Xerox Holdings Corp 10-K

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Throughout the Management’s Discussion and Analysis (MD&A) that follows, 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. References to “Xerox Holdings Corporation” refer to the stand-alone parent company and do not include its subsidiaries. References to “Xerox Corporation” refer to the stand-alone company and do not include subsidiaries. Currently, Xerox Holdings' primary direct operating subsidiary is Xerox and Xerox reflects nearly all of Xerox Holdings' operations. Accordingly, the following MD&A primarily focuses on the operations of Xerox and is intended to help the reader understand Xerox's business and its results of operations and financial condition. Throughout this combined Form 10-K, references are made to various notes in the Consolidated Financial Statements which appear in Part II, Item 8 of this combined Form 10-K, and the information contained in such notes is incorporated by reference into the MD&A in the places where such references are made. Xerox Holdings' other direct operating subsidiary is CareAR, a small SaaS solutions provider, which was acquired for $9 million in 2020. CareAR incurred approximately $1 million of Selling, administrative and general expenses in 2020, which are included in this discussion with Xerox's costs and expenses since immaterial and for ease of discussion. Executive Overview Impact of COVID-19 The COVID-19 pandemic and the measures taken to prevent its spread impacted our business and presented significant challenges throughout 2020. To reduce the transmission of COVID-19, governments, worldwide, implemented a wide range of restrictions on business and individual activities, including closures or limitations on the operations of businesses along with restrictions on travel and other actions to promote or enforce physical distancing. The pandemic has significantly impacted how our customers use our products and services, how they interact with us, and how our employees work and provide services to our customers. The pandemic has also presented unprecedented business challenges, and we have experienced impacts related to the COVID-19 pandemic, primarily related to impacts of travel restrictions, site access and quarantine requirements, and the impacts of remote work and adjusted work schedules. 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. The COVID-19 pandemic significantly impacted our results of operations during 2020 and we expect that there will continue to be effects through 2021. Refer to Financial Overview for additional discussion regarding the impacts of the COVID-19 pandemic on our business in 2020. Business Overview With annual revenues of approximately $7.0 billion, we remain a leading global provider of digital print technology and related services, software and solutions. Our primary offerings span three main areas: Workplace Solutions, Graphic Communications and Production Solutions and Xerox Services: • Workplace Solutions includes two strategic product groups, Entry and Mid-Range, which share common technology, manufacturing and product platforms. Workplace Solutions revenues include the sale of products and supplies, as well as the associated technical service and financing of those products. • Graphic Communications and Production Solutions are designed for customers in the graphic communications, in-plant and production print environments with high-volume printing requirements. • Xerox Services includes a continuum of solutions and services that helps our customers optimize their print and communications infrastructure, apply automation and simplification to maximize productivity, and ensure the highest levels of security. Our primary offerings in this area are Intelligent Workplace Services (IWS) and a range of Digital Services that leverage our software capabilities in Workflow Automation, Personalization and Communication Software, Content Management Solutions, and Digitization Services. In addition to our three primary offering areas described above, a smaller portion of our revenues comes from non-core streams including paper sales in our developing market countries, wide-format systems, licensing revenue, as well as from Software and IT Services, which are two areas of business in which we have enhanced our focus and investments. Xerox 2020 Annual Report 26 Table of Contents Headquartered in Norwalk, Connecticut, with approximately 24,700 employees, Xerox serves customers in approximately 160 countries. We have a broad and diverse base of customers by both geography and industry, ranging from small and medium-sized businesses (SMBs) to printing production (including graphic communications) companies, governmental entities, educational institutions and Fortune 1000 corporations. Our business does not depend upon a single customer, or a few customers, the loss of which would have a material adverse effect on our business. In 2020, approximately 40% of our revenue was generated outside the United States. Market and Business Strategy Our market and business strategy is to maintain overall market share leadership in our core market and increase our participation in the growth areas, while expanding into adjacent markets and leveraging our innovation capabilities to enter new markets. The company’s four strategic initiatives, summarized below, remain at the core of how we operate and deliver results for all stakeholders. 1. Optimize Operations for Simplicity • Continuously improve operating model for greater efficiency • Invest further in robotic process automation, augmented reality and analytics to drive efficiencies • Reduce complexity and simplify billing and offerings 2. Drive Revenue • Scale IT Services in the SMB • Grow Xerox Financial Services (XFS) as a global payment solutions business • Expand software offerings in enterprise content management and customer experience 3. Re-energize the Innovation Engine • Deliver revenue growth from 3D and the Internet of Things (IoT) • Launch a $250 million corporate venture capital fund • Embed PARC’s AI technology into new and existing software offerings 4. Focus on cash flow and increasing capital returns • Maximize annual free cash flow 1 generation • Deploy excess capital for strategic M&A • Opportunistic share repurchases _____________ (1) Free cash flow is defined as Operating cash flow from continuing operations less capital expenditures. Post-sale Based Business Model In 2020, 78% of our total revenue was post-sale based, which includes contracted services, equipment maintenance, supplies and financing. These revenue streams generally follow equipment placements and provide some stability to our revenue and cash flows. Key indicators of future post sale revenue include installs and related removals of printers and multifunction devices, the number and type of machines in the field (MIF), page volumes (including the mix of pages printed on color devices) and the type and nature of related software and services provided to customers. Post sale revenue also includes transactional IT hardware sales and implementation services primarily from our XBS organization. Project Own It During the second half of 2018, we initiated a transformation project - Project Own It - centered on creating a more effective organization to enhance our focus on our customers and our partners, instill a culture of continuous improvement and improve our financial results through on-going cost reductions and savings. The primary goal of this project is to improve productivity by driving end-to-end transformation of our processes and systems to improve effectiveness and to reduce costs. These efforts are considered critical to making us more competitive and giving us the capacity to invest in growth and maximize shareholder returns. Key opportunities under Project Own It include establishing more effective shared service centers (captive and through our outsource partners), rationalizing our IT infrastructure, reducing our real estate footprint, improving our supply chain management and the productivity of our supplier base. Project Own It is on track to deliver against our 3 year gross cost reduction objective of $1.5 billion. This project also involves evaluating the sourcing of all of our products in an effort to optimize our options. Our approach is to analyze our potential options both by product category and holistically to determine what sourcing makes the most strategic and economic sense. Xerox 2020 Annual Report 27 Table of Contents 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 selected finance functions, from Xerox to HCL. We incurred restructuring and related costs, net of $93 million for the year ended December 31, 2020 primarily related to costs incurred to implement initiatives under our business transformation projects including Project Own It. Refer to Restructuring and Related Costs, Net section of the MD&A and Note 14 - Restructuring Programs in the Consolidated Financial Statements for additional information. New Businesses Strategy In January 2021, we announced our intention to stand up our Software, Financing and Innovation organizations as separate and distinct businesses by 2022. The Software business will include a growing portfolio comprised of: DocuShare®, a cloud-based content management system; FreeFlow®, automation software for production print; XMPie, a multi-channel marketing software company; and CareAR, an enterprise augmented reality business Xerox acquired in late 2020. Xerox Financial Services (XFS) will become a global payment solutions business, offering leasing for Xerox and third-party technology and office equipment. This will expand the Company’s customer base, create cross-selling opportunities and provide more leasing options for small and medium-sized businesses. The Innovation business will include the scientists and engineers located in Palo Alto, Calif.; Webster, N.Y.; Cary, N.C., and Toronto and will be named PARC Innovation. This team will be focused on incubating, productizing and commercializing disruptive technology aligned with our innovation focus areas such as 3D Printing and Digital Manufacturing, Sensors and Services for the IoT, AI and clean tech. In the coming months, Xerox plans to establish a $250 million corporate venture capital fund to invest in startups and early and mid-stage growth companies aligned with the Company’s innovation focus areas and targeted adjacencies. The corporate venture capital fund will further enhance the Company’s existing innovation ecosystem and drive growth through investment, commercial partnerships and co-development of new technologies. Sales of Ownership Interests in Fuji Xerox Co., Ltd. and Xerox International Partners In November 2019, Xerox Holdings completed a series of transactions to restructure its relationship with FUJIFILM Holdings Corporation (FH), including the sale of its indirect 25% equity interest in Fuji Xerox (FX) 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). Refer to Note 6 - Divestitures in the Consolidated Financial Statements for additional information related to the Sales. The transactions with FH also included an OEM license agreement by and between FX and Xerox, granting FX the right to use specific Xerox Intellectual Property (IP) in providing certain named original equipment manufacturers (OEM’s) with products (such as printer engines) in exchange for an upfront license fee of $77 million. The $77 million ($58 million after-tax) OEM license fee, which was recorded in Service, maintenance and rentals revenue in 2019, had the following impact on our financial results for the years ended December 31, 2020 and 2019, respectively: Xerox 2020 Annual Report 28 Table of Contents ( in millions, except per share amounts ) Year Ended December 31, 2020 Year Ended December 31, 2019 Financial Results from Continuing Operations As Reported OEM License Impact As Reported Excluding OEM License Impact As Reported OEM License Impact As Reported Excluding OEM License Impact Total Revenue (22.5) % (0.6) % (21.9) % (6.2) % 0.8 % (7.0) % Total Revenue - CC (1) (22.7) % (0.7) % (22.0) % (4.7) % 0.8 % (5.5) % Post sale revenue (22.1) % (0.9) % (21.2) % (6.4) % 1.0 % (7.4) % Post sale revenue - CC (1) (22.1) % (0.8) % (21.3) % (4.9) % 1.0 % (5.9) % Gross Margin n/a n/a n/a 40.3 % 0.6 % 39.7 % Adjusted Operating Margin (1) n/a n/a n/a 13.1 % 0.7 % 12.4 % EPS - GAAP n/a n/a n/a $ 2.78 $ 0.25 $ 2.53 EPS - Adjusted (1) n/a n/a n/a $ 3.55 $ 0.25 $ 3.30 Operating Cash Flow n/a n/a n/a $ 1,244 $ 58 $ 1,186 _____________ CC - See "Currency Impact" section for description of Constant Currency. (1) Refer to the "Non-GAAP Financial Measures" section for an explanation of the non-GAAP financial measure. Financial Overview Impact of COVID-19 on Our Business Operations The COVID-19 pandemic has significantly impacted our sales of equipment and unbundled supplies as businesses hold off or delay purchases; due to their transactional nature, we expect that these sales will continue to fluctuate and gradually improve concurrent with office building reopenings and the roll-out of vaccinations, which is anticipated to allow more of our customers' employees to return to the office. Our bundled services contracts, on average, include a significant variable component based on print volumes, and a minimum fixed charge. The variable charges are impacted by our customers' employees not being in the office using our equipment and services 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. With our Project Own It transformation and cost savings, we built a leaner and 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 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. In addition, we also actively took advantage of available temporary government assistance measures and furlough programs to offset related employee costs. The resurgence of the virus in several European countries and U.S. regions in the fourth quarter of 2020 contribute to the remaining uncertainty around the trajectory, duration and economic impact of the pandemic in the near term, however, we expect that measures to control the infection rate and expand economic activity will result in moderate economic improvement in 2021. We expect to continue our actions to mitigate the effects of the pandemic on our business operations and financial performance. 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. In March 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). In 2020, we recognized savings of approximately $107 million from these temporary measures in the U.S., Canada and Europe, including $92 million from various government assistance programs and $15 million from furlough programs. Through the use of these programs, we have thus far been able to provide an offset to our costs, without further use of cash. Xerox 2020 Annual Report 29 Table of Contents There were no material impacts to our income tax expense in 2020 as a result of the temporary changes included in the CARES Act. In addition, we deferred payment of the employer-paid portion of social security payroll taxes through the end of calendar year 2020 to the extent not reduced by employee retention credits earned during 2020. This deferral ended in 2020 and we expect to pay 50% of the net deferred amount in 2021 and the remaining 50% in 2022 together with amounts normally due for the employer-paid portion of social security payroll taxes in those years. Estimated savings were recorded as follows in the Consolidated Statements of Income: (in millions) Year Ended December 31, 2020 Cost of sales $ 1 Cost of services, maintenance and rentals 73 Research, development and engineering expenses 1 Selling, administrative and general expenses 32 Total Estimated savings $ 107 We continue to monitor government programs and actions being implemented or expected to be implemented to counter the economic impacts of the COVID-19 pandemic. In December 2020, an additional $900 billion stimulus package, the Consolidated Appropriations Act, 2021, was enacted in the U.S. extending the refundable employee retention credits into 2021. Other governments are likewise considering new programs or the extension of existing programs. 2020 Operating Results Total revenue of $7.0 billion in 2020 decreased 22.5% from the prior year, including a 0.2-percentage point favorable impact from currency and an approximate 1.2-percentage point favorable impact from 2020 partner dealer acquisitions, partially offset by an approximate 0.6-percentage point unfavorable impact from the upfront OEM license fee of $77 million received in the prior year. The decrease in revenue reflected a 22.1% decrease in Post sale revenue, including no impact from currency and an approximate 0.9-percentage point unfavorable impact from the OEM license fee; and a 24.2% decrease in Equipment sales revenue, including a 0.4-percentage point favorable impact from currency. The COVID-19 pandemic significantly impacted our 2020 revenues due to business closures and office building capacity restrictions that slowed our customers' purchasing decisions and caused lower printing volumes on our devices. Net income from continuing operations attributable to Xerox Holdings was as follows: Year Ended December 31, B/(W) (in millions) 2020 2019 2018 2020 2019 Net income from continuing operations attributable to Xerox Holdings $ 192 $ 648 $ 306 $ (456) $ 342 Adjusted (1) Net income from continuing operations attributable to Xerox Holdings 313 828 745 (515) 83 Net income from continuing operations attributable to Xerox Holdings for 2020 decreased $456 million as compared to the prior year primarily reflecting lower revenues as a result of the COVID-19 pandemic, which were only partially offset by lower costs and expense, which includes savings from our Project Own It transformation actions and other actions in response to the COVID-19 pandemic, as well as lower Restructuring and related costs, net and Income tax expense. Adjusted 1 net income from continuing operations attributable to Xerox Holdings for 2020 decreased $515 million as compared to the prior year primarily reflecting lower revenues as a result of the COVID-19 pandemic, which were only partially offset by lower cost and expense, which includes savings from our Project Own It transformation actions. Adjustments in 2020 include Restructuring and related costs, net, Amortization of intangible assets, Transaction and related costs, net as well as non-service retirement-related costs and other discrete, unusual or infrequent items, which included the loss on the early extinguishment of debt. Operating cash flow provided by continuing operations of Xerox Holdings was $548 million in 2020 as compared to $1,244 million in 2019. The decrease is primarily due to lower profits and higher levels of inventory due to decline in sales as well as lower accounts payable, accrued compensation and other liabilities due to lower spending. These decreases were partially offset by reductions in accounts receivables, likewise due to decline in revenues, a higher run-off of finance receivables, lower placements of equipment on operating leases and lower cash tax payments. Xerox 2020 Annual Report 30 Table of Contents Cash used in investing activities of continuing operations of Xerox Holdings was $246 million in 2020 reflecting acquisitions of $203 million and capital expenditures of $74 million, which were partially offset by $30 million from the sales of non-core business assets. Cash used in financing activities of Xerox Holdings was $416 million in 2020 reflecting repayments of $2,137 million on Senior Notes and $73 million for secured borrowings, partially offset by the issuance of Senior Notes of $1,507 million and $840 million from secured borrowings, as well as payments of $300 million for share repurchases and dividend payments of $230 million. _____________ (1) Refer to the "Non-GAAP Financial Measures" section for an explanation of this non-GAAP financial measure. 2021 Outlook We currently expect a modest recovery in 2021, however, the first quarter of 2021 will likely remain challenged due to continuing COVID-19-related lockdowns and business closures. We expect total revenues to increase in 2021 to at least $7.2 billion, or approximately 2.5%, excluding the impact of currency. We are confident in our ability to generate cash and plan to continue our capital allocation policy of returning at least 50% of our annual free cash flow to shareholders. We expect 2021 operating cash flows from continuing operations to be approximately $600 million, with capital expenditures of approximately $100 million. During 2021, we expect to opportunistically make share repurchases utilizing our remaining share repurchase authorization of approximately $500 million. Macro Economic and Market Factors Tariffs - Our business, results of operations and financial condition may be negatively impacted by a potential increase in the cost of our products as a result of new or incremental trade protection measures such as, increased import tariffs, import or export restrictions and requirements and the revocation or material modification of trade agreements. Beginning in the fourth quarter of 2019 and extending into 2020, incremental tariff costs negatively impacted gross margin. We expect margins will 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, although the year-over-year impact should lessen in 2021 due to mitigation efforts. We continue to take actions to mitigate the impact of these tariffs to the extent possible, such as raising prices on certain products. Brexit - On January 31, 2020, the United Kingdom (U.K.) formally left the European Union (E.U.) when the U.K.-E.U. Withdrawal Agreement became effective. Under the Withdrawal Agreement, a transition period began that ran until December 31, 2020. In general, E.U. law no longer applies in the U.K. except where, at least temporarily, it has been retained as U.K. law (though there are certain exceptions regarding the application of E.U. regulations in Northern Ireland). On December 24, 2020, the European Commission reached a trade agreement with the U.K. on the terms of its future cooperation with the E.U. (Trade and Cooperation Agreement or TCA). The TCA offers U.K. and E.U. companies preferential access to each other’s markets, ensuring imported goods will be free of tariffs and quotas; however, economic relations between the U.K. and the E.U. will now be on more restricted terms than existed previously. At this time, we cannot predict the impact that the TCA and any future agreements will have on our business, suppliers and customers. However, we continue to assess the situation and expect to take necessary steps to mitigate any potential volatility, increased costs or disruptions to our supply chain or customers that may result from this situation. For the year ended December 31, 2020, revenues and assets in Europe, including the U.K., represented approximately 27% of both our consolidated revenues and total assets. Xerox 2020 Annual Report 31 Table of Contents Currency Impact To understand the trends in the 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 and 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. Approximately 40% of our consolidated revenues are derived from operations outside of the U.S. where the U.S. Dollar is normally not the functional currency. As a result, foreign currency translation had a 0.2-percentage point favorable impact on revenue in 2020 and a 1.5-percentage point unfavorable impact on revenue in 2019. Application of Critical Accounting Policies In preparing our Consolidated Financial Statements and accounting for the underlying transactions and balances, we apply various accounting policies. Senior management has discussed the development and selection of the critical accounting policies, estimates and related disclosures included herein with the Audit Committee of the Xerox Holdings Board of Directors. We consider the policies discussed below as critical to understanding our Consolidated Financial Statements, as their application places the most significant demands on management's judgment, since financial reporting results rely on estimates of the effects of matters that are inherently uncertain. In instances where different estimates could have reasonably been used, we disclosed the impact of these different estimates on our operations. In certain instances, such as revenue recognition for leases, the accounting rules are prescriptive; therefore, it would not have been possible to reasonably use different estimates. Changes in assumptions and estimates are reflected in the period in which they occur. The impact of such changes could be material to our results of operations and financial condition in any quarterly or annual period. As discussed above (see Impact of COVID-19 on Our Business Operations ), during 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. 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. Specific risks associated with these critical accounting policies are discussed throughout the MD&A, where such policies affect our reported and expected financial results. For a detailed discussion of the application of these and other accounting policies, refer to Note 1 - Basis of Presentation and Summary of Significant Accounting Policies in the Consolidated Financial Statements. Revenue Recognition Application of the various accounting principles in GAAP related to the measurement and recognition of revenue requires us to make judgments and estimates including ASC Topic 606 - Revenue from Contracts with Customers and ASC Topic 842 Leases . We adopted ASU 2014-09, Revenue from Contracts with Customers (ASC Topic 606) on January 1, 2018 and ASU 2016-02, Leases (ASC Topic 842) on January 1 2019. Refer to Note 1 - Basis of Presentation and Summary of Significant Accounting Policies in the Consolidated Financial Statements for additional information regarding our revenue recognition and lease revenue recognition policies . Complex arrangements with nonstandard terms and conditions may require significant contract interpretation to determine the appropriate accounting. Specifically, the revenue related to the following areas involves significant judgments and estimates: Bundled Lease Arrangements : We sell our equipment direct to end customers under bundled lease arrangements, which typically include the equipment, service, supplies and a financing component for which the customer pays a single negotiated fixed minimum monthly payment for all elements over the contractual lease term. These arrangements also typically include an incremental, variable component for page volumes in excess of the contractual page volume minimums, which are often expressed in terms of price-per-image or page. Lease deliverables include the equipment and financing, while the non-lease deliverables generally consist of the services, which include supplies. Sales made under bundled lease arrangements directly to end customers or through third party leasing companies comprise 37% or $573 million of our equipment sales revenue. Revenues under these bundled lease arrangements are allocated considering the relative standalone selling prices of the lease and non-lease deliverables included in the bundled arrangement. The allocation of revenue among the elements – Xerox 2020 Annual Report 32 Table of Contents equipment vs. post-sale (service, supplies and financing) – has remained fairly consistent at approximately 25% and 75%, respectively, over the past three years. Sales to Distributors and Resellers : We utilize distributors and resellers to sell many of our products, supplies and parts to end-user customers. Sales to distributors and resellers are generally recognized as revenue when products are shipped to such distributors and resellers. Distributors and resellers participate in various discount, rebate, price-support, cooperative marketing and other programs, and we record provisions and allowances for these programs as a reduction to revenue when the sales occur. Similarly, we also record estimates for sales returns and other discounts and allowances when the sales occur. We consider various factors, including a review of specific transactions and programs, historical experience and market and economic conditions when calculating these provisions and allowances. Total sales of equipment, supplies and parts to distributors and resellers were $910 million for the year ended December 31, 2020 and provisions and allowances recorded on these sales were approximately 25% of the associated gross revenues. Service Arrangements : 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, 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 did 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 Consistent with our adoption of ASU 2016-13 effective January 1, 2020 (Refer to Note 1 - Basis of Presentation and Summary of Significant Accounting Policies in the Consolidated Financial Statements for additional information), the allowance for doubtful accounts and credit losses is based on an assessment of past collection experience as well as consideration of current and future economic conditions and changes in our customer collection trends. We recorded bad debt provisions of $116 million, $46 million and $36 million in Selling, administrative and general (SAG) expenses in our Consolidated Statements of Income for the years ended December 31, 2020, 2019 and 2018, respectively. Reserves, as a percentage of trade and finance receivables, were 4.8% at December 31, 2020, as compared to 3.0% at December 31, 2019 and 2018, respectively. We continue to assess our receivables portfolio in light of the current economic environment and its impact on our estimation of the adequacy of the allowance for doubtful accounts. The significant increase in bad debt provision and reserve percentage in 2020 are principally due to the impact of the COVID-19 pandemic on our customers. In assessing the level of provision and related reserve for 2020, we critically assessed 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 receivables portfolio during the credit crisis in 2008/09 as additional reference points to objectively determine the adequacy of our allowance. As discussed above, we estimated our provision for doubtful accounts based on historical experience, expected future economic conditions and customer-specific collection issues. Our methodology was updated in 2020 consistent with the adoption of ASU 2016-13 , but is essentially consistent with prior periods, as our previous methodology for assessing the adequacy of our allowance for doubtful accounts for finance receivables, the larger component of our receivables reserves, incorporated an expected loss model and the methodology for both allowances included an assessment of current economic conditions. During the five year period ended December 31, 2020, our reserve for doubtful accounts ranged from 3.0% to 4.8% of gross receivables. Holding all assumptions constant, a 0.5-percentage point increase or decrease in the reserve from the December 31, 2020 rate of 4.8% would change the 2020 provision by approximately $21 million. Refer to Note 1 - Basis of Presentation and Summary of Significant Accounting Policies in the Consolidated Financial Statements for additional information regarding our adoption of ASU 2016-13 and Note 7 - Accounts Xerox 2020 Annual Report 33 Table of Contents Receivable, Net and Note 8 - Finance Receivables, Net in the Consolidated Financial Statements for additional information regarding our allowance for doubtful accounts. 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. Pension Plan Assumptions We sponsor defined benefit pension plans in various forms in several countries covering employees who meet eligibility requirements. Where legally possible, we have amended our major defined benefit pension plans to freeze current benefits and eliminate benefit accruals for future service, including our primary U.S. defined benefit plan for salaried employees, the Canadian Salary Pension Plan and the U.K. Final Salary Pension Plan. In certain Non-U.S. plans, we are required to continue to consider salary increases and inflation in determining the benefit obligation related to prior service. Our pension plan in the Netherlands was changed to a Collective Defined Contribution (CDC) plan. From a Company risk perspective, this plan operates just like a defined contribution plan as the Company is only responsible for a contribution for annual benefit accruals under 5-year agreements. Although the Company risk has been mitigated, under U.S. GAAP this plan doesn’t meet the definition of a defined contribution plan and therefore is accounted for as a defined benefit plan. Several statistical and other factors that attempt to anticipate future events are used in calculating the expense, liability and asset values related to our defined benefit pension plans. These factors include assumptions we make about the expected return on plan assets, discount rate, lump-sum settlement rates, the rate of future compensation increases and mortality. Differences between these assumptions and actual experiences are reported as net actuarial gains and losses and are subject to amortization to net periodic benefit cost over future periods. Cumulative net actuarial losses for our defined benefit pension plans of $2.3 billion as of December 31, 2020 decreased by $176 million from December 31, 2019, primarily due to the excess of actual returns over expected returns and the recognition of actuarial losses through amortization and U.S. settlement losses, partially offset by lower discount rates and the resultant increase in the Projected Benefit Obligation (PBO) as well as currency. The total actuarial loss at December 31, 2020 is subject to offsetting gains or losses in the future due to both changes in actuarial assumptions and future experience and will be recognized in future periods through amortization or settlement losses. We used a consolidated weighted average expected rate of return on plan assets of 4.1% for 2020, 4.6% for 2019 and 4.5% for 2018, on a worldwide basis. During 2020, the actual return on plan assets was a gain of $1,200 million as compared to an expected return of $408 million, with the difference largely due to positive equity market returns, the positive impact of decreasing interest rates on our fixed income investments and the impact of our hedging portfolio in the U.S. When estimating the 2021 expected rate of return, in addition to assessing recent performance, we considered the historical returns earned on plan assets, the rates of return expected in the future, particularly in light of current economic conditions, and our investment strategy and asset mix with respect to the plans' funds. The weighted average expected rate of return on plan assets we will use in 2021 is 3.9% with the decrease from 2020 primarily in our non-U.S. plans. Another significant assumption affecting our defined benefit pension obligations and the net periodic benefit cost is the rate that we use to discount our future anticipated benefit obligations. In the U.S. and the U.K., which comprise approximately 75% of our PBO, we consider yield curves derived from Moody's Aa or better rated Corporate Bonds and U.K. Corporate bonds rated AA by at least one of the main ratings agencies, respectively, in the determination of the appropriate discount rate assumptions. The consolidated weighted average discount rate we used to measure our pension obligations as of December 31, 2020 and to calculate our 2021 expense was 1.6%; the rate used to calculate our obligations as of December 31, 2019 and our 2020 expense was 2.3%. The decrease reflects lower interest rates in both U.S. and non-U.S. regions. Holding all other assumptions constant, the following table summarizes the estimated impacts of a 0.25% change in the discount rate and a 0.25% change in the expected return on plan assets: Discount Rate Expected Return (in millions) 0.25% Increase 0.25% Decrease 0.25% Increase 0.25% Decrease Increase/(Decrease) 2021 Projected net periodic pension cost $ (10) $ 10 $ (20) $ 20 Projected benefit obligation as of December 31, 2020 (390) 425 N/A N/A Xerox 2020 Annual Report 34 Table of Contents One of the most significant and volatile elements of our net periodic defined benefit pension plan expense is settlement losses. Our primary domestic plans allow participants the option of settling their vested benefits through the receipt of a lump-sum payment. We recognize the losses associated with these settlements immediately upon the settlement of the vested benefits. Settlement accounting requires us to recognize a pro-rata portion of the aggregate unamortized net actuarial losses upon settlement. As noted above, cumulative unamortized net actuarial losses were $2.3 billion at December 31, 2020, of which the U.S. primary domestic plans, with a lump-sum feature, represented approximately $710 million. The pro-rata factor is computed as the percentage reduction in the projected benefit obligation due to the settlement of a participant ' s vested benefit. Settlement accounting is only applied when the event of settlement occurs - i.e. the lump-sum payment is made. Since settlement is dependent on an employee's decision and election, the level of settlements and the associated losses can fluctuate significantly from period to period. During the three years ended December 31, 2020, 2019 and 2018, U.S. plan settlements were approximately $220 million, $355 million and $660 million, respectively, and the associated settlement losses on those plan settlements were $53 million, $93 million and $173 million, respectively. In 2021, on average, we estimate that approximately $100 million of plan settlements will result in settlement losses of approximately $25 million. The following is a summary of our benefit plan costs for the three years ended December 31, 2020, 2019 and 2018, as well as estimated amounts for 2021: Estimated Actual (in millions) 2021 2020 2019 2018 Defined benefit pension plans (1) $ (10) $ 5 $ 16 $ 2 U.S. settlement losses 70 53 93 173 Defined contribution plans (2) 40 19 49 66 Retiree health benefit plans (55) (63) (65) 8 Total Benefit Plan Expense $ 45 $ 14 $ 93 $ 249 _____________ (1) Excludes U.S. settlement losses. (2) The decrease in 2020 reflects the Company's decision to suspend and not make the 2020 employer matching contribution to our U.S. based 401(k) savings plans for salaried employees. The employer matching contribution is expected to be resumed and provided for in 2021. The following is a summary of our benefit plan funding for the three years ended December 31, 2020, 2019 and 2018, as well as estimated amounts for 2021: Estimated Actual (in millions) 2021 2020 2019 2018 U.S. Defined benefit pension plans $ 25 $ 35 $ 26 $ 27 Non-U.S. Defined benefit pension plans 105 104 115 117 Defined contribution plans (1) 25 19 49 66 Retiree health benefit plans 30 25 30 57 Total Benefit Plan Funding $ 185 $ 183 $ 220 $ 267 _____________ (1) The difference between the estimated funding amount and the estimated expense in 2021 of $15 million is due to estimated contributions for our U.S. based 401(k) savings plan expensed in 2021 as earned but which are expected to be contributed in January of 2022. Contributions to our U.S. Defined benefit plans in 2020 include $25 million associated with our non-qualified plan and $10 million for one of our tax-qualified defined benefit plans. Estimated contributions to our U.S. Defined benefit plans in 2021 are associated with our non-qualified plan as no other amounts were required to meet the minimum funding requirements for our tax qualified plans. Refer to Note 19 - Employee Benefit Plans in the Consolidated Financial Statements for additional information regarding defined benefit pension plan assumptions, expense and funding. Income Taxes We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgments are required in determining the consolidated provision for income taxes. Our provision is based on nonrecurring events as well as recurring factors, including the taxation of foreign income. In addition, our provision will change based on discrete or other nonrecurring events such as audit settlements, tax law changes, changes in valuation allowances, etc., that may not be predictable. Xerox 2020 Annual Report 35 Table of Contents We record the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and the amounts reported in our Consolidated Balance Sheets, as well as 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 differences and tax planning strategies. Refer to Note 20 - Income and Other Taxes in the Consolidated Financial Statements for additional information regarding the valuation of our allowance against our deferred tax assets. As a result of the COVID-19 pandemic, we reviewed the valuation allowances to determine if any change was required based on the rapid change in the economic environment and the expected changes in our financial projections resulting from the impacts of the COVID-19 pandemic. Our effective tax rate for the year ended December 31, 2020 included an approximate 9.9-percentage point impact for additional valuation allowances, which partly reflect the negative impacts of the COVID-19 pandemic. Increases to our valuation allowance, through income tax expense, were $25 million, $16 million and $3 million for the years ended December 31, 2020, 2019 and 2018, respectively. There were other (decreases) increases to our valuation allowance, including the effects of currency, of $(28) million, $(14) million and $(41) million for the years ended December 31, 2020, 2019 and 2018, respectively. These did not affect income tax expense in total as there was a corresponding adjustment to Deferred tax assets or Other comprehensive income. The following is a summary of gross deferred tax assets and the related valuation allowances for the three years ended December 31, 2020: Year Ended December 31, (in millions) 2020 2019 2018 Gross deferred tax assets $ 1,379 $ 1,463 $ 1,566 Valuation allowance (396) (399) (397) Net deferred tax assets $ 983 $ 1,064 $ 1,169 We are subject to ongoing tax examinations and assessments in various jurisdictions. Accordingly, we may incur additional tax expense based upon our assessment of the more-likely-than-not outcomes of such matters. In addition, when applicable, we adjust the previously recorded tax expense to reflect examination results. Our ongoing assessments of the more-likely-than-not outcomes of the examinations and related tax positions require judgment and can materially increase or decrease our effective tax rate, as well as impact our operating results. Unrecognized tax benefits were $115 million, $127 million and $108 million at December 31, 2020, 2019 and 2018, respectively. Refer to Note 20 - Income and Other Taxes in the Consolidated Financial Statements for additional information regarding deferred income taxes and unrecognized tax benefits. Business Combinations and Goodwill We allocate the fair value of purchase consideration to tangible assets, liabilities assumed and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is allocated to Goodwill. The allocation of the purchase consideration requires management to make significant estimates and assumptions, especially with respect to intangible assets. These estimates can include, but are not limited to, future expected cash flows of acquired customers, acquired technology and trade names from a market participant perspective, as well as estimates of useful lives and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable and when appropriate, include assistance from independent third-party valuation firms. During the measurement period, which is up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to Goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings. Refer to Note 5 - Acquisitions in the Consolidated Financial Statements for additional information regarding the allocation of the purchase price consideration for our acquisitions. Our Goodwill balance was $4.1 billion at December 31, 2020. We assess Goodwill for impairment at least annually, during the fourth quarter based on balances as of October 1st, and more frequently on an interim basis if we believe indicators of impairment exist. The application of an interim or the annual Goodwill impairment test begins with the Xerox 2020 Annual Report 36 Table of Contents identification of reporting units, which requires judgment. Consistent with the determination that we have one operating segment, we determined that there is one reporting unit and therefore we tested Goodwill for impairment at the Company or entity level. The process of evaluating the potential impairment of Goodwill is highly subjective and requires significant judgment. Our review of impairment starts with an assessment of qualitative factors to determine whether events or circumstances lead to a determination that it is more-likely-than-not that the fair value of the Company is less than net book value. Our qualitative assessment of the recoverability of Goodwill, whether performed annually or based on specific events or circumstances, considers various macroeconomic, industry-specific and company-specific factors. These factors include: (i) severe adverse industry or economic trends; (ii) significant company-specific actions, including exiting an activity in conjunction with restructuring of operations; (iii) current, historical or projected deterioration of our financial performance; or (iv) a sustained decrease in our market capitalization below our net book value. After assessing the totality of events and circumstances, if we determine that it is not more-likely-than-not that the fair value of the Company is less than its net book value, no further assessment is performed. If we determine that it is more likely-than-not that the fair value of the Company is less than net book value or if we elect to bypass the qualitative assessment, we proceed to a quantitative assessment or test of Goodwill. If a quantitative assessment of Goodwill is required, the determination of the fair value of the Company will involve the use of significant estimates and assumptions. Our quantitative Goodwill impairment test uses both the income approach and the market approach to estimate fair value. The income approach is based on the discounted cash flow method that uses the Company's estimates of forecasted future financial performance including revenues, gross margins, operating expenses, and taxes, as well as working capital and capital asset requirements. These estimates are developed as part of our long-term planning process based on assumed market segment growth rates and our assumed market segment share, estimated costs based on historical data and various internal estimates. 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 risks unique to the subject cash flows. When performing our market approach, we rely specifically on the guideline public company method. Our guideline public company method incorporates revenues and earnings multiples from publicly traded companies with operations and other characteristics similar to our entity. The selected multiples consider our entity's growth, profitability, size and risk relative to those of the selected publicly traded companies. 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. As a result of limited market comparables due to companies not providing guidance in this current economic environment, our interim quantitative evaluation of Goodwill in the second quarter 2020 was based solely on the income approach to estimate fair value. The income approach was based on the discounted cash flow method of the Company's estimates of future forecasted financial performance including revenues, gross margins, operating expenses, and taxes, as well as working capital and capital asset requirements. Our estimates regarding future forecasted cash flows accordingly reflected consideration of the negative financial impacts from the COVID-19 pandemic on our current and future operations as well as expected recovery scenarios and we believe provided a result that was equally or more representative of the fair value at that time given the circumstances. After completing our interim impairment review, we concluded that Goodwill was not impaired in the second quarter 2020. Although business performance improved in the second half of 2020, the COVID-19 pandemic continued to have a significant impact on the Company’s revenues, expenses, cash flows and market capitalization in 2020. As a result of these impacts as well as related macroeconomic and industry factors, we elected to utilize a quantitative model for the assessment of the recoverability of our Goodwill balance for our annual fourth quarter 2020 impairment test. After completing our quantitative impairment review, we concluded that Goodwill was not impaired. Based on various forecast models, which we believe reflect the inherent uncertainty of the future, we estimated that the excess of fair value over carrying value ranged between 15% and 20%. This estimate reflected a 75/25 allocation between the income and market approach and the application of a discount rate applied to our projected cash flows that ranged from 7.75% to 8.25%. Similar to the second quarter 2020 assessment, we believe the heavier weighting to the income approach was appropriate due to the inherent limitations of a market comparison during a year impacted by the COVID-19 pandemic. We likewise believe the discount rate applied was reasonable based on the estimated capital costs of applicable market participants and an appropriate company-specific risk premium that reflects current market and industry conditions. We also ran sensitivity cases on both the income/market allocation as well as the discount rate and, although in certain scenarios our excess fair value declined to approximately 10%, no impairment was indicated. Xerox 2020 Annual Report 37 Table of Contents Although our current results and our internal future forecasts clearly indicate that Xerox has been and will continue to be significantly impacted by the economic disruption caused by the COVID-19 pandemic, based on a review of macroeconomic and industry considerations as well as internal growth strategies, the business is expected to continue to recover in 2021 with the expectation of a return to normal trends by 2023. This expectation is extended a year from the expectation in the second quarter 2020 of a return to normal trends by 2022, primarily due to recent economic data that suggests a slower recovery of the global economy before the full benefits from the distribution of vaccines and other therapies materialize to facilitate the reopening of businesses that closed and the return of more employees back to the office. In addition, consistent with our historical results, we believe we have the ability, within a relevant range, to offset potential delays in the recovery of our revenue base with cost reductions and productivity improvements to help manage and maintain our projected level of cash flows. Lastly, although our estimates of the fair value of the entity were in excess of our market capitalization, we believe the implied premiums that would be indicated at net book value or at our estimated fair values are reasonable. In performing its assessment, the Company believes it has made reasonable estimates based on the facts and circumstances that were available as of the reporting date in light of the continuing impacts from the COVID-19 pandemic. However, the determination of fair value includes assumptions that are subject to risk and uncertainty. The discounted cash flow calculations are dependent on subjective factors including the timing of future cash flows and the discount rate. If assumptions or estimates in the fair value calculations change or if future cash flows vary from what was forecasted, 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 will continue to monitor developments in 2021 including updates to our forecasts as well as our market capitalization and an update of our assessment and related estimates may be required in the future as the situation evolves. If the extent and duration of the economic disruption caused by the pandemic is longer or more severe than currently estimated, and actions taken by the Company do not sufficiently compensate for those impacts, 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. Subsequent to our fourth quarter impairment test, we did not identify any triggering events that required an update to the annual impairment test. Refer to Note 13 - Goodwill and Intangible Assets, Net in the Consolidated Financial Statements for additional information regarding Goodwill. Xerox 2020 Annual Report 38 Table of Contents Revenue Results Summary Total Revenue Revenue for the three years ended December 31, 2020, 2019 and 2018 was as follows: Revenue % Change CC % Change % of Total Revenue (in millions) 2020 2019 2018 2020 2019 2020 2019 2020 2019 2018 Equipment sales $ 1,564 $ 2,062 $ 2,178 (24.2) % (5.3) % (24.6) % (4.0) % 22 % 23 % 23 % Post sale revenue 5,458 7,004 7,484 (22.1) % (6.4) % (22.1) % (4.9) % 78 % 77 % 77 % Total Revenue $ 7,022 $ 9,066 $ 9,662 (22.5) % (6.2) % (22.7) % (4.7) % 100 % 100 % 100 % Reconciliation to Consolidated Statements of Income: Sales $ 2,449 $ 3,227 $ 3,454 (24.1) % (6.6) % (24.3) % (5.3) % Less: Supplies, paper and other sales (885) (1,165) (1,276) (24.0) % (8.7) % (23.6) % (7.4) % Equipment sales $ 1,564 $ 2,062 $ 2,178 (24.2) % (5.3) % (24.6) % (4.0) % Services, maintenance and rentals $ 4,347 $ 5,595 $ 5,940 (22.3) % (5.8) % (22.5) % (4.4) % Add: Supplies, paper and other sales 885 1,165 1,276 (24.0) % (8.7) % (23.6) % (7.4) % Add: Financing 226 244 268 (7.4) % (9.0) % (7.7) % (7.5) % Post sale revenue $ 5,458 $ 7,004 $ 7,484 (22.1) % (6.4) % (22.1) % (4.9) % Americas $ 4,589 $ 5,963 $ 6,308 (23.0) % (5.5) % (22.7) % (5.2) % 65 % 66 % 65 % EMEA 2,246 2,817 3,137 (20.3) % (10.2) % (21.5) % (6.4) % 32 % 31 % 33 % Other 187 286 217 (34.6) % 31.8 % (34.6) % 31.8 % 3 % 3 % 2 % Total Revenue (1) $ 7,022 $ 9,066 $ 9,662 (22.5) % (6.2) % (22.7) % (4.7) % 100 % 100 % 100 % Memo: Xerox Services $ 2,756 $ 3,406 $ 3,621 (19.1) % (5.9) % (19.2) % (4.0) % 39 % 38 % 37 % _____________ CC - See "Currency Impact" section for description of Constant Currency. (1) Refer to the "Geographic Sales Channels and Product and Offerings Definitions" section. Revenue Total revenue decreased 22.5% for the year ended December 31, 2020 including a 0.2-percentage point favorable impact from currency and an approximate 1.2-percentage point favorable impact from 2020 partner dealer acquisitions, partially offset by an approximate 0.6-percentage point unfavorable impact from a one-time upfront OEM license fee of $77 million received in the prior year. Total revenue decreased 6.2% for the year ended December 31, 2019 compared to the prior year, including a 1.5-percentage point unfavorable impact from currency and an approximate 0.8-percentage point favorable impact from the OEM license fee. The COVID-19 pandemic significantly impacted our 2020 revenues due to business closures and office building capacity restrictions that slowed our customers' purchasing decisions and caused lower printing volumes on our devices. The biggest impact from the pandemic occurred in the second quarter 2020. The rate of revenue declines in our business moderated through the third quarter 2020, consistent with business reopenings. This trend continued in the earlier part of the fourth quarter, however, the resurgence of the virus in several European countries and U.S. regions at the end of the year halted the recovery in the latter part of the fourth quarter and, as a result, our rate of revenue decline during the fourth quarter remained virtually unchanged as compared to the third quarter after excluding the one-time OEM license fee received in the prior year, as described above. Geographically, revenue declines from our EMEA operations were smaller, primarily as a result of the favorable impact from recent acquisitions in the region, as well as higher installation of mono devices in our developing regions of EMEA associated with our hybrid workplace promotions. The EMEA region also benefited from wider reopenings of workplaces and economies earlier in 2020, as compared to our Americas Organization, for which reopenings did not begin until later in the third quarter 2020. Revenue declines in our Americas Organization were larger in our indirect channels in the U.S, whereas higher sales of IT Services through our XBS sales organization, as well as higher sales to our U.S. government accounts and higher installs of our mono personal printers in Latin America provided a partial offset. Total revenues included the following: Xerox 2020 Annual Report 39 Table of Contents 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 primarily from our XBS organization. For the year ended December 31, 2020, Post sale revenue decreased 22.1% compared to the prior year with no impact from currency and an approximate 0.8-percentage point unfavorable impact from the upfront OEM license fee in the prior year, excluding the impact of currency. For the year ended December 31, 2019, Post sale revenue decreased 6.4% compared to the prior year including a 1.5-percentage point unfavorable impact from currency and an approximate 1.0-percentage point favorable impact from the OEM license fee, excluding the impact of currency. Post sale revenue is comprised of 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 year ended December 31, 2020, these revenues decreased 22.3%, including a 0.2-percentage point favorable impact from currency and an approximate 1.1-percentage point unfavorable impact from the one-time OEM license fee in the prior year. The decline at constant currency 1 reflected a lower population of devices (which is partially associated with 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 moderated during third quarter 2020 (consistent with business reopenings), however, in the fourth quarter 2020, the rate of decline began to increase as a second wave of the COVID-19 virus drove new business shutdowns in certain geographical areas in the U.S. and EMEA regions. ◦ For the year ended December 31, 2019, these revenues decreased 5.8%, including a 1.4-percentage point unfavorable impact from currency and an approximate 1.3-percentage point favorable impact from the OEM license fee. The decline at constant currency 1 reflected the continuing trends of lower page volumes (including a higher mix of lower usage products), an ongoing competitive price environment and a lower population of devices, which are partially associated with continued lower Enterprise signings and lower installs from prior and current periods. These declines were larger in the U.S. during the first half as a result of organizational changes being implemented as part of our Project Own It transformation actions. The impact began to moderate late in the second quarter, and was much less in the second half of 2019. • Supplies, paper and other sales includes unbundled supplies and other sales. ◦ For the year ended December 31, 2020, these revenues decreased 24.0%, including a 0.4-percentage point unfavorable impact from currency. The decline at constant currency 1 primarily reflected lower supplies revenues associated with lower page volume trends, partially 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, have reduced their inventory purchases to manage liquidity. We expect that such resellers will maintain lower inventories until there is a stable recovery in sales activity. ◦ For the year ended December 31, 2019, these revenues decreased 8.7%, including a 1.3-percentage point unfavorable impact from currency. The decline at constant currency 1 primarily reflected the impact of lower supplies revenues, primarily associated with lower page volume trends as well as the impact of lower paper sales from developing markets (primarily from the Latin America region). • Financing revenue is generated from financed equipment sale transactions. For the year ended December 31, 2020, Financing revenue decreased 7.4%, including a 0.3-percentage point favorable impact from currency, while Financing revenue for the year ended December 31, 2019 decreased 9.0%, including a 1.5-percentage point unfavorable impact from currency. The decline in both periods reflected a continued decline in finance receivables balance due to lower equipment sales in prior periods. The decline in 2019 also reflected a greater mix of equipment sales to channels where our financing penetration rate and return is lower. Xerox 2020 Annual Report 40 Table of Contents Equipment sales revenue Equipment revenue for the three years ended December 31, 2020, 2019 and 2018 was as follows: Revenue % Change CC % Change % of Equipment Revenue (in millions) 2020 2019 2018 2020 2019 2020 2019 2020 2019 2018 Entry $ 188 $ 217 $ 237 (13.4)% (8.4)% (13.8)% (6.9)% 12% 11% 11% Mid-range 1,043 1,404 1,493 (25.7)% (6.0)% (26.2)% (4.9)% 67% 68% 69% High-end 312 421 423 (25.9)% (0.5)% (26.5)% 1.2% 20% 20% 19% Other 21 20 25 5.0% (20.0)% 5.0% (20.0)% 1% 1% 1% Equipment sales $ 1,564 $ 2,062 $ 2,178 (24.2)% (5.3)% (24.6)% (4.0)% 100% 100% 100% _____________ CC - See "Currency Impact" section for description of Constant Currency. Equipment sales revenue decreased 24.2% for the year ended December 31, 2020 including a 0.4-percentage point favorable 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. Additionally, our mix of revenues from lower-end black-and-white devices increased as a result of hybrid workplace trends associated with the COVID-19 pandemic. For the year ended December 31, 2019, Equipment sales decreased 5.3% including a 1.3-percentage point unfavorable impact from currency. The decline at constant currency 1 was primarily driven by lower sales of our office-centric devices (entry and mid-range products) partially offset by higher sales of our production-centric devices (high-end) as well as the benefit of targeted price actions. The change at constant currency 1 reflected the following: • Entry ◦ For the year ended December 31, 2020, the decrease was primarily due to lower sales of devices in our indirect channels in EMEA, Latin America and the U.S. affected in part by the COVID-19 pandemic, partially offset by higher installs of our black-and-white devices in developing regions in EMEA, including large-order government deals in Eurasia. ◦ For the year ended December 31, 2019, the decrease reflected lower sales of devices primarily in the indirect channels in EMEA, reflecting continued weakness and delayed decisions as a result of uncertainty in the economic environment, as well as lower revenues from our indirect channels in the U.S., reflecting targeted price investments in the fourth quarter of 2019, partially offset by higher installs. • Mid-range ◦ For the year ended December 31, 2020, the decrease was primarily driven by the COVID-19 pandemic and related office closures, which has 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 ConnectKey devices. ◦ For the year ended December 31, 2019, the decrease reflected lower sales from our XBS sales organization, which continued to recover from the impact of organizational changes in the first half of 2019 that were implemented as part of our Project Own It transformation actions (including the transitioning of accounts to implement coverage changes, consolidation of real estate locations and reduction of management layers), as well as lower revenues from our indirect channels in the U.S. and EMEA. The decrease was partially offset by higher revenues from our U.S. Enterprise organization, which had higher activity from light-production devices associated with the recent launch of PrimeLink (an entry-level production printer) and the benefit of a large account refresh in the second half. • High-end ◦ For the year ended December 31, 2020, the decrease primarily reflected lower installs of our Versant entry-production systems and iGen production presses, as well as lower installs of our Iridesse production presses in EMEA, which were partially offset by demand for our larger Baltoro cut-sheet inkjet press and higher sales in the U.S. of our continuous-feed color systems. ◦ For the year ended December 31, 2019, the increase primarily reflected higher sales of color systems associated with continued demand for our Iridesse production press, as well as global demand for our newly-launched Baltoro inkjet press. The increase also reflected higher revenues from our U.S. Enterprise organization and from our indirect channels in the U.S., which was partially offset by lower revenues in EMEA, as well as lower sales from Versant (our lower-end production devices) and iGen print production systems. _____________ (1) See "Currency Impact" section for description of Constant Currency. Xerox 2020 Annual Report 41 Table of Contents Revenue Metrics Installs reflect new placements 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 as well as Xerox and non-Xerox branded products installed by our XBS sales unit 1 . Detail by product group (see Geographic Sales Channels and Product and Offerings Definitions) is shown below: Installs 1 for the year ended December 31, 2020 were: Entry • 21% decrease in color multifunction devices reflecting lower installs of ConnectKey devices through our indirect channels in the U.S. and EMEA. • 20% 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 and Latin America associated with work-from-home sales programs, partially offset by lower installs through our indirect channels in the U.S. Mid-Range (2) • 26% decrease in mid-range color installs primarily reflecting lower installs of multifunction color devices partially offset by strong demand for our recently launched PrimeLink entry-production color devices and our new generation of ConnectKey multifunction devices. • 22% decrease in mid-range black-and-white installs 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 multifunction devices. High-End (2) • 42% decrease in high-end color installs primarily reflecting lower installs of our lower-end Versant devices, along with lower installs of our Iridesse and iGen production systems, partially offset by strong demand for our Baltoro cut-sheet inkjet press and higher installs in the U.S. of our continuous-feed systems. • 13% decrease in high-end black-and-white systems reflecting lower installs of our Nuvera devices along with market trends. Installs 1 for the year ended December 31, 2019 were: Entry • Color multifunction devices were flat, reflecting higher installs of ConnectKey products primarily from our indirect channels in the U.S., offset by lower installs of devices from EMEA. • 4% decrease in black-and-white multifunction devices, reflecting lower activity primarily from U.S. Enterprise and EMEA, as well as from our developing regions in the Americas, partially offset by higher activity from our indirect channels in Canada, as well as XBS. Mid-Range (2) • 7% decrease in mid-range color installs, primarily reflecting lower installs of multifunction color devices through our U.S. enterprise, partially offset by higher installs of light-production devices that sit at the higher end of the portfolio range. • 17% decrease in mid-range black-and-white, reflecting, in part, global market trends. High-End (2) • 4% decrease in high-end color installs primarily reflecting lower activity from iGen and Versant production systems, partially offset by global demand for our newly-launched Baltoro inkjet press and continued strong demand for our Iridesse production press. • 14% decrease in high-end black-and-white systems reflecting global market trends. _____________ (1) During fourth quarter 2020, we revised the measurement of total installs to include installations of Xerox and non-Xerox branded devices made directly by our XBS sales unit. Previously, total installs were based on intercompany transfers of devices to XBS and was limited to Xerox-branded devices only. Although the overall impact from the change was not material, we believe the new measurement basis provides a stronger connection between Equipment sales revenues and installations. See Equipment Installs - Measurement Methodology Update for the revision of prior quarters in 2020 based on the new methodology. Installs growth rates for 2019 were not revised and are presented on the previously reported basis. (2) Mid-range and High-end color installations exclude Fuji Xerox digital front-end sales; including Fuji Xerox digital front-end sales, Mid-range color devices decreased 26% and 7% for the years ended December 31, 2020 and 2019, respectively, while High-end color systems decreased 42% and 4% for the years ended December 31, 2020 and 2019, respectively. Xerox 2020 Annual Report 42 Table of Contents 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, which 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 Communications and Marketing Solutions. Equipment Installs - Measurement Methodology Update In the fourth quarter 2020, we updated our equipment installation measurement methodology to reflect the following: i) activity from our XBS sales unit based on the timing of installations, whereas prior to this methodology update XBS activity was based on units shipped to the XBS sales unit, and (ii) installations of non-Xerox branded devices by our XBS sales unit, which, although not material, are included in equipment sales. Note: Entry installations exclude OEM sales; Mid-range and High-end color installations exclude Fuji Xerox digital front-end sales. 2020 Installs % Change YOY As Reported Updated Methodology Q1 Q2 Q3 Q1 Q2 Q3 Q4 FY Entry A4 MFPs Color (20) % (35) % (9) % (19) % (33) % (9) % (22) % (21) % B&W 2 % (9) % 52 % 3 % (8) % 54 % 28 % 20 % Mid-range Color (26) % (46) % (21) % (26) % (42) % (19) % (20) % (26) % B&W (14) % (42) % (19) % (16) % (35) % (20) % (16) % (22) % High-end Color (52) % (58) % (38) % (50) % (55) % (39) % (26) % (42) % B&W (25) % 2 % (13) % (30) % (2) % (13) % (6) % (13) % Xerox 2020 Annual Report 43 Table of Contents Costs, Expenses and Other Income Summary of Key Financial Ratios The following is a summary of our key financial ratios used to assess our performance: Year Ended December 31, (in millions) 2020 2019 2018 2020 B/(W) 2019 B/(W) Gross Profit $ 2,626 $ 3,650 $ 3,869 $ (1,024) $ (219) RD&E 311 373 397 62 24 SAG 1,851 2,085 2,379 234 294 Equipment Gross Margin 27.4 % 32.6 % 33.9 % (5.2) pts. (1.3) pts. Post sale Gross Margin 40.3 % 42.5 % 41.8 % (2.2) pts. 0.7 pts. Total Gross Margin 37.4 % 40.3 % 40.0 % (2.9) pts. 0.3 pts. RD&E as a % of Revenue 4.4 % 4.1 % 4.1 % (0.3) pts. — pts. SAG as a % of Revenue 26.4 % 23.0 % 24.6 % (3.4) pts. 1.6 pts. Pre-tax Income $ 252 $ 822 $ 549 $ (570) $ 273 Pre-tax Income Margin 3.6 % 9.1 % 5.7 % (5.5) pts. 3.4 pts. Adjusted (1) Operating Profit $ 464 $ 1,192 $ 1,093 $ (728) $ 99 Adjusted (1) Operating Margin 6.6 % 13.1 % 11.3 % (6.5) pts. 1.8 pts. _____________ (1) Refer to the "Non-GAAP Financial Measures" section for an explanation of the non-GAAP financial measure. Pre-tax Income Margin Pre-tax income margin for the year ended December 31, 2020 of 3.6% decreased 5.5-percentage points compared to 2019. The decrease primarily reflected the impact of lower adjusted 1 operating margin (see below), of 6.5-percentage points, as well as higher Amortization of intangible assets and Transaction and related cost, net, partially offset by lower Restructuring and related costs, net and Other expenses, net. Pre-tax income margin for the year ended December 31, 2019 of 9.1% increased 3.4-percentage points compared to 2018, reflecting the impact of higher adjusted 1 operating margin (see below), of 1.8-percentage points, which included an approximate 0.7-percentage point favorable impact from the $77 million OEM license fee. The increase also reflected the impact of lower Other expenses, net and Transactions and related costs, net. These benefits were partially offset by higher Restructuring and related costs, net. Transaction currency had a 0.3-percentage point unfavorable impact. Pre-tax income margin includes Restructuring and related costs, net, the Amortization of intangible assets, Transaction and related costs, net and Other expenses, net , all of which are separately discussed in subsequent sections. Adjusted 1 Operating margin, discussed below, excludes these items. Adjusted 1 Operating Margin Adjusted 1 operating margin for the year ended December 31, 2020 of 6.6% decreased 6.5-percentage points compared to 2019. The decrease reflects the impact of lower revenues, primarily as a result of the significant effect of the COVID-19 pandemic on our business and a 0.9-percentage point unfavorable impact due to an increase in bad debt expense of $61 million in the first quarter of 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 lower costs and expenses, which include savings associated with our Project Own It transformation actions as well as additional savings from various cost reductions actions to mitigate the impact of the pandemic. These actions include approximately $107 million from temporary government assistance measures and furlough programs (see the Government Assistance and Furlough Programs section for additional details) and other reductions in discretionary spending such as near-term targeted marketing programs, 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 also included an approximate 0.4-percentage point unfavorable impact from transaction currency and was affected by an approximate 0.7-percentage point unfavorable impact from the one-time OEM license fee received in the prior year. Adjusted 1 operating margin for the year ended December 31, 2019 of 13.1% increased 1.8-percentage points as compared to 2018, primarily reflecting an approximate 0.7-percentage point favorable impact from the $77 million OEM license fee, as well as the impact of cost and expense reductions associated with our Project Own It Xerox 2020 Annual Report 44 Table of Contents transformation actions, which more than offset the pace of revenue decline. The increase also reflected a $44 million favorable impact from higher costs in the prior year related to the exit of a surplus real estate facility and the termination of certain IT projects. Adjusted 1 operating margin also included a 0.3-percentage point unfavorable impact from transaction currency. _____________ (1) Refer to Operating Income and Margin reconciliation table in the "Non-GAAP Financial Measures" section. Gross Margin Total gross margin for the year ended December 31, 2020 of 37.4% decreased 2.9-percentage points compared to 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 promotion programs, and an approximate 0.5-percentage point adverse combined impact from transaction currency and higher tariffs. The decrease was also affected by an approximate 0.6-percentage point unfavorable impact from the one-time OEM license fee received in the prior year. These headwinds were partially offset by the cost savings 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 $74 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. Total gross margin for the year ended December 31, 2019 of 40.3% increased 0.3-percentage points compared to 2018, primarily reflecting an approximate 0.6-percentage point favorable impact from the $77 million OEM license fee, as well as an unfavorable impact from transaction currency of 0.3-percentage points. Gross margin also reflects cost reductions from our business transformation actions as part of Project Own It, which were entirely offset by the impact of targeted pricing actions. Equipment gross margin for the year ended December 31, 2020 of 27.4% decreased 5.2-percentage points compared to 2019, primarily reflecting the impact of lower revenues (primarily as a result of COVID-19-related business closures) as well as the adverse impact of price promotion programs, incremental tariff costs and the 0.6-percentage point unfavorable impact from transaction currency partially offset by cost reductions from Project Own It. Equipment gross margin for the year ended December 31, 2019 of 32.6% decreased 1.3-percentage points compared to 2018, primarily as a result of targeted pricing actions, which were partially offset by savings from cost productivity, as well as a more profitable mix of revenues from the higher end of the portfolio. Equipment gross margin included the unfavorable impact from transaction currency of 0.8-percentage points. Post sale gross margin for the year ended December 31, 2020 of 40.3% decreased 2.2-percentage points compared to 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. These actions include approximately $73 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. The decrease was also affected by an approximate 0.6-percentage point unfavorable impact from the one-time OEM license fee received in the prior year. Post sale gross margin for the year ended December 31, 2019 of 42.5% increased 0.7-percentage points compared to 2018, including an approximate 0.6-percentage point favorable impact from the $77 million OEM license fee, as well as cost reductions from our business transformation actions, offset by lower revenues and lower pricing on contract renewals. Research, Development and Engineering Expenses (RD&E) Year Ended December 31, Change (in millions) 2020 2019 2018 2020 2019 R&D $ 257 $ 311 $ 325 $ (54) $ (14) Sustaining engineering 54 62 72 (8) (10) Total RD&E Expenses $ 311 $ 373 $ 397 $ (62) $ (24) RD&E as a percentage of revenue for the year ended December 31, 2020 of 4.4% was 0.3-percentage points higher compared to 2019, as the impact of revenue declines outpaced the rate of cost reductions. Xerox 2020 Annual Report 45 Table of Contents RD&E of $311 million for the year ended December 31, 2020, decreased $62 million from 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 the impact from the timing of investments, partially offset by higher spend in our innovation areas. RD&E as a percentage of revenue for the year ended December 31, 2019 of 4.1% was flat compared to 2018. RD&E of $373 million for the year ended December 31, 2019 decreased $24 million from 2018 reflecting cost reductions from our Project Own It transformation actions, including lower sustaining engineering expenses, partially offset by modest investments in innovation in complementary market areas. Selling, Administrative and General Expenses (SAG) SAG as a percentage of revenue of 26.4% increased 3.4-percentage points for the year ended December 31, 2020 compared to 2019 and included a 0.9-percentage point unfavorable impact due to the increase in bad debt expense of $61 million in the first quarter 2020. The increase also reflected the impact of lower revenues, partially offset by the benefits from cost reductions associated with our Project Own It transformation actions and savings from additional cost reduction actions to mitigate the impact of the pandemic. These actions included approximately $32 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 the 401(k) matching contributions, as well as lower compensation incentives consistent with lower sales and operating results. SAG expenses of $1,851 million for the year ended December 31, 2020 were $234 million lower than 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 noted above. These savings were partially offset by higher bad debt expense, as well as expenses from recent acquisitions. Bad debt expense for the year ended December 31, 2020 was $116 million or $70 million higher than the prior year primarily as a result of the increase in the bad debt provision recorded in first quarter 2020, which reflects the estimated 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 remainder of 2020, write-offs as well as the bad debt reserves for our trade and finance receivables portfolios were in line with our projections and consistent with future expectations regarding our estimated impacts from the COVID-19 pandemic. We continue to 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 of approximately 2.7% percent of total gross receivables on a trailing-twelve-month basis (TTM) was higher than the 2019 trend of less than one percent, reflecting the significant increase in 2020 due to impacts from the COVID-19 pandemic. SAG as a percentage of revenue of 23.0% decreased 1.6-percentage points for the year ended December 31, 2019 compared to 2018 primarily reflecting expense reductions from our business transformation actions. The decrease in SAG as a percentage of revenue includes the benefit from a 0.4-percentage point unfavorable impact from the exit of a real estate facility and the cancellation of certain IT projects in 2018. SAG expenses of $2,085 million for the year ended December 31, 2019 were $294 million lower than 2018, including an approximate $30 million unfavorable impact from currency. The decrease primarily reflected expense reductions from our Project Own It transformation actions as well as lower compensation expense; the reduction also includes the favorable impact of $44 million higher costs in 2018 related to the accelerated depreciation associated with the exit of a surplus real estate facility and the termination of certain IT projects. Bad debt expense for the year ended December 31, 2019 was $46 million or $10 million higher than the prior year primarily due to an increased level of sales-type leases as a result of our adoption of ASC Topic 842 - Leases and associated changes in the collectibility assessment of certain leases as well as an increased mix of high-end equipment sales (Refer to Note 4 - Lessor in the Consolidated Financial Statements for additional information regarding our adoption of ASC 842). On a trailing twelve-month basis (TTM), bad debt expense remained at less than one percent of total receivables. Xerox 2020 Annual Report 46 Table of Contents Restructuring and Related Costs, Net We incurred restructuring and related costs, net of $93 million for the year ended December 31, 2020, as compared to $229 million for the year ended December 31, 2019. These costs were primarily related to the implementation of initiatives under our business transformation projects including Project Own It. The decrease in restructuring and related costs in 2020 is partially due to a higher level of asset impairments and severance and related costs in 2019 for employees transferred as part of an outsourcing arrangement. The following is a breakdown of costs: Year Ended December 31, (in millions) 2020 2019 Restructuring and severance costs (1) $ 107 $ 81 Asset impairments (2) 6 61 Other contractual termination costs (3) 3 19 Net reversals (4) (29) (34) Restructuring and asset impairment costs 87 127 Retention related severance/bonuses (5) 4 39 Contractual severance costs (6) (2) 43 Consulting and other costs (7) 4 20 Total $ 93 $ 229 ____________________________ (1) Reflects headcount reductions of approximately 1,850 and 1,000 employees worldwide for the years ended December 31, 2020 and 2019, respectively. (2) Primarily related to the exit and abandonment of leased and owned facilities. For the years ended December 31, 2020 and 2019 , the charge includes the accelerated write-off of $4 million and $39 million, respectively, for leased right-of-use assets and $2 million and $22 million, 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 retention period before termination. (6) Primarily reflects severance and other related costs associated with employees transferred (approximately 2,200) as part of a shared service arrangement entered into with HCL Technologies. (7) Represents professional support services associated with our business transformation initiatives. Restructuring and asset impairment costs were $116 million for the year ended December 31, 2020 and included $107 million of severance costs related to headcount reductions of approximately 1,850 employees worldwide, $3 million of other contractual termination costs and $6 million of asset impairment charges. These costs were partially offset by $29 million of net reversals, primarily resulting from changes in estimated reserves from prior period initiatives. 2020 actions impacted several functional areas, with approximately 55% focused on gross margin improvements and approximately 45% focused on SAG reductions. We expect 2021 pre-tax savings of approximately $70 million from our 2020 restructuring actions. Restructuring and asset impairment costs were $161 million for the year ended December 31, 2019 and included $81 million of severance costs related to headcount reductions of approximately 1,000 employees worldwide, $19 million of other contractual termination costs and $61 million of asset impairment charges. These costs were partially offset by $34 million of net reversals, primarily resulting from changes in estimated reserves from prior period initiatives as well as $10 million in favorable adjustments from the early termination of prior period impaired leases. 2019 actions impacted several functional areas, with approximately 15% focused on gross margin improvements, approximately 80% focused on SAG reductions, and the remainder focused on RD&E optimization. The implementation of our Project Own It initiatives as well as other business transformation initiatives is expected to continue to deliver significant cost savings in 2021. While many initiatives are underway and have yet to yield the full transformation benefits expected upon their completion, the changes implemented thus far have improved our cost structure and are beginning to yield longer-term benefits. However, expected savings associated with these initiatives may be offset to some extent by business disruption during the implementation phase as well as investments in new processes and systems until the initiatives are fully implemented and stabilized. Xerox 2020 Annual Report 47 Table of Contents Restructuring Summary The restructuring reserve balance as of December 31, 2020 for all programs was $103 million, which is expected to be paid over the next twelve months. Refer to Note 14 - Restructuring Programs in the Consolidated Financial Statements for additional information regarding our restructuring programs. Transaction and Related Costs, Net Transaction and related costs, net primarily reflect costs from third party providers for professional services associated with certain strategic M&A projects. Transaction and related costs, net, were $18 million in 2020 as compared to $12 million incurred in 2019. Transaction and related costs, net, were $68 million in 2018 and reflect costs related to the proposed combination transaction with Fuji Xerox including financing costs and costs associated with litigation that resulted from the proposed transaction, which was terminated in May 2018. These costs were partially offset by insurance recoveries and a settlement refund from a financial adviser that had been associated with the terminated transaction. We continue to pursue additional recoveries from insurance carriers and other parties for costs and expenses related to the terminated transaction and therefore additional recoveries and adjustments may be recorded in future periods, when finalized. Amortization of Intangible Assets Amortization of intangible assets for the three years ended December 31, 2020 , 2019 and 2018 was $56 million, $45 million and $48 million, respectively. The increase of $11 million in 2020 as compared to 2019 was primarily due to the accelerated write-off of certain XBS tradenames as part of our continued efforts to realign and consolidate this sales unit as part of Project Own It, as well as the impact from intangible assets recorded on the partner dealer acquisitions in 2020. The decrease of $3 million in 2019 as compared to 2018, was primarily the result of a lower level of acquisitions in prior years, and was partially offset by the accelerated write-off of trade names associated with our realignment and consolidation of certain XBS sales units as part of Project Own It. Refer to Note 13 - Goodwill and Intangible Assets, Net in the Consolidated Financial Statements for additional information regarding our intangible assets. Worldwide Employment Worldwide employment was approximately 24,700 as of December 31, 2020 and decreased by approximately 2,300 from December 31, 2019. The reduction resulted from net attrition (attrition net of gross hires), a large portion of which is not expected to be backfilled, as well as the impact of organizational changes. Other Expenses, Net Year Ended December 31, (in millions) 2020 2019 2018 Non-financing interest expense $ 94 $ 105 $ 114 Interest income (14) (16) (15) Non-service retirement-related costs (29) 18 150 Gains on sales of businesses and assets (30) (21) (35) Currency losses, net 3 7 5 Loss on sales of accounts receivable 2 3 3 Loss on early extinguishment of debt 26 — — Litigation matters (1) (8) 1 Contract termination costs - IT services 3 (12) 43 Tax indemnification from Conduent (9) — — All other expenses, net — 8 5 Other expenses, net $ 45 $ 84 $ 271 Non-financing interest expense Non-financing interest expense for the year ended December 31, 2020 of $94 million was $11 million lower than 2019. When non-financing interest expense is combined with financing interest expense (Cost of financing), total interest expense of $215 million decreased by $21 million from the prior year period reflecting a lower average debt balance primarily due to the full-year effect of the 2019 debt repayments that were not refinanced. Xerox 2020 Annual Report 48 Table of Contents NOTE : Both Xerox Holdings and Xerox reported total interest expense of $215 million, however, the amount reported by Xerox includes $32 million of interest paid to Xerox Holdings as reimbursement for the interest expense incurred on the Xerox Holdings Corporation Senior Notes as the net proceeds from those notes were contributed in full to Xerox and used to repay existing debt of Xerox Corporation. Non-financing interest expense for the year ended December 31, 2019 of $105 million was $9 million lower than 2018. When non-financing interest expense is combined with financing interest expense (Cost of financing), total interest expense decreased by $10 million from the prior year. The decrease is primarily due to a lower debt balance reflecting the repayment of approximately $960 million of debt maturing in 2019 that was not refinanced. Refer to Note 16 - Debt in the Consolidated Financial Statements for additional information regarding our debt activity as well as information regarding the allocation of interest expense. Non-service retirement-related costs Non-service retirement-related costs decreased $47 million for the year ended December 31, 2020 as compared to 2019 primarily driven by lower losses from pension settlements in the U.S. of $53 million, a $40 million decrease compared to 2019. Non-service retirement-related costs decreased $132 million for the year ended December 31, 2019 as compared to the prior year primarily due to the favorable impact of a 2018 amendment to our U.S. Retiree Health Plan and lower losses from pension settlements in the U.S. of $93 million, an $80 million decrease compared to the prior year. Refer to Note 19 - Employee Benefit Plans in the Consolidated Financial Statements for additional information regarding non-service retirement-related costs. Gains on sales of businesses and assets The gains on sales of businesses and assets in all periods reflect the sales of non-core business assets. Loss on early extinguishment of debt During fourth quarter 2020 we recorded a $26 million loss associated with the early extinguishment of $1,062 million of the Senior Notes due May 2021. The net loss included the payment of a redemption premium of $24 million as well as the write-off of unamortized debt issuance costs and other debt carrying value adjustments. Refer to Note 16 - Debt in the Consolidated Financial Statements for additional information regarding our debt activity. Litigation matters Litigation matters for the year ended December 31, 2020 were $7 million higher as compared to 2019 and $9 million lower for the year ended December 31, 2019, as compared to 2018. The year-over-year changes reflect the favorable resolution of certain litigation matters in 2019. Contract termination costs - IT services Contract termination costs were a $3 million charge in 2020 and a $12 million credit in 2019 both of which are adjustments to a $43 million penalty recorded in 2018 related to the termination of an IT services arrangement. The penalty was associated with a minimum purchase commitment that would not be fulfilled due to the termination of the related IT services arrangement. The adjustments in 2020 and 2019 reflect changes in the estimate regarding the expected spending in the run-off of this terminated IT services arrangement and the amount due under the minimum purchase agreement. The minimum purchase commitment had originally been entered into in connection with the sale of our Information Technology Outsourcing (ITO) business in 2015. Tax indemnification from Conduent Represents an indemnification payment expected to be received from Conduent as part of the settlement of pre-separation unrecognized tax positions related to Conduent when included in of our consolidated return. The equal and offsetting charge to this receipt is recorded in Income tax expense, as part of our obligation to pay the taxing authorities. Xerox 2020 Annual Report 49 Table of Contents Income Taxes The 2020 effective tax rate was 25.4%. On an adjusted 1 basis, the 2020 effective tax rate was 26.3%. These rates were higher than the U.S. statutory tax rate of 21% primarily due to state taxes, 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, net, 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 2019 effective tax rate was 21.8% and included a credit of $35 million related to the 2017 Tax Cuts and Jobs Act (the Tax Act). On an adjusted 1 basis, the 2019 effective tax rate was 26.1%. Both rates were higher than the U.S. statutory tax rate of 21% primarily due to state taxes. In addition to excluding the impact of the Tax Act, the adjusted 1 effective tax rate excludes the tax impacts associated with the following charges: Restructuring and related costs, net, Amortization of intangible assets, Transaction and related costs, net, non-service retirement-related costs as well as other discrete, unusual or infrequent items as described in our Non-GAAP Financial Measures section. The 2018 effective tax rate was 45.0% and included a charge of $89 million related to the 2017 Tax Act. On an adjusted 1 basis, the 2018 effective tax rate was 27.0%. Both rates were higher than the U.S. statutory tax rate of 21% primarily due to the geographical mix of earnings. In addition to excluding the impact of the Tax Act, the adjusted 1 effective tax rate excludes the tax impacts associated with the following charges: Restructuring and related costs, net, Amortization of intangible assets, Transaction and related costs, net, non-service retirement-related costs as well as other discrete, unusual or infrequent items as described in our Non-GAAP Financial Measures section. Xerox operations are widely dispersed. However, no one country outside of the U.S. is a significant factor in determining our overall effective tax rate. The tax impact from these non-U.S. operations on our full-year effective tax rate for 2020 was (2.6)%. Refer to Note 20 - Income and Other Taxes in the Consolidated Financial Statements for additional information regarding the geographic mix of income before taxes and the related impacts on our effective tax rate. 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. Excluding the effects of the Restructuring and related costs, net, Amortization of intangible assets, Transaction and related costs, net, non-service retirement-related costs and other discrete items, we anticipate that our adjusted 1 effective tax rate will be approximately 26% to 29% for full year 2021. _____________ (1) Refer to the Effective Tax Rate reconciliation table in the "Non-GAAP Financial Measures" section. 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. Accordingly, our remaining Investment in Affiliates, at Equity largely consists of several minor investments in entities in the Middle East region. Refer to Note 6 - Divestitures, in the Consolidated Financial Statements for additional information regarding the sale Fuji Xerox. Year Ended December 31, (in millions) 2020 2019 2018 Equity in net income of unconsolidated affiliates - Fuji Xerox (1) $ — $ 147 $ 25 Equity in net income of unconsolidated affiliates - continuing operations 4 8 8 Total Equity in net income of unconsolidated affiliates $ 4 $ 155 $ 33 Fuji Xerox after-tax restructuring and other charges included in equity income — 20 95 _____________ (1) Equity in net income for Fuji Xerox is reported in Income from discontinued operations, net of tax for all years presented. The equity in net income for Fuji Xerox in 2019 is through the date of sale. For the year ended December 31, 2019 equity income from Fuji Xerox increased $122 million as compared to 2018, primarily due to lower restructuring costs of $75 million as well as an out-of-period adjustment of $28 million in 2018. Refer to Note 12 - Investment in Affiliates, at Equity in the Consolidated Financial Statements for additional information regarding our equity investments. Xerox 2020 Annual Report 50 Table of Contents Net Income from Continuing Operations Net income from continuing operations attributable to Xerox Holdings for the year ended December 31, 2020 was $192 million, or $0.84 per diluted share. On an adjusted 1 basis, Net income from continuing operations attributable to Xerox Holdings was $313 million, or $1.41 per diluted share, and includes adjustments for Restructuring and related costs, net, Amortization of intangible assets, Transaction and related costs, net as well as non-service retirement-related costs and other discrete, unusual or infrequent items, which included a Loss on the early extinguishment of debt, as described in our Non-GAAP Financial Measures. Net income from continuing operations attributable to Xerox Holdings for the year ended December 31, 2019 was $648 million, or $2.78 per diluted share. On an adjusted 1 basis, Net income from continuing operations attributable to Xerox Holdings was $828 million, or $3.55 per diluted share, and includes adjustments for Restructuring and related costs, net, Amortization of intangible assets, Transaction and related costs, net as well as non-service retirement-related costs and other discrete, unusual or infrequent items, including the impact from the Tax Act, as described in our Non-GAAP Financial Measures. Net income from continuing operations attributable to Xerox Holdings for the year ended December 31, 2018 was $306 million, or $1.16 per diluted share. On an adjusted 1 basis, Net income from continuing operations attributable to Xerox Holdings was $745 million, or $2.88 per diluted share, and includes adjustments for Restructuring and related costs, net, Amortization of intangible assets, Transaction and related costs, net as well as non-service retirement-related costs and other discrete, unusual or infrequent items, including the impact from the Tax Act, as described in our Non-GAAP Financial Measures. Refer to Note 26 - Earnings per Share in the 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. Discontinued Operations Discontinued operations relate to the November 2019 Sales of our indirect 25% equity interest in Fuji Xerox (FX) and our indirect 51% partnership interest in Xerox International Partners (XIP), which had been consolidated. Refer to Note 6 - Divestitures in the Consolidated Financial Statements for additional information regarding discontinued operations. Other Comprehensive Income The historical statement of Comprehensive Income was not revised to reflect the Sales of our investments in Fuji Xerox and XIP and instead reflects discontinued operations as a final adjustment to the Accumulated Other Comprehensive Loss (AOCL) balances at December 31, 2019. Accordingly, all reported amounts in 2018 reflect movements in AOCL for both continuing operations and discontinued operations. Refer to Note 6 - Divestitures in the Consolidated Financial Statements for additional information regarding discontinued operations. Other comprehensive income attributable to Xerox was $314 million in 2020 and included the following: i) net translation adjustment gains of $241 million reflecting the strengthening of our major foreign currencies against the U.S. Dollar during 2020; ii) $69 million of net gains from changes in defined benefit plans primarily reflecting net actuarial gains due to actual returns in excess of expected returns offsetting the impacts from lower discount rates as well as the amortization or recognition through settlement losses of accumulated losses from AOCL. These impacts were partially offset by other losses, primarily due to unfavorable currency; and iii) $4 million in unrealized gains, net. Other comprehensive income attributable to Xerox was $46 million in 2019 and included the following: i) net translation adjustment gains of $62 million reflecting aggregate translation gains of $45 million from the strengthening of most of our major foreign currencies against the U.S. Dollar during 2019, as well as a reclassification of $17 million of accumulated translation losses from AOCL into earnings as a result of the divestiture of our investments in FX and XIP; ii) $10 million of net losses from changes in defined benefit plans reflecting net losses of $138 million associated with defined benefit plan changes during 2019, primarily as a result of lower discount rates, as well as other losses of $21 million, primarily due to unfavorable currency. These losses were partially offset by the reclassification of $148 million of accumulated losses from AOCL into earnings as a result of the divestiture of our investments in FX and XIP; and iii) $6 million in unrealized losses, net. Other comprehensive income attributable to Xerox was $183 million in 2018 and included the following: i) $409 million of net gains from the changes in defined benefit plans primarily due to prior service credits resulting from an amendment to our U.S. and Canadian Retiree Health plans, settlements and the positive impacts from currency on accumulated net actuarial losses, as well as a $43 million out-of-period pension adjustment (refer to Note 1 - Basis Xerox 2020 Annual Report 51 Table of Contents of Presentation and Summary of Significant Accounting Policies in the Consolidated Financial Statements for additional information on the out-of-period adjustment); ii) $16 million in unrealized gains, net, and iii) net translation adjustment losses of $242 million reflecting the weakening of most of our major foreign currencies against the U.S. Dollar. Refer to our discussion of Pension Plan Assumptions in the Application of Critical Accounting Policies section of the MD&A as well as Note 19 - Employee Benefit Plans in the Consolidated Financial Statements for additional information regarding changes in our defined benefit plans. Refer to Note 17 - Financial Instruments in the Consolidated Financial Statements for additional information regarding our foreign currency derivatives and associated unrealized gains and losses. Recent Accounting Pronouncements Refer to Note 1 - Basis of Presentation and Summary of Significant Accounting Policies in the Consolidated Financial Statements for a description of recent accounting pronouncements including the respective dates of adoption and the effects on results of operations and financial conditions. Xerox 2020 Annual Report 52 Table of Contents Capital Resources and Liquidity Our 2020 financial results were significantly impacted by COVID-19 related business closures and office building capacity restrictions that slowed our customers' purchasing decisions and caused delayed installations and lower printing volumes on our devices. However, we believe we have sufficient liquidity to manage our 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 December 31, 2020 and 2019, total cash, cash equivalents and restricted cash were $2,691 million and $2,795 million, respectively, and apart from restricted cash of $66 million and $55 million, respectively, was readily accessible for use. • As of December 31, 2020 and 2019, there were no borrowings or letters of credit outstanding under our $1.8 billion Credit Facility that matures in August 2022. In connection with the issuance of our $1.5 billion of new Senior Notes in August 2020, we amended the Credit Facility debt covenants to consider our level of cash on hand as part of our principal debt balance. • In fourth quarter, we completed the early redemption of Xerox Corporation's $1.1 billion Senior Notes due May 2021. We have utilized a combination of capital markets financing and securitization to refinance all 2020 and 2021 debt maturities, significantly reducing our near-term debt commitments and improving our long-term liquidity. • 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. • We expect operating cash flows from continuing operations to be approximately $600 million in 2021, reflecting the continued negative impacts of the COVID-19 pandemic. Refer to Note 16 - Debt in the Consolidated Financial Statements for additional information regarding debt activity in 2020. Cash Flow Analysis The following summarizes our cash flows for the three years ended December 31, 2020, 2019 and 2018, as reported in our Consolidated Statements of Cash Flows in the accompanying Consolidated Financial Statements: Year Ended December 31, Change (in millions) 2020 2019 2018 2020 2019 Net cash provided by operating activities of continuing operations $ 548 $ 1,244 $ 1,082 $ (696) $ 162 Net cash provided by operating activities of discontinued operations — 89 58 (89) 31 Net cash provided by operating activities 548 1,333 1,140 (785) 193 Net cash used in investing activities of continuing operations (246) (85) (29) (161) (56) Net cash provided by investing activities of discontinued operations — 2,233 — (2,233) 2,233 Net cash (used in) provided by investing activities (246) 2,148 (29) (2,394) 2,177 Net cash used in financing activities (416) (1,834) (1,301) 1,418 (533) Effect of exchange rate changes on cash, cash equivalents and restricted cash 10 — (30) 10 30 (Decrease) increase in cash, cash equivalents and restricted cash (104) 1,647 (220) (1,751) 1,867 Cash, cash equivalents and restricted cash at beginning of year 2,795 1,148 1,368 1,647 (220) Cash, Cash Equivalents and Restricted Cash at End of Year $ 2,691 $ 2,795 $ 1,148 $ (104) $ 1,647 Xerox 2020 Annual Report 53 Table of Contents Cash Flows from Operating Activities Net cash provided by operating activities of continuing operations was $548 million for the year ended December 31, 2020. The $696 million decrease in operating cash from 2019 was primarily due to the following: • $729 million decrease in pre-tax income before depreciation and amortization, provisions, gain on sales of businesses and assets, restructuring and related costs, net, defined benefit pension costs and loss on early extinguishment of debt. • $243 million decrease from higher levels of inventory primarily due to lower sales volume. • $147 million decrease in other current and long-term liabilities, reflecting lower accruals, particularly incentive-related payments associated with our direct channel partners and decrease in deferred revenue reflecting lower sales activity. • $95 million decrease from accrued compensation primarily due to decreased spending and the year-over-year timing of payments. • $76 million decrease from lower accounts payable primarily related to lower inventory and other spending partially offset by the timing of supplier and vendor payments. • $359 million increase from accounts receivable primarily due to lower revenue and the timing of invoicing and collections. • $117 million increase primarily related to a higher level of net run-off due to lower originations of finance receivables of $82 million and lower equipment on operating leases of $35 million. • $57 million increase from net taxes primarily due to lower payments in 2020 as a result of lower pre-tax income. • $51 million increase primarily due to lower restructuring and related costs, net as compared to the prior year. Net cash provided by operating activities of continuing operations was $1,244 million for the year ended December 31, 2019. The $162 million increase in operating cash from 2018 was primarily due to the following: • $95 million increase due to lower placements of equipment on operating leases. • $92 million increase primarily due to lower levels of inventories partially reflecting lower sales volume and improved inventory management. • $58 million increase from the after-tax impact of the OEM license agreement with FX. • $47 million increase due to lower net payments for transaction and related costs as current year payments are primarily limited to costs related to on-going litigation. • $65 million decrease due to a lower net run-off of finance receivables. • $54 million decrease from the change in accounts payable primarily related to lower inventory and other spending as well as the year-over-year timing of supplier and vendor payments. • $21 million decrease from accounts receivable primarily due to the timing of invoicing and collections. Cash Flows from Investing Activities Net cash used in investing activities of continuing operations for Xerox Holdings was $246 million for the year ended December 31, 2020. The $161 million change in cash from 2019 was primarily due to four acquisitions completed by Xerox for $194 million and one additional acquisition completed by Xerox Holdings of $9 million in the current year compared to two acquisitions in the prior year for $42 million. Net cash used in investing activities of continuing operations was $85 million for the year ended December 31, 2019. The $56 million change in cash from 2018 was primarily due to the following: • $42 million decrease from acquisitions. • $38 million decrease due to lower proceeds from the sales of assets. • $25 million increase reflecting lower capital expenditures. Cash Flows from Financing Activities Net cash used in financing activities for Xerox Holdings was $416 million for the year ended December 31, 2020. The $1,418 million decrease in the use of cash from 2019 was primarily due to the following: • $1,083 million decrease from net debt activity. 2020 reflects payments of $2,137 million on Senior Notes, $73 million for secured financing arrangements and $16 million of deferred debt issuance costs offset by proceeds of $1,507 million from a Senior Notes offering and $840 million from secured financing arrangements. 2019 reflects payments of $960 million on Senior Notes. • $300 million decrease due to lower share repurchases. • $13 million decrease due to lower common stock dividends due to lower outstanding shares. • $11 million decrease from lower distributions of noncontrolling interests. Xerox 2020 Annual Report 54 Table of Contents Net cash used in financing activities for Xerox was $425 million for the year ended December 31, 2020. 2020 reflects payments of $2,137 million on Senior Notes, $73 million for secured financing arrangements and $3 million of deferred debt issuance costs offset by proceeds of $840 million from secured financing arrangements. Distributions to Xerox Holdings were $558 million and were primarily used to fund Xerox Holdings continuing dividends to shareholders and share repurchases. Xerox's distributions to the parent are expected to continue with those distributions primarily being used by Xerox Holdings to fund dividends and share repurchases. Contributions from parent of $1,494 million primarily represent the contribution by Xerox Holdings of aggregate net debt proceeds received from its Senior Note offerings in the third quarter of 2020 to Xerox. Net cash used in financing activities for Xerox Holdings, on a consolidated basis, was $1,834 million for the year ended December 31, 2019. The $533 million increase in the use of cash from 2018 was primarily due to the following: • $643 million increase from net debt activity. 2019 reflects payments of $960 million on Senior Notes compared to prior year payments of $265 million on Senior Notes, $25 million related to the termination of a capital lease obligation and $19 million of bridge facility costs. • $26 million decrease due to lower common stock dividends. • $100 million decrease from lower share repurchases due to timing. Net cash used in financing activities for Xerox, on a consolidated basis, was $1,834 million for the year ended December 31, 2019. Dividends of $181 million and share repurchases of $300 million were through the date of the holding company reorganization, July 31, 2019. Distributions to Xerox Holdings were $373 million and are subsequent to the date of the reorganization and are primarily to fund Xerox Holdings continuing dividends to shareholders and share repurchases. Xerox's distributions to the parent are expected to continue on a regular basis in the future with those distributions primarily being used by Xerox Holdings to fund dividends and share repurchases. Cash, Cash Equivalents and Restricted Cash Refer to Note 15 - Supplementary Financial Information in the 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 and for certain equipment in our domestic operations. Additionally, we have identified embedded operating leases within certain supply chain contracts for warehouses, primarily within our domestic operations. Our leases have remaining terms of up to twelve years and a variety of renewal and/or termination options. As of December 31, 2020 and 2019, total operating lease liabilities were $333 million and $347 million, respectively. Refer to Note 11 - Lessee in the Consolidated Financial Statements for additional information regarding our right-of-use (ROU) assets and lease obligations associated with our operating leases. Xerox 2020 Annual Report 55 Table of Contents Debt and Customer Financing Activities The following summarizes our total debt: December 31, (in millions) 2020 2019 Xerox Holdings Corporation $ 1,500 $ — Xerox Corporation 2,200 4,313 Xerox - Other Subsidiaries (1) 767 — Subtotal - Principal debt balance (2) $ 4,467 $ 4,313 Debt issuance costs Xerox Holdings Corporation (13) — Xerox Corporation (11) (17) Xerox - Other Subsidiaries (1) (3) — Subtotal - Debt issuance costs (27) (17) Net unamortized discount (premium) 3 (16) Fair value adjustments (3) - terminated swaps 1 1 - current swaps — 1 Total Debt $ 4,444 $ 4,282 _____________ (1) Represents subsidiaries of Xerox Corporation. (2) There were no Notes Payable at December 31, 2020 and December 31, 2019, respectively. (3) 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. Refer to Note 16 - Debt in the Consolidated Financial Statements for additional information regarding our debt activity. Finance Assets and Related Debt We provide lease equipment financing to our customers. Our lease contracts permit customers to pay for equipment over time rather than at the date of installation. Our investment in these contracts is reflected in total finance assets, net. We primarily fund our customer financing activity through cash generated from operations, cash on hand, sales and securitizations of finance receivables and proceeds from capital markets offerings. We have arrangements, in certain international countries and domestically, with our small and mid-sized customers in which third-party financial institutions independently provide lease financing directly to our customers, on a non-recourse basis to Xerox. In these arrangements, we sell and transfer title of the equipment to these financial institutions. Generally, we have no continuing ownership rights in the equipment subsequent to its sale; therefore, the unrelated third-party finance receivable and debt are not included in our Consolidated Financial Statements. The following represents our total finance assets, net associated with our lease and finance operations: December 31, (in millions) 2020 2019 Total finance receivables, net (1) $ 3,165 $ 3,351 Equipment on operating leases, net 296 364 Total Finance assets, net (2) $ 3,461 $ 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 Consolidated Balance Sheets. (2) The change from December 31, 2019 includes an increase of $96 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 receivables, 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. Approximately 35% of our Total Finance assets, net balance at December 31, 2020 include lease financing provided to end-user customers who purchased equipment sold through distributors, resellers and dealers. Xerox 2020 Annual Report 56 Table of Contents Based on this leverage, the following represents the breakdown of total debt between financing debt and core debt: December 31, (in millions) 2020 2019 Finance receivables debt (1) $ 2,769 $ 2,932 Equipment on operating leases debt 259 319 Financing debt 3,028 3,251 Core debt 1,416 1,031 Total Debt $ 4,444 $ 4,282 _____________ (1) Finance receivables debt is the basis for our calculation of “Cost of financing” expense in the Consolidated Statements of Income. At December 31, 2020, leverage was assessed against the Total Debt of Xerox Holdings Corporation and Xerox Corporation since the debt held by Xerox Holdings Corporation is guaranteed by Xerox Corporation and the funds from that borrowing were contributed in full by Xerox Holdings Corporation to Xerox Corporation. In 2021, we expect to continue leveraging our finance assets on a Total Debt basis at an assumed 7:1 ratio of debt to equity. Capital Market Activity During 2020 we repaid $2,113 million of Xerox Corporation's Senior Notes maturing in 2020 and 2021 and issued $1.5 billion in a Senior Notes offering and received $840 million from secured financing arrangements. Refer to Note 16 - Debt in the Consolidated Financial Statements for additional information regarding our debt activity. Financial Instruments Refer to Note 17 - Financial Instruments in the Consolidated Financial Statements for additional information. Sales of Accounts Receivable The net impact from the sales of accounts receivable on reported net cash flows is summarized below: Year Ended December 31, (in millions) 2020 2019 2018 Estimated (decrease) increase to net cash flows (1) $ (41) $ 37 $ (23) _____________ (1) Represents the difference between current and prior year fourth quarter accounts receivable sales adjusted for the effects of: (i) the deferred proceeds, (ii) collections prior to the end of the year and (iii) currency. The decrease in 2020 reflects a decrease in the level of accounts receivable sold due to lower sales revenue as a result of impacts from the COVID-19 pandemic. Refer to Note 7 - Accounts Receivable, Net in the Consolidated Financial Statements for additional information regarding our accounts receivable sales arrangements. Share Repurchase Programs - Treasury Stock During 2020, Xerox Holdings repurchased 15.6 million shares of our common stock for an aggregate cost of $300 million, including fees. In January 2021, the Xerox Holdings Corporation's Board of Directors authorized an additional $100 million of share repurchase authority, bringing the total authorization of the existing share repurchase program to $1.1 billion (exclusive of any commissions and other transaction fees and costs related thereto). The cumulative total of shares repurchased by Xerox Holdings under the current share repurchase program that commenced in July 2019 is 24.7 million shares for an aggregate cost of $600 million, including fees, leaving a remaining authorization of $500 million. During 2019, Xerox Holdings repurchased 9.1 million shares of our common stock for an aggregate cost of $300 million, including fees. Including the shares repurchased under Xerox Corporation's previously authorized share repurchase program, Xerox Holdings repurchased 18.3 million shares of our common stock for an aggregate cost of $600 million, including fees, during 2019. During 2018, Xerox Corporation repurchased 26.1 million shares of our common stock for an aggregate cost of $700 million, including fees. These shares were repurchased under Xerox Corporation's previously authorized share repurchase program, which was cancelled upon the reorganization of Xerox Corporation's corporate structure into a holding company structure on July 31, 2019. Refer to Note 23 - Shareholders' Equity in the Consolidated Financial Statements for additional information regarding our share repurchase program. Xerox 2020 Annual Report 57 Table of Contents Dividends Aggregate dividends of $209 million, $226 million and $251 million were declared on common stock in 2020, 2019 and 2018, respectively. The decrease in dividends since 2018 primarily reflects lower shares of common stock outstanding as a result of our share repurchase programs. Aggregate dividends of $14 million in 2020, 2019 and 2018, respectively, were declared on preferred stock. Liquidity and Financial Flexibility We manage our worldwide liquidity using internal cash management practices, which are subject to (i) the statutes, regulations and practices of each of the local jurisdictions in which we operate, (ii) the legal requirements of the agreements to which we are a party and (iii) the policies and cooperation of the financial institutions we utilize to maintain and provide cash management services. Our principal debt maturities are in line with historical and projected cash flows and are spread over the next five years as follows: (in millions) Xerox Holdings Corporation Xerox Corporation Xerox - Other Subsidiaries (1) Total 2021 - Q1 $ — $ — $ 96 $ 96 2021 - Q2 — — 107 107 2021 - Q3 — — 100 100 2021 - Q4 — — 92 92 2022 — 300 291 591 2023 — 1,000 81 1,081 2024 — 300 — 300 2025 750 — — 750 2026 and thereafter 750 600 — 1,350 Total (2) $ 1,500 $ 2,200 $ 767 $ 4,467 _____________ (1) Represents subsidiaries of Xerox Corporation. (2) Includes fair value adjustments. Loan Covenants and Compliance At December 31, 2020, we were in full compliance with the covenants and other provisions of our Credit Facility and Senior Notes. We have the right to terminate the Credit Facility without penalty. Failure to comply with material provisions or covenants of the Credit Facility and Senior Notes could have a material adverse effect on our liquidity and operations and our ability to continue to fund our customers' purchases of Xerox equipment. Refer to Note 16 - Debt in the Consolidated Financial Statements for additional information regarding debt arrangements and our Credit Facility. Xerox 2020 Annual Report 58 Table of Contents Contractual Cash Obligations and Other Commercial Commitments and Contingencies At December 31, 2020, we had the following contractual cash obligations and other commercial commitments and contingencies: (in millions) 2021 2022 2023 2024 2025 Thereafter Total debt (1) $ 395 $ 591 $ 1,081 $ 300 $ 750 $ 1,350 Interest on debt (1) 194 176 137 119 100 549 Minimum operating lease commitments (2) 104 88 68 37 25 52 Defined benefit pension plans 130 — — — — — Retiree health payments 30 29 28 26 25 107 Estimated Purchase Commitments: Fuji Xerox (3) 1,077 — — — — — Flex (4) 108 — — — — — HCL (5) 196 189 187 185 183 45 Other (6) 146 63 29 — — — Total $ 2,380 $ 1,136 $ 1,530 $ 667 $ 1,083 $ 2,103 _____________ (1) Refer to Note 16 - Debt in the Consolidated Financial Statements for additional information regarding debt and interest on debt. (2) Refer to Note 11 – Lessee in the Consolidated Financial Statements for additional information related to minimum operating lease commitments. (3) Fuji Xerox: The amount included in the table reflects our estimate of purchases over the next year and is not a contractual commitment. Refer to Note 12 - Investments in Affiliates, at Equity in the Consolidated Financial Statements for additional information related to transactions with Fuji Xerox. (4) Flex: We outsource certain manufacturing activities to Flex. The amount included in the table reflects our estimate of purchases over the next year and is not a contractual commitment. In the past two years, actual purchases from Flex averaged approximately $123 million per year. (5) HCL: Shared services arrangement with HCL Technologies. (6) Other purchase commitments: We enter into other purchase commitments with vendors in the ordinary course of business. Our policy with respect to all purchase commitments is to record losses, if any, when they are probable and reasonably estimable. We currently do not have, nor do we anticipate, material loss contracts. Pension and Retiree Health Benefit Plans We sponsor defined benefit pension plans and retiree health plans that require periodic cash contributions. Our 2020 cash contributions for these plans were $139 million for our defined benefit pension plans and $25 million for our retiree health plans. In 2021, based on current actuarial calculations, we expect to make contributions of approximately $130 million to our worldwide defined benefit pension plans and $30 million to our retiree health benefit plans. There are no contributions required in 2021 for our U.S. tax-qualified defined benefit plans to meet the minimum funding requirements. Contributions to our defined benefit pension plans in subsequent years will depend on a number of factors, including the investment performance of plan assets and discount rates as well as potential legislative and plan changes. At December 31, 2020, the net unfunded balance of our U.S. defined benefit pension plans was $945 million and the net funded balance of our Non-U.S. defined benefit pension plans was $40 million, or an aggregate unfunded balance of $905 million, which is a $307 million decrease from the balance at December 31, 2019. The decrease is primarily due to contributions and favorable asset returns as compared to expected returns, partially offset by lower discount rates. Approximately $851 million of the $905 million net unfunded balance is attributable to certain plans that by design do not require or allow for advanced funding. The remaining net deficit in funded plans of $54 million includes an under-funded position for our U.S. Primary Plans of $606 million and $552 million of net over funded positions for our international plans (primarily in the U.K.). Cash contributions to our retiree health plans are made each year to cover medical claims costs incurred during the year. The amounts reported in the above table as retiree health payments represent our estimate of future benefit payments. Our retiree health benefit plans are non-funded and are primarily related to domestic operations. The unfunded balance of our retiree health plans of $370 million at December 31, 2020 decreased $15 million from the balance at December 31, 2019. Refer to Note 19 - Employee Benefit Plans in the Consolidated Financial Statements for additional information regarding contributions to our defined benefit pension and retiree health plans. Xerox 2020 Annual Report 59 Table of Contents Fuji Xerox As previously disclosed, in November 2019, Xerox Holdings completed the sale of its indirect 25% equity interest in Fuji Xerox (FX). Arrangements with FX whereby we purchase inventory from and sell inventory to FX continued after the sale. We purchased products, including parts and supplies, from FX totaling $1.1 billion, $1.3 billion and $1.5 billion in 2020, 2019 and 2018, respectively. Our product supply agreements with Fuji Xerox are designed to support the entire product lifecycle, end-to-end, including the availability of spare parts, consumables and technical support throughout the time such products are with our customers. Our purchase orders under such agreements are made in the normal course of business and typically have a lead time of three months. Transactions with Fuji Xerox are discussed further in Note 12 - Investments in Affiliates, at Equity in the Consolidated Financial Statements. 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 selected finance functions, from Xerox to HCL. The shared services arrangement with HCL includes a remaining aggregate spending commitment of approximately $985 million over the next 5 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. We incurred net charges of approximately $185 million for the year ended December 31, 2020 associated with this arrangement. The cost has been allocated to the various functional expense lines in the 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. Brazil Contingencies Our Brazilian operations have received or been the subject of numerous governmental assessments related to indirect and other taxes. These tax matters principally relate to claims for taxes on the internal transfer of inventory, municipal service taxes on rentals and gross revenue taxes. We are disputing these tax matters and intend to vigorously defend our positions. Based on the opinion of legal counsel and current reserves for those matters deemed probable of loss, we do not believe that the ultimate resolution of these matters will materially impact our results of operations, financial position or cash flows. Below is a summary of our Brazilian tax contingencies: (in millions) December 31, 2020 December 31, 2019 Tax contingency - unreserved $ 355 $ 442 Escrow cash deposits 39 51 Surety bonds 112 135 Letters of credit 78 91 Liens on Brazilian assets — — The decrease in the unreserved portion of the tax contingency, inclusive of any related interest, was primarily related to closed cases. With respect to the unreserved tax contingency, the majority has been assessed by management as being remote as to the likelihood of ultimately resulting in a loss to the Company. In connection with the above proceedings, customary local regulations may require us to make escrow cash deposits or post other security of up to half of the total amount in dispute, as well as additional surety bonds and letters of credit, which include associated indexation. Generally, any escrowed amounts would be refundable and any liens on assets would be removed to the extent the matters are resolved in our favor. We are also involved in certain disputes with contract and former employees. Exposures related to labor matters are not material to the financial statements as of December 31, 2020. We routinely assess all these matters as to probability of ultimately incurring a liability against our Brazilian operations and record our best estimate of the ultimate loss in situations where we assess the likelihood of an ultimate loss as probable. Other Contingencies and Commitments As more fully discussed in Note 21 - Contingencies and Litigation in the Consolidated Financial Statements, we are involved in a variety of claims, lawsuits, investigations and proceedings concerning: securities law; governmental entity contracting, servicing and procurement law; intellectual property law; environmental law; employment law; the Employee Retirement Income Security Act (ERISA); and other laws and regulations. In addition, guarantees, indemnifications and claims may arise during the ordinary course of business from relationships with suppliers, Xerox 2020 Annual Report 60 Table of Contents customers and non-consolidated affiliates. Nonperformance under a contract including a guarantee, indemnification or claim could trigger an obligation of the Company. We determine whether an estimated loss from a contingency should be accrued by assessing whether a loss is deemed probable and can be reasonably estimated. Should developments in any of these areas cause a change in our determination as to an unfavorable outcome and result in the need to recognize a material accrual, or should any of these matters result in a final adverse judgment or be settled for significant amounts, they could have a material adverse effect on our results of operations, financial position and cash flows in the period or periods in which such change in determination, judgment or settlement occurs. Unrecognized Tax Benefits As of December 31, 2020, we had $115 million of unrecognized tax benefits. This represents the tax benefits associated with various tax positions taken, or expected to be taken, on domestic and foreign tax returns that have not been recognized in our financial statements due to uncertainty regarding their resolution. The resolution or settlement of these tax positions with the taxing authorities is at various stages and, therefore, we are unable to make a reliable estimate of the eventual cash flows by period that may be required to settle these matters. In addition, certain of these matters may not require cash settlement due to the existence of credit and net operating loss carryforwards, as well as other offsets, including the indirect benefit from other taxing jurisdictions that may be available. Refer to Note 20 - Income and Other Taxes in the Consolidated Financial Statements for additional information regarding unrecognized tax benefits. Off-Balance Sheet Arrangements We may occasionally utilize off-balance sheet arrangements in our operations (as defined by the SEC Financial Reporting Release 67 (FRR-67), “Disclosure in Management’s Discussion and Analysis about Off-Balance Sheet Arrangements and Aggregate Contractual Obligations”). Accounts receivable sales facilities arrangements that we enter into may have off-balance sheet elements. During 2017, we terminated all accounts receivable sales arrangements in North America and all but one arrangement in Europe. Refer to Note 7 - Accounts Receivable, Net in the Consolidated Financial Statements for further information regarding accounts receivable sales. As of December 31, 2020, we do not believe we have any off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future effect on financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. In addition, see the preceding table for the Company's contractual cash obligations and other commercial commitments and contingencies and Note 21 - Contingencies and Litigation in the Consolidated Financial Statements for additional information regarding contingencies, guarantees, indemnifications and warranty liabilities. Xerox 2020 Annual Report 61 Table of Contents 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 in the following tables. 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, net: Restructuring and related costs, net 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 primarily reflect costs from third party providers for professional services associated with certain strategic M&A projects. These costs and expense are primarily for third-party legal, accounting, consulting and other similar type professional services as well as costs associated with potential legal actions or matters 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. Xerox 2020 Annual Report 62 Table of Contents Other discrete, unusual or infrequent items: In addition, we have also excluded the following items given their discrete, unusual or infrequent nature and their impact on our results for the period: • Contract termination costs - IT services. • Losses on early extinguishment of debt. • Impacts associated with the Tax Cuts and Jobs Act (the Tax Act) enacted in December 2017. 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 the Currency Impact section in the MD&A for 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 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. Net Income and EPS reconciliation Year Ended December 31, 2020 2019 2018 (in millions, except per share amounts) Net Income EPS Net Income EPS Net Income EPS Reported (1) $ 192 $ 0.84 $ 648 $ 2.78 $ 306 $ 1.16 Adjustments: Restructuring and related costs, net 93 229 157 Amortization of intangible assets 56 45 48 Transaction and related costs, net 18 12 68 Non-service retirement-related costs (29) 18 150 Loss on early extinguishment of debt 26 — — Contract termination costs - IT services 3 (12) 43 Income tax on adjustments (2) (46) (77) (116) Tax Act — (35) 89 Adjusted $ 313 $ 1.41 $ 828 $ 3.55 $ 745 $ 2.88 Dividends on preferred stock used in adjusted EPS calculation (3) $ 14 $ — $ — Weighted average shares for adjusted EPS (3) 211 233 258 Fully diluted shares at December 31, 2020 (4) 207 _____________ (1) Net income and EPS from continuing operations attributable to Xerox Holdings. (2) Refer to Effective Tax Rate reconciliation. (3) For those periods that exclude the preferred stock dividend, the average shares for the calculations of diluted EPS include 7 million shares associated with Xerox Holdings Corporation's Series A Convertible preferred stock, as applicable. (4) Represents common shares outstanding at December 31, 2020 as well as shares associated with Xerox Holdings Corporation's Series A convertible preferred stock plus potential dilutive common shares used for the calculation of adjusted diluted earnings per share for the year ended December 31, 2020. Xerox 2020 Annual Report 63 Table of Contents Effective Tax Rate reconciliation Year Ended December 31, 2020 2019 2018 (in millions) Pre-Tax Income Income Tax Expense Effective Tax Rate Pre-Tax Income Income Tax Expense Effective Tax Rate Pre-Tax Income Income Tax Expense Effective Tax Rate Reported (1) $ 252 $ 64 25.4 % $ 822 $ 179 21.8 % $ 549 $ 247 45.0 % Non-GAAP Adjustments (2) 167 46 292 77 466 116 Tax Act — — — 35 — (89) Adjusted (3) $ 419 $ 110 26.3 % $ 1,114 $ 291 26.1 % $ 1,015 $ 274 27.0 % _____________ (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 Year Ended December 31, 2020 2019 2018 (in millions) Profit Revenue Margin Profit Revenue Margin Profit Revenue Margin Reported (1) $ 252 $ 7,022 3.6 % $ 822 $ 9,066 9.1 % $ 549 $ 9,662 5.7 % Adjustments: Restructuring and related costs, net 93 229 157 Amortization of intangible assets 56 45 48 Transaction and related costs, net 18 12 68 Other expenses, net (2) 45 84 271 Adjusted $ 464 $ 7,022 6.6 % $ 1,192 $ 9,066 13.1 % $ 1,093 $ 9,662 11.3 % _____________ (1) Pre-tax Income and revenue from continuing operations. (2) Includes non-service retirement-related costs of $(29) million, $18 million and $150 million for the years ended December 31, 2020, 2019 and 2018, respectively. Xerox 2020 Annual Report 64 Table of Contents