Financial Results
- $34 million of operating cash flow from continuing operations,
down $242 million year-over-year, and $15 million of free cash
flow, down $245 million year-over-year
- Adjusted operating margin of 4.2 percent, down 820 basis points
year-over-year
- $1.47 billion of revenue, a decrease of 35.3 percent
year-over-year or 34.6 percent in constant currency
- GAAP earnings per share (EPS) from continuing operations of
$0.11 per share, down $0.49 year-over-year, and adjusted EPS of
$0.15, down $0.64 year-over-year
Xerox Holdings Corporation (NYSE: XRX) announced its
second-quarter 2020 financial results.
“I am proud of our employees who did what was necessary during
this unprecedented disruption to support our business and clients,
especially those delivering essential services. While the bulk of
our markets were fully or partially shut down during the quarter,
our team’s financial discipline enabled us to deliver positive
earnings per share and cash flow while continuing to invest in key
areas of growth,” said Xerox Vice Chairman and CEO John Visentin.
“No one can control or accurately predict what happens next. We
have modeled numerous scenarios to ensure we have flexibility no
matter how the pandemic continues to impact global business.”
Second-Quarter Key Financial Results - Continuing
Operations
(in millions, except per share
data)
Q2 2020
Q2 2019
B/(W) YOY
% Change YOY
Revenue
$1,465
$2,263
$(798)
(35.3)% AC (34.6)% CC1
Gross Margin
38.5%
39.1%
(60) bps
RD&E %
5.2%
3.9%
(130) bps
SAG %
29.1%
22.8%
(630) bps
Pre-Tax Income
$35
$190
$(155)
(81.6)%
Pre-Tax Income Margin
2.4%
8.4%
(600) bps
Operating Income - Adjusted1
$62
$280
$(218)
(77.9)%
Operating Margin - Adjusted1
4.2%
12.4%
(820) bps
GAAP EPS
$0.11
$0.60
$(0.49)
(81.7)%
EPS - Adjusted1
$0.15
$0.79
$(0.64)
(81.0)%
(1) Refer to the “Non-GAAP Financial Measures” section of this
release for a discussion of these non-GAAP measures and their
reconciliation to the reported GAAP measures.
Business Highlights
- Launched “Make Now Work,” an integrated content marketing
campaign that demonstrates how Xerox supports clients’ digital
transformations and changing needs accelerated by COVID-19.
- Added and renewed several Fortune 500 and public sector clients
such as HM Land Registry; Ministry of Citizens’ Services, BC Mail
Plus; Veterans Affairs of Montana & Wyoming; and Allianz.
- Expanded the company’s software portfolio with the launch of
the Xerox Team Availability App to support flexible workplace
needs.
- Introduced the next-generation AltaLink® C8100/B8100 Series
with ConnectKey® apps and automation that speeds digital
transformation and supports workers in and out of the office.
- Announced the Adaptive CMYK+ Kit for the Xerox Versant®, an
enhancement that allows print providers to offer higher value,
embellishment solutions without a major investment.
- Stood up manufacturing operations for Xerox’s COVID-19
healthcare initiatives such as making disposable, low-cost
FDA-cleared ventilators and hospital-grade hand sanitizer—an area
where the company is doubling production in response to
demand.
About Xerox
Xerox Holdings Corporation makes every day work better.
We are a workplace technology company building and integrating
software and hardware for enterprises large and small. As customers
seek to manage information across digital and physical platforms,
Xerox delivers a seamless, secure and sustainable experience.
Whether inventing the copier, the Ethernet, the laser printer or
more, Xerox has long defined the modern work experience. Learn how
that innovation continues at xerox.com.
Non-GAAP Measures
This release refers to the following non-GAAP financial measures
for the second-quarter:
- Adjusted EPS, which excludes restructuring and related costs,
the amortization of intangible assets, non-service
retirement-related costs and transaction and related costs, net
from GAAP earnings per share from continuing operations.
- Adjusted operating income/margin, which exclude the EPS
adjustments noted above as well as the remainder of other expenses,
net from pre-tax income/margin.
- Constant currency (CC) revenue change, which excludes the
effects of currency translation.
- Free cash flow, which is operating cash flow from continuing
operations less capital expenditures.
Refer to the “Non-GAAP Financial Measures” section of this
release for a discussion of these non-GAAP measures and their
reconciliation to the reported GAAP measures.
Forward-Looking Statements
This release, and other written or oral statements made from
time to time by management contain “forward-looking statements” as
defined in the Private Securities Litigation Reform Act of 1995.
The words “anticipate”, “believe”, “estimate”, “expect”, “intend”,
“will”, “should”, "targeting", "projecting", "driving" and similar
expressions, as they relate to us, our performance and/or our
technology, are intended to identify forward-looking statements.
These statements reflect management’s current beliefs, assumptions
and expectations and are subject to a number of factors that may
cause actual results to differ materially. Such factors include but
are not limited to: the effects of the COVID-19 pandemic on our and
our customers' businesses and the duration and extent to which this
will impact our future results of operations and overall financial
performance; our ability to address our business challenges in
order to reverse revenue declines, reduce costs and increase
productivity so that we can invest in and grow our business; our
ability to attract and retain key personnel; changes in economic
and political conditions, trade protection measures, licensing
requirements and tax laws in the United States and in the foreign
countries in which we do business; the imposition of new or
incremental trade protection measures such as tariffs and import or
export restrictions; changes in foreign currency exchange rates;
our ability to successfully develop new products, technologies and
service offerings and to protect our intellectual property rights;
the risk that multi-year contracts with governmental entities could
be terminated prior to the end of the contract term and that civil
or criminal penalties and administrative sanctions could be imposed
on us if we fail to comply with the terms of such contracts and
applicable law; the risk that partners, subcontractors and software
vendors will not perform in a timely, quality manner; actions of
competitors and our ability to promptly and effectively react to
changing technologies and customer expectations; our ability to
obtain adequate pricing for our products and services and to
maintain and improve cost efficiency of operations, including
savings from restructuring actions; the risk that confidential
and/or individually identifiable information of ours, our
customers, clients and employees could be inadvertently disclosed
or disclosed as a result of a breach of our security systems due to
cyber attacks or other intentional acts; reliance on third parties,
including subcontractors, for manufacturing of products and
provision of services; the exit of the United Kingdom from the
European Union; our ability to manage changes in the printing
environment and expand equipment placements; interest rates, cost
of borrowing and access to credit markets; funding requirements
associated with our employee pension and retiree health benefit
plans; the risk that our operations and products may not comply
with applicable worldwide regulatory requirements, particularly
environmental regulations and directives and anti-corruption laws;
the outcome of litigation and regulatory proceedings to which we
may be a party; any impacts resulting from the restructuring of our
relationship with Fujifilm Holdings Corporation; and the shared
services arrangements entered into by us as part of Project Own It.
Additional risks that may affect Xerox’s operations and other
factors that are set forth in the “Risk Factors” section, the
“Legal Proceedings” section, the “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” section
and other sections of Xerox Holdings Corporation’s and Xerox
Corporation's 2019 Annual Report on Form 10-K, as well as in Xerox
Holdings Corporation's and Xerox Corporation's Quarterly Reports on
Form 10-Q and Current Reports on Form 8-K filed with the SEC.
These forward-looking statements speak only as of the date of
this release or as of the date to which they refer, and Xerox
assumes no obligation to update any forward-looking statements as a
result of new information or future events or developments, except
as required by law.
Note: To receive RSS news feeds, visit
https://www.news.xerox.com. For open commentary, industry
perspectives and views, visit http://twitter.com/xerox,
http://www.facebook.com/XeroxCorp,
https://www.instagram.com/xerox/,
http://www.linkedin.com/company/xerox,
http://www.youtube.com/XeroxCorp.
Xerox®, AltaLink®, ConnectKey® and Versant® are trademarks of
Xerox in the United States and/or other countries.
XEROX HOLDINGS CORPORATION CONDENSED CONSOLIDATED
STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended June 30,
Six Months Ended June 30,
(in millions, except per-share data)
2020
2019
2020
2019
Revenues
Sales
$
460
$
800
$
1,025
$
1,524
Services, maintenance and rentals
949
1,402
2,185
2,795
Financing
56
61
115
124
Total Revenues
1,465
2,263
3,325
4,443
Costs and Expenses
Cost of sales
338
539
725
989
Cost of services, maintenance and
rentals
533
806
1,264
1,627
Cost of financing
30
33
60
65
Research, development and engineering
expenses
76
88
160
180
Selling, administrative and general
expenses
426
517
967
1,063
Restructuring and related costs
3
37
44
149
Amortization of intangible assets
10
11
21
26
Transaction and related costs, net
7
4
24
4
Other expenses, net
7
38
30
77
Total Costs and Expenses
1,430
2,073
3,295
4,180
Income before Income Taxes & Equity
Income(1)
35
190
30
263
Income tax expense
8
50
7
40
Equity in net income of unconsolidated
affiliates
—
2
2
4
Income from Continuing
Operations
27
142
25
227
Income from discontinued operations, net
of tax
—
42
—
93
Net Income
27
184
25
320
Less: Income from continuing operations
attributable to noncontrolling interests
—
1
—
2
Less: Income from discontinued operations
attributable to noncontrolling interests
—
2
—
4
Net Income Attributable to Xerox
Holdings
$
27
$
181
$
25
$
314
Amounts Attributable to Xerox
Holdings:
Income from continuing operations
$
27
$
141
$
25
$
225
Income from discontinued operations
—
40
—
89
Net Income Attributable to Xerox
Holdings
$
27
$
181
$
25
$
314
Basic Earnings per Share:
Continuing operations
$
0.11
$
0.62
$
0.08
$
0.97
Discontinued operations
—
0.17
—
0.39
Total Basic Earnings per Share
$
0.11
$
0.79
$
0.08
$
1.36
Diluted Earnings per Share:
Continuing operations
$
0.11
$
0.60
$
0.08
$
0.94
Discontinued operations
—
0.17
—
0.38
Total Diluted Earnings per
Share
$
0.11
$
0.77
$
0.08
$
1.32
___________________________
(1) Referred to as “Pre-Tax Income” throughout the remainder of
this document.
XEROX HOLDINGS CORPORATION CONDENSED CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
Three Months Ended June 30,
Six Months Ended June 30,
(in millions)
2020
2019
2020
2019
Net Income
$
27
$
184
$
25
$
320
Less: Income from continuing operations
attributable to noncontrolling interests
—
1
—
2
Less: Income from discontinued operations
attributable to noncontrolling interests
—
2
—
4
Net Income Attributable to Xerox
Holdings
27
181
25
314
Other Comprehensive Income (Loss),
Net
Translation adjustments, net
25
(4)
(172)
33
Unrealized (losses) gains, net
(2)
—
3
2
Changes in defined benefit plans, net
80
9
134
10
Other Comprehensive Income (Loss), Net
Attributable to Xerox Holdings
103
5
(35)
45
Comprehensive Income (Loss),
Net
130
189
(10)
365
Less: Comprehensive income, net from
continuing operations attributable to noncontrolling interests
—
1
—
2
Less: Comprehensive income, net from
discontinued operations attributable to noncontrolling
interests
—
2
—
4
Comprehensive Income (Loss), Net
Attributable to Xerox Holdings
$
130
$
186
$
(10)
$
359
XEROX HOLDINGS CORPORATION CONDENSED CONSOLIDATED
BALANCE SHEETS (UNAUDITED)
(in millions, except share data in
thousands)
June 30, 2020
December 31, 2019
Assets
Cash and cash equivalents
$
2,272
$
2,740
Accounts receivable (net of allowances of
$60 and $55, respectively)
789
1,236
Billed portion of finance receivables (net
of allowances of $4 and $3, respectively)
116
111
Finance receivables, net
1,046
1,158
Inventories
922
694
Other current assets
246
201
Total current assets
5,391
6,140
Finance receivables due after one year
(net of allowances of $139 and $86, respectively)
1,908
2,082
Equipment on operating leases, net
312
364
Land, buildings and equipment, net
418
426
Intangible assets, net
250
199
Goodwill
3,939
3,900
Deferred tax assets
563
598
Other long-term assets
1,344
1,338
Total Assets
$
14,125
$
15,047
Liabilities and Equity
Short-term debt and current portion of
long-term debt
$
1,793
$
1,049
Accounts payable
916
1,053
Accrued compensation and benefits
costs
269
349
Accrued expenses and other current
liabilities
813
984
Total current liabilities
3,791
3,435
Long-term debt
2,185
3,233
Pension and other benefit liabilities
1,595
1,707
Post-retirement medical benefits
338
352
Other long-term liabilities
521
512
Total Liabilities
8,430
9,239
Convertible Preferred Stock
214
214
Common stock
213
215
Additional paid-in capital
2,722
2,782
Treasury stock, at cost
—
(76)
Retained earnings
6,223
6,312
Accumulated other comprehensive loss
(3,681)
(3,646)
Xerox Holdings shareholders’ equity
5,477
5,587
Noncontrolling interests
4
7
Total Equity
5,481
5,594
Total Liabilities and Equity
$
14,125
$
15,047
Shares of common stock issued
213,014
214,621
Treasury stock
—
(2,031)
Shares of Common Stock
Outstanding
213,014
212,590
XEROX HOLDINGS CORPORATION CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended June 30,
Six Months Ended June 30,
(in millions)
2020
2019
2020
2019
Cash Flows from Operating
Activities
Net Income
$
27
$
184
$
25
$
320
Income from discontinued operations, net
of tax
—
(42)
—
(93)
Income from continuing operations
27
142
25
227
Adjustments required to reconcile Net
income to Cash flows from operating activities
Depreciation and amortization
88
110
182
228
Provisions
21
20
101
42
Net gain on sales of businesses and
assets
—
—
(1)
(1)
Stock-based compensation
13
15
24
30
Restructuring and asset impairment
charges
(2)
18
27
72
Payments for restructurings
(17)
(21)
(52)
(54)
Defined benefit pension cost
13
32
37
68
Contributions to defined benefit pension
plans
(31)
(36)
(64)
(70)
Decrease (increase) in accounts receivable
and billed portion of finance receivables
262
(29)
428
9
(Increase) decrease in inventories
(99)
64
(225)
16
Increase in equipment on operating
leases
(23)
(42)
(55)
(72)
Decrease in finance receivables
97
38
190
119
Decrease (increase) in other current and
long-term assets
1
17
(15)
15
Decrease in accounts payable
(210)
(14)
(159)
(46)
Decrease in accrued compensation
(21)
(10)
(129)
(83)
Decrease in other current and long-term
liabilities
(92)
(54)
(130)
(7)
Net change in income tax assets and
liabilities
13
10
3
(11)
Net change in derivative assets and
liabilities
(10)
2
(2)
10
Other operating, net
4
14
22
6
Net cash provided by operating activities
of continuing operations
34
276
207
498
Net cash provided by operating activities
of discontinued operations
—
37
—
41
Net cash provided by operating
activities
34
313
207
539
Cash Flows from Investing
Activities
Cost of additions to land, buildings,
equipment and software
(19)
(16)
(42)
(31)
Proceeds from sales of businesses and
assets
—
—
2
1
Acquisitions, net of cash acquired
—
(38)
(193)
(42)
Other investing, net
1
—
1
—
Net cash used in investing activities
(18)
(54)
(232)
(72)
Cash Flows from Financing
Activities
Net (payments) proceeds on debt
(310)
1
(308)
(401)
Dividends
(57)
(60)
(115)
(122)
Payments to acquire treasury stock,
including fees
—
(197)
—
(300)
Other financing, net
(5)
(21)
(9)
(23)
Net cash used in financing activities
(372)
(277)
(432)
(846)
Effect of exchange rate changes on cash,
cash equivalents and restricted cash
5
8
(24)
7
Decrease in cash, cash equivalents and
restricted cash
(351)
(10)
(481)
(372)
Cash, cash equivalents and restricted cash
at beginning of period
2,665
786
2,795
1,148
Cash, Cash Equivalents and Restricted
Cash at End of Period
$
2,314
$
776
$
2,314
$
776
Impact of COVID-19 on Our Business Operations
In response to the global COVID-19 pandemic crisis, we have
prioritized the health and safety of our employees, customers and
partners and continue to work to support their needs. While we
continue to implement actions to mitigate the effects of this
crisis on our business and operations, the uncertainty around the
duration and economic impact of this crisis makes it difficult for
the company to predict the full impact of the crisis on our
business operations and financial performance. As a result, we are
not providing financial guidance at this time.
We have modeled the potential impacts on our business of
numerous recovery scenarios. The most significant near-term impact
from the crisis has been on our equipment and unbundled supplies
sales which are transactional in nature. Sales are expected to
continue to decline significantly as businesses hold off or delay
purchases during the closure period and until there is a more
certain path to controlling the health crisis and to economic
recovery. However, we expect this transactional portion of the
business to begin to recover gradually in the second half as
businesses reopen. The impact on revenues from lower equipment and
supply sales is somewhat mitigated by bundled services, which are
more contractual in nature. Our bundled services contracts, on
average, include a minimum fixed charge and a significant variable
component linked to print volumes. The variable charges are
impacted by our customers' employees not being in the office and
using our equipment due to the current lock-down and capacity
restrictions in office buildings as they reopen. We expect that
this contractual relationship will continue to enable us to be
ready to ramp up and support our customers' needs as businesses
resume operations.
The continued uncertainty around the spread and resurgence of
the virus has changed our prior expectation for an inflection point
following the second quarter. While Europe, Canada and some areas
of the U.S. are reopening after controlling the rate of new
infections, other areas in Latin America and parts of southern and
western U.S. are seeing surges that have forced the rollback of
business reopenings and impacted their economies. We experienced
some signs of recovery, and a moderation in our rate of revenue
declines during the month of June, however we expect that our
business will continue to be impacted by the ongoing uncertainty.
Accordingly, we now expect a slower pace of gradual recovery in the
second half of the year.
We have a strong balance sheet and sufficient liquidity,
including access to our undrawn $1.8 billion revolver as well as to
receivables securitization and capital markets. Due to our Project
Own It transformation, we have a more flexible cost structure, and
have also focused our efforts on incremental actions to prioritize
and preserve cash as we manage through this crisis. These actions
include the reduction of discretionary spend such as near term
targeted marketing programs and the use of contract employees as
well as compensation incentives consistent with lower sales and
operating results.
Government Assistance and Furlough Programs
In response to the COVID-19 pandemic crisis, various governments
have enacted or continue to contemplate temporary measures to
provide aid and economic stimulus directly to companies through
cash grants and credits or indirectly through payments to
temporarily furloughed employees.
On March 27, 2020, in response to the COVID-19 crisis, the U.S.
government enacted the Coronavirus Aid, Relief, and Economic
Security Act (the "CARES Act"). In addition to including temporary
changes to income and non-income-based tax laws, the CARES Act also
provides refundable employee retention credits and defers the
requirement to remit the employer-paid portion of social security
payroll taxes. Similar pay protection programs were enacted in
Canada and Europe that primarily provide direct grants to companies
to cover the salary and wages of employees (retained or temporarily
furloughed). During second quarter 2020, we recognized savings of
approximately $60 million from these temporary measures in the
U.S., Canada and Europe, including $53 million from various
government assistance programs and $7 million from furlough
programs. Through the use of these programs, we have thus far been
able to provide an offset to our costs, without further use of
cash, while maintaining our employee base and minimizing the
financial impact to our employees.
There were no material impacts to our income tax expense in the
second quarter 2020 as a result of the temporary changes included
in the CARES Act and we expect to defer payment of the
employer-paid portion of social security payroll taxes through the
end of calendar year 2020; however, this deferral will be reduced
by employee retention credits as earned during 2020.
The savings of approximately $60 million were recorded as
follows in the Condensed Consolidated Statements of Income:
(in millions)
Three Months Ended June 30,
2020
Cost of services, maintenance and
rentals
$
40
Research, development and engineering
expenses
1
Selling, administrative and general
expenses
19
Total Estimated Savings
$
60
Revenues
Three Months Ended June 30,
% of Total Revenue
(in millions)
2020
2019
% Change
CC % Change
2020
2019
Equipment sales
$
310
$
504
(38.5)%
(38.0)%
21%
22%
Post sale revenue
1,155
1,759
(34.3)%
(33.6)%
79%
78%
Total Revenue
$
1,465
$
2,263
(35.3)%
(34.6)%
100%
100%
Reconciliation to Condensed
Consolidated Statements of Income:
Sales
$
460
$
800
(42.5)%
(41.8)%
Less: Supplies, paper and other sales
(150)
(296)
(49.3)%
(48.1)%
Equipment Sales
$
310
$
504
(38.5)%
(38.0)%
Services, maintenance and rentals
$
949
$
1,402
(32.3)%
(31.6)%
Add: Supplies, paper and other sales
150
296
(49.3)%
(48.1)%
Add: Financing
56
61
(8.2)%
(7.5)%
Post Sale Revenue
$
1,155
$
1,759
(34.3)%
(33.6)%
Americas
$
990
$
1,504
(34.2)%
(33.6)%
68%
67%
EMEA
428
709
(39.6)%
(38.5)%
29%
31%
Other
47
50
(6.0)%
(6.0)%
3%
2%
Total Revenue(1)
$
1,465
$
2,263
(35.3)%
(34.6)%
100%
100%
Memo:
Xerox Services
$
604
$
853
(29.2)%
(28.2)%
41%
38%
____________________________
CC - Constant Currency (see "Non-GAAP Financial Measures"
section).
- Refer to Appendix II for our Geographic Sales Channels and
Products and Offerings Definitions.
Second quarter 2020 total revenue decreased 35.3% as compared to
second quarter 2019, including a 0.7-percentage point unfavorable
impact from currency and an approximate 1.0-percentage point
favorable impact from recent partner dealer acquisitions. The
global COVID-19 pandemic crisis significantly impacted our second
quarter 2020 revenues due to business closures and office building
capacity restrictions that impacted our customers' purchasing
decisions and caused lower printing volumes on our devices.
Geographically, our European operations had larger revenue declines
during the quarter, partially due to a larger mix of sales through
indirect channel partners which, in response to the lower demand
caused by the crisis, reduced their inventory purchases to manage
liquidity. Our North American operations include a larger mix of
government, education, healthcare and other large customers that
were less affected by business closures than our SMB customers and,
on average, our North American customers have contracts with a
higher component of fixed charges. Second quarter 2020 total
revenue reflected the following:
- Post sale revenue primarily reflects contracted
services, equipment maintenance, supplies and financing. These
revenues are associated not only with the population of devices in
the field, which is affected by installs and removals, but also by
the page volumes generated from the usage of such devices and the
revenue per printed page. Post sale revenue also includes
transactional IT hardware sales and implementation services from
our XBS organization. Post sale revenue decreased 34.3% as compared
to second quarter 2019, including a 0.7-percentage point
unfavorable impact from currency. The global COVID-19 pandemic
crisis significantly impacted our post sale revenue during the
second quarter 2020, however its impact on our post sale revenue
slightly moderated later in the quarter, as businesses started to
reopen in certain geographical areas in the U.S. and Europe,
resulting in a gradual moderation of our page volume declines. The
decline in post sale revenue reflected the following:
- Services, maintenance and rentals revenue includes
rental and maintenance revenue (including bundled supplies) as well
as the post sale component of the document services revenue from
our Xerox Services offerings. These revenues decreased 32.3% as
compared to second quarter 2019, including a 0.7-percentage point
unfavorable impact from currency. The decline at constant currency1
reflected a lower population of devices (which is partially
associated with continued lower Enterprise signings and lower
installs in prior and current periods), an ongoing competitive
price environment, and lower page volumes (including a higher mix
of lower average-page-volume products) that are worse than
pre-COVID-19 decline trends due to the impact of business closures
during the quarter. While these revenues are contractual in nature,
on average, our bundled services contracts include a minimum fixed
charge and a significant variable component based on print volumes.
The rate of decline of these revenues slightly moderated later in
the quarter as businesses started to reopen in certain geographical
areas in the U.S. and Europe.
- Supplies, paper and other sales includes unbundled
supplies and other sales. These revenues decreased 49.3% as
compared to second quarter 2019, including a 1.2-percentage point
unfavorable impact from currency and reflected lower supplies
revenues associated with lower page volume trends. The decrease in
supplies was significantly impacted by lower sales to indirect
channels, which, in response to the lower demand caused by the
crisis, reduced their inventory purchases to manage liquidity. We
expect that indirect channels will maintain low purchase levels and
continue to reduce their inventories until there is a stable
recovery in sales activity.
- Financing revenue is generated from financed equipment
sale transactions. The 8.2% decline in these revenues reflected a
continued decline in the finance receivables balance due to lower
equipment sales in prior periods and included a 0.7-percentage
point unfavorable impact from currency.
Three Months Ended June 30,
% of Equipment Sales
(in millions)
2020
2019
% Change
CC % Change
2020
2019
Entry
$
34
$
52
(34.6)%
(33.5)%
11%
10%
Mid-range
209
350
(40.3)%
(40.1)%
67%
70%
High-end
64
97
(34.0)%
(27.5)%
21%
19%
Other
3
5
(40.0)%
(40.0)%
1%
1%
Equipment Sales
$
310
$
504
(38.5)%
(38.0)%
100%
100%
____________________________
CC - Constant Currency (see "Non-GAAP Financial Measures"
section).
- Equipment sales revenue decreased 38.5% as compared to
second quarter 2019, including a 0.5-percentage point unfavorable
impact from currency as well as the impact of price declines of
approximately 5%. The global COVID-19 pandemic crisis significantly
impacted our equipment sales revenue during the second quarter 2020
as a result of business closures and office building capacity
restrictions that impacted our customers' purchasing decisions and
caused delayed installations. The global pandemic affected our
operations throughout the quarter, however, its impact on our
equipment sales lessened later in the quarter, as businesses
started to reopen in certain geographical areas in the U.S. and
Europe. The decline at constant currency1 reflected the following:
- Entry - The decrease was primarily due to lower sales of
devices through our indirect channels in EMEA, Latin America and
the U.S. affected in part by the COVID-19 crisis and partially
offset by higher sales of lower-end black-and-white devices
associated with work-from-home promos and large order deals from
Eurasia.
- Mid-range - The decrease was driven by lower sales of
devices partially as a result of the COVID-19 crisis and related
office closures, which impacted this group of products more due to
their prevalence in office-team settings; the decline was also more
significant in our European operations due to a heavier mix of
businesses through indirect channel partners, which, in response to
the lower demand caused by the crisis, reduced their inventory
purchases to manage liquidity. Higher sales to our government and
healthcare customers in North America, as well as strong demand for
our recently launched PrimeLink devices, provided a partial
offset.
- High-end - The decrease reflected primarily lower
installs of our Versant entry-production color devices, and lower
installs in EMEA of our Iridesse production presses. Sales of black
and white presses for customers with transactional printing
applications, and iGen systems grew during the quarter. The
decrease in our equipment sales revenue from production color
systems was partially impacted by the COVID-19 crisis, particularly
in our European operations, where the distribution of our Versant
and Iridesse devices through indirect channels was affected by
furlough adoptions and lower inventory purchases as dealers managed
their liquidity.
Total Installs
Installs reflect new placement of devices only (i.e., measure
does not take into account removal of devices which may occur as a
result of contract renewals or cancellations). Revenue associated
with equipment installations may be reflected up-front in Equipment
sales or over time either through rental income or as part of our
Xerox Services revenues (which are both reported within our post
sale revenues), depending on the terms and conditions of our
agreements with customers. Installs include activity from Xerox
Services and Xerox-branded products shipped to our XBS sales unit.
Detail by product group (see Appendix II) is shown below:
Entry
- 35% decrease in color multifunction devices reflecting lower
installs of ConnectKey devices through our indirect channels in the
U.S. and in EMEA.
- 9% decrease in black-and-white multifunction devices reflecting
lower activity from North and Latin America, partially offset by
higher activity from EMEA. The declines are primarily driven by
lower sales in the higher end of the portfolio partially offset by
higher sales of low-end devices associated with large order deals
from Eurasia and work-from-home promotions.
Mid-Range2
- 46% decrease in mid-range color installs primarily reflecting
lower installs of multifunction color devices partially offset by
strong demand for our recently launched PrimeLink entry-production
color devices.
- 42% decrease in mid-range black-and-white reflecting in part
global market trends partially offset by strong demand for our
recently launched PrimeLink light-production multi-function
devices.
High-End2
- 58% decrease in high-end color installs reflecting primarily
lower installs of our lower-end Versant devices and of our Iridesse
productions systems.
- 2% increase in high-end black-and-white systems reflecting
higher installs of our Nuvera offsetting market trends.
___________________________
- See the “Non-GAAP Financial Measures” section for an
explanation of the non-GAAP financial measure.
- Mid-range and High-end color installations exclude Fuji Xerox
digital front-end sales; including Fuji Xerox digital front-end
sales, Mid-range color devices decreased 46%, and High-end color
systems decreased 57%.
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 June 30,
(in millions)
2020
2019
B/(W)
Gross Profit
$
564
$
885
$
(321)
RD&E
76
88
12
SAG
426
517
91
Equipment Gross Margin
28.8
%
28.8
%
—
pts.
Post sale Gross Margin
41.1
%
42.0
%
(0.9)
pts.
Total Gross Margin
38.5
%
39.1
%
(0.6)
pts.
RD&E as a % of Revenue
5.2
%
3.9
%
(1.3)
pts.
SAG as a % of Revenue
29.1
%
22.8
%
(6.3)
pts.
Pre-tax Income
$
35
$
190
$
(155)
Pre-tax Income Margin
2.4
%
8.4
%
(6.0)
pts.
Adjusted(1) Operating Profit
$
62
$
280
$
(218)
Adjusted(1) Operating Margin
4.2
%
12.4
%
(8.2)
pts.
____________________________
(1) See the “Non-GAAP Financial Measures” section for an
explanation of the non-GAAP financial measure.
Pre-tax Income Margin
Second quarter 2020 pre-tax income margin of 2.4% decreased
6.0-percentage points as compared to second quarter 2019. The
decrease primarily reflected the impact of lower adjusted1
operating margin (see below) of 8.2-percentage points, partially
offset by lower Restructuring and related costs and Other expenses,
net.
Adjusted1 Operating Margin
Second quarter 2020 adjusted1 operating margin of 4.2% decreased
by 8.2-percentage points as compared to second quarter 2019
reflecting the impact of lower revenues, primarily as a result of
the significant effect of the COVID-19 pandemic crisis on our
business, partially offset by cost and expense reductions
associated with our Project Own It transformation actions as well
as additional savings from various cost reduction actions to
mitigate the impact of the crisis, including approximately $60
million from temporary government assistance measures and furlough
programs (see the “Government Assistance and Furlough Programs”
section for further details) and other reductions in discretionary
spend such as near term targeted marketing programs and the use of
contract employees as well as compensation incentives consistent
with lower sales and operating results.
____________________________
(1) Refer to the Operating Income / Margin reconciliation table
in the “Non-GAAP Financial Measures” section.
Gross Margin
Second quarter 2020 gross margin of 38.5% decreased by
0.6-percentage points compared to second quarter 2019, reflecting
the impact of lower revenues, (including from our higher margin
post sale stream) primarily as a result of the significant effect
of the COVID-19 crisis due to business closures, as well as the
impact of price reductions, adverse transaction currency and
tariffs. These headwinds were partially offset by the benefits from
our Project Own It transformation actions as well as the additional
cost reduction actions to mitigate the impact of the crisis,
including savings of approximately $40 million from temporary
government assistance measures and furlough programs.
Gross margins are expected to continue to be negatively impacted
in future periods as a result of an increase in the cost of our
imported products due to higher import tariffs. We currently
estimate an approximate $30 million cost impact from these higher
tariffs for the full year 2020.
Second quarter 2020 equipment gross margin of 28.8% was flat as
compared to second quarter 2019, reflecting the benefit of cost
reductions from Project Own It as well as a favorable mix of
revenues due to the relatively smaller declines in our high-end
category, which offset the pressure from lower revenues (primarily
as a result of COVID-19 related business closures) and the adverse
impact of transaction currency, incremental tariff costs and price
incentives.
Second quarter 2020 post sale gross margin of 41.1% decreased by
0.9-percentage points as compared to second quarter 2019,
reflecting the impact of lower revenues (primarily as a result of
COVID-19 related business closures) and pricing pressure on
contract renewals, partially offset by productivity and
restructuring savings associated with our Project Own It
transformation actions, as well as savings from our additional cost
reduction actions to mitigate the impact of the crisis, including
approximately $40 million of savings from temporary government
assistance measures and furlough programs.
Research, Development and Engineering
Expenses (RD&E)
Second quarter 2020 RD&E as a percentage of revenue of 5.2%
increased by 1.3-percentage points as compared to second quarter
2019, due to the impact of revenue declines that outpaced the
benefit of cost reductions.
RD&E of $76 million decreased $12 million as compared to
second quarter 2019 reflecting savings from Project Own It and
other temporary cost actions, as well as a favorable impact from
the timing of investments, partially offset by higher spend in our
innovation areas.
Selling, Administrative and General
Expenses (SAG)
SAG as a percentage of revenue of 29.1% increased by
6.3-percentage points as compared to second quarter 2019, primarily
due the impact of lower revenues, partially offset by the benefits
from productivity and restructuring associated with our Project Own
It transformation actions, and savings from additional cost
reduction actions to mitigate the impact of the crisis, including
approximately $19 million from temporary government assistance
measures and furlough programs, and other reductions in
discretionary spend such as near term targeted marketing programs
and the use of contract employees as well as compensation
incentives consistent with lower sales and operating results.
During first quarter 2020 our bad debt provision was $61 million
higher than the prior year period primarily reflecting the expected
impact to our customer base and related outstanding receivable
portfolio as a result of the economic disruption caused by the
COVID-19 pandemic crisis. During second quarter 2020, write-offs
were in line with expectations and the current bad debt reserves
for our trade and finance receivables portfolios were determined to
be adequate and consistent with future expectations regarding the
impacts from the COVID-19 crisis. Accordingly, no incremental
reserves were required and bad debt expense for second quarter 2020
of $13 million was effectively flat as compared to second quarter
2019. We continue to monitor developments regarding this crisis,
including expectations for lifting of business closures and
mitigating government support actions and as a result our reserve
estimates may need to be updated in future periods. Bad debt
expense of approximately 2.7 percent of total gross receivables on
a trailing-twelve-month basis (TTM) reflects the significant
increase in first quarter 2020 and remained high as compared to the
2019 trend of less than one percent.
SAG of $426 million decreased by $91 million as compared to
second quarter 2019, reflecting productivity and restructuring
savings associated with our Project Own It transformation actions
and from additional cost reduction actions, including lower
compensation incentives and targeted marketing expenses, to
mitigate the impact of the crisis.
Restructuring and Related Costs
We incurred restructuring and related costs of $3 million for
the second quarter 2020 as compared to $37 million for second
quarter 2019. 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 June 30,
(in millions)
2020
2019
Restructuring Severance (1)
$
7
$
13
Asset Impairments (2)
—
10
Other contractual termination costs
(3)
—
3
Net reversals (4)
(9)
(8)
Restructuring and asset impairment
costs
(2)
18
Retention related severance/bonuses
(5)
4
11
Consulting and other costs (6)
1
8
Total
$
3
$
37
___________________
- Reflects headcount reductions of approximately 150 employees
worldwide in second quarter of 2020 and 2019, respectively.
- Primarily related to the exit and abandonment of leased and
owned facilities. The 2019 charge includes the accelerated
write-off of $8 million for leased right-of-use assets and $2
million for owned assets upon exit from the facilities, net of any
potential sublease income and other recoveries.
- Primarily includes additional costs incurred upon the exit from
our facilities including decommissioning costs and associated
contractual termination costs.
- Reflects net reversals for changes in estimated reserves from
prior period initiatives.
- Includes retention related severance and bonuses for employees
expected to continue working beyond their minimum notification
period before termination.
- Represents professional support services associated with our
business transformation initiatives.
Second quarter 2020 actions impacted several functional areas,
with approximately 10% focused on gross margin improvements and
approximately 90% focused on SAG reductions.
Second quarter 2019 actions impacted several functional areas,
with approximately 15% focused on gross margin improvements,
approximately 80% focused on SAG reductions, and the remainder
focused on RD&E optimization.
The restructuring and related costs reserve balance as of June
30, 2020 for all programs was $94 million, which is expected to be
paid over the next twelve months.
Transaction and Related Costs,
Net
We incurred $7 million of Transaction and related costs, net
during second quarter 2020 primarily related to legal and other
professional costs associated with certain strategic M&A
projects including our terminated proposal to acquire HP Inc. (see
the “Termination of Proposed Transaction with HP Inc.” section for
further details).
Amortization of Intangible
Assets
Second quarter 2020 Amortization of intangible assets of $10
million decreased by $1 million compared to second quarter 2019 as
a result of the write-off of trade names in prior periods
associated with our realignment and consolidation of certain XBS
sales units as part of Project Own It transformation actions
partially offset by intangible amortization associated with 2020
and 2019 acquisitions.
Worldwide Employment
Worldwide employment was approximately 26,100 as of June 30,
2020 and decreased by approximately 900 from December 31, 2019. The
reduction resulted from net attrition (attrition net of gross
hires), of which a large portion is not expected to be back filled,
as well as the impact of organizational changes.
Other Expenses, Net
Three Months Ended June 30,
(in millions)
2020
2019
Non-financing interest expense
$
18
$
26
Non-service retirement-related costs
(8)
10
Interest income
(3)
(3)
Currency losses, net
2
—
All other expenses, net
(2)
5
Other expenses, net
$
7
$
38
Non-financing interest expense
Second quarter 2020 non-financing interest expense of $18
million was $8 million lower than second quarter 2019. When
combined with financing interest expense (Cost of financing), total
interest expense decreased by $11 million from second quarter 2019
primarily due to a lower debt balance.
Non-service retirement-related
costs
Second quarter 2020 non-service retirement-related costs were
$18 million lower than second quarter 2019, primarily driven by
lower losses from pension settlements in the U.S.
Income Taxes
Second quarter 2020 effective tax rate was 22.9%. On an
adjusted1 basis, second quarter 2020 effective tax rate was 23.4%.
This rate was higher than the U.S. federal statutory tax rate of
21% primarily due to state taxes and the geographical mix of
profits partially offset by the impact from various non-deductible
and discrete items on lower pre-tax income. The adjusted1 effective
tax rate excludes the tax impacts associated with the following
charges: Restructuring and related costs, Amortization of
intangible assets, Transaction and related costs, net as well as
non-service retirement-related costs and other discrete, unusual or
infrequent items as described in our Non-GAAP Financial Measures
section.
Second quarter 2019 effective tax rate was 26.3%. On an
adjusted1 basis, second quarter 2019 effective tax rate was 26.6%.
These rates were higher than the U.S. federal statutory tax rate of
21% primarily due to state taxes and the geographical mix of
profits. The adjusted1 effective tax rate excludes the tax impacts
associated with the following charges: Restructuring and related
costs, Amortization of intangible assets, Transaction and related
costs, net, and non-service retirement-related costs.
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.
______________
- Refer to the Effective Tax Rate reconciliation table in the
"Non-GAAP Financial Measures" section.
Net Income from Continuing Operations
Second quarter 2020 net income from continuing operations
attributable to Xerox Holdings was $27 million, or $0.11 per
diluted share. On an adjusted1 basis, net income from continuing
operations attributable to Xerox Holdings was $36 million, or $0.15
per diluted share. Second quarter 2020 adjustments to net income
from continuing operations included Restructuring and related
costs, Amortization of intangible assets, Transaction and related
costs, net and non-service retirement-related costs.
Second quarter 2019 net income from continuing operations
attributable to Xerox Holdings was $141 million, or $0.60 per
diluted share. On an adjusted1 basis, net income from continuing
operations attributable to Xerox Holdings was $186 million, or
$0.79 per diluted share. Second quarter 2019 adjustments to net
income from continuing operations included Restructuring and
related costs, Amortization of intangible assets, Transaction and
related costs, net and non-service retirement-related costs.
___________
- Refer to the "Non-GAAP Financial Measures" section for the
calculation of adjusted EPS. The calculations of basic and diluted
earnings per share are included in Appendix I.
Discontinued Operations
In November 2019, Xerox Holdings completed a series of
transactions to restructure its relationship with FUJIFILM Holdings
Corporation (“FH”), including the sale of its indirect 25% equity
interest in Fuji Xerox Co., Ltd. ("FX") for approximately $2.2
billion as well as the sale of its indirect 51% partnership
interest in Xerox International Partners ("XIP") for approximately
$23 million (collectively the “Sales”). As a result of the Sales
and the related strategic shift in our business, the historical
financial results of our equity method investment in FX and our XIP
business (which was consolidated) for the periods prior to the
Sales are reflected as a discontinued operation and as such, their
impact is excluded from continuing operations for all periods
presented.
Summarized financial information for our Discontinued operations
is as follows:
Three Months Ended June 30,
(in millions)
2020
2019
Revenue
$
—
$
26
Income from operations(1)
$
—
$
42
Income before income taxes
—
42
Income tax expense
—
—
Income from discontinued operations,
net of tax
—
42
Income from discontinued operations
attributable to noncontrolling interests, net of tax
—
2
Income from discontinued operations,
attributable to Xerox Holdings, net of tax
$
—
$
40
____________________________
(1) Includes equity income from FX of $32 million for the three
months ended June 30, 2019.
Capital Resources and Liquidity
Our second quarter financial results were significantly impacted
by COVID-19 related business closures and office building capacity
restrictions that impacted our customers' purchasing decisions and
caused delayed installations and lower printing volumes on our
devices. However, we believe we have sufficient liquidity to manage
the business through the economic disruption caused by this
crisis:
- A majority of our business is contractually based and our
bundled services contracts, on average, include not only a variable
component linked to print volumes, but also a fixed minimum, which
provides us with a continuing stream of operating cash flow.
- As of June 30, 2020, total cash, cash equivalents and
restricted cash were $2,314 million and, apart from restricted cash
of $42 million, was readily accessible for use.
- We have access to an undrawn $1.8 billion Credit Facility that
matures in August 2022.
- We expect to be able to utilize a combination of cash on hand,
capital markets and securitization to manage debt maturities during
2020 (see “Secured Borrowings and Collateral” section for
additional information regarding a recent secured borrowing
transaction).
- We have focused our efforts on incremental actions to
prioritize and preserve cash as we manage through this crisis.
These actions include the reduction of discretionary spend such as
near term targeted marketing programs, the use of contract
employees and compensation incentives consistent with lower sales
and operating results, as well as the use of available temporary
government assistance measures and furlough programs.
The following summarizes our cash, cash equivalents and
restricted cash:
Three Months Ended June 30,
(in millions)
2020
2019
Change
Net cash provided by operating activities
of continuing operations
$
34
$
276
$
(242)
Net cash provided by operating activities
of discontinued operations
—
37
(37)
Net cash provided by operating
activities
34
313
(279)
Net cash used in investing activities
(18)
(54)
36
Net cash used in financing activities
(372)
(277)
(95)
Effect of exchange rate changes on cash,
cash equivalents and restricted cash
5
8
(3)
Decrease in cash, cash equivalents and
restricted cash
(351)
(10)
(341)
Cash, cash equivalents and restricted cash
at beginning of period
2,665
786
1,879
Cash, Cash Equivalents and Restricted
Cash at End of Period
$
2,314
$
776
$
1,538
Cash Flows from Operating
Activities
Net cash provided by operating activities of continuing
operations was $34 million in second quarter 2020. The $242 million
decrease in operating cash from second quarter 2019 was primarily
due to the following:
- $231 million decrease in pre-tax income before depreciation and
amortization, restructuring and related costs and defined benefit
pension costs.
- $196 million decrease from lower accounts payable primarily due
to decreased spending and the year-over-year timing of supplier and
vendor payments.
- $163 million decrease from higher levels of inventory primarily
due to lower sales volume.
- $63 million decrease in other current and long-term
liabilities, reflecting lower accruals, particularly
incentive-related and other payments, associated with our indirect
channel partners.
- $16 million decrease primarily related to the current period
settlements of EUR/GBP derivative contracts.
- $11 million decrease from accrued compensation primarily
related to lower compensation costs and the year-over-year timing
of payments.
- $291 million increase from accounts receivable primarily due to
lower revenue.
- $78 million increase primarily related to a higher level of
run-off due to lower originations of finance receivables of $59
million and lower equipment on operating leases of $19
million.
- $45 million increase from net taxes primarily due to lower
payments in 2020 as a result of lower pre-tax income and government
programs, enacted as part of the COVID-19 relief actions, that
allow for the deferral of income tax payments to 2021.
- $40 million increase due to the timing of payments associated
with restructuring related costs of $8 million in the current
period compared to $48 million in the prior year.
Cash Flows from Investing
Activities
Net cash used in investing activities was $18 million in second
quarter 2020. The $36 million change from second quarter 2019 was
primarily due to two acquisitions in the prior year for $38 million
compared to no acquisitions in the current period.
Cash Flows from Financing
Activities
Net cash used in financing activities was $372 million in second
quarter 2020. The $95 million increase in the use of cash from
second quarter 2019 was primarily due to the following:
- $311 million increase from net debt activity primarily due to
payments of $313 million on Senior Notes in the current period
compared to no debt payments in the prior year.
- $197 million decrease due to share repurchases in prior year
compared to no share repurchases in the current period.
Cash, Cash Equivalents and Restricted Cash
Restricted cash primarily relates to escrow cash deposits made
in Brazil associated with ongoing litigation. Various litigation
matters in Brazil require us to make cash deposits to escrow as a
condition of continuing the litigation. Restricted cash amounts are
classified in our Condensed Consolidated Balance Sheets based on
when the cash will be contractually or judicially released.
(in millions)
June 30, 2020
December 31, 2019
Cash and cash equivalents
$
2,272
$
2,740
Restricted cash
Litigation deposits in Brazil
40
55
Other restricted cash
2
—
Total Restricted cash
42
55
Cash, cash equivalents and restricted
cash
$
2,314
$
2,795
Restricted cash was reported in the Condensed Consolidated
Balance Sheets as follows:
(in millions)
June 30, 2020
December 31, 2019
Other current assets
$
1
$
—
Other long-term assets
41
55
Total Restricted cash
$
42
$
55
Operating Leases
We have operating leases for real estate and vehicles in our
domestic and international operations as well as for certain
equipment in our domestic operations. Additionally, we have
identified embedded operating leases within certain supply chain
contracts for warehouses, primarily within our domestic operations.
Our leases have remaining terms of up to ten years and a variety of
renewal and/or termination options.
Operating leases right-of-use (ROU) assets, net and operating
lease liabilities were reported in the Condensed Consolidated
Balance Sheets as follows:
(in millions)
June 30, 2020
December 31, 2019
Other long-term assets
$
327
$
319
Accrued expenses and other current
liabilities
$
86
$
87
Other long-term liabilities
269
260
Total Operating lease
liabilities
$
355
$
347
Debt and Customer Financing Activities
The following summarizes our debt:
(in millions)
June 30, 2020
December 31, 2019
Principal debt balance(1)
$
4,000
$
4,313
Net unamortized discount
(11)
(16)
Debt issuance costs
(14)
(17)
Fair value adjustments(2)
- terminated swaps
1
1
- current swaps
2
1
Total Debt
$
3,978
$
4,282
____________________________
- There were no Notes Payable as of June 30, 2020 and December
31, 2019, respectively.
- Fair value adjustments include the following: (i) fair value
adjustments to debt associated with terminated interest rate swaps,
which are being amortized to interest expense over the remaining
term of the related notes; and (ii) changes in fair value of hedged
debt obligations attributable to movements in benchmark interest
rates. Hedge accounting requires hedged debt instruments to be
reported inclusive of any fair value adjustment.
Finance Assets and Related Debt
The following represents our total finance assets, net
associated with our lease and finance operations:
(in millions)
June 30, 2020
December 31, 2019
Total finance receivables, net(1)
$
3,070
$
3,351
Equipment on operating leases, net
312
364
Total Finance Assets, net(2)
$
3,382
$
3,715
____________________________
- 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.
- The change from December 31, 2019 includes a decrease of $33
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)
June 30, 2020
December 31, 2019
Finance receivables debt(1)
$
2,686
$
2,932
Equipment on operating leases debt
273
319
Financing debt
2,959
3,251
Core debt
1,019
1,031
Total Debt
$
3,978
$
4,282
____________________________
- 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
Accounts receivable sales arrangements may be utilized in the
normal course of business as part of our cash and liquidity
management. Accounts receivable sold are generally short-term trade
receivables with payment due dates of less than 60 days.
Accounts receivable sales activities were as follows:
Three Months Ended June 30,
(in millions)
2020
2019
Accounts receivable sales(1)
$
14
$
110
Estimated (decrease) increase to operating
cash flows(2)
(58)
5
____________________________
- Loss on sales were not material. Customers may also enter into
structured-payable arrangements that require us to sell our
receivables from that customer to a third-party financial
institution, which then makes payments to us to settle the
customer's receivable. In these instances, we ensure the sale of
the receivables are bankruptcy remote and the payment made to us is
without recourse. The activity associated with these arrangements
is not reflected in this disclosure as payments under these
arrangements have not been material and these are customer directed
arrangements.
- Represents the difference between current and prior period
accounts receivable sales adjusted for the effects of currency. In
second quarter 2020, the $58 million decrease reflects decreased
sales activity in the channel.
Secured Borrowings and Collateral
In July 2020, we entered into a secured loan agreement with a
financial institution where we sold $355 million of U.S. based
finance receivables and the rights to payments under operating
leases with an equipment net book value of $10 million to a special
purpose entity (SPE). The purchase by the SPE was funded through an
amortizing secured loan to the SPE from the financial institution
of $340 million. The SPE is fully consolidated in our financial
statements.
The debt has a variable interest rate based on LIBOR (initial
rate of 1.76%) and an expected life of less than three years with
half projected to be repaid within the first year based on
estimated collections of the underlying portfolio of receivables.
We also entered into an interest rate hedge agreement to cap LIBOR
over the life of the loan.
Shared Services Arrangement with HCL Technologies
In March 2019, as part of Project Own It, Xerox entered into a
shared services arrangement with HCL Technologies ("HCL") pursuant
to which we transitioned certain global administrative and support
functions, including, among others, selected information technology
and finance functions (excluding accounting), from Xerox to HCL.
This transition was expected to be completed during 2020, however,
as a result of delays caused by the COVID-19 pandemic crisis, the
transition is now expected to extend into 2021. HCL is expected to
make certain ongoing investments in software, tools and other
technology to consolidate, optimize and automate the transferred
functions with the goal of providing improved service levels and
significant cost savings. The shared services arrangement with HCL
includes a remaining aggregate spending commitment of approximately
$1.2 billion over the next 6 years. However, we can terminate the
arrangement at any time at our discretion, subject to payment of
termination fees that decline over the term, or for cause.
During second quarter 2020, we incurred net charges of
approximately $45 million associated with this arrangement. The
cost has been allocated to the various functional expense lines in
the Condensed Consolidated Statements of Income based on an
assessment of the nature and amount of the costs incurred for the
various transferred functions prior to their transfer to HCL.
Termination of Proposed Transaction with HP Inc.
In November 2019, Xerox Holdings commenced a proposed business
combination transaction with HP Inc. (“HP”). HP rejected our
initial and subsequent proposals and refused to engage in mutual
due diligence or negotiations. In January 2020, Xerox Holdings
nominated a slate of directors to HP’s board to be voted on at HP’s
2020 annual meeting of stockholders and shortly thereafter, it
launched a tender offer to acquire all outstanding shares of HP, as
it intended to continue to pursue the proposed business combination
transaction. However, the ongoing COVID-19 pandemic crisis and
resulting macroeconomic and market turmoil created an environment
that the company determined to not be conducive to Xerox Holdings
continuing its pursuit of an acquisition of HP. Accordingly, on
March 31, 2020 Xerox Holdings withdrew its tender offer to acquire
HP and terminated its proxy solicitation to nominate a slate of
candidates to HP’s board of directors.
In 2020, Xerox Holdings had obtained $24 billion in financing
commitments from several banks to support the cash portion of the
proposed business combination transaction with HP. On March 31,
2020, following the withdrawal of Xerox Holdings' tender offer to
acquire HP, notice was provided to the banks of the immediate
termination of the financing commitment. No termination penalties
were paid as a result of termination.
Forward-Looking Statements
This release, and other written or oral statements made from
time to time by management contain “forward-looking statements” as
defined in the Private Securities Litigation Reform Act of 1995.
The words “anticipate”, “believe”, “estimate”, “expect”, “intend”,
“will”, “should”, "targeting", "projecting", "driving" and similar
expressions, as they relate to us, our performance and/or our
technology, are intended to identify forward-looking statements.
These statements reflect management’s current beliefs, assumptions
and expectations and are subject to a number of factors that may
cause actual results to differ materially. Such factors include but
are not limited to: the effects of the COVID-19 pandemic on our and
our customers' businesses and the duration and extent to which this
will impact our future results of operations and overall financial
performance; our ability to address our business challenges in
order to reverse revenue declines, reduce costs and increase
productivity so that we can invest in and grow our business; our
ability to attract and retain key personnel; changes in economic
and political conditions, trade protection measures, licensing
requirements and tax laws in the United States and in the foreign
countries in which we do business; the imposition of new or
incremental trade protection measures such as tariffs and import or
export restrictions; changes in foreign currency exchange rates;
our ability to successfully develop new products, technologies and
service offerings and to protect our intellectual property rights;
the risk that multi-year contracts with governmental entities could
be terminated prior to the end of the contract term and that civil
or criminal penalties and administrative sanctions could be imposed
on us if we fail to comply with the terms of such contracts and
applicable law; the risk that partners, subcontractors and software
vendors will not perform in a timely, quality manner; actions of
competitors and our ability to promptly and effectively react to
changing technologies and customer expectations; our ability to
obtain adequate pricing for our products and services and to
maintain and improve cost efficiency of operations, including
savings from restructuring actions; the risk that confidential
and/or individually identifiable information of ours, our
customers, clients and employees could be inadvertently disclosed
or disclosed as a result of a breach of our security systems due to
cyber attacks or other intentional acts; reliance on third parties,
including subcontractors, for manufacturing of products and
provision of services; the exit of the United Kingdom from the
European Union; our ability to manage changes in the printing
environment and expand equipment placements; interest rates, cost
of borrowing and access to credit markets; funding requirements
associated with our employee pension and retiree health benefit
plans; the risk that our operations and products may not comply
with applicable worldwide regulatory requirements, particularly
environmental regulations and directives and anti-corruption laws;
the outcome of litigation and regulatory proceedings to which we
may be a party; any impacts resulting from the restructuring of our
relationship with Fujifilm Holdings Corporation; and the shared
services arrangements entered into by us as part of Project Own It.
Additional risks that may affect Xerox’s operations and other
factors that are set forth in the “Risk Factors” section, the
“Legal Proceedings” section, the “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” section
and other sections of Xerox Holdings Corporation’s and Xerox
Corporation's 2019 Annual Report on Form 10-K, as well as in Xerox
Holdings Corporation's and Xerox Corporation's Quarterly Reports on
Form 10-Q and Current Reports on Form 8-K filed with the SEC.
These forward-looking statements speak only as of the date of
this release or as of the date to which they refer, and Xerox
assumes no obligation to update any forward-looking statements as a
result of new information or future events or developments, except
as required by law.
Non-GAAP Financial Measures
We have reported our financial results in accordance with
generally accepted accounting principles (GAAP). In addition, we
have discussed our financial results using the non-GAAP measures
described below. We believe these non-GAAP measures allow investors
to better understand the trends in our business and to better
understand and compare our results. Accordingly, we believe it is
necessary to adjust several reported amounts, determined in
accordance with GAAP, to exclude the effects of certain items as
well as their related income tax effects.
A reconciliation of these non-GAAP financial measures to the
most directly comparable financial measures calculated and
presented in accordance with GAAP are set forth below as well as in
the second quarter 2020 presentation slides available at
www.xerox.com/investor.
These non-GAAP financial measures should be viewed in addition
to, and not as a substitute for, the company’s reported results
prepared in accordance with GAAP.
Adjusted Earnings Measures
- Net Income and Earnings per share (EPS)
- Effective Tax Rate
The above measures were adjusted for the following items:
- Restructuring and related costs:
Restructuring and related costs include restructuring and asset
impairment charges as well as costs associated with our
transformation programs beyond those normally included in
restructuring and asset impairment charges. Restructuring consists
of costs primarily related to severance and benefits paid to
employees pursuant to formal restructuring and workforce reduction
plans. Asset impairment includes costs incurred for those assets
sold, abandoned or made obsolete as a result of our restructuring
actions, exiting from a business or other strategic business
changes. Additional costs for our transformation programs are
primarily related to the implementation of strategic actions and
initiatives and include third-party professional service costs as
well as one-time incremental costs. All of these costs can vary
significantly in terms of amount and frequency based on the nature
of the actions as well as the changing needs of the business.
Accordingly, due to that significant variability, we will exclude
these charges since we do not believe they provide meaningful
insight into our current or past operating performance nor do we
believe they are reflective of our expected future operating
expenses as such charges are expected to yield future benefits and
savings with respect to our operational performance.
- Amortization of intangible
assets: The amortization of
intangible assets is driven by our acquisition activity which can
vary in size, nature and timing as compared to other companies
within our industry and from period to period. The use of
intangible assets contributed to our revenues earned during the
periods presented and will contribute to our future period revenues
as well. Amortization of intangible assets will recur in future
periods.
- Transaction and related costs,
net: Transaction and related costs, net are costs and
expenses primarily associated with certain strategic M&A
projects including our announced proposal to acquire HP Inc., which
was terminated in March 2020, and our planned transaction with
Fujifilm/Fuji Xerox, which was terminated in May 2018. These costs
are primarily for third-party legal, accounting, consulting and
other similar type professional services as well as potential legal
settlements. 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 exclude other items given their discrete, unusual
or infrequent nature and their impact on our results for the
period. There were no adjustments for the second quarter 2020 and
second quarter 2019.
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/Margin
We calculate and utilize adjusted operating income and margin
measures by adjusting our reported pre-tax income and margin
amounts. In addition to the costs and expenses noted as adjustments
for our Adjusted Earnings measures, adjusted operating income and
margin also exclude the remaining amounts included in Other
expenses, net, which are primarily non-financing interest expense
and certain other non-operating costs and expenses. We exclude
these amounts in order to evaluate our current and past operating
performance and to better understand the expected future trends in
our business.
Constant Currency
To better understand trends in our business, we believe that it
is helpful to adjust revenue to exclude the impact of changes in
the translation of foreign currencies into U.S. dollars. We refer
to this adjusted revenue as “constant 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 not the U.S. dollar. 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.
Free Cash Flow
To better understand trends in our business, we believe that it
is helpful to adjust operating cash flows by subtracting amounts
related to capital expenditures. Management believes this measure
gives investors an additional perspective on cash flow from
operating activities in excess of amounts required for
reinvestment. It provides a measure of our ability to fund
acquisitions, dividends and share repurchase.
Summary:
Management believes that all of these non-GAAP financial
measures provide an additional means of analyzing the current
period’s results against the corresponding prior period’s results.
However, these non-GAAP financial measures should be viewed in
addition to, and not as a substitute for, the company’s reported
results prepared in accordance with GAAP. Our non-GAAP financial
measures are not meant to be considered in isolation or as a
substitute for comparable GAAP measures and should be read only in
conjunction with our consolidated financial statements prepared in
accordance with GAAP. Our management regularly uses our
supplemental non-GAAP financial measures internally to understand,
manage and evaluate our business and make operating decisions.
These non-GAAP measures are among the primary factors management
uses in planning for and forecasting future periods. Compensation
of our executives is based in part on the performance of our
business based on these non-GAAP measures.
A reconciliation of these non-GAAP financial measures and the
most directly comparable measures calculated and presented in
accordance with GAAP are set forth on the following tables:
Net Income and EPS
reconciliation
Three Months Ended June 30,
2020
Three Months Ended June 30,
2019
(in millions, except per share
amounts)
Net Income
EPS
Net Income
EPS
Reported(1)
$
27
$
0.11
$
141
$
0.60
Adjustments:
Restructuring and related costs
3
37
Amortization of intangible assets
10
11
Transaction and related costs, net
7
4
Non-service retirement-related costs
(8)
10
Income tax on adjustments(2)
(3)
(17)
Adjusted
$
36
$
0.15
$
186
$
0.79
Dividends on preferred stock used in
adjusted EPS calculation(3)
$
3
$
—
Weighted average shares for adjusted
EPS(3)
216
235
Fully diluted shares at June 30,
2020(4)
216
____________________________
- Net income and EPS from continuing operations attributable to
Xerox Holdings.
- Refer to Effective Tax Rate reconciliation.
- Average shares for the calculation of adjusted diluted EPS for
2020 exclude 7 million shares associated with our Series A
convertible preferred stock and therefore earnings include the
preferred stock dividend. Average shares for the calculation of
adjusted diluted EPS for 2019 exclude the preferred stock dividend
and include 7 million shares associated with our Series A
convertible preferred stock.
- Represents common shares outstanding at June 30, 2020 plus
potential dilutive common shares as used for the calculation of
adjusted diluted EPS for the second quarter 2020. The amount
excludes shares associated with our Series A convertible preferred
stock as they are expected to be anti-dilutive for the year.
Effective Tax Rate
reconciliation
Three Months Ended June 30,
2020
Three Months Ended June 30,
2019
(in millions)
Pre-Tax Income
Income Tax Expense
Effective Tax Rate
Pre-Tax Income
Income Tax Expense
Effective Tax Rate
Reported(1)
$
35
$
8
22.9
%
$
190
$
50
26.3
%
Non-GAAP Adjustments(2)
12
3
62
17
Adjusted(3)
$
47
$
11
23.4
%
$
252
$
67
26.6
%
____________________________
(1) Pre-tax income and income tax expense from continuing
operations.
(2) Refer to Net Income and EPS reconciliation for details.
(3) The tax impact on Adjusted Pre-Tax Income from continuing
operations is calculated under the same accounting principles
applied to the
Reported Pre-Tax Income under ASC 740, which employs an annual
effective tax rate method to the results.
Operating Income / Margin
reconciliation
Three Months Ended June 30,
2020
Three Months Ended June 30,
2019
(in millions)
Profit
Revenue
Margin
Profit
Revenue
Margin
Reported(1)
$
35
$
1,465
2.4
%
$
190
$
2,263
8.4
%
Adjustments:
Restructuring and related costs
3
37
Amortization of intangible assets
10
11
Transaction and related costs, net
7
4
Other expenses, net
7
38
Adjusted
$
62
$
1,465
4.2
%
$
280
$
2,263
12.4
%
___________________________
(1) Pre-tax Income and revenue from continuing operations.
Free Cash Flow reconciliation
Three Months Ended June 30,
(in millions)
2020
2019
Reported(1)
$
34
$
276
Capital expenditures
(19)
(16)
Free Cash Flow
$
15
$
260
____________________________
- Net cash provided by operating activities of continuing
operations.
APPENDIX I
Xerox Holdings Corporation Earnings
per Common Share
(in millions, except per-share data,
shares in thousands)
Three Months Ended June 30,
Six Months Ended June 30,
2020
2019
2020
2019
Basic Earnings per Share:
Net Income from continuing operations
attributable to Xerox Holdings
$
27
$
141
$
25
$
225
Accrued dividends on preferred stock
(3)
(3)
(7)
(7)
Adjusted net income from continuing
operations available to common shareholders
24
138
18
218
Income from discontinued operations
attributable to Xerox Holdings, net of tax
—
40
—
89
Adjusted net income available to common
shareholders
$
24
$
178
$
18
$
307
Weighted average common shares
outstanding
212,949
223,606
212,852
226,040
Basic Earnings per Share:
Continuing operations
$
0.11
$
0.62
$
0.08
$
0.97
Discontinued operations
—
0.17
—
0.39
Basic Earnings per Share
$
0.11
$
0.79
$
0.08
$
1.36
Diluted Earnings per Share:
Net Income from continuing operations
attributable to Xerox Holdings
$
27
$
141
$
25
$
225
Accrued dividends on preferred stock
(3)
—
(7)
(7)
Adjusted net income from continuing
operations available to common shareholders
24
141
18
218
Income from discontinued operations
attributable to Xerox Holdings, net of tax
—
40
—
89
Adjusted net income available to common
shareholders
$
24
$
181
$
18
$
307
Weighted average common shares
outstanding
212,949
223,606
212,852
226,040
Common shares issuable with respect
to:
Stock Options
—
65
30
34
Restricted stock and performance
shares
2,618
4,866
3,132
4,636
Convertible preferred stock
—
6,742
—
—
Adjusted weighted average common shares
outstanding
215,567
235,279
216,014
230,710
—
Diluted Earnings per Share:
Continuing operations
$
0.11
$
0.60
$
0.08
$
0.94
Discontinued operations
—
0.17
—
0.38
Diluted Earnings per Share
$
0.11
$
0.77
$
0.08
$
1.32
The following securities were not included
in the computation of diluted earnings per share as they were
either contingently issuable shares or shares that if included
would have been anti-dilutive:
Stock options
845
848
816
879
Restricted stock and performance
shares
3,648
2,357
3,134
2,587
Convertible preferred stock
6,742
—
6,742
6,742
Total Anti-Dilutive Securities
11,235
3,205
10,692
10,208
Dividends per Common Share
$
0.25
$
0.25
$
0.50
$
0.50
APPENDIX II
Xerox Holdings Corporation Geographic
Sales Channels and Product/Offering Definitions
Our business is aligned to a geographic focus and is primarily
organized on the basis of go-to-market sales channels, which are
structured to serve a range of customers for our products and
services. In 2019 we changed our geographic structure to create a
more streamlined, flatter and more effective organization, as
follows:
- Americas, which includes our sales channels in the U.S. and
Canada, as well as Mexico, and Central and South America.
- EMEA, which includes our sales channels in Europe, the Middle
East, Africa and India.
- Other, primarily includes sales to and royalties from Fuji
Xerox, and our licensing revenue.
Our products and offerings include:
- “Entry”, which includes A4 devices and desktop printers. Prices
in this product group can range from approximately $150 to
$3,000.
- “Mid-Range”, which includes A3 Office and Light Production
devices that generally serve workgroup environments in mid to large
enterprises. Prices in this product group can range from
approximately $2,000 to $75,000+.
- “High-End”, which includes production printing and publishing
systems that generally serve the graphic communications marketplace
and large enterprises. Prices for these systems can range from
approximately $30,000 to $1,000,000+.
- Xerox Services, includes solutions and services that span from
managing print to automating processes to managing content. Our
primary offerings are Intelligent Workplace Services (IWS), as well
as Digital and Cloud Print Services (including centralized print
services) and Communication and Marketing Solutions.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20200728005284/en/
Media Contact: Caroline Gransee-Linsey Xerox
+1-203-849-2359 Caroline.Gransee-Linsey@xerox.com
Investor Contact: Ann Pettrone Xerox +1-203-849-2590
Ann.Pettrone@xerox.com
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