What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-11-03 compared with 2021-08-04 · 284 added, 244 removed, 482 unchanged (52% of the section changed)

8 unchanged sentences

Throughout this MD&A, references are made to various notes in the Condensed Consolidated Financial Statements which appear in Item 1 of this Quarterly Report on Form 10-Q, and the information contained in such notes is incorporated by reference into the MD&A in the places where such references are made.

Xerox Holdings' other direct operating subsidiary is CareAR, Inc.

(CareAR), an SaaS solutions provider, which was acquired in 2020.

CareAR incurred $5 million and $7 million of costs and expenses for the three and six months ended June 30, 2021, respectively.

Due to their immaterial nature, and for ease of discussion, CareAR's expenses are included in this discussion with Xerox's costs and expenses.

In connection with Xerox Holdings Corporation's announcement of the formation of the CareAR software business in the third quarter 2021, the ownership of CareAR Holdings LLC was transferred from Xerox Holdings Corporation to Xerox Corporation.

Refer to Note 1 - Basis of Presentation in the Condensed Consolidated Financial Statements for additional information regarding the change in ownership of CareAR Holdings LLC.

Currency Impact

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Impact of COVID-19 on Our Business Operations

In response to the COVID-19 pandemic, we continue to prioritize the health and safety of our employees, customers and partners and support their needs so they can perform their work flawlessly, whether in the office or a remote location.

During the second quarter 2021, our business continued to be impacted by the pandemic.

However, we saw a continued gradual recovery of our revenues in the quarter as businesses gained confidence in the control of the pandemic and as a result invested in new printing technology and services.

We continued to see a positive correlation between the roll-out of vaccinations, the return of employees to the office, and the gradual recovery of our page-volume driven post sale revenues.

We expect that measures to control the pandemic and expand economic activity will result in a moderate economic improvement in 2021.

However, in the near term, the recovery may be uneven and affected by the emergence of new variants of the COVID-19 virus which could result in a resurgence of cases in various countries and regions.

During the third quarter 2021, our business continued to be impacted by the COVID-19 pandemic.

The prolonged and extensive impact of the Delta variant drove many of our customers to delay their plans to return employees to workplaces.

As a result, while we continued to see a correlation between the roll-out of vaccinations, the return of employees to the workplace, and the gradual recovery of our post sale revenues, the marginal improvement in our page-volume-driven post sale revenues was less than previously anticipated.

In addition, global supply chain issues, created in part by the COVID-19 pandemic, have resulted in an unprecedented level of disruption that has led to shortages and transportation delays of our products and third-party IT hardware.

This has resulted in lower than anticipated equipment and IT sales, higher transportation and logistics costs and growth of our order backlog 1 at the end of the quarter, as our customers continued to invest in our print technology and services.

We expect the ongoing effects of the COVID-19 pandemic, including the potential emergence of new variants, as well as global supply chain disruptions, to delay economic recovery and continue to affect our revenues and margins into 2022.

We have a strong balance sheet and sufficient liquidity, including approximately $2.3 billion of cash and cash equivalents and access to our undrawn $1.8 billion revolver.

With our Project Own It transformation and cost savings, we have built a leaner and more flexible cost structure.

We also continue to focus our efforts on incremental actions to prioritize and preserve cash as we manage through the pandemic.

These actions include the continued reduction of discretionary spend such as near-term targeted marketing programs and the suspension of 401(k) matching contributions.

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

We recognized savings from the use of such measures in the U.S., Canada and Europe.

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.

The savings from government assistance were recorded as follows in the Condensed Consolidated Statements of Income:

The savings from temporary government assistance were recorded as follows in the Condensed Consolidated Statements of Income:

(in millions) Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2021 2020 2021 2020

Cost of sales $ — $ 1 $ — $ 1

Cost of services, maintenance and rentals 4 25 17 65

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Total Estimated savings $ 9 $ 35 $ 29 $ 95

Second Quarter 2021 Review

Total revenue of $1.79 billion for second quarter 2021 increased 22.4% from second quarter 2020, including a 4.3-percentage point favorable impact from currency.

The increase in revenue reflected an increase of 18.1% in Post sale revenue, including a 4.3-percentage point favorable impact from currency and an increase of 38.4% in Equipment sales revenue, including a 4.4-percentage point favorable impact from currency.

Total revenue of $3.50 billion for the six months ended June 30, 2021 increased 5.4% as compared to the prior year period, including a 3.3-percentage point favorable impact from currency.

The increase in revenue reflected an increase of 0.1% in Post sale revenue, including a 3.1-percentage point favorable impact from currency and an increase of 27.6% in Equipment sales revenue, including a 3.7-percentage point favorable impact from currency.

The increase in revenue for the three and six months ended June 30, 2021 reflected the significant effect of the COVID-19 pandemic in the respective prior year periods, which caused business closures and office building capacity restrictions that impacted our customers' purchasing decisions in 2020 and drove lower printing volumes on our devices.

Third Quarter 2021 Review

Total revenue of $1.76 billion for third quarter 2021 decreased 0.5% from third quarter 2020, including a 1.1-percentage point favorable impact from currency.

Total revenue reflected an increase of 1.7% in Post sale revenue, including a 1.2-percentage point favorable impact from currency and a decrease of 7.6% in Equipment sales revenue, including a 0.8-percentage point favorable impact from currency.

Total revenue of $5.26 billion for the nine months ended September 30, 2021 increased 3.3% as compared to the prior year period, including a 2.5-percentage point favorable impact from currency.

Total revenue reflected an increase of 0.6% in Post sale revenue, including a 2.4-percentage point favorable impact from currency and an increase of 13.6% in Equipment sales revenue, including a 2.6-percentage point favorable impact from currency.

As the third quarter 2021 progressed, we saw an increase in the supply chain challenges we experienced in the second quarter 2021.

Specifically, raw material and component shortages limited the availability of certain of our products, particularly with respect to our mid-range devices.

Transportation constraints and labor shortages extended delivery times and increased unit shipping costs above normal levels.

These challenges caused equipment revenue to fall short of our expectations.

However, demand for our products remains strong, resulting in further growth of our order backlog 1 for equipment and I/T hardware.

Post sale revenue in the third quarter fell below our expectations, as the Delta variant disrupted many companies’ plans to return workers to the workplace.

While business closures and limited office occupancy as a result of the COVID-19 pandemic continue to affect our

Xerox 2021 Form 10-Q 42

revenues, the progress of vaccinations and the gradual reopening of workplaces resulted in higher sequential and year-over-year page volumes in third quarter 2021.

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

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

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

(in millions) 2021 2020 B/(W) 2021 2020 B/(W)

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90 105 (15) 231 191 40

Second quarter 2021 Net income attributable to Xerox Holdings increased $64 million as compared to second quarter 2020 primarily due to higher revenues as compared to the prior year period, as well as lower Transaction and related costs, net, non-service retirement-related costs and the benefit from a change in tax law, which were partially offset by higher Restructuring and related costs, net, Amortization of intangible assets and non-financing interest expense.

Second quarter 2021 A djusted 1 net income attributable to Xerox Holdings increased $58 million as compared to the prior year, primarily reflecting higher revenues as well continued cost and expense reductions associated with our Project Own It transformation actions and lower bad debt expense, which helped to improve operating income and margin.

These benefits were partially offset by reduced temporary government assistance and furlough measures and higher freight costs as well as higher non-financing interest expense.

Net income attributable to Xerox Holdings for the six months ended June 30, 2021 increased $105 million as compared to the prior year period primarily due to higher revenues and lower bad debt expense, as the prior year period included a $60 million incremental provision to cover estimated write-offs on our trade and finance receivable portfolio from the COVID-19 pandemic, as well as lower Transaction and related costs, net, non-service retirement-related costs, Restructuring and related costs, net and the benefit from a change in tax law in second quarter 2021.

These benefits were partially offset by reduced temporary government assistance and furlough measures, as well as higher Amortization of intangible assets and higher non-financing interest expense.

A djusted 1 net income attributable to Xerox Holdings for the six months ended June 30, 2021 increased $55 million as compared to the prior year, primarily due to higher revenues and lower bad debts expense.

These benefits were partially offset by reduced temporary government assistance and furlough measures as well higher non-financing interest expense.

Cash flows provided by operating activities for the six months ended June 30, 2021 were $331 million, as compared to $207 million in the prior year period, which includes the receipt of an upfront prepaid fixed royalty from FUJIFILM Business Innovation Corp.

(formerly Fuji Xerox) (FX) of $100 million, partially offset by a lower run-off of finance receivables and cash from working capital, net 2 .

Cash used in investing activities for the six months ended June 30, 2021 was $72 million reflecting capital expenditures of $33 million and acquisitions of $37 million.

Cash used in financing activities for the six months ended June 30, 2021 was $747 million reflecting $413 million for repurchases of our Common Stock, payments of $209 million on secured borrowing arrangements and dividend payments of $108 million.

We continue to expect a modest recovery in 2021 and expect full year total revenues to increase 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, as disclosed in our 2020 Annual Report.

We expect operating cash flows to be approximately $600 million, with capital expenditures of approximately $100 million and plan to opportunistically make share repurchases utilizing our remaining share repurchase authorization of approximately $88 million.

Third quarter 2021 Net income attributable to Xerox Holdings was flat as compared to third quarter 2020 reflecting lower Income tax expense, as well as lower Selling, administrative and general expenses, in part due to lower bad debt expense, as well as lower Restructuring and related costs, net and Other expenses, net.

These benefits were all offset by lower gross profit reflecting lower revenues and higher logistics costs associated with product supply constraints as well as the reduction of benefits from temporary government assistance and furlough measures.

Third quarter 2021 A djusted 2 net income attributable to Xerox Holdings decreased $15 million as compared to the prior year, primarily reflecting lower gross profit due to lower revenues and higher logistics costs associated with product supply constraints as well as the reduction of benefits from temporary government assistance and furlough measures, which were partially offset by lower Income tax expense and Selling, administrative and general expenses, in part due to lower bad debt expense, as well as lower Other expenses, net.

Net income attributable to Xerox Holdings for the nine months ended September 30, 2021 increased $105 million as compared to the prior year period primarily reflecting higher revenues and lower bad debt expense, as well as lower non-service retirement-related costs, Restructuring and related costs, net, Transaction and related costs, net and Income tax expense.

These benefits were partially offset by reduced temporary government assistance and furlough measures, as well as higher freight costs, which reduced gross profit.

A djusted 2 net income attributable to Xerox Holdings for the nine months ended September 30, 2021 increased $40 million as compared to the prior year, primarily due to higher revenue, lower bad debts expense and Income tax expense.

These benefits were partially offset by reduced temporary government assistance and furlough measures as well higher freight costs, which reduced gross profit.

Cash flows provided by operating activities for the nine months ended September 30, 2021 were $431 million, as compared to $313 million in the prior year period, which includes the receipt of an upfront prepaid fixed royalty from FUJIFILM Business Innovation Corp.

(formerly Fuji Xerox) (FX) of $100 million and higher cash from working capital, net 3 , partially offset by a lower run-off of finance receivables.

Cash used in investing activities for the nine months ended September 30, 2021 was $54 million reflecting capital expenditures of $52 million and acquisitions of $38 million, which were partially offset by proceeds from sales of assets of $39 million.

Cash used in financing activities for the nine months ended September 30, 2021 was $793 million reflecting $500 million for repurchases of our Common Stock, payments of $444 million on secured financing arrangements, partially offset by proceeds of $311 million on a secured financing arrangement and dividend payments of $157 million.

Given the continued uncertainty associated with global supply chains and a delay in many companies’ plans to return to workplaces until 2022, we are lowering our revenue guidance to approximately $7.1 billion, or $7.0 billion at constant currency 2 .

However, our focus on cash gives us confidence to reaffirm our free cash flow guidance and we plan to continue our capital allocation policy of returning at least 50% of our annual free cash flow to shareholders, as disclosed in our 2020 Annual Report.

We expect operating cash flows to be approximately $580 million, with capital expenditures of approximately $80 million.

Additionally, a new share repurchase authorization of $500 million was approved by our Board of Directors in October 2021, which will be used opportunistically to repurchase shares.

____________________________

(1) Order backlog is measured as the value of unfulfilled sales orders, shipped and non-shipped, received from our customers waiting to be

installed, including orders with future installation dates.

It includes printing devices as well as IT hardware associated with our IT services

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

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Three Months Ended

June 30, Six Months Ended

June 30, % of Total Revenue

September 30, Nine Months Ended

September 30, % of Total Revenue

(in millions) 2021 2020 % Change CC % Change 2021 2020 % Change CC % Change 2021 2020

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

Second quarter 2021 total revenue increased 22.4% as compared to second quarter 2020, including a 4.3-percentage point favorable impact from currency, while total revenue for the six months ended June 30, 2021 increased 5.4% as compared to the prior year period, including a 3.3-percentage point favorable impact from currency and an approximate 0.7-percentage point favorable impact from recent partner dealer acquisitions.

The increase for both the three and six months ended June 30, 2021 reflected the significant effect of the COVID-19 pandemic in the prior year, which at that time caused business closures and office building capacity restrictions that drove lower printing volumes on our devices and impacted our customers' purchasing decisions.

Business closures and limited office occupancy continue to affect our revenues.

However, the progress of vaccinations and the gradual reopening of workplaces in second quarter 2021 have resulted in higher installations of Mid-range devices to near pre-pandemic levels, as well as a continued modest sequential increase in our page volumes (as compared to first quarter 2021).

Improvements in total revenue for both the three and six months ended June 30, 2021 were partially offset by the impact of global freight disruptions and product supply constraints that started in the second quarter of 2021 (the result of market-wide shortages of computer chips and resins).

Geographically, revenue increased more significantly in our EMEA operations for both the three and six months ended June 30, 2021, partially due to the region's more expansive shutdown in the prior year and its larger indirect channel business, which in the prior year experienced a significant reduction of inventory purchases from channel partners seeking to protect their liquidity amidst market uncertainty.

EMEA also benefited from a faster recovery of SMB businesses, while our North American operations include a higher proportion of Education, State and Local government and Enterprise customers who are experiencing a slower pace of return to workplaces.

Our EMEA revenues were also favorably impacted by prior year acquisitions in the region.

Total revenue for the three and six months ended June 30, 2021 reflected the following:

Third quarter 2021 total revenue decreased 0.5% as compared to third quarter 2020, including a 1.1-percentage point favorable impact from currency, while total revenue for the nine months ended September 30, 2021 increased 3.3% as compared to the prior year period, including a 2.5-percentage point favorable impact from currency and an approximate 0.5-percentage point favorable impact from recent partner dealer acquisitions.

Total revenue for both the three and nine months ended September 30, 2021 reflected global product supply constraints and freight disruptions (as a result of container shortages and transportation congestion) which limited our ability to fulfill orders and resulted in growth of our order backlog.

While business closures and limited office occupancy as a result of the COVID-19 pandemic (particularly the Delta variant) continue to affect our revenues, the progress of vaccinations and the gradual reopening of workplaces resulted in higher sequential and year-over-year page volumes in the third quarter 2021.

Geographically, revenue increased more significantly in our EMEA operations for both the three and nine months ended September 30, 2021, where we have a larger presence across SMB businesses which have had a faster recovery and greater resiliency against pandemic resurgences.

Revenue decreased in our North American operations, which were more significantly impacted by freight disruptions that were further amplified by labor shortages within the transportation industry.

North America also has a higher proportion of large enterprise customers, who are generally experiencing a slower pace of return to workplaces.

Total revenue for the three and nine months ended September 30, 2021 reflected the following:

Post sale revenue

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Post sale revenue also includes transactional IT hardware sales and implementation services primarily from our XBS organization in the U.S.

For the three months ended September 30, 2021, Post sale revenue increased 1.7% as compared to third quarter 2020, including a 1.2-percentage point favorable impact from currency, while Post sale revenue increased 0.6% for

Xerox 2021 Form 10-Q 44

For the three months ended June 30, 2021, Post sale revenue increased 18.1% as compared to second quarter 2020, including a 4.3-percentage point favorable impact from currency, while Post Sale revenues increased 0.1% for the six months ended June 30, 2021, including a 3.1-percentage point favorable impact from currency.

The increases in Post Sale revenue correspond with the gradual reopening of workplaces.

the nine months ended September 30, 2021, including a 2.4-percentage point favorable impact from currency.

Post sale revenue reflected the following:

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

While these revenues are contractual in nature, our bundled services contracts generally include a minimum fixed charge and a significant variable component based on print volumes.

◦ For the three months ended June 30, 2021, these revenues increased 12.4% as compared to second quarter 2020, including a 4.1-percentage point favorable impact from currency, reflecting the impact of higher page volumes, corresponding with the reopening of workplaces, which more than offset the effect of a lower population of devices (which is partially associated with lower installs in prior periods), and an ongoing competitive price environment.

◦ For the six months ended June 30, 2021, these revenues decreased 3.0% as compared to the prior year period, including a 3.1-percentage point favorable impact from currency, reflecting a lower population of devices (which is partially associated with lower installs in prior periods), an ongoing competitive price environment, and lower page volumes during first quarter 2021 (including a higher mix of lower average-page-volume products) as business shutdowns only started at the end of first quarter 2020.

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

While these revenues are contractual in nature, our bundled services contracts generally include a fixed minimum charge and a significant variable component based on print volumes.

◦ For the three months ended September 30, 2021, these revenues decreased 1.4% as compared to third quarter 2020, including a 1.1-percentage point favorable impact from currency, reflecting the impact of lower royalty revenue and lower third-party financing commissions (resulting from higher XFS lease penetration of our XBS operations), as well as a lower net population of devices, and an ongoing competitive price environment, partially offset by modestly higher page volumes corresponding with the gradual reopening of workplaces.

◦ For the nine months ended September 30, 2021, these revenues decreased 2.5% as compared to the prior year period, including a 2.4-percentage point favorable impact from currency, reflecting the impact of lower royalty revenue and lower third-party financing commissions (resulting from higher XFS lease penetration of our XBS operations), a lower population of devices (which is partially associated with lower installs in prior periods), an ongoing competitive price environment, and lower page volumes during first quarter 2021 (including a higher mix of lower average-page-volume products).

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

◦ For the three months ended June 30, 2021, these revenues increased 60.7% as compared to second quarter 2020, including a 6.3-percentage point favorable impact from currency, reflecting primarily higher supplies revenues consistent with the gradual reopening of workplaces which drove higher demand.

◦ For the six months ended June 30, 2021, these revenues increased 18.5% as compared to the prior year period, including a 3.2-percentage point favorable impact from currency, reflecting primarily higher supplies revenues.

◦ For the three months ended September 30, 2021, these revenues increased 16.4% as compared to third quarter 2020, including a 1.3-percentage point favorable impact from currency and primarily reflected higher supplies and paper revenues consistent with the gradual reopening of workplaces, which drove higher demand.

We also saw a marginal improvement in inventories carried by channel partners, as confidence in the recovery continued to moderately improve.

The increase also reflected higher IT revenues, driven by higher demand for our offerings, but partially dampened by IT hardware product constraints.

◦ For the nine months ended September 30, 2021, these revenues increased 17.7% as compared to the prior year period, including a 2.5-percentage point favorable impact from currency, reflecting primarily higher supplies revenues, as well as higher paper sales, consistent with the gradual reopening of workplaces, which drove higher demand.

• Financing revenue is generated from financed equipment sale transactions.

For the three months ended June 30, 2021, these revenues were flat as compared to second quarter 2020, including a 3.4-percentage point favorable impact from currency, while Financing revenue for the six months ended June 30, 2021 decreased 3.5%, including a 2.6-percentage point favorable impact from currency.

The decrease at constant currency 1 reflected a lower finance receivables balance due to lower equipment sales in prior periods.

Our lease originations increased for both the three and six months ended June 30, 2021 as compared to the respective prior year periods, as well as on a sequential basis for the second quarter 2021 as compared to the first quarter 2021, due to a higher level of lease originations from our XBS sales unit as well as higher equipment sales.

For the three months ended September 30, 2021, these revenues were flat as compared to third quarter 2020, including a 2.3-percentage point favorable impact from currency, while Financing revenue for the nine months ended September 30, 2021 decreased 2.4%, including a 2.4-percentage point favorable impact from currency.

The decrease at constant currency 1 reflected a lower finance receivables balance due to the pace of run-off of our lease portfolio and lower equipment sales in prior periods, as well as the impact of lower equipment sales in the third quarter 2021.

However, lease originations increased for both the three and nine months ended September 30, 2021 as compared to the respective prior year periods primarily as a result of higher XFS lease penetration from our XBS sales unit.

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

Xerox 2021 Form 10-Q 44

Equipment sales revenue

Three Months Ended June 30, Six Months Ended

June 30, % of Equipment Sales

Three Months Ended September 30, Nine Months Ended

September 30, % of Equipment Sales

(in millions) 2021 2020 %

9 unchanged sentences

Refer to the Equipment Sales Revenue - Classification Update section, for the revision of prior periods based on the new classification.

Equipment sales revenue increased 38.4% for the three months ended June 30, 2021 as compared to second quarter 2020, including a 4.4-percentage point favorable impact from currency partially offset by the impact of price declines of less than 5%, while for the six months ended June 30, 2021, Equipment sales revenue increased 27.6% as compared to the prior year period, including a 3.7-percentage point favorable impact from currency partially offset by the impact of price declines of less than 5%.

The increase is partially the result of a favorable compare to the three and six month ended June 30, 2020, when businesses were extensively shut down due to the COVID-19 pandemic.

Equipment sales revenue increased at a higher pace through our indirect channels, both in the U.S.

and EMEA, as demand continued to increase with business reopenings.

Sales of office-centric devices led the increase of these revenues (as businesses re-open and prepare for a broader return to the office), while sales of high-end production systems, which demand larger capital investments, had a more moderate increase.

Equipment sales were significantly impacted by global freight disruptions and product supply constraints (the result of market-wide shortages of computer chips and resins) which resulted in a backlog of orders at the end of the second quarter 2021 that increased over the first quarter 2021 and was significantly above prior year and pre-pandemic levels.

The growth at constant currency 1 reflected the following:

• Entry - The increase for the three months ended June 30, 2021 as compared to second quarter 2020, was driven by higher demand for our printers and MFPs through our indirect channels in EMEA and the Americas, which resulted in markedly higher installations of Entry devices.

While sales increased across this portfolio, we experienced an unfavorable mix from significantly higher sales of our lower-end black-and-white devices.

The increase for the six months ended June 30, 2021 as compared to the prior year period, was driven primarily by higher demand for our lower-end printers and MFPs through our indirect channels in EMEA and the Americas, as well as higher installs related to government deals in the developing regions of EMEA, which resulted in markedly higher installations of Entry devices.

Xerox 2021 Form 10-Q 45

Equipment sales revenue decreased 7.6% for the three months ended September 30, 2021 as compared to third quarter 2020, including a 0.8-percentage point favorable impact from currency partially offset by the impact of price declines of less than 5%, while for the nine months ended September 30, 2021, Equipment sales revenue increased 13.6% as compared to the prior year period, including a 2.6-percentage point favorable impact from currency partially offset by the impact of price declines of less than 5%.

The decrease in Equipment sales revenue in the third quarter 2021 reflected the adverse impact of product supply constraints (consistent with market-wide shortages of computer chips and resins) and global freight disruptions that were further amplified by labor shortages within the transportation industry.

Demand continued to increase as businesses reopened, resulting in a backlog of orders at the end of the quarter that increased sequentially and was above both prior year and pre-pandemic levels.

Equipment sales revenue increased in EMEA, as the impact of supply chain disruptions was offset by higher demand from our indirect channels serving SMB, and from large government deals (in Europe and certain developing market regions).

Equipment sales revenue decreased in our Americas operations as freight disruptions (from container shortages and transportation congestion) were more prevalent in the U.S.

The supply chain disruption impacted the availability of our mid-range devices most significantly.

The increase in Equipment sales revenue for the nine months ended September 30, 2021 is partially the result of a favorable compare to the respective prior year period, as businesses were extensively shut down in 2020 due to the COVID-19 pandemic.

Equipment sales revenue increased at a higher pace through our indirect channels primarily in EMEA, as well as in the U.S.

Sales of office-centric devices led the increase of these revenues (as businesses re-open and prepare for a broader return to workplaces), while sales of high-end production systems, which demand larger capital investments, had a more moderate increase.

Equipment sales were significantly impacted by global freight disruptions and product supply constraints (the result of market-wide shortages of computer chips and resins).

The change at constant currency 1 reflected the following:

• Entry - The increase for the three months ended September 30, 2021 as compared to third quarter 2020, was driven by higher demand for our printers and MFPs through our indirect channels in EMEA and the Americas.

The increase for the nine months ended September 30, 2021 as compared to the prior year period, was driven by higher demand for our lower-end printers and MFPs through our indirect channels primarily in EMEA as well as in the Americas, which included markedly higher installs related to government deals in the developing regions of EMEA.

While sales increased across this portfolio, we experienced an unfavorable mix from significantly higher sales of our lower-end black-and-white devices.

• Mid-range - The increase for the three months ended June 30, 2021 as compared to second quarter 2020, was driven primarily by higher demand across geographies, consistent with the gradual reopening of workplaces as well as improved activity from our indirect channels as they moderately eased their tight cash preservation measures to rebuild their inventories.

The increase for the six months ended June 30, 2021 as compared to the prior year period, was also driven primarily by higher demand across geographies, consistent with the gradual reopening of workplaces, as compared to business shutdowns that reduced purchases of office devices in the prior year period, as well as higher demand for our MFP devices and improved activity from our indirect channels.

• High-end - The increase for the three months ended June 30, 2021 as compared to second quarter 2020, primarily reflected improvement in sales of devices in the lower-end of the range and to SMB customers, as well as sales of black-and-white systems corresponding with our customers' refresh cycles.

Sales of larger color production engines, while higher than the second quarter 2020, had a more moderate increase, as a result of our customers' delayed capital investment decisions as they assess their post-pandemic operational print requirements.

The increase for the six months ended June 30, 2021 as compared to the prior year period, reflected primarily improvement in sales of devices in the lower-end of the range and to SMB customers, as well as sales of black-and-white systems corresponding with our customers' refresh cycles, while sales of larger color production engines continued to be depressed as a result of our customers' delayed capital investment decisions.

• Mid-range - The decrease for the three months ended September 30, 2021 as compared to third quarter 2020, was primarily driven by the significant impact of global product supply constraints and freight disruptions that had a more severe effect on our U.S.

The decrease also reflected unfavorable mix from growth in black-and-white devices.

The increase for the nine months ended September 30, 2021 as compared to the prior year period, was driven by higher demand primarily from EMEA and our indirect channels in the U.S., consistent with the gradual reopening of workplaces, as compared to business shutdowns that reduced purchases of office devices in the prior year period.

• High-end - The decrease for the three months ended September 30, 2021 as compared to third quarter 2020, primarily reflected the impact of global product supply constraints and freight disruptions, resulting in lower sales of color systems in the U.S., partially offset by higher sales of black-and-white systems corresponding with our customers' refresh cycles.

The increase for the nine months ended September 30, 2021 as compared to the prior year period, reflected primarily improvement in sales of devices in the lower-end of the range and to SMB customers, as well as sales of black-and-white systems corresponding with our customers' refresh cycles, while sales of larger color production engines continued to be depressed as a result of our customers' delayed capital investment decisions as well as the impact of global product supply constraints and freight disruptions, resulting in lower sales of color systems in the U.S.

Xerox 2021 Form 10-Q 46

Total Installs

Installs reflect new placement of devices only (i.e., measure does not take into account removal of devices which may occur as a result of contract renewals or cancellations).

Installs reflect only new placements of devices (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 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 and non-Xerox branded products installed by our XBS sales unit.

Installs include activity for Xerox and non-Xerox branded products installed by our XBS sales unit.

Detail by product group (see Geographic Sales Channels and Products and Offerings Definitions ) is shown below.

Installs for the three months ended June 30, 2021:

• 19% increase in color multifunction devices reflecting higher installs of ConnectKey devices through our indirect channels primarily in EMEA, as well as in the Americas.

• 63% increase in black-and-white multifunction devices reflecting higher activity primarily from low-end devices through indirect channels in developing regions of EMEA and Latin America.

Mid-Range (1)

• 62% increase in mid-range color installs primarily reflecting higher installs of our recently launched new-generation of ConnectKey multi-function printers and our PrimeLink entry-production color devices.

• 36% increase in mid-range black-and-white installs reflecting higher installs of our recently launched new-generation of ConnectKey multi-function devices and our PrimeLink light-production devices.

• 27% increase in high-end color installs primarily reflecting growth from our lower-end Versant devices.

• 47% increase in high-end black-and-white systems reflecting higher installs of our Nuvera devices related to cyclical account refreshes in the U.S.

Installs for the six months ended June 30, 2021:

• 13% increase in color multifunction devices reflecting higher installs of ConnectKey devices through our indirect channels in EMEA and the Americas.

Installs for the three months ended September 30, 2021:

• 17% increase in color multifunction devices reflecting higher installs of ConnectKey devices through our indirect channels primarily in EMEA, as well as in North America.

• 7% decrease in black-and-white multifunction devices reflecting lower installs as a result of product constraints and a larger number of installs of black-and-white devices in the prior year, primarily associated with work-from-home demand associated with the COVID-19 pandemic.

• 1% increase in mid-range color installs primarily reflecting higher installs of our recently launched new-generation of ConnectKey multi-function printers, and the impact of freight disruption and product constraints.

• 20% increase in mid-range black-and-white installs primarily in EMEA, reflecting higher installs of our recently launched new-generation of ConnectKey multi-function devices.

• 7% decrease in high-end color installs primarily reflecting the impact of global product constraints and freight disruption that resulted in lower installations of color systems in the U.S.

• 34% increase in high-end black-and-white systems reflecting higher installs of our Nuvera devices related to cyclical account refreshes.

Installs for the nine months ended September 30, 2021:

• 13% increase in color multifunction devices reflecting higher installs of ConnectKey devices through our indirect channels in EMEA and North America.

• 40% increase in black-and-white multifunction devices reflecting higher activity primarily from low-end devices through indirect channels in the Americas, and from developing regions in EMEA, which included large order government deals.

Mid-Range (2)

• 35% increase in mid-range color installs primarily reflecting higher installs of our recently launched new-generation of ConnectKey multi-function printers and our PrimeLink entry-production color devices.

• 24% increase in mid-range black-and-white installs reflecting higher installs of our recently launched new-generation of ConnectKey multi-function devices and our PrimeLink light-production devices.

• 36% increase in high-end color installs reflecting primarily growth from our lower-end Versant devices and our Iridesse systems partially offset by lower installs of our higher-end production presses.

• 33% increase in high-end black-and-white systems reflecting higher installs of our Nuvera devices related to cyclical account refreshes in the U.S.

• 22% increase in mid-range color installs primarily in EMEA, reflecting higher installs of our recently launched new-generation of ConnectKey multi-function printers, as well as our PrimeLink entry-production color devices.

• 22% increase in mid-range black-and-white installs reflecting higher installs of our recently launched new-generation of ConnectKey multi-function devices, as well as our PrimeLink entry-production color devices.

• 19% increase in high-end color installs reflecting primarily growth from our lower-end Versant devices as well as our Iridesse and iGen production systems partially offset by lower installs of our higher-end production presses.

• 33% increase in high-end black-and-white systems reflecting higher installs of our Nuvera devices primarily related to cyclical account refreshes in the U.S.

_____________

(1) Mid-range and High-end color installations exclude FX digital front-end sales in 2020.

When we include these sales in 2020, installs of Mid-range color devices increased 63% and 35%, respectively, and High-end color systems increased 25% and 34%, respectively, for the three and six months ended June 30, 2021.

(1) Refer to the Non-GAAP Financial Measures section for an explanation of the non-GAAP financial measure.

(2) Mid-range and High-end color installations exclude FX digital front-end sales through the second quarter of 2020.

When we include these sales in 2020, installs of Mid-range color devices increased 22% and High-end color systems increased 18% for the nine months ended September 30, 2021.

Xerox 2021 Form 10-Q 47

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

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

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

(in millions) 2021 2020 B/(W) 2021 2020 B/(W)

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Pre-tax Income Margin

Second quarter 2021 pre-tax income margin of 5.5% increased 3.1-percentage points as compared to second quarter 2020.

The increase primarily reflected the impact of higher adjusted 1 operating margin (see below) as well as lower Transaction and related costs, net and Other expenses, net, partially offset by higher Restructuring and related costs, net and Amortization of intangible assets.

Pre-tax income margin for the six months ended June 30, 2021 of 4.3% increased 3.4-percentage points as compared to the prior year period.

The increase primarily reflected the impact of higher adjusted 1 operating margin (see below) as well as lower Restructuring and related costs, net, Transaction and related costs, net and Other expenses, net, partially offset by higher Amortization of intangible assets.

Third quarter 2021 pre-tax income margin of 4.8% decreased 1.9-percentage points as compared to third quarter 2020.

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

Pre-tax income margin for the nine months ended September 30, 2021 of 4.5% increased 1.6-percentage points as compared to the prior year period.

The increase primarily reflected the impact of lower Restructuring and related costs, net, Transaction and related costs, net and Other expenses, net, while adjusted 1 operating margin was flat as compared to the prior year period.

Adjusted 1 Operating Margin

Second quarter 2021 adjusted 1 operating margin of 7.0% increased by 2.8-percentage points as compared to second quarter 2020, reflecting the impact of higher revenues, primarily due to the significant effect of the COVID-19 pandemic on our business during the prior year period, as well as cost and expense reductions associated with our Project Own It transformation actions and additional savings from various other cost reductions to mitigate the impact of the pandemic (including reductions in discretionary spend such as near-term targeted marketing programs, and the suspension of 401(k) matching contributions), and lower bad debt expenses.

These favorable factors were partially offset by an approximate $50 million reduction of temporary government assistance and furlough measures and higher freight costs.

Adjusted 1 operating margin for the six months ended June 30, 2021 of 6.1% increased by 1.6-percentage points as compared to the prior year period, reflecting an approximate 2.1-percentage point favorable impact from lower bad debt expense due to a higher provision in the prior year to reflect the expected impact to our trade and finance receivable portfolio from the COVID-19 pandemic.

Additionally, higher revenues favorably impacted adjusted 1 operating margin, primarily due to the significant effect of the COVID-19 pandemic on our business during the prior year period, as well as cost and expense reductions associated with our Project Own It transformation actions and additional savings from various other cost reductions to mitigate the impact of the pandemic (including reductions in discretionary spend such as near-term targeted marketing programs, and the suspension of 401(k) matching contributions).

These favorable factors were partially offset by an approximate $40 million reduction of temporary government assistance and furlough measures and higher freight costs.

Third quarter 2021 adjusted 1 operating margin of 4.2% decreased by 3.2-percentage points as compared to third quarter 2020, reflecting the impact of higher freight costs and lower revenues associated with product supply constraints, as well as a reduction of temporary government assistance and furlough measures, lower royalty revenues and third-party lease commissions, partially offset by lower bad debt expenses and cost and expense reductions associated with our Project Own It transformation actions.

Adjusted 1 operating margin for the nine months ended September 30, 2021 of 5.5% was flat as compared to the prior year period, reflecting an approximate 1.8-percentage point favorable impact from lower bad debt expense due to a higher provision in the prior year to reflect the expected impact to our trade and finance receivable portfolio from the COVID-19 pandemic.

Additionally, cost and expense reductions associated with our Project Own It transformation actions as well as higher revenues, primarily due to the significant effect of the COVID-19 pandemic on our business during the prior year period, favorably impacted adjusted 1 operating margin.

These favorable factors were partially offset by a $66 million reduction of temporary government assistance and furlough measures and higher freight costs associated with product supply constraints, which lowered gross profit.

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Xerox 2021 Form 10-Q 49

Second quarter 2021 gross margin of 35.6% decreased by 2.9-percentage points as compared to second quarter 2020, reflecting the impact of lower savings from temporary government assistance and furlough measures as well as higher freight costs and the impact of the ongoing competitive price environment, partially offset by higher revenue and cost savings from our Project Own It transformation actions as well as the additional cost reduction actions to mitigate the impact of the pandemic (including reductions in discretionary spend such as the suspension of 401(k) matching contributions).

Gross margin for the six months ended June 30, 2021 of 35.7% decreased by 2.7-percentage points as compared to the prior year period, reflecting the impact of lower savings from temporary government assistance and furlough measures and the impact of the ongoing competitive price environment, as well as the impact of a lower mix of our higher-margin post sale stream and higher freight costs.

These headwinds were partially offset by the cost savings from our Project Own It transformation actions as well as the additional cost reduction actions to mitigate the impact of the pandemic (including reductions in discretionary spend such as the suspension of 401(k) matching contributions).

Second quarter 2021 equipment gross margin of 28.1% decreased by 0.7-percentage points as compared to second quarter 2020, reflecting higher freight costs, the impact of targeted price promotions sales and the higher mix of sales from our EMEA channel, partially offset by higher revenue and a larger contribution from our mid-range product portfolio.

Equipment gross margin for the six months ended June 30, 2021 of 28.0% increased by 0.5-percentage points as compared to the prior year period, primarily reflecting higher revenues and favorable transaction currency, partially offset by higher freight costs, as well as an unfavorable mix of growth in low-end devices and the impact of targeted price promotions.

Second quarter 2021 Post sale gross margin of 38.1% decreased by 3.0-percentage points as compared to second quarter 2020, reflecting the impact of lower savings from temporary government assistance and furlough measures, as well as price erosion on contract renewals and lower royalty revenues, partially offset by productivity and cost savings and restructuring savings associated with Project Own It transformation actions, as well as savings from the additional cost reduction actions to mitigate the impact of the pandemic (including reductions in discretionary spend such as the suspension of 401(k) matching contributions).

Post sale gross margin for the six months ended June 30, 2021 of 38.0% decreased by 2.9-percentage points as compared to the prior year period, reflecting the impact of lower savings from temporary government assistance and furlough measures and the impact of the ongoing competitive price environment, partially offset by productivity and cost savings and restructuring savings associated with Project Own It transformation actions, as well as savings from additional cost reduction actions to mitigate the impact of the pandemic (including reductions in discretionary spend such as the suspension of 401(k) matching contributions).

Third quarter 2021 gross margin of 32.4% decreased by 4.4-percentage points as compared to third quarter 2020, reflecting unfavorable impacts of approximately 2.9-percentage points associated with supply chain costs and capacity restrictions (including significantly higher freight and shipping costs and constrained availability of higher margin equipment), and 0.6-percentage points associated with investments to support future growth.

The remainder of the decline reflects the impact of lower savings from temporary government assistance and furlough measures, net of Project Own It savings, as well as the impact from an ongoing competitive price environment and lower royalty revenues.

Gross margin for the nine months ended September 30, 2021 of 34.6% decreased by 3.2-percentage points as compared to the prior year period, reflecting unfavorable impacts of approximately 1.5-percentage points associated with supply chain costs and capacity restrictions (including significantly higher freight and shipping costs and constrained availability of higher margin equipment) and 0.5-percentage points associated with investments to support future growth.

The remainder of the decline reflects the impact of lower savings from temporary government assistance and furlough measures and from an ongoing competitive price environment.

These headwinds were partially offset by the cost savings from our Project Own It transformation actions.

Third quarter 2021 equipment gross margin of 18.3% decreased by 7.2-percentage points as compared to third quarter 2020, reflecting the impact of higher freight costs and lower revenues associated with product supply constraints and an unfavorable mix of sales through our EMEA channel and of lower margin Entry products, as well as the impacts of price declines.

Equipment gross margin for the nine months ended September 30, 2021 of 24.9% decreased by 1.8-percentage points as compared to the prior year period, primarily reflecting the impact of higher freight costs associated with product supply constraints, as well as the impact of price declines and an unfavorable mix of growth in low-end devices, partially offset by higher revenues and favorable transaction currency.

Third quarter 2021 Post sale gross margin of 36.4% decreased by 3.9-percentage points as compared to third quarter 2020, reflecting the impact of contracted service and maintenance revenues, and lower savings from temporary government assistance and furlough measures, as well as pricing pressure on contract renewals and lower royalty revenues and third-party lease commissions, partially offset by productivity and cost savings and restructuring savings associated with Project Own It transformation actions.

Post sale gross margin for the nine months ended September 30, 2021 of 37.5% decreased by 3.2-percentage points as compared to the prior year period, reflecting the impact of contracted service and maintenance revenues, and lower savings from temporary government assistance and furlough measures and the impact of pricing pressure on contract renewals, as well as lower royalty revenues and third-party lease commissions, partially offset by productivity and cost savings and restructuring savings associated with Project Own It transformation actions.

Research, Development and Engineering Expenses (RD&E)

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

(in millions) 2021 2020 Change 2021 2020 Change

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Total RD&E Expenses $ 82 $ 76 $ 6 $ 235 $ 236 $ (1)

Second quarter 2021 RD&E as a percentage of revenue of 4.4% decreased by 0.8-percentage points as compared to second quarter 2020, as a result of higher revenues that outpaced the rate of investments.

RD&E of $79 million increased $3 million as compared to second quarter 2020 reflecting primarily investments in our innovation portfolio and higher compensation related accrual expenses (corresponding with higher expected operating results) partially offset by savings from restructuring and productivity as well as benefits from the timing of program cycles.

RD&E as a percentage of revenue for the six months ended June 30, 2021 of 4.4% decreased by 0.4-percentage points as compared to the prior year period, as a result of higher revenues and Project Own It cost reductions, that outpaced the rate of investments.

Third quarter 2021 RD&E as a percentage of revenue of 4.7% increased by 0.4-percentage points as compared to third quarter 2020, as a result of revenue declines that outpaced the rate of investments.

RD&E of $82 million increased $6 million as compared to third quarter 2020 primarily reflecting investments in our innovation portfolio and the reversal of 401(k) matching contributions in the third quarter 2020, partially offset by savings from restructuring and productivity as well as benefits from the timing of program development cycles.

RD&E as a percentage of revenue for the nine months ended September 30, 2021 of 4.5% decreased by 0.1-percentage points as compared to the prior year period, as a result of higher revenues and Project Own It cost reductions, that outpaced the rate of investments.

RD&E for the nine months ended September 30, 2021 of $235 million decreased $1 million as compared to the prior year period, primarily reflecting the benefits from the timing of program development cycles, as well as savings from restructuring and productivity, partially offset by investments in our innovation portfolio.

Xerox 2021 Form 10-Q 50

RD&E for the six months ended June 30, 2021 of $153 million decreased $7 million as compared to the prior year period, primarily reflecting the benefits from the timing of program cycles, as well as savings from simplification and rationalization in our core technology, partially offset by investments in our innovation portfolio and higher compensation related accrual expenses (corresponding with higher expected operating results).

Selling, Administrative and General Expenses (SAG)

Second quarter 2021 SAG as a percentage of revenue of 24.2% decreased 4.9-percentage points as compared to second quarter 2020, primarily as a result of higher revenues and lower bad debt provision offsetting higher selling and administrative expenses.

Second quarter 2021 SAG of $434 million increased by $8 million as compared to second quarter 2020, including an approximate $15 million adverse impact from translation currency, partially offset by a $10 million benefit from a lower bad debt provision.

The remaining increase reflected the impact of lower savings from temporary government assistance and furlough measures, as well as higher compensation related accrual expenses and other investments in the business corresponding with higher expected operating results, partially offset by productivity and cost savings from our Project Own It transformation actions and other cost reduction actions to mitigate the impact of the pandemic (including reductions in discretionary spend such as near-term targeted marketing programs and the suspension of 401(k) matching contributions).

SAG as a percentage of revenue for the six months ended June 30, 2021 of 25.2% decreased 3.9-percentage points as compared to the prior year period, primarily as a result of an approximate 2.1-percentage point favorable impact from lower bad debt expense due to a higher provision in the prior year to reflect the expected impact to our trade and finance receivable portfolio from the COVID-19 pandemic.

The remaining decrease was primarily due to the impact of lower expenses as a result of cost savings and restructuring associated with our Project Own It transformation actions, and savings from additional cost reduction actions to mitigate the impact of the pandemic (including reductions in discretionary spend such as near-term targeted marketing programs and the suspension of 401(k) matching contributions).

SAG for the six months ended June 30, 2021 of $882 million decreased by $85 million as compared to the prior year period, primarily reflecting lower bad debt expenses, as well as 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 (including reductions in discretionary spend such as near-term targeted marketing programs and the suspension of 401(k) matching contributions), partially offset by an approximate $25 million adverse impact from translation currency, higher compensation related accrual expenses and other investments in the business corresponding with higher expected operating results, the impact of lower savings from temporary government assistance and furlough measures and higher expenses from prior year acquisitions.

Our bad debt provision for the six months ended June 30, 2021 of $13 million decreased by $74 million as compared to the prior year period, primarily due to the prior year reflecting an approximate $60 million incremental provision to cover estimated write-offs on our trade and finance receivable portfolio from the COVID-19 pandemic, as well as a reserve reduction, in second quarter 2021, of approximately $6 million reflecting improvements in the macroeconomic environment as well as lower write-offs.

Although actual write-offs incurred to date have lagged expectations, we believe our current reserve position remains sufficient to cover expected future losses that may result from future economic conditions.

Despite the 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.

Third quarter 2021 SAG as a percentage of revenue of 23.5% decreased by 1.6-percentage points as compared to third quarter 2020, primarily as a result of a lower bad debt provision and lower selling and administrative expenses which more than offset lower revenues.

Third quarter 2021 SAG of $413 million decreased by $31 million as compared to third quarter 2020, including a $20 million benefit from a lower bad debt provision.

The remaining decrease reflected the impact of productivity and cost savings from our Project Own It transformation actions, partially offset by lower benefits from temporary government assistance and furlough measures, higher compensation related accruals (corresponding with higher expected operating results) and other investments in the business to support future growth, as well as the reversal of the accrual for 401(k) matching contributions in the third quarter 2020 and the adverse impact from translation currency.

SAG as a percentage of revenue for the nine months ended September 30, 2021 of 24.6% decreased by 3.1-percentage points as compared to the prior year period, primarily as a result of an approximate 1.8-percentage point favorable impact from lower bad debt expense due to a higher provision in the prior year to reflect the expected impact to our trade and finance receivable portfolio from the COVID-19 pandemic.

The remaining decrease was primarily due to the impact of higher revenues and lower selling expenses as a result of cost savings and restructuring associated with our Project Own It transformation actions, and savings from additional cost reduction actions to mitigate the impact of the pandemic (including reductions in discretionary spend such as near-term targeted marketing programs).

SAG for the nine months ended September 30, 2021 of $1,295 million decreased by $116 million as compared to the prior year period, primarily reflecting lower bad debt expenses, as well as 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 (including reductions in discretionary spend such as near-term targeted marketing programs), partially offset by an approximate $30 million adverse impact from translation currency, higher compensation related accruals (corresponding with higher expected operating results) and other investments in the business to support future growth, as well as the impact of lower benefits from temporary government assistance and furlough measures and higher expenses from prior year acquisitions.

Our bad debt provision for the nine months ended September 30, 2021 of $9 million decreased by $94 million as compared to the prior year period, primarily due to the prior year reflecting an approximate $60 million incremental provision to cover estimated write-offs on our trade and finance receivable portfolio from the COVID-19 pandemic, while 2021 reflected finance receivable reserve reductions, in the second quarter and third quarter 2021 of approximately $6 million and $14 million, respectively, and lower reserves for trade receivables.

The 2021 reductions in our Finance and Trade reserves reflect improvements in the macroeconomic environment as well as lower write-offs.

Although actual finance receivable write-offs incurred to date continued to lag expectations, we believe our current reserve position remains sufficient to cover expected future losses that may result from future economic conditions.

Despite the improvement in the global economy, significant uncertainties remain as local 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.

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We continue to monitor developments regarding the pandemic, including business closures and 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.

On a trailing twelve-month basis (TTM), bad debt expense was approximately 1.0% of total receivables, which is consistent with the pre-pandemic trend and reflects the consistent level of reserves subsequent to the first quarter 2020 charge.

On a trailing twelve-month basis (TTM), bad debt expense was approximately 1.0% of total receivables (excluding the second and third quarter 2021 reductions of $6 million and $14 million, respectively), which is consistent with the pre-pandemic trend and reflects the consistent level of reserves subsequent to the first quarter 2020 charge.

Refer to Note 7 - Accounts Receivable, Net and Note 8 - Finance Receivables, Net in the Condensed Consolidated Financial Statements for additional information regarding our bad debt provision.

Xerox 2021 Form 10-Q 51

Restructuring and Related Costs, Net

We incurred Restructuring and related costs, net of $12 million for the second quarter 2021 , as compared to $3 million for second quarter 2020, and $29 million for the six months ended June 30, 2021, as compared to $44 million in the prior year period.

We incurred Restructuring and related costs, net of $10 million for the third quarter 2021 , as compared to $20 million for third quarter 2020, and $39 million for the nine months ended September 30, 2021, as compared to $64 million in the prior year period.

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

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Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

(in millions) 2021 2020 2021 2020

1 unchanged sentence

$ 5 $ 18 $ 25 $ 57

Asset impairments (2)

Asset impairments - leased right-of-use assets (2)

Asset impairments - owned assets (2)

Other contractual termination costs (3)

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_____________

(1) Reflects headcount reductions of approximately 50 and 150 employees worldwide in second quarter 2021 and 2020, respectively and 400 and 450 employees worldwide for the six months ended June 30, 2021 and 2020, respectively.

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

The charge includes the accelerated write-off of $1 million in second quarter 2021, as compared to no write-offs in second quarter 2020 and $2 million and $1 million for the six months ended June 30, 2021 and 2020, respectively, for leased right-of-use assets, as well as no write-offs in second quarter 2021 and 2020, and $9 million and $1 million for the six months ended June 30, 2021 and 2020, respectively, for owned assets upon exit from the facilities, net of any potential sublease income and other recoveries, including potential sales..

(1) Reflects headcount reductions of approximately 35 and 650 employees worldwide in third quarter 2021 and 2020, respectively and 435 and 1,100 employees worldwide for the nine months ended September 30, 2021 and 2020, respectively.

(2) Primarily related to the exit and abandonment of leased and owned facilities net of any potential sublease income and other recoveries, including potential sales.

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

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

The $1 million credit through the six months ended June 30, 2021 , reflected a change in estimate.

(6) Amounts primarily reflect severance and other related costs we are contractually required to pay in connection with employees transferred as part of the shared service arrangement entered into with HCL Technologies.

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

Second quarter 2021 actions impacted several functional areas, with approximately 30% focused on gross margin improvements and approximately 70% focused on SAG reductions.

Second quarter 2020 actions impacted several functional areas, with approximately 10% focused on gross margin improvements and approximately 90% focused on SAG reductions.

The Restructuring and related costs, net reserve balance as of June 30, 2021 for all programs was $63 million, which is expected to be paid over the next twelve months.

Third quarter 2021 actions impacted several functional areas, with approximately 35% focused on gross margin improvements, approximately 50% focused on SAG reductions and the remainder focused on RD&E optimization.

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

The Restructuring and related costs, net reserve balance as of September 30, 2021 for all programs was $58 million, which is expected to be paid over the next twelve months.

Refer to Note 11 - Restructuring Programs in the Condensed Consolidated Financial Statements for additional information regarding our restructuring programs.

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There were no Transaction and related costs, net incurred during 2021.

Transaction and related costs, net for the three and six months ended June 30, 2020 were $7 million and $24 million, respectively, and primarily related to legal and other professional costs associated with the terminated proposal to acquire HP Inc.

For the three months ended September 30, 2020, we recognized a credit of $6 million, primarily related to adjustments to costs from third party providers of professional services, while for the nine months ended September 30, 2020 we incurred $18 million of costs primarily related to legal and other professional costs associated with the terminated proposal to acquire HP Inc.

Amortization of Intangible Assets

Amortization of intangible assets for the three and six months ended June 30, 2021 of $14 million and $29 million, respectively, increased by $4 million and $8 million as compared to the respective prior year periods, primarily related to intangible assets associated with our recent acquisitions.

Third quarter 2021 Amortization of intangible assets of $13 million was flat as compared to the third quarter 2020.

Amortization of intangible assets for the nine months ended September 30, 2020 was $42 million, an increase of $8 million as compared to the prior year period primarily due to intangible assets associated with our 2020 and 2021 acquisitions.

Xerox 2021 Form 10-Q 52

Worldwide Employment

Worldwide employment was approximately 24,000 as of June 30, 2021 and decreased by approximately 1,100 1 from December 31, 2020.

Worldwide employment was approximately 23,600 as of September 30, 2021 and decreased by approximately 1,500 1 from December 31, 2020.

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

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Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

(in millions) 2021 2020 2021 2020

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Non-Financing Interest Expense

Second quarter 2021 non-financing interest expense of $24 million was $6 million higher than second quarter 2020.

When combined with financing interest expense (Cost of financing), total interest expense increased by $4 million as compared to second quarter 2020 primarily reflecting a higher average debt balance and average interest rate.

Non-financing interest expense for the six months ended June 30, 2021 of $48 million was $9 million higher than the prior year.

When combined with financing interest expense (Cost of financing), total interest expense increased by $5 million from the prior year period reflecting a higher average debt balance and average interest rate.

Third quarter 2021 non-financing interest expense of $23 million was $7 million lower than third quarter 2020.

When combined with financing interest expense (Cost of financing), total interest expense decreased by $7 million as compared to third quarter 2020, primarily reflecting a lower average interest rate and average debt balance.

Non-financing interest expense for the nine months ended September 30, 2021 of $71 million was $2 million higher than the prior year period.

When combined with financing interest expense (Cost of financing), total interest expense decreased by $2 million from the prior year period reflecting a lower average interest rate and average debt balance.

Refer to Note 12 - Debt in the Condensed Consolidated Financial Statements, for additional information regarding debt activity and the interest expense.

Interest Income

Interest income for the three and six months ended June 30, 2021 were $2 million and $9 million lower, respectively, than the respective prior year periods, primarily due to lower interest rates and a lower cash balance.

Interest income for the nine months ended September 30, 2021 was $9 million lower than the prior year period, primarily due to lower interest rates and a lower cash balance.

Non-Service Retirement-Related Costs

Non-service retirement-related costs for the three and six months ended June 30, 2021 were $14 million and $35 million lower than the respective prior year periods, primarily driven by lower discount rates and higher expected returns on plan assets due to higher asset balances as well as lower losses from pension settlements in the U.S.

Non-service retirement-related costs for the three and nine months ended September 30, 2021 were $9 million and $44 million lower than the respective prior year periods, primarily driven by lower discount rates and higher expected returns on plan assets due to higher asset balances.

Refer to Note 15 - Employee Benefit Plans in the Condensed Consolidated Financial Statements, for additional information regarding non-service retirement-related costs.

Second quarter 2021 effective tax rate was 9.1%.

On an adjusted 1 basis, second quarter 2021 effective tax rate was 9.7%.

Both rates include the benefit from a change in tax law, resulting in the remeasurement of deferred tax assets of approximately 16%.

Gains on Sales of Businesses and Assets

Gains on sales of businesses and assets increased $11 million for both the three and nine months ended September 30, 2021 as compared to the respective prior year periods, reflecting higher proceeds from the sale of non-core business assets.

Third quarter 2021 effective tax rate was (4.8)%.

On an adjusted 1 basis, third quarter 2021 effective tax rate was (3.5)%.

Both rates include the benefits from additional incentives as a result of changes in elections made with the filed tax returns, as well as a decrease in the deferred tax valuation allowances of approximately 26%.

The adjusted 1 effective tax rate was lower than the U.S.

federal statutory tax rate of 21% primarily due to the change in tax law, partially offset by state taxes and the geographical mix of earnings.

federal statutory tax rate of 21% primarily due to additional incentives as a result of changes in elections made with the filed tax returns, decrease in deferred tax valuation allowances, and the geographical mix of earnings.

The adjusted 1 effective tax rate excludes the tax impacts associated with the following charges:

Restructuring and related costs, net, Amortization of intangible assets, non-service retirement-related costs and other discrete, unusual or infrequent items (as applicable) as described in our Non-GAAP Financial Measures section.

Second quarter 2020 effective tax rate was 22.9%.

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

Restructuring and related costs, net, Amortization of intangible assets, non-

Xerox 2021 Form 10-Q 53

service retirement-related costs and other discrete, unusual or infrequent items (as applicable) as described in our Non-GAAP Financial Measures section.

Third quarter 2020 effective tax rate was 24.4%.

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

This rate was higher than the U.S.

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

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

The adjusted 1 effective tax rate excludes the tax impacts associated with the following charges:

Restructuring and related costs, net, Amortization of intangible assets, Transaction and related costs, net, non-service retirement-related costs and other discrete, unusual or infrequent items (as applicable), as described in our Non-GAAP Financial Measures section.

Xerox 2021 Form 10-Q 52

The effective tax rate for the six months ended June 30, 2021 was 15.1%.

On an adjusted 1 basis, the effective tax rate for the six months ended June 30, 2021 was 16.7%.

Both rates include the benefit from a change in tax law, resulting in the remeasurement of deferred tax assets of approximately 10%.

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 applicable), as described in our Non-GAAP Financial Measures section.

The effective tax rate for the nine months ended September 30, 2021 was 8.1%.

On an adjusted 1 basis, the effective tax rate for the nine months ended September 30, 2021 was 9.9%.

Both rates include the benefits from tax law changes, additional incentives as a result of changes in elections made with the filed tax returns, as well as a decrease in the deferred tax valuation allowances of approximately 15%.

The adjusted 1 effective tax was lower than the U.S.

federal statutory tax rate of 21% primarily due to the change in the tax law, partially offset by state taxes and the geographical mix of earnings.

federal statutory tax rate of 21% primarily due to benefits from tax law changes, additional incentives as a result of changes in elections made with the filed tax returns, decrease in deferred tax valuation allowances and partially offset by state taxes and the geographical mix of earnings.

The adjusted 1 effective tax rate excludes the tax impacts associated with the following charges:

Restructuring and related costs, net, Amortization of intangible assets, non-service retirement-related costs and other discrete, unusual or infrequent items (as applicable), as described in our Non-GAAP Financial Measures section.

The effective tax rate for the six months ended June 30, 2020 was 23.3%.

On an adjusted 1 basis, the effective tax rate for the six months ended June 30, 2020 was 27.0%.

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

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

This rate was higher than the U.S.

federal statutory tax rate of 21% primarily due to the impact of changes in our uncertain tax positions, state taxes and various non-deductible items partially offset by the impact of tax law changes and other discrete items.

federal statutory tax rate of 21% primarily due to state taxes, the geographical mix of earnings which includes non-deductible items on lower pre-tax income and an increase in deferred tax asset valuation allowances partially offset by a benefit of approximately 6.0% for the impact from various tax law changes.

The adjusted 1 effective tax rate excludes the tax impacts associated with the following charges:

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Investment in Affiliates, at Equity largely consists of several minor investments in entities in the Middle East region.

Equity in net income of unconsolidated affiliates for the six months ended June 30, 2021 was $1 million, as compared to $2 million for the six months ended June 30, 2020.

Second quarter 2021 Net income attributable to Xerox Holdings was $91 million, or $0.46 per diluted share and included the benefit from a change in tax law (see Income Taxes above).

Equity in net income of unconsolidated affiliates for the nine months ended September 30, 2021 of $2 million was flat as compared to the prior year period.

Third quarter 2021 Net income attributable to Xerox Holdings was $90 million, or $0.48 per diluted share.

On an adjusted 1 basis, Net income attributable to Xerox Holdings was $90 million, or $0.48 per diluted share.

Second quarter 2021 adjustments to Net income included Restructuring and related costs, net, Amortization of intangible assets, and non-service retirement-related costs (see Non-GAAP Financial Measures ).

Net income attributable to Xerox Holdings for the six months ended June 30, 2021 was $130 million, or $0.64 per diluted share and included the benefit from a change in tax law (see Income Taxes above).

Third quarter 2021 adjustments to Net income attributable to Xerox Holdings included Restructuring and related costs, net, Amortization of intangible assets, and non-service retirement-related costs (see Non-GAAP Financial Measures ).

Net income attributable to Xerox Holdings for the nine months ended September 30, 2021 was $220 million, or $1.10 per diluted share and included the benefit from a change in tax law (see Income Taxes above).

On an adjusted 1 basis, Net income attributable to Xerox Holdings was $231 million, or $1.16 per diluted share.

Adjustments to Net income for the six months ended June 30, 2021 included Restructuring and related costs, net, Amortization of intangible assets, and non-service retirement-related costs (see Non-GAAP Financial Measures ).

Second quarter 2020 Net income attributable to Xerox Holdings was $27 million, or $0.11 per diluted share.

Adjustments to Net income attributable to Xerox Holdings for the nine months ended September 30, 2021 included Restructuring and related costs, net, Amortization of intangible assets, and non-service retirement-related costs (see Non-GAAP Financial Measures ).

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

On an adjusted 1 basis, Net income attributable to Xerox Holdings was $105 million, or $0.48 per diluted share.

Second quarter 2020 adjustments to Net income included Restructuring and related costs, net, Amortization of intangible assets, Transaction and related costs, net as well as non-service retirement-related costs (see Non-GAAP Financial Measures ).

Net income attributable to Xerox Holdings for the six months ended June 30, 2020 was $25 million, or $0.08 per diluted share.

Third quarter 2020 adjustments to Net income attributable to Xerox Holdings included Restructuring and related costs, net, Amortization of intangible assets, Transaction and related costs, net as well as non-service retirement-related costs (see Non-GAAP Financial Measures ).

Xerox 2021 Form 10-Q 54

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

On an adjusted 1 basis, Net income attributable to Xerox Holdings was $191 million, or $0.84 per diluted share.

Both amounts included the impact of the approximately $60 million pre-tax increase in bad debt expense (approximately $43 million after-tax) as compared to the prior year period, primarily reflecting the expected impact to our customer base and related outstanding receivable portfolio from the COVID-19 pandemic.

Adjustments to Net income for the six months ended June 30, 2020 included 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 (see Non-GAAP Financial Measures ).

Refer to Note 19 - Earnings per Share (EPS) in the Condensed Consolidated Financial Statements, for additional information regarding the calculation of basic and diluted earnings per share.

Adjustments to Net income attributable to Xerox Holdings for the nine months ended September 30, 2020 included 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 (see Non-GAAP Financial Measures ).

Refer to Note 19 - Earnings per Share in the Condensed Consolidated Financial Statements, for additional information regarding the calculation of basic and diluted earnings per share.

_____________

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

Xerox 2021 Form 10-Q 53

Other Comprehensive Income (Loss)

Second quarter 2021 Other Comprehensive Income, Net Attributable to Xerox was $70 million and included the following:

i) net translation adjustment gains of $54 million reflecting the strengthening of our major foreign currencies against the U.S.

Other Comprehensive (Loss) Income

Third quarter 2021 Other Comprehensive Loss, Net Attributable to Xerox was $70 million and included the following:

i) net translation adjustment losses of $125 million reflecting the weakening of our major foreign currencies against the U.S.

Dollar during the quarter;

and ii) $16 million of net gains from the changes in defined benefit plans primarily due to remeasurement and net actuarial gains as a result of higher discount rates.

This compares to Other Comprehensive Income, Net Attributable to Xerox of $103 million for the second quarter 2020, which reflected the following:

i) $80 million of net gains from the changes in defined benefit plans primarily due to remeasurement;

ii) $4 million of net unrealized gains;

and iii) $51 million of net gains from the changes in defined benefit plans primarily due to net actuarial gains as a result of better than expected investment returns and higher discount rates as well as the positive impact of currency.

This compares to Other Comprehensive Income, Net Attributable to Xerox of $88 million for the third quarter 2020, which reflected the following:

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

ii) $1 million of net unrealized gains;

and iii) $92 million of net losses from the changes in defined benefit plans primarily due to net actuarial losses as a result of lower discount rates in the U.S.

and the negative impacts from currency, partially offset by settlements.

Other Comprehensive Loss, Net Attributable to Xerox for the nine months ended September 30, 2021 was $3 million and included the following:

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

ii) $3 million of net unrealized losses;

and iii) $122 million of net gains from the changes in defined benefit plans primarily due to remeasurement in the second quarter of 2021 and net actuarial gains as a result of higher discount rates, as well as the positive impact of currency.

This compares to Other Comprehensive Income, Net Attributable to Xerox for the nine months ended September 30, 2020 of $53 million, which reflected the following:

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

ii) net translation adjustment gains of $7 million reflecting the strengthening of our major foreign currencies against the U.S.

and iii) $2 million of net unrealized losses.

Other Comprehensive Income, Net Attributable to Xerox for the six months ended June 30, 2021 was $67 million and included the following:

i) $71 million of net gains from the changes in defined benefit plans primarily due to remeasurement in the second quarter of 2021 and net actuarial gains as a result of higher discount rates.;

ii) net translation adjustment gains of $3 million reflecting the strengthening of the GBP and CAD that was only partially offset by the weakening of the EUR against the U.S.

and iii) $7 million of net unrealized losses.

This compares to Other Comprehensive Loss, Net Attributable to Xerox for the six months ended June 30, 2020 of $35 million, which reflected the following:

i) net translation adjustment losses of $172 million reflecting the significant weakening of our major foreign currencies against the U.S.

ii) $134 million of net gains from the changes in defined benefit plans primarily due to remeasurement in the second quarter of 2020;

and iii) $4 million of net unrealized gains.

Refer to Note 18 - Other Comprehensive Income (Loss) in the Condensed Consolidated Financial Statements, for the components of Other Comprehensive Income (Loss), Note 13 - Financial Instruments in the Condensed Consolidated Financial Statements, for additional information regarding unrealized (losses) gains, net, and Note 15 - Employee Benefit Plans in the Condensed Consolidated Financial Statements, for additional information regarding net changes in our defined benefit plans.

Refer to Note 18 - Other Comprehensive (Loss) Income in the Condensed Consolidated Financial Statements, for the components of Other Comprehensive (Loss) Income, Note 13 - Financial Instruments in the Condensed Consolidated Financial Statements, for additional information regarding unrealized (losses) gains, net, and Note 15 - Employee Benefit Plans in the Condensed Consolidated Financial Statements, for additional information regarding net changes in our defined benefit plans.

_____________

(1) AOCL - Accumulated other comprehensive loss.

New Business Strategy

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Accordingly, the chief operating decision maker (CODM) and management continue to manage the Company’s operations, including the products and services from these units, through the GTM sales channels and as result, we continue to have one operating and reportable segment.

We expect that the business and financial information for these new units, as well as the operational management of these businesses, will continue to be refined and improved during 2021.

Accordingly, a reassessment of our operating segments may be required later in 2021.

We expect that the business and financial information for these new units, as well as the operational management of these businesses, will continue to be refined and improved during the fourth quarter 2021.

Accordingly, a reassessment of our operating segments may be required beginning in 2022.

Xerox 2021 Form 10-Q 55

Capital Resources and Liquidity

Our financial results through June 30, 2021 were impacted by COVID-19 related business closures and office building capacity restrictions.

Our financial results through September 30, 2021 were impacted by ongoing COVID-19 related business closures and office building capacity restrictions, as well as supply chain and freight disruptions.

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

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

• As of June 30, 2021, total cash, cash equivalents and restricted cash were $2,203 million and, apart from the restricted cash of $79 million, was readily accessible for use.

• The majority of our business is contractually based and most of our bundled services contracts include a fixed minimum as well as a variable component linked to excess print volumes, which provides us with a continuing stream of operating cash flow.

• As of September 30, 2021, total cash, cash equivalents and restricted cash were $2,262 million and, apart from restricted cash of $53 million, was readily accessible for use.

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

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

Six Months Ended

June 30, Change

Nine Months Ended

September 30, Change

(in millions) 2021 2020

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Net cash used in investing activities (54) (223) 169

Net cash used in financing activities (747) (432) (315)

Net cash (used in) provided by financing activities (793) 424 (1,217)

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

Decrease in cash, cash equivalents and restricted cash (488) (481) (7)

(Decrease) increase in cash, cash equivalents and restricted cash (429) 502 (931)

Cash, cash equivalents and restricted cash at beginning of period 2,691 2,795 (104)

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Cash Flows from Operating Activities

Net cash provided by operating activities was $331 million for the six months ended June 30, 2021.

Net cash provided by operating activities was $431 million for the nine months ended September 30, 2021.

The $118 million increase in operating cash from the prior year period was primarily due to the following:

• $229 million increase from inventory primarily due to increased revenues as well as significant cash usage in 2020 as inventory levels increased with the onset of the COVID-19 pandemic.

• $126 million increase from accounts payable primarily due to the increase in spending as compared to the prior year partially offset by the timing of supplier and vendor payments.

• $109 million decrease in pre-tax income before depreciation and amortization, provisions, gain on sales of businesses and assets, restructuring and related costs, net and defined benefit pension costs.

• $284 million increase from inventory primarily due to significant cash usage in 2020 as inventory levels increased because of lower demand resulting from the COVID-19 pandemic.

• $143 million increase from accounts payable primarily due to higher spending as compared to the prior year, partially offset by the timing of supplier and vendor payments.

• $132 million increase from other current and long-term liabilities, reflecting higher accruals from the increased level of operations as compared to the prior year.

• $100 million increase due to the receipt of an upfront prepaid fixed royalty from FX for their continued use of the Xerox brand trademark subsequent to the termination of our technology agreement with them.

• $93 million increase from accrued compensation primarily related to higher employee incentive accruals and year-over-year timing of employee incentive payments.

• $80 million increase primarily due to the receipt of an upfront prepaid fixed royalty from FX of $100 million for their continued use of the Xerox brand trademark subsequent to the termination of our technology agreement with them.

• $362 million decrease from accounts receivable primarily due to higher revenues as compared to the prior year, partially offset by the timing of collections.

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Cash Flows from Investing Activities

Net cash used in investing activities was $72 million for the six months ended June 30, 2021.

The $160 million change from the prior year period was primarily due to two acquisitions completed in the current year for $37 million compared to four acquisitions in the prior year for $193 million.

Net cash used in investing activities was $54 million for the nine months ended September 30, 2021.

The $169 million change from the prior year period was primarily due to the following:

• $156 million change due to two acquisitions completed in the current year for $37 million compared to four acquisitions in the prior year for $193 million.

• $11 million increase due to proceeds from the sales of non-core business assets of $38 million in the current year compared to $27 million in the prior year.

• Other investing, net includes $3 million of noncontrolling investments as part of our corporate venture capital fund.

Cash Flows from Financing Activities

Net cash used in financing activities was $747 million for the six months ended June 30, 2021.

The $315 million increase in the use of cash from the prior year period was primarily due to the following:

• $413 million increase due to share repurchases in the current year compared to no share repurchases in the prior year.

Xerox 2021 Form 10-Q 56

• $99 million decrease from net debt activity primarily due to payments of $209 million on secured financing arrangements in the current year compared to payments of $313 million on Senior Notes in the prior year.

• Other financing, net includes the receipt of $5 million for a noncontrolling investment in Eloque, a newly-formed joint venture for the remote monitoring of critical infrastructure assets, such as road and railway bridges.

Cash Flows from Financing Activities

Net cash used in financing activities was $793 million for the nine months ended September 30, 2021.

The $1,217 million decrease in cash from the prior year period was primarily due to the following:

• $902 million decrease from net debt activity.

2021 reflects payments of $444 million on existing secured financing arrangements 1 and $1 million of deferred debt issuance costs offset by proceeds of $311 million on a new secured financing arrangement.

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

• $350 million decrease due to share repurchases in the current year of $500 million compared to share repurchases of $150 million in the prior year.

• Other financing, net includes receipts for noncontrolling investments of $5 million in Eloque, a joint venture for the remote monitoring of critical infrastructure assets, and $10 million in CareAR Holdings LLC, a newly formed software business.

_____________

(1) The payments on existing secured financing arrangements of $444 million include $136 million associated with the early extinguishment of an existing arrangement that was funded through the new secured financing arrangement.

Refer to Note 12 - Debt for further information.

Cash, Cash Equivalents and Restricted Cash

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

As of June 30, 2021 and December 31, 2020, total operating liabilities were $302 million and $333 million, respectively.

As of September 30, 2021 and December 31, 2020, total operating lease liabilities were $290 million and $333 million, respectively.

Refer to Note 10 - Lessee in the Condensed Consolidated Financial Statements for additional information regarding our leases accounted under lessee accounting.

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The following summarizes our debt:

(in millions) June 30, 2021 December 31, 2020

(in millions) September 30, 2021 December 31, 2020

Xerox Holdings Corporation $ 1,500 $ 1,500

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_____________

(1) Represents secured debt issued by subsidiaries of Xerox Corporation as part of the securitization of Finance Receivables - Refer to Note 12 - Debt in the Condensed Consolidated Financial Statements for additional information.

(1) Represents secured debt issued by subsidiaries of Xerox Corporation as part of the securitization of Finance Receivables.

(2) Fair value adjustments normally include the following:

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Refer to Note 12 - Debt in the Condensed Consolidated Financial Statements for additional information regarding debt.

Xerox 2021 Form 10-Q 57

Finance Assets and Related Debt

The following represents our total finance assets, net associated with our lease and finance operations:

(in millions) June 30, 2021 December 31, 2020

(in millions) September 30, 2021 December 31, 2020

Total finance receivables, net (1)

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(2) The change from December 31, 2020 includes a decrease of $59 million due to currency.

Xerox 2021 Form 10-Q 56

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

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

(in millions) June 30, 2021 December 31, 2020

(in millions) September 30, 2021 December 31, 2020

Finance receivables debt (1)

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Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

(in millions) 2021 2020 2021 2020

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

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

$ (17) $ 54 $ (43) $ (86)

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Refer to Note 7 - Accounts Receivable, Net in the Condensed Consolidated Financial Statements for additional information regarding our accounts receivable sales arrangements.

Xerox 2021 Form 10-Q 58

Liquidity and Financial Flexibility

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2021 Q4 $ — $ — $ 76 $ 76

2021 Q4 — — 89 89

2022 — 300 349 649

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_____________

(1) Represents secured debt issued by subsidiaries of Xerox Corporation as part of securitization of Finance Receivables - Refer to Note 12 - Debt in the Condensed Consolidated Financial Statements for additional information.

(1) Represents secured debt issued by subsidiaries of Xerox Corporation as part of securitization of Finance Receivables.

(2) Includes fair value adjustments.

Xerox 2021 Form 10-Q 57

Refer to Note 12 - Debt in the Condensed Consolidated Financial Statements for additional information regarding debt.

Treasury Stock

Xerox Holdings repurchased 10.4 million shares of our common stock for an aggregate $251 million, including fees, in second quarter 2021.

Xerox Holdings repurchased 17.1 million shares of our common stock for an aggregate cost of $413 million, including fees, during the six months ended June 30, 2021.

The cumulative total of shares repurchased by Xerox Holdings under the current share repurchase program is 41.8 million shares for an aggregate cost of $1,013 million, including fees.

As of June 30, 2021, the remaining share repurchase authorization, excluding fees and expenses, is approximately $88 million.

Shared Services Arrangement with HCL Technologies

Xerox Holdings Corporation repurchased 3.7 million shares of its common stock for an aggregate $87 million, including fees, in third quarter 2021.

Xerox Holdings Corporation repurchased 20.8 million shares of its common stock for an aggregate cost of $500 million, including fees, during the nine months ended September 30, 2021.

The cumulative total of shares repurchased by Xerox Holdings Corporation under the current share repurchase program is 45.5 million shares for an aggregate cost of approximately $1,100 million, including fees.

As of September 30, 2021, there was approximately $500 thousand of remaining share repurchase authorization.

In October 2021, Xerox Holdings Corporation's Board of Directors authorized a new $500 million share repurchase program (exclusive of any commissions and other transaction fees and costs related thereto), to be used opportunistically.

The approximately $500 thousand of authority remaining under Xerox Holdings Corporation's previously authorized $1.1 billion share repurchase program was cancelled.

Xerox 2021 Form 10-Q 59

Shared Services Arrangements

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

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

We incurred net charges of approximately $50 million and $45 million during the three months ended June 30, 2021 and 2020, respectively, and approximately $100 million and $90 million for the six months ended June 30, 2021 and 2020.

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

ServiceNow License Purchase

In June 2021, Xerox entered into a software services agreement with a system integrator that included Xerox's use of ServiceNow software licenses for a 5-year commitment of approximately $60 million.

A portion of licenses obtained through this new arrangement are expected to be used by Xerox as part of a future project with the system integrator for the reengineering and restructure of Xerox's current global technical service force.

Shared Services Arrangement with Tata Consulting Services

In July 2021, Xerox entered into an arrangement with Tata Consulting Services (TCS), whereby TCS will provide business processing outsourcing services in support of our global finance organization.

This will include the transition of all the finance processes currently being provided by HCL.

These activities started to transition during the third quarter 2021 and are expected to be completed in fourth quarter 2021.

The transition does not impact our minimum revenue commitments to HCL and will result in all of our finance business processing outsourcing services being provided by one vendor.

TCS will leverage their existing technology and make additional investments as required to consolidate, optimize and automate the supported services with the goal of providing improved service levels and cost savings.

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We can terminate the arrangement subject to payment of termination fees that decline over the term.

We incurred net charges of $52 million and $49 million during the three months ended September 30, 2021 and 2020, respectively, and $152 million and $139 million for the nine months ended September 30, 2021 and 2020, respectively, related to these shared services arrangements.

ServiceNow License Purchase

In June 2021, Xerox entered into a software services agreement with a system integrator that included Xerox's use of ServiceNow software licenses for a 5-year commitment of approximately $60 million.

Xerox 2021 Form 10-Q 60

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Accordingly, we believe it is necessary to adjust several reported amounts, determined in accordance with GAAP, to exclude the effects of certain items as well as their related income tax effects.

A reconciliation of these non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP are set forth below as well as in the second quarter 2021 presentation slides available at www.xerox.com/investor.

Reconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP are set forth below as well as in the third quarter 2021 presentation slides available at www.xerox.com/investor.

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

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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.

In addition to the costs and expenses noted above 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.

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Compensation of our executives is based in part on the performance of our business based on these non-GAAP measures.

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

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

Net Income and EPS reconciliation:

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

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

2021 2020 2021 2020

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182 213 190 215

Fully diluted shares at June 30, 2021 (4)

Fully diluted shares at September 30, 2021 (4)

____________________________

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(3) Average shares for the calculation of adjusted diluted EPS for 2021 and 2020 excludes 7 million shares associated with our Series A convertible preferred stock and therefore earnings includes the preferred stock dividend.

(4) Represents common shares outstanding at June 30, 2021 plus potential dilutive common shares as used for the calculation of adjusted diluted EPS for 2021.

(4) Represents common shares outstanding at September 30, 2021 plus potential dilutive common shares as used for the calculation of adjusted diluted EPS for 2021.

The amount excludes shares associated with our Series A convertible preferred stock as they were anti-dilutive for 2021.

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Effective Tax Rate reconciliation:

Three Months Ended June 30,

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

Three Months Ended September 30,

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

Tax Rate Pre-Tax Income Income Tax Expense Effective

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$ 85 $ (3) (3.5) % $ 133 $ 28 21.1 %

Six Months Ended June 30,

Nine Months Ended September 30,

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

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____________________________

(1) Pre-tax income and income tax expense.

(1) Pre-tax income and income tax (benefit) expense.

(2) Refer to Net Income and EPS reconciliation for details.

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Operating Income and Margin reconciliation:

Three Months Ended June 30,

Three Months Ended September 30,

(in millions) Profit Revenue Margin Profit Revenue Margin

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Adjusted $ 74 $ 1,758 4.2 % $ 131 $ 1,767 7.4 %

Six Months Ended June 30,

Nine Months Ended September 30,

(in millions) Profit Revenue Margin Profit Revenue Margin

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis