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Item 1. Financial Statements

2021-08-04 compared with 2021-04-30 · 335 added, 166 removed, 1052 unchanged (32% of the section changed)

1 unchanged sentence

XEROX HOLDINGS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) (UNAUDITED)

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Three Months Ended

June 30, Six Months Ended

(in millions, except per-share data) 2021 2020 2021 2020

14 unchanged sentences

Total Costs and Expenses 1,694 1,430 3,351 3,295

Income (Loss) before Income Taxes and Equity Income 53 ( 5 )

Income tax expense (benefit) 14 ( 1 )

Income before Income Taxes and Equity Income 99 35 152 30

Income tax expense 9 8 23 7

Equity in net income of unconsolidated affiliates 1 — 1 2

Net Income (Loss) 39 ( 2 )

Net Income 91 27 130 25

Net income attributable to noncontrolling interests — — — —

Net Income (Loss) Attributable to Xerox Holdings $ 39 $ ( 2 )

Basic Earnings (Loss) per Share $ 0.18 $ ( 0.03 )

Diluted Earnings (Loss) per Share $ 0.18 $ ( 0.03 )

Net Income Attributable to Xerox Holdings $ 91 $ 27 $ 130 $ 25

Basic Earnings per Share $ 0.47 $ 0.11 $ 0.64 $ 0.08

Diluted Earnings per Share $ 0.46 $ 0.11 $ 0.64 $ 0.08

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

3 unchanged sentences

Three Months Ended

June 30, Six Months Ended

(in millions) 2021 2020 2021 2020

Net Income (Loss) $ 39 $ ( 2 )

Net Income $ 91 $ 27 $ 130 $ 25

Net income attributable to noncontrolling interests — — — —

Net Income (Loss) Attributable to Xerox Holdings 39 ( 2 )

Other Comprehensive (Loss) Income, Net (1)

Net Income Attributable to Xerox Holdings 91 27 130 25

Other Comprehensive Income (Loss), Net (1)

Translation adjustments, net 54 25 3 ( 172 )

1 unchanged sentence

Changes in defined benefit plans, net 16 80 71 134

Other Comprehensive Loss, Net Attributable to Xerox Holdings ( 3 ) ( 138 )

Other Comprehensive Income (Loss), Net Attributable to Xerox Holdings 70 103 67 ( 35 )

Comprehensive Income (Loss), Net Attributable to Xerox Holdings $ 161 $ 130 $ 197 $ ( 10 )

_____________

(1) Refer to Note 17 - Other Comprehensive Income (Loss) for gross components of Other comprehensive loss, net, reclassification adjustments out of Accumulated other comprehensive loss and related tax effects.

(1) Refer to Note 18 - Other Comprehensive Income (Loss) for gross components of Other comprehensive income (loss), net, reclassification adjustments out of Accumulated other comprehensive loss and related tax effects.

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

2 unchanged sentences

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in millions, except share data in thousands) March 31,

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

2021 December 31,

44 unchanged sentences

Three Months Ended

June 30, Six Months Ended

(in millions) 2021 2020 2021 2020

Cash Flows from Operating Activities

Net Income (Loss) $ 39 $ ( 2 )

Adjustments required to reconcile Net income (loss) to Cash flows from operating activities

Net Income $ 91 $ 27 $ 130 $ 25

Adjustments required to reconcile Net income to Cash flows from operating activities

Depreciation and amortization 84 88 170 182

6 unchanged sentences

Contributions to defined benefit pension plans ( 34 ) ( 31 ) ( 69 ) ( 64 )

Decrease in accounts receivable and billed portion of finance receivables 92 166

Increase in inventories ( 18 ) ( 126 )

(Increase) decrease in accounts receivable and billed portion of finance receivables ( 55 ) 262 37 428

Decrease (increase) in inventories 22 ( 99 ) 4 ( 225 )

Increase in equipment on operating leases ( 35 ) ( 23 ) ( 63 ) ( 55 )

Decrease in finance receivables 37 93

(Increase) decrease in finance receivables ( 25 ) 97 12 190

Decrease (increase) in other current and long-term assets 48 1 66 ( 15 )

(Decrease) increase in accounts payable ( 31 ) 51

Decrease in accrued compensation ( 36 ) ( 108 )

Decrease in other current and long-term liabilities ( 35 ) ( 38 )

Decrease in accounts payable ( 2 ) ( 210 ) ( 33 ) ( 159 )

Increase (decrease) in accrued compensation 1 ( 21 ) ( 35 ) ( 129 )

Increase (decrease) in other current and long-term liabilities 127 ( 92 ) 92 ( 130 )

Net change in income tax assets and liabilities ( 4 ) 13 2 3

6 unchanged sentences

Acquisitions, net of cash acquired ( 37 ) — ( 37 ) ( 193 )

Other investing, net ( 3 ) 1 ( 3 ) 1

Net cash used in investing activities ( 55 ) ( 18 ) ( 72 ) ( 232 )

13 unchanged sentences

XEROX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) (UNAUDITED)

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Three Months Ended

June 30, Six Months Ended

(in millions) 2021 2020 2021 2020

14 unchanged sentences

Total Costs and Expenses 1,689 1,430 3,344 3,295

Income (Loss) before Income Taxes and Equity Income 55 ( 5 )

Income tax expense (benefit) 14 ( 1 )

Income before Income Taxes and Equity Income 104 35 159 30

Income tax expense 9 8 23 7

Equity in net income of unconsolidated affiliates 1 — 1 2

Net Income (Loss) 41 ( 2 )

Net Income 96 27 137 25

Net income attributable to noncontrolling interests — — — —

Net Income (Loss) Attributable to Xerox $ 41 $ ( 2 )

Net Income Attributable to Xerox $ 96 $ 27 $ 137 $ 25

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

3 unchanged sentences

Three Months Ended

June 30, Six Months Ended

(in millions) 2021 2020 2021 2020

Net Income (Loss) $ 41 $ ( 2 )

Net Income $ 96 $ 27 $ 137 $ 25

Net income attributable to noncontrolling interests — — — —

Net Income (Loss) Attributable to Xerox 41 ( 2 )

Other Comprehensive (Loss) Income, Net (1)

Net Income Attributable to Xerox 96 27 137 25

Other Comprehensive Income (Loss), Net (1)

Translation adjustments, net 54 25 3 ( 172 )

1 unchanged sentence

Changes in defined benefit plans, net 16 80 71 134

Other Comprehensive Loss, Net Attributable to Xerox ( 3 ) ( 138 )

Other Comprehensive Income (Loss), Net Attributable to Xerox 70 103 67 ( 35 )

Comprehensive Income (Loss), Net Attributable to Xerox $ 166 $ 130 $ 204 $ ( 10 )

_____________

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

2 unchanged sentences

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in millions) March 31,

(in millions) June 30,

2021 December 31,

39 unchanged sentences

Three Months Ended

June 30, Six Months Ended

(in millions) 2021 2020 2021 2020

Cash Flows from Operating Activities

Net Income (Loss) $ 41 $ ( 2 )

Adjustments required to reconcile Net income (loss) to Cash flows from operating activities

Net Income $ 96 $ 27 $ 137 $ 25

Adjustments required to reconcile Net income to Cash flows from operating activities

Depreciation and amortization 83 88 168 182

6 unchanged sentences

Contributions to defined benefit pension plans ( 34 ) ( 31 ) ( 69 ) ( 64 )

Decrease in accounts receivable and billed portion of finance receivables 92 166

Increase in inventories ( 18 ) ( 126 )

(Increase) decrease in accounts receivable and billed portion of finance receivables ( 54 ) 262 38 428

Decrease (increase) in inventories 22 ( 99 ) 4 ( 225 )

Increase in equipment on operating leases ( 35 ) ( 23 ) ( 63 ) ( 55 )

Decrease in finance receivables 37 93

(Increase) decrease in finance receivables ( 25 ) 97 12 190

Decrease (increase) in other current and long-term assets 42 1 60 ( 15 )

(Decrease) increase in accounts payable ( 31 ) 51

Decrease in accrued compensation ( 36 ) ( 108 )

Decrease in other current and long-term liabilities ( 36 ) ( 38 )

Decrease in accounts payable ( 2 ) ( 210 ) ( 33 ) ( 159 )

Increase (decrease) in accrued compensation 1 ( 21 ) ( 35 ) ( 129 )

Increase (decrease) in other current and long-term liabilities 128 ( 92 ) 92 ( 130 )

Net change in income tax assets and liabilities ( 4 ) 13 2 3

6 unchanged sentences

Acquisitions, net of cash acquired ( 37 ) — ( 37 ) ( 193 )

Other investing, net — 1 — 1

Net cash used in investing activities ( 52 ) ( 18 ) ( 69 ) ( 232 )

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

As of March 31, 2021, although we did see certain improvement in our financial results as businesses gained confidence in the progress to control the COVID-19 pandemic and resumed investments in new printing technology and services, the pandemic continues to progress and impact our financial results.

As of June 30, 2021 we are seeing improvement in our financial results as regions and countries continue to progress in controlling the COVID-19 pandemic and businesses resume investments in new printing technology and increase their level of printing services as compared to the prior year.

However, the pandemic continues to have varying and divergent impacts across various regions and countries and a high degree of economic uncertainty still remains.

We expect the pandemic's effects will likely continue to impact our financial results over the remainder of the year.

Accordingly, many of our estimates and assumptions continue to require an increased level of judgment and may have to change in the future as events continue to evolve and additional information becomes available.

For convenience and ease of reference, we refer to the financial statement caption “Income (Loss) before Income Taxes and Equity Income” as “pre-tax income (loss)”.

For convenience and ease of reference, we refer to the financial statement caption “Income before Income Taxes and Equity Income” as “pre-tax income”.

Notes to the Condensed Consolidated Financial Statements reflect the activity for both Xerox Holdings and Xerox for all periods presented, unless otherwise noted.

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Based on various forecast models, which we believe reflected the inherent uncertainty of the future, we estimated that the excess of fair value over carrying value ranged between 15 % and 20 %.

During the quarter ended March 31, 2021, although business performance continues to improve, we determined that the continued negative impacts on our current operations resulting from the COVID-19 pandemic as well as a market capitalization that remains less than book value required us to qualitatively assess whether a triggering event had occurred and whether it was more likely than not that our goodwill was impaired as of March 31, 2021.

Based on our interim qualitative assessment as of March 31, 2021, we determined that it was more-likely-than-not that the fair value of the Company was greater than the net book value and that we did not have a “triggering event” requiring a quantitative or Step 1 assessment of goodwill.

Our review of macroeconomic and industry considerations, as well as the Company's financial results for the first quarter 2021 and projections for the full year 2021, were consistent with the expectations and sensitivities assessed as part of our review performed in the fourth

During the six months ended June 30, 2021, although business performance continued to improve, we determined that the continued negative impacts on our current operations resulting from the COVID-19 pandemic, as well as a market capitalization that remains less than book value, required us to qualitatively assess whether a triggering event had occurred and whether it was more likely than not that our Goodwill was impaired as of June 30, 2021.

Based on our interim qualitative assessment as of June 30, 2021, we determined that it was more-likely-than-not that the fair value of the Company was greater than the net book value and that we did not have a “triggering event” requiring a quantitative or Step 1 assessment of Goodwill.

Our review of macroeconomic and industry considerations, as well as the Company's financial results for the first half of 2021 and projections for the full year

Xerox 2021 Form 10-Q 11

quarter 2020.

Further, although our market capitalization remained below our net book value, the Company's market capitalization did improve in the first quarter 2021.

2021, were consistent with the expectations and sensitivities assessed as part of our review performed in the fourth quarter 2020.

Further, although our market capitalization remained below our net book value, the Company's market capitalization remained fairly constant in relation to book value during the second quarter 2021.

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

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These ASUs were effective commencing with our quarter ended March 31, 2020 through December 31, 2022.

There has been no impact to date as a result of ASU 2020-04 or ASU 2021-01 and subsequent amendments on reference rate reform, however we continue to evaluate potential future impacts that may result from the discontinuation of LIBOR or other reference rates as well as the accounting provided in this update on our financial condition, results of operations, and cash flows.

There has been no impact to date as a result of ASU 2020-04 or ASU 2021-01 and subsequent amendments on reference rate reform.

However, we continue to evaluate potential future impacts that may result from the discontinuation of LIBOR or other reference rates as well as the accounting provided in this update on our financial condition, results of operations, and cash flows.

Accounting Standard Updates Adopted in 2021:

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ASU 2020-01 , Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323) and Derivatives and Hedging (Topic 815).

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

We adopted this update effective for our fiscal year beginning January 1, 2021.

• Equity Instruments:

ASU 2021-04 , Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic470-50), Compensation—Stock Compensation(Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) Issuer’s Accounting for Certain Modifications

Xerox 2021 Form 10-Q 12

or Exchanges of Freestanding Equity-Classified Written Call Options).

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

ASU 2021-05 , Leases - Certain Lease Payments with Variable Lease Payments (ASC 842).

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

Note 3 – Revenue

1 unchanged sentence

Three Months Ended

June 30, Six Months Ended

2021 2020 2021 2020

Primary geographical markets (1) :

8 unchanged sentences

Maintenance agreements (2)

448 366 883 895

Service arrangements (3)

508 460 997 1,026

Rental and other 111 123 240 264

3 unchanged sentences

Direct equipment lease (4)

$ 189 $ 111 $ 336 $ 237

Distributors & resellers (5)

289 136 543 359

Customer direct 192 213 393 429

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

Our contract liabilities, which represent billings in excess of revenue recognized, are primarily related to advanced billings for maintenance and other services to be performed and were approximately $ 126 and $ 130 at March 31, 2021 and December 31, 2020, respectively.

The majority of the balance at March 31, 2021 is expected to be amortized to revenue over approximately the next 30 months.

Our contract liabilities, which represent billings in excess of revenue recognized, are primarily related to advanced billings for maintenance and other services to be performed and were approximately $ 129 and $ 130 at June 30, 2021 and December 31, 2020, respectively.

The majority of the balance at June 30, 2021 is expected to be amortized to revenue over approximately the next 30 months.

Contract Costs:

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We pay commensurate sales commissions upon customer renewals, therefore our amortization period is aligned to our initial contract term.

Xerox 2021 Form 10-Q 13

Incremental direct costs are as follows:

Three Months Ended

June 30, Six Months Ended

2021 2020 2021 2020

Incremental direct costs of obtaining a contract $ 17 $ 13 $ 30 $ 28

Amortization of incremental direct costs 18 20 37 41

Xerox 2021 Form 10-Q 13

The balance of deferred incremental direct costs net of accumulated amortization at March 31, 2021 and December 31, 2020 was $ 140 and $ 145 , respectively.

The balance of deferred incremental direct costs net of accumulated amortization at June 30, 2021 and December 31, 2020 was $ 139 and $ 145 , respectively.

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

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

As of March 31, 2021 and December 31, 2020 amounts deferred associated with contract fulfillment costs and inducements were $ 17 and $ 13 , respectively.

The related amortization was $ 1 and $ 1 for the three months ended March 31, 2021 and 2020, respectively.

As of June 30, 2021 and December 31, 2020 amounts deferred associated with contract fulfillment costs and inducements were $ 16 and $ 13 , respectively.

The related amortization was $ 2 and $ 1 for the three months ended June 30, 2021 and 2020, respectively, and $ 3 and $ 2 for the six months ended June 30, 2021 and 2020, respectively.

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

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Three Months Ended

Location in Statements of Income (Loss) 2021 2020

June 30, Six Months Ended

Location in Statements of Income 2021 2020 2021 2020

Revenue from sales type leases Sales $ 189 $ 111 $ 336 $ 237

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Total Lease income $ 319 $ 260 $ 596 $ 553

Profit at lease commencement on sales type leases was estimated to be $ 56 and $ 43 for the three months ended March 31, 2021 and 2020, respectively.

Profit at lease commencement on sales type leases was estimated to be $ 57 and $ 42 for the three months ended June 30, 2021 and 2020, respectively, and $ 101 and $ 86 for the six months ended June 30, 2021 and 2020, respectively.

Xerox 2021 Form 10-Q 14

Note 5 – Acquisitions and Investments

In 2021, Xerox continued its strategy of focusing on further penetrating the small-to-medium sized business (SMB) market through acquisitions of local area resellers and partners (including multi-brand dealers).

During the second quarter of 2021, business acquisitions associated with this initiative totaled $ 37 , net of cash acquired, and included an office equipment dealer in Canada for approximately $ 30 and a document solutions provider in the U.S.

for approximately $ 7 .

The operating results of these acquisitions are not material to our financial statements and are included within our results from the acquisition date.

The purchase prices were all cash for 100 % ownership of the acquired companies and were primarily allocated to Intangible assets, net (approximately $ 21 ) and Goodwill (approximately $ 18 ), with the remainder to tangible net assets.

The allocations are based on preliminary management estimates, which continue to be reviewed, and are expected to be finalized by the end of 2021 and may include input and support from third-party valuations.

Any adjustments to the preliminary allocations are not expected to be material.

Joint Venture Formation

In May 2021, Xerox and the Victorian Government (AU) (VicGov) announced that they have partnered to launch Eloque, a venture to commercialize new technology that will remotely monitor the structural health of critical infrastructure assets, such as road and railway bridges.

Under the terms of the agreement, Xerox contributed approximately $ 5 in cash, along with technology and intellectual property for a controlling interest in the entity, whereas VicGov contributed approximately $ 5 in cash, along with technology and intellectual property for a noncontrolling interest in the entity.

As a result of Xerox’s controlling interest in the newly formed entity, beginning with the second quarter 2021, Xerox consolidated the new entity and the VicGov investment was reported as a noncontrolling interest.

The revenues and expenses of the new entity post formation did not materially impact the Company’s reported results for the three months ended June 30, 2021.

Note 6 – Supplementary Financial Information

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(1) Represents collections on finance receivables pledged for secured borrowings that will be remitted to lenders in the following month.

Restricted cash primarily relates to cash collections on finance receivables that were pledged for secured borrowings as well as escrow cash deposits made in Brazil associated with ongoing litigation.

Restricted cash primarily relates to escrow cash deposits made in Brazil associated with ongoing litigation as well as cash collections on finance receivables that were pledged for secured borrowings.

As more fully discussed in Note 20 - Contingencies and Litigation, various litigation matters in Brazil require us to make cash deposits to escrow as a condition of continuing the litigation.

5 unchanged sentences

Total Restricted cash $ 79 $ 66

Xerox 2021 Form 10-Q 15

Supplemental Cash Flow Information

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Three Months Ended

June 30, Six Months Ended

2021 2020 2021 2020

Provision for receivables $ 4 $ 13 $ 15 $ 87

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_____________

(1) Amortization of acquired intangible assets of Xerox is $ 14 for the three months ended March 31, 2021.

(1) Amortization of acquired intangible assets of Xerox was $ 13 and $ 27 for the three and six months ended June 30, 2021, respectively.

(2) Amortization of customer contract costs is reported in Decrease (increase) in other current and long-term assets in the Condensed Consolidated Statements of Cash Flows.

Refer to Note 3 - Revenue - Contract Costs for additional information.

Fuji Xerox Technology Agreement (TA)

As previously disclosed, our TA with Fuji Xerox (now known as FUJIFILM Business Innovation Corp.) expired on March 31, 2021.

The TA included a provision that allowed Fuji Xerox continued use of the Xerox brand trademark for two years after the date of termination of the TA as it transitions to a new brand in exchange for an upfront prepaid fixed royalty of $ 100 .

Fuji Xerox elected to continue its use of the Xerox brand trademark over the next two years and, therefore, made the upfront payment due under the TA of $ 100 in April 2021, which is included in Operating cash flows for the six month period ended June 30, 2021.

We expect to recognize the revenue associated with this extended brand license ratably over the two year transition period.

Accordingly, any potential entry by Xerox for Xerographic products into the Fuji Xerox territory under the Xerox brand will be deferred to at least April 1, 2023.

The product supply agreements with Fuji Xerox will continue to be effective despite the termination of the TA, and Fuji Xerox and Xerox will continue to operate as each other’s product supplier under existing or new purchase/supply agreements.

Xerox 2021 Form 10-Q 16

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Balance at March 31 st

Provision 1 9

Charge-offs ( 2 ) ( 8 )

Recoveries and other (1)

Balance at June 30 th

_____________

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The allowance for uncollectible accounts receivable is determined based on an assessment of past collection experience as well as consideration of current and future economic conditions and changes in our customer collection trends.

Based on that assessment the allowance for doubtful accounts as a percent of gross accounts receivable was 8.0 % at March 31, 2021 and 7.2 % at December 31, 2020.

The allowance for doubtful accounts as a percent of gross accounts receivable remain at an elevated level as compared to historical levels primarily as a result of the macroeconomic and market disruption caused by COVID-19.

Based on that assessment the allowance for doubtful accounts as a percent of gross accounts receivable was 7.4 % at June 30, 2021 and 7.2 % at December 31, 2020.

The allowance for doubtful accounts as a percent of gross accounts receivable remains at an elevated level as compared to historical levels primarily as a result of the macroeconomic and market disruption caused by COVID-19.

Accounts Receivable Sales Arrangements

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

Of the accounts receivable sold and derecognized from our balance sheet, $ 93 and $ 136 remained uncollected as of March 31, 2021 and December 31, 2020, respectively.

Of the accounts receivable sold and derecognized from our balance sheet, $ 107 and $ 136 remained uncollected as of June 30, 2021 and December 31, 2020, respectively.

Accounts receivable sales activity was as follows:

Three Months Ended

June 30, Six Months Ended

2021 2020 2021 2020

Accounts receivable sales (1)

$ 125 $ 14 $ 232 $ 67

(1) Losses on sales were not material.

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Customer credit limits are based upon an initial evaluation of the customer's credit quality and we adjust that limit accordingly based upon ongoing credit assessments of the customer, including payment history and changes in credit quality.

The allowance for credit losses is determined principally based on an assessment of origination year and past collection experience as well as consideration of current and future economic conditions and changes in our customer collection trends.

Based on that assessment the allowance for doubtful credit losses as a percentage of gross finance receivables (net of unearned income) was 4.2 % at March 31, 2021 and 4.0 % at December 31, 2020.

The allowance for credit losses is principally determined based on an assessment of origination year and past collection experience as well as consideration of current and future economic conditions and changes in our customer collection trends.

Based on that assessment, the allowance for doubtful credit losses as a percentage of gross finance receivables (net of unearned income) was 4.1 % at June 30, 2021 and 4.0 % at December 31, 2020.

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

Our assessment also included a review of current portfolio credit metrics and the level of write-offs incurred over the past year of the COVID-19 pandemic.

The allowance for doubtful accounts and provision for credit losses represents an estimate of the losses expected to be incurred from the Company's finance receivable portfolio.

The allowance for doubtful accounts and provision for credit losses represent estimates of the losses expected to be incurred from the Company's finance receivable portfolio.

The level of the allowance is determined on a collective basis by applying projected loss rates to our different portfolios by country, which represent our portfolio segments.

This is the level at which we develop and document our methodology to determine the allowance for credit losses.

This projected loss rates are primarily based upon historical loss experience adjusted for judgments about the probable effects of relevant observable data including current and future economic conditions as well as delinquency trends, resolution rates, the aging of receivables, credit quality indicators and the financial health of specific customer classes or groups.

These projected loss rates are primarily based upon historical loss experience adjusted for judgments about the probable effects of relevant observable data including current and future economic conditions as well as delinquency trends, resolution rates, the aging of receivables, credit quality indicators and the financial health of specific customer classes or groups.

The allowance for doubtful finance receivables is inherently more difficult to estimate than the allowance for trade accounts receivable because the underlying lease portfolio has an average maturity, at any time, of approximately two to three years and contains past due billed amounts, as well as unbilled amounts.

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Our policy and methodology used to establish our allowance for doubtful accounts has been consistently applied over all periods presented.

Since our allowance for doubtful finance receivables is effectively determined by geography, the risk characteristics in our finance receivable portfolio segments will generally be consistent with the risk factors associated with the economies of the countries/regions included in those geographies.

Our allowance for doubtful finance receivables is effectively determined by geography, the risk characteristics in our finance receivable portfolio segments will generally be consistent with the risk factors associated with the economies of the countries/regions included in those geographies.

Since EMEA is comprised of various countries and regional economies, the risk profile within that portfolio segment is somewhat more diversified due to the varying economic conditions among and within the countries.

The first quarter 2020 reflected an incremental $ 60 provision to cover estimated write-offs on our finance receivable portfolio from the economic disruption caused by the COVID-19 pandemic.

Subsequent to the first quarter of 2020 provision and through the first quarter of 2021, actual write-offs incurred to date have lagged expectations but

The bad debt provision of $ 2 for the second quarter 2021 included a reserve reduction of approximately $ 6 reflecting improvements in the macroeconomic environment as well as lower write-offs.

Actual write-offs incurred to date have lagged expectations but remain in line with our original projections over the life of the lease portfolio and

Xerox 2021 Form 10-Q 18

remain in line with our original projections over the life of the lease portfolio and consistent with future expectations regarding our estimated impacts from the COVID-19 pandemic.

Accordingly, our total reserve as a percent of receivables has remained fairly consistent subsequent to the first quarter 2020 charge at around 4 %.

are consistent with future expectations regarding our estimated impacts from the COVID-19 pandemic.

Despite improvement in the global economy, economies continue to recover from the impacts of the COVID-19 pandemic including the cessation of government support as well as labor, interest rate and inflation risks and the potential for higher taxes.

As a result of these uncertainties, we continue to consider various adverse macroeconomic scenarios in our models.

Accordingly, our reserves as a percent of receivables have remained fairly consistent subsequent to the first quarter 2020 when we recorded a charge of approximately $ 60 to initially record expected losses from the COVID-19 pandemic.

We continue to monitor developments regarding the pandemic, including business reopenings and mitigating government support actions as well as future economic conditions, and as a result, our reserves may need to be updated in future periods.

The allowance for doubtful accounts as well as the related investment in finance receivables were as follows:

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Balance at March 31, 2021 $ 78 $ 16 $ 41 $ 135

Finance receivables as of March 31, 2021 collectively evaluated for impairment (3)

Provision 6 ( 1 ) ( 3 ) 2

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

Recoveries and other (3)

Balance at June 30, 2021 $ 81 $ 15 $ 37 $ 133

Finance receivables as of June 30, 2021 collectively evaluated for impairment (3)

$ 1,845 $ 283 $ 1,122 $ 3,250

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Balance at March 31, 2020 $ 91 $ 15 $ 40 $ 146

Finance receivables as of March 31, 2020 collectively evaluated for impairment (3)

Provision 3 1 — 4

Charge-offs ( 5 ) ( 1 ) ( 2 ) ( 8 )

Recoveries and other (3)

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

Finance receivables as of June 30, 2020 collectively evaluated for impairment (3)

$ 1,824 $ 289 $ 1,100 $ 3,213

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

(3) Total Finance receivables exclude the allowance for credit losses of $ 135 and $ 146 at March 31, 2021 and 2020, respectively.

(3) Total Finance receivables exclude the allowance for credit losses of $ 133 and $ 143 at June 30, 2021 and 2020, respectively.

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

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Indirect also includes lease financing to end-user customers who purchased equipment we sold to distributors or resellers.

Xerox 2021 Form 10-Q 19

We evaluate our customers based on the following credit quality indicators:

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Credit quality indicators are updated at least annually, or more frequently to the extent required by economic conditions, and the credit quality of any given customer can change during the life of the portfolio.

Xerox 2021 Form 10-Q 18

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

March 31, 2021

June 30, 2021

2021 2020 2019 2018 2017 Prior Total

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The aging of our billed finance receivables is as follows:

March 31, 2021

June 30, 2021

Current 31-90

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

As of March 31, 2021 the SPE holds $ 248 of total Finance receivables, net, which are included in our Condensed Consolidated Balance Sheet as collateral for the secured loan agreement.

As of June 30, 2021 the SPE holds $ 214 of total Finance receivables, net, which are included in our Condensed Consolidated Balance Sheet as collateral for the secured loan agreement.

In December 2020, we sold $ 610 of U.S.

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

As of March 31, 2021 the SPE holds $ 543 of total Finance receivables, net, which are included in our Condensed Consolidated Balance Sheet as collateral for the secured loan agreement.

As of June 30, 2021 the SPE holds $ 485 of total Finance receivables, net, which are included in our Condensed Consolidated Balance Sheet as collateral for the secured loan agreement.

Refer to Note 12 - Debt, for additional information related to this arrangement including the related secured loan agreement.

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Equipment on operating leases, net $ 271 $ 296

Total contingent rentals on operating leases, consisting principally of usage charges in excess of minimum contracted amounts, were $ 15 and $ 22 for the three months ended March 31, 2021 and 2020, respectively.

Xerox 2021 Form 10-Q 22

Total contingent rentals on operating leases, consisting principally of usage charges in excess of minimum contracted amounts, were $ 16 and $ 14 for the three months ended June 30, 2021 and 2020, respectively and $ 31 and $ 36 for the six months ended June 30, 2021 and 2020, respectively.

Note 10 – Lessee

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

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

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

The components of lease expense are as follows:

Three Months Ended

June 30, Six Months Ended

2021 2020 2021 2020

Operating lease expense $ 27 $ 28 $ 54 $ 56

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(1) Variable lease expense is related to our leased real estate for offices and warehouses and primarily includes labor and operational costs as well as taxes and insurance.

As of March 31, 2021, we have one additional real estate operating lease that has not yet commenced.

This operating lease has an obligation and corresponding right-of-use (ROU) asset of $ 8 and commenced in April 2021 with a lease term of approximately 6 years and a one -time option to terminate the lease after 3 years.

Operating lease ROU assets, net and operating lease liabilities were reported in the Condensed Consolidated Balance Sheets as follows:

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We engage in restructuring actions through Project Own It as well as other transformation efforts in order to reduce our cost structure and realign it to the changing nature of our business.

As part of our efforts to reduce costs, our restructuring actions may also include the off-shoring or outsourcing of certain operations, services and other functions, as well as reducing our real estate footprint.

During the three months ended March 31, 2021, we recorded net restructuring and asset impairment charges of $ 21 , which included $ 14 of severance costs related to headcount reductions of approximately 350 employees worldwide, $ 1 of other contractual termination costs and $ 10 of asset impairment charges.

As part of our efforts to reduce costs, our restructuring actions may also include the off-shoring and/or outsourcing of certain operations, services and other functions, as well as reducing our real estate footprint.

During the six months ended June 30, 2021, we recorded net restructuring and asset impairment charges of $ 25 , which included $ 20 of severance costs related to headcount reductions of approximately 400 employees worldwide, $ 2 of other contractual termination costs and $ 12 of asset impairment charges.

These costs were partially offset by $ 9 of net reversals, primarily resulting from changes in estimated reserves from prior period initiatives.

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Balance at March 31, 2021 $ 59 $ 4 $ — $ 63

Provision 6 1 2 9

Reversals ( 3 ) ( 1 ) ( 1 ) ( 5 )

Net current period charges (1)

Charges against reserve and currency ( 20 ) ( 1 ) ( 1 ) ( 22 )

Balance at June 30, 2021 $ 42 $ 3 $ — $ 45

_____________ _

(1) Represents net amount recognized within the Condensed Consolidated Statements of Income (Loss) for the period shown for restructuring and asset impairment charges.

(1) Represents net amount recognized within the Condensed Consolidated Statements of Income for the period shown for restructuring and asset impairment charges.

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

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

The charge includes the accelerated write-off of $ 1 for leased ROU assets and $ 9 for owned assets upon exit from the facilities, net of any potential sublease income and other recoveries, including potential sales, in the first quarter of 2021.

The charges include the accelerated write-off of $ 2 for leased ROU assets and $ 9 for owned assets upon exit from the facilities, net of any potential sublease income and other recoveries, including potential sales.

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

Three Months Ended

June 30, Six Months Ended

2021 2020 2021 2020

Charges against reserve and currency $ ( 22 ) $ ( 13 ) $ ( 62 ) $ ( 48 )

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Three Months Ended

June 30, Six Months Ended

2021 2020 2021 2020

Retention related severance/bonuses (1)

$ 3 $ 4 $ ( 1 ) $ 11

Contractual severance costs 3 — 3 4

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

The credit of $ 4 in the first quarter 2021 reflects a change in estimate.

The credit for the six months ended June 30, 2021 reflects a change in estimate.

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

Cash paid for restructuring related costs were approximately $ 3 and $ 0 for the three months ended March 31, 2021 and 2020, respectively, while the reserve was $ 13 and $ 21 at March 31, 2021 and December 31, 2020.

The balance at March 31, 2021 is expected to be paid over the next twelve months.

Cash paid for restructuring related costs were approximately $ 3 and $ 8 for the three months ended June 30, 2021 and 2020, respectively, and $ 6 and $ 8 for the six months ended June 30, 2021 and 2020, respectively.

The restructuring related costs reserve was $ 18 and $ 21 at June 30, 2021 and December 31, 2020, respectively.

The balance at June 30, 2021 is expected to be paid over the next twelve months.

Xerox 2021 Form 10-Q 24

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In February 2021, Xerox Holdings Corporation and Xerox Corporation entered into an Intercompany Loan agreement for the net proceeds of $ 1,494 contributed by Xerox Holdings Corporation to Xerox Corporation in 2020.

The intercompany loan, which did not involve the exchange of cash in the current period, resulted in the capitalization of the amount as Related Party Debt for Xerox Corporation as of March 31, 2021.

The intercompany loan, which did not involve the exchange of cash in the current period, resulted in capitalization of the amount as Related Party Debt for Xerox Corporation.

The amount was originally recorded as Additional paid-in capital in 2020 when the cash was contributed by Xerox Holdings Corporation.

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The intercompany interest expense also includes a ratable amount to reimburse Xerox Holdings Corporation for its debt issuance costs and premium.

At March 31, 2021, the balance of the Intercompany Loan reported in Xerox Corporation’s Condensed Consolidated Balance Sheet was $ 1,494 , which is net of related debt issuance costs, and the intercompany interest payable was $ 10 .

Xerox Corporation’s interest expense for the three months ended March 31, 2021 included $ 20 of interest expense associated with this Intercompany Loan.

At June 30, 2021, the balance of the Intercompany Loan reported in Xerox Corporation’s Condensed Consolidated Balance Sheet was $ 1,494 , which is net of related debt issuance costs, and the intercompany interest payable was $ 30 .

Xerox Corporation’s interest expense for the three and six months ended June 30, 2021 included $ 19 and $ 39 , respectively, of interest expense associated with this Intercompany Loan.

Secured Borrowings and Collateral

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

The debt has a variable interest rate based on LIBOR plus a spread (current rate of 1.69 % at March 31, 2021).

The debt has a variable interest rate based on LIBOR plus a spread (current rate of 1.67 % at June 30, 2021).

In December 2020, we entered into a second secured loan agreement with a financial institution where we sold $ 610 of U.S.

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The purchase by the SPE was funded through an amortizing secured loan to the SPE from the financial institution of $ 500 .

The debt has a variable interest rate based on the financial institution's cost of funds plus a spread (current rate of 1.73 % at March 31, 2021).

The debt has a variable interest rate based on the financial institution's cost of funds plus a spread (current rate of 1.68 % at June 30, 2021).

Below are the assets and liabilities held by the consolidated SPEs, which are included in our Condensed Consolidated Balance Sheets.

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Three Months Ended

June 30, Six Months Ended

2021 2020 2021 2020

Interest expense (1)(2)

$ 52 $ 48 $ 104 $ 99

Interest income (3)

57 59 113 126

(1) Includes Cost of financing as well as non-financing interest expense that is included in Other expenses, net in the Condensed Consolidated Statements of Income (Loss).

(2) Interest expense for the three month ended March 31, 2021 for Xerox Corporation includes $ 20 of intercompany interest expense for the Xerox Holdings Corporation / Xerox Corporation Intercompany Loan.

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

(1) Includes Cost of financing as well as non-financing interest expense that is included in Other expenses, net in the Condensed Consolidated Statements of Income.

(2) Interest expense of Xerox Corporation for the three and six months ended June 30, 2021 includes $ 19 and $ 39 , respectively, of intercompany interest expense for the Xerox Holdings Corporation / Xerox Corporation Intercompany Loan.

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

Note 13 – Financial Instruments

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These derivatives may be designated as fair value hedges or cash flow hedges depending on the nature of the risk being hedged.

At March 31, 2021 there were no material interest rate derivative contracts outstanding.

At June 30, 2021, there were no interest rate derivative contracts outstanding.

Foreign Exchange Risk Management

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• Forecasted purchases and sales in foreign currency

At March 31, 2021 and December 31, 2020, we had outstanding forward exchange and purchased option contracts with gross notional values of $ 968 and $ 1,161 respectively, with terms of less than 12 months.

Approximately 78 % of the contracts at March 31, 2021 mature within three months, 11 % mature in three to six months and 11 % in six to twelve months.

At June 30, 2021 and December 31, 2020, we had outstanding forward exchange and purchased option contracts with gross notional values of $ 1,073 and $ 1,161 respectively, with terms of less than 12 months.

Approximately 81 % of the contracts at June 30, 2021 mature within three months, 10 % mature in three to six months and 9 % in six to twelve months.

The decrease in hedge position from December 31, 2020 is primarily for GBP and YEN exposures due to lower requirements.

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

There have not been any material changes in our hedging strategy.

Foreign Currency Cash Flow Hedges

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

The net (liability) asset fair value of these contracts were $( 7 ) and $ 2 as of March 31, 2021 and December 31, 2020, respectively.

The net (liability) asset fair value of these contracts were $( 4 ) and $ 2 as of June 30, 2021 and December 31, 2020, respectively.

Xerox 2021 Form 10-Q 26

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

Designation of Derivatives Balance Sheet Location March 31,

Designation of Derivatives Balance Sheet Location June 30,

2021 December 31,

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Three Months Ended

June 30, Six Months Ended

Gain (Loss) on Derivative Instruments 2021 2020 2021 2020

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Derivative (loss) gain recognized in OCI (effective portion) $ ( 2 ) $ ( 3 ) $ ( 12 ) $ 4

Derivative loss reclassified from AOCL to income - Cost of sales (effective portion) ( 1 ) ( 1 )

During the three months ended March 31, 2021 and 2020, no amount of ineffectiveness was recorded in the Condensed Consolidated Statements of Income (Loss) for these designated cash flow hedges and all components of each derivative’s gain or (loss) were included in the assessment of hedge effectiveness.

Derivative (loss) gain reclassified from AOCL to income - Cost of sales (effective portion) ( 2 ) 2 ( 3 ) 1

During the three and six months ended June 30, 2021 and 2020, no amount of ineffectiveness was recorded in the Condensed Consolidated Statements of Income for these designated cash flow hedges and all components of each derivative’s gain or (loss) were included in the assessment of hedge effectiveness.

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

As of March 31, 2021, a net after-tax loss of $ 5 was recorded in Accumulated other comprehensive loss associated with our cash flow hedging activity.

As of June 30, 2021, a net after-tax loss of $ 5 was recorded in Accumulated other comprehensive loss associated with our cash flow hedging activity.

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

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

June 30, Six Months Ended

2021 2020 2021 2020

Foreign exchange contracts – forwards Other expense – Currency (losses) gains, net $ ( 4 ) $ 3 $ ( 22 ) $ 17

For the three months ended March 31, 2021 and 2020 currency losses, net were $ 2 and $ 2 , respectively.

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

Xerox 2021 Form 10-Q 27

Currency losses, net were $ 1 and $ 2 for the three months ended June 30, 2021 and 2020, respectively and $ 3 and $ 4 for six months ended June 30, 2021 and 2020, respectively.

Note 14 – Fair Value of Financial Assets and Liabilities

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

March 31, 2021 December 31, 2020

June 30, 2021 December 31, 2020

Cash and cash equivalents $ 2,124 $ 2,124 $ 2,625 $ 2,625

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Long-term debt $ 3,597 $ 3,778 $ 4,050 $ 4,266

____________ _

(1) Represents subsidiaries of Xerox Corporation

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

Three Months Ended March 31,

Three Months Ended June 30,

Pension Benefits

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Expected return on plan assets ( 27 ) ( 26 ) ( 52 ) ( 46 ) — —

Recognized net actuarial loss 5 7 15 14 — —

Recognized net actuarial loss (gain) 4 7 14 14 — ( 1 )

Amortization of prior service credit ( 1 ) ( 1 ) — — ( 16 ) ( 19 )

Recognized settlement loss 13 13 — — — —

Defined benefit plans 9 14 ( 11 ) ( 1 ) ( 14 ) ( 16 )

Defined contribution plans — 6 5 5 n/a n/a

Net Periodic Benefit Cost (Credit) 9 20 ( 6 ) 4 ( 14 ) ( 16 )

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

Net actuarial (gain) loss (1)

( 25 ) ( 92 ) — — 2 ( 6 )

Amortization of net actuarial (loss) gain ( 17 ) ( 20 ) ( 14 ) ( 14 ) — 1

Amortization of net prior service credit 1 1 — — 16 19

Total Recognized in Other Comprehensive Income (Loss) (2)

( 41 ) ( 111 ) ( 14 ) ( 14 ) 18 14

Total Recognized in Net Periodic Benefit (Credit) Cost and Other Comprehensive Income (Loss) $ ( 32 ) $ ( 91 ) $ ( 20 ) $ ( 10 ) $ 4 $ ( 2 )

Six Months Ended June 30,

Pension Benefits

Plans Non-U.S.

Plans Retiree Health

Components of Net Periodic Benefit Costs:

2021 2020 2021 2020 2021 2020

Service cost $ 1 $ 1 $ 10 $ 10 $ 1 $ 1

Interest cost 37 44 44 55 4 6

Expected return on plan assets ( 55 ) ( 52 ) ( 104 ) ( 93 ) — —

Recognized net actuarial loss (gain) 9 14 29 28 — ( 1 )

Amortization of prior service credit ( 1 ) ( 1 ) — — ( 33 ) ( 38 )

Recognized settlement loss 28 32 — — — —

Recognized curtailment gain — — — ( 1 ) — —

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( 69 ) ( 80 ) 1 — 2 ( 6 )

Amortization of net actuarial loss ( 20 ) ( 26 ) ( 15 ) ( 14 ) — —

Amortization of net actuarial (loss) gain ( 37 ) ( 46 ) ( 29 ) ( 28 ) — 1

Amortization of prior service credit 1 1 — — 33 38

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(1) The net actuarial (gain) loss for U.S.

Plans primarily reflects the remeasurement of our primary U.S.

pension plans as a result of the payment of periodic settlements.

Plans primarily reflects (i) the remeasurement of our primary U.S.

pension plans as a result of the payment of periodic settlements and (ii) adjustments for the actuarial valuation results based on the January 1st plan census data.

(2) Amounts represent the pre-tax effect included within Other Comprehensive Income (Loss).

Refer to Note 18 - Other Comprehensive Income (Loss) for related tax effects and the after-tax amounts.

Xerox 2021 Form 10-Q 29

Contributions

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

Three Months Ended

March 31, Year Ended December 31,

Six Months Ended

June 30, Year Ended December 31,

2021 2020 Estimated 2021

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Defined Contribution Plans

In the first quarter 2021, the Company temporarily suspended and will not make its full year 2021 employer match/contribution for its U.S.

In the first quarter 2021, the Company suspended and will not make its full year 2021 employer match/contribution for its U.S.

based 401(k) saving plans for salaried employees.

The suspension is expected to result in savings of approximately $ 20 for the year ending December 31, 2021.

Xerox 2021 Form 10-Q 29

Note 16 – Shareholders’ Equity of Xerox Holdings

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Treasury Stock Retained

Xerox Holdings Shareholders’ Equity Non-controlling Interests Total

Balance at March 31, 2021 $ 199 $ 2,456 $ ( 162 ) $ 6,267 $ ( 3,335 ) $ 5,425 $ 4 $ 5,429

Comprehensive income, net — — — 91 70 161 — 161

Cash dividends declared - common (3)

— — — ( 47 ) — ( 47 ) — ( 47 )

Cash dividends declared - preferred (4)

— — — ( 3 ) — ( 3 ) — ( 3 )

Stock option and incentive plans, net — 5 — — — 5 — 5

Payments to acquire treasury stock, including fees — — ( 251 ) — — ( 251 ) — ( 251 )

Cancellation of treasury stock ( 10 ) ( 244 ) 254 — — — — —

Investment from noncontrolling interests (5)

— 1 — — — 1 4 5

Other — ( 4 ) — — — ( 4 ) — ( 4 )

Balance at June 30, 2021

$ 189 $ 2,214 $ ( 159 ) $ 6,308 $ ( 3,265 ) $ 5,287 $ 8 $ 5,295

Treasury Stock Retained

Xerox Holdings Shareholders’ Equity Non- controlling Interests Total

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

Comprehensive income, net — — — 27 103 130 — 130

Cash dividends declared - common (3)

— — — ( 53 ) — ( 53 ) — ( 53 )

Cash dividends declared - preferred (4)

— — — ( 3 ) — ( 3 ) — ( 3 )

Stock option and incentive plans, net — 10 — — — 10 — 10

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

Balance at June 30, 2020

$ 213 $ 2,722 $ — $ 6,223 $ ( 3,681 ) $ 5,477 $ 4 $ 5,481

Xerox 2021 Form 10-Q 30

Treasury Stock Retained

Xerox Holdings

2 unchanged sentences

Balance at December 31, 2020 $ 198 $ 2,445 $ — $ 6,281 $ ( 3,332 ) $ 5,592 $ 4 $ 5,596

Comprehensive income (loss), net — — — 39 ( 3 ) 36 — 36

Comprehensive income, net — — — 130 67 197 — 197

Cash dividends declared - common (3)

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Payments to acquire treasury stock, including fees — — ( 413 ) — — ( 413 ) — ( 413 )

Balance at March 31, 2021 $ 199 $ 2,456 $ ( 162 ) $ 6,267 $ ( 3,335 ) $ 5,425 $ 4 $ 5,429

Cancellation of treasury stock ( 10 ) ( 244 ) 254 — — — — —

Investment from noncontrolling interests (5)

— 1 — — — 1 4 5

Other — ( 4 ) — — — ( 4 ) — ( 4 )

Balance at June 30, 2021

$ 189 $ 2,214 $ ( 159 ) $ 6,308 $ ( 3,265 ) $ 5,287 $ 8 $ 5,295

Treasury Stock Retained

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

Comprehensive loss, net — — — ( 2 ) ( 138 ) ( 140 ) — ( 140 )

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

Cash dividends declared - common (3)

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

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

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

Balance at June 30, 2020

$ 213 $ 2,722 $ — $ 6,223 $ ( 3,681 ) $ 5,477 $ 4 $ 5,481

_____________

(1) Common Stock has a par value of $ 1 per share.

(2) Refer to Note 18 - Other Comprehensive Income (Loss) for the components of AOCL.

(3) Cash dividends declared on common stock for the three months ended March 31, 2021 and 2020 were $ 0.25 per share, respectively.

(4) Cash dividends declared on preferred stock for the three months ended March 31, 2021 and 2020 were $ 20.00 per share, respectively.

(3) Cash dividends declared on common stock for the three and six months ended June 30, 2021 and 2020 were $ 0.25 per share, respectively, and $ 0.50 per share, respectively.

(4) Cash dividends declared on preferred stock for the three and six months ended June 30, 2021 and 2020 were $ 20.00 per share, respectively, and $ 40.00 per share, respectively.

(5) Refer to Note 5 - Acquisitions and Investments for additional information regarding this noncontrolling investment.

Treasury Stock

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Cancellations ( 10,426 ) ( 254 )

Balance at March 31, 2021 6,704 $ 162

Balance at June 30, 2021

_____________

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The shareholder's equity information presented below reflects the consolidated activity of Xerox.

Additional Paid-in Capital Retained Earnings AOCL (1)

Xerox Shareholder's Equity Non-

Balance at March 31, 2021 $ 3,351 $ 5,674 $ ( 3,335 ) $ 5,690 $ 4 $ 5,694

Comprehensive income, net — 96 70 166 — 166

Dividends declared to parent — ( 358 ) — ( 358 ) — ( 358 )

Transfers from parent 52 — — 52 — 52

Investment from noncontrolling interests (2)

Balance at June 30, 2021

$ 3,404 $ 5,412 $ ( 3,265 ) $ 5,551 $ 8 $ 5,559

Additional Paid-in Capital Retained Earnings AOCL (1)

Xerox Shareholder's Equity Non- controlling Interests Total

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

Comprehensive income, net — 27 103 130 — 130

Dividends declared to parent — ( 57 ) — ( 57 ) — ( 57 )

Transfers from parent 11 — — 11 — 11

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

Balance at June 30, 2020

$ 3,515 $ 5,925 $ ( 3,681 ) $ 5,759 $ 4 $ 5,763

Shareholder's

Equity Non-controlling

Balance at December 31, 2020 $ 4,879 $ 5,834 $ ( 3,332 ) $ 7,381 $ 4 $ 7,385

Comprehensive income (loss), net — 41 ( 3 ) 38 — 38

Comprehensive income, net — 137 67 204 — 204

Dividends declared to parent — ( 559 ) — ( 559 ) — ( 559 )

1 unchanged sentence

( 1,494 ) — — ( 1,494 ) — ( 1,494 )

Transfers to parent ( 34 ) — — ( 34 ) — ( 34 )

Balance at March 31, 2021 $ 3,351 $ 5,674 $ ( 3,335 ) $ 5,690 $ 4 $ 5,694

Transfers from parent 18 — — 18 — 18

Investment from noncontrolling interests (2)

Balance at June 30, 2021

$ 3,404 $ 5,412 $ ( 3,265 ) $ 5,551 $ 8 $ 5,559

Shareholder's

Equity Non-controlling

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

Comprehensive loss, net — ( 2 ) ( 138 ) ( 140 ) — ( 140 )

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

Dividends declared to parent — ( 347 ) — ( 347 ) — ( 347 )

Transfers from parent 249 — — 249 — 249

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

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

Balance at June 30, 2020

$ 3,515 $ 5,925 $ ( 3,681 ) $ 5,759 $ 4 $ 5,763

_____________

(1) Refer to Note 18 - Other Comprehensive Income (Loss) for the components of AOCL.

(2) Refer to Note 5 - Acquisitions and Investments for additional information regarding this noncontrolling investment.

(3) Refer to Note 12 - Debt for information regarding capitalization of balance to Intercompany Loan with Xerox Holdings Corporation.

3 unchanged sentences

Three Months Ended

Pre-tax Net of Tax Pre-tax Net of Tax

Translation Adjustments Losses $ ( 52 ) $ ( 51 ) $ ( 204 ) $ ( 197 )

June 30, Six Months Ended

2021 2020 2021 2020

Pre-tax Net of Tax Pre-tax Net of Tax Pre-tax Net of Tax Pre-tax Net of Tax

Translation Adjustments Gains (Losses) $ 55 $ 54 $ 26 $ 25 $ 3 $ 3 $ ( 178 ) $ ( 172 )

Unrealized (Losses) Gains

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Changes in cash flow hedges reclassed to earnings (1)

2 1 ( 2 ) ( 1 ) 3 2 ( 1 ) —

Net Unrealized (Losses) Gains — — ( 5 ) ( 2 ) ( 9 ) ( 7 ) 3 3

Defined Benefit Plans Gains (Losses)

Net actuarial/prior service gains (losses) 43 32 ( 12 ) ( 9 )

Net actuarial/prior service gains 23 17 98 73 66 49 86 64

Prior service amortization (2)

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Actuarial loss amortization/settlement (2)

Other gains (3)

31 23 33 26 66 49 73 56

Other (losses) gains (3)

( 11 ) ( 11 ) ( 4 ) ( 4 ) ( 2 ) ( 2 ) 43 43

Changes in Defined Benefit Plans Gains 26 16 107 80 96 71 163 134

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Xerox 2021 Form 10-Q 33

Note 18 – Earnings (Loss) per Share

Note 19 – Earnings per Share

(shares in thousands)

The following table sets forth the computation of basic and diluted earnings (loss) per share of Xerox Holdings Corporation's common stock:

The following table sets forth the computation of basic and diluted earnings per share of Xerox Holdings Corporation's common stock:

Three Months Ended

Basic Earnings (Loss) per Share

Net Income (Loss) Attributable to Xerox Holdings $ 39 $ ( 2 )

June 30, Six Months Ended

2021 2020 2021 2020

Basic Earnings per Share

Net Income Attributable to Xerox Holdings $ 91 $ 27 $ 130 $ 25

Accrued dividends on preferred stock ( 3 ) ( 3 ) ( 7 ) ( 7 )

Adjusted Net income (loss) available to common shareholders $ 35 $ ( 6 )

Adjusted Net income available to common shareholders $ 88 $ 24 $ 123 $ 18

Weighted average common shares outstanding 187,009 212,949 191,433 212,852

Basic Earnings (Loss) per Share $ 0.18 $ ( 0.03 )

Diluted Earnings (Loss) per Share

Net Income (Loss) Attributable to Xerox Holdings $ 39 $ ( 2 )

Basic Earnings per Share $ 0.47 $ 0.11 $ 0.64 $ 0.08

Diluted Earnings per Share

Net Income Attributable to Xerox Holdings $ 91 $ 27 $ 130 $ 25

Accrued dividends on preferred stock ( 3 ) ( 3 ) ( 7 ) ( 7 )

Adjusted Net income (loss) available to common shareholders $ 35 $ ( 6 )

Adjusted Net income available to common shareholders $ 88 $ 24 $ 123 $ 18

Weighted average common shares outstanding 187,009 212,949 191,433 212,852

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Adjusted weighted average common shares outstanding 189,021 215,567 193,529 216,014

Diluted Earnings (Loss) per Share $ 0.18 $ ( 0.03 )

Diluted Earnings per Share $ 0.46 $ 0.11 $ 0.64 $ 0.08

The following securities were not included in the computation of diluted earnings per share as they were either contingently issuable shares or shares that if included would have been anti-dilutive:

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Liens on Brazilian assets — —

The decrease in the unreserved portion of the tax contingency, inclusive of any related interest, was primarily related to currency, partially offset by interest.

The increase in the unreserved portion of the tax contingency, inclusive of any related interest, was primarily related to currency and interest.

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.

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

Exposures related to labor matters are not material to the financial statements as of March 31, 2021 and December 31, 2020.

Exposures related to labor matters are not material to the financial statements as of June 30, 2021 and December 31, 2020.

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

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On January 13, 2021, plaintiff filed a notice of appeal of the December 14, 2020 dismissal order to the Appellate Division, First Department.

Upon his application to the Appellate Division, plaintiff’s time to perfect the appeal of the December 14, 2020 dismissal order has been extended to September 13, 2021.

Xerox 2021 Form 10-Q 36

On April 7, 2021, plaintiff filed in the previously dismissed Ribbe I and XCCSL actions a motion seeking an award of attorneys’ fees of $ 1.5 and a service award of $ 10 thousand for benefits he allegedly obtained for Xerox and its stockholders.

On June 4, 2021, the Court granted plaintiff’s fee application, in part, and awarded plaintiff attorneys’ fees in the amount of $ 125 thousand in the dismissed actions.

The Court denied plaintiff’s request for a service award.

Xerox will vigorously defend against this matter.

35 unchanged sentences

On January 20, 2021, plaintiff filed a notice of appeal of the January 15, 2021 order denying its motion for discovery to the Appellate Division, First Department.

On July 15, 2021, plaintiff filed its brief in connection with the appeals of the December 14, 2020 dismissal order and the January 15, 2021 discovery order.

Xerox 2021 Form 10-Q 37

Xerox Holdings will vigorously defend against this matter.

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

Xerox 2021 Form 10-Q 36

Other Litigation

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Also on March 10, 2021, subsidiaries of XHC filed similar complaints and related requests for arbitration in Toronto, London, and Amsterdam (see below).

XHC consented to defendant’s request for an extension until May 6, 2021 of its time in which to answer or otherwise respond to the complaint.

XHC consented to defendant’s request for an extension of its time in which to answer or otherwise respond to the complaint.

The parties consented to assignment to the Court’s business calendar.

At an initial conference on April 8, 2021, both parties informed the Court that they anticipate filing motions for judgment on the pleadings.

On May 6, 2021, FMG filed its answer to the complaint.

The parties thereafter agreed to stay all non-U.S.

proceedings pending the outcome of the U.S.

Canadian action

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Plaintiffs must serve both filings by September 10, 2021.

The parties have executed a tolling agreement and will seek an order from the Court staying the action on consent.

On March 10, 2021, plaintiffs Concept Group Limited, Continua Limited, Xerox Limited, and Xerox UK Limited filed a Claim Form against F.M.

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Also on March 10, 2021, plaintiffs submitted two Requests for Arbitration, which were withdrawn after the parties agreed on March 31, 2021 that both liability and quantum of plaintiffs’ claims would be litigated in the Commercial Court proceeding.

On May 20, 2021, the Court entered an order on consent of the parties for a stay of nine months and extensions of 11 and 14 months, respectively, of plaintiffs’ deadline to file and serve their Particulars of Claim and FMG’s deadline to file and serve its Defense.

Netherlands action

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Also on March 10, 2021, plaintiffs submitted a Request for Arbitration, which was withdrawn after the parties agreed on April 12, 2021, that both liability and quantum of plaintiffs’ claims would be litigated in the District Court proceeding.

We have issued or provided approximately $ 277 of guarantees as of March 31, 2021 in the form of letters of credit or surety bonds issued to i) support certain insurance programs;

The parties are in the process of executing a tolling agreement to stay the District Court proceeding until full and final resolution of the U.S.

Xerox 2021 Form 10-Q 38

We have issued or provided approximately $ 306 of guarantees as of June 30, 2021 in the form of letters of credit or surety bonds issued to i) support certain insurance programs;

ii) support our obligations related to the Brazil contingencies;

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Xerox 2021 Form 10-Q 39

Note 20 – Subsequent Events

Fuji Xerox Technology Agreement (TA)

As previously disclosed, our TA with Fuji Xerox (now known as FUJIFILM Business Innovation Corp.((Fuji Xerox)) expired on March 31, 2021.

Fuji Xerox elected to continue its use of the Xerox brand trademark over the next two years and, therefore, made the upfront payment due under the amended agreement of $ 100 in April 2021.

We expect to recognize the revenue associated with this extended brand license ratably over the two year transition period.

Accordingly, we expect any potential entry by Xerox for Xerographic products into the Fuji Xerox territory under the Xerox brand to be deferred to at least April 1, 2023.

In April 2021, Xerox acquired an office equipment dealer in Canada for approximately $ 30 .

This acquisition is part of Xerox's strategy of focusing on further penetrating the small-to-medium sized business (SMB) market through acquisitions of local area resellers and partners (including multi-brand dealers).

We are currently assessing the purchase price allocation but expect the majority to be allocated to intangible assets and goodwill.

Xerox 2021 Form 10-Q 38

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

What changed 10-Q

Item 1. Financial Statements