in the U.S., Canada and Europe. Refer to the Government Assistance and Furlough Programs section for additional information. 
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 Cash flows provided by operating activities of continuing operations for the nine months ended September 30, 2020 were $313 million, as compared to $846 million in the prior year period primarily reflecting lower net income, as result of the COVID-19 pandemic, as well as increased use of working capital, net 3, partially offset by decreases in finance assets and lower payments for taxes due to lower pre-tax income. Cash used in investing activities for the nine months ended September 30, 2020 was $223 million including capital expenditures of $60 million and acquisitions of $193 million. Cash provided by financing activities for the nine months ended September 30, 2020 was $424 million reflecting proceeds of $1,507 million from the issuance of Senior Notes and $340 million from a secured financing arrangement, partially offset by payments of $1,051 million on Senior Notes, $150 million on repurchases of our Common Stock and dividend payments of $176 million. 
 2020 Outlook 
 As a result of the uncertainty created by the COVID-19 pandemic, in the first quarter 2020 we withdrew our previously disclosed outlooks for full year 2020 revenue, earnings, operating cash flows and capital allocation as disclosed in our 2019 Annual Report. At this time, we remain committed to delivering positive earnings and operating cash flows from continuing operations, after capital expenditures, in the fourth quarter. We also remain committed to paying our current dividend on common shares and returning at least 50% of operating cash flows from continuing operations, after capital expenditures, to shareholders. We expect to complete at least $150 million in share repurchases during the remainder of 2020. 
 ____________________________ 
 (1) Net income from continuing operations attributable to Xerox Holdings. 
 (2) See the “Non-GAAP Financial Measures” section for an explanation of the non-GAAP financial measure. 
 (3) Working capital, net reflects Accounts receivable, net, Inventories and Accounts payable. 
 Critical Accounting Policies and Estimates 
 Management’s Discussion and Analysis of our financial condition and results of operations (MD&A) is based on the Condensed Consolidated Financial Statements and accompanying notes that have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 
 As discussed in our MD&A, during the first half of 2020 the company was significantly impacted by the economic disruption caused by the COVID-19 pandemic. This disruption required us to review the majority of our estimates to ensure we appropriately considered the impacts caused by the COVID-19 pandemic. The following is a discussion of several key estimates with respect to revenue recognition, allowance for doubtful accounts and credit losses, income taxes and goodwill. As the extent and duration of the impacts from the COVID-19 pandemic remain uncertain, the Company’s estimates and assumptions may evolve as conditions change. 
 Revenue Recognition 
 As disclosed in our 2019 Annual Report, revenues associated with our service arrangements – maintenance and document management - are generally recognized as maintenance and printing services are rendered, which is generally on the basis of the number of images produced. Accordingly, this recognition methodology requires us to estimate customer usage at the end of a period since the customer is typically not invoiced for that usage until the following period. Normally this estimation process is straight-forward and objective based on our significant history with different types of customers and device usage as well as the fact that a majority of our devices have connectivity to Xerox so we can remotely read and collect usage data. In addition, as disclosed in our 2019 Annual report, our service arrangements normally include a minimum volume charge together with a variable charge, so the estimation process is limited to the variable component, which will vary based on the channel and geography. However, the impacts from the COVID-19 economic disruption that began in March 2020, as well as the related shutdowns of some of our customers, required us to further review our estimation process for the variable component to ensure we properly and objectively captured the impacts of the decline in volumes and not solely rely on historical usage data. We will continue to assess the usage data of our customers to ensure we properly adjust historical averages and recognize revenue consistent with those revised usage patterns and ultimately what is invoiced to the customer. 
 Allowance for Doubtful Accounts and Credit Losses 
 As disclosed in Notes 8 – Accounts Receivable, Net and Note 9 - Finance Receivables, Net, in the Condensed Consolidated Financial Statements consistent with our adoption of ASU 2016-13 effective January 1, 2020 (refer to Note 2 - Recent Accounting Pronouncements in the Condensed Consolidated Financial Statements), the allowance 
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 for doubtful accounts and credit losses is based on an assessment of past collection experience as well as consideration of current and future economic conditions and changes in our customer collection trends. In assessing the level of reserve in 2020, we had to critically assess current and forecasted economic conditions as a result of the COVID-19 pandemic to ensure we objectively included those expected impacts in the determination of our reserve. Our assessment also included current portfolio credit metrics and the level of reserves and write-offs we recorded on our receivable’s portfolio during the credit crisis in 2008/09 as additional reference points to objectively determine the adequacy of our allowance. Refer also to the Selling, Administrative and General Expenses (SAG) section for additional discussion regarding the incremental bad debt provision recorded in the first quarter 2020 primarily related to the economic impact of the COVID-19 pandemic. 
 Income Taxes 
 As disclosed in our 2019 Annual Report, we record the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and the amounts reported, as well as net operating loss and tax credit carryforwards. Deferred tax assets are assessed for realizability and, where applicable, a valuation allowance is recorded to reduce the total deferred tax asset to an amount that will, more-likely-than-not, be realized in the future. We apply judgment in assessing the realizability of these deferred tax assets and the need for any valuation allowances. In determining the amount of deferred tax assets that are more-likely-than-not to be realized, we considered historical profitability, projected future taxable income, the expected timing of the reversals of existing temporary difference and tax planning strategies. 
 Similar to other estimates during 2020, we needed to determine if any change in valuation allowances was required based on the rapid change in the economic environment and the expected changes in our financial projections for 2020 resulting from the impacts of the COVID-19 pandemic. Our effective tax rate for the nine months ended September 30, 2020 included an approximate 5-percentage point impact for additional valuation allowances, which were primarily the result of the negative impacts of the COVID-19 pandemic. We expect to continue to review projections and their potential impact on our assessment regarding the recoverability of our deferred tax asset balances in the fourth quarter 2020 and new or additions to existing valuation allowances may be required. 
 Goodwill 
 We perform our annual Goodwill impairment testing in the fourth quarter of each year. During the fourth quarter 2019 impairment testing, our estimated fair value of the Company was significantly in excess of our net book value. However, in the second quarter 2020, as a result of the continued negative financial impacts from the COVID-19 pandemic on our current and near-term future operations, the expected slower recovery during the latter half of 2020 as businesses return to their respective offices, as well as a sustained market capitalization below our book value, we determined there was a triggering event requiring an interim quantitative evaluation of Goodwill. 
 In prior years' quantitative tests we estimated the fair value of the entity by weighting the results of the income approach (discounted cash flow methodology) and market approach. However, as a result of limited market compares due to companies not providing guidance in this current economic environment, our interim quantitative evaluation of goodwill was based on the income approach to estimate fair value. The income approach, which we believe provides a result that is equally or more representative of fair value in the current circumstances, is based on the discounted cash flow method that uses the Company's estimates for future forecasted financial performance including revenues, operating expenses, and taxes, as well as working capital and capital asset requirements. Projected cash flows are then discounted to a present value employing a discount rate that properly accounts for the estimated market weighted-average cost of capital, as well as any risk unique to the subject cash flows. Our estimates regarding future forecasted cash flows accordingly reflected consideration of the continued negative financial impacts from the COVID-19 pandemic on our current and future operations as well expected recovery scenarios. 
 After completing our interim impairment review, we concluded that Goodwill was not impaired and, based on various forecast models and related sensitivity analysis, which we believe reflect the inherent uncertainty of the future, the excess of fair value over carrying value ranged between 10 and 20 percent. We believe the discount rate applied in our cases was an appropriate risk adjusted cost of capital and considers the current lower debt interest rates in the market. Although our internal forecasts clearly indicate that Xerox is and will be significantly impacted by the economic disruption caused by the COVID-19 pandemic in 2020, based on a review of macroeconomic and industry considerations, the business is expected to continue to recover in the second half of the year and recover further still in 2021 with the expectation of a return to normal trends by 2022. In addition, consistent with our historical results, we believe we have the ability, within a relevant range, to offset potential further delays in the recovery of our revenue base with cost reductions and productivity improvements to help manage and maintain our projected 
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 level of cash flows. Lastly, although our estimates of the fair value of the entity were in excess of our market capitalization, we believe the implied premiums that would be indicated at net book value or at our estimated fair values are reasonable. In performing its assessment, the Company believes it has made reasonable estimates based on the facts and circumstances that were available as of the second quarter reporting date in light of the developing situation resulting from the COVID-19 pandemic. 
 In the third quarter 2020, although business performance improved, we determined that the continued negative impacts on our current operations resulting from the COVID-19 pandemic and the impacts expected on our future operations as well as a market capitalization that remains less than book value required us to qualitatively assess whether a triggering event had occurred and whether it was more likely than not that our goodwill was impaired as of September 30, 2020. Based on our interim qualitative assessment as of September 30, 2020, we determined that it was more-likely-than-not that the fair value of the Company was greater than net book value and that we did not have a “triggering event” requiring a quantitative or Step 1 assessment of goodwill. Our review of macroeconomic and industry considerations, as well as the Company's financial results for the third quarter 2020 were all consistent with expectations and sensitivities assessed as part of our quantitative review performed in the second quarter 2020. Further, although our market capitalization remained below our net book value, the Company's market capitalization did improve in the third quarter 2020. 
 If assumptions or estimates in the fair value calculations change or if future cash flows vary from what was expected, including those assumptions relating to the duration and severity of the financial impact from the COVID-19 pandemic, this may impact the impairment analysis and could reduce the underlying cash flows used to estimate fair values and result in a decline in fair value that may trigger future impairment charges. We normally assess goodwill for impairment during the fourth quarter and based on the events and factors noted in 2020 – macroeconomic, industry and company – we plan to utilize a quantitative model for the assessment of the recoverability of our goodwill balance. As part of that quantitative assessment, we expect to monitor developments regarding the COVID-19 pandemic, including its impact to our forecasted revenues, expenses and cash flow, as well as our market capitalization. If the extent and duration of the economic disruption caused by the pandemic is longer or more severe than currently estimated there could be a material impact to our revenues and expected cash flows which in turn could negatively impact the recoverability of our Goodwill balance. 
 
 
 
 
 
 
 
 
 
 
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 Financial Review 
 Revenues 
 
 Three Months Ended
September 30, Nine Months Ended
September 30, % of Total Revenue 
 (in millions) 2020 2019 % Change CC % Change 2020 2019 % Change CC % Change 2020 2019 
 Equipment sales $ 419 $ 494 (15.2) % (16.1) % $ 1,054 $ 1,446 (27.1) % (27.1) % 21 % 22 % 
 Post sale revenue 1,348 1,685 (20.0) % (20.7) % 4,038 5,176 (22.0) % (21.7) % 79 % 78 % 
 Total Revenue $ 1,767 $ 2,179 (18.9) % (19.7) % $ 5,092 $ 6,622 (23.1) % (22.8) % 100 % 100 % 
 
 Reconciliation to Condensed Consolidated Statements of Income: 
 Sales $ 651 $ 784 (17.0) % (17.7) % $ 1,676 $ 2,308 (27.4) % (27.1) % 
 Less: Supplies, paper and other sales (232) (290) (20.0) % (20.2) % (622) (862) (27.8) % (27.1) % 
 
 Equipment sales $ 419 $ 494 (15.2) % (16.1) % $ 1,054 $ 1,446 (27.1) % (27.1) % 
 
 Services, maintenance and rentals $ 1,061 $ 1,335 (20.5) % (21.3) % $ 3,246 $ 4,130 (21.4) % (21.2) % 
 Add: Supplies, paper and other sales 232 290 (20.0) % (20.2) % 622 862 (27.8) % (27.1) % 
 Add: Financing 55 60 (8.3) % (8.8) % 170 184 (7.6) % (7.3) % 
 
 Post sale revenue 
 $ 1,348 $ 1,685 (20.0) % (20.7) % $ 4,038 $ 5,176 (22.0) % (21.7) % 
 
 Americas $ 1,152 $ 1,488 (22.6) % (22.2) % $ 3,381 $ 4,402 (23.2) % (22.8) % 66 % 67 % 
 EMEA 568 640 (11.3) % (14.6) % 1,571 2,061 (23.8) % (23.8) % 31 % 31 % 
 Other 47 51 (7.8) % (7.8) % 140 159 (11.9) % (11.9) % 3 % 2 % 
 Total Revenue (1) 
 $ 1,767 $ 2,179 (18.9) % (19.7) % $ 5,092 $ 6,622 (23.1) % (22.8) % 100 % 100 % 
 
 Memo: 
 Xerox Services $ 661 $ 829 (20.3) % (21.3) % $ 2,041 $ 2,535 (19.5) % (19.2) % 40 % 38 % 

 _____________ 
 CC - See "Currency Impact" section for a description of Constant Currency. 
 (1) Refer to the "Geographic Sales Channels and Product and Offerings Definitions" section. 
 Total revenue for the three months ended September 30, 2020 decreased 18.9% as compared to the third quarter 2019, including a 0.8-percentage point favorable impact from currency and an approximate 1.4-percentage point favorable impact from recent partner dealer acquisitions, while total revenue for the nine months ended September 30, 2020 decreased 23.1% as compared to the prior year period, including a 0.3-percentage point unfavorable impact from currency and an approximate 1.1-percentage point favorable impact from recent partner dealer acquisitions. 
 The COVID-19 pandemic significantly impacted our revenue during 2020 due to business closures and office building capacity restrictions that impacted our customers' purchasing decisions and caused lower printing volumes on our devices. However, the rate of our revenue decline improved sequentially from second quarter, as more businesses slowly reopened and more employees returned to the workplace. Geographically, revenue declines were similar in both of our go-to-market regions for the nine months ended September 30, 2020, while revenue growth in third quarter 2020 from our EMEA Operations improved the most sequentially, primarily as a result of wider reopenings of workplaces and economies over the summer in the region, and higher installation of devices associated with our hybrid workplace promotions. EMEA revenues were also more favorably impacted by recent acquisitions in the region. The decrease of revenues in third quarter 2020 from our Americas Organization also improved sequentially as a result of business reopenings, primarily in our SMB and indirect channels, while the sequential recovery of Large Enterprise revenues in the region was smaller due to the more restricted reopening of large office buildings, as well as a larger mix of bundled contracts with fixed minimums. Our North American operations include a larger mix of government, education, healthcare and other large customers that have been less affected by business closures than our SMB customers. Our Latin American Operations had the largest revenue declines, consistent with the extensive lockdowns and the economic crisis throughout the region. Total revenue for the three and nine months ended September 30, 2020 reflected the following: 
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 Post sale revenue 
 Post sale revenue primarily reflects contracted services, equipment maintenance, supplies and financing. These revenues are associated not only with the population of devices in the field, which is affected by installs and removals, but also by the page volumes generated from the usage of such devices and the revenue per printed page. Post sale revenue also includes transactional IT hardware sales and implementation services from our XBS organization. For the three months ended September 30, 2020 Post sale revenue decreased 20.0% as compared to the third quarter 2019, including a 0.7-percentage point favorable impact from currency, while Post Sale revenue decreased 22.0% for the nine months ended September 30, 2020, including a 0.3-percentage point unfavorable impact from currency. The COVID-19 pandemic significantly impacted our Post sale revenue since March 2020, however, its impact on our Post sale revenue slightly moderated later in the second quarter and continued to moderate during the third quarter, as business reopenings in certain geographical areas in the U.S. and Europe resulted in a gradual moderation of our page volume declines. The decline in Post sale revenue reflected the following: 
 • Services, maintenance and rentals revenue includes rental and maintenance revenue (including bundled supplies) as well as the post sale component of the document services revenue from our Xerox Services offerings. 
 ◦ For the three months ended September 30, 2020, these revenues decreased 20.5% as compared to the third quarter 2019, including a 0.8-percentage point favorable impact from currency. The decline at constant currency 1 reflected a lower population of devices (which is partially associated with continued lower Enterprise signings and lower installs in prior and current periods), an ongoing competitive price environment, and lower page volumes (including a higher mix of lower average-page-volume products) that are worse than pre-COVID-19 decline trends due to the impact of business closures during the quarter. While these revenues are contractual in nature, on average, our bundled services contracts include a minimum fixed charge and a significant variable component based on print volumes. The rate of decline of these revenues moderated during the quarter compared to the prior quarter as businesses reopened in certain geographical areas in the U.S. and EMEA. 
 ◦ For the nine months ended September 30, 2020, these revenues decreased 21.4% as compared to the prior year period, including a 0.2-percentage point unfavorable impact from currency. The decline at constant currency 1 reflected a lower population of devices (which is partially associated with continued lower Enterprise signings and lower installs in prior and current periods), an ongoing competitive price environment, and lower page volumes (including a higher mix of lower average-page-volume products) that are worse than pre-COVID-19 decline trends due to the impact of business closures since March 2020. While these revenues are contractual in nature, on average, our bundled services contracts include a minimum fixed charge and a significant variable component based on print volumes. The rate of decline of these revenues began to slightly moderate late in the first half of 2020, and continued to moderate during the third quarter 2020, as businesses started to reopen in certain geographical areas in the U.S. and EMEA. 
 • Supplies, paper and other sales includes unbundled supplies and other sales. 
 ◦ For the three months ended September 30, 2020, these revenues decreased 20.0% as compared to third quarter 2019, including a 0.2-percentage point favorable impact from currency and reflected lower supplies revenues associated with lower page volume trends, slightly offset by higher IT revenues from our XBS channel and from recently acquired IT dealers outside of the U.S. The decrease in supplies was significantly impacted by lower sales through indirect channels, as resellers, in response to the lower demand caused by the pandemic, reduced their inventory purchases to manage liquidity. We expect that such resellers will maintain low purchase levels and lower inventories until there is a stable recovery in sales activity. 
 ◦ For the nine months ended September 30, 2020, these revenues decreased 27.8% as compared to the prior year period, including a 0.7-percentage point unfavorable impact from currency and reflected lower supplies revenues associated with lower page volume trends, slightly offset by higher IT revenues from our XBS channel and from recently acquired IT dealers outside of the U.S. The decrease in supplies was significantly impacted by lower sales through indirect channels, as resellers, in response to the lower demand caused by the pandemic, reduced their inventory purchases to manage liquidity. We expect that such resellers will maintain low purchase levels and lower inventories until there is a stable recovery in sales activity. 
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 • Financing revenue is generated from financed equipment sale transactions. For the three months ended September 30, 2020, these revenues declined 8.3% as compared to third quarter 2019, including a 0.5-percentage point favorable impact from currency, while Financing revenue for the nine months ended September 30, 2020 decreased 7.6%, including a 0.3-percentage point unfavorable impact from currency and reflected a continued decline in the finance receivables balance due to lower equipment sales in prior periods. 
 ____________ 
 (1) See the “Non-GAAP Financial Measures” section for an explanation of the non-GAAP financial measure. 
 Equipment sales revenue 
 
 Three Months Ended September 30, Nine Months Ended
September 30, % of Equipment Sales 
 (in millions) 2020 2019 % 
 Change 
 CC % Change 2020 2019 % Change CC % Change 2020 2019 
 Entry $ 55 $ 49 12.2% 11.6% $ 129 $ 154 (16.2)% (15.9)% 12% 11% 
 Mid-range 291 344 (15.4)% (16.3)% 718 996 (27.9)% (28.0)% 68% 69% 
 High-end 69 96 (28.1)% (28.9)% 197 282 (30.1)% (30.1)% 19% 19% 
 Other 4 5 (20.0)% (20.0)% 10 14 (28.6)% (28.6)% 1% 1% 
 Equipment sales $ 419 $ 494 (15.2)% (16.1)% $ 1,054 $ 1,446 (27.1)% (27.1)% 100% 100% 

 _____________ 
 CC - See "Currency Impact" section for a description of Constant Currency. 
 Equipment sales revenue decreased 15.2% for the three months ended September 30, 2020 as compared to third quarter 2019, including a 0.9-percentage point favorable impact from currency as well as the impact of price declines of approximately 5%, while for the nine months ended September 30, 2020, Equipment sales revenue decreased 27.1%, as compared to the prior year period, with no impact from currency, as well as the impact of price declines of approximately 5%. The COVID-19 pandemic has significantly impacted our equipment sales revenue during 2020 as a result of business closures and office building capacity restrictions that impacted our customers' purchasing decisions and caused delayed installations. The pandemic affected our operations in March 2020 and throughout the second quarter 2020, however, as businesses reopened in certain geographical areas of the U.S. and EMEA the impact of the pandemic on our equipment sales lessened compared to its impact in the first half of 2020, resulting in sequential improvement in third quarter 2020 in the rate of decline. The decline at constant currency 1 reflected the following: 
 • Entry - The increase for the three months ended September 30, 2020, as compared to third quarter 2019, was due to higher installs of lower-end printers and MFPs (primarily black and white devices) in EMEA and through our indirect channels in the U.S., in part associated with hybrid workplace promotions. The decrease for the nine months ended September 30, 2020, as compared to the prior year period, was primarily due to lower sales of devices through our indirect channels in EMEA, Latin America and the U.S. affected primarily by the COVID-19 pandemic and partially offset by higher installs of black and white devices in EMEA as well as the benefit of large order deals from Eurasia. 
 • Mid-range - The decrease for the three months ended September 30, 2020, as compared to third quarter 2019, was driven primarily by the COVID-19 pandemic and related office closures, which impacted sales of this group of products more due to their prevalence in office-team settings. Higher sales to our government and education sector customers in North America, as well as strong demand for our recently launched PrimeLink devices and our new generation of ConnectKey devices, provided a partial offset. The decrease for the nine months ended September 30, 2020, as compared to the prior year period, was primarily driven by the COVID-19 pandemic and related office closures, which has more significantly impacted our sales through indirect channels in the U.S. and Europe, as resellers in response to lower demand caused by the pandemic, have reduced their inventory purchases to manage liquidity, partially offset by strong demand for our recently launched PrimeLink devices and our new generation of ConnectKey devices. 
 • High-end - The decrease for the three months ended September 30, 2020, as compared to third quarter 2019, primarily reflected lower installs of our Versant entry-production color, Iridesse and iGen production presses, partially offset by higher installs of our cut-sheet inkjet systems. The decrease in our equipment sales revenue from production color systems was partially impacted by the COVID-19 pandemic, particularly affecting installs of our Versant and Iridesse systems due to their higher mix to the SMB segment where production printing applications depend on business reopening activity. The decrease for the nine months ended September 30, 2020, as compared to the prior year period, primarily reflected lower installs of our Versant entry-production color and iGen production presses, as well as lower installs of our Iridesse production presses in EMEA, which were partially offset by demand for our recently launched Baltoro Inkjet press. The decrease in our equipment sales revenue from production color systems was partially impacted by the COVID-19 pandemic, primarily in 
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 our European operations, where the distribution of our Iridesse systems through indirect channels was affected by furlough adoptions and lower inventory purchases as dealers managed their liquidity. 
 Total Installs 
 Installs reflect new placement of devices only (i.e., measure does not take into account removal of devices which may occur as a result of contract renewals or cancellations). Revenue associated with equipment installations may be reflected up-front in Equipment sales or over time either through rental income or as part of our Xerox Services revenues (which are both reported within our Post sale revenues), depending on the terms and conditions of our agreements with customers. Installs include activity from Xerox Services and Xerox-branded products shipped to our XBS sales unit. Detail by product group (see Geographic Sales Channels and Product and Offerings Definitions) is shown below. 
 Installs for the third quarter 2019: 
 Entry 
 • 9% decrease in color multifunction devices reflecting lower installs of ConnectKey devices through our indirect channels in the U.S. and in EMEA. 
 • 52% increase in black-and-white multifunction devices reflecting higher activity primarily from indirect channels in the U.S. and developing regions in EMEA. The increase is primarily driven by higher sales of low-end devices associated with large order deals from Eurasia and hybrid workplace promotions. 
 Mid-Range (1) 
 • 21% decrease in mid-range color installs primarily reflecting lower installs of multifunction color devices partially offset by strong demand for our recently launched PrimeLink entry-production color devices and our new generation of ConnectKey multi-function devices. 
 • 19% decrease in black-and-white mid-range installs reflecting in part global market trends partially offset by strong demand for our recently launched PrimeLink light-production devices and our new generation of ConnectKey multi-function devices. 
 High-End (1) 
 • 38% decrease in high-end color installs reflecting primarily lower installs of our lower-end Versant devices and of our Iridesse and iGen production systems, partially offset by higher installs of our Baltoro cut-sheet inkjet systems. 
 • 13% decrease in high-end black-and-white systems reflecting lower installs of our Nuvera devices along with market trends. 
 Installs for the nine months ended September 30, 2020: 
 Entry 
 • 21% decrease in color multifunction devices reflecting lower installs of ConnectKey devices through our indirect channels in the U.S. and in EMEA. 
 • 15% increase in black-and-white multifunction devices reflecting higher activity primarily from sales in the lower end of the portfolio through indirect channels in our developing regions in EMEA, partially offset by lower installs through our indirect channels in Latin America and the U.S. 
 Mid-Range (1) 
 • 31% decrease in mid-range color installs primarily reflecting lower installs of multifunction color devices partially offset by strong demand for our recently launched PrimeLink entry-production color devices and our new generation of ConnectKey multi-function devices. 
 • 26% decrease in mid-range black-and-white reflecting in part global market trends partially offset by strong demand for our recently launched PrimeLink light-production multi-function devices and our new generation of ConnectKey multi-function devices. 
 High-End (1) 
 • 50% decrease in high-end color installs reflecting primarily lower installs of our lower-end Versant devices, along with lower installs of our Iridesse production systems, partially offset by strong demand for our recently-launched Baltoro cut-sheet inkjet systems. 
 • 16% decrease in high-end black-and-white systems reflecting lower installs of our Nuvera devices along with market trends. 
 _____________ 
 (1) Mid-range and High-end color installations exclude Fuji Xerox digital front-end sales; including Fuji Xerox digital front-end sales for the three and nine months ended September 30, 2020 Mid-range color devices decreased 21% and 31%, respectively, and High-end color systems decreased 39% and 50%, respectively. 
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 Geographic Sales Channels and Product and Offerings Definitions 
 Our business is aligned to a geographic focus and is primarily organized on the basis of go-to-market sales channels, which are structured to serve a range of customers for our products and services. In 2019 we changed our geographic structure to create a more streamlined, flatter and more effective organization, as follows: 
 • Americas, which includes our sales channels in the U.S. and Canada, as well as Mexico, and Central and South America. 
 • EMEA, which includes our sales channels in Europe, the Middle East, Africa and India. 
 • Other, primarily includes sales to and royalties from Fuji Xerox, and our licensing revenue. 
 Our products and offerings include: 
 • “Entry”, which includes A4 devices and desktop printers. Prices in this product group can range from approximately $150 to $3,000. 
 • “Mid-Range”, which includes A3 Office and Light Production devices that generally serve workgroup environments in mid to large enterprises. Prices in this product group can range from approximately $2,000 to $75,000+. 
 • “High-End”, which includes production printing and publishing systems that generally serve the graphic communications marketplace and large enterprises. Prices for these systems can range from approximately $30,000 to $1,000,000+. 
 • Xerox Services, includes solutions and services that span from managing print to automating processes to managing content. Our primary offerings are Intelligent Workplace Services (IWS), as well as Digital and Cloud Print Services (including centralized print services) and Communication and Marketing Solutions. 
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 Costs, Expenses and Other Income 
 Summary of Key Financial Ratios 
 The following is a summary of key financial ratios used to assess our performance: 
 
 Three Months Ended September 30, Nine Months Ended September 30, 
 
 (in millions) 2020 2019 B/(W) 2020 2019 B/(W) 
 
 
 
 
 
 Gross Profit $ 651 $ 872 $ (221) $ 1,927 $ 2,634 $ (707) 
 RD&E 76 100 24 236 280 44 
 SAG 444 510 66 1,411 1,573 162 
 
 Equipment Gross Margin 25.5 % 34.5 % (9.0) pts. 26.7 % 32.9 % (6.2) pts. 
 Post sale Gross Margin 40.3 % 41.6 % (1.3) pts. 40.7 % 41.7 % (1.0) pts. 
 Total Gross Margin 36.8 % 40.0 % (3.2) pts. 37.8 % 39.8 % (2.0) pts. 
 RD&E as a % of Revenue 4.3 % 4.6 % 0.3 pts. 4.6 % 4.2 % (0.4) pts. 
 SAG as a % of Revenue 25.1 % 23.4 % (1.7) pts. 27.7 % 23.8 % (3.9) pts. 
 
 Pre-tax Income $ 119 $ 223 $ (104) $ 149 $ 486 $ (337) 
 Pre-tax Income Margin 6.7 % 10.2 % (3.5) pts. 2.9 % 7.3 % (4.4) pts. 
 
 Adjusted (1) Operating Profit 
 $ 131 $ 262 $ (131) $ 280 $ 781 $ (501) 
 Adjusted (1) Operating Margin 
 7.4 % 12.0 % (4.6) pts. 5.5 % 11.8 % (6.3) pts. 
 
 
 

 ____________ _ 
 (1) See the “Non-GAAP Financial Measures” section for an explanation of the non-GAAP financial measure. 
 Pre-tax Income Margin 
 Third quarter 2020 pre-tax income margin of 6.7% decreased 3.5-percentage points as compared to third quarter 2019. The decrease primarily reflected the impact of lower adjusted 1 operating margin (see below), of 4.6-percentage points, partially offset by lower Other expenses, net, Transaction and related, costs, net and Restructuring and related costs. 
 Pre-tax income margin for the nine months ended September 30, 2020 of 2.9% decreased 4.4-percentage points as compared to the prior year period. The decrease primarily reflected the impact of lower adjusted 1 operating margin (see below), of 6.3-percentage points, partially offset by lower Restructuring and related costs and Other expenses, net. 
 Adjusted 1 Operating Margin 
 Third quarter 2020 adjusted 1 operating margin of 7.4% decreased 4.6-percentage points as compared to third quarter 2019 reflecting the impact of lower revenues, primarily as a result of the significant effect of the COVID-19 pandemic on our business, partially offset by cost and expense reductions associated with our Project Own It transformation actions as well additional savings from various cost reduction actions to mitigate the impact of the pandemic, including approximately $35 million from temporary government assistance measures and furlough programs (see the Government Assistance and Furlough Programs section for further details) and other reductions in discretionary spend such as near-term targeted marketing programs and the use of contract employees and the temporary suspension of 401(k) matching contributions for the year 2020, as well as lower compensation incentives consistent with lower sales and operating results. The suspension of the 401(k) matching contribution in the third quarter 2020 resulted in a 0.7-percentage point benefit from the reversal in the third quarter 2020 of the accrual through the second quarter 2020. The decrease was also affected by an approximate 1.0-percentage point unfavorable combined impact from higher tariffs and transaction currency. 
 Adjusted 1 operating margin for the nine months ended September 30, 2020 of 5.5% decreased 6.3-percentage points as compared to prior year period reflecting the impact of lower revenues, primarily as a result of the significant effect of the COVID-19 pandemic on our business and a 1.2-percentage point unfavorable impact due to an increase in bad debt expense of $61 million in the first quarter 2020, to reflect the expected impact to our customer base and related outstanding trade and finance receivable portfolio as a result of the economic disruption caused by the pandemic. These negative impacts were partially offset by cost and expense reductions associated with our Project Own It transformation actions as well as additional savings from various cost reduction actions to mitigate the impact of the pandemic, including approximately $95 million from temporary government assistance 
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 measures and furlough programs in the second and third quarters of 2020 (see the Government Assistance and Furlough Programs section for further details) and other reductions in discretionary spend such as near-term targeted marketing programs and the use of contract employees and the temporary suspension of 401(k) matching contributions for the year 2020, as well as lower compensation incentives consistent with lower sales and operating results. The decrease was also affected by an approximate 0.8-percentage point unfavorable combined impact from higher tariffs and transaction currency. 
 ______________ 
 (1) Refer to the Operating Income and Margin reconciliation table in the "Non-GAAP Financial Measures" section. 
 Gross Margin 
 Third quarter 2020 gross margin of 36.8% decreased 3.2-percentage points as compared to third quarter 2019, reflecting the impact of lower revenues (including from our higher margin post sale stream) primarily as a result of the significant effect of the COVID-19 pandemic due to business closures, as well as price promotions, and an approximate 1.0-percentage point adverse combined impact from transaction currency and higher tariffs. These headwinds were partially offset by the cost savings from our Project Own It transformation actions, as well as the additional cost reduction actions to mitigate the impact of the pandemic, including savings of approximately $26 million from temporary government assistance measures and furlough programs and other reductions in discretionary spend such as the use of contract employees and the temporary suspension of 401(k) matching contributions. 
 Gross margin for the nine months ended September 30, 2020 of 37.8% decreased 2.0-percentage points as compared to the prior year period, reflecting the impact of lower revenues (including from our higher margin post sale stream) primarily as a result of the significant effect of the COVID-19 pandemic due to business closures, as well as price promotions, and an approximate 0.8-percentage point adverse combined impact from transaction currency and higher tariffs. These headwinds were partially offset by the benefits from our Project Own It transformation actions, as well as additional cost reduction actions to mitigate the impact of the pandemic, including savings of approximately $66 million from temporary government assistance measures and furlough programs and other reductions in discretionary spend such as the use of contract employees and the temporary suspension of 401(k) matching contributions. 
 Gross margins are expected to continue to be negatively impacted in future periods as a result of an increase in the cost of our imported products due to higher import tariffs. We currently estimate an approximate $30 million cost impact from these higher tariffs for the full year 2020. 
 Third quarter 2020 equipment gross margin of 25.5% decreased 9.0-percentage points as compared to third quarter 2019, reflecting the pressure from lower revenues (primarily as a result of COVID-19 related business closures) and an unfavorable mix of growth in low-end devices as well as the adverse impact of price incentives, transaction currency and incremental tariff costs partially offset by the benefit of cost reductions from Project Own It. 
 Equipment gross margin for the nine months ended September 30, 2020 of 26.7% decreased 6.2-percentage points as compared to the prior year period, reflecting the impact of lower revenues (primarily as a result of COVID-19 related business closures) as well as the adverse impact of price incentives, transaction currency and incremental tariff costs partially offset by the benefit of cost reductions from Project Own It. 
 Third quarter 2020 Post sale gross margin of 40.3% decreased 1.3-percentage points as compared to third quarter 2019, reflecting the impact of lower revenues (primarily as a result of COVID-19 related business closures impacting page volumes) and price erosion on contract renewals, partially offset by productivity and cost savings and restructuring savings associated with Project Own It transformation actions, as well as savings from our additional cost reduction actions to mitigate the impact of the pandemic, including approximately $25 million of savings from temporary government assistance measures and furlough programs and other reductions in discretionary spend such as the use of contract employees and the temporary suspension of 401(k) matching contributions. 
 Post sale gross margin for the nine months ended September 30, 2020 of 40.7% decreased 1.0-percentage points as compared to the prior year period, reflecting the impact of lower revenues (primarily as a result of COVID-19 related business closures impacting page volumes) and price erosion on contract renewals, partially offset by productivity and cost savings and restructuring savings associated with Project Own It transformation actions, as well as savings from our additional cost reduction actions to mitigate the impact of the pandemic, including approximately $65 million of savings from temporary government assistance measures and furlough programs and other reductions in discretionary spend such as the use of contract employees and the temporary suspension of 401(k) matching contributions. 
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 Research, Development and Engineering Expenses (RD&E) 
 
 Three Months Ended
September 30, Nine Months Ended
September 30, 
 (in millions) 2020 2019 Change 2020 2019 Change 
 R&D $ 61 $ 84 $ (23) $ 194 $ 234 $ (40) 
 Sustaining engineering 15 16 (1) 42 46 (4) 
 Total RD&E Expenses $ 76 $ 100 $ (24) $ 236 $ 280 $ (44) 

 Third quarter 2020 RD&E as a percentage of revenue of 4.3% decreased by 0.3-percentage points as compared to third quarter 2019, primarily due to the benefit of cost reductions that outpaced the impact of revenue declines. 
 RD&E of $76 million decreased $24 million as compared to third quarter 2019 reflecting savings from Project Own It that enhanced simplification and rationalization in our core technology spend, and other temporary cost actions, as well as a favorable impact from the timing of investments, partially offset by higher spend in our innovation areas. 
 RD&E as a percentage of revenue for the nine months ended September 30, 2020 of 4.6% increased by 0.4-percentage points as compared to the prior year period, primarily due to the impact of revenue declines that outpaced the benefit of cost reductions. 
 RD&E for the nine months ended September 30, 2020 of $236 million decreased $44 million as compared to the prior year period, reflecting savings from Project Own It that enhanced simplification and rationalization in our core technology spend, and other temporary cost actions, as well as a favorable impact from the timing of investments, partially offset by higher spend in our innovation areas. 
 Selling, Administrative and General Expenses (SAG) 
 Third quarter 2020 SAG as a percentage of revenue of 25.1% increased by 1.7-percentage points as compared to third quarter 2019, primarily due to the impact of lower revenues, partially offset by the benefits from cost savings and restructuring associated with our Project Own It transformation actions, and savings from additional cost reduction actions to mitigate the impact of the pandemic, including approximately $9 million from temporary government assistance measures and furlough programs, and other reductions in discretionary spend such as near-term targeted marketing programs, the use of contract employees and the temporary suspension of 401(k) matching contributions, as well as lower compensation incentives consistent with lower sales and operating results. 
 Third quarter 2020 SAG of $444 million decreased by $66 million as compared to third quarter 2019, reflecting cost savings and restructuring savings associated with our Project Own It transformation actions and from additional cost reduction actions to mitigate the impact of the pandemic, as described above, partially offset by expenses from recent acquisitions. 
 SAG as a percentage of revenue for the nine months ended September 30, 2020 of 27.7% increased by 3.9-percentage points as compared to the prior year period and included a 1.2-percentage point unfavorable impact due to the increase in bad debt expense of $61 million in the first quarter 2020, as compared to the prior year period. The increase also reflected the impact of lower revenues, partially offset by the benefits from cost savings and restructuring associated with our Project Own It transformation actions and savings from additional cost reduction actions to mitigate the impact of the pandemic, including approximately $28 million from temporary government assistance measures and furlough programs, and other reductions in discretionary spend such as near-term targeted marketing programs and the use of contract employees and the temporary suspension of the 401(k) matching contributions, as well as lower compensation incentives consistent with lower sales and operating results. 
 SAG for the nine months ended September 30, 2020 of $1,411 million decreased $162 million as compared to the prior year period, reflecting cost savings and restructuring savings associated with our Project Own It transformation actions and from additional cost reduction actions to mitigate the impact of the pandemic, as noted above. These savings were partially offset by the increase in bad debt expense as described above, as well as expenses from recent acquisitions. 
 During first quarter 2020, our bad debt provision was $61 million higher than the prior year period, primarily reflecting the expected impact on our customer base and related outstanding receivables portfolio as a result of the economic disruption caused by the COVID-19 pandemic. The majority of the increased provision is related to finance receivables due to their larger balance and longer-term nature. During the second and third quarters 2020, write-offs as well as the bad debt reserves for our trade and finance receivables portfolios were in line with our models and consistent with future expectations regarding the impacts from the COVID-19 pandemic. We continue to 
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 monitor developments regarding the pandemic, including business closures and mitigating government support actions and as a result our reserves may need to be updated in future periods. Bad debt expense for third quarter 2020 of $16 million was $3 million higher as compared to third quarter 2019, while bad debt expense for the nine months ended September 30, 2020 of $103 million was $65 million higher compared to the prior year period as a result of the increase in the bad debts provision recorded in first quarter 2020 as described above. Bad debt expense of approximately 2.7 percent of total gross receivables on a trailing-twelve-month basis (TTM) remained higher than the 2019 trend of less than one percent, reflecting the significant increase in first quarter 2020. 
 Restructuring and Related Costs 
 We incurred restructuring and related costs of $20 million for the third quarter 2020, as compared to $27 million for third quarter 2019, and $64 million for the nine months ended September 30, 2020 as compared to $176 million in the prior year period . These costs were primarily related to implementation of initiatives under our business transformation projects including Project Own It. The following is a breakdown of those costs: 
 
 Three Months Ended
September 30, Nine Months Ended
September 30, 
 (in millions) 2020 2019 2020 2019 
 Restructuring and severance (1) 
 $ 18 $ 12 $ 57 $ 37 
 Asset impairments (2) 
 4 2 6 48 
 Other contractual termination costs (3) 
 1 1 2 18 
 Net reversals (4) 
 (3) (7) (18) (23) 
 Restructuring and asset impairment costs 20 8 47 80 
 Retention related severance/bonuses (5) 
 (2) 11 9 31 
 Contractual severance costs (6) 
 — 3 4 41 
 Consulting and other costs (7) 
 2 5 4 24 
 Total $ 20 $ 27 $ 64 $ 176 

 _____________ 
 (1) Reflects headcount reductions of approximately 650 and 150 employees worldwide for the three months ended September 30, 2020 and 2019, respectively, and 1,100 and 450 employees worldwide for the nine months ended September 30, 2020 and 2019, respectively. 
 (2) Primarily related to the exit and abandonment of leased and owned facilities. The charge includes the accelerated write-off of $2 million f or the three months ended September 30, 2020 and 2019, respectively, and $3 million and $36 million f or the nine months ended September 30, 2020 and 2019 , respectively, for leased right-of-use assets, as well as $2 million and $0 million f or the three months ended September 30, 2020 and 2019, respectively, and $3 million and $12 million for the nine months ended September 30, 2020 and 2019 , respectively, for owned assets upon exit from the facilities, net of any potential sublease income and other recoveries. 
 (3) Primarily includes additional costs incurred upon the exit from our facilities including decommissioning costs and associated contractual termination costs. 
 (4) Reflects net reversals for changes in estimated reserves from prior period initiatives. 
 (5) Includes retention related severance and bonuses for employees expected to continue working beyond their minimum notification period before termination. 
 (6) Amounts for nine months ended September 30, 2019 include approximately $38 million for estimated severance and other related costs we were contractually required to pay in connection with employees transferred as part of the shared service arrangement entered into with HCL Technologies in the first quarter 2019. 
 (7) Represents professional support services associated with our business transformation initiatives. 
 Third quarter 2020 actions impacted several functional areas, with approximately 30% focused on gross margin improvements, approximately 65% focused on SAG reductions and the remainder focused on RD&E optimization. 
 Third quarter 2019 actions impacted several functional areas, with approximately 50% focused on gross margin improvements, approximately 45% focused on SAG reductions and the remainder focused on RD&E optimization. 
 The restructuring and related costs reserve balance as of September 30, 2020 for all programs was $87 million, which is expected to be paid over the next twelve months. 
 Refer to Note 12 - Restructuring Programs in the Condensed Consolidated Financial Statements for additional information regarding our restructuring programs. 
 Transaction and Related Costs, Net 
 We recognized a credit of $(6) million for the three months ended September 30, 2020 for Transaction and related costs, net, primarily related to adjustments to costs from third party providers of professional services associated with certain strategic M&A projects. Transaction and related costs, net were $18 million for the nine months ended September 30, 2020 primarily related to costs from third party providers of professional services associated with certain strategic M&A projects including our terminated proposal to acquire HP Inc. 
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 Amortization of Intangible Assets 
 Amortization of intangible assets for the three months ended September 30, 2020 of $13 million increased by $4 million, primarily due to the impact from 2020 partner dealer acquisitions, while Amortization of intangible assets for the nine months ended September 30, 2020 of $34 million decreased by $1 million as compared to the prior year period as a result of the write-off of trade names in prior periods associated with our realignment and consolidation of certain XBS sales units as part of Project Own It transformation actions, partially offset by intangible amortization associated with 2020 and 2019 acquisitions. 
 Worldwide Employment 
 Worldwide employment was approximately 25,500 as of September 30, 2020 and decreased by approximately 1,500 from December 31, 2019. The reduction resulted from net attrition (attrition net of gross hires), of which a large portion is not expected to be back filled, as well as the impact of organizational changes. 
 Other Expenses, Net 
 
 Three Months Ended
September 30, Nine Months Ended
September 30, 
 (in millions) 2020 2019 2020 2019 
 Non-financing interest expense (1) 
 $ 30 $ 27 $ 69 $ 81 
 Non-service retirement-related costs (13) (2) (20) 21 
 Interest income (1) (2) (12) (9) 
 Gains on sales of businesses and assets (28) (19) (29) (20) 
 Litigation matters (1) (8) (1) (8) 
 Contract termination costs - IT services — (8) 3 (8) 
 Currency losses, net — 4 4 6 
 
 
 
 All other expenses, net (2) 7 1 13 
 Other expenses, net $ (15) $ (1) $ 15 $ 76 

 _____________ 
 (1) Includes interest expense of $11 million that is attributable to Senior Notes issued by Xerox Holdings. Refer to Note 13 - Debt in the Condensed Consolidated Financial Statements for additional information regarding debt activity in 2020. 
 Non-Financing Interest Expense 
 Third quarter 2020 non-financing interest expense of $30 million was $3 million higher than third quarter 2019. When combined with financing interest expense (Cost of financing), total interest expense decreased by $1 million from third quarter 2019 primarily reflecting a lower average debt balance in the third quarter as the impact from the incremental $770 million of net new senior unsecured debt was only partially reflected in the quarter. 
 For the nine months ended September 30, 2020 non-financing interest expense of $69 million was $12 million lower than the prior year period. When combined with financing interest expense (Cost of financing), total interest expense decreased by $21 million from the prior year period primarily reflecting a lower average debt balance as the impact from the incremental $770 million of net new senior unsecured debt was only partially reflected in the third quarter 2020. 
 In October 2020, the Company completed the early redemption of $750 million of Senior Notes due May 2021. Refer to Note 22 - Subsequent Event in the Condensed Consolidated Financial Statements for additional information. 
 Refer to Note 13 - Debt in the Condensed Consolidated Financial Statements, for additional information regarding debt activity and the interest expense. 
 Non-Service Retirement-Related Costs 
 Non-service retirement-related costs for the three and nine months ended September 30, 2020 decreased $11 million and $41 million, respectively, compared to the prior year periods, primarily driven by lower losses from pension settlements in the U.S and lower discount rates. 
 Refer to Note 16 - Employee Benefit Plans in the Condensed Consolidated Financial Statements, for additional information regarding non-service retirement-related costs. 
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 Interest Income 
 Interest income for the nine months ended September 30, 2020 increased $3 million compared to the prior year period, primarily reflecting interest on a higher cash balance as a result of cash proceeds received from the sales of our indirect 25% equity interest in Fuji Xerox Co., Ltd. (FX) and indirect 51% partnership interest in Xerox International Partners (XIP) completed in fourth quarter 2019, partially offset by lower market interest rates. 
 Gains on Sales of Businesses and Assets 
 Gains on the sales of businesses and assets increased $9 million for the three and nine months ended September 30, 2020, respectively, as compared to both prior year periods reflecting higher proceeds from sales of non-core business assets. 
 Litigation Matters 
 Litigation matters increased $7 million for the three and nine months ended September 30, 2020, respectively, as compared to both prior year periods, reflecting the favorable resolution of certain litigation matters in third quarter 2019. 
 Contract Termination Costs - IT Services 
 Contract termination costs - IT services increased $8 million and $11 million for the three and nine months ended September 30, 2020, respectively, as compared to both prior year periods, reflecting an adjustment in 2019 to a $43 million penalty recorded in fourth quarter 2018, associated with the termination of an IT services arrangement. 
 Income Taxes 
 Third quarter 2020 effective tax rate was 24.4%. On an adjusted 1 basis, third quarter 2020 effective tax rate was 21.1%. This rate was higher than the U.S. federal statutory tax rate of 21% primarily due to state taxes, the geographical mix of profits which includes non-deductible items on lower pre-tax income and an increase in deferred tax asset valuation allowances partially offset by the impact from various tax law changes. The adjusted 1 effective tax rate excludes the tax impacts associated with the following charges: Restructuring and related costs, Amortization of intangible assets, Transaction and related costs, net as well as non-service retirement-related costs and other discrete, unusual or infrequent items as described in our Non-GAAP Financial Measures section. 
 The effective tax rate for the nine months ended September 30, 2020 was 24.2%. On an adjusted 1 basis, the effective tax rate for the nine months ended September 30, 2020 was 23.8%. This rate was higher than the U.S. federal statutory tax rate of 21% primarily due to state taxes, the geographical mix of profits which includes non-deductible items on lower pre-tax income and an increase in deferred tax asset valuation allowances partially offset by a benefit of approximately 6.0% for the impact from various tax law changes. The adjusted 1 effective tax rate excludes the tax impacts associated with the following charges: Restructuring and related costs, Amortization of intangible assets, Transaction and related costs, net as well as non-service retirement-related costs and other discrete, unusual or infrequent items as described in our Non-GAAP Financial Measures section. 
 Third quarter 2019 effective tax rate was 29.6%. On an adjusted 1 basis, third quarter 2019 effective tax rate was 27.3%. These rates were higher than the U.S. federal statutory tax rate of 21% primarily due to state taxes and the geographical mix of profits. The adjusted 1 effective tax rate excludes the tax impacts associated with the following charges: Restructuring and related costs, Amortization of intangible assets, Transaction and related costs, net as well as non-service retirement-related costs and other discrete, unusual or infrequent items as described in our Non-GAAP Financial Measures section. 
 The effective tax rate for the nine months ended September 30, 2019 was 21.8% and included a benefit of $31 million related to the January 2019 finalization of regulations that govern the repatriation tax from the 2017 Tax Cuts and Jobs Act (the Tax Act). On an adjusted 1 basis, the effective tax rate for the nine months ended September 30, 2019 was 26.7%. This rate was higher than the U.S. federal statutory tax rate of 21% primarily due to state taxes and the geographical mix of profits. The adjusted 1 effective tax rate excludes the tax impacts associated with the following charges: Restructuring and related costs, Amortization of intangible assets, Transaction and related costs, net and non-service retirement-related costs as well as other discrete, unusual or infrequent items as described in our Non-GAAP Financial Measures section, which included the impact of the Tax Act. 
 Our effective tax rate is based on nonrecurring events as well as recurring factors, including the taxation of foreign income. In addition, our effective tax rate will change based on discrete or other nonrecurring events that may not be predictable. 
 _____________ 
 (1) Refer to the Effective Tax Rate reconciliation table in the "Non-GAAP Financial Measures" section. 
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 Equity in Net Income of Unconsolidated Affiliates 
 In November 2019, Xerox Holdings sold its remaining indirect 25% equity interest in Fuji Xerox, which had been previously accounted for as an equity method investment. Refer to Discontinued Operations below and Note 6 - Divestitures, in the Condensed Consolidated Financial Statements for additional information regarding the sale of Fuji Xerox. Accordingly, our remaining investment in Affiliates, at Equity at September 30, 2020 largely consists of several minor investments in entities in the Middle East region. 
 
 Three Months Ended
September 30, Nine Months Ended
September 30, 
 (in millions) 2020 2019 2020 2019 
 Equity in net income of unconsolidated affiliates - Fuji Xerox (1) 
 $ — $ 57 $ — $ 132 
 Equity in net income of unconsolidated affiliates - continuing operations — 1 2 5 
 Total Equity in net income of unconsolidated affiliates $ — $ 58 $ 2 $ 137 
 
 Fuji Xerox after-tax restructuring and other charges $ — $ — $ — $ 19 

 _____________ 
 (1) Equity in net income for Fuji Xerox for 2019 is reported in Income from discontinued operations, net of tax. 
 Net Income from Continuing Operations 
 Third quarter 2020 Net income from continuing operations attributable to Xerox Holdings was $90 million, or $0.41 per diluted share. On an adjusted 1 basis, Net income from continuing operations attributable to Xerox Holdings was $105 million, or $0.48 per diluted share. Third quarter 2020 adjustments to Net income from continuing operations included Restructuring and related costs, Amortization of intangible assets, Transaction and related costs, net and non-service retirement-related costs as well as other discrete, unusual or infrequent items (see Non-GAAP Financial Measures). 
 Net income from continuing operations attributable to Xerox Holdings for the nine months ended September 30, 2020 was $115 million, or $0.49 per diluted share. On an adjusted 1 basis, Net income from continuing operations attributable to Xerox Holdings was $191 million, or $0.84 per diluted share and included the negative impact of a $61 million pre-tax increase in bad debt expense (approximately $43 million after-tax) as compared to the prior year period, primarily reflecting the expected impact to our customer base and related outstanding receivables portfolio as a result of the economic disruption caused by the COVID-19 pandemic. Adjustments to Net income from continuing operations for the nine months ended September 30, 2020 included Restructuring and related costs, Amortization of intangible assets, Transaction and related costs, net, non-service retirement-related costs, as well as other discrete, unusual or infrequent items (see Non-GAAP Financial Measures). 
 Third quarter 2019 Net income from continuing operations attributable to Xerox Holdings was $157 million, or $0.68 per diluted share. On an adjusted 1 basis, Net income from continuing operations attributable to Xerox Holdings was $184 million, or $0.80 per diluted share. Third quarter 2019 adjustments to Net income from continuing operations included Restructuring and related costs, Amortization of intangible assets, Transaction and related costs, net and non-service retirement-related costs as well as other discrete, unusual or infrequent items (see Non-GAAP Financial Measures). 
 Net income from continuing operations attributable to Xerox Holdings for the nine months ended September 30, 2019 was $382 million, or $1.62 per diluted share. On an adjusted 1 basis, Net income from continuing operations attributable to Xerox Holdings was $528 million, or $2.24 per diluted share. Adjustments to Net income from continuing operations for the nine months ended September 30, 2019 included Restructuring and related costs, Amortization of intangible assets, Transaction and related costs, net and non-service retirement-related costs, as well as other discrete, unusual or infrequent items (see Non-GAAP Financial Measures). 
 Refer to Note 20 - Earnings per Share in the Condensed Consolidated Financial Statements, for additional information regarding the calculation of basic and diluted earnings per share. 
 _____________ 
 (1) Refer to the Net Income and EPS reconciliation table in the "Non-GAAP Financial Measures" section. 
 Xerox 2020 Form 10-Q 
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 Discontinued Operations 
 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 Co., Ltd. (FX) for approximately $2.2 billion as well as the sale of its indirect 51% partnership interest in Xerox International Partners (XIP) for approximately $23 million (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. 
 Refer to Note 6 - Divestitures in the Condensed Consolidated Financial Statements for additional information regarding discontinued operations. 
 Other Comprehensive Income (Loss) 
 Third quarter 2020 Other Comprehensive Income, Net Attributable to Xerox Holdings was $88 million and included the following: i) net translation adjustment gains of $179 million reflecting the significant strengthening of our major foreign currencies against the U.S. Dollar; ii) $1 million of net unrealized gains; and iii) $92 million of net losses from the changes in defined benefit plans primarily due to net actuarial losses as a result of lower discount rates in the U.S and the negative impacts from currency, partially offset by settlements. This compares to Other Comprehensive Loss, Net Attributable to Xerox Holdings of $203 million for the third quarter 2019, which reflected the following: i) $155 million of net translation adjustment losses reflecting the significant weakening of our major foreign currencies against the U.S. Dollar; ii) $48 million of net losses from the changes in defined benefit plans primarily due to net actuarial losses as a result of lower discount rates in the U.S., partially offset by settlements and the positive impacts from currency; and iii) $1 million net unrealized gains. 
 Other Comprehensive Income, Net Attributable to Xerox Holdings for the nine months ended September 30, 2020 was $53 million and included the following: i) $42 million of net gains from the changes in defined benefit plans is primarily due to the amortization and recognition of net actuarial losses from AOCL 1 ; ii) net translation adjustment gains of $7 million reflecting the strengthening of our major foreign currencies against the U.S. Dollar; and iii) $4 million of net unrealized gains. This compares to Other Comprehensive Loss, Net Attributable to Xerox Holdings of $158 million for the nine months ended September 30, 2019, which reflected the following: i) $122 million of net translation adjustment losses, reflecting the significant weakening of our major foreign currencies against the U.S. Dollar; ii) $38 million of net losses from the changes in defined benefit plans; and iii) $3 million of net unrealized gains. 
 Refer to Note 19 - Other Comprehensive Income (Loss) in the Condensed Consolidated Financial Statements, for the components of Other Comprehensive Income (Loss), Note 14 - Financial Instruments in the Condensed Consolidated Financial Statements, for additional information regarding unrealized (losses) gains, net, and Note 16 - Employee Benefit Plans in the Condensed Consolidated Financial Statements, for additional information regarding net changes in our defined benefit plans. 
 _____________ 
 (1) AOCL - Accumulated other comprehensive loss. 
 Xerox 2020 Form 10-Q 
 59 

 
 
 

 Capital Resources and Liquidity 
 Our financial results through September 30, 2020 were significantly impacted by COVID-19 related business closures and office building capacity restrictions that impacted our customers' purchasing decisions and caused delayed installations and lower printing volumes on our devices. However, we believe we have sufficient liquidity to manage the business through the economic disruption caused by this pandemic: 
 • A majority of our business is contractually based and our bundled services contracts, on average, include not only a variable component linked to print volumes, but also a fixed minimum, which provides us with a continuing stream of operating cash flow. 
 • As of September 30, 2020, total cash, cash equivalents and restricted cash were $3,297 million and, apart from the restricted cash of $55 million, was readily accessible for use. In October 2020, we completed the early redemption of $750 million of the approximately $1,062 million Senior Notes due in May 2021 from cash on hand. Refer to Note 13 - Debt in the Condensed Consolidated Financial Statements for additional information. 
 • We have access to an undrawn $1.8 billion Credit Facility that matures in August 2022. In connection with the issuance of our $1.5 billion of new Senior Notes, we amended the Credit Facility debt covenants to consider our level of cash on hand as part of our principal debt balance. Refer to Note 13 - Debt in the Condensed Consolidated Financial Statements for additional information. 
 • We have utilized a combination of capital markets financing and securitization to refinance all 2020 debt maturities and a portion of our 2021 debt maturities, significantly reducing our near-term debt commitments and improving our liquidity. Refer to Note 22 - Subsequent Event in the Condensed Consolidated Financial Statements for additional information regarding the early redemption of a portion of the Senior Notes due 2021. 
 • We have focused our efforts on incremental actions to prioritize and preserve cash as we manage through the pandemic. These actions include the use of available temporary government assistance measures and furlough programs and the reduction of discretionary spend such as near-term targeted marketing programs, the use of contract employees and the temporary suspension of 401(k) matching contributions, as well as lower compensation incentives consistent with lower sales and operating results. 
 Cash Flow Analysis 
 The following summarizes our cash, cash equivalents and restricted cash: 
 
 Nine Months Ended
September 30, Change 
 (in millions) 2020 2019 
 Net cash provided by operating activities of continuing operations $ 313 $ 846 $ (533) 
 Net cash provided by operating activities of discontinued operations — 49 (49) 
 Net cash provided by operating activities 313 895 (582) 
 
 
 
 
 Net cash used in investing activities (223) (68) (155) 
 
 Net cash provided by (used in) financing activities 424 (983) 1,407 
 Effect of exchange rate changes on cash, cash equivalents and restricted cash (12) (13) 1 
 
 Increase (decrease) in cash, cash equivalents and restricted cash 502 (169) 671 
 Cash, cash equivalents and restricted cash at beginning of period 2,795 1,148 1,647 
 Cash, Cash Equivalents and Restricted Cash at End of Period $ 3,297 $ 979 $ 2,318 

 Cash Flows from Operating Activities 
 Net cash provided by operating activities of continuing operations was $313 million for the nine months ended September 30, 2020. The $533 million decrease in operating cash from the prior year period was primarily due to the following: 
 • $495 million decrease in pre-tax income before depreciation and amortization, provisions, gain on sales of businesses and assets, restructuring and related costs and defined benefit pension costs. 
 • $305 million decrease from higher levels of inventory primarily due to lower sales volume. 
 • $125 million decrease in other current and long-term liabilities, reflecting lower accruals, particularly incentive-related payments associated with our indirect channel partners and decreases in deferred revenue reflecting lower sales activity. 
 • $50 million decrease from accrued compensation primarily related to lower compensation costs and the year-over-year timing of payments. 
 • $45 million decrease from lower accounts payable primarily due to decreased spending and the year-over-year timing of supplier and vendor payments. 
 Xerox 2020 Form 10-Q 
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 • $272 million increase from accounts receivable primarily due to lower revenue as well as timing of collections. 
 • $124 million increase primarily related to a higher level of run-off due to lower originations of finance receivables of $97 million and lower equipment on operating leases of $27 million. 
 • $53 million increase from net taxes primarily due to lower payments in 2020 as a result of lower pre-tax income. 
 • $47 million increase primarily due to lower restructuring and related costs as compared to the prior year. 
 Cash Flows from Investing Activities 
 Net cash used in investing activities was $223 million for the nine months ended September 30, 2020. The $155 million change from the prior year period was primarily due to four acquisitions completed in the current year for $193 million compared to two acquisitions in the prior year for $42 million. 
 Cash Flows from Financing Activities 
 Net cash provided by financing activities was $424 million for the nine months ended September 30, 2020. The $1,407 million increase in cash from the prior year period was primarily due to the following: 
 • $1,168 million increase from net debt activity. 2020 reflects proceeds of $1,507 million from a Senior Notes offering and $340 million from a secured financing arrangement offset by payments of $1,051 million on Senior Notes, $22 million on the secured financing arrangement and $13 million of deferred debt issuance costs. 2019 reflects payments of $406 million on Senior Notes. 
 • $218 million increase due to share repurchases. 
 • $11 million increase from lower distributions of noncontrolling interests. 
 Cash, Cash Equivalents and Restricted Cash 
 Refer to Note 7 - Supplementary Financial Information in the Condensed Consolidated Financial Statements for additional information regarding Cash, cash equivalents and restricted cash. 
 Operating Leases 
 We have operating leases for real estate and vehicles in our domestic and international operations as well as 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. 
 Refer to Note 11 - Lessee in the Condensed Consolidated Financial Statements for additional information regarding our leases accounted under lessee accounting. 
 Debt and Customer Financing Activities 
 The following summarizes our debt: 
 
 (in millions) September 30, 2020 December 31, 2019 
 Principal debt balance (1) 
 $ 5,082 $ 4,313 
 Net unamortized discount (3) (16) 
 Debt issuance costs (28) (17) 
 Fair value adjustments (2) 
 
 - terminated swaps 3 1 
 - current swaps — 1 
 Total Debt $ 5,054 $ 4,282 

 _____________ 
 (1) Includes Notes Payable of $2 million as of September 30, 2020. There were no Notes Payable as of December 31, 2019. 
 (2) Fair value adjustments include the following: (i) fair value adjustments to debt associated with terminated interest rate swaps, which are being amortized to interest expense over the remaining term of the related notes; and (ii) changes in fair value of hedged debt obligations attributable to movements in benchmark interest rates. Hedge accounting requires hedged debt instruments to be reported inclusive of any fair value adjustment. 
 Credit Rating Downgrade 
 In August, the Company's $1.0 billion Senior Notes due 2023 were downgraded by S&P and, pursuant to the terms of the Notes, the coupon rate on the Notes increased by 0.25% from 4.125% to 4.375% per annum. 
 Xerox 2020 Form 10-Q 
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 Finance Assets and Related Debt 
 The following represents our total finance assets, net associated with our lease and finance operations: 
 
 (in millions) September 30, 2020 December 31, 2019 
 Total finance receivables, net (1) 
 $ 3,076 $ 3,351 
 Equipment on operating leases, net 301 364 
 Total Finance Assets, net (2) 
 $ 3,377 $ 3,715 

 _____________ 
 (1) Includes (i) Billed portion of finance receivables, net, (ii) Finance receivables, net and (iii) Finance receivables due after one year, net as included in our Condensed Consolidated Balance Sheets. 
 (2) The change from December 31, 2019 includes an increase of $24 million due to currency. 
 Our lease contracts permit customers to pay for equipment over time rather than at the date of installation; therefore, we maintain a certain level of debt (that we refer to as financing debt) to support our investment in these lease contracts, which are reflected in total finance assets, net. For this financing aspect of our business, we maintain an assumed 7:1 leverage ratio of debt to equity as compared to our finance assets. Based on this leverage, the following represents the breakdown of total debt between financing debt and core debt: 
 
 (in millions) September 30, 2020 December 31, 2019 
 Finance receivables debt (1) 
 $ 2,692 $ 2,932 
 Equipment on operating leases debt 263 319 
 Financing debt 2,955 3,251 
 Core debt 2,099 1,031 
 Total Debt $ 5,054 $ 4,282 

 ____________________________ 
 (1) Finance receivables debt is the basis for our calculation of "Cost of financing" expense in the Condensed Consolidated Statements of Income. 
 Sales of Accounts Receivable 
 Activity related to sales of accounts receivable is as follows: 
 
 Three Months Ended
September 30, Nine Months Ended
September 30, 
 (in millions) 2020 2019 2020 2019 
 Estimated increase (decrease) to operating cash flows (1) 
 $ 54 $ (33) $ (86) $ (33) 

 _____________ 
 (1) Represents the difference between current and prior period accounts receivable sales adjusted for the effects of currency. The increase for the three months ended September 30, 2020 reflects increased sales activity in the channel. 
 Refer to Note 8 - Accounts Receivable, Net in the Condensed Consolidated Financial Statements for additional information regarding our accounts receivable sales arrangements. 
 Liquidity and Financial Flexibility 
 We manage our worldwide liquidity using internal cash management practices, which are subject to i) the statutes, regulations and practices of each of the local jurisdictions in which we operate, ii) the legal requirements of the agreements to which we are a party and iii) the policies and cooperation of the financial institutions we utilize to maintain and provide cash management services. 
 Our principal debt maturities are spread over the next five years as follows: 
 
 (in millions) Amount (1) 
 
 2020 Q4 (2) 
 $ 2 
 2021 (3) 
 1,222 
 2022 300 
 2023 1,158 
 2024 300 
 2025 750 
 2026 and thereafter 1,350 
 Total $ 5,082 

 _____________ 
 (1) Includes fair value adjustments. 
 (2) Includes Notes Payable of $2 million as of September 30, 2020. 
 (3) Includes $750 million of Senior Notes due May 2021 that were redeemed in October 2020. Refer to Note 22 - Subsequent Event in the Condensed Consolidated Financial Statements for additional information regarding the early redemption of these Senior Notes. 
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 Treasury Stock 
 In the third quarter 2020 Xerox Holdings repurchased 8.0 million shares of our common stock for an aggregate cost of $150 million, including fees. No share repurchases were made in the first or second quarter of 2020. We expect to repurchase an additional $150 million of our common stock in the fourth quarter 2020. 
 Shared Services Arrangement with HCL Technologies 
 In March 2019, as part of Project Own It, Xerox entered into a shared services arrangement with HCL Technologies 
 (HCL) pursuant to which we transitioned certain global administrative and support functions, including, among others, selected information technology and finance functions (excluding accounting), from Xerox to HCL. This transition was expected to be completed during 2020, however, as a result of delays caused by the COVID-19 pandemic, the transition is now expected to extend into 2021. HCL is expected to make certain ongoing investments in software, tools and other technology to consolidate, optimize and automate the transferred functions with the goal of providing improved service levels and significant cost savings. The shared services arrangement with HCL includes a remaining aggregate spending commitment of approximately $1.2 billion over the next 6 years. However, we can terminate the arrangement at any time at our discretion, subject to payment of termination fees that decline over the term, or for cause. 
 For the three and nine months ended September 30, 2020, we incurred net charges of approximately $49 million and $139 million, respectively, associated with this arrangement. The cost has been allocated to the various functional expense lines in the Condensed Consolidated Statements of Income based on an assessment of the nature and amount of the costs incurred for the various transferred functions prior to their transfer to HCL. 
 
 Financial Risk Management 
 We are exposed to market risk from foreign currency exchange rates and interest rates, which could affect operating results, financial position and cash flows. We manage our exposure to these market risks through our regular operating and financing activities and, when appropriate, through the use of derivative financial instruments. We utilize derivative financial instruments to hedge economic exposures, as well as to reduce earnings and cash flow volatility resulting from shifts in market rates. We enter into limited types of derivative contracts, including interest rate swap agreements, foreign currency spot, forward and swap contracts and net purchased foreign currency options to manage interest rate and foreign currency exposures. Our primary foreign currency market exposures include the Japanese Yen, Euro and U.K. Pound Sterling. The fair market values of all our derivative contracts change with fluctuations in interest rates and/or currency exchange rates and are designed so that any changes in their values are offset by changes in the values of the underlying exposures. Derivative financial instruments are held solely as risk management tools and not for trading or speculative purposes. The related cash flow impacts of all of our derivative activities are reflected as cash flows from operating activities. 
 We are required to recognize all derivative instruments as either assets or liabilities at fair value in the balance sheet. As permitted, certain of these derivative contracts have been designated for hedge accounting treatment. Certain of our derivatives that do not qualify for hedge accounting are effective as economic hedges. These derivative contracts are likewise required to be recognized each period at fair value and therefore do result in some level of volatility. The level of volatility will vary with the type and amount of derivative hedges outstanding, as well as fluctuations in the currency and interest rate markets during the period. The related cash flow impacts of all of our derivative activities are reflected as cash flows from operating activities. 
 By their nature, all derivative instruments involve, to varying degrees, elements of market and credit risk. The market risk associated with these instruments resulting from currency exchange and interest rate movements is expected to offset the market risk of the underlying transactions, assets and liabilities being hedged. We do not believe there is significant risk of loss in the event of non-performance by the counterparties associated with these instruments because these transactions are executed with a diversified group of major financial institutions. Further, our policy is to deal with counterparties having a minimum investment grade or better credit rating. Credit risk is managed through the continuous monitoring of exposures to such counterparties. 
 The current market events have not required us to materially modify or change our financial risk management strategies with respect to our exposures to interest rate and foreign currency risk. Refer to Note 14 – Financial Instruments in the Condensed Consolidated Financial Statements for further discussion and information on our financial risk management strategies. 
 Xerox 2020 Form 10-Q 
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 Non-GAAP Financial Measures 
 We have reported our financial results in accordance with generally accepted accounting principles (GAAP). In addition, we have discussed our financial results using the non-GAAP measures described below. We believe these non-GAAP measures allow investors to better understand the trends in our business and to better understand and compare our results. Accordingly, we believe it is necessary to adjust several reported amounts, determined in accordance with GAAP, to exclude the effects of certain items as well as their related income tax effects. 
 A reconciliation of these non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP are set forth below as well as in the third quarter 2020 presentation slides available at www.xerox.com/investor . 
 These non-GAAP financial measures should be viewed in addition to, and not as a substitute for, the Company’s reported results prepared in accordance with GAAP. 
 Adjusted Earnings Measures 
 • Net income and Earnings per share (EPS) 
 • Effective tax rate 
 The above measures were adjusted for the following items: 
 Restructuring and related costs: Restructuring and related costs include restructuring and asset impairment charges as well as costs associated with our transformation programs beyond those normally included in restructuring and asset impairment charges. Restructuring consists of costs primarily related to severance and benefits paid to employees pursuant to formal restructuring and workforce reduction plans. Asset impairment includes costs incurred for those assets sold, abandoned or made obsolete as a result of our restructuring actions, exiting from a business or other strategic business changes. Additional costs for our transformation programs are primarily related to the implementation of strategic actions and initiatives and include third-party professional service costs as well as one-time incremental costs. All of these costs can vary significantly in terms of amount and frequency based on the nature of the actions as well as the changing needs of the business. Accordingly, due to that significant variability, we will exclude these charges since we do not believe they provide meaningful insight into our current or past operating performance nor do we believe they are reflective of our expected future operating expenses as such charges are expected to yield future benefits and savings with respect to our operational performance. 
 Amortization of intangible assets: The amortization of intangible assets is driven by our acquisition activity which can vary in size, nature and timing as compared to other companies within our industry and from period to period. The use of intangible assets contributed to our revenues earned during the periods presented and will contribute to our future period revenues as well. Amortization of intangible assets will recur in future periods. 
 Transaction and related costs, net: Transaction and related costs, net are costs and expenses primarily associated with certain strategic M&A projects. These costs are primarily for third-party legal, accounting, consulting and other similar type professional services as well as potential legal settlements that may arise in connection with those M&A transactions. These costs are considered incremental to our normal operating charges and were incurred or are expected to be incurred solely as a result of the planned transactions. Accordingly, we are excluding these expenses from our Adjusted Earnings Measures in order to evaluate our performance on a comparable basis. 
 Non-service retirement-related costs: Our defined benefit pension and retiree health costs include several elements impacted by changes in plan assets and obligations that are primarily driven by changes in the debt and equity markets as well as those that are predominantly legacy in nature and related to employees who are no longer providing current service to the company (e.g. retirees and ex-employees). These elements include (i) interest cost, (ii) expected return on plan assets, (iii) amortization of prior plan amendments, (iv) amortized actuarial gains/losses and (v) the impacts of any plan settlements/curtailments. Accordingly, we consider these elements of our periodic retirement plan costs to be outside the operational performance of the business or legacy costs and not necessarily indicative of current or future cash flow requirements. This approach is consistent with the classification of these costs as non-operating in other expenses, net. Adjusted earnings will continue to include the service cost elements of our retirement costs, which is related to current employee service as well as the cost of our defined contribution plans. 
 Other discrete, unusual or infrequent items: We excluded the following items given their discrete, unusual or infrequent nature and their impact on our results for each period: 
 • Contract termination costs - IT Services 
 • Impacts associated with the Tax Cuts and Jobs Act (the "Tax Act") enacted in December 2017 
 Xerox 2020 Form 10-Q 
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 We believe the exclusion of these items allows investors to better understand and analyze the results for the period as compared to prior periods and expected future trends in our business. 
 Adjusted Operating Income and Margin 
 We calculate and utilize adjusted operating income and margin measures by adjusting our reported pre-tax income and margin amounts. In addition to the costs and expenses noted as adjustments for our Adjusted Earnings measures, adjusted operating income and margin also exclude the remaining amounts included in Other expenses, net, which are primarily non-financing interest expense and certain other non-operating costs and expenses. We exclude these amounts in order to evaluate our current and past operating performance and to better understand the expected future trends in our business. 
 Constant Currency (CC) 
 Refer to "Currency Impact" for a discussion of this measure and its use in our analysis of revenue growth. 
 Summary 
 Management believes that all of these non-GAAP financial measures provide an additional means of analyzing the current period’s results against the corresponding prior period’s results. However, these non-GAAP financial measures should be viewed in addition to, and not as a substitute for, the company’s reported results prepared in accordance with GAAP. Our non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP measures and should be read only in conjunction with our Condensed Consolidated Financial Statements prepared in accordance with GAAP. Our management regularly uses our supplemental non-GAAP financial measures internally to understand, manage and evaluate our business and make operating decisions. These non-GAAP measures are among the primary factors management uses in planning for and forecasting future periods. Compensation of our executives is based in part on the performance of our business based on these non-GAAP measures. 
 A reconciliation of these non-GAAP financial measures and the most directly comparable measures calculated and presented in accordance with GAAP are set forth on the following tables: 
 Net Income and EPS reconciliation: 
 
 Three Months Ended September 30, Nine Months Ended September 30, 
 2020 2019 2020 2019 
 (in millions, except per share amounts) Net Income EPS Net Income EPS Net Income EPS Net Income EPS 
 Reported (1) 
 $ 90 $ 0.41 $ 157 $ 0.68 $ 115 $ 0.49 $ 382 $ 1.62 
 Adjustments: 
 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 
 Non-service retirement-related costs (13) (2) (20) 21 
 Contract termination costs - IT services — (8) 3 (8) 
 
 Income tax on adjustments (2) 
 1 (7) (23) (55) 
 
 
 Tax Act — 4 — (31) 
 Adjusted $ 105 $ 0.48 $ 184 $ 0.80 $ 191 $ 0.84 $ 528 $ 2.24 
 Dividends on preferred stock used in adjusted EPS calculation (3) 
 $ 4 $ — $ 11 $ — 
 Weighted average shares for adjusted EPS (3) 
 213 231 215 235 
 Fully diluted shares at September 30, 2020 (4) 
 208 

 ____________________________ 
 (1) Net income and EPS from continuing operations attributable to Xerox Holdings. 
 (2) Refer to Effective Tax Rate reconciliation. 
 (3) Average shares for the calculation of adjusted diluted EPS for 2020 exclude 7 million shares associated with our Series A convertible preferred stock and therefore earnings include the preferred stock dividend. Average shares for the calculation of adjusted diluted EPS for 2019 include 7 million shares associated with our Series A convertible preferred stock and therefore exclude the preferred stock dividend. 
 (4) Represents common shares outstanding at September 30, 2020 plus potential dilutive common shares as used for the calculation of adjusted diluted EPS for the third quarter 2020. The amount excludes shares associated with our Series A convertible preferred stock as they are expected to be anti-dilutive for the year. 
 Xerox 2020 Form 10-Q 
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 Effective Tax Rate reconciliation: 
 
 Three Months Ended September 30, 
 2020 2019 
 (in millions) Pre-Tax Income Income Tax Expense (Benefit) Effective
Tax Rate Pre-Tax Income Income Tax Expense (Benefit) Effective
Tax Rate 
 Reported (1) 
 $ 119 $ 29 24.4 % $ 223 $ 66 29.6 % 
 Non-GAAP Adjustments (2) 
 14 (1) 30 7 
 Tax Act — — — (4) 
 Adjusted (3) 
 $ 133 $ 28 21.1 % $ 253 $ 69 27.3 % 
 
 
 Nine Months Ended September 30, 
 2020 2019 
 (in millions) Pre-Tax Income Income Tax Expense Effective
Tax Rate Pre-Tax Income Income Tax Expense Effective
Tax Rate 
 Reported (1) 
 $ 149 $ 36 24.2 % $ 486 $ 106 21.8 % 
 Non-GAAP Adjustments (2) 
 99 23 232 55 
 Tax Act — — — 31 
 Adjusted (3) 
 $ 248 $ 59 23.8 % $ 718 $ 192 26.7 % 

 ____________________________ 
 (1) Pre-tax income and income tax expense from continuing operations. 
 (2) Refer to Net Income and EPS reconciliation for details. 
 (3) The tax impact on Adjusted Pre-Tax Income from continuing operations is calculated under the same accounting principles applied to the Reported Pre-Tax Income under ASC 740, which employs an annual effective tax rate method to the results. 
 Operating Income and Margin reconciliation: 
 
 Three Months Ended September 30, 
 2020 2019 
 (in millions) Profit Revenue Margin Profit Revenue Margin 
 Reported (1) 
 $ 119 $ 1,767 6.7 % $ 223 $ 2,179 10.2 % 
 Adjustments: 
 Restructuring and related costs 20 27 
 Amortization of intangible assets 13 9 
 Transaction and related costs, net (6) 4 
 
 
 
 Other expenses, net (15) (1) 
 
 Adjusted $ 131 $ 1,767 7.4 % $ 262 $ 2,179 12.0 % 
 
 
 Nine Months Ended September 30, 
 2020 2019 
 (in millions) Profit Revenue Margin Profit Revenue Margin 
 Reported (1) 
 $ 149 $ 5,092 2.9 % $ 486 $ 6,622 7.3 % 
 Adjustments: 
 Restructuring and related costs 64 176 
 Amortization of intangible assets 34 35 
 Transaction and related costs, net 18 8 
 
 Other expenses, net 15 76 
 Adjusted $ 280 $ 5,092 5.5 % $ 781 $ 6,622 11.8 % 

 ____________________________ 
 (1) Pre-Tax Income and Revenue from continuing operations. 
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 ITEM 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 
 The information set forth under the “Financial Risk Management” section of this Quarterly Report on Form 10-Q is hereby incorporated by reference in answer to this Item.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.
Xerox Holdings Corp 10-Q

Item 2. Management’s Discussion and Analysis
