Xerox Holdings Corp 10-Q

ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Throughout the Management’s Discussion and Analysis (MD&A), references to “Xerox Holdings” refer to Xerox Holdings Corporation and its consolidated subsidiaries while references to “Xerox” refer to Xerox Corporation and its consolidated subsidiaries. References herein to “we,” “us,” “our,” the “Company” refer collectively to both Xerox Holdings and Xerox unless the context suggests otherwise. References to "Xerox Holdings Corporation" refer to the stand-alone parent company and do not include its subsidiaries. References to "Xerox Corporation" refer to the stand-alone company and do not include its subsidiaries. Currently, Xerox Holdings' primary direct operating subsidiary is Xerox and Xerox reflects nearly all of Xerox Holdings' operations. Accordingly, the following MD&A primarily focuses on the operations of Xerox and is intended to help the reader understand Xerox's business and its results of operations and financial condition. The MD&A is provided as a supplement to, and should be read in conjunction with, the Condensed Consolidated Financial Statements and the accompanying notes. Throughout 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. 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 To understand the trends in the business, we believe that it is helpful to analyze the impact of changes in the translation of foreign currencies into U.S. Dollars on revenue and expenses. We refer to this analysis as "constant currency", “currency impact” or “the impact from currency.” This impact is calculated by translating current period activity in local currency using the comparable prior year period's currency translation rate. This impact is calculated for all countries where the functional currency is the local country currency. We do not hedge the translation effect of revenues or expenses denominated in currencies where the local currency is the functional currency. Management believes the constant currency measure provides investors an additional perspective on revenue trends. Currency impact can be determined as the difference between actual growth rates and constant currency growth rates. Xerox 2021 Form 10-Q 41 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 workplace or a remote location. 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. 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 temporary government assistance were recorded as follows in the Condensed Consolidated Statements of Income: (in millions) Three 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 Research, development and engineering expenses — — — 1 Selling, administrative and general expenses 5 9 12 28 Total Estimated savings $ 9 $ 35 $ 29 $ 95 Overview 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 September 30, Nine Months Ended September 30, (in millions) 2021 2020 B/(W) 2021 2020 B/(W) Net income attributable to Xerox Holdings $ 90 $ 90 $ — $ 220 $ 115 $ 105 Adjusted (2) Net income attributable to Xerox Holdings 90 105 (15) 231 191 40 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. 2021 Outlook 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 offerings. (2) See the “Non-GAAP Financial Measures” section for an explanation of the non-GAAP financial measure. (3) Working capital, net reflects Accounts receivable, net, Inventories and Accounts payable. Xerox 2021 Form 10-Q 43 Financial Review Revenues Three Months Ended September 30, Nine Months Ended September 30, % of Total Revenue (in millions) 2021 2020 % Change CC % Change 2021 2020 % Change CC % Change 2021 2020 Equipment sales $ 387 $ 419 (7.6) % (8.4) % $ 1,197 $ 1,054 13.6 % 11.0 % 23 % 21 % Post sale revenue 1,371 1,348 1.7 % 0.5 % 4,064 4,038 0.6 % (1.8) % 77 % 79 % Total Revenue $ 1,758 $ 1,767 (0.5) % (1.6) % $ 5,261 $ 5,092 3.3 % 0.8 % 100 % 100 % Reconciliation to Condensed Consolidated Statements of Income: Sales $ 657 $ 651 0.9 % (0.1) % $ 1,929 $ 1,676 15.1 % 12.6 % Less: Supplies, paper and other sales (270) (232) 16.4 % 15.1 % (732) (622) 17.7 % 15.2 % Equipment sales $ 387 $ 419 (7.6) % (8.4) % $ 1,197 $ 1,054 13.6 % 11.0 % Services, maintenance and rentals $ 1,046 $ 1,061 (1.4) % (2.5) % $ 3,166 $ 3,246 (2.5) % (4.9) % Add: Supplies, paper and other sales 270 232 16.4 % 15.1 % 732 622 17.7 % 15.2 % Add: Financing 55 55 — % (2.3) % 166 170 (2.4) % (4.8) % Post sale revenue $ 1,371 $ 1,348 1.7 % 0.5 % $ 4,064 $ 4,038 0.6 % (1.8) % Americas $ 1,127 $ 1,152 (2.2) % (2.9) % $ 3,336 $ 3,381 (1.3) % (2.2) % 63 % 66 % EMEA 594 568 4.6 % 2.6 % 1,798 1,571 14.4 % 8.3 % 34 % 31 % Other 37 47 (21.3) % (21.3) % 127 140 (9.3) % (9.3) % 3 % 3 % Total Revenue (1) $ 1,758 $ 1,767 (0.5) % (1.6) % $ 5,261 $ 5,092 3.3 % 0.8 % 100 % 100 % _____________ CC - See "Currency Impact" section for a description of Constant Currency. (1) Refer to the "Geographic Sales Channels and Products and Offerings Definitions" section. 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 Post sale revenue primarily reflects contracted services, equipment maintenance, supplies and financing. These revenues are associated not only with the population of devices in the field, which are affected by installs and removals, but also by the page volumes generated from the usage of such devices and the revenue per printed page. Post sale revenue also includes transactional IT hardware sales and implementation services primarily from our XBS organization 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 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 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 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 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. Equipment sales revenue Three Months Ended September 30, Nine Months Ended September 30, % of Equipment Sales (in millions) 2021 2020 % Change CC % Change 2021 2020 % Change CC % Change 2021 2020 Entry $ 69 $ 66 4.5% 3.9% $ 206 $ 158 30.4% 27.6% 17% 15% Mid-range 244 276 (11.6)% (12.2)% 758 677 12.0% 9.7% 64% 64% High-end 68 72 (5.6)% (6.5)% 218 206 5.8% 3.1% 18% 20% Other 6 5 20.0% 20.0% 15 13 15.4% 15.4% 1% 1% Equipment sales $ 387 $ 419 (7.6)% (8.4)% $ 1,197 $ 1,054 13.6% 11.0% 100% 100% _____________ CC - See "Currency Impact" section for a description of Constant Currency. Note: During first quarter 2021, we revised the classification of equipment sales revenue by category for our XBS sales unit. Refer to the Equipment Sales Revenue - Classification Update section, for the revision of prior periods based on the new classification. 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. than abroad. 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 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. operations. 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 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 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 September 30, 2021: Entry • 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. Mid-Range • 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. High-End • 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: Entry • 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) • 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. High-End (2) • 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) 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 Geographic Sales Channels and Products and Offerings Definitions Our business is aligned to a geographic focus and is primarily organized on the basis of go-to-market sales channels, which are structured to serve a range of customers for our products and services. In 2019 we changed our geographic structure to create a more streamlined, flatter and more effective organization, as follows: • Americas, which includes our sales channels in the U.S. and Canada, as well as Mexico, and Central and South America. • EMEA, which includes our sales channels in Europe, the Middle East, Africa and India. • Other, primarily includes sales to and royalties from FX, and our licensing revenue. Our products and offerings include: • “Entry”, which includes A4 devices and desktop printers. Prices in this product group can range from approximately $150 to $3,000. • “Mid-Range”, which includes A3 Office and Light Production devices that generally serve workgroup environments in mid to large enterprises. Prices in this product group can range from approximately $2,000 to $75,000+. • “High-End”, which includes production printing and publishing systems that generally serve the graphic communications marketplace and large enterprises. Prices for these systems can range from approximately $30,000 to $1,000,000+. Equipment Sales Revenue - Classification Update During first quarter 2021, we revised the classification of equipment sales revenue by category for our XBS sales unit to conform the classification of devices across Xerox sales channels. The revision had no impact on reported total equipment sales revenue. 2020 Equipment Sales Revenue As Reported (in millions) Q1 Q2 Q3 Q4 FY Entry $ 40 $ 34 $ 55 $ 59 $ 188 Mid-range 218 209 291 325 1,043 High-end 64 64 69 115 312 Other 3 3 4 11 21 Equipment Sales Revenue $ 325 $ 310 $ 419 $ 510 $ 1,564 Change (in millions) Q1 Q2 Q3 Q4 FY Entry $ 8 $ 10 $ 11 $ 11 $ 40 Mid-range (12) (14) (15) (16) (57) High-end 3 3 3 4 13 Other 1 1 1 1 4 Equipment Sales Revenue $ — $ — $ — $ — $ — 2020 Equipment Sales Revenue As Revised (in millions) Q1 Q2 Q3 Q4 FY Entry $ 48 $ 44 $ 66 $ 70 $ 228 Mid-range 206 195 276 309 986 High-end 67 67 72 119 325 Other 4 4 5 12 25 Equipment Sales Revenue $ 325 $ 310 $ 419 $ 510 $ 1,564 Xerox 2021 Form 10-Q 48 Costs, Expenses and Other Income Summary of Key Financial Ratios The following is a summary of key financial ratios used to assess our performance: Three Months Ended September 30, Nine Months Ended September 30, (in millions) 2021 2020 B/(W) 2021 2020 B/(W) Gross Profit $ 569 $ 651 $ (82) $ 1,819 $ 1,927 $ (108) RD&E 82 76 (6) 235 236 1 SAG 413 444 31 1,295 1,411 116 Equipment Gross Margin 18.3 % 25.5 % (7.2) pts. 24.9 % 26.7 % (1.8) pts. Post sale Gross Margin 36.4 % 40.3 % (3.9) pts. 37.5 % 40.7 % (3.2) pts. Total Gross Margin 32.4 % 36.8 % (4.4) pts. 34.6 % 37.8 % (3.2) pts. RD&E as a % of Revenue 4.7 % 4.3 % (0.4) pts. 4.5 % 4.6 % 0.1 pts. SAG as a % of Revenue 23.5 % 25.1 % 1.6 pts. 24.6 % 27.7 % 3.1 pts. Pre-tax Income $ 84 $ 119 $ (35) $ 236 $ 149 $ 87 Pre-tax Income Margin 4.8 % 6.7 % (1.9) pts. 4.5 % 2.9 % 1.6 pts. Adjusted (1) Operating Profit $ 74 $ 131 $ (57) $ 289 $ 280 $ 9 Adjusted (1) Operating Margin 4.2 % 7.4 % (3.2) pts. 5.5 % 5.5 % — pts. ____________ _ (1) See the “Non-GAAP Financial Measures” section for an explanation of the non-GAAP financial measure. Pre-tax Income Margin 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 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. ______________ (1) Refer to the Operating Income and Margin reconciliation table in the "Non-GAAP Financial Measures" section. Xerox 2021 Form 10-Q 49 Gross Margin 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 September 30, Nine Months Ended September 30, (in millions) 2021 2020 Change 2021 2020 Change R&D $ 67 $ 61 $ 6 $ 189 $ 194 $ (5) Sustaining engineering 15 15 — 46 42 4 Total RD&E Expenses $ 82 $ 76 $ 6 $ 235 $ 236 $ (1) 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 Selling, Administrative and General Expenses (SAG) 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. Accordingly, our reserves as a percent of receivables have remained fairly consistent subsequent to the first quarter 2020 charge of approximately $60 million to initially record expected losses from the COVID-19 pandemic. 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 (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 $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. The following is a breakdown of those costs: Three Months Ended September 30, Nine Months Ended September 30, (in millions) 2021 2020 2021 2020 Severance (1) $ 5 $ 18 $ 25 $ 57 Asset impairments - leased right-of-use assets (2) — 2 3 3 Asset impairments - owned assets (2) — 2 9 3 Other contractual termination costs (3) 1 1 3 2 Net reversals (4) (3) (3) (12) (18) Restructuring and asset impairment costs 3 20 28 47 Retention-related severance/bonuses (5) 7 (2) 6 9 Contractual severance costs (6) — — 3 4 Consulting and other costs (7) — 2 2 4 Total $ 10 $ 20 $ 39 $ 64 _____________ (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. (4) Reflects net reversals for changes in estimated reserves from prior period initiatives. (5) Includes retention related severance and bonuses for employees expected to continue working beyond their minimum notification period before termination. (6) Amounts 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. 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. Transaction and Related Costs, Net Transaction and related costs, net primarily reflect costs from third party providers for professional services associated with certain major and strategic M&A projects. There were no Transaction and related costs, net incurred during 2021. 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 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 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. _____________ (1) Decrease based on revised headcount at December 31, 2020 of 25,100 from 24,700 due to the change in definition of full-time equivalent employee. Other Expenses, Net Three Months Ended September 30, Nine Months Ended September 30, (in millions) 2021 2020 2021 2020 Non-financing interest expense $ 23 $ 30 $ 71 $ 69 Interest income (1) (1) (3) (12) Non-service retirement-related costs (22) (13) (64) (20) Gains on sales of businesses and assets (39) (28) (40) (29) Currency losses, net 3 — 6 4 Contract termination costs - IT services — — — 3 All other expenses, net 3 (3) 2 — Other expenses, net $ (33) $ (15) $ (28) $ 15 Non-Financing Interest Expense 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 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 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. 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. Income Taxes 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 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- 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 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, 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 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 nine months ended September 30, 2020 was 24.2%. On an adjusted 1 basis, the effective tax rate for the nine months ended September 30, 2020 was 23.8%. This rate was higher than the U.S. federal statutory tax rate of 21% primarily due to state taxes, the geographical mix of 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: 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. Our effective tax rate is based on nonrecurring events as well as recurring factors, including the taxation of foreign income. In addition, our effective tax rate will change based on discrete or other nonrecurring events that may not be predictable. _____________ (1) Refer to the Effective Tax Rate reconciliation table in the "Non-GAAP Financial Measures" section. Equity in Net Income of Unconsolidated Affiliates 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 nine months ended September 30, 2021 of $2 million was flat as compared to the prior year period. Net Income 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. 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 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. 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 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. 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; 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. Dollar; ii) $1 million of net unrealized gains; and iii) $92 million of net losses from the changes in defined benefit plans primarily due to net actuarial losses as a result of lower discount rates in the U.S. and the negative impacts from currency, partially offset by settlements. 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. Dollar; 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. Dollar; and iii) $4 million of net unrealized gains. 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 As disclosed in our 2020 Annual Report, in January 2021 we announced our intention to stand up our Software, Financing and Innovation businesses as separate units by 2022. At this stage, the operations and financial results for these units continue to be primarily managed by and reported in our “go-to-market” (GTM) sales channels. We have begun the process of reorganizing these new units from the GTM units but we have not progressed to the point where we have discrete and complete financial information for these new businesses. 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 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 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: • 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. Cash Flow Analysis The following summarizes our cash, cash equivalents and restricted cash: Nine Months Ended September 30, Change (in millions) 2021 2020 Net cash provided by operating activities $ 431 $ 313 $ 118 Net cash used in investing activities (54) (223) 169 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) 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) Cash, Cash Equivalents and Restricted Cash at End of Period $ 2,262 $ 3,297 $ (1,035) Cash Flows from Operating Activities 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: • $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. • $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. • $188 million decrease from a lower net run-off of finance receivables due to an increased level of direct lease originations from our XBS sales unit as well as higher equipment sales. Cash Flows from Investing Activities 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. Xerox 2021 Form 10-Q 56 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 Refer to Note 6 - Supplementary Financial Information in the Condensed Consolidated Financial Statements for additional information regarding Cash, cash equivalents and restricted cash. Operating Leases We have operating leases for real estate and vehicles in our domestic and international operations and certain equipment in our domestic operations. Additionally, we have identified embedded operating leases within certain supply chain contracts for warehouses, primarily within our domestic operations. Our leases have remaining terms of up to eleven years and a variety of renewal and/or termination options. 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. Debt and Customer Financing Activities The following summarizes our debt: (in millions) September 30, 2021 December 31, 2020 Xerox Holdings Corporation $ 1,500 $ 1,500 Xerox Corporation 2,200 2,200 Xerox - Other Subsidiaries (1) 636 767 Subtotal - Principal debt balance 4,336 4,467 Debt issuance costs Xerox Holdings Corporation (11) (13) Xerox Corporation (7) (11) Xerox - Other Subsidiaries (1) (2) (3) Subtotal - Debt issuance costs (20) (27) Net unamortized premium 3 3 Fair value adjustments (2) - terminated swaps — 1 Total Debt $ 4,319 $ 4,444 _____________ (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: (i) fair value adjustments to debt associated with terminated interest rate swaps, which are being amortized to interest expense over the remaining term of the related notes; and (ii) changes in fair value of hedged debt obligations attributable to movements in benchmark interest rates. Hedge accounting requires hedged debt instruments to be reported inclusive of any fair value adjustment. Refer to Note 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) September 30, 2021 December 31, 2020 Total finance receivables, net (1) $ 3,075 $ 3,165 Equipment on operating leases, net 254 296 Total Finance Assets, net (2) $ 3,329 $ 3,461 _____________ (1) Includes (i) Billed portion of finance receivables, net, (ii) Finance receivables, net and (iii) Finance receivables due after one year, net as included in our Condensed Consolidated Balance Sheets. (2) The change from December 31, 2020 includes a decrease of $59 million due to currency. Our lease contracts permit customers to pay for equipment over time rather than at the date of installation; therefore, we maintain a certain level of debt (that we refer to as financing debt) to support our investment in these lease contracts, which are reflected in Total finance assets, net. For this financing aspect of our business, we maintain an assumed 7:1 leverage ratio of debt to equity as compared to our finance assets. Based on this leverage, the following represents the breakdown of total debt between financing debt and core debt: (in millions) September 30, 2021 December 31, 2020 Finance receivables debt (1) $ 2,691 $ 2,769 Equipment on operating leases debt 222 259 Financing debt 2,913 3,028 Core debt 1,406 1,416 Total Debt $ 4,319 $ 4,444 ____________________________ (1) Finance receivables debt is the basis for our calculation of "Cost of financing" expense in the Condensed Consolidated Statements of Income. Sales of Accounts Receivable Activity related to sales of accounts receivable is as follows: Three Months Ended September 30, Nine Months Ended September 30, (in millions) 2021 2020 2021 2020 Estimated (decrease) increase to operating cash flows (1) $ (17) $ 54 $ (43) $ (86) _____________ (1) Represents the difference between current and prior period accounts receivable sales adjusted for the effects of currency. 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 We manage our worldwide liquidity using internal cash management practices, which are subject to i) the statutes, regulations and practices of each of the local jurisdictions in which we operate, ii) the legal requirements of the agreements to which we are a party and iii) the policies and cooperation of the financial institutions we utilize to maintain and provide cash management services. Our principal debt maturities are spread over the next five years as follows: (in millions) Xerox Holdings Corporation Xerox Corporation Xerox - Other Subsidiaries (1) Total 2021 Q4 $ — $ — $ 76 $ 76 2022 — 300 349 649 2023 — 1,000 184 1,184 2024 — 300 27 327 2025 750 — — 750 2026 and thereafter 750 600 — 1,350 Total (2) $ 1,500 $ 2,200 $ 636 $ 4,336 _____________ (1) Represents secured debt issued by subsidiaries of Xerox Corporation as part of securitization of Finance Receivables. (2) Includes fair value adjustments. Refer to Note 12 - Debt in the Condensed Consolidated Financial Statements for additional information regarding debt. Treasury Stock 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. This transition was expected to be completed during 2020, however, it sustained some delays caused by the COVID-19 pandemic, and it is now expected to be finalized by the end of 2021. HCL is expected to make certain ongoing investments in software, tools and other technology to consolidate, optimize and automate the transferred functions with the goal of providing improved service levels and significant cost savings. The shared services arrangement with HCL includes a remaining aggregate spending commitment of approximately $900 million over the next 5 years. However, we can terminate the arrangement at any time at our discretion, subject to payment of termination fees that decline over the term, or for cause. 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. The arrangement is initially for 6 years with a total contract value of approximately $160 million. 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. 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 and TCS. 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. Xerox 2021 Form 10-Q 60 Financial Risk Management We are exposed to market risk from foreign currency exchange rates and interest rates, which could affect operating results, financial position and cash flows. We manage our exposure to these market risks through our regular operating and financing activities and, when appropriate, through the use of derivative financial instruments. We utilize derivative financial instruments to hedge economic exposures, as well as to reduce earnings and cash flow volatility resulting from shifts in market rates. We enter into limited types of derivative contracts, including interest rate swap agreements, interest rate caps, foreign currency spot, forward and swap contracts and net purchased foreign currency options to manage interest rate and foreign currency exposures. Our primary foreign currency market exposures include the Japanese Yen, Euro and U.K. Pound Sterling. The fair market values of all our derivative contracts change with fluctuations in interest rates and/or currency exchange rates and are designed so that any changes in their values are offset by changes in the values of the underlying exposures. Derivative financial instruments are held solely as risk management tools and not for trading or speculative purposes. The related cash flow impacts of all of our derivative activities are reflected as cash flows from operating activities. We are required to recognize all derivative instruments as either assets or liabilities at fair value in the balance sheet. As permitted, certain of these derivative contracts have been designated for hedge accounting treatment. Certain of our derivatives that do not qualify for hedge accounting are effective as economic hedges. These derivative contracts are likewise required to be recognized each period at fair value and therefore do result in some level of volatility. The level of volatility will vary with the type and amount of derivative hedges outstanding, as well as fluctuations in the currency and interest rate markets during the period. The related cash flow impacts of all of our derivative activities are reflected as cash flows from operating activities. By their nature, all derivative instruments involve, to varying degrees, elements of market and credit risk. The market risk associated with these instruments resulting from currency exchange and interest rate movements is expected to offset the market risk of the underlying transactions, assets and liabilities being hedged. We do not believe there is significant risk of loss in the event of non-performance by the counterparties associated with these instruments because these transactions are executed with a diversified group of major financial institutions. Further, our policy is to deal with counterparties having a minimum investment grade or better credit rating. Credit risk is managed through the continuous monitoring of exposures to such counterparties. The current market events have not required us to materially modify or change our financial risk management strategies with respect to our exposures to interest rate and foreign currency risk. Refer to Note 13 – Financial Instruments in the Condensed Consolidated Financial Statements for further discussion and information on our financial risk management strategies. Xerox 2021 Form 10-Q 61 Non-GAAP Financial Measures We have reported our financial results in accordance with generally accepted accounting principles (GAAP). In addition, we have discussed our financial results using the non-GAAP measures described below. We believe these non-GAAP measures allow investors to better understand the trends in our business and to better understand and compare our results. Accordingly, we believe it is necessary to adjust several reported amounts, determined in accordance with GAAP, to exclude the effects of certain items as well as their related income tax effects. 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. Adjusted Earnings Measures • Net Income and EPS • Effective Tax Rate The above measures were adjusted for the following items: Restructuring and related costs, net: Restructuring and related costs, net include restructuring and asset impairment charges as well as costs associated with our transformation programs beyond those normally included in restructuring and asset impairment charges. Restructuring consists of costs primarily related to severance and benefits paid to employees pursuant to formal restructuring and workforce reduction plans. Asset impairment includes costs incurred for those assets sold, abandoned or made obsolete as a result of our restructuring actions, exiting from a business or other strategic business changes. Additional costs for our transformation programs are primarily related to the implementation of strategic actions and initiatives and include third-party professional service costs as well as one-time incremental costs. All of these costs can vary significantly in terms of amount and frequency based on the nature of the actions as well as the changing needs of the business. Accordingly, due to that significant variability, we will exclude these charges since we do not believe they provide meaningful insight into our current or past operating performance nor do we believe they are reflective of our expected future operating expenses as such charges are expected to yield future benefits and savings with respect to our operational performance. Amortization of intangible assets: The amortization of intangible assets is driven by our acquisition activity which can vary in size, nature and timing as compared to other companies within our industry and from period to period. The use of intangible assets contributed to our revenues earned during the periods presented and will contribute to our future period revenues as well. Amortization of intangible assets will recur in future periods. Transaction and related costs, net: Transaction and related costs, net are costs and expenses primarily associated with certain strategic M&A projects. These costs are primarily for third-party legal, accounting, consulting and other similar type professional services as well as potential legal settlements that may arise in connection with those M&A transactions. These costs are considered incremental to our normal operating charges and were incurred or are expected to be incurred solely as a result of the planned transactions. Accordingly, we are excluding these expenses from our Adjusted Earnings Measures in order to evaluate our performance on a comparable basis. Non-service retirement-related costs: Our defined benefit pension and retiree health costs include several elements impacted by changes in plan assets and obligations that are primarily driven by changes in the debt and equity markets as well as those that are predominantly legacy in nature and related to employees who are no longer providing current service to the Company (e.g. retirees and ex-employees). These elements include (i) interest cost, (ii) expected return on plan assets, (iii) amortization of prior plan amendments, (iv) amortized actuarial gains/losses and (v) the impacts of any plan settlements/curtailments. Accordingly, we consider these elements of our periodic retirement plan costs to be outside the operational performance of the business or legacy costs and not necessarily indicative of current or future cash flow requirements. This approach is consistent with the classification of these costs as non-operating in Other expenses, net. Adjusted earnings will continue to include the service cost elements of our retirement costs, which is related to current employee service as well as the cost of our defined contribution plans. Other discrete, unusual or infrequent items: We excluded these items, when applicable, given their discrete, unusual or infrequent nature and its impact on our results for the period. Xerox 2021 Form 10-Q 62 We believe the exclusion of these items allows investors to better understand and analyze the results for the period as compared to prior periods and expected future trends in our business. Adjusted Operating Income and Margin We calculate and utilize adjusted operating income and margin measures by adjusting our reported pre-tax income and margin amounts. In addition to the costs and expenses noted 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. Constant Currency (CC) Refer to "Currency Impact" for a discussion of this measure and its use in our analysis of revenue growth. Summary Management believes that all of these non-GAAP financial measures provide an additional means of analyzing the current period’s results against the corresponding prior period’s results. However, these non-GAAP financial measures should be viewed in addition to, and not as a substitute for, the Company’s reported results prepared in accordance with GAAP. Our non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP measures and should be read only in conjunction with our Condensed Consolidated Financial Statements prepared in accordance with GAAP. Our management regularly uses our supplemental non-GAAP financial measures internally to understand, manage and evaluate our business and make operating decisions. These non-GAAP measures are among the primary factors management uses in planning for and forecasting future periods. Compensation of our executives is based in part on the performance of our business based on these non-GAAP measures. 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 September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (in millions, except per share amounts) Net Income EPS Net Income EPS Net Income EPS Net Income EPS Reported (1) $ 90 $ 0.48 $ 90 $ 0.41 $ 220 $ 1.10 $ 115 $ 0.49 Adjustments: Restructuring and related costs, net 10 20 39 64 Amortization of intangible assets 13 13 42 34 Transaction and related costs, net — (6) — 18 Non-service retirement-related costs (22) (13) (64) (20) Contract termination costs - IT services — — — 3 Income tax on adjustments (2) (1) 1 (6) (23) Adjusted $ 90 $ 0.48 $ 105 $ 0.48 $ 231 $ 1.16 $ 191 $ 0.84 Dividends on preferred stock used in adjusted EPS calculation (3) $ 4 $ 4 $ 11 $ 11 Weighted average shares for adjusted EPS (3) 182 213 190 215 Fully diluted shares at September 30, 2021 (4) 181 ____________________________ (1) Net income and EPS attributable to Xerox Holdings. (2) Refer to Effective Tax Rate reconciliation. (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 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. Xerox 2021 Form 10-Q 63 Effective Tax Rate reconciliation: Three Months Ended September 30, 2021 2020 (in millions) Pre-Tax Income Income Tax Benefit Effective Tax Rate Pre-Tax Income Income Tax Expense Effective Tax Rate Reported (1) $ 84 $ (4) (4.8) % $ 119 $ 29 24.4 % Non-GAAP Adjustments (2) 1 1 14 (1) Adjusted (3) $ 85 $ (3) (3.5) % $ 133 $ 28 21.1 % Nine Months Ended September 30, 2021 2020 (in millions) Pre-Tax Income Income Tax Expense Effective Tax Rate Pre-Tax Income Income Tax Expense Effective Tax Rate Reported (1) $ 236 $ 19 8.1 % $ 149 $ 36 24.2 % Non-GAAP Adjustments (2) 17 6 99 23 Adjusted (3) $ 253 $ 25 9.9 % $ 248 $ 59 23.8 % ____________________________ (1) Pre-tax income and income tax (benefit) expense. (2) Refer to Net Income and EPS reconciliation for details. (3) The tax impact on Adjusted Pre-Tax Income is calculated under the same accounting principles applied to the Reported Pre-Tax Income under ASC 740, which employs an annual effective tax rate method to the results. Operating Income and Margin reconciliation: Three Months Ended September 30, 2021 2020 (in millions) Profit Revenue Margin Profit Revenue Margin Reported (1) $ 84 $ 1,758 4.8 % $ 119 $ 1,767 6.7 % Adjustments: Restructuring and related costs, net 10 20 Amortization of intangible assets 13 13 Transaction and related costs, net — (6) Other expenses, net (33) (15) Adjusted $ 74 $ 1,758 4.2 % $ 131 $ 1,767 7.4 % Nine Months Ended September 30, 2021 2020 (in millions) Profit Revenue Margin Profit Revenue Margin Reported (1) $ 236 $ 5,261 4.5 % $ 149 $ 5,092 2.9 % Adjustments: Restructuring and related costs, net 39 64 Amortization of intangible assets 42 34 Transaction and related costs, net — 18 Other expenses, net (28) 15 Adjusted $ 289 $ 5,261 5.5 % $ 280 $ 5,092 5.5 % ____________________________ (1) Pre-Tax Income Xerox 2021 Form 10-Q 64 ITEM 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information set forth under the “Financial Risk Management” section of this Quarterly Report on Form 10-Q is hereby incorporated by reference in answer to this Item.