Notes to Consolidated Financial Statements
(in millions, except per-share data and where otherwise noted)
Note 1 – Basis of Presentation and Summary of Significant Accounting Policies
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.
The accompanying Consolidated Financial Statements and footnotes represent the respective consolidated results and financial results of Xerox Holdings and Xerox and all respective companies that each registrant directly or indirectly controls, either through majority ownership or otherwise. This is a combined report of Xerox Holdings and Xerox, which includes separate Consolidated Financial Statements for each registrant.
The accompanying Consolidated Financial Statements of both Xerox Holdings and Xerox have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP).
Notes to the Consolidated Financial Statements reflect the activity for both Xerox Holdings and Xerox for all periods presented, unless otherwise noted.
Description of Business
Currently, Xerox Holdings' primary direct operating subsidiary is Xerox and therefore Xerox represents nearly all of Xerox Holdings' operations. Xerox is a global enterprise for document management solutions. We provide advanced document technology, services, software and genuine Xerox supplies for a range of customers including small and mid-size businesses, large enterprises, governments and graphic communications providers, and for our partners who serve them. We operate in approximately 160 countries worldwide.
Xerox Holdings' other direct subsidiary is Xerox Ventures LLC, which was established in 2021 solely to invest in startups and early/mid-stage growth companies aligned with the Company’s innovation focus areas and targeted adjacencies. Xerox Ventures LLC had investments of approximately $8 at December 31, 2021.
Basis of Consolidation
All significant intercompany accounts and transactions have been eliminated. Investments in business entities in which we do not have control, but we have the ability to exercise significant influence over operating and financial policies (generally 20% to 50% ownership) are accounted for using the equity method of accounting. Operating results of acquired businesses are included in the Consolidated Statements of (Loss) Income from the date of acquisition.
We consolidate variable interest entities if we are deemed to be the primary beneficiary of the entity. Operating results for variable interest entities in which we are determined to be the primary beneficiary are included in the Consolidated Statements of (Loss) Income from the date such determination is made.
For convenience and ease of reference, we refer to the financial statement caption “Income before Income Taxes and Equity Income” as “pre-tax (loss) income” throughout the Notes to the Consolidated Financial Statements.
Transfer of CareAR Holdings LLC to Xerox
In August 2021, in connection with Xerox Holdings Corporation's announcement of the formation of the CareAR software business, the ownership of CareAR Holdings LLC was transferred from Xerox Holdings Corporation to Xerox Corporation. The transfer was accounted for as a transfer of an entity under common control with retrospective adjustment of Xerox's prior period financial statements to reflect the ownership of the business from its acquisition in the fourth quarter 2020. The impact of this retrospective adjustment was not material to Xerox as the acquisition value was $9 and the entity incurred approximately $1 of expenses in 2020.
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 (now known as FUJIFILM Business Innovation Corp.) as well as the sale of its indirect 51% partnership interest in Xerox
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International Partners (XIP) (collectively the Sales). As a result of the Sales of FX and XIP 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 2019 are reflected as a discontinued operation and as such, their impact is excluded from continuing operations for 2019. The historical statements of Comprehensive Income and Shareholders' Equity have not been revised to reflect the Sales and instead reflect the Sales as an adjustment to the balances at December 31, 2019. Refer to Note 6 - Divestitures for additional information regarding discontinued operations.
Use of Estimates
The preparation of our Consolidated Financial Statements requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities, as well as the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Future events and their effects cannot be predicted with certainty; accordingly, our accounting estimates require the exercise of judgment. The accounting estimates used in the preparation of our Consolidated Financial Statements will change as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes. Our estimates are based on management's best available information including current events, historical experience, actions that the company may undertake in the future and on various other assumptions that are believed to be reasonable under the circumstances. As a result, actual results may be different from these estimates.
In the ordinary course of accounting for the items discussed above, we make changes in estimates as appropriate and as we become aware of new or revised circumstances surrounding those estimates. Such changes and refinements in estimation methodologies are reflected in reported results of operations in the period in which the changes are made and, if material, their effects are disclosed in the Notes to the Consolidated Financial Statements and in Management's Discussion and Analysis of Financial Condition and Results of Operations.
As of December 31, 2021, the impact of the COVID-19 pandemic continues to have varying and divergent impacts across various regions and countries in which we operate and a degree of economic uncertainty still remains. We expect the pandemic's effects will likely continue to impact our financial results into at least the first half of 2022. Accordingly, many of our estimates and assumptions continue to require a greater degree of judgment and may change in the future as events continue to evolve and additional information becomes available.
New Accounting Standards and Accounting Changes
Except for the Accounting Standard Updates (ASUs) discussed below, the new ASUs issued by the FASB during the last two years did not have any significant impact on the Company.
Accounting Standard Updates to be Adopted:
Government Assistance
In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832), Disclosures by Business Entities about Government Assistance. The update increases the transparency surrounding government assistance by requiring disclosure of 1) the types of assistance received, 2) an entity’s accounting for the assistance, and 3) the effect of the assistance on the entity’s financial statements. We expect to adopt this update effective for our fiscal year beginning January 1, 2022. We are currently evaluating the impact of the adoption of this update on our Consolidated Financial Statements, which will largely depend on the amounts of government assistance expected to be received in the future. However, prior to the COVID pandemic, the amounts of government assistance the Company received were not material and since the update is limited to increased disclosures, we do not expect the adoption to have a material impact on our financial condition, results of operations, and cash flows.
Business Combinations
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The new guidance requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC Topic 606, Revenue from Contracts with Customers, as if the acquirer had originated the contracts. This approach differs from the current requirement to measure contract assets and contract liabilities acquired in a business combination at fair value. This update is effective for our fiscal year beginning January 1, 2023, with early adoption permitted. The impact of adopting the new standard will depend on the magnitude of future acquisitions. The standard will not impact contract assets or liabilities acquired in business combinations that occurred prior to the adoption date.
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Reference Rate Reform
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by the discontinuation of the London Interbank Offered Rate (LIBOR) or by another reference rate expected to be discontinued. In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848), Scope, which provided clarification to ASU 2020-04. These ASUs were effective commencing with our quarter ended March 31, 2020 and will continue through December 31, 2022. There has been no impact to date as a result of adopting ASU 2020-04 or ASU 2021-01 and subsequent amendments on reference rate reform. However, we continue to evaluate potential future impacts that may result from the discontinuation of LIBOR or other reference rates as well as the accounting provided in this update on our financial condition, results of operations, and cash flows.
Accounting Standard Updates Recently Adopted:
Debt
In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40). This update simplifies the accounting for convertible instruments by reducing the number of accounting models available for convertible debt instruments and convertible preferred stock. This update also amends the guidance for the derivatives scope exception for contracts in an entity's own equity to reduce form-over-substance-based accounting conclusions and requires the application of the if-converted method for calculating diluted earnings per share. We adopted this update effective for our fiscal year beginning January 1, 2022. The adoption of this standard did not have a material impact on our Consolidated Financial Statements and related disclosures.
Income Taxes
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which was intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. We adopted this update effective for our fiscal year beginning January 1, 2021. The adoption did not have a material impact on our results of operations, financial position, cash flows or disclosures.
Leases
In April 2020, the FASB staff issued a question and answer (Q&A) document on the application of lease accounting guidance related to lease concessions provided as a result of the economic disruption caused by the COVID-19 pandemic (Topic 842 Q&A). Topic 842 Q&A provides interpretive guidance allowing companies the option to account for lease concessions related to the COVID-19 pandemic consistent with how those concessions would be accounted for under ASU 2016-02, Leases (Topic 842), discussed below, as though enforceable rights and obligations for those concessions existed at the beginning of the contract (regardless of whether those enforceable rights and obligations for the concessions explicitly exist in the contract). This interpretive guidance was issued in order to reduce the costs and complexities of applying lease modification accounting under Topic 842 to leases impacted by the effects of the COVID-19 pandemic. This election is available for concessions related to the effects of the COVID-19 pandemic that do not result in a substantial increase in the rights of the lessor or the obligations of the lessee. We have elected to apply the interpretive guidance provided in Topic 842 Q&A to rent concessions related to the COVID-19 pandemic provided as a Lessor to our customers and as received as a Lessee.
Through September 30, 2020 we provided rent deferrals as a Lessor that were primarily offered to customers with sales type lease receivables. This special program was discontinued in the fourth quarter of 2020. We elected to account for the deferrals in the timing of lease payments as if there were no changes in the lease contracts. Under this approach, assuming that collectibility of future lease payments is still probable, the classification of the leases was not updated and we retained the balance of the deferral as a receivable and will settle that receivable at the revised payment date or dates. Through September 30, 2020, we approved payment deferrals of up to 3 months for approximately $33 or approximately 1% of our total finance receivable portfolio. Rent abatements to the extent provided were not material and were accounted for as write-offs as part of our normal bad debt reserve assessment.
With respect to rent deferrals and abatements received as a Lessee, we elected to account for the deferrals and abatements as a resolution of a contingency within the lease. Under this approach, we follow the resolution of a contingency model in ASC 842 without reclassifying the lease or updating the discount rate. We remeasure the remaining consideration in the contract, reallocate it to the lease and non-lease components as applicable, and remeasure the lease liability with an adjustment to the right-of-use asset for the same amount. If the total lease
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payments remain exactly the same, the lease cost remains unchanged. The impact of this election was not material to our financial condition, results of operations or cash flows, as rent concessions provided to Xerox in 2021 or 2020 were not material, individually or in the aggregate.
On January 1, 2019, we adopted ASU 2016-02, Leases (ASC Topic 842). This update, as well as additional amendments and targeted improvements issued in 2018 and early 2019, supersedes existing lease accounting guidance found under ASC 840, Leases (ASC 840) and requires the recognition of right-to-use assets and lease obligations by lessees for those leases originally classified as operating leases under prior lease guidance. Effective with the adoption, leases are classified as either finance or operating, with such classification affecting the pattern of expense recognition. Short-term leases with a term of 12 months or less are not required to be recognized. The update also requires qualitative and quantitative disclosure of key information regarding the amount, timing and uncertainty of cash flows arising from leasing arrangements in order to increase transparency and comparability among companies. The accounting for lessors does not fundamentally change with this update except for changes to conform and align guidance to the lessee guidance, as well as to the revenue recognition guidance in ASU 2014-09. Some of these conforming changes, such as those related to the definition of lease term and minimum lease payments, resulted in certain lease arrangements that would have been previously accounted for as operating leases, to instead be classified and accounted for as sales-type leases with a corresponding up-front recognition of equipment sales revenue.
Upon adoption, we applied the transition option, whereby prior comparative periods are not retrospectively presented in the Consolidated Financial Statements. We also elected the package of practical expedients not to reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs and the lessee practical expedient to combine lease and non-lease components for certain asset classes (real estate lease arrangements for offices and warehouses). Additionally, we made a policy election to not recognize right-of-use assets and lease liabilities for short-term leases for all asset classes. We elected the package of practical expedients from both the Lessee and Lessor prospective, to the extent applicable.
Lessee accounting - the adoption of this update resulted in an increase to assets and related liabilities of approximately $385 (approximately $440 undiscounted) primarily related to leases of facilities. Refer to Note 11 - Lessee for additional information related to our lessee accounting.
Lessor accounting - the adoption of this update resulted in an increase to equipment sales by approximately $30 in 2019 as compared to 2018. Refer to Note 4 - Lessor for additional information related to our lessor accounting.
Financial Instruments - Credit Losses
On January 1, 2020, we adopted ASU 2016-13, Financial Instruments Credit Losses - Measurement of Credit Losses on Financial Instruments. This update was issued by the FASB in June 2016, with additional updates and amendments being issued in 2018, 2019 and 2020 and requires measurement and recognition of expected credit losses for financial assets on an expected loss model rather than an incurred loss model. The update impacted financial assets including net investment in leases that are not accounted for at fair value through Net Income. The adoption of ASU 2016-13 primarily impacted the estimation of our Allowance for doubtful accounts for Accounts Receivable and Finance Receivables. The impact recorded on our initial adoption of ASU 2016-13 was not material as our previous methodology for assessing the adequacy of our Allowance for doubtful accounts for Finance Receivables, the larger component of our receivable reserves, incorporated an expected loss model and the methodology for both allowances included an assessment of current economic conditions. However, as previously disclosed, the future impact from this update is highly dependent on future economic conditions. Refer to Note 7 - Accounts Receivable, Net and Note 8 - Finance Receivables, Net for additional discussion regarding the impacts from the adoption of this update during the first quarter 2020.
Intangibles - Internal-Use Software
On January 1, 2020, we adopted ASU 2018-15, Intangibles - Goodwill and Other - Internal Use Software (Subtopic 350-40), Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. This update was issued by the FASB in August 2018 and aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The update provides criteria for determining which implementation costs to capitalize as an asset related to the service contract and which costs to expense. The capitalized implementation costs are required to be expensed over the term of the hosting arrangement. The update also clarifies the presentation requirements for reporting such costs in the entity’s financial statements. The adoption of ASU 2018-15 did not have a material impact on our financial condition, results of operations or cash flows as we had previously capitalized these implementation costs and such amounts were not material.
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Other Updates
The FASB also issued the following Accounting Standards Updates, which have not had, and are not expected to have, a material impact on our financial condition, results of operations or cash flows upon adoption.
•Equity Instruments: ASU 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options). This update is effective for our fiscal year beginning January 1, 2022.
•Leases: ASU 2021-05, Leases - Certain Lease Payments with Variable Lease Payments (ASC 842). This update is effective for our fiscal year beginning January 1, 2022.
•Investments: ASU 2020-01, Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815). This update was effective for our fiscal year beginning January 1, 2021.
•Compensation - Stock Compensation and Revenue from Contracts with Customers: ASU 2019-08, (Topic 718) and (Topic 606) Codification Improvements - Share-Based Consideration Payable to a Customer. This update was effective for our fiscal year beginning January 1, 2020.
Summary of Accounting Policies
Revenue Recognition
We generate revenue through the sale of equipment and supplies and by providing maintenance and printing services. Revenue is measured based on the consideration specified in a contract with a customer and is recognized when we satisfy a performance obligation by transferring control of a product to a customer or in the period the customer benefits from the service. With the exception of our sales-type lease arrangements, our invoices to the customer, which normally have short-term payment terms, are typically aligned to the transfer of goods or as services are rendered to our customers and therefore in most cases we recognize revenue based on our right to invoice customers. As a result of the application of this practical expedient for the substantial portion of our revenue, the disclosure of the value of unsatisfied performance obligations for our services is not required.
Significant judgments primarily include the identification of performance obligations in our Document management services arrangements as well the pattern of delivery for those services.
More specifically, revenue related to our products and services is generally recognized as follows:
Equipment: Revenues from the sale of equipment directly to end-user customers, including those from sales-type leases (see below), are recognized when obligations under the terms of a contract with our customer are satisfied and control has been transferred to the customer. For equipment placements that require us to install the product at the customer location, revenue is normally recognized when the equipment has been delivered and installed at the customer location. Sales of customer installable products are recognized upon shipment or receipt by the customer according to the customer's shipping terms. Revenue from the equipment performance obligation also includes certain analyst training services performed in connection with the installation or delivery of the equipment.
Maintenance services: We provide maintenance agreements on our equipment that include service and supplies for which the customer may pay a base minimum plus a price-per-page charge for usage. In arrangements that include minimums, those minimums are normally set below the customer’s estimated page volumes and are not considered substantive. These agreements are sold as part of a bundled lease arrangement or through distributors and resellers. We normally account for these maintenance agreements as a single performance obligation for printing services being delivered in a series with delivery being measured by usage as billed to the customer. Accordingly, revenue on these types of agreements is normally recognized as billed to the customer over the term of the agreements based on page volumes. A substantial portion of our products are sold with full service maintenance agreements, accordingly, other than the product warranty obligations associated with certain of our entry level products, we do not have any significant warranty obligations, including any obligations under customer satisfaction programs.
Document management services: Revenues associated with our document management services are generally recognized as printing services are rendered, which is generally on the basis of the number of images produced. Revenues on unit-price contracts are recognized at the contractual selling prices as work is completed by the customer. We account for these arrangements as a single performance obligation for printing services being delivered in a series with delivery being measured by usage as billed to the customer.
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Our services contracts may also include the sale or lease of equipment and software. In these instances, we follow the policies noted for Equipment or Software Revenues and separately report the revenue associated with these performance obligations. Certain document management services arrangements may also include an embedded lease of equipment. In these instances, the revenues associated with the lease are recognized in accordance with the requirements for lease accounting.
Sales to distributors and resellers: We utilize distributors and resellers to sell our equipment, supplies and maintenance services to end-user customers. We refer to our distributor and reseller network as our two-tier distribution model. Revenues on sales to distributors and resellers are generally recognized when products are shipped to such distributors and resellers. However, revenue is only recognized when the distributor or reseller has economic substance apart from the Company such that collectability is probable and we have no further obligations related to bringing about the resale, delivery or installation of the product that would impact transfer of control. Revenues associated with maintenance agreements sold through distributors and resellers to end-user customers are recognized in a consistent manner for maintenance services. Revenue that may be subject to a reversal of revenue due to contractual terms or uncertainties is not recorded as revenue until the contractual provisions lapse or the uncertainties are resolved.
Distributors and resellers participate in various rebate, price-protection, cooperative marketing and other programs. We estimate the variable consideration associated with these programs and record those amounts as a reduction to revenue when sales occur. Similarly, we account for our estimates of sales returns and other allowances when sales occur based on our historical experience.
In certain instances, we may provide lease financing to end-user customers who purchased equipment we sold to distributors or resellers. We are not obligated to provide financing and we compete with other third-party leasing companies with respect to the lease financing provided to these end-user customers.
Software: Most of our equipment has both software and non-software components that function together to deliver the equipment's essential functionality and therefore they are accounted for together as part of Equipment sales revenues. Software accessories sold in connection with our Equipment sales, as well as free-standing software sales, are accounted for as separate performance obligations if determined to be material in relation to the overall arrangement. Revenue from software is not a significant component of our Total revenues.
Supplies: Supplies revenue is recognized upon transfer of control to the customer, generally upon utilization or shipment to the customer in accordance with the sales contract terms.
Financing: Finance income attributable to sales-type leases, direct financing leases and installment loans is recognized on the accrual basis using the effective interest method.
Bundled Lease Arrangements: A portion of our direct sales of equipment to end-user customers are made through bundled lease arrangements which typically include equipment, services (maintenance and managed services) and financing components, where the customer pays a single negotiated fixed minimum monthly payment for all elements over the contractual lease term. These arrangements also typically include an incremental, variable component for page volumes in excess of the contractual page volume minimums, which are often expressed in terms of price-per-image or page. Revenues under these bundled lease arrangements are allocated considering the relative standalone selling prices of the lease and non-lease deliverables included in the bundled arrangement. Lease deliverables include the equipment and financing, while the non-lease deliverables generally consist of the services, which include supplies. Consistent with the guidance in ASC 842 and ASC 606, regarding the allocation of fixed and variable consideration, we only consider the fixed payments for purposes of allocation to the lease elements of the contract. The fixed minimum monthly payments are multiplied by the number of months in the contract term to arrive at the total fixed lease payments that the customer is obligated to make over the lease term. Amounts allocated to the equipment and financing elements are then subjected to the accounting estimates noted below under Leases to ensure the values reflect standalone selling prices.
The remainder of any fixed payments, as well as the variable payments, are allocated to non-lease elements because the variable consideration for incremental page volume or usage is considered attributable to the delivery of those elements. The consideration for the non-lease elements is not dependent on the consideration for equipment and vice versa, and the consideration for the equipment and services is priced at the appropriate standalone values; therefore, the relative standalone selling price allocation method is not necessary. The revenue associated with the non-lease elements are normally accounted for as a single performance obligation being delivered in a series, with delivery being measured as the usage billed to the customer. Accordingly, revenue from these agreements is recognized in a manner consistent with the guidance for Maintenance and Services agreements.
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Leases: The two primary accounting provisions we use to classify transactions as sales-type or operating leases are: (i) a review of the lease term to determine if it is for the major part of the economic life of the underlying equipment (defined as greater than 75%); and (ii) a review of the present value of the lease payments to determine if they are equal to or greater than substantially all of the fair market value of the equipment at the inception of the lease (defined as greater than 90%). Equipment placements included in arrangements meeting these conditions are accounted for as sales-type leases and revenue is recognized in a manner consistent with Equipment sales. Equipment placements included in arrangements that do not meet these conditions are accounted for as operating leases and revenue is recognized over the term of the lease.
We consider the economic life of most of our products to be five years, since this represents the most frequent contractual lease term for our principal products and only a small percentage of our leases are for original terms longer than five years. There is no significant after-market for our used equipment. We believe five years is representative of the period during which the equipment is expected to be economically usable, with normal service, for the purpose for which it is intended.
We perform an analysis of the stand-alone selling price of equipment based on cash selling prices as well as other methodologies including a margin analysis during the applicable period. With respect to the analysis of cash sales, cash selling prices are compared to the range of values determined for our leases. The range of cash selling prices must be reasonably consistent with the lease selling prices in order for us to determine that such lease prices reflect stand-alone value.
Our lease pricing interest rates, which are used in determining customer payments in a bundled lease arrangement, are developed based upon a variety of factors including local prevailing rates in the marketplace, cost of funds and the customer’s credit history, industry and credit class. We reassess our pricing interest rates quarterly based on changes in the local prevailing rates in the marketplace. The pricing interest rates generally equal the implicit rates within the leases, as corroborated by our comparisons of cash to lease selling prices and other analyses as noted above.
Additional Lease Payments: Certain leases may require the customer to pay property taxes and insurance on the equipment. In these instances, the amounts for property taxes and insurance that we invoice to customers and pay to third parties are considered variable payments and are recorded as other revenues and other cost of revenues, respectively. Amounts related to property taxes and insurance are not material. We exclude from variable payments all lessor costs that are explicitly required to be paid directly by a lessee on behalf of the lessor to a third party.
Other Revenue Recognition Policies
Revenue-based Taxes: Revenue-based taxes assessed by governmental authorities that are both imposed on and concurrent with specific revenue-producing transactions, and that are collected by the Company from a customer, are excluded from revenue. The primary revenue-based taxes are sales tax and value-added tax (VAT).
Shipping and Handling: Shipping and handling costs are accounted for as a fulfillment cost and are included in Cost of sales in the Consolidated Statements of (Loss) Income.
Refer to Note 2 - Revenue for additional information regarding revenue recognition policies with respect to contract assets and liabilities as well as contract costs.
Other Significant Accounting Policies
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand, including money market funds, and investments with original maturities of three months or less.
Allowance for Doubtful Accounts and Credit Losses
The allowance for doubtful accounts and provision for credit losses represents an estimate of the losses expected to be incurred from the Company's trade and finance receivable portfolio. The measurement and recognition of expected credit losses is based on an expected loss model and incorporates an assessment of past collection experience as well as consideration of current and future economic conditions and changes in our customer collection trends.
The allowance of finance receivables is determined on a collective basis by year of origination through the application of projected loss rates to our different portfolios by country, which represent our portfolio segments. This is the level at which we develop and document our methodology to determine the allowance for credit losses. These projected loss rates are primarily based upon historical loss experience adjusted for judgments about the probable
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effects of relevant observable data including current and future economic conditions as well as delinquency trends, resolution rates, the aging of receivables, credit quality indicators and the financial health of specific customer classes or groups.
The allowance for finance receivables is inherently more difficult to estimate than the allowance for trade accounts receivable because the underlying lease portfolio has an average maturity, at any time, of approximately two to three years and contains past due billed amounts, as well as unbilled amounts. We consider all available information in our quarterly assessments of the adequacy of the allowance for doubtful accounts. We believe our estimates, including any qualitative adjustments, are reasonable and have considered all reasonably available information about past events, current conditions, and reasonable and supportable forecasts of future events and economic conditions. The identification of account-specific exposure is not a significant factor in establishing the allowance for doubtful finance receivables.
Receivable Sales
We transfer certain portions of our receivable portfolios to third parties and normally account for those transfers as sales based on meeting the criteria for derecognition in accordance with ASC Topic 860 "Transfer and Servicing" of Financial Assets. Gains or losses on the sale of receivables depend, in part, on both (a) the cash proceeds and (b) the net non-cash proceeds received or paid. When we sell receivables, we normally receive beneficial interests in the transferred receivables from the purchasers as part of the proceeds. We may refer to these beneficial interests as a deferred purchase price. The beneficial interests obtained are initially measured at their fair value. We generally estimate fair value based on the present value of expected future cash flows, which are calculated using management's best estimates of the key assumptions including credit losses, prepayment rate and discount rates commensurate with the risks involved. Refer to Note 7 - Accounts Receivable, Net for additional information on our receivable sales.
Inventories
Inventories are carried at the lower of average cost or net realizable value. Inventories also include equipment that is returned at the end of the lease term. Returned equipment is recorded at the lower of remaining net book value or salvage value, which is normally not significant. We regularly review inventory quantities and record a provision for excess and/or obsolete inventory based primarily on our estimated forecast of product demand, production requirements and servicing commitments. Several factors may influence the realizability of our inventories, including our decision to exit a product line, technological changes and new product development. The provision for excess and/or obsolete raw materials and equipment inventories is based primarily on near-term forecasts of product demand and include consideration of new product introductions, as well as changes in remanufacturing strategies. The provision for excess and/or obsolete service parts inventory is based primarily on projected servicing requirements over the life of the related equipment populations. Refer to Note 9 - Inventories and Equipment on Operating Leases, Net for further discussion.
Land, Buildings and Equipment on Operating Leases
Land, buildings and equipment are recorded at cost. Buildings and equipment are depreciated over their estimated useful lives. Leasehold improvements are depreciated over the shorter of the lease term or the estimated useful life. Equipment on operating leases is depreciated to estimated salvage value over the lease term. Depreciation is computed using the straight-line method. Significant improvements are capitalized and maintenance and repairs are expensed. Refer to Note 9 - Inventories and Equipment on Operating Leases, Net and Note 10 - Land, Buildings, Equipment and Software, Net for further discussion.
Leased Assets
We determine at inception whether an arrangement is a lease. Our leases do not include assets of a specialized nature, or the transfer of ownership at the end of the lease, and the exercise of end-of-lease purchase options, which are primarily in our equipment leases, is not reasonably assured at lease inception. Accordingly, the two primary criteria we use to classify transactions as operating leases or finance leases are: (i) a review of the lease term to determine if it is equal to or greater than 75% of the economic life of the asset, and (ii) a review of the present value of the minimum lease payments to determine if they are equal to or greater than 90% of the fair market value of the asset at the inception of the lease. Right-of-use (ROU) assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. We also assess arrangements for goods or services to determine if the arrangement contains a lease at its inception. This assessment first considers whether there is an implicitly or explicitly identified asset in the arrangement and then whether there is a right to control the use of the asset. If there is an embedded lease within a
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contract, the Company determines the classification of the lease at the lease inception date consistent with standalone leases of assets.
Operating leases are included in Other long-term assets, Accrued expenses and other current liabilities, and Other long-term liabilities in our Consolidated Balance Sheets. Finance leases are included in Land, buildings and equipment, net, Accrued expenses and other current liabilities, and Other long-term liabilities in our Consolidated Balance Sheets.
Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. Since the implicit rate for almost all of our leases is not readily determinable, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The incremental borrowing rate is the rate of interest that we would have to pay to borrow, on a collateralized basis, an amount equal to the lease payments, in a similar economic environment and over a similar term. The rate is dependent on several factors, including the lease term and currency of the lease payments.
Lease terms used to calculate the present value of lease payments generally do not include any options to extend, renew, or terminate the lease, as we do not have reasonable certainty at lease inception that these options will be exercised. We generally consider the economic life of our operating lease ROU assets to be comparable to the useful life of similar owned assets. We have elected the short-term lease exception, therefore operating lease ROU assets and liabilities do not include leases with a lease term of twelve months or less. Our leases generally do not provide a residual guarantee. The operating lease ROU asset also excludes lease incentives.
Lease expense is recognized on a straight-line basis over the lease term. We have lease agreements with lease and non-lease components. These components are accounted for separately for vehicle and equipment leases. We account for the lease and non-lease components as a single lease component for real estate leases of offices and warehouses.
We review the potential impairment of our ROU assets consistent with the approach applied for our other long-lived assets. We review the recoverability of our long-lived assets when events or changes in circumstances occur that indicate that the carrying value of the asset may not be recoverable. The assessment of possible impairment is based on our ability to recover the carrying value of the asset from the expected undiscounted future pre-tax cash flows of the related operations. We have elected to include the carrying amount of operating lease liabilities in any tested asset group and include the associated operating lease payments in the undiscounted future pre-tax cash flows.
Software - Internal Use and Product
We capitalize direct costs associated with developing, purchasing or otherwise acquiring software for internal use and amortize these costs on a straight-line basis over the expected useful life of the software, beginning when the software is implemented (Internal Use Software). Costs incurred for upgrades and enhancements that will not result in additional functionality are expensed as incurred. Amounts expended for Internal Use Software are included in Cash Flows from Investing activities.
We also capitalize certain costs related to the development of software solutions to be sold to our customers upon reaching technological feasibility (Product Software). These costs are amortized on a straight-line basis over the estimated economic life of the software. Amounts expended for Product Software are included in Cash Flows from Operations. We perform periodic reviews to ensure that unamortized Product Software costs remain recoverable from estimated future operating profits (net realizable value or NRV). Costs to support or service licensed software are charged to Costs of services as incurred. Refer to Note 10 - Land, Buildings, Equipment and Software, Net for further information.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of acquired net assets in a business combination, including the amount assigned to identifiable intangible assets. The primary drivers that generate goodwill are the value of synergies between the acquired entities and the company and the acquired assembled workforce, neither of which qualifies as an identifiable intangible asset. Goodwill is not amortized, but rather is tested for impairment annually, or more frequently whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable and an impairment loss may have been incurred.
We assess goodwill for impairment at least annually, during the fourth quarter based on balances as of October 1st, and more frequently if indicators of impairment exist or if a decision is made to sell or exit a business. Impairment testing for goodwill is done at the reporting unit level. A reporting unit is an operating segment or one level below an
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operating segment (a component) if the component constitutes a business for which discrete financial information is available, and segment management regularly reviews the operating results of that component. Consistent with the determination that we had one operating segment, we determined that there is one reporting unit and tested goodwill for impairment at the entity level.
We perform an assessment of goodwill, utilizing either a qualitative or quantitative impairment test. The qualitative impairment test assesses several factors to determine whether it is more-likely-than-not that the fair value of the entity is less than its carrying amount. If we conclude it is more-likely-than-not that the fair value of the entity is less than its carrying amount, a quantitative fair value test is performed. In certain circumstances, we may also bypass the qualitative test and proceed directly to a quantitative impairment test. In a quantitative impairment test, we assess goodwill by comparing the carrying amount of the entity to its fair value. Fair value of the entity is determined by using a weighted combination of an income approach and a market approach. If the fair value exceeds the carrying value, goodwill is not considered impaired. If the carrying value exceeds the fair value, goodwill is considered impaired and we would recognize an impairment loss for the excess.
The COVID-19 pandemic continued to have a significant effect on the Company’s operations impacting revenues, expenses, cash flows and market capitalization in 2021. Although business results improved in the first half of 2021 and the Company was meeting expectations, the emergence of new COVID-19 variants during the year resulted in many of our customers delaying their plans to return employees to workplaces and allowing employees to continue to work remotely and in a hybrid environment. This impact combined with the global supply chain and logistic issues, created in part by the COVID-19 pandemic, had a negative effect on the Company’s results particularly in the third and fourth quarter of 2021. As a result of these impacts and projections of these impacts on our future operating results, as well as a sustained market capitalization below book value, we elected to utilize a quantitative model for the assessment of the recoverability of our Goodwill balance for our annual fourth quarter 2021 impairment test. After completing our annual impairment test, we concluded that the fair value of the Company - our single reporting unit - had declined below its carrying value. As a result, we recognized an after-tax non-cash impairment charge of $750 ($781 pre-tax) related to our goodwill for the year ended December 31, 2021.
Other intangible assets primarily consist of assets obtained in connection with business acquisitions, including installed customer base and distribution network relationships, existing technology, trademarks and non-compete agreements. We apply an impairment evaluation whenever events or changes in business circumstances indicate that the carrying value of our intangible assets may not be recoverable. Other intangible assets are amortized on a straight-line basis over their estimated economic lives. We believe that the straight-line method of amortization reflects an appropriate allocation of the cost of the intangible assets to earnings in proportion to the amount of economic benefits obtained annually by the Company. Refer to Note 13 - Goodwill and Intangible Assets, Net for further information.
Impairment of Long-Lived Assets
We review the recoverability of our long-lived assets, including buildings, equipment, right-of-use leased assets, internal use software and other intangible assets, when events or changes in circumstances occur that indicate that the carrying value of the asset may not be recoverable. The assessment of possible impairment is based on our ability to recover the carrying value of the asset from the expected future pre-tax cash flows (undiscounted and without interest charges) of the related operations. If these cash flows are less than the carrying value of such asset, an impairment loss is recognized for the difference between estimated fair value and carrying value. Our primary measure of fair value is based on discounted cash flows. Long-lived assets to be disposed of by sale are reported at the lower of carrying amount or fair value less costs to sell. Long-lived assets to be disposed of other than by sale (e.g., by abandonment, cease-use) would continue to be classified as held and used until the long-lived asset is disposed of (e.g. abandoned or when asset ceases to be used).
In 2021, we evaluated the recoverability of our Long-Lived Assets and Other Intangible Assets to be held and used by comparing the carrying amount of those assets to the net undiscounted cash flows expected to be generated by the business unit/component using those assets to determine if the carrying value was not recoverable. The recoverability test/income approach indicated that our Long-Lived assets and Other Intangible Assets were not impaired.
Pension and Post-Retirement Benefit Obligations
We sponsor various forms of defined benefit pension plans in several countries covering employees who meet eligibility requirements. Retiree health benefit plans cover a portion of our U.S. and Canadian employees for retiree medical costs. We employ a delayed recognition feature in measuring the costs of pension and post-retirement benefit plans. This requires changes in the benefit obligations and changes in the value of assets set aside to meet
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those obligations to be recognized not as they occur, but systematically and gradually over subsequent periods. All changes are ultimately recognized as components of net periodic benefit cost, except to the extent they may be offset by subsequent changes. At any point, changes that have been identified and quantified but not recognized as components of net periodic benefit cost are recognized in Accumulated other comprehensive loss, net of tax.
Several statistical and other factors that attempt to anticipate future events are used in calculating the expense, liability and asset values related to our pension and retiree health benefit plans. These factors include assumptions we make about the applicable discount rate, expected return on plan assets, cash balance interest-crediting rate, rate of increase in healthcare costs, the rate of future compensation increases and mortality. Actual returns on plan assets are not immediately recognized in our income statement due to the delayed recognition requirement. In calculating the expected return on the plan asset component of our net periodic pension cost, we apply our estimate of the long-term rate of return on the plan assets that support our pension obligations, after deducting assets that are specifically allocated to Transitional Retirement Accounts (which are accounted for based on specific plan terms).
For purposes of determining the expected return on plan assets, we utilize a market-related value approach in determining the value of the pension plan assets, rather than a fair market value approach. The primary difference between the two methods relates to systematic recognition of changes in fair value over time (generally two years) versus immediate recognition of changes in fair value. Our expected rate of return on plan assets is applied to the market-related asset value to determine the amount of the expected return on plan assets to be used in the determination of the net periodic pension cost. The market-related value approach reduces the volatility in net periodic pension cost that would result from using the fair market value approach.
The discount rate is used to present value our future anticipated benefit obligations. The discount rate reflects the current rate at which benefit liabilities could be effectively settled considering the timing of expected payments for plan participants. In estimating our discount rate, we consider rates of return on high-quality fixed-income investments adjusted to eliminate the effects of call provisions, as well as the expected timing of pension and other benefit payments.
Each year, the difference between the actual return on plan assets and the expected return on plan assets, as well as increases or decreases in the benefit obligation as a result of changes in the discount rate and other actuarial assumptions, are added to or subtracted from any cumulative actuarial gain or loss from prior years. This amount is the net actuarial gain or loss recognized in Accumulated other comprehensive loss. We amortize net actuarial gains and losses as a component of net pension cost for a year if, as of the beginning of the year, that net gain or loss (excluding asset gains or losses that have not been recognized in market-related value) exceeds 10% of the greater of the projected benefit obligation or the market-related value of plan assets (the corridor method). This determination is made on a plan-by-plan basis. If amortization is required for a particular plan, we amortize the applicable net gain or loss in excess of the 10% threshold on a straight-line basis in net periodic pension cost over the remaining service period of the employees participating in that pension plan. In plans where substantially all participants are inactive, the amortization period for the excess is the average remaining life expectancy of the plan participants.
Our primary domestic plans allow participants the option of settling their vested benefits through the receipt of a lump-sum payment. The participant's vested benefit is considered fully settled upon payment of the lump sum. We have elected to apply settlement accounting and therefore we recognize the losses associated with settlements in this plan immediately upon the settlement of the vested benefits. Settlement accounting requires us to recognize a pro rata portion of the aggregate unamortized net actuarial losses upon settlement. The pro rata factor is computed as the percentage reduction in the projected benefit obligation due to the settlement of the participant's vested benefit. Refer to Note 19 - Employee Benefit Plans for further information regarding our Pension and Post-Retirement Benefit Obligations.
Research, Development and Engineering (RD&E)
Research, development and engineering costs are expensed as incurred. Sustaining engineering costs are incurred with respect to on-going product improvements or environmental compliance after initial product launch. Sustaining engineering costs were $59, $54 and $62 in for the years ended December 31, 2021, 2020 and 2019, respectively.
Government Grants/Assistance
Government grants related to income are recognized as a reduction of related expenses in the Consolidated Statements of (Loss) Income when there is a reasonable assurance that the entity will comply with the conditions attached to the grant and that the grants will be received. The timing and pattern of recognition of government
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grants is made on a systematic basis over the periods in which the Company recognizes the related expenses or losses that the grants are intended to compensate.
Foreign Currency Translation and Remeasurement
The functional currency for most of our foreign operations is the local currency. Net assets are translated at current rates of exchange and income, expense and cash flow items are translated at average exchange rates for the applicable period. The translation adjustments are recorded in Accumulated other comprehensive loss.
The U.S. Dollar is used as the functional currency for certain foreign subsidiaries that conduct their business in U.S. Dollars as well as foreign subsidiaries operating in highly inflationary economies. For these subsidiaries, non-monetary foreign currency assets and liabilities are translated using historical rates, while monetary assets and liabilities are translated at current rates, with the U.S. dollar effects of rate changes recorded in Currency (gains) and losses within Other expenses, net together with other foreign currency remeasurements.
Note 2 – Revenue
Revenues disaggregated by primary geographic markets, major product lines, and sales channels are as follows: | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
Primary geographical markets(1) | | | | | | |
| United States | | $ | 3,982 | | | $ | 4,186 | | | $ | 5,429 | |
| Europe | | 2,023 | | | 1,883 | | | 2,326 | |
| Canada | | 398 | | | 393 | | | 518 | |
| Other | | 635 | | | 560 | | | 793 | |
| Total Revenues | | $ | 7,038 | | | $ | 7,022 | | | $ | 9,066 | |
| | | | | | |
| Major product and services lines | | | | | | |
| Equipment | | $ | 1,581 | | | $ | 1,564 | | | $ | 2,062 | |
| Supplies, paper and other sales | | 1,001 | | | 885 | | | 1,165 | |
Maintenance agreements(2) | | 1,787 | | | 1,803 | | | 2,372 | |
Service arrangements(3) | | 1,991 | | | 2,014 | | | 2,517 | |
| Rental and other | | 457 | | | 530 | | | 706 | |
| Financing | | 221 | | | 226 | | | 244 | |
| | | | | | |
| Total Revenues | | $ | 7,038 | | | $ | 7,022 | | | $ | 9,066 | |
| | | | | | |
| Sales channels: | | | | | | |
| | | | | | |
Direct equipment lease(4) | | $ | 664 | | | $ | 573 | | | $ | 672 | |
Distributors & resellers(5) | | 1,130 | | | 910 | | | 1,343 | |
| Customer direct | | 788 | | | 966 | | | 1,212 | |
| Total Sales | | $ | 2,582 | | | $ | 2,449 | | | $ | 3,227 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
_____________
(1)Geographic area data is based upon the location of the subsidiary reporting the revenue.
(2)Includes revenues from maintenance agreements on sold equipment as well as revenues associated with service agreements sold through our channel partners as Xerox Partner Print Services (XPPS).
(3)Primarily includes revenues from our Managed Services arrangements. Also includes revenues from embedded operating leases in our Managed Services arrangements, which were not significant.
(4)Primarily reflects sales through bundled lease arrangements.
(5)Primarily reflects sales through our two-tier distribution channels.
Contract assets and liabilities: We normally do not have contract assets, which are primarily unbilled accounts receivable that are conditional on something other than the passage of time. Our contract liabilities, which represent billings in excess of revenue recognized, are primarily related to advanced billings for maintenance and other services to be performed and were approximately $144 and $130 at December 31, 2021 and 2020, respectively. The majority of the balance at December 31, 2021 will be amortized to revenue over approximately the next 30 months.
Contract Costs: Incremental direct costs of obtaining a contract primarily include sales commissions paid to sales people and agents in connection with the placement of equipment with associated post sale services arrangements. These costs are deferred and amortized on the straight-line basis over the estimated contract term, which is currently estimated to be approximately four years. We pay commensurate sales commissions upon customer renewals, therefore our amortization period is aligned to our initial contract term.
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Incremental direct costs are as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Incremental direct costs of obtaining a contract | | $ | 61 | | | $ | 62 | | | $ | 78 | |
| Amortization of incremental direct costs | | 73 | | | 81 | | | 88 | |
The balance of deferred incremental direct costs net of accumulated amortization at December 31, 2021 and 2020 was $132 and $145, respectively. This amount is expected to be amortized over its estimated period of benefit, which we currently estimate to be approximately four years.
We may also incur costs associated with our services arrangements to generate or enhance resources and assets that will be used to satisfy our future performance obligations included in these arrangements. These costs are considered contract fulfillment costs and are amortized over the contractual service period of the arrangement to cost of services. In addition, we also provide inducements to certain customers in various forms, including contractual credits, which are capitalized and amortized as a reduction of revenue over the term of the contract. Amounts deferred associated with contract fulfillment costs and inducements were $15 and $13 at December 31, 2021 and 2020, respectively, and related amortization was $6, $4 and $5 for the three years ended December 31, 2021, 2020 and 2019, respectively.
Equipment and software used in the fulfillment of service arrangements, and where the Company retains control, are capitalized and depreciated over the shorter of their useful life or the term of the contract if an asset is contract specific.
Note 3 – Segment and Geographic Area Reporting
Segment Discussion
We manage our operations on a geographic basis and are primarily organized from a sales perspective on the basis of “go-to-market” sales channels. These sales channels are structured to serve a range of customers for our products and services. As a result of this structure, we concluded that for 2021 we had one operating and reportable segment - the design, development and sale of document management systems and solutions. Our chief executive officer was identified as the chief operating decision maker (CODM). All of the company’s activities are interrelated, and each activity is dependent upon and supportive of the other, including product development, supply chain and back-office support services. In addition, all significant operating decisions made by management and the Board, are largely based upon the analysis of Xerox Holdings and Xerox on a total company basis, including assessments related to our incentive compensation plans.
Geographic Area Data
Geographic area data is based upon the location of the subsidiary reporting the revenue or long-lived assets and is as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Revenues | | Long-Lived Assets (1) |
| | Year Ended December 31, | | As of December 31, |
| | | 2021 | | 2020 | | 2019 | | 2021 | | 2020 |
| United States | | $ | 3,982 | | | $ | 4,186 | | | $ | 5,429 | | | $ | 638 | | | $ | 692 | |
| Europe | | 2,023 | | | 1,883 | | | 2,326 | | | 258 | | | 312 | |
| Canada | | 398 | | | 393 | | | 518 | | | 68 | | | 84 | |
| Other areas | | 635 | | | 560 | | | 793 | | | 32 | | | 43 | |
| Total | | $ | 7,038 | | | $ | 7,022 | | | $ | 9,066 | | | $ | 996 | | | $ | 1,131 | |
_____________
(1)Long-lived assets are comprised of (i) Land, buildings and equipment, net, (ii) Equipment on operating leases, net, (iii) Leased right-of-use (ROU) assets, net, (iv) Internal use software, net, and v) Capitalized product software, net.
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Note 4 – Lessor
Revenue from sales-type leases is presented on a gross basis when the company enters into a lease to realize value from a product that it would otherwise sell in its ordinary course of business, whereas in transactions where the company enters into a lease for the purpose of generating revenue by providing financing, the profit or loss, if any, is presented on a net basis. In addition, we have elected to account for sales tax and other similar taxes collected from a lessee as lessee costs and therefore we exclude these costs from contract consideration and variable consideration and present revenue net of these costs.
The components of lease income are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Location in Statements of (Loss) Income | | Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Revenue from sales type leases | | Sales | | $ | 664 | | | $ | 573 | | | $ | 672 | |
| | | | | | | | |
| | | | | | | | |
| Interest income on lease receivables | | Financing | | 221 | | | 226 | | | 244 | |
| | | | | | | | |
| | | | | | | | |
| Lease income - operating leases | | Services, maintenance and rentals | | 246 | | | 313 | | | 396 | |
| Variable lease income | | Services, maintenance and rentals | | 62 | | | 66 | | | 107 | |
| Total Lease income | | | | $ | 1,193 | | | $ | 1,178 | | | $ | 1,419 | |
Profit at lease commencement on sales type leases was estimated to be approximately $221, $207 and $276 for the three years ended December 31, 2021, 2020 and 2019, respectively.
Note 5 – Acquisitions and Investments
The following table summarizes the purchase price allocations for our acquisitions as of the acquisition dates:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2021 | | Year Ended December 31, 2020 |
| | Weighted-Average Life | | Acquisitions | | Weighted-Average Life | | Acquisitions |
| Accounts/finance receivables | | | | $ | 5 | | | | | $ | 20 | |
| Intangible assets: | | | | | | | | |
| Customer relationships | | 9 years | | 27 | | | 9 years | | 69 | |
| Trademarks | | 5 years | | 3 | | | 9 years | | 9 | |
| Technology | | 3 years | | 1 | | | 3 years | | 9 | |
| | | | | | | | |
| Goodwill | | | | 25 | | | | | 111 | |
| Other assets | | | | 4 | | | | | 44 | |
| Total Assets acquired | | | | 65 | | | | | 262 | |
| Liabilities assumed | | | | (12) | | | | | (59) | |
| Total Purchase Price | | | | $ | 53 | | | | | $ | 203 | |
2021 Acquisitions
In 2021, Xerox continued its strategy of focusing on further penetrating the small-to-medium sized business (SMB) market through acquisitions of local area resellers and partners, including multi-brand dealers as well as companies with an adjacent or sole IT services business. During 2021, we acquired businesses associated with this initiative that totaled $50, net of cash acquired, which included an office equipment dealer in Canada for approximately $31, as well as two acquisitions in the U.S. for approximately $19. 2021 also included smaller acquisitions totaling approximately $3.
All of our 2021 acquisitions resulted in 100% ownership of the acquired companies. The operating results of these acquisitions are not material to our financial statements and are included within our results from the respective acquisition dates. The purchase prices were all cash and were primarily allocated to Intangible assets, net and Goodwill, of which, none is expected to be deductible for tax purposes.
2020 Acquisitions
Business acquisitions in 2020 totaled $194, net of cash acquired, and included three acquisitions in the U.K. for $172 (GBP 133 million) - Arena Group, Altodigital Networks and ITEC Connect, as well as an acquisition in Canada for approximately $22 (CAD 29 million). These acquisitions are expected to expand our presence in the SMB market in both Western Europe and Canada. 2020 also included the acquisition of CareAR for $9.
All of our 2020 acquisitions resulted in 100% ownership of the acquired companies. The operating results of these acquisitions are not material to our financial statements and are included within our results from the respective
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acquisition dates. The purchase prices were all cash and were primarily allocated to Intangible assets, net and Goodwill, of which, none is expected to be deductible for tax purposes.
2019 Acquisitions
Business acquisitions in 2019 totaled $38 and included Rabbit Office Automation (ROA), a San Francisco Bay area dealer, and Heritage Business Systems, Inc. (HBS), a Delaware Valley dealer. The acquisition of these dealers in 2019 expanded our distribution capabilities of office technology sales, services and supplies to SMB customers in these markets. 2019 acquisitions also include $4 related to an acquisition of assets.
All of our 2019 acquisitions resulted in 100% ownership of the acquired companies. The operating results of the 2019 acquisitions are not material to our financial statements and were included within our results from the respective acquisition dates. The purchase prices for these acquisitions were all cash and were primarily allocated to Intangible assets, net and Goodwill.
Revenue Summary
Our acquisitions contributed aggregate revenues from their respective acquisition dates as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| Acquisition Year | | 2021 | | 2020 | | 2019 |
| 2021 | | $ | 19 | | | $ | — | | | $ | — | |
| 2020 | | 137 | | | 99 | | | — | |
| 2019 | | 17 | | | 21 | | | 18 | |
| Total Contributed Aggregate Revenue | | $ | 173 | | | $ | 120 | | | $ | 18 | |
Joint Venture Formation
In May 2021, Xerox and the Victorian Government (AU) (VicGov) partnered to launch Eloque, a venture to commercialize new technology that will remotely monitor the structural health of critical infrastructure assets, such as road and railway bridges. Under the terms of the agreement, Xerox contributed approximately $5 in cash, along with technology and intellectual property for a controlling interest in the entity, whereas VicGov contributed approximately $5 in cash, along with technology and intellectual property for a noncontrolling interest in the entity. As a result of Xerox’s controlling interest in the newly formed entity, beginning with the second quarter 2021, Xerox consolidated the new entity and the VicGov investment was reported as a noncontrolling interest. The revenues and expenses of the new entity post formation did not materially impact the Company’s reported results for the year ended December 31, 2021.
ServiceNow Inc. Investment in CareAR
In August 2021, in connection with Xerox Holdings Corporation's formation of the CareAR software business, ServiceNow, Inc. acquired a noncontrolling interest in CareAR Holdings LLC for $10. CareAR Holdings LLC is a direct operating subsidiary of Xerox Corporation and includes Xerox’s XMPie, Inc., DocuShare LLC and CareAR, Inc. business units. ServiceNow’s investment includes a fair value redemption right, which is contingent on the non-occurrence of a future liquidity event (e.g., sale, public offering, spin-off, etc.) within 6 years of the closing of the investment. As a result of this contingent redemption right, we classified ServiceNow’s noncontrolling interest in CareAR Holdings LLC as temporary equity within Xerox’s Consolidated Balance Sheet.
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Note 6 – Divestitures
Discontinued Operations
Sales of Ownership Interests in Fuji Xerox Co., Ltd. and Xerox International Partners
In November 2019, Xerox Holdings completed a series of transactions to restructure its relationship with FUJIFILM Holdings Corporation (FH), including the sale of its indirect 25% equity interest in Fuji Xerox (now known as FUJIFILM Business Innovation Corp.) for approximately $2.2 billion as well as the sale of its indirect 51% partnership interest in Xerox International Partners (XIP) for approximately $23 (collectively the Sales).
As a result of the Sales and the related strategic shift in our business, the financial results of our equity method investment in Fuji Xerox and our XIP business (which was consolidated) are reflected as a discontinued operation and as such, their impact is excluded from continuing operations for 2019.
The Sales resulted in a pre-tax gain of $629 ($539 after-tax), and included a reclassification from Accumulated other comprehensive loss of $165 (Refer to Note 25 - Other Comprehensive Income (Loss)) as well as approximately $9 of transaction costs and $9 of allocated goodwill associated with our XIP business (Refer to Note 13 - Goodwill and Intangible Assets, Net). The XIP allocated goodwill was based on the relative fair value of our XIP business, as evidenced by the sales price, as compared to the total estimated fair value of Xerox. No Goodwill was allocated for our investment in Fuji Xerox based on consideration of the guidance in ASC 350-20-40-2 and the fact that an equity investment is not considered a business in accordance with ASC 805-10-55, as Fuji Xerox was not controlled by Xerox.
The transactions with FH also included an OEM license agreement by and between Fuji Xerox and Xerox, granting Fuji Xerox the right to use specific Xerox Intellectual Property (IP) in providing certain named original equipment manufacturers (OEM’s) with products (such as printer engines) in exchange for a one-time upfront license fee of $77. The license fee is recorded within Rental and other revenues for 2019.
Our Technology Agreement (TA) with Fuji Xerox expired on March 31, 2021. The TA included a provision that allowed Fuji Xerox continued use of the Xerox brand trademark for two years after the date of termination of the TA as it transitions to a new brand in exchange for an upfront prepaid fixed royalty of $100. Fuji Xerox elected to continue its use of the Xerox brand trademark over the two year period and, therefore, in April 2021, made the $100 upfront payment due under the TA, which is included in Operating cash flows for the year ended December 31, 2021.
We are recognizing the revenue associated with this extended brand license ratably over the two year transition period in Service, maintenance and rental revenues. Accordingly, any potential entry by Xerox for Xerographic products into the Fuji Xerox territory under the Xerox brand will be deferred to at least April 1, 2023. The product supply agreements with Fuji Xerox will continue to be effective despite the termination of the TA, and Fuji Xerox and Xerox will continue to operate as each other’s product supplier under existing purchase/supply agreements. Prior to the sale of our investment in Fuji Xerox, pricing of the transactions under these arrangements were based on terms the Company believed to be negotiated at arm's length. Our purchase commitments with Fuji Xerox are in the normal course of business and typically have a lead time of three months. In addition, we pay Fuji Xerox and they pay us for unique research and development costs.
There were no discontinued operations in 2021 or 2020, nor were there any adjustments to the 2019 Discontinued Operation.
Summarized financial information for our Discontinued Operations is as follows:
| | | | | | | | | | | | |
| | | | | | Year Ended December 31, 2019 |
| Revenue | | | | | | $ | 79 | |
| | | | | | |
| | | | | | |
| | | | | | |
| Income from operations | | | | | | $ | 176 | |
| Gain on disposal | | | | | | 629 | |
| Income before income taxes | | | | | | 805 | |
| Income tax expense | | | | | | 95 | |
| Income from discontinued operations, net of tax | | | | | | 710 | |
| Income from discontinued operations attributable to noncontrolling interests, net of tax | | | | | | 5 | |
| Income from discontinued operations, attributable to Xerox, net of tax | | | | | | $ | 705 | |
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The following is a summary of selected financial information for our Discontinued Operations:
| | | | | | | | | | | | |
| | | | | |
| | | | | | Year Ended December 31, 2019 |
| Cost and Expenses: | | | | | | |
| Cost of revenues | | | | | | $ | 44 | |
| | | | | | |
| Other expenses | | | | | | 6 | |
| Total Costs and Expenses | | | | | | $ | 50 | |
| Selected amounts included in Costs and Expenses: | | | | | | |
| Depreciation and amortization | | | | | | $ | — | |
| Restructuring and related costs, net | | | | | | — | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Other: | | | | | | |
| Equity in net income of FX | | | | | | $ | 147 | |
| Net income attributable to noncontrolling interest - XIP | | | | | | 5 | |
| Capital expenditures | | | | | | — | |
| | | | | | |
Refer to Note 12 - Investments in Affiliates, at Equity for additional information regarding Fuji Xerox, including summarized financial information of Fuji Xerox.
Note 7 – Accounts Receivable, Net
Accounts receivable, net were as follows: | | | | | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 |
| Invoiced | | $ | 660 | | | $ | 735 | |
Accrued (1) | | 216 | | | 217 | |
| Allowance for doubtful accounts | | (58) | | | (69) | |
| Accounts receivable, net | | $ | 818 | | | $ | 883 | |
____________
(1)Accrued receivables includes amounts to be invoiced in the subsequent quarter for current services provided.
The allowance for doubtful accounts was as follows:
| | | | | | | | |
| Balance at December 31, 2019 | | $ | 55 | |
| Provision | | 35 | |
| Charge-offs | | (22) | |
Recoveries and other(1) | | 1 | |
| Balance at December 31, 2020 | | $ | 69 | |
| Provision | | 8 | |
| Charge-offs | | (18) | |
Recoveries and other(1) | | (1) | |
| Balance at December 31, 2021 | | $ | 58 | |
_____________
(1)Includes the impacts of foreign currency translation and adjustments to reserves necessary to reflect events of non-payment such as customer accommodations and contract terminations.
The allowance for doubtful accounts as a percentage of gross receivables was 6.6% at December 31, 2021 and 7.2% at December 31, 2020. The allowance for doubtful accounts as a percent of gross accounts receivable remains at an elevated level as compared to historical levels primarily as a result of the macroeconomic and market disruption caused by the COVID-19 pandemic.
Accounts Receivable Sale Arrangements
Accounts receivable sale arrangements are utilized in the normal course of business as part of our cash and liquidity management. The accounts receivable sold are generally short-term trade receivables with payment due dates of less than 60 days. We have one facility in Europe that enables us to sell accounts receivable associated with our distributor network on an ongoing basis without recourse. Under this arrangement, we sell our entire
Xerox 2021 Annual Report 99
interest in the related accounts receivable for cash and no portion of the payment is held back or deferred by the purchaser.
Of the accounts receivable sold and derecognized from our balance sheet, $102 and $136 remained uncollected as of December 31, 2021 and 2020, respectively.
Accounts receivable sales activity was as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2021 | | 2020 | | 2019 |
Accounts receivable sales(1) | | $ | 478 | | | $ | 333 | | | $ | 393 | |
| | | | | | |
| | | | | | |
_____________
(1)Losses 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.
Note 8 – Finance Receivables, Net
Finance receivables include sales-type leases and installment loans arising from the marketing of our equipment. These receivables are typically collateralized by a security interest in the underlying equipment.
Finance receivables, net were as follows:
| | | | | | | | | | | | | | |
| | December 31, |
| | | 2021 | | 2020 |
| Gross receivables | | $ | 3,568 | | | $ | 3,691 | |
| Unearned income | | (380) | | | (393) | |
| Subtotal | | 3,188 | | | 3,298 | |
| Residual values | | — | | | — | |
| Allowance for doubtful accounts | | (118) | | | (133) | |
| Finance Receivables, Net | | 3,070 | | | 3,165 | |
| Less: Billed portion of finance receivables, net | | 94 | | | 99 | |
| Less: Current portion of finance receivables not billed, net | | 1,042 | | | 1,082 | |
| Finance Receivables Due After One Year, Net | | $ | 1,934 | | | $ | 1,984 | |
A summary of our gross finance receivables' future contractual maturities, including those previously billed, is as follows: | | | | | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 |
| 12 Months | | $ | 1,357 | | | $ | 1,426 | |
| 24 Months | | 972 | | | 1,006 | |
| 36 Months | | 668 | | | 697 | |
| 48 Months | | 396 | | | 395 | |
| 60 Months | | 157 | | | 152 | |
| Thereafter | | 18 | | | 15 | |
| Total | | $ | 3,568 | | | $ | 3,691 | |
Finance Receivables - Allowance for Credit Losses and Credit Quality
Our finance receivable portfolios are primarily in the U.S., Canada and EMEA. We generally establish customer credit limits and estimate the allowance for credit losses on a country or geographic basis. Customer credit limits are based upon an initial evaluation of the customer's credit quality and we adjust that limit accordingly based upon ongoing credit assessments of the customer, including payment history and changes in credit quality.
The allowance for doubtful credit losses as a percentage of gross financial receivables (net of unearned income) was 3.7% at December 31, 2021 and 4.0% at December 31, 2020. In determining the level of reserve required, we critically assessed current and forecasted economic conditions in light of the COVID-19 pandemic to ensure we objectively included those expected impacts in the determination of our reserve. Our assessment also included a
Xerox 2021 Annual Report 100
review of current portfolio credit metrics and the level of write-offs incurred over the past year of the COVID-19 pandemic.
Our allowance for doubtful finance receivables is effectively determined by geography. The risk characteristics in our finance receivable portfolio segments are generally consistent with the risk factors associated with the economies of the countries/regions included in those geographies. Since EMEA is comprised of various countries and regional economies, the risk profile within that portfolio segment is somewhat more diversified due to the varying economic conditions among and within the countries.
The bad debt provision of $(1) for the year ended December 31, 2021 included a reserve reduction of approximately $31 reflecting improvements in the macroeconomic environment as well as lower write-offs as a result of the COVID-19 pandemic. This compares to a bad debt provision of $81 for the year ended December 31, 2020, which included a first quarter 2020 charge of approximately $60 to initially record expected losses from the COVID-19 pandemic.
Actual write-offs incurred to date have lagged expectations but we believe estimates of additional losses are in line with current and future economic conditions including the estimated impacts from the on-going COVID-19 pandemic. Despite improvement in the global economy, 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 also consider these various adverse macroeconomic impacts in our models. Accordingly, although our reserves as a percent of receivables have declined from the prior year, they remain elevated as compared to pre-pandemic levels.
The allowance for doubtful accounts as well as the related investment in finance receivables were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Allowance for Credit Losses: | | United States | | Canada(1) | | Europe(1)(2) | | | | Total |
| Balance at December 31, 2019 | | $ | 59 | | | $ | 10 | | | $ | 20 | | | | | $ | 89 | |
| Provision | | 41 | | | 8 | | | 32 | | | | | 81 | |
| Charge-offs | | (23) | | | (5) | | | (14) | | | | | (42) | |
Recoveries and other(3) | | — | | | 2 | | | 3 | | | | | 5 | |
| | | | | | | | | | |
| Balance at December 31, 2020 | | $ | 77 | | | $ | 15 | | | $ | 41 | | | | | $ | 133 | |
| Provision | | 5 | | | (3) | | | (3) | | | | | (1) | |
| Charge-offs | | (7) | | | (3) | | | (6) | | | | | (16) | |
Recoveries and other(3) | | 2 | | | 2 | | | (2) | | | | | 2 | |
| | | | | | | | | | |
| Balance at December 31, 2021 | | $ | 77 | | | $ | 11 | | | $ | 30 | | | | | $ | 118 | |
| Finance Receivables Collectively Evaluated for Impairment: | | | | | | | | | | |
December 31, 2020(4) | | $ | 1,823 | | | $ | 297 | | | $ | 1,178 | | | | | $ | 3,298 | |
December 31, 2021(4) | | $ | 1,876 | | | $ | 251 | | | $ | 1,061 | | | | | $ | 3,188 | |
_____________(1)2019 amounts have been recast to include the Other geographic region, which was previously disclosed as a separate grouping, conforming to the current year's presentation.
(2)Includes developing market countries.
(3)Includes the impacts of foreign currency translation and adjustments to reserves necessary to reflect events of non-payment such as customer accommodations and contract terminations.
(4)Total Finance receivables exclude the allowance for credit losses of $118 and $133 at December 31, 2021 and 2020, respectively.
In the U.S., customers are further evaluated by class based on the type of lease origination. The primary categories are direct, which primarily includes leases originated directly with end-user customers through bundled lease arrangements, and indirect, which primarily includes leases originated through our XBS sales channel that utilizes a combination of internal and third-party leasing in its lease arrangements with end-user customers. Indirect also includes lease financing to end-user customers who purchased equipment we sold to distributors or resellers.
We evaluate our customers based on the following credit quality indicators:
•Low Credit Risk: This rating includes accounts with excellent to good business credit, asset quality and capacity to meet financial obligations. These customers are less susceptible to adverse effects due to shifts in economic conditions or changes in circumstance. The rating generally equates to a Standard & Poor's (S&P) rating of BBB- or better. Loss rates in this category in the normal course are generally less than 1%.
•Average Credit Risk: This rating includes accounts with average credit risk that are more susceptible to loss in the event of adverse business or economic conditions. This rating generally equates to a BB S&P rating. Although we experience higher loss rates associated with this customer class, we believe the risk is somewhat mitigated by the fact that our leases are fairly well dispersed across a large and diverse customer base. In
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addition, the higher loss rates are largely offset by the higher rates of return we obtain with such leases. Loss rates in this category in the normal course are generally in the range of 2% to 5%.
•High Credit Risk: This rating includes accounts that have marginal credit risk such that the customer’s ability to make repayment is impaired or may likely become impaired. We use numerous strategies to mitigate risk including higher rates of interest, prepayments, personal guarantees, etc. Accounts in this category include customers who were downgraded during the term of the lease from low and average credit risk evaluation when the lease was originated. Accordingly, there is a distinct possibility for a loss of principal and interest or customer default. The loss rates in this category in the normal course are generally in the range of 7% to 10%.
Credit quality indicators are updated at least annually, or more frequently to the extent required by economic conditions, and the credit quality of any given customer can change during the life of the portfolio.
Details about our finance receivables portfolio based on geography, origination year and credit quality indicators are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | Total
Finance Receivables |
| United States (Direct): | | | | | | | | | | | | |
| Low Credit Risk | $ | 148 | | | $ | 121 | | | $ | 98 | | | $ | 68 | | | $ | 21 | | | $ | 3 | | | $ | 459 | |
| Average Credit Risk | 60 | | | 40 | | | 57 | | | 23 | | | 8 | | | 2 | | | 190 | |
| High Credit Risk | 91 | | | 73 | | | 31 | | | 16 | | | 6 | | | 1 | | | 218 | |
| Total | 299 | | | 234 | | | 186 | | | 107 | | | 35 | | | 6 | | | 867 | |
| | | | | | | | | | | | | |
| United States (Indirect): | | | | | | | | | | | | |
| Low Credit Risk | 235 | | | 145 | | | 100 | | | 43 | | | 11 | | | — | | | 534 | |
| Average Credit Risk | 201 | | | 103 | | | 74 | | | 35 | | | 10 | | | — | | | 423 | |
| High Credit Risk | 24 | | | 15 | | | 8 | | | 4 | | | 1 | | | — | | | 52 | |
| Total | 460 | | | 263 | | | 182 | | | 82 | | | 22 | | | — | | | 1,009 | |
| | | | | | | | | | | | | |
| Canada | | | | | | | | | | | | | |
| Low Credit Risk | 32 | | | 27 | | | 22 | | | 13 | | | 3 | | | 1 | | | 98 | |
| Average Credit Risk | 34 | | | 34 | | | 27 | | | 15 | | | 6 | | | 1 | | | 117 | |
| High Credit Risk | 8 | | | 12 | | | 7 | | | 5 | | | 4 | | | — | | | 36 | |
| Total | 74 | | | 73 | | | 56 | | | 33 | | | 13 | | | 2 | | | 251 | |
| | | | | | | | | | | | | |
EMEA(1) | | | | | | | | | | | | | |
| Low Credit Risk | 229 | | | 143 | | | 121 | | | 71 | | | 22 | | | 6 | | | 592 | |
| Average Credit Risk | 156 | | | 109 | | | 84 | | | 45 | | | 15 | | | 3 | | | 412 | |
| High Credit Risk | 18 | | | 15 | | | 13 | | | 8 | | | 3 | | | — | | | 57 | |
| Total | 403 | | | 267 | | | 218 | | | 124 | | | 40 | | | 9 | | | 1,061 | |
| | | | | | | | | | | | | |
| Total Finance Receivables | | | | | | | | | | | | | |
| Low Credit Risk | 644 | | | 436 | | | 341 | | | 195 | | | 57 | | | 10 | | | 1,683 | |
| Average Credit Risk | 451 | | | 286 | | | 242 | | | 118 | | | 39 | | | 6 | | | 1,142 | |
| High Credit Risk | 141 | | | 115 | | | 59 | | | 33 | | | 14 | | | 1 | | | 363 | |
| Total | $ | 1,236 | | | $ | 837 | | | $ | 642 | | | $ | 346 | | | $ | 110 | | | $ | 17 | | | $ | 3,188 | |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 |
| | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | Total
Finance Receivables |
| United States (Direct): | | | | | | | | | | | | | |
| Low Credit Risk | $ | 164 | | | $ | 151 | | | $ | 128 | | | $ | 71 | | | $ | 32 | | | $ | 4 | | | $ | 550 | |
| Average Credit Risk | 54 | | | 95 | | | 52 | | | 26 | | | 8 | | | 2 | | | 237 | |
| High Credit Risk | 90 | | | 42 | | | 27 | | | 13 | | | 5 | | | 3 | | | 180 | |
| Total | 308 | | | 288 | | | 207 | | | 110 | | | 45 | | | 9 | | | 967 | |
| | | | | | | | | | | | | |
| United States (Indirect): | | | | | | | | | | | | | |
| Low Credit Risk | 193 | | | 140 | | | 79 | | | 33 | | | 7 | | | — | | | 452 | |
| Average Credit Risk | 129 | | | 124 | | | 71 | | | 31 | | | 8 | | | — | | | 363 | |
| High Credit Risk | 19 | | | 9 | | | 9 | | | 3 | | | 1 | | | — | | | 41 | |
| Total | 341 | | | 273 | | | 159 | | | 67 | | | 16 | | | — | | | 856 | |
| | | | | | | | | | | | | |
| Canada | | | | | | | | | | | | | |
| Low Credit Risk | 37 | | | 34 | | | 24 | | | 10 | | | 5 | | | 1 | | | 111 | |
| Average Credit Risk | 46 | | | 39 | | | 26 | | | 17 | | | 6 | | | 1 | | | 135 | |
| High Credit Risk | 18 | | | 10 | | | 10 | | | 10 | | | 3 | | | — | | | 51 | |
| Total | 101 | | | 83 | | | 60 | | | 37 | | | 14 | | | 2 | | | 297 | |
| | | | | | | — | | | | | | | |
EMEA(1) | | | | | | | | | | | | | |
| Low Credit Risk | 197 | | | 177 | | | 131 | | | 62 | | | 20 | | | 4 | | | 591 | |
| Average Credit Risk | 170 | | | 160 | | | 108 | | | 51 | | | 17 | | | 4 | | | 510 | |
| High Credit Risk | 23 | | | 24 | | | 15 | | | 10 | | | 4 | | | 1 | | | 77 | |
| Total | 390 | | | 361 | | | 254 | | | 123 | | | 41 | | | 9 | | | 1,178 | |
| | | | | | | | | | | | | |
| Total Finance Receivables | | | | | | | | | | | | | |
| Low Credit Risk | 591 | | | 502 | | | 362 | | | 176 | | | 64 | | | 9 | | | 1,704 | |
| Average Credit Risk | 399 | | | 418 | | | 257 | | | 125 | | | 39 | | | 7 | | | 1,245 | |
| High Credit Risk | 150 | | | 85 | | | 61 | | | 36 | | | 13 | | | 4 | | | 349 | |
| Total | $ | 1,140 | | | $ | 1,005 | | | $ | 680 | | | $ | 337 | | | $ | 116 | | | $ | 20 | | | $ | 3,298 | |
_____________
(1)Includes developing market countries.
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The aging of our receivables portfolio is based upon the number of days an invoice is past due. Receivables that are more than 90 days past due are considered delinquent. Receivable losses are charged against the allowance when management believes the uncollectibility of the receivable is confirmed and is generally based on individual credit evaluations, results of collection efforts and specific circumstances of the customer. Subsequent recoveries, if any, are credited to the allowance.
We generally continue to maintain equipment on lease and provide services to customers that have invoices for finance receivables that are 90 days or more past due and, as a result of the bundled nature of billings, we also continue to accrue interest on those receivables. However, interest revenue for such billings is only recognized if collectability is deemed reasonably assured.
The aging of our billed finance receivables is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| | Current | | 31-90
Days
Past Due | | >90 Days
Past Due | | Total Billed | | Unbilled | | Total
Finance
Receivables | | >90 Days
and
Accruing |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Direct | $ | 28 | | | $ | 7 | | | $ | 7 | | | $ | 42 | | | $ | 825 | | | $ | 867 | | | $ | 61 | |
| Indirect | 28 | | | 5 | | | 4 | | | 37 | | | 972 | | | 1,009 | | | — | |
| Total United States | 56 | | | 12 | | | 11 | | | 79 | | | 1,797 | | | 1,876 | | | 61 | |
| Canada | 6 | | | 1 | | | — | | | 7 | | | 244 | | | 251 | | | 9 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
EMEA (1) | 9 | | | 2 | | | 1 | | | 12 | | | 1,049 | | | 1,061 | | | 13 | |
| | | | | | | | | | | | | |
| Total | $ | 71 | | | $ | 15 | | | $ | 12 | | | $ | 98 | | | $ | 3,090 | | | $ | 3,188 | | | $ | 83 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 |
| | Current | | 31-90
Days
Past Due | | >90 Days
Past Due | | Total Billed | | Unbilled | | Total
Finance
Receivables | | >90 Days
and
Accruing |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Direct | $ | 33 | | | $ | 6 | | | $ | 9 | | | $ | 48 | | | $ | 919 | | | $ | 967 | | | $ | 74 | |
| Indirect | 21 | | | 4 | | | 3 | | | 28 | | | 828 | | | 856 | | | — | |
| Total United States | 54 | | | 10 | | | 12 | | | 76 | | | 1,747 | | | 1,823 | | | 74 | |
| Canada | 8 | | | 2 | | | — | | | 10 | | | 287 | | | 297 | | | 12 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
EMEA(1) | 12 | | | 3 | | | 2 | | | 17 | | | 1,161 | | | 1,178 | | | 23 | |
| | | | | | | | | | | | | |
| Total | $ | 74 | | | $ | 15 | | | $ | 14 | | | $ | 103 | | | $ | 3,195 | | | $ | 3,298 | | | $ | 109 | |
_____________
(1)Includes developing market countries.
Secured Borrowings and Collateral
In September 2021, we sold $331 of U.S. based finance receivables to a consolidated special purpose entity (SPE). At December 31, 2021 the SPE holds $308 of total Finance receivables, net, which are included in our Consolidated Balance Sheet as collateral for the secured loan.
In December 2020, we sold $610 of U.S. based finance receivables to a consolidated SPE. As of December 31, 2021 the SPE holds $380 of total Finance receivables, net, which are included in our Consolidated Balance Sheet as collateral for the secured loan.
Refer to Note 16 - Debt, for additional information related to these arrangements including the related secured loan agreement.
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Note 9 – Inventories and Equipment on Operating Leases, Net
The following is a summary of Inventories by major category: | | | | | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 |
| Finished goods | | $ | 568 | | | $ | 707 | |
| Work-in-process | | 43 | | | 43 | |
| Raw materials | | 85 | | | 93 | |
| Total Inventories | | $ | 696 | | | $ | 843 | |
The transfer of equipment from our inventories to equipment subject to an operating lease is presented in our Consolidated Statements of Cash Flows in the operating activities section. Equipment on operating leases and similar arrangements consists of our equipment rented to customers and depreciated to estimated salvage value at the end of the lease term.
Equipment on operating leases and the related accumulated depreciation were as follows:
| | | | | | | | | | | | | | |
| | December 31, |
| | | 2021 | | 2020 |
| Equipment on operating leases | | $ | 1,266 | | | $ | 1,376 | |
| Accumulated depreciation | | (1,013) | | | (1,080) | |
| Equipment on operating leases, net | | $ | 253 | | | $ | 296 | |
Depreciable lives generally vary from four to five years consistent with our planned and historical usage of the equipment subject to operating leases. Estimated minimum future revenues associated with Equipment on operating leases are as follows:
| | | | | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 |
| 12 months | | $ | 202 | | | $ | 215 | |
| 24 months | | 110 | | | 129 | |
| 36 months | | 61 | | | 74 | |
| 48 months | | 32 | | | 32 | |
| 60 months | | 10 | | | 12 | |
| Thereafter | | 2 | | | 1 | |
| Total | | $ | 417 | | | $ | 463 | |
Total contingent rentals on operating leases, consisting principally of usage charges in excess of minimum contracted amounts, for the years ended December 31, 2021, 2020 and 2019 amounted to $62, $66 and $107, respectively. The decrease in contingent rentals for the year ended December 31, 2020 is primarily the result of lower equipment usage during 2020 as a result of business closures related to the COVID-19 pandemic.
Secured Borrowings and Collateral
In September 2021, we sold the rights to payments under operating leases with an equipment net book value of $9 to a consolidated SPE, which funded the purchase through a secured loan agreement with a financial institution. As of December 31, 2021 the SPE holds $8 of Equipment on operating leases, net, which are included in our Consolidated Balance Sheet as collateral for the secured loan agreement.
Refer to Note 16 - Debt, for additional information related to this arrangement.
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Note 10 - Land, Buildings, Equipment and Software, Net
Land, buildings and equipment, net were as follows: | | | | | | | | | | | | | | | | | | | | |
| | | | December 31, |
| | | Estimated Useful Lives (Years) | | 2021 | | 2020 |
| Land | | | | $ | 9 | | | $ | 13 | |
| Building and building equipment | | 25 to 50 | | 777 | | | 814 | |
| Leasehold improvements | | 1 to 12 | | 112 | | | 124 | |
| Plant machinery | | 5 to 12 | | 1,098 | | | 1,149 | |
| Office furniture and equipment | | 3 to 15 | | 475 | | | 476 | |
Finance leases(1) | | 1 to 12 | | 13 | | | 13 | |
Other(1) | | 4 to 20 | | 44 | | | 32 | |
| Construction in progress | | | | 17 | | | 17 | |
| Subtotal | | | | 2,545 | | | 2,638 | |
| Accumulated depreciation | | | | (2,187) | | | (2,231) | |
| Land, buildings and equipment, net | | | | $ | 358 | | | $ | 407 | |
_____________
(1)Prior year amounts have been recast to conform to the current year's presentation to separately report finance lease ROU assets.
Depreciation expense was $76, $87 and $101 for the three years ended December 31, 2021, 2020 and 2019, respectively.
We lease buildings and equipment, substantially all of which are accounted for as operating leases. Finance leased assets were $9 and $10 at December 31, 2021 and 2020, respectively. Refer to Note 11 - Lessee for additional information regarding leased assets.
Internal Use Software
As of December 31, 2021 and 2020, capitalized costs related to internal use software, net of accumulated amortization, were $120 and $118, respectively. Useful lives of our internal use software generally vary from three to seven years.
Note 11 – Lessee
Operating Leases
We have operating leases for real estate and vehicles in our domestic and international operations and for certain equipment in our domestic operations. Additionally, we have identified embedded operating leases within certain supply chain contracts for warehouses, primarily within our domestic operations. Our leases have remaining terms of up to eleven years and a variety of renewal and/or termination options.
The components of lease expense are as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Operating lease expense | | $ | 104 | | | $ | 113 | | | $ | 125 | |
| Short-term lease expense | | 20 | | | 20 | | | 21 | |
Variable lease expense(1) | | 48 | | | 47 | | | 48 | |
| Sublease income | | (4) | | | (2) | | | (1) | |
| | | | | | |
| Total Lease expense | | $ | 168 | | | $ | 178 | | | $ | 193 | |
_____________
(1)Variable lease expense is related to our leased real estate for offices and warehouses and primarily includes labor and operational costs, as well as taxes and insurance.
As of December 31, 2021, we had no additional operating leases that had not yet commenced.
Xerox 2021 Annual Report 106
Operating leases ROU assets, net and operating lease liabilities were reported in the Consolidated Balance Sheets as follows:
| | | | | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 |
| Other long-term assets | | $ | 264 | | | $ | 310 | |
| | | | |
| Accrued expenses and other current liabilities | | $ | 79 | | | $ | 83 | |
| Other long-term liabilities | | 204 | | | 250 | |
| Total Operating lease liabilities | | $ | 283 | | | $ | 333 | |
Supplemental information related to operating leases is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Cash paid for amounts included in the measurement of lease liabilities - Operating cash flows | | $ | 109 | | | $ | 119 | | | $ | 126 | |
Right-of-use assets obtained in exchange for new lease liabilities (1) | | 41 | | | 76 | | | 75 | |
| Weighted-average remaining lease term | | 5 years | | 5 years | | 4 years |
| Weighted-average discount rate | | 4.67 | % | | 5.03 | % | | 5.47 | % |
_____________
(1)Includes the impact of new leases as well as remeasurements and modifications to existing leases.
Maturities and additional information related to operating lease liabilities are as follows:
| | | | | | | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 | | |
| 12 months | | $ | 98 | | | $ | 104 | | | |
| 24 months | | 78 | | | 88 | | | |
| 36 months | | 45 | | | 68 | | | |
| 48 months | | 31 | | | 37 | | | |
| 60 months | | 26 | | | 25 | | | |
| Thereafter | | 35 | | | 52 | | | |
| Total Lease payments | | 313 | | | 374 | | | |
| Less: Imputed interest | | 30 | | | 41 | | | |
| Total Operating lease liabilities | | $ | 283 | | | $ | 333 | | | |
Finance Leases
Xerox has finance leases for equipment in the U.S. and Europe and related infrastructure, within outsourced warehouse supply arrangements, in the U.S. These leases have remaining maturities up to nine years with a maximum expiration date through December 2030. As of December 31, 2021 and 2020, the remaining lease obligation for all finance leases is $7 and $9, respectively, based on discount rates of 4.51% and 4.34%, respectively. The ROU asset balances associated with these finance leases at December 31, 2021 and 2020 of $9 and $10, respectively are included in Land, buildings and equipment, net in the Consolidated Balance Sheets.
Xerox 2021 Annual Report 107
Note 12 – Investment in Affiliates, at Equity
As disclosed in Note 6 - Divestitures, in November 2019 Xerox Holdings sold its remaining indirect 25% equity interest in Fuji Xerox (now known as FUJIFILM Business Innovation Corp.), which had been previously accounted for as an equity method investment. Accordingly, our remaining Investment in Affiliates, at Equity largely consists of several minor investments in entities in the Middle East region. Investments in corporate joint ventures and other companies in which we generally have a 20% to 50% ownership interest were $45 and $47 at December 31, 2021 and 2020, respectively.
Our equity in net income of our unconsolidated affiliates is as follows: | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2021 | | 2020 | | 2019 |
Fuji Xerox(1) | | $ | — | | | $ | — | | | $ | 147 | |
| Other | | 3 | | | 4 | | | 8 | |
| Total Equity in net income of unconsolidated affiliates | | $ | 3 | | | $ | 4 | | | $ | 155 | |
_____________
(1)Equity in net income for Fuji Xerox is reported in Income from discontinued operations, net of tax for 2019 and is through the date of sale.
Fuji Xerox
We received dividends of $69 from Fuji Xerox for the year ended December 31, 2019, which was reflected as a reduction in our investment upon receipt. No dividends were received from Fuji Xerox in 2021 or 2020 due to the Sale of our equity interest in Fuji Xerox in 2019.
Summarized financial information for Fuji Xerox was as follows: | | | | | | | | | | | | |
| | | | Through Date of Sale | | |
| | | | | | |
| Summary of Operations | | | | | | |
| Revenues | | | | $ | 7,667 | | | |
| Costs and expenses | | | | 6,814 | | | |
| Income before income taxes | | | | 853 | | | |
| Income tax expense | | | | 258 | | | |
| Net Income | | | | 595 | | | |
| Less: Net income - noncontrolling interests | | | | 3 | | | |
| Net Income - Fuji Xerox | | | | $ | 592 | | | |
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Yen/U.S. Dollar exchange rate used to translate was as follows:
| | | | | | | | | | | | | | | | | | |
| Financial Statement | | Exchange Basis | | | | | | 2019 |
| Summary of Operations | | Weighted average rate | | | | | | 109.03 | |
| | | | | | | | |
Xerox 2021 Annual Report 108
Note 13 - Goodwill and Intangible Assets, Net
Goodwill
The following table presents the changes in the carrying amount of Goodwill: | | | | | | | | |
| | | Total |
| | |
| | |
| Balance at December 31, 2018 | | $ | 3,858 | |
| Foreign currency translation | | 28 | |
| Acquisitions | | 14 | |
| | |
| | |
| | |
| Balance at December 31, 2019 | | $ | 3,900 | |
| Foreign currency translation | | 60 | |
| Acquisitions: | | |
| U.K. Acquisitions | | 98 | |
| Canada Acquisition | | 10 | |
| Other | | 3 | |
Balance at December 31, 2020(1) | | $ | 4,071 | |
| Foreign currency translation | | (23) | |
| Acquisitions: | | |
| U.S. Acquisitions | | 9 | |
| Canada Acquisition | | 16 | |
Goodwill impairment(2) | | (781) | |
| Other | | (5) | |
| Balance at December 31, 2021 | | $ | 3,287 | |
_____________
(1)CareAR Holdings, LLC was transferred from Xerox Holdings to Xerox in 2021. Accordingly, the balance at December 31, 2020 reflects the balance for both Xerox Holdings and Xerox.
(2)Non-cash, pre-tax Goodwill impairment charge of $781 ($750 after-tax).
After completing our annual impairment test in the fourth quarter of 2021, we concluded that the estimated fair value of the Company had declined below its carrying value. As a result, we recognized an after-tax non-cash impairment charge of $750 ($781 pre-tax) related to our Goodwill for the year ended December 31, 2021.
Refer to Note 1 - Basis of Presentation and Summary of Significant Accounting Policies for additional information related to the Goodwill impairment.
Intangible Assets, Net
Intangible assets, net were $211 at December 31, 2021. Intangible assets were comprised of the following: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | December 31, 2021 | | December 31, 2020 |
| | Weighted Average
Amortization | | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Amount | | Gross
Carrying
Amount | | Accumulated
Amortization | | Net Amount(1) |
| Customer relationships | | 10 years | | $ | 211 | | | $ | 95 | | | $ | 116 | | | $ | 185 | | | $ | 74 | | | $ | 111 | |
| Distribution network | | 25 years | | 123 | | | 108 | | | 15 | | | 123 | | | 103 | | | 20 | |
| Trademarks | | 19 years | | 237 | | | 164 | | | 73 | | | 235 | | | 138 | | | 97 | |
| Technology and non-compete | | 3 years | | 15 | | | 8 | | | 7 | | | 29 | | | 20 | | | 9 | |
| Total Intangible Assets | | | | $ | 586 | | | $ | 375 | | | $ | 211 | | | $ | 572 | | | $ | 335 | | | $ | 237 | |
_____________
(1)CareAR Holdings, LLC was transferred from Xerox Holdings to Xerox in 2021. Accordingly, the balances at December 31, 2020 reflect the balances for both Xerox Holdings and Xerox.
Amortization expense related to intangible assets was $55, $56 and $45 for the three years ended December 31, 2021, 2020 and 2019, respectively. Excluding the impact of future acquisitions, amortization expense is expected to approximate $43 in 2022, $40 in 2023, $38 in 2024, $33 in 2025 and $33 in 2026. Distribution network assets are expected to be fully amortized by 2025.
Xerox 2021 Annual Report 109
Note 14 – Restructuring Programs
We engage in restructuring actions, including Project Own It, as well as other transformation efforts in order to reduce our cost structure and realign it to the changing nature of our business. As part of our efforts to reduce costs, our restructuring actions may also include the off-shoring and/or outsourcing of certain operations, services and other functions, as well as reducing our real estate footprint.
Restructuring costs include employee severance and related costs, other contractual termination costs and asset impairments that may result from employee reductions, migration of facilities from higher-cost to lower-cost countries, and the consolidation of facilities within countries. In those geographies where we have either a formal severance plan or a history of consistently providing severance benefits representing a substantive plan (on-going benefit arrangements), we recognize employee severance and related costs when they are both probable and reasonably estimable. In the event employees are required to perform future service beyond their minimum retention period, we record severance charges ratably over the remaining service period of those employees. Severance payments made under a one-time benefit arrangement are recorded upon communication to the affected employees. Contractual termination costs, including facility exit costs, are generally recognized when it has been determined that a liability has been incurred. Restructuring activities may include the disposal or abandonment of assets, including leased right-of-use assets, that require an acceleration of depreciation or an impairment charge reflecting the excess of an asset's book value over fair value or other recoveries.
The recognition of restructuring costs requires that we make certain judgments and estimates regarding the nature, timing and amount of costs associated with planned initiatives. To the extent our actual results differ from our estimates and assumptions, we may be required to revise the estimated liabilities, requiring the recognition of additional restructuring costs or the reduction of liabilities already recognized. At the end of each reporting period, we evaluate the remaining accrued balances to ensure they are properly stated and the utilization of the reserves are for their intended purpose in accordance with developed exit plans.
A summary of our restructuring program activity for the three years ended December 31, 2021, 2020 and 2019 is as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Severance and
Related Costs | | Other Contractual Termination Costs(2) | | Asset Impairments(3)(4) | | Total |
| Balance at December 31, 2018 | | $ | 94 | | | $ | 1 | | | $ | — | | | $ | 95 | |
| Restructuring provision | | 81 | | | 19 | | | 61 | | | 161 | |
| Reversals of prior charges | | (24) | | | (5) | | | (5) | | | (34) | |
Net Current Period Charges(1) | | 57 | | | 14 | | | 56 | | | 127 | |
| Charges against reserve and currency | | (85) | | | (11) | | | (56) | | | (152) | |
| Balance at December 31, 2019 | | $ | 66 | | | $ | 4 | | | $ | — | | | $ | 70 | |
| Restructuring provision | | 107 | | | 3 | | | 6 | | | 116 | |
| Reversals of prior charges | | (21) | | | (2) | | | (6) | | | (29) | |
Net Current Period Charges(1) | | 86 | | | 1 | | | — | | | 87 | |
| Charges against reserve and currency | | (74) | | | (1) | | | — | | | (75) | |
| Balance at December 31, 2020 | | $ | 78 | | | $ | 4 | | | $ | — | | | $ | 82 | |
| Restructuring provision | | 30 | | | 3 | | | 15 | | | 48 | |
| Reversals of prior charges | | (13) | | | (6) | | | (2) | | | (21) | |
Net Current Period Charges(1) | | 17 | | | (3) | | | 13 | | | 27 | |
| | | | | | | | |
| | | | | | | | |
| Charges against reserve and currency | | (70) | | | 1 | | | (13) | | | (82) | |
| Balance at December 31, 2021 | | $ | 25 | | | $ | 2 | | | $ | — | | | $ | 27 | |
_____________
(1)Represents net amount recognized within the Consolidated Statements of (Loss) Income for the years shown for restructuring and asset impairment charges. Reversals of prior charges primarily includes net changes in estimated reserves from prior period initiatives. Net reversals for 2021 also include a $4 gain on the sale of surplus land.
(2)Primarily includes additional costs incurred upon the exit from our facilities including decommissioning costs and associated contractual termination costs.
(3)Charges associated with asset impairments represent the write-down of the related assets to their new cost basis and are recorded concurrently with the recognition of the provision.
(4)Amounts primarily relate to the exit and abandonment of leased and owned facilities. For the year ended December 31, 2021, 2020 and 2019, the charge includes the accelerated write-off of $3, $4 and $39, respectively, for leased right-of-use assets and $12, $2 and $22, respectively, for owned assets. Impairments are net of any potential sublease income or other recovery amounts.
Xerox 2021 Annual Report 110
The following table summarizes the reconciliation to the Consolidated Statements of Cash Flows: | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2021 | | 2020 | | 2019 |
| Charges against reserve and currency | | $ | (82) | | | $ | (75) | | | $ | (152) | |
| Asset impairments | | 13 | | | — | | | 56 | |
| Effects of foreign currency and other non-cash items | | (3) | | | (6) | | | 3 | |
| Restructuring Cash Payments | | $ | (72) | | | $ | (81) | | | $ | (93) | |
In connection with our restructuring programs, we also incurred certain related costs as follows: | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
Retention related severance/bonuses(1) | | $ | 6 | | | $ | 4 | | | $ | 39 | |
Contractual severance costs(2) | | 1 | | | (2) | | | 43 | |
Consulting and other costs(3) | | 4 | | | 4 | | | 20 | |
| | $ | 11 | | | $ | 6 | | | $ | 102 | |
_____________
(1)Includes retention related severance and bonuses for employees expected to continue working beyond their minimum retention period before termination.
(2)2019 costs include approximately $38 for estimated severance and other related costs we were contractually required to pay in connection with employees transferred (approximately 2,200) as part of the shared service arrangement entered into with HCL Technologies.
(3)Represents professional support services associated with our business transformation initiatives.
For the years ended December 31, 2021, 2020 and 2019, cash payments for restructuring related costs were approximately $13, $26 and $65, respectively, while the reserve was $18 and $21 at December 31, 2021 and 2020, respectively. The balance at December 31, 2021 is expected to be paid over the next twelve months.
Xerox 2021 Annual Report 111
Note 15 - Supplementary Financial Information
The components of Other assets and liabilities are as follows: | | | | | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 |
| Other Current Assets | | | | |
| | | | |
| Income taxes receivable | | $ | 11 | | | $ | 29 | |
| Royalties, license fees and software maintenance | | 23 | | | 21 | |
| Restricted cash | | 33 | | | 23 | |
| Prepaid expenses | | 30 | | | 31 | |
| | | | |
| | | | |
| | | | |
| Advances and deposits | | 32 | | | 34 | |
| Other | | 82 | | | 113 | |
| | | | |
| Total Other Current Assets | | $ | 211 | | | $ | 251 | |
| | | | |
| Other Long-term Assets | | | | |
| Income taxes receivable | | $ | 8 | | | $ | 7 | |
| Prepaid pension costs | | 1,211 | | | 617 | |
| | | | |
| | | | |
| Internal use software, net | | 120 | | | 118 | |
| | | | |
| Restricted cash | | 36 | | | 43 | |
| | | | |
| Customer contract costs, net | | 147 | | | 158 | |
| | | | |
| Operating lease right-of-use assets | | 264 | | | 310 | |
| Deferred compensation plan investments | | 18 | | | 18 | |
Investments in affiliates, at equity(1) | | 45 | | | 47 | |
| Investments at cost - Xerox Holdings | | 8 | | | — | |
| Other | | 103 | | | 137 | |
| | | | |
Total Other Long-term Assets(2) | | $ | 1,960 | | | $ | 1,455 | |
| | | | |
| Accrued Expenses and Other Current Liabilities | | | | |
| | | | |
| Income taxes payable | | $ | 30 | | | $ | 7 | |
| Other taxes payable | | 69 | | | 68 | |
| Operating lease obligations | | 79 | | | 83 | |
| Financing lease obligations | | 2 | | | 2 | |
| Interest payable | | 53 | | | 56 | |
| Restructuring reserves | | 26 | | | 82 | |
| Restructuring related costs | | 18 | | | 21 | |
| | | | |
| Product warranties | | 5 | | | 5 | |
Dividends payable(3) | | 48 | | | 59 | |
| Distributor and reseller rebates/commissions | | 112 | | | 123 | |
| | | | |
| Unearned income and other revenue deferrals | | 194 | | | 140 | |
| Administration and overhead | | 57 | | | 52 | |
| Other | | 178 | | | 142 | |
| | | | |
Total Accrued Expenses and Other Current Liabilities(4) | | $ | 871 | | | $ | 840 | |
| | | | |
| Other Long-term Liabilities | | | | |
| Deferred taxes | | $ | 108 | | | $ | 35 | |
| Income taxes payable | | 40 | | | 57 | |
| Operating lease obligations | | 204 | | | 250 | |
| Finance lease obligations | | 5 | | | 7 | |
| Environmental reserves | | 9 | | | 9 | |
| | | | |
| Restructuring reserves | | 1 | | | 2 | |
| Other | | 114 | | | 137 | |
| | | | |
| Total Other Long-term Liabilities | | $ | 481 | | | $ | 497 | |
_____________
(1)Refer to Note 12 - Investments in Affiliates, at Equity for additional information.
(2)Xerox's balance of 1,952 at December 31, 2021 excludes Investments at cost.
(3)Represents dividends payable by Xerox Holdings Corporation on Common and Preferred Stock.
(4)Xerox's balance of $823 at December 31, 2021 excludes Dividends Payable of $48. Xerox's balance of $749 at December 31, 2020 excludes Interest Payable of $32 and Dividends Payable of $59.
Xerox 2021 Annual Report 112
Cash, Cash Equivalents and Restricted Cash
Restricted cash primarily relates to escrow cash deposits made in Brazil associated with ongoing litigation as well as cash collections on finance receivables that were pledged for secured borrowings. As more fully discussed in Note 21 - Contingencies and 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 Consolidated Balance Sheets based on when the cash will be contractually or judicially released. Cash, cash equivalents and restricted cash amounts are as follows:
| | | | | | | | | | | | | | |
| | December 31, |
| | | 2021 | | 2020 |
| Cash and cash equivalents | | $ | 1,840 | | | $ | 2,625 | |
| Restricted cash | | | | |
| Litigation deposits in Brazil | | 34 | | | 42 | |
Escrow and cash collections related to secured borrowing arrangements(1) | | 32 | | | 22 | |
| Other restricted cash | | 3 | | | 2 | |
| Total Restricted Cash | | 69 | | | 66 | |
| | | | |
| | | | |
| Cash, cash equivalents and restricted cash | | $ | 1,909 | | | $ | 2,691 | |
__________________________
(1)Represents collections on finance receivables pledged for secured borrowings that will be remitted to lenders in the following month.
Restricted cash is reported in the Consolidated Balance Sheets as follows:
| | | | | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 |
| Other current assets | | $ | 33 | | | $ | 23 | |
| Other long-term assets | | 36 | | | 43 | |
| Total Restricted cash | | $ | 69 | | | $ | 66 | |
Pension and Other Benefit Liabilities | | | | | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 |
Pension liabilities(1) | | $ | 1,285 | | | $ | 1,474 | |
| Accrued compensation liabilities | | 66 | | | 70 | |
Deferred compensation liabilities(2) | | 22 | | | 22 | |
| Pension and other benefit liabilities | | $ | 1,373 | | | $ | 1,566 | |
__________________________
(1)Refer to Note 19 - Employee Benefit Plans for additional information regarding pension liabilities.
(2)Includes amounts measured at fair value on a recurring basis at December 31, 2021 and 2020 of $18 and $17, respectively. Refer to Note 18 - Fair Value of Financial Assets and Liabilities for additional information regarding deferred compensation liabilities.
Summarized Cash Flow Information
Summarized cash flow information is as follows: | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Provision for receivables | | $ | 12 | | | $ | 116 | | | $ | 49 | |
| Provision for inventories | | 34 | | | 31 | | | 24 | |
| Provision for product warranties | | 8 | | | 8 | | | 12 | |
| Depreciation of buildings and equipment | | 76 | | | 87 | | | 101 | |
| Depreciation and obsolescence of equipment on operating leases | | 155 | | | 183 | | | 225 | |
| Amortization of internal use software | | 41 | | | 42 | | | 59 | |
| | | | | | |
| Amortization of acquired intangible assets | | 55 | | | 56 | | | 45 | |
Amortization of customer contract costs(1) | | 79 | | | 85 | | | 93 | |
| Cost of additions to land, buildings and equipment | | 29 | | | 44 | | | 41 | |
| Cost of additions to internal use software | | 39 | | | 30 | | | 24 | |
| Common stock dividends - Xerox Holdings | | 192 | | | 216 | | | 229 | |
| Preferred stock dividends - Xerox Holdings | | 14 | | | 14 | | | 14 | |
| Payments to noncontrolling interests | | 1 | | | 3 | | | 14 | |
| Repurchases related to stock-based compensation - Xerox Holdings | | 18 | | | 19 | | | 28 | |
| Investments from noncontrolling interests | | 15 | | | — | | | — | |
__________________________
(1)Amortization of customer contract costs is reported in Decrease (increase) in other current and long-term assets on the Consolidated Statements of Cash Flows. Refer to Note 2 - Revenue - Contract Costs for additional information.
Xerox 2021 Annual Report 113
Note 16 – Debt
Short-term borrowings were as follows:
| | | | | | | | | | | | | | |
| | December 31, |
| | | 2021 | | 2020 |
| | | | |
| | | | |
| Short-term debt and current portion of long-term debt | | | | |
| Xerox Holdings Corporation | | $ | — | | | $ | — | |
| Xerox Corporation | | 300 | | | — | |
Xerox - Other Subsidiaries(1) | | 350 | | | 394 | |
| Total | | $ | 650 | | | $ | 394 | |
_____________
(1)Represents subsidiaries of Xerox Corporation.
We classify our debt based on the contractual maturity dates of the underlying debt instruments or as of the earliest put date available to the debt holders. We defer costs associated with debt issuance over the applicable term, or to the first put date in the case of convertible debt or debt with a put feature. These costs are amortized as interest expense in our Consolidated Statements of (Loss) Income.
Long-term debt was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | December 31, |
| | | Stated Rate | | Weighted Average Interest Rates at December 31, 2021(1) | | 2021 | | 2020 |
| Xerox Holdings Corporation | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Senior Notes due 2025 | | 5.00 | % | | 4.95 | % | | $ | 750 | | | $ | 750 | |
| Senior Notes due 2028 | | 5.50 | % | | 5.40 | % | | 750 | | | 750 | |
| Subtotal - Xerox Holdings Corporation | | | | | | $ | 1,500 | | | $ | 1,500 | |
| Xerox Corporation | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Senior Notes due 2022 | | 4.07 | % | | 4.07 | % | | $ | 300 | | | $ | 300 | |
Senior Notes due 2023(2) | | 4.38 | % | | 3.68 | % | | 1,000 | | | 1,000 | |
| Senior Notes due 2024 | | 3.80 | % | | 3.84 | % | | 300 | | | 300 | |
| Senior Notes due 2035 | | 4.80 | % | | 4.84 | % | | 250 | | | 250 | |
| Senior Notes due 2039 | | 6.75 | % | | 6.78 | % | | 350 | | | 350 | |
| Subtotal - Xerox Corporation | | | | | | $ | 2,200 | | | $ | 2,200 | |
Xerox - Other Subsidiaries(3) | | | | | | | | |
| Secured Borrowing - July 2020 | | 1.76 | % | | — | % | | $ | — | | | $ | 267 | |
| Secured Borrowing - December 2020 | | 1.74 | % | | 1.74 | % | | 268 | | | 500 | |
| Secured Borrowing - September 2021 | | 1.40 | % | | 1.40 | % | | 293 | | | — | |
| Subtotal - Xerox - Other Subsidiaries | | | | | | $ | 561 | | | $ | 767 | |
| | | | | | | | |
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| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Principal debt balance | | | | | | $ | 4,261 | | | $ | 4,467 | |
| Xerox Holdings Corporation - Debt issuance costs | | | | | | (11) | | | (13) | |
| Xerox Corporation - Debt issuance costs | | | | | | (6) | | | (11) | |
| Xerox - Other subsidiaries - Debt issuance costs | | | | | | (1) | | | (3) | |
| Subtotal - Debt issuance costs | | | | | | (18) | | | (27) | |
| Unamortized premium | | | | | | 3 | | | 3 | |
Fair value adjustments(4) | | | | | | | | |
| Terminated swaps | | | | | | — | | | 1 | |
| Current swaps | | | | | | — | | | — | |
| Less: current maturities | | | | | | (650) | | | (394) | |
| Total Long-term Debt | | | | | | $ | 3,596 | | | $ | 4,050 | |
_____________
(1)Represents the weighted average effective interest rate, which includes the effect of discounts and premiums on issued debt.
(2)As a result of the downgrade of our debt ratings in August 2020, the coupon rate of 4.125% increased by 0.25% to 4.375% effective September 15, 2020.
(3)The rates disclosed for Other Subsidiaries of Xerox Corporation are variable interest rates. Refer to the Secured Borrowings and Collateral section below for additional information.
(4)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.
Xerox 2021 Annual Report 114
Scheduled principal payments due on our long-term debt for the next five years and thereafter are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2022(1) | | 2023 | | 2024 | | 2025 | | 2026 | | Thereafter | | Total |
| Xerox Holdings Corporation | | $ | — | | | $ | — | | | $ | — | | | $ | 750 | | | $ | — | | | $ | 750 | | | $ | 1,500 | |
| Xerox Corporation | | 300 | | | 1,000 | | | 300 | | | — | | | — | | | 600 | | | 2,200 | |
Xerox - Other Subsidiaries(2)
| | 351 | | | 185 | | | 25 | | | — | | | — | | | — | | | 561 | |
| Total | | $ | 651 | | | $ | 1,185 | | | $ | 325 | | | $ | 750 | | | $ | — | | | $ | 1,350 | | | $ | 4,261 | |
_____________
(1)Current portion of long-term debt maturities for 2022 are $396, $92, $85 and $78 for the first, second, third and fourth quarters, respectively.
(2)Represents subsidiaries of Xerox Corporation.
Xerox Holdings Corporation/Xerox Corporation Intercompany Loan
In August 2020, Xerox Holdings Corporation issued $550 of 5.00% Senior Notes due August 2025 (the "2025 Senior Notes") at par and $550 of 5.50% Senior Notes due August 2028 (the "2028 Senior Notes") at par resulting in aggregate net proceeds (after fees and expenses) of approximately $1,089. On August 24, 2020, Xerox Holdings Corporation issued an additional $200 of the 2025 Senior Notes at 100.75% of par and an additional $200 of the 2028 Senior Notes at 102.50% of par resulting in additional aggregate net proceeds (after premium, fees and expenses) of approximately $405 for total aggregate net proceeds from both issuances of approximately $1,494. In 2020, the net debt proceeds were contributed by Xerox Holdings Corporation to Xerox Corporation and recorded as Additional paid-in capital by Xerox Corporation.
In February 2021, Xerox Holdings Corporation and Xerox Corporation entered into an Intercompany Loan agreement for the net proceeds of $1,494 contributed by Xerox Holdings Corporation to Xerox Corporation in 2020. The intercompany loan, which did not involve the exchange of cash in the current period, resulted in capitalization of the amount as Related Party Debt for Xerox Corporation. The amount was originally recorded as Additional paid-in capital in 2020 when the cash was contributed by Xerox Holdings Corporation.
The intercompany loan was established to mirror the terms of Xerox Holdings Corporation’s 2025 and 2028 Senior Notes, including interest rates and payment dates. The intercompany interest expense also includes a ratable amount to reimburse Xerox Holdings Corporation for its debt issuance costs and premium.
At December 31, 2021, the balance of the Intercompany Loan reported in Xerox Corporation’s Consolidated Balance Sheet was $1,495, which is net of related debt issuance costs, and the intercompany interest payable was $30. Xerox Corporation’s interest expense included interest expense associated with this Intercompany Loan of $80 and $32 for the years ended December 31, 2021 and 2020, respectively.
Credit Facility
We have a $1.8 billion unsecured revolving Credit Facility with a group of lenders, that matures in August 2022. The Credit Facility includes a $250 letter of credit sub-facility.
Proceeds from any borrowings under the Credit Facility can be used to provide working capital for the Company and its subsidiaries and for general corporate purposes. The Credit Facility is available, without sublimit, to certain of our qualifying subsidiaries. Our obligations under the Credit Facility are unsecured and are not currently guaranteed by any of our subsidiaries. Any borrowings under the Credit Facility by Xerox Corporation will be guaranteed by Xerox Holdings Corporation. Any domestic subsidiary that guarantees more than $100 of Xerox Corporation debt must also guaranty Xerox Corporation's obligations under the Credit Facility. In the event that any of our subsidiaries borrows under the Credit Facility, its borrowings thereunder would be guaranteed by us. At December 31, 2021 and 2020, we had no outstanding borrowings or letters of credit under the amended and restated Credit Facility.
On July 31, 2020, Xerox and Xerox Holdings entered into Amendment No. 3 to the Credit Facility, which modified the facility's financial covenants. During a specified covenant modification period, which began on the effective date of July 31, 2020 and ended effective and inclusive of December 31, 2021 (the Covenant Modification Period), Xerox was required to maintain unrestricted cash (as defined in the Amendment) in an amount not less than $1.0 billion. Further, the Amendment modified the financial maintenance leverage covenant in the Credit Agreement by requiring that, during the Covenant Modification Period, Xerox was required to maintain a ratio of net debt for borrowed money to consolidated EBITDA of not greater than 4.25x (with a cap on cash netting of $1.75 billion), in lieu of the 4.25x total debt for borrowed money to consolidated EBITDA ratio requirement applicable prior to the Amendment. The Covenant Modification Period ended effective and inclusive of December 31, 2021. Accordingly, for the quarter ended March 31, 2022, the financial maintenance covenants return to the covenants in effect prior to the July 31, 2020 amendment to the Credit Facility.
Xerox 2021 Annual Report 115
Borrowings under the Credit Facility bear interest at our choice, at either (a) a Base Rate as defined in the Credit Facility agreement, plus a spread that varies between 0.000% and 0.700% depending on our credit rating at the time of borrowing, or (b) LIBOR plus an all-in spread that varies between 1.000% and 1.700% depending on our credit rating at the time of borrowing. Based on our credit rating as of December 31, 2021, the applicable all-in spreads for the Base Rate and LIBOR borrowing were 0.375% and 1.375%, respectively. Effective December 31, 2021 the Credit Facility was modified to acknowledge certain LIBOR currencies and tenors would cease to be available as of January 1, 2022, and therefore, the Company agreed to suspend rights to request borrowings under those currencies and tenors for the remainder of the term of the Credit Facility.
An annual facility fee is payable to each lender in the Credit Facility at a rate that varies between 0.125% and 0.300% depending on our credit rating. Based on our credit rating as of December 31, 2021 the applicable rate is 0.25%.
The Credit Facility contains various conditions to borrowing and affirmative, negative and financial maintenance covenants. Certain of the more significant covenants are summarized below:
(a)Minimum Unrestricted Cash during the Covenant Modification Period, at all times, maintain Unrestricted Cash (as defined in the amended and restated Credit Facility) in an amount not less than $1.0 billion. This covenant expired December 31, 2021.
(b)Maximum leverage ratio during the Covenant Modification Period (a quarterly test that is calculated as net debt for borrowed money divided by consolidated EBITDA, both as defined in the amended and restated Credit Facility - with a cap on cash netting of $1.75 billion) of 4.25x. This ratio had temporarily replaced the pre-amendment maximum leverage ratio (a quarterly test that is calculated as debt for borrowed money divided by consolidated EBITDA, both as defined in the amended and restated Credit Facility) of 4.25x, which is effective for the quarter ended March 31, 2022.
(c)Minimum interest coverage ratio (a quarterly test that is calculated as consolidated EBITDA divided by consolidated interest expense, both as defined in the amended and restated Credit Facility) may not be less than 3.00x.
(d)Limitations on (i) liens securing debt, (ii) mergers, consolidations and liquidations, (iii) limitations on debt incurred by certain subsidiaries, (iv) sale of all or substantially all our assets, (v) payment restrictions affecting subsidiaries, (vi) non-arm's length transactions with affiliates, (vii) change in nature of business, (viii) actions that may violate OFAC and anti-corruption laws.
The Credit Facility contains various events of default, the occurrence of which could result in termination of the lenders' commitments to lend and the acceleration of all our obligations under the amended and restated Credit Facility. These events of default include, without limitation: (i) payment defaults, (ii) breaches of covenants under the amended and restated Credit Facility (certain of which breaches do not have any grace period), (iii) cross-defaults and acceleration to certain of our other obligations and (iv) a change of control of Xerox Holdings.
Secured Borrowings and Collateral
In September 2021, we entered into a secured loan agreement with a financial institution where we sold $331 of U.S. based finance receivables and the rights to payments under operating leases with an equipment net book value of $9 to a special purpose entity (SPE). The purchase by the SPE was funded through a $311 amortizing secured loan to the SPE from the financial institution. The secured loan was an amendment of the July 2020 secured borrowing with the same financial institution, which had a remaining balance of $136, and we received the incremental net cash. The transaction was accounted for as an extinguishment of debt and the issuance of new debt and associated collateral. The new loan has a variable interest rate based on LIBOR plus a spread (current rate of 1.40% at December 31, 2021) and an expected life of approximately 2.5 years with half projected to be repaid within the first year based on collections of the underlying portfolio of receivables. In October 2021, we entered into an interest rate hedge agreement to cap LIBOR over the life of the loan.
In December 2020, we entered into a secured loan agreement with a financial institution where we sold $610 of U.S. based finance receivables to an SPE. The purchase by the SPE was funded through an amortizing secured loan to the SPE from the financial institution of $500. The debt has a variable interest rate based on the financial institution's cost of funds plus a spread (current rate of 1.74% at December 31, 2021). Refer to Note 27 - Subsequent Events for additional information related to this arrangement.
The sales of the receivables to the SPEs were structured as "true sales at law," and we have received opinions to that effect from outside legal counsel. However, the transactions were accounted for as secured borrowings as we consolidate the SPEs since we have both the power to direct the activities that most significantly impact the SPEs' economic performance through our role as servicer of all the receivables held by the SPEs, and the obligation through variable interests in the SPEs to absorb losses or receive benefits that could potentially be significant to the
Xerox 2021 Annual Report 116
SPEs. As a result, the assets of the SPEs are not available to satisfy any of our other obligations. Conversely, the credit holders of these SPEs do not have legal recourse to the Company’s general credit.
Below are the assets and liabilities held by the consolidated SPEs, which are included in our Consolidated Balance Sheet: | | | | | | | | | | | | | | |
| | December 31,
2021 | | December 31,
2020 |
| Assets held by SPEs | | | | |
| Billed portion of finance receivables, net | | $ | 27 | | | $ | 28 | |
| Finance receivables, net | | 299 | | 350 |
| Finance receivables due after one year, net | | 362 | | 510 |
| Equipment on operating leases, net | | 8 | | 8 |
Restricted cash(1) | | 32 | | 22 |
Total Assets | | $ | 728 | | | $ | 918 | |
| Liabilities held by SPEs | | | | |
Current portion of long-term debt, net(2) | | $ | 350 | | | $ | 394 | |
| Long term debt, net | | 210 | | 370 |
| Total Liabilities | | $ | 560 | | | $ | 764 | |
_____________
(1)Restricted cash is included in Other current assets in our Consolidated Balance Sheet.
(2)Amounts net of unamortized debt issuance costs of $1.
Interest
Interest paid on our short-term and long-term debt amounted to $203, $181 and $221 for the years ended December 31, 2021, 2020 and 2019, respectively.
Interest expense and interest income was as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | | 2021 | | 2020 | | 2019 |
Interest expense(1) (2) | | $ | 207 | | | $ | 215 | | | $ | 236 | |
Interest income(3) | | 225 | | | 240 | | | 260 | |
_____________
(1)Includes Equipment financing interest as well as non-financing interest expense included in Other expenses, net in the Consolidated Statements of (Loss) Income.
(2)Interest expense of Xerox Corporation included intercompany expense associated with the Xerox Holdings Corporation/Xerox Corporation Intercompany Loan of $80 and $32 for the years ended December 31, 2021 and 2020, respectively.
(3)Includes Finance income, as well as other interest income that is included in Other expenses, net in the Consolidated Statements of (Loss) Income.
Equipment financing interest is determined based on an estimated cost of funds, applied against the estimated level of debt required to support our net finance receivables. The estimated cost of funds is based on the interest cost associated with actual borrowings determined to be in support of the leasing business. The estimated level of debt continues to be based on an assumed 7 to 1 leverage ratio of debt/equity as compared to our average finance receivable balance during the applicable period.
Xerox 2021 Annual Report 117
Note 17 – Financial Instruments
We are exposed to market risk from changes in 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. These derivative financial instruments are utilized 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 do not believe there is significant risk of loss in the event of non-performance by the counterparties associated with our derivative instruments because these transactions are executed with a diversified group of major financial institutions. Further, our policy is to deal only with counterparties having a minimum investment grade or better credit rating. Credit risk is managed through the continuous monitoring of exposures to such counterparties.
Interest Rate Risk Management
We use interest rate swap and interest rate cap agreements to manage our interest rate exposure and to achieve a desired proportion of variable and fixed rate debt. These derivatives may be designated as fair value hedges or cash flow hedges depending on the nature of the risk being hedged. At December 31, 2021, there was one interest rate cap contract outstanding.
Fair Value Hedges
In 2020 we terminated our remaining pay variable/receive fixed interest rate swaps with the notional amount of $200 and net asset fair value of $4 prior to termination. In 2019, we terminated an interest rate swap with a notional amount of $100 and an immaterial net asset fair value. In both instances, the swaps had been designated and accounted for as fair value hedges prior to termination. The swaps were structured to hedge the fair value of related debt by converting them from fixed rate instruments to variable rate instruments. Prior to termination no ineffective portion was recorded to earnings for the years ended December 31, 2020 and 2019. The corresponding net fair value adjustment to the hedged debt of ($4) is being recognized in earnings concurrently with the remaining term of the related debt, which may include early extinguishment.
The remaining unamortized debt fair value adjustment associated with all terminated swaps was $0 and $1 at December 31, 2021 and 2020, respectively. In 2021, 2020 and 2019, the amortization of these fair value adjustments reduced interest expense by $1, $2 and $1, respectively, and the loss on early extinguishment of debt in 2020 by $2.
Foreign Exchange Risk Management
We are a global company and we are exposed to foreign currency exchange rate fluctuations in the normal course of our business. As a part of our foreign exchange risk management strategy, we use derivative instruments, primarily forward contracts and purchased option contracts, to hedge the following foreign currency exposures, thereby reducing volatility of earnings or protecting fair values of assets and liabilities:
•Foreign currency-denominated assets and liabilities
•Forecasted purchases, and sales in foreign currency
At December 31, 2021, we had outstanding forward exchange and purchased option contracts with gross notional values of $1,113, with terms of less than 12 months. At December 31, 2021, approximately 84% of these contracts mature within three months, 7% in three to six months and 9% in six to twelve months. The associated exposures being hedged at December 31, 2021 were lower by 4.1%, as compared to December 31, 2020. There has not been any material changes in our hedging strategy during 2021.
Xerox 2021 Annual Report 118
The following is a summary of the primary hedging positions and corresponding fair values as of December 31, 2021: | | | | | | | | | | | | | | |
| Currencies Hedged (Buy/Sell) | | Gross
Notional
Value | | Fair Value Asset(1) |
| Japanese Yen/U.S. Dollar | | $ | 262 | | | $ | (6) | |
| Euro/U.K. Pound Sterling | | 197 | | | (2) | |
| Japanese Yen/Euro | | 169 | | | (1) | |
| Euro/U.S. Dollar | | 145 | | | 1 | |
| U.S. Dollar/Euro | | 118 | | | 1 | |
| U.S. Dollar/Canadian Dollar | | 50 | | | 1 | |
| Euro/Danish Krone | | 34 | | | — | |
| Euro/Canadian Dollar | | 28 | | | — | |
| U.K. Pound Sterling/Euro | | 23 | | | — | |
| U.S. Dollar/Russian Ruble | | 10 | | | — | |
| U.S. Dollar/Brazilian Real | | 10 | | | — | |
| | | | |
| U.S. Dollar/Israeli Shekel | | 8 | | | — | |
| Russian Ruble/U.S. Dollar | | 8 | | | — | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| All Other | | 51 | | | (1) | |
| Total Foreign exchange hedging | | $ | 1,113 | | | $ | (7) | |
____________
(1)Represents the net receivable (payable) amount included in the Consolidated Balance Sheet at December 31, 2021.
Foreign Currency Cash Flow Hedges
We designate a portion of our foreign currency derivative contracts as cash flow hedges of our foreign currency-denominated inventory purchases, sales and expenses. No amount of ineffectiveness was recorded in the Consolidated Statements of (Loss) Income for these designated cash flow hedges and all components of each derivative’s gain or loss were included in the assessment of hedge effectiveness. The net (liability) asset fair value of these contracts were $(3) and $2 as of December 31, 2021 and 2020, respectively.
Summary of Derivative Instruments Fair Value
The following table provides a summary of the fair value amounts of our derivative instruments: | | | | | | | | | | | | | | | | | | | | |
| | | | December 31, |
| Designation of Derivatives | | Balance Sheet Location | | 2021 | | 2020 |
| Derivatives Designated as Hedging Instruments | | | | |
| Foreign exchange contracts – forwards | | Other current assets | | $ | 3 | | | $ | 3 | |
| | Accrued expenses and other current liabilities | | (6) | | | (2) | |
| Foreign currency options | | Other current assets | | — | | | 1 | |
| | | | | | |
| Interest rate cap | | Other long-term assets | | 1 | | | — | |
| | | | | | |
| | Net Designated Derivative (Liability) Asset | | $ | (2) | | | $ | 2 | |
| | | | | | |
| Derivatives NOT Designated as Hedging Instruments | | | | |
| Foreign exchange contracts – forwards | | Other current assets | | $ | 1 | | | $ | 3 | |
| | Accrued expenses and other current liabilities | | (5) | | | (3) | |
| | Net Undesignated Derivative Liability | | $ | (4) | | | $ | — | |
| | | | | | |
| Summary of Derivatives | | Total Derivative Assets | | $ | 5 | | | $ | 7 | |
| | Total Derivative Liabilities | | (11) | | | (5) | |
| | Net Derivative (Liability) Asset | | $ | (6) | | | $ | 2 | |
Xerox 2021 Annual Report 119
Summary of Derivative Instruments Gains (Losses)
Derivative gains and (losses) affect the income statement based on whether such derivatives are designated as hedges of underlying exposures. The following is a summary of derivative gains and (losses).
Designated Derivative Instruments Gains (Losses)
The following tables provide a summary of gains (losses) on derivative instruments:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Derivative (Loss) Gain Recognized in Income | | Hedged Item Gain (Loss) Recognized in Income |
Derivatives in Fair Value
Relationships | | Location of Gain (Loss)
Recognized in Income | | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 | | 2021 | | 2020 | | 2019 |
| Interest rate contracts | | Interest expense | | $ | — | | | $ | (1) | | | $ | 4 | | | $ | — | | | $ | 1 | | | $ | (4) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Derivative (Loss) Gain Recognized in OCI (Effective Portion) | | | | (Loss) Gain Reclassified from AOCI to Income (Effective Portion) |
Derivatives in Cash Flow
Hedging Relationships | | Year Ended December 31, | | Location of Derivative
(Loss) Gain Reclassified
from AOCI into Income
(Effective Portion) | | Year Ended December 31, |
| 2021 | | 2020 | | 2019 | | | 2021 | | 2020 | | 2019 |
| Foreign exchange contracts – forwards/options | | $ | (12) | | | $ | 4 | | | $ | 2 | | | Cost of sales | | $ | (7) | | | $ | (1) | | | $ | 9 | |
For the three years ended December 31, 2021, 2020 and 2019 no amount of ineffectiveness was recorded in the Consolidated Statements of (Loss) Income for these designated cash flow hedges. All components of each derivative’s gain or (loss) were included in the assessment of hedge effectiveness. In addition, no amount was recorded for an underlying exposure that did not occur or was not expected to occur.
At December 31, 2021, a net after-tax loss of $2 was recorded in Accumulated other comprehensive loss associated with our cash flow hedging activity. The entire balance is expected to be reclassified into Net income within the next 12 months, providing an offsetting economic impact against the underlying anticipated transactions.
Non-Designated Derivative Instruments Gains (Losses)
Non-designated derivative instruments are primarily instruments used to hedge foreign currency-denominated assets and liabilities. They are not designated as hedges since there is a natural offset for the remeasurement of the underlying foreign currency-denominated asset or liability.
The following table provides a summary of gains (losses) on non-designated derivative instruments:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Year Ended December 31, |
| Derivatives NOT Designated as Hedging Instruments | | Location of Derivative (Loss) Gain | | 2021 | | 2020 | | 2019 |
| Foreign exchange contracts – forwards | | Other expense – Currency (losses) gains, net | | $ | (26) | | | $ | 14 | | | $ | (6) | |
For the three years ended December 31, 2021, 2020 and 2019, we recorded Currency losses, net of $7, $3 and $7, respectively. Net currency gains and losses include the mark-to-market adjustments of the derivatives not designated as hedging instruments and the related cost of those derivatives, as well as the remeasurement of foreign currency-denominated assets and liabilities and are included in Other expenses, net.
Xerox 2021 Annual Report 120
Note 18 – Fair Value of Financial Assets and Liabilities
The following table represents assets and liabilities' fair value measured on a recurring basis. The basis for the measurement at fair value in all cases is Level 2 – Significant Other Observable Inputs.
| | | | | | | | | | | | | | |
| | As of December 31, |
| | 2021 | | 2020 |
| Assets | | | | |
| Foreign exchange contracts - forwards | | $ | 4 | | | $ | 6 | |
| Foreign currency options | | — | | | 1 | |
| Interest rate cap | | 1 | | | — | |
| | | | |
| Deferred compensation investments in mutual funds | | 18 | | | 18 | |
| Total | | $ | 23 | | | $ | 25 | |
| Liabilities | | | | |
| Foreign exchange contracts - forwards | | $ | 11 | | | $ | 5 | |
| | | | |
| | | | |
| Deferred compensation plan liabilities | | 18 | | | 17 | |
| Total | | $ | 29 | | | $ | 22 | |
We utilize the income approach to measure the fair value for our derivative assets and liabilities. The income approach uses pricing models that rely on market observable inputs such as yield curves, currency exchange rates and forward prices, and therefore are classified as Level 2.
Fair value for our deferred compensation plan investments in mutual funds is based on quoted market prices for those funds. Fair value for deferred compensation plan liabilities is based on the fair value of investments corresponding to employees’ investment selections.
Summary of Other Financial Assets and Liabilities
The estimated fair values of our other financial assets and liabilities were as follows: | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 |
| | Carrying
Amount | | Fair
Value | | Carrying
Amount | | Fair
Value |
| Cash and cash equivalents | $ | 1,840 | | | $ | 1,840 | | | $ | 2,625 | | | $ | 2,625 | |
| Accounts receivable, net | 818 | | | 818 | | | 883 | | | 883 | |
| Short-term debt and current portion of long-term debt | 650 | | | 653 | | | 394 | | | 396 | |
| Long-term debt | | | | | | | |
| Xerox Holdings Corporation | $ | 1,494 | | | $ | 1,579 | | | $ | 1,493 | | | $ | 1,596 | |
| Xerox Corporation | 1,892 | | | 1,987 | | | 2,187 | | | 2,298 | |
Xerox - Other Subsidiaries(1) | 210 | | | 210 | | | 370 | | | 372 | |
| Total Long-term debt | $ | 3,596 | | | $ | 3,776 | | | $ | 4,050 | | | $ | 4,266 | |
_____________
(1)Represents subsidiaries of Xerox Corporation.
The fair value amounts for Cash and cash equivalents and Accounts receivable, net, approximate carrying amounts due to the short maturities of these instruments. The fair value of Short-term debt, including the current portion of long-term debt, and Long-term debt was estimated based on the current rates offered to us for debt of similar maturities (Level 2). The difference between the fair value and the carrying value represents the theoretical net premium or discount we would pay or receive to retire all debt at such date.
Xerox 2021 Annual Report 121
Note 19 – Employee Benefit Plans
We sponsor numerous defined benefit and defined contribution pension and other post-retirement benefit plans, primarily retiree health care, in our domestic and international operations. December 31 is the measurement date for all of our post-retirement benefit plans.
Where legally possible, we have amended our major defined benefit pension plans to freeze current benefits and eliminate benefit accruals for future service, including our primary U.S. defined benefit plan for salaried employees, the Canadian Salary Pension Plan and the U.K. Final Salary Pension Plan. In certain Non-U.S. plans, we are required to continue to consider salary increases and inflation in determining the benefit obligation related to prior service. Our pension plan in the Netherlands was changed to a Collective Defined Contribution (CDC) plan. From a Company risk perspective, this plan operates just like a defined contribution plan as the company is only responsible for a contribution for annual benefit accruals under 5-year agreements. Although the Company's risk has been mitigated, under U.S. GAAP this plan doesn’t meet the definition of a defined contribution plan and therefore is accounted for as a defined benefit plan.
Prior to the freeze of current benefits, most of our defined benefit pension plans generally provided employees a benefit, depending on eligibility, calculated under a highest average pay and years of service formula. Our primary domestic defined benefit pension plans provided a benefit at the greater of (i) the highest average pay and years of service formula, (ii) the benefit calculated under a formula that provides for the accumulation of salary and interest credits during an employee's work life or (iii) the individual account balance from the Company's prior defined contribution plan (Transitional Retirement Account or TRA). Pension plan assets consist of both defined benefit plan assets and assets legally restricted to the TRA accounts.
The combined investment results for our primary domestic plans, along with the results for our other defined benefit plans, are shown below in the “actual return on plan assets” caption. To the extent that investment results relate to TRA assets, such results are charged directly to these accounts as a component of interest cost.
Xerox 2021 Annual Report 122
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Benefits | | |
| | U.S. Plans | | Non-U.S. Plans | | Retiree Health |
| | | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 |
| Change in Benefit Obligation: | | | | | | | | | | | | |
| Benefit obligation, January 1 | | $ | 3,747 | | | $ | 3,598 | | | $ | 7,159 | | | $ | 6,492 | | | $ | 370 | | | $ | 385 | |
| Service cost | | 2 | | | 2 | | | 20 | | | 20 | | | 2 | | | 2 | |
| Interest cost | | 80 | | | 196 | | | 88 | | | 113 | | | 8 | | | 12 | |
| Plan participants' contributions | | — | | | — | | | 3 | | | 3 | | | 8 | | | 10 | |
| Actuarial (gain) loss | | (86) | | | 240 | | | (233) | | | 439 | | | (1) | | | 4 | |
| Currency exchange rate changes | | — | | | — | | | (193) | | | 374 | | | — | | | 3 | |
| Plan Amendments/Curtailments | | — | | | — | | | (4) | | | 2 | | | (50) | | | (11) | |
| | | | | | | | | | | | |
| Benefits paid/settlements | | (371) | | | (289) | | | (297) | | | (284) | | | (34) | | | (35) | |
| Other | | — | | | — | | | — | | | — | | | — | | | — | |
| Benefit Obligation, December 31 | | $ | 3,372 | | | $ | 3,747 | | | $ | 6,543 | | | $ | 7,159 | | | $ | 303 | | | $ | 370 | |
| | | | | | | | | | | | |
| Change in Plan Assets: | | | | | | | | | | | | |
| Fair value of plan assets, January 1 | | $ | 2,802 | | | $ | 2,493 | | | $ | 7,199 | | | $ | 6,385 | | | $ | — | | | $ | — | |
| Actual return on plan assets | | 89 | | | 563 | | | 415 | | | 637 | | | — | | | — | |
| Employer contributions | | 24 | | | 35 | | | 111 | | | 104 | | | 25 | | | 25 | |
| Plan participants' contributions | | — | | | — | | | 3 | | | 3 | | | 8 | | | 10 | |
| Currency exchange rate changes | | — | | | — | | | (178) | | | 354 | | | — | | | — | |
| Benefits paid/settlements | | (371) | | | (289) | | | (297) | | | (284) | | | (33) | | | (35) | |
| Other | | — | | | — | | | (1) | | | — | | | — | | | — | |
| Fair Value of Plan Assets, December 31 | | $ | 2,544 | | | $ | 2,802 | | | $ | 7,252 | | | $ | 7,199 | | | $ | — | | | $ | — | |
| | | | | | | | | | | | |
Net Funded Status at December 31(1) | | $ | (828) | | | $ | (945) | | | $ | 709 | | | $ | 40 | | | $ | (303) | | | $ | (370) | |
| | | | | | | | | | | | |
| Amounts Recognized in the Consolidated Balance Sheets: | | | | | | | | | | | | |
| Other long-term assets | | $ | — | | | $ | — | | | $ | 1,211 | | | $ | 617 | | | $ | — | | | $ | — | |
| Accrued compensation and benefit costs | | (24) | | | (24) | | | (21) | | | (24) | | | (26) | | | (30) | |
| Pension and other benefit liabilities | | (804) | | | (921) | | | (481) | | | (553) | | | — | | | — | |
| Post-retirement medical benefits | | — | | | — | | | — | | | — | | | (277) | | | (340) | |
| Net Amounts Recognized | | $ | (828) | | | $ | (945) | | | $ | 709 | | | $ | 40 | | | $ | (303) | | | $ | (370) | |
| | | | | | | | | | | | |
| Accumulated Benefit Obligation | | $ | 3,372 | | | $ | 3,747 | | | $ | 6,412 | | | $ | 7,018 | | | | | |
_____________
(1)Includes under-funded and unfunded plans.
Benefit plans pre-tax amounts recognized in AOCL at December 31st: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Benefits | | |
| | U.S. Plans | | Non-U.S. Plans | | Retiree Health |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 |
| Net actuarial loss (gain) | | $ | 745 | | | $ | 874 | | | $ | 939 | | | $ | 1,471 | | | $ | (25) | | | $ | (23) | |
| Prior service (credit) cost | | — | | | (1) | | | 29 | | | 27 | | | (83) | | | (99) | |
| Total Pre-tax loss (gain) | | $ | 745 | | | $ | 873 | | | $ | 968 | | | $ | 1,498 | | | $ | (108) | | | $ | (122) | |
Xerox 2021 Annual Report 123
Aggregate information for pension plans with an Accumulated benefit obligation in excess of plan assets is presented below. Information for Retiree Health plans with an accumulated post-retirement benefit obligation in excess of plan assets has been disclosed in the preceding table on Benefit obligations and Net funded status as all Retiree Health plans are unfunded.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | December 31, 2021 | | | | December 31, 2020 |
| | | | Accumulated Benefit Obligation | | Fair Value of Plan Assets | | | | Accumulated Benefit Obligation | | Fair Value of Plan Assets |
| Underfunded Plans: | | | | | | | | | | | | |
| U.S. | | | | $ | 3,056 | | | $ | 2,544 | | | | | $ | 3,408 | | | $ | 2,802 | |
| Non U.S. | | | | 181 | | | 144 | | | | | 921 | | | 873 | |
| | | | | | | | | | | | |
| Unfunded Plans: | | | | | | | | | | | | |
| U.S. | | | | $ | 316 | | | $ | — | | | | | $ | 339 | | | $ | — | |
| Non U.S. | | | | 440 | | | — | | | | | 502 | | | — | |
| | | | | | | | | | | | |
| Total Underfunded and Unfunded Plans: | | | | | | | | | | | | |
| U.S. | | | | $ | 3,372 | | | $ | 2,544 | | | | | $ | 3,747 | | | $ | 2,802 | |
| Non U.S. | | | | 621 | | | 144 | | | | | 1,423 | | | 873 | |
| Total | | | | $ | 3,993 | | | $ | 2,688 | | | | | $ | 5,170 | | | $ | 3,675 | |
Aggregate information for pension plans with a benefit obligation in excess of plan assets is presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 |
| | Benefit Obligation | | Fair Value of Plan Assets | | Benefit Obligation | | Fair Value of Plan Assets |
| Underfunded Plans: | | | | | | | | |
| U.S. | | $ | 3,056 | | | $ | 2,544 | | | $ | 3,408 | | | $ | 2,802 | |
| Non U.S. | | 810 | | | 751 | | | 942 | | | 873 | |
| | | | | | | | |
| Unfunded Plans: | | | | | | | | |
| U.S. | | $ | 316 | | | $ | — | | | $ | 339 | | | $ | — | |
| Non U.S. | | 447 | | | — | | | 512 | | | — | |
| | | | | | | | |
| Total Underfunded and Unfunded Plans: | | | | | | | | |
| U.S. | | $ | 3,372 | | | $ | 2,544 | | | $ | 3,747 | | | $ | 2,802 | |
| Non U.S. | | 1,257 | | | 751 | | | 1,454 | | | 873 | |
| Total | | $ | 4,629 | | | $ | 3,295 | | | $ | 5,201 | | | $ | 3,675 | |
Pension plan assets and benefit obligations by country were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 |
| | Fair Value of Pension Plan Assets | | Pension Benefit Obligations | | Net Funded Status | | Fair Value of Pension Plan Assets | | Pension Benefit Obligations | | Net Funded Status |
| U.S. funded | | $ | 2,544 | | | $ | 3,056 | | | $ | (512) | | | $ | 2,802 | | | $ | 3,408 | | | $ | (606) | |
| U.S. unfunded | | — | | | 316 | | | (316) | | | — | | | 339 | | | (339) | |
| Total U.S. | | 2,544 | | | 3,372 | | | (828) | | | 2,802 | | | 3,747 | | | (945) | |
| U.K. | | 4,914 | | | 3,870 | | | 1,044 | | | 4,707 | | | 4,218 | | | 489 | |
| Netherlands | | 1,174 | | | 1,145 | | | 29 | | | 1,266 | | | 1,226 | | | 40 | |
| Canada | | 746 | | | 747 | | | (1) | | | 794 | | | 797 | | | (3) | |
| Germany | | — | | | 346 | | | (346) | | | — | | | 395 | | | (395) | |
| | | | | | | | | | | | |
| Other | | 418 | | | 435 | | | (17) | | | 432 | | | 523 | | | (91) | |
| Total | | $ | 9,796 | | | $ | 9,915 | | | $ | (119) | | | $ | 10,001 | | | $ | 10,906 | | | $ | (905) | |
Xerox 2021 Annual Report 124
The components of Net periodic benefit cost and other changes in plan assets and benefit obligations were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | | Pension Benefits | | | | | | |
| | | U.S. Plans | | Non-U.S. Plans | | Retiree Health |
| | | 2021 | | 2020 | | 2019 | | 2021 | | 2020 | | 2019 | | 2021 | | 2020 | | 2019 |
| Components of Net Periodic Benefit Costs: | | | | | | | | | | | | | | | | | | |
| Service cost | | $ | 2 | | | $ | 2 | | | $ | 2 | | | $ | 20 | | | $ | 20 | | | $ | 22 | | | $ | 2 | | | $ | 2 | | | $ | 2 | |
Interest cost(1) | | 80 | | | 196 | | | 218 | | | 88 | | | 113 | | | 153 | | | 8 | | | 12 | | | 15 | |
Expected return on plan assets(2) | | (117) | | | (217) | | | (210) | | | (208) | | | (191) | | | (233) | | | — | | | — | | | — | |
| Recognized net actuarial loss (gain) | | 17 | | | 27 | | | 24 | | | 59 | | | 58 | | | 43 | | | 1 | | | (1) | | | (5) | |
| Amortization of prior service credit | | (1) | | | (2) | | | (2) | | | (1) | | | (1) | | | (2) | | | (66) | | | (76) | | | (77) | |
| Recognized settlement loss | | 54 | | | 53 | | | 93 | | | 1 | | | 1 | | | 1 | | | — | | | — | | | — | |
| Recognized curtailment gain | | — | | | — | | | — | | | (4) | | | (1) | | | — | | | — | | | — | | | — | |
| Defined Benefit Plans | | 35 | | | 59 | | | 125 | | | (45) | | | (1) | | | (16) | | | (55) | | | (63) | | | (65) | |
| Defined contribution plans | | — | | | 1 | | | 26 | | | 18 | | | 18 | | | 23 | | | n/a | | n/a | | n/a |
| Net Periodic Benefit Cost (Credit) | | 35 | | | 60 | | | 151 | | | (27) | | | 17 | | | 7 | | | (55) | | | (63) | | | (65) | |
| Other changes in plan assets and benefit obligations recognized in Other Comprehensive Income (Loss): | | | | | | | | | | | | | | | | | | |
Net actuarial (gain) loss | | (57) | | | (105) | | | 243 | | | (425) | | | (9) | | | 24 | | | (1) | | | 4 | | | 8 | |
| Prior service (credit) cost | | — | | | — | | | — | | | (4) | | | 4 | | | — | | | (50) | | | (11) | | | — | |
| Amortization of net actuarial (loss) gain | | (71) | | | (80) | | | (117) | | | (60) | | | (59) | | | (44) | | | (1) | | | 1 | | | 5 | |
| Amortization of net prior service credit | | 1 | | | 2 | | | 2 | | | 1 | | | 1 | | | 2 | | | 66 | | | 76 | | | 77 | |
| Curtailment gain | | — | | | — | | | — | | | 4 | | | 1 | | | — | | | — | | | — | | | — | |
Total Recognized in Other Comprehensive Income (Loss)(3) | | (127) | | | (183) | | | 128 | | | (484) | | | (62) | | | (18) | | | 14 | | | 70 | | | 90 | |
| Total Recognized in Net Periodic Benefit Cost and Other Comprehensive Income (Loss) | | $ | (92) | | | $ | (123) | | | $ | 279 | | | $ | (511) | | | $ | (45) | | | $ | (11) | | | $ | (41) | | | $ | 7 | | | $ | 25 | |
_____________
(1)Interest cost for Pension Benefits includes interest expense on non-TRA obligations of $150, $184 and $243 and interest expense (income) directly allocated to TRA participant accounts of $18, $125 and $128 for the years ended December 31, 2021, 2020 and 2019, respectively.
(2)Expected return on plan assets includes expected investment income on non-TRA assets of $307, $283 and $315 and actual investment income (loss) on TRA assets of $18, $125 and $128 for the years ended December 31, 2021, 2020 and 2019, respectively.
(3)Amounts represent the pre-tax effect included in Other comprehensive income. Refer to Note 25 - Other Comprehensive Income (Loss) for the related tax effects and the net of tax amounts.
Plan Amendments
Pension:
In October 2018, the High Court of Justice in the United Kingdom (the High Court) ruled that Lloyds Bank PLC was required to equalize benefits payable to men and women under its U.K. defined benefit pension plans by amending those plans to increase the pension benefits payable to participants that accrued such benefits during the period from 1990 to 1997. The inequalities arose from statutory differences in the retirement ages and rates of accrual of benefits for men and women related to Guaranteed Minimum Pension (GMP) benefits that are included in U.K. defined benefit pension plans.
Based on the above ruling, we estimated the cost of equalization under the minimum cost approach permitted by the High Court’s ruling to be approximately 1.2% of our U.K. defined benefit plan obligation at December 31, 2018 or approximately GBP 33 million (approximately USD $42). This increase in the benefit obligation was recorded as a plan amendment in 2018. In November 2020, the High Court made another ruling in this matter related to benefit transfers out of the plan prior to the date of the 2018 ruling, which increased our estimated cost of equalization by a further GBP 3 million (approximately USD $4). Consistent with our approach to the estimate in 2018, the increase in the benefit obligation was recorded as a plan amendment in 2020 and together with the 2018 adjustment will be amortized to future net periodic benefit costs as a prior service cost (total approximately USD $2 per year covering both adjustments).
At December 31, 2021, the aggregate cost for this matter is estimated to be approximately 0.8% of the U.K. defined benefit plan obligation before equalization or approximately GBP 23 million (approximately USD $31) a reduction of
Xerox 2021 Annual Report 125
approximately GBP 13 million (approximately USD $18) from prior estimates, which was accounted for as an actuarial gain. This latest estimate reflects a more recent analysis completed by the Plan Actuary. However, several significant uncertainties remain and therefore our estimate is subject to future change and adjustment. In particular, the cost is very sensitive to i) the method of GMP equalization; ii) actuarial assumptions and market conditions; iii) the benefit structure of our plan and operational practices; and iv) the demographic profile of our plan. In addition, we are continuing to evaluate the acceptable methodologies that the High Court has determined, and we still need to agree upon the appropriate methodology with our plan trustees.
Retiree Health Plans:
In December 2021, we amended our U.S. Retiree Health Plan to reduce certain benefits for existing union retirees through the reduction or elimination of coverage or cost-sharing subsidies for retiree health care and life insurance costs. This negative plan amendment resulted in a reduction of $50 in the postretirement benefit obligation. The amount for the plan amendment will be amortized to future net periodic benefit costs as a prior service credit beginning in 2022.
In October 2020, we reduced the level of Company cost sharing for retiree health care benefits provided to certain existing non-union retirees. This change to our U.S. Retiree Health Plan was effective January 1, 2021. The change in cost sharing is considered a negative plan amendment resulting in a reduction in the postretirement benefit obligation of $11. The amount for the plan amendment will be amortized to future net periodic benefit costs as a prior service credit.
Plan Assets
Current Allocation
As of the 2021 and 2020 measurement dates, the global pension plan assets were $9,796 and $10,001, respectively. These assets were invested among several asset classes.
The following tables present the defined benefit plans assets measured at fair value and the basis for that measurement. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| | U.S. Plans | Non-U.S. Plans |
| Asset Class | | Level 1 | | Level 2 | | Level 3 | | Assets measured at NAV(1) | | Total | | Level 1 | | Level 2 | | Level 3 | | Assets measured at NAV(1) | | Total |
| Cash and cash equivalents | | $ | 3 | | | $ | — | | | $ | — | | | $ | — | | | $ | 3 | | | $ | 477 | | | $ | — | | | $ | — | | | $ | — | | | $ | 477 | |
| Equity Securities: | | | | | | | | | | | | | | | | | | | | |
| U.S. | | 148 | | | — | | | — | | | — | | | 148 | | | 35 | | | 36 | | | — | | | — | | | 71 | |
| International | | 161 | | | — | | | — | | | 230 | | | 391 | | | 699 | | | 339 | | | — | | | 37 | | | 1,075 | |
| Fixed Income Securities: | | | | | | | | | | | | | | | | | | | | |
| U.S. treasury securities | | — | | | 214 | | | — | | | — | | | 214 | | | — | | | 61 | | | — | | | — | | | 61 | |
| Debt security issued by government agency | | — | | | 119 | | | — | | | — | | | 119 | | | — | | | 2,181 | | | — | | | — | | | 2,181 | |
| Corporate bonds | | — | | | 1,134 | | | — | | | — | | | 1,134 | | | — | | | 985 | | | — | | | — | | | 985 | |
| | | | | | | | | | | | | | | | | | | | |
| Derivatives | | — | | | 5 | | | — | | | — | | | 5 | | | — | | | 300 | | | — | | | — | | | 300 | |
| Real estate | | — | | | — | | | 51 | | | 10 | | | 61 | | | — | | | — | | | 164 | | | 112 | | | 276 | |
| Private equity/venture capital | | — | | | — | | | — | | | 239 | | | 239 | | | — | | | — | | | 4 | | | 1,684 | | | 1,688 | |
| Guaranteed insurance contracts | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 75 | | | — | | | 75 | |
Other(2)(3) | | 95 | | | — | | | — | | | 135 | | | 230 | | | 22 | | | 41 | | | — | | | — | | | 63 | |
| Total Fair Value of Plan Assets | | $ | 407 | | | $ | 1,472 | | | $ | 51 | | | $ | 614 | | | $ | 2,544 | | | $ | 1,233 | | | $ | 3,943 | | | $ | 243 | | | $ | 1,833 | | | $ | 7,252 | |
_____________
(1)Certain assets that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.
(2)Other NAV includes mutual funds of $75 (measured at NAV) which are invested approximately 75% in fixed income securities and approximately 25% in equity securities.
(3)Other Level 1 includes mutual funds of $93, which are invested in equity securities, and net non-financial assets of $2 U.S. and $22 Non-U.S., respectively, such as due to/from broker, interest receivables and accrued expenses.
Xerox 2021 Annual Report 126
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 |
| | U.S. Plans | | Non-U.S. Plans |
| Asset Class | | Level 1 | | Level 2 | | Level 3 | | Assets measured at NAV(1) | | Total | | Level 1 | | Level 2 | | Level 3 | | Assets measured at NAV(1) | | Total |
| Cash and cash equivalents | | $ | 17 | | | $ | — | | | $ | — | | | $ | — | | | $ | 17 | | | $ | 401 | | | $ | — | | | $ | — | | | $ | — | | | $ | 401 | |
| Equity Securities: | | | | | | | | | | | | | | | | | | | | |
| U.S. | | 224 | | | — | | | — | | | 39 | | | 263 | | | 178 | | | 56 | | | — | | | — | | | 234 | |
| International | | 243 | | | — | | | — | | | 204 | | | 447 | | | 559 | | | 321 | | | — | | | 151 | | | 1,031 | |
| Fixed Income Securities: | | | | | | | | | | | | | | | | | | | | |
| U.S. treasury securities | | — | | | 325 | | | — | | | — | | | 325 | | | — | | | 77 | | | — | | | — | | | 77 | |
| Debt security issued by government agency | | — | | | 78 | | | — | | | — | | | 78 | | | — | | | 2,026 | | | — | | | — | | | 2,026 | |
| Corporate bonds | | — | | | 1,252 | | | — | | | — | | | 1,252 | | | — | | | 921 | | | — | | | — | | | 921 | |
| | | | | | | | | | | | | | | | | | | | |
| Derivatives | | — | | | 11 | | | — | | | — | | | 11 | | | — | | | 488 | | | — | | | — | | | 488 | |
| Real estate | | — | | | — | | | 31 | | | 10 | | | 41 | | | — | | | — | | | 208 | | | 108 | | | 316 | |
| Private equity/venture capital | | — | | | — | | | — | | | 209 | | | 209 | | | — | | | — | | | 3 | | | 1,557 | | | 1,560 | |
| Guaranteed insurance contracts | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 86 | | | — | | | 86 | |
Other(2)(3) | | 7 | | | — | | | — | | | 152 | | | 159 | | | 21 | | | 38 | | | — | | | — | | | 59 | |
| Total Fair Value of Plan Assets | | $ | 491 | | | $ | 1,666 | | | $ | 31 | | | $ | 614 | | | $ | 2,802 | | | $ | 1,159 | | | $ | 3,927 | | | $ | 297 | | | $ | 1,816 | | | $ | 7,199 | |
_____________
(1)Certain assets that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.
(2)Other NAV includes mutual funds of $73 (measured at NAV) which are invested approximately 70% in fixed income securities and approximately 30% in equity securities.
(3)Other Level 1 includes net non-financial (liabilities) assets of $7 U.S. and $21 Non-U.S., respectively, such as due to/from broker, interest receivables and accrued expenses.
The following tables represents a roll-forward of the defined benefit plans assets measured at fair value using significant unobservable inputs (Level 3 assets):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | U.S. | | | | | | Non-U.S. |
| | Real Estate | | | | | | Real Estate | | Private Equity/Venture Capital | | Guaranteed Insurance Contracts | | Total |
| Balance at December 31, 2019 | | $ | 5 | | | | | | | $ | 219 | | | $ | 5 | | | $ | 90 | | | $ | 314 | |
| Purchases | | 27 | | | | | | | — | | | 3 | | | — | | | 3 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Sales | | — | | | | | | | (15) | | | — | | | (4) | | | (19) | |
| | | | | | | | | | | | | | |
| Unrealized losses | | (1) | | | | | | | (8) | | | (4) | | | (8) | | | (20) | |
| Currency translation | | — | | | | | | | 12 | | | (1) | | | 8 | | | 19 | |
| | | | | | | | | | | | | | |
| Balance at December 31, 2020 | | $ | 31 | | | | | | | $ | 208 | | | $ | 3 | | | $ | 86 | | | $ | 297 | |
| Purchases | | 15 | | | | | | | 10 | | | — | | | — | | | 10 | |
| | | | | | | | | | | | | | |
| Sales | | — | | | | | | | (33) | | | — | | | (5) | | | (38) | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Unrealized gains (losses) | | 5 | | | | | | | (12) | | | 1 | | | 1 | | | (10) | |
| Currency translation | | — | | | | | | | (9) | | | — | | | (7) | | | (16) | |
| | | | | | | | | | | | | | |
| Balance at December 31, 2021 | | $ | 51 | | | | | | | $ | 164 | | | $ | 4 | | | $ | 75 | | | $ | 243 | |
Level 3 Valuation Method
Our primary Level 3 assets are Real Estate and Private Equity/Venture Capital investments. The fair value of our real estate investment funds is based on the Net Asset Value (NAV) of our ownership interest in the funds. NAV information is received from the investment advisers and is primarily derived from third-party real estate appraisals for the properties owned. The fair value for our private equity/venture capital partnership investments are based on our share of the estimated fair values of the underlying investments held by these partnerships as reported (or expected to be reported) in their audited financial statements. The valuation techniques and inputs for our Level 3 assets have been consistently applied for all periods presented.
Xerox 2021 Annual Report 127
Investment Strategy
The target asset allocations for our worldwide defined benefit pension plans were: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 |
| | | U.S. | | Non-U.S. | | U.S. | | Non-U.S. |
Equity investments(1) | | 24% | | 15% | | 23% | | 15% |
| Fixed income investments | | 60% | | 44% | | 61% | | 44% |
| Real estate | | 6% | | 4% | | 6% | | 4% |
| Private equity/venture capital | | 8% | | 24% | | 8% | | 22% |
| Other | | 2% | | 13% | | 2% | | 15% |
| Total Investment Strategy | | 100% | | 100% | | 100% | | 100% |
_____________
(1)Target allows for an additional allocation to synthetic equity which is offset by cash.
We employ a total return investment approach whereby a mix of equities and fixed income investments are used to maximize the long-term return of plan assets for a prudent level of risk. The intent of this strategy is to minimize plan expenses by exceeding the interest growth in long-term plan liabilities. Risk tolerance is established through careful consideration of plan liabilities, plan funded status and corporate financial condition. This consideration involves the use of long-term measures that address both return and risk. The investment portfolio contains a diversified blend of equity and fixed income investments. Furthermore, equity investments are diversified across U.S. and non-U.S. stocks, as well as growth, value and small and large capitalizations. Other assets such as real estate, private equity, and hedge funds are used to improve portfolio diversification. Derivatives may be used to hedge market exposure in an efficient, timely and cost-effective manner; however, derivatives may not be used to speculate or leverage the portfolio beyond the market value of the underlying investments. Investment risks and returns are measured and monitored on an ongoing basis through annual liability measurements and quarterly investment portfolio reviews.
Expected Long-term Rate of Return
We employ a “building block” approach in determining the long-term rate of return for plan assets. Historical markets are studied and long-term relationships between equities and fixed income are assessed. Current market factors such as inflation and interest rates are evaluated before long-term capital market assumptions are determined. The long-term portfolio return is established giving consideration to investment diversification and rebalancing. Peer data and historical returns are reviewed periodically to assess reasonableness and appropriateness.
Contributions
The following table summarizes cash contributions to our defined benefit pension plans and retiree health benefit plans. | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | Estimated 2022 |
| U.S. Plans | | $ | 24 | | | $ | 25 | |
| Non-U.S. Plans | | 111 | | | 110 | |
| Total | | $ | 135 | | | $ | 135 | |
| | | | |
| Retiree Health | | $ | 25 | | | $ | 25 | |
The 2021 U.S. Defined benefit plans contributions did not include any contributions for our domestic tax-qualified defined benefit plans because none were required to meet the minimum funding requirements. There are no contributions required in 2022 for our U.S. tax-qualified defined benefit plans to meet the minimum funding requirements.
Xerox 2021 Annual Report 128
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid during the following years: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Benefits | | |
| | U.S. | | Non-U.S. | | Total | | Retiree Health |
| 2022 | | $ | 349 | | | $ | 284 | | | $ | 633 | | | $ | 25 | |
| 2023 | | 301 | | | 291 | | | 592 | | | 25 | |
| 2024 | | 287 | | | 301 | | | 588 | | | 24 | |
| 2025 | | 276 | | | 304 | | | 580 | | | 22 | |
| 2026 | | 263 | | | 313 | | | 576 | | | 21 | |
| Years 2027-2031 | | 1,095 | | | 1,681 | | | 2,776 | | | 87 | |
Assumptions
Weighted-average assumptions used to determine benefit obligations at the plan measurement dates: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits |
| | | 2021 | | 2020 | | 2019 |
| | U.S. | | Non-U.S. | | U.S. | | Non-U.S. | | U.S. | | Non-U.S. |
| Discount rate | | 2.7 | % | | 1.8 | % | | 2.2 | % | | 1.3 | % | | 3.1 | % | | 1.8 | % |
| Rate of compensation increase | | 0.1 | % | | 2.8 | % | | 0.1 | % | | 2.6 | % | | 0.2 | % | | 2.6 | % |
| Interest crediting rate | | 2.8 | % | | 1.5 | % | | 2.8 | % | | 1.5 | % | | 2.8 | % | | 1.5 | % |
| | | | | | | | | | | | | | | | | | | | |
| | Retiree Health |
| | | 2021 | | 2020 | | 2019 |
| Discount rate | | 2.7 | % | | 2.2 | % | | 3.0 | % |
Weighted-average assumptions used to determine net periodic benefit cost for years ended December 31: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Benefits |
| | 2022 | | 2021 | | 2020 | | 2019 |
| | | U.S. | | Non-U.S. | | U.S. | | Non-U.S. | | U.S. | | Non-U.S. | | U.S. | | Non-U.S. |
| Discount rate | | 2.7 | % | | 1.8 | % | | 2.2 | % | | 1.3 | % | | 3.1 | % | | 1.8 | % | | 4.2 | % | | 2.6 | % |
| Expected return on plan assets | | 5.9 | % | | 3.2 | % | | 5.9 | % | | 3.1 | % | | 6.0 | % | | 3.3 | % | | 6.0 | % | | 4.0 | % |
| Rate of compensation increase | | 0.1 | % | | 2.8 | % | | 0.1 | % | | 2.6 | % | | 0.2 | % | | 2.6 | % | | 0.2 | % | | 2.6 | % |
| Interest crediting rate | | 2.5 | % | | 1.5 | % | | 2.8 | % | | 1.5 | % | | 2.8 | % | | 1.5 | % | | 2.8 | % | | 1.5 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Retiree Health |
| | | 2022 | | 2021 | | 2020 | | 2019 |
| Discount rate | | 2.7 | % | | 2.2 | % | | 3.0 | % | | 4.1 | % |
_____________
Note: Expected return on plan assets is not applicable to retiree health benefits as these plans are not funded. Rate of compensation increase is not applicable to retiree health benefits as compensation levels do not impact earned benefits.
Assumed health care cost trend rates were as follows: | | | | | | | | | | | | | | |
| | December 31, |
| | | 2021 | | 2020 |
| Health care cost trend rate assumed for next year | | 5.3 | % | | 5.7 | % |
| Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) | | 4.3 | % | | 4.3 | % |
| Year that the rate reaches the ultimate trend rate | | 2026 | | 2025 |
Defined Contribution Plans
We have post-retirement savings and investment plans in several countries, including the U.S., the U.K. and Canada. In many instances, employees who participated in the defined benefit pension plans that have been amended to freeze future service accruals were transitioned to an enhanced defined contribution plan. In these plans, employees are allowed to contribute a portion of their salaries and bonuses to the plans, and we match a portion of the employee contributions. We recorded charges related to our defined contribution plans of $18 in 2021, $19 in 2020 and $49 in 2019.
During 2021, the Company suspended, and did not make, its full year 2021 employer matching contribution for its U.S. based 401(k) plan for salaried (non-union) employees. The suspension resulted in savings of $20 for the year ended December 31, 2021.
Xerox 2021 Annual Report 129
Note 20 - Income and Other Taxes
(Loss) income before income taxes and equity income (pre-tax (loss) income) from continuing operations was as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | | 2021 | | 2020 | | 2019 |
| Domestic (loss) income | | $ | (343) | | | $ | 353 | | | $ | 679 | |
| Foreign (loss) income | | (132) | | | (101) | | | 143 | |
| (Loss) Income before Income Taxes and Equity Income | | $ | (475) | | | $ | 252 | | | $ | 822 | |
The components of Income tax (benefit) expense from continuing operations were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | | 2021 | | 2020 | | 2019 |
| Federal Income Taxes | | | | | | |
| Current | | $ | 33 | | | $ | 3 | | | $ | (3) | |
| Deferred | | (61) | | | 58 | | | 98 | |
| Foreign Income Taxes | | | | | | |
| Current | | 29 | | | 19 | | | 43 | |
| Deferred | | (20) | | | (34) | | | 5 | |
| State Income Taxes | | | | | | |
| Current | | 10 | | | 8 | | | 15 | |
| Deferred | | (8) | | | 10 | | | 21 | |
| Income Tax (Benefit) Expense | | $ | (17) | | | $ | 64 | | | $ | 179 | |
A reconciliation of the U.S. federal statutory income tax rate to the consolidated effective income tax rate was as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | | 2021 | | 2020 | | 2019 |
| U.S. federal statutory income tax rate | | 21.0 | % | | 21.0 | % | | 21.0 | % |
| Nondeductible expenses | | (1.9) | % | | 4.1 | % | | 1.3 | % |
| Effect of tax law changes | | 3.1 | % | | (10.5) | % | | (4.6) | % |
| Change in valuation allowance for deferred tax assets | | 2.0 | % | | 9.9 | % | | 2.0 | % |
| State taxes, net of federal benefit | | (0.6) | % | | 5.5 | % | | 3.5 | % |
| Audit and other tax return adjustments | | 5.6 | % | | 1.4 | % | | 0.6 | % |
| Tax-exempt income, credits and incentives | | 4.5 | % | | (5.9) | % | | (2.1) | % |
Foreign rate differential adjusted for U.S. taxation of foreign profits(1) | | (0.9) | % | | (2.6) | % | | 0.1 | % |
| Stock-based compensation | | (0.2) | % | | 2.3 | % | | (0.3) | % |
| Goodwill impairment | | (29.1) | % | | — | % | | — | % |
| Other | | 0.1 | % | | 0.2 | % | | 0.3 | % |
| Effective Income Tax Rate | | 3.6 | % | | 25.4 | % | | 21.8 | % |
_____________
(1)The “U.S. taxation of foreign profits” represents the U.S. tax, net of foreign tax credits, associated with actual and deemed repatriations of earnings from our non-U.S. subsidiaries.
On a consolidated basis, including discontinued operations, we paid a total of $61, $32 and $94 in income taxes to federal, foreign and state jurisdictions during the three years ended December 31, 2021, 2020 and 2019, respectively.
Xerox 2021 Annual Report 130
Total income tax expense (benefit) was allocated to the following items: | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | | 2021 | | 2020 | | 2019 |
| Pre-tax (loss) income | | $ | (17) | | | $ | 64 | | | $ | 179 | |
Discontinued operations(1) | | — | | | — | | | 95 | |
| | | | | | |
| | | | | | |
| Common shareholders' equity: | | | | | | |
| Changes in defined benefit plans | | 143 | | | 43 | | | (55) | |
| | | | | | |
| Cash flow hedges | | (1) | | | 1 | | | (1) | |
| Translation adjustments | | (4) | | | (3) | | | 8 | |
| Retained Earnings | | — | | | — | | | — | |
| Total Income Tax Expense | | $ | 121 | | | $ | 105 | | | $ | 226 | |
_____________
(1)Refer to Note 6 - Divestitures for additional information regarding discontinued operations.
Unrecognized Tax Benefits and Audit Resolutions
We recognize tax liabilities when, despite our belief that our tax return positions are supportable, we believe that certain positions may not be fully sustained upon review by tax authorities. Each period, we assess uncertain tax positions for recognition, measurement and effective settlement. Benefits from uncertain tax positions are measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon settlement - the more-likely-than-not recognition threshold. Where we have determined that our tax return filing position does not satisfy the more-likely-than-not recognition threshold, we have recorded no tax benefits. These assessments require the use of considerable estimates and judgments and can increase or decrease our effective tax rate, as well as impact our operating results. A difference in the ultimate resolution of uncertain tax positions from what is currently estimated could have a material impact on our results of operations and financial condition.
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a variety of jurisdictions. We are also subject to ongoing tax examinations in numerous jurisdictions due to the extensive geographical scope of our operations. As a result, we have received, and may in the future receive, proposed tax adjustments and tax assessments in multiple jurisdictions. We regularly assess the likelihood of the outcomes resulting from these ongoing tax examinations as part of our continuing assessment of uncertain tax positions to determine our provision for income taxes. The specific timing of when the resolution of each tax position will be reached is uncertain. As of December 31, 2021, we do not believe that there are any positions for which it is reasonably possible that the total amount of unrecognized tax benefits will significantly increase or decrease within the next 12 months.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | 2019 |
| Balance at January 1 | | $ | 115 | | | $ | 127 | | | $ | 108 | |
| Additions related to current year | | 7 | | | 3 | | | 42 | |
| Additions related to prior years positions | | — | | | 8 | | | 17 | |
| Reductions related to prior years positions | | (14) | | | (10) | | | (36) | |
Settlements with taxing authorities(1) | | 7 | | | (8) | | | (1) | |
| Reductions related to lapse of statute of limitations | | (7) | | | (7) | | | (3) | |
| Currency | | (1) | | | 2 | | | — | |
| | | | | | |
| Balance at December 31 | | $ | 107 | | | $ | 115 | | | $ | 127 | |
_____________
(1)The majority of settlements did not result in the utilization of cash.
Included in the balances at December 31, 2021, 2020 and 2019 are $1, $8 and $3, respectively, of tax positions that are highly certain of realizability but for which there is uncertainty about the timing or that they may be reduced through an indirect benefit from other taxing jurisdictions. Because of the impact of deferred tax accounting, other than for the possible incurrence of interest and penalties, the disallowance of these positions would not affect the annual effective tax rate.
Within income tax expense, we recognize interest and penalties accrued on unrecognized tax benefits, as well as interest received from favorable settlements. We had $1, $4 and $2 accrued for the payment of interest and penalties associated with unrecognized tax benefits at December 31, 2021, 2020 and 2019, respectively.
In the U.S., we are no longer subject to U.S. federal income tax examinations for years before 2017. With respect to our major foreign jurisdictions, we are no longer subject to tax examinations by tax authorities for years before 2011.
Xerox 2021 Annual Report 131
Deferred Income Taxes
At December 31, 2021 we have not provided deferred taxes on our undistributed pre-1987 E&P of approximately $330, as such undistributed earnings have been determined to be indefinitely reinvested and we currently do not plan to initiate any action that would precipitate a deferred tax impact. The decrease from the amount at December 31, 2020 of $350 is due to foreign currency translation adjustments. Additionally, we have also not provided deferred taxes on the outside basis differences in our investments in foreign subsidiaries that are unrelated to undistributed earnings. These basis differences are also indefinitely reinvested. A determination of the unrecognized deferred taxes related to these components is not practicable.
The tax effects of temporary differences that give rise to significant portions of the deferred taxes were as follows:
| | | | | | | | | | | | | | |
| | December 31, |
| | | 2021 | | 2020 |
| Deferred Tax Assets | | | | |
| Research and development | | $ | 185 | | | $ | 150 | |
| Post-retirement medical benefits | | 78 | | | 94 | |
| | | | |
| Net operating losses | | 363 | | | 377 | |
| Operating reserves, accruals and deferrals | | 133 | | | 124 | |
| Tax credit carryforwards | | 143 | | | 249 | |
| Deferred and share-based compensation | | 24 | | | 13 | |
| Pension | | 7 | | | 211 | |
| Depreciation | | 31 | | | 35 | |
| Operating lease liabilities | | 62 | | | 82 | |
| Other | | 36 | | | 44 | |
| Subtotal | | 1,062 | | | 1,379 | |
| Valuation allowance | | (357) | | | (396) | |
| Total | | $ | 705 | | | $ | 983 | |
| | | | |
| Deferred Tax Liabilities | | | | |
| Finance lease and installment sales | | $ | 61 | | | $ | 247 | |
| | | | |
| Intangibles and goodwill | | 122 | | | 140 | |
| Unremitted earnings of foreign subsidiaries | | 31 | | | 31 | |
| Operating lease ROU assets | | 58 | | | 76 | |
| Other | | 22 | | | 16 | |
| Total | | $ | 294 | | | $ | 510 | |
| | | | |
| Total Deferred Taxes, Net | | $ | 411 | | | $ | 473 | |
| | | | |
| Reconciliation to the Consolidated Balance Sheets | | | | |
| Deferred tax assets | | $ | 519 | | | $ | 508 | |
Deferred tax liabilities(1) | | (108) | | | (35) | |
| Total Deferred Taxes, Net | | $ | 411 | | | $ | 473 | |
_____________
(1)Represents the deferred tax liabilities recorded in Other long-term liabilities - refer to Note 15 - Supplementary Financial Information.
We record the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and the amounts reported, as well as net operating loss and tax credit carryforwards. Deferred tax assets are assessed for realizability and, where applicable, a valuation allowance is recorded to reduce the total deferred tax asset to an amount that will, more-likely-than-not, be realized in the future. We apply judgment in assessing the realizability of these deferred tax assets and the need for any valuation allowances. In determining the amount of deferred tax assets that are more-likely-than-not to be realized, we considered historical profitability, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. The deferred tax assets requiring significant judgment are U.S. tax credit carryforwards with a limited life.
The net change in the total valuation allowance for the years ended December 31, 2021, 2020 and 2019 was a decrease of $39, a decrease of $3 and an increase of $2, respectively. The valuation allowance relates primarily to certain net operating loss carryforwards, tax credit carryforwards and deductible temporary differences for which we have concluded it is more-likely-than-not that these items will not be realized in the ordinary course of operations.
Although realization is not assured, we have concluded that it is more-likely-than-not that the deferred tax assets, for which a valuation allowance was determined to be unnecessary, will be realized in the ordinary course of
Xerox 2021 Annual Report 132
operations based on the available positive and negative evidence, including scheduling of deferred tax liabilities and projected income from operating activities. The amount of the net deferred tax assets considered realizable, however, could change in the near term if future income or income tax rates are higher or lower than currently estimated, or if there are differences in the timing or amount of future reversals of existing taxable or deductible temporary differences.
At December 31, 2021, we had tax credit carryforwards of $143 available to offset future income taxes, of which $2 are available to carryforward indefinitely while the remaining $141 will expire 2022 through 2042 if not utilized. We also had net operating loss carryforwards for income tax purposes of $496 that will expire 2022 through 2042, if not utilized, and $1.6 billion available to offset future taxable income indefinitely.
Note 21 – Contingencies and Litigation
As more fully discussed below, we are involved in a variety of claims, lawsuits, investigations and proceedings concerning: securities law; governmental entity contracting, servicing and procurement law; intellectual property law; environmental law; employment law; the Employee Retirement Income Security Act (ERISA); and other laws and regulations. We determine whether an estimated loss from a contingency should be accrued by assessing whether a loss is deemed probable and can be reasonably estimated. We assess our potential liability by analyzing our litigation and regulatory matters using available information. We develop our views on estimated losses in consultation with outside counsel handling our defense in these matters, which involves an analysis of potential results, assuming a combination of litigation and settlement strategies. Should developments in any of these matters cause a change in our determination as to an unfavorable outcome and result in the need to recognize a material accrual, or should any of these matters result in a final adverse judgment or be settled for significant amounts, they could have a material adverse effect on our results of operations, cash flows and financial position in the period or periods in which such change in determination, judgment or settlement occurs.
Additionally, guarantees, indemnifications and claims may arise during the ordinary course of business from relationships with suppliers, customers and nonconsolidated affiliates, as well as through divestitures and sales of businesses, when the Company undertakes an obligation to guarantee the performance of others if specified triggering events occur. Nonperformance under a contract could trigger an obligation of the Company. These potential claims include actions based upon alleged exposures to products, real estate, intellectual property such as patents, environmental matters, and other indemnifications. The ultimate effect on future financial results is not subject to reasonable estimation because considerable uncertainty exists as to the final outcome of these claims. However, while the ultimate liabilities resulting from such claims may be significant to results of operations in the period recognized, management does not anticipate they will have a material adverse effect on the Company's consolidated financial position or liquidity. As of December 31, 2021, we have accrued our estimate of liability incurred under our indemnification arrangements and guarantees.
Brazil Contingencies
Our Brazilian operations have received or been the subject of numerous governmental assessments related to indirect and other taxes. These tax matters principally relate to claims for taxes on the internal transfer of inventory, municipal service taxes on rentals and gross revenue taxes. We are disputing these tax matters and intend to vigorously defend our positions. Based on the opinion of legal counsel and current reserves for those matters deemed probable of loss, we do not believe that the ultimate resolution of these matters will materially impact our results of operations, financial position or cash flows. Below is a summary of our Brazilian tax contingencies:
| | | | | | | | | | | | | | |
| | December 31,
2021 | | December 31,
2020 |
| Tax contingency - unreserved | | $ | 292 | | | $ | 355 | |
| Escrow cash deposits | | 32 | | | 39 | |
| Surety bonds | | 96 | | | 112 | |
| Letters of credit | | 74 | | | 78 | |
| Liens on Brazilian assets | | — | | | — | |
The decrease in the unreserved portion of the tax contingency, inclusive of any related interest, was primarily related to closed cases and currency, partially offset by interest. With respect to the unreserved tax contingency, the majority has been assessed by management as being remote as to the likelihood of ultimately resulting in a loss to the Company. In connection with the above proceedings, customary local regulations may require us to make escrow cash deposits or post other security of up to half of the total amount in dispute, as well as additional surety bonds and letters of credit, which include associated indexation. Generally, any escrowed amounts would be refundable and any liens on assets would be removed to the extent the matters are resolved in our favor. We are
Xerox 2021 Annual Report 133
also involved in certain disputes with contract and former employees. Exposures related to labor matters are not material to the financial statements as of December 31, 2021 and 2020. We routinely assess all these matters as to probability of ultimately incurring a liability against our Brazilian operations and record our best estimate of the ultimate loss in situations where we assess the likelihood of an ultimate loss as probable.
Litigation Against the Company
Miami Firefighters’ Relief & Pension Fund v. Icahn, et al.:
On December 13, 2019, alleged shareholder Miami Firefighters’ Relief & Pension Fund (“Miami Firefighters”) filed a purported derivative complaint in New York State Supreme Court, New York County on behalf of Xerox Holdings Corporation ("Xerox Holdings") (as nominal defendant) against Carl Icahn and his affiliated entities High River Limited Partnership and Icahn Capital LP (the "Icahn defendants"), Xerox Holdings, and all then-current Xerox Holdings directors (the "Directors"). Plaintiff made no demand on the Board before bringing the action, but instead alleges that doing so would be futile because the Directors lack independence due to alleged direct or indirect relationships with Icahn. Among other things, the complaint alleges that Icahn controls and dominates Xerox Holdings and therefore owes a fiduciary duty of loyalty to Xerox Holdings, which he breached by acquiring HP stock at a time when he knew that Xerox Holdings was considering an offer to acquire HP or had knowledge of the "obvious merits" of such potential acquisition, and that the Icahn defendants’ holdings of HP common stock have risen in market value by approximately $128 since disclosure of the offer. The complaint includes four causes of action: breach of fiduciary duty of loyalty against the Icahn defendants; breach of contract against the Icahn defendants (for purchasing HP stock in violation of Icahn’s confidentiality agreement with Xerox Holdings); unjust enrichment against the Icahn defendants; and breach of fiduciary duty of loyalty against the Directors (for any consent to the Icahn defendants’ purchases of HP common stock while Xerox Holdings was considering acquiring HP). The complaint seeks a judgment of breach of fiduciary duties against the Icahn defendants and the Directors; a declaration that Icahn breached his confidentiality agreement with Xerox Holdings; a constructive trust on Icahn Capital and High River's investments in HP securities; disgorgement to Xerox Holdings of profits Icahn Capital and High River earned from trading in HP stock; payment of unspecified damages by the Directors for breaching fiduciary duties; and attorneys' fees, costs, and other relief the Court deems just and proper. On January 15, 2020, the Court entered an order granting plaintiff’s unopposed motion to consolidate with Miami Firefighters a similar action filed on December 26, 2019 by alleged shareholder Steven J. Reynolds against the same parties in the same court, and designating Miami Firefighters’ counsel as lead counsel in the consolidated action.
Discovery commenced. On August 10, 2020, the Xerox defendants and the Icahn defendants filed separate motions to dismiss. Briefing on the motions was completed on October 21, 2020. On December 14, 2020, following oral argument, the Court issued a decision and order granting defendants’ motions and dismissing the action in its entirety as to all defendants. Dismissal as to the Icahn defendants was conditioned on the filing of an affidavit, which the Icahn defendants filed on December 16, 2020, indicating whether defendant Icahn gained a profit or incurred a loss on purchases of HP stock during the relevant time period.
On December 23, 2020, plaintiff filed a motion seeking discovery related to the Icahn defendants’ losses resulting from their investment in HP. The motion was fully briefed on January 7, 2021. On January 15, 2021, the Court issued a decision and order denying the motion.
Also on January 15, 2021, plaintiff filed a notice of appeal of the December 14, 2020 dismissal order to the Appellate Division, First Department. On January 20, 2021, plaintiff filed a notice of appeal of the January 15, 2021 order denying its motion for discovery to the Appellate Division, First Department. On July 15, 2021, plaintiff filed its brief in connection with the appeals of the December 14, 2020 dismissal order and the January 15, 2021 discovery order.
On November 18, 2021, the Appellate Division issued its decision. The Court reversed the lower court’s ruling to the extent that it dismissed the claims asserted against the Icahn defendants. The claims asserted against the Directors remain dismissed. On December 8, 2021, the Xerox Board approved the formation of a Special Litigation Committee to investigate and evaluate the claims and allegations asserted in the Miami Firefighters’ case and determine the course of action that would be in the best interests of the Company and its shareholders. The Special Litigation Committee moved to stay the litigation pending its investigation and on January 25, 2022, the Court issued an order staying all discovery until February 28, 2022, except as related to the issue of the alleged damages sustained by Xerox.
Xerox 2021 Annual Report 134
Xerox Holdings Corporation v. Factory Mutual Insurance Company and Related Actions:
On March 10, 2021, Xerox Holdings Corporation (“Xerox Holdings”) filed a complaint for breach of contract and declaratory judgment against Factory Mutual Insurance Company in Rhode Island Superior Court, Providence County seeking insurance coverage for business interruption losses resulting from the coronavirus/COVID-19 pandemic. The complaint alleges that defendant agreed to provide Xerox Holdings with up to $1 billion in per-occurrence coverage for losses resulting from pandemic-related loss or damage to certain real and other property, including business interruption loss resulting from insured property damage; that the pandemic had inflicted significant physical loss or damage to property of Xerox Holdings and its direct and indirect customers; that Xerox Holdings’ worldwide actual and projected losses through the end of 2020 totaled in excess of $300 (and is still increasing); and that following Xerox Holdings' timely and proper claim in March 2020 for coverage under the “all risk” commercial property insurance policy it had purchased from defendant, defendant improperly denied and rejected coverage for most of the claim. The complaint seeks a jury trial, a declaratory judgment against defendant declaring that Xerox is entitled to full coverage of costs and losses under defendant’s policy and declaring that defendant is required to pay for such costs and losses, subject to any applicable limits; damages in an amount to be determined at trial; consequential damages; attorneys’ fees and costs; pre- and post-judgment interest; and other relief the Court deems just and proper. Also on March 10, 2021, subsidiaries of Xerox Holdings filed similar complaints and related requests for arbitration in Toronto, London, and Amsterdam for Canadian, UK and European losses.
Xerox Holdings consented to defendant’s request for an extension of its time in which to answer or otherwise respond to the complaint. On May 6, 2021, FMG filed its answer to the complaint. The parties thereafter agreed to stay all non-U.S. proceedings pending the outcome of the U.S. litigation.
Guarantees, Indemnifications and Warranty Liabilities
Indemnifications Provided as Part of Contracts and Agreements
Acquisitions/Divestitures:
We have indemnified, subject to certain deductibles and limits, the purchasers of businesses or divested assets for the occurrence of specified events under certain of our divestiture agreements. In addition, we customarily agree to hold the other party harmless against losses arising from a breach of representations and covenants, including such matters as adequate title to assets sold, intellectual property rights, specified environmental matters and certain income taxes arising prior to the date of acquisition. Where appropriate, an obligation for such indemnifications is recorded as a liability at the time of the acquisition or divestiture. Since the obligated amounts of these types of indemnifications are often not explicitly stated and/or are contingent on the occurrence of future events, the overall maximum amount of the obligation under such indemnifications cannot be reasonably estimated. Other than obligations recorded as liabilities at the time of divestiture, we have not historically made significant payments for these indemnifications. Additionally, under certain of our acquisition agreements, we have provided for additional consideration to be paid to the sellers if established financial targets are achieved post-closing. We have recognized liabilities for these contingent obligations based on an estimate of the fair value of these contingencies at the time of acquisition. Contingent obligations related to indemnifications arising from our divestitures and contingent consideration provided for by our acquisitions are not expected to be material to our financial position, results of operations or cash flows.
Other Agreements:
We are also party to the following types of agreements pursuant to which we may be obligated to indemnify the other party with respect to certain matters:
•Guarantees on behalf of our subsidiaries with respect to real estate leases. These lease guarantees may remain in effect subsequent to the sale of the subsidiary.
•Agreements to indemnify various service providers, trustees and bank agents from any third-party claims related to their performance on our behalf, with the exception of claims that result from a third-party's own willful misconduct or gross negligence.
•Guarantees of our performance in certain sales and services contracts to our customers and indirectly the performance of third parties with whom we have subcontracted for their services. This includes indemnifications to customers for losses that may be sustained as a result of the use of our equipment at a customer's location.
In each of these circumstances, our payment is conditioned on the other party making a claim pursuant to the procedures specified in the particular contract and such procedures also typically allow us to challenge the other party's claims. In the case of lease guarantees, we may contest the liabilities asserted under the lease. Further, our
Xerox 2021 Annual Report 135
obligations under these agreements and guarantees may be limited in terms of time and/or amount, and in some instances, we may have recourse against third parties for certain payments we made.
Patent Indemnifications
In most sales transactions to resellers of our products, we indemnify against possible claims of patent infringement caused by our products or solutions. In addition, we indemnify certain software providers against claims that may arise as a result of our use or our subsidiaries', customers' or resellers' use of their software in our products and solutions. These indemnities usually do not include limits on the claims, provided the claim is made pursuant to the procedures required in the sales contract.
Indemnification of Officers and Directors
The corporate by-laws of Xerox Holdings Corporation and Xerox Corporation require that, except to the extent expressly prohibited by law, we must indemnify Xerox Holdings Corporation's and Xerox Corporation's officers and directors, respectively, against judgments, fines, penalties and amounts paid in settlement, including legal fees and all appeals, incurred in connection with civil or criminal action or proceedings, as it relates to their services to Xerox Holdings Corporation and/or Xerox Corporation and their subsidiaries. Although the by-laws provide no limit on the amount of indemnification, Xerox Holdings Corporation or Xerox Corporation may have recourse against our insurance carriers for certain payments made by Xerox Holdings Corporation or Xerox Corporation. However, certain indemnification payments (such as those related to "clawback" provisions in certain compensation arrangements) may not be covered under Xerox Holdings Corporation's and Xerox Corporation's directors' and officers' insurance coverage. Xerox Holdings Corporation and Xerox Corporation also indemnify certain fiduciaries of our employee benefit plans for liabilities incurred in their service as fiduciary whether or not they are officers of Xerox Holdings Corporation or Xerox Corporation. Finally, in connection with Xerox Holdings Corporation's and/or Xerox Corporation's acquisition of businesses, we may become contractually obligated to indemnify certain former and current directors, officers and employees of those businesses in accordance with pre-acquisition by-laws and/or indemnification agreements and/or applicable state law.
Product Warranty Liabilities
In connection with our normal sales of equipment, including those under sales-type leases, we generally do not issue product warranties. Our arrangements typically involve a separate full service maintenance agreement with the customer. The agreements generally extend over a period equivalent to the lease term or the expected useful life of the equipment under a cash sale. The service agreements involve the payment of fees in return for our performance of repairs and maintenance. As a consequence, we do not have any significant product warranty obligations, including any obligations under customer satisfaction programs. In a few circumstances, particularly in certain cash sales, we may issue a limited product warranty if negotiated by the customer. We also issue warranties for certain of our entry level products, where full service maintenance agreements are not available. In these instances, we record warranty obligations at the time of the sale. Aggregate product warranty liability expenses for the three years ended December 31, 2021, 2020 and 2019 were $8, $8 and $12, respectively. Total product warranty liabilities as of December 31, 2021 and 2020 were $6 and $6, respectively.
Guarantees
We have issued or provided approximately $292 of guarantees as of December 31, 2021 in the form of letters of credit or surety bonds issued to i) support certain insurance programs; ii) support our obligations related to the Brazil tax and labor contingencies (see Brazil Contingencies); iii) support our obligations related to our U.K. pension plans; and iv) support certain contracts, primarily with public sector customers, which require us to provide a surety bond as a guarantee of our performance of contractual obligations.
In general, we would only be liable for the amount of these guarantees in the event we, or one of our direct or indirect subsidiaries whose obligations we have guaranteed, defaulted in performing our obligations under each contract; the probability of which we believe is remote. We believe that our capacity in the surety markets as well as under various credit arrangements (including our Credit Facility) is sufficient to allow us to respond to future requests for proposals that require such credit support.
Xerox 2021 Annual Report 136
Note 22 - Preferred Stock
Series A Convertible Perpetual Voting Preferred Stock
As of December 31, 2021, Xerox Holdings Corporation had one class of preferred stock outstanding. Xerox Holdings Corporation has issued 180,000 shares of Series A Preferred Stock that have an aggregate liquidation value of $180 and a carrying value of $214. The Series A Preferred Stock pays quarterly cash dividends at a rate of 8% per year ($14 per year), on a cumulative basis. Each share of Series A Preferred Stock is convertible at any time, at the option of the holder, into 37.4532 shares of common stock of Xerox Holdings Corporation for a total of 6,742 thousand shares (reflecting an initial conversion price of approximately $26.70 per share of common stock), subject to customary anti-dilution adjustments.
If the closing price of Xerox Holdings Corporation common stock exceeds $39.00 or 146.1% of the initial conversion price of $26.70 per share of common stock for 20 out of 30 consecutive trading days, Xerox Holdings Corporation will have the right to cause any or all of the Series A Preferred Stock to be converted into shares of common stock at the then applicable conversion rate. The Series A Preferred Stock is also convertible, at the option of the holder, upon a change in control, at the applicable conversion rate plus an additional number of shares determined by reference to the price paid for our common stock upon such change in control. In addition, upon the occurrence of certain fundamental change events, including a change in control or the delisting of Xerox Holdings Corporation's common stock, the holder of the Series A Preferred Stock has the right to require Xerox Holdings Corporation to redeem any or all of the preferred stock in cash at a redemption price per share equal to the liquidation preference and any accrued and unpaid dividends up to, but not including, the redemption date. The Series A Preferred Stock is classified as temporary equity (i.e., apart from permanent equity) as a result of the contingent redemption feature.
Series A Preferred Stock Voting Rights
The Xerox Holdings Corporation Series A Preferred Stock votes together with the Xerox Holdings Corporation common stock, as a single class, on all matters submitted to the shareholders of Xerox Holdings Corporation, but the Xerox Holdings Corporation Series A Voting Preferred Stock is only entitled to one vote for every ten shares of Xerox Holdings Corporation common stock into which the Xerox Holdings Corporation Series A Preferred Stock is convertible (674,157 votes at December 31, 2021).
Xerox 2021 Annual Report 137
Note 23 – Shareholders’ Equity
Xerox Holdings
Preferred Stock
Xerox Holdings Corporation is authorized to issue approximately 22 million shares of cumulative Preferred stock, $1.00 par value per share. Refer to Note 22 - Preferred Stock for additional information.
Common Stock
Xerox Holdings Corporation is authorized to issue 437.5 million shares of Common stock, $1.00 par value per share. At December 31, 2021, 25 million shares were reserved for issuance under our incentive compensation plans and 7 million shares were reserved for conversion of the Series A Convertible Perpetual Preferred Voting Stock.
Treasury Stock
Xerox Holdings Corporation accounts for the repurchased Common stock under the cost method and includes such Treasury stock as a component of our Common shareholders' equity. Retirement of Treasury stock is recorded as a reduction of Common stock and Additional paid-in capital at the time such retirement is approved by our Board of Directors.
In October 2021, the Xerox Holdings Corporation's Board of Directors authorized a $500 share repurchase program (exclusive of commissions and fees). This program replaced the approximate $450 thousand of authority remaining under Xerox Holdings Corporation's previously authorized $1.1 billion share repurchase program.
The following provides cumulative information relating to Xerox Holdings Corporation's current share repurchase program from its inception in October 2021 through December 31, 2021 (shares in thousands):
| | | | | | | | |
| Authorized share repurchase program | | $ | 500 | |
| Share repurchase cost | | $ | 387 | |
| Share repurchase fees | | $ | 1 | |
| Number of shares repurchased | | 19,401 |
Of the $500 of share repurchase granted in October 2021 by Xerox Holdings Corporation's Board of Directors, approximately $113 of that authority remained available at December 31, 2021.
The following table reflects the changes in Common and Treasury stock shares (shares in thousands). The Treasury stock repurchases in the table below include the repurchases under both the prior Xerox Corporation authorized share repurchase program and the current Xerox Holdings Corporation authorized share repurchase program.
| | | | | | | | | | | | | | |
| | Common Stock Shares | | Treasury Stock Shares |
| Balance at December 31, 2018 | | 231,690 | | | 2,067 | |
| Stock based compensation plans, net | | 1,310 | | — |
| | | | |
| Acquisition of Treasury stock | | — | | | 18,343 | |
| Cancellation of Treasury stock | | (18,379) | | (18,379) |
| | | | |
| Balance at December 31, 2019 | | 214,621 | | | 2,031 | |
| Stock based compensation plans, net | | 1,390 | | | — | |
| | | | |
| Acquisition of Treasury stock | | — | | | 15,594 | |
| Cancellation of Treasury stock | | (17,625) | | | (17,625) | |
| | | | |
| | | | |
| Balance at December 31, 2020 | | 198,386 | | | — | |
| Stock based compensation plans, net | | 1,206 | | | — | |
| Acquisition of Treasury stock | | — | | | 40,198 | |
| Cancellation of Treasury stock | | (31,523) | | | (31,523) | |
| | | | |
| Balance at December 31, 2021 | | 168,069 | | | 8,675 | |
Xerox
At December 31, 2021, Xerox Corporation has 1,000 authorized shares of Common stock, $1.00 par value per share, of which 100 shares are issued and outstanding and held by Xerox Holdings Corporation.
Xerox 2021 Annual Report 138
Note 24 – Stock-Based Compensation
(shares in thousands)
We have a long-term incentive plan whereby eligible employees may be granted restricted stock units (RSUs), performance share units (PSUs) and stock options (SOs). We grant stock-based compensation awards in order to continue to attract and retain qualified employees and to better align employees' interests with those of our shareholders. Each of these awards is subject to settlement with newly issued shares of Xerox Holdings Corporation's common stock. At December 31, 2021 and 2020, 8 million and 11 million shares, respectively, were available for grant of awards.
Stock-based compensation expense was as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Stock-based compensation expense, pre-tax | | $ | 54 | | | $ | 42 | | | $ | 50 | |
| Income tax benefit recognized in earnings | | 13 | | | 11 | | | 13 | |
In 2019, the timing of our annual grant of awards was changed from April to January to more closely align the grant date with the underlying performance period related to PSUs. Stock options were last awarded under the 2018 grant.
Restricted Stock Units
Compensation expense for RSUs is based upon the grant-date market price and is recognized on a straight-line basis over the vesting period, based on management's estimate of the number of shares expected to vest. Beginning with the 2018 grant, RSU's vest on a graded schedule as follows: 25% after one year of service, 25% after two years of service and 50% after three years of service from the date of grant. Prior to the 2018 grant, RSUs vested on a three-year cliff basis from the date of grant. Beginning with the 2021 grant, RSUs vest on a graded schedule as follows: 33% after one year of service, 33% after two years of service and 34% after three years of service from the date of grant.
Performance Share Units
PSU awards granted in 2021, 2020 and 2019 were comprised of a performance-based component that included a Revenue and Free Cash Flow metric and a market-based component that included an Absolute Share Price metric. The metrics are weighted as follows: 25% Revenue, 25% Free Cash Flow and 50% Absolute Share Price. Accordingly, each PSU grant was one-half performance-based (Revenue and Free Cash Flow) and one-half market-based (Absolute Share Price). The measures are independent of each other and depending on the achievement of these metrics, a recipient of a PSU award is entitled to receive a number of shares equal to a percentage, ranging from 0% to 200% of the PSU award granted. PSUs have a three-year cliff vesting from the date of grant.
In November 2020, the Xerox Holdings Corporation Board approved grants of RSUs to employees who had received grants of PSUs in 2019 and/or 2020 that included performance and market metrics that have been permanently adversely impacted by the COVID-19 pandemic. These grants of RSUs were made in December 2020. The grant-date value of the new RSUs for each recipient was approximately 50% of the grant-date value of the recipient’s 2020 and/or 2019 PSUs. These RSU grants were not intended to take the place of the Company’s 2021 regular annual equity incentive programs.
Performance-Based Component: PSUs vest contingent upon meeting pre-determined cumulative performance metrics. The fair value of our PSUs is based upon the grant-date market price. Compensation expense is recognized on a straight-line basis over the vesting period, based on management's estimate of the number of shares expected to vest and based on meeting the performance metrics. If the cumulative three-year actual results exceed the stated targets, all plan participants have the potential to earn additional shares of common stock up to a maximum over-achievement of 100% of the original grant. If the stated targets are not met, any recognized compensation cost would be reversed.
Market-Based Component: The Absolute Share Price metric, included as the market-based component of the 2021, 2020 and 2019 PSU grant, is based on Xerox Holdings Corporation's average closing price for the last 20 trading days of the three-year performance period, inclusive of dividends during that period. Payout for this portion of the PSU will be determined based on total return targets. Since the Absolute Share Price metric of the PSU award represents a market condition, a Monte Carlo simulation was used to determine the grant-date fair value.
Xerox 2021 Annual Report 139
The TSR metric included as the market-based component of the 2018 PSU grant was based on the percentage change in Xerox Corporation stock price plus dividends paid over the three-year measurement period. Payout for this portion of the PSU was to be determined based on Xerox Corporation percentage change compared to the shareholder returns of the peer group of companies approved by the compensation committee of the Board (as disclosed in the 2018 annual proxy statement). Since the TSR metric of the PSU award represented a market condition, a Monte Carlo simulation was used to determine the grant-date fair value.
A summary of Xerox Holdings key valuation input assumptions used in the Monte Carlo simulation relative to awards granted were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 Award | | 2020 Award | | 2019 Award | | 2018 Award |
| Term | | 3 years | | 3 years | | 3 years | | 3 years |
Risk-free interest rate(1) | | 0.20 | % | | 1.60 | % | | 2.51 | % | | 2.39 | % |
Dividend yield(2) | | 4.66 | % | | 2.80 | % | | 3.97 | % | | 3.24 | % |
Volatility(3) | | 44.76 | % | | 29.49 | % | | 32.95 | % | | 29.12 | % |
Weighted average fair value(4) | | $ | 25.80 | | | $ | 41.28 | | | $ | 16.27 | | | $ | 32.01 | |
____________
(1)The risk-free interest rate was based on the zero-coupon U.S. Treasury yield curve on the valuation date, with a maturity matched to the performance period.
(2)The dividend yield was calculated as the expected quarterly dividend divided by our three-month average stock price as of the valuation date, annualized and continuously compounded.
(3)Volatility is derived from historical stock prices as well as implied volatility when appropriate and available.
(4)The weighted average of fair values used to record compensation expense as determined by the Monte Carlo simulation.
Our Absolute Share Price metric is compared against total return targets to determine the payout as follows:
| | | | | | | | | | | | | | | | | | | | |
| Payout as a Percent of Target | | 2021 Total Return Targets(1) | | 2020 Total Return Targets(1) | | 2019 Total Return Targets(1) |
| 200% | | $33.00 and above | | $45.00 and above | | $40.00 and above |
| 100% | | $ | 30.00 | | | $ | 40.00 | | | $ | 35.00 | |
| 50% | | $ | 27.00 | | | $ | 37.00 | | | $ | 30.00 | |
| 0% | | Below $27.00 | | Below $37.00 | | Below $30.00 |
Our 2018 TSR metric compared to the peer group TSR will determine the payout as follows:
| | | | | | | | |
| Payout as a Percent of Target | | Percentile(1) |
| 200% | | 80th and above |
| 100% | | 50th |
| 35% | | 25th |
| 0% | | Below 25th |
____________
(1)For performance between the levels described above, the degree of vesting is interpolated on a linear basis.
Compensation expense for the market-based component of the PSU awards is recognized on a straight-line basis over the vesting period based on the fair value determined by the Monte Carlo simulation and, except in cases of employee forfeiture, cannot be reversed regardless of performance. There was no impact to compensation expense as a result of the Xerox Corporation Board’s approval to modify the 2018 TSR metric to a one-year performance period (2018) and a two-year time-based requirement (2019 and 2020).
Xerox 2021 Annual Report 140
Stock Options
The Xerox Corporation Board approved the granting of SOs as part of the 2018 plan design. Compensation expense associated with SOs is based upon the grant date fair value determined by utilizing the Black-Scholes (BS) option-pricing model and is recognized on a straight-line basis over the vesting period, based on management's estimate of the number of SOs expected to vest. The 2018 SOs have a contractual term of 10 years from the date of grant and vest as follows: 25% after one year of service, 25% after two years of service, and 50% after three years of service from the date of grant.
Xerox Holdings weighted average assumptions used in the BS option-pricing model relative to SO awards were as follows: | | | | | | | | |
| | 2018 Award |
Expected term(1) | | 6.13 years |
Expected volatility(2) | | 27.25 | % |
Expected dividend yield(3) | | 3.25 | % |
Risk-free interest rate(4) | | 2.63 | % |
Weighted average fair value(5) | | $5.71 |
____________
(1)Since these SO grants were effectively part of a new program, the expected term was calculated using the "Simplified Method” under the SEC guidance based on the SOs vesting schedule and contractual term. We did not have sufficient historical exercise data to provide a reasonable basis to estimate an expected term.
(2)The expected volatility was calculated based on a combination of term-matched historical volatility and implied volatility from traded options.
(3)The dividend yield was calculated as the expected quarterly dividend divided by our three-month average stock price as of the grant date.
(4)The risk-free interest rate was based on the zero-coupon U.S. Treasury yield curve with a maturity matched to the expected term of the SOs.
(5)The weighted average of fair values used to record compensation expense as determined by the BS option-pricing model.
Note: Management’s estimate of the number of shares expected to vest at the time of grant reflects an estimate for forfeitures based on our historical forfeiture rate to date. Should actual forfeitures differ from management’s estimate, the activity will be reflected in a subsequent period. In addition, RSUs, PSUs and SOs awarded to employees who are retirement-eligible at the date of grant, become retirement-eligible during the vesting period, or are terminated not-for-cause (e.g. as part of a restructuring initiative), vest based on service provided from the date of grant to the date of separation.
Xerox 2021 Annual Report 141
Summary of Stock-based Compensation Activity
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2021 | | 2020 | | 2019 |
| | Shares | | Weighted Average Grant Date Fair Value | | Shares | | Weighted Average Grant Date Fair Value(1) | | Shares | | Weighted Average Grant Date Fair Value(1) |
Restricted Stock Units (2) | | | | | | | | | | | | |
| Outstanding at January 1 | | 3,187 | | | $ | 26.48 | | | 2,845 | | | $ | 26.87 | | | 3,559 | | | $ | 29.51 | |
| Granted | | 1,513 | | | 23.37 | | | 2,028 | | | 27.85 | | | 1,366 | | | 23.22 | |
| Vested | | (1,327) | | | 26.07 | | | (1,473) | | | 28.85 | | | (1,666) | | | 29.28 | |
| Forfeited | | (212) | | | 25.06 | | | (213) | | | 28.39 | | | (414) | | | 27.85 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Outstanding at December 31 | | 3,161 | | | 25.26 | | | 3,187 | | | 26.48 | | | 2,845 | | | 26.87 | |
| Performance Shares | | | | | | | | | | | | |
| Outstanding at January 1 | | 2,425 | | | $ | 26.67 | | | 2,830 | | | $ | 24.99 | | | 2,462 | | | $ | 29.83 | |
Granted(3) | | 1,195 | | | 24.67 | | | 901 | | | 37.59 | | | 1,433 | | | 19.46 | |
| Vested | | (672) | | | 28.08 | | | (993) | | | 31.94 | | | (633) | | | 29.56 | |
| Forfeited/Expired | | (130) | | | 26.92 | | | (313) | | | 26.22 | | | (432) | | | 27.50 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Outstanding at December 31 | | 2,818 | | | 25.47 | | | 2,425 | | | 26.67 | | | 2,830 | | | 24.99 | |
| Stock Options | | | | | | | | | | | | |
| Outstanding at January 1 | | 799 | | | $ | 27.81 | | | 861 | | | $ | 27.83 | | | 1,022 | | | $ | 27.84 | |
| Granted | | — | | | — | | | — | | | — | | | — | | | — | |
| Forfeited/Expired | | (187) | | | 27.97 | | | (60) | | | 27.98 | | | (92) | | | 27.92 | |
| Exercised | | — | | | — | | | (2) | | | 27.98 | | | (69) | | | 27.98 | |
| | | | | | | | | | | | |
| Outstanding at December 31 | | 612 | | | 27.77 | | | 799 | | | 27.81 | | | 861 | | | 27.83 | |
| Exercisable at December 31 | | 612 | | | 27.77 | | | 470 | | | 27.84 | | | 233 | | | 27.83 | |
____________
(1)Weighted average exercise price for stock options.
(2)Includes a 2018 Restricted Stock Award (RSA) grant of 351 shares with a corresponding grant date fair value of $28.51, which vested in 2019.
(3)Includes 60 shares associated with the over-performance of our 2018 PSU grant.
Unrecognized compensation cost related to non-vested stock-based awards at December 31, 2021 was as follows: | | | | | | | | | | | | | | |
| Awards | | Unrecognized Compensation | | Remaining Weighted-Average Vesting Period (Years) |
| Restricted Stock Units | | $ | 40 | | | 1.47 |
| Performance Shares | | 13 | | | 1.7 |
| | | | |
| Total | | $ | 53 | | | |
The aggregate intrinsic value of outstanding stock-based awards was as follows: | | | | | | | | |
| Awards | | December 31, 2021 |
| Restricted Stock Units | | $ | 72 | |
| Performance Shares | | 64 | |
Stock Options(1) | | — | |
____________ (1)Strike price greater than Xerox Holdings Corporation Stock price at December 31, 2021, therefore, intrinsic value is considered to be $0.
The intrinsic value and actual tax benefit realized for all vested and exercised stock-based awards was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2021 | | December 31, 2020 | | December 31, 2019 |
| Awards | | Total Intrinsic Value | | Cash Received | | Tax Benefit | | Total Intrinsic Value | | Cash Received | | Tax Benefit | | Total Intrinsic Value(1) | | Cash Received | | Tax Benefit |
| Restricted Stock Units | | $ | 30 | | | $ | — | | | $ | 5 | | | $ | 33 | | | $ | — | | | $ | 5 | | | $ | 55 | | | $ | — | | | $ | 11 | |
| Performance Share Units | | 17 | | | — | | | 2 | | | 18 | | | — | | | 4 | | | 23 | | | — | | | 6 | |
| Stock Options | | — | | | — | | | — | | | — | | | — | | | — | | | 1 | | | 2 | | | — | |
____________
(1)RSUs include a RSA grant of 351 shares, which vested in 2019.
Xerox 2021 Annual Report 142
Note 25 – Other Comprehensive Income (Loss)
In 2019, as a result of the sale of our investment in Fuji Xerox, we reclassified out of Accumulated other comprehensive loss and into earnings $165 of accumulated translation adjustments and defined benefit plan losses related to Fuji Xerox. The reclassified amounts are included in the gain recognized on the Sales. Refer to Note 6 - Divestitures for additional information regarding these Sales and the associated gain recognized.
Other Comprehensive Income (Loss) is comprised of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | | 2021 | | 2020 | | 2019 |
| | Pre-tax | | Net of Tax | | Pre-tax | | Net of Tax | | Pre-tax | | Net of Tax |
| Translation Adjustments (Losses) Gains | | | | | | | | | | | | |
| Aggregates adjustment in period | | $ | (145) | | | $ | (141) | | | $ | 238 | | | $ | 241 | | | $ | 53 | | | $ | 45 | |
| Divestiture - reclassification | | — | | | — | | | — | | | — | | | 17 | | | 17 | |
| Net Translation Adjustments (Losses) Gains | | (145) | | | (141) | | | 238 | | | 241 | | | 70 | | | 62 | |
| | | | | | | | | | | | |
| Unrealized Gains (Losses) | | | | | | | | | | | | |
| Changes in fair value of cash flow hedges (losses) gains | | (12) | | | (9) | | | 4 | | | 3 | | | 2 | | | 1 | |
Changes in cash flow hedges reclassed to earnings(1) | | 7 | | | 5 | | | 1 | | | 1 | | | (9) | | | (7) | |
| | | | | | | | | | | | |
| Net Unrealized (Losses) Gains | | (5) | | | (4) | | | 5 | | | 4 | | | (7) | | | (6) | |
| | | | | | | | | | | | |
| Defined Benefit Plans Gains (Losses) | | | | | | | | | | | | |
| Net actuarial/prior service gains (losses) | | 537 | | | 409 | | | 117 | | | 86 | | | (275) | | | (202) | |
Prior service amortization/curtailment(2) | | (72) | | | (54) | | | (80) | | | (60) | | | (81) | | | (61) | |
Actuarial loss amortization/settlement(2) | | 132 | | | 99 | | | 138 | | | 104 | | | 156 | | | 118 | |
Fuji Xerox changes in defined benefit plans, net(3) | | — | | | — | | | — | | | — | | | 8 | | | 8 | |
Other (losses) gains(4) | | 35 | | | 35 | | | (63) | | | (61) | | | (21) | | | (21) | |
| Divestiture - reclassification | | — | | | — | | | — | | | — | | | 148 | | | 148 | |
| Changes in Defined Benefit Plans Gains (Losses) | | 632 | | | 489 | | | 112 | | | 69 | | | (65) | | | (10) | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Other Comprehensive Income (Loss) Attributable to Xerox Holdings/Xerox | | $ | 482 | | | $ | 344 | | | $ | 355 | | | $ | 314 | | | $ | (2) | | | $ | 46 | |
_____________
(1)Reclassified to Cost of sales - refer to Note 17 - Financial Instruments for additional information regarding our cash flow hedges.
(2)Reclassified to Total Net Periodic Benefit Cost - refer to Note 19 - Employee Benefit Plans for additional information.
(3)Represents our share of Fuji Xerox's benefit plan changes.
(4)Primarily represents currency impact on cumulative amount of benefit plan net actuarial losses and prior service credits in AOCL.
Accumulated Other Comprehensive Loss (AOCL)
AOCL is comprised of the following:
| | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 | | 2019 |
| Cumulative translation adjustments | | $ | (1,861) | | | $ | (1,720) | | | $ | (1,961) | |
| Other unrealized (losses) gains, net | | (2) | | | 2 | | | (2) | |
| Benefit plans net actuarial losses and prior service credits | | (1,125) | | | (1,614) | | | (1,683) | |
| Total Accumulated Other Comprehensive Loss Attributable to Xerox Holdings/Xerox | | $ | (2,988) | | | $ | (3,332) | | | $ | (3,646) | |
We utilize the aggregate portfolio approach for releasing disproportionate income tax effects from AOCL.
Xerox 2021 Annual Report 143
Note 26 – (Loss) Earnings per Share
The following table sets forth the computation of basic and diluted earnings per share of Xerox Holdings Corporation's Common stock (shares in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2021 | | 2020 | | 2019 |
| Basic (Loss) Earnings per Share: | | | | | | |
| Net (Loss) Income from continuing operations attributable to Xerox Holdings | | $ | (455) | | | $ | 192 | | | $ | 648 | |
| Accrued dividends on preferred stock | | (14) | | | (14) | | | (14) | |
| Adjusted Net (Loss) income from continuing operations available to common shareholders | | (469) | | | 178 | | | 634 | |
| Income from discontinued operations attributable to Xerox Holdings, net of tax | | — | | | — | | | 705 | |
| Adjusted Net (Loss) income available to common shareholders | | $ | (469) | | | $ | 178 | | | $ | 1,339 | |
| Weighted average common shares outstanding | | 183,168 | | | 208,983 | | | 221,969 | |
| Basic (Loss) Earnings per Share: | | | | | | |
| Continuing operations | | $ | (2.56) | | | $ | 0.85 | | | $ | 2.86 | |
| Discontinued operations | | — | | | — | | | 3.17 | |
| Basic (Loss) Earnings per Share | | $ | (2.56) | | | $ | 0.85 | | | $ | 6.03 | |
| | | | | | |
| Diluted (Loss) Earnings per Share: | | | | | | |
| Net (Loss) Income from continuing operations attributable to Xerox Holdings | | $ | (455) | | | $ | 192 | | | $ | 648 | |
| Accrued dividends on preferred stock | | (14) | | | (14) | | | — | |
| | | | | | |
| Adjusted Net (Loss) income from continuing operations available to common shareholders | | (469) | | | 178 | | | 648 | |
| Income from discontinued operations attributable to Xerox Holdings, net of tax | | — | | | — | | | 705 | |
| Adjusted Net (Loss) income available to common shareholders | | $ | (469) | | | $ | 178 | | | $ | 1,353 | |
| Weighted average common shares outstanding | | 183,168 | | | 208,983 | | | 221,969 | |
| Common shares issuable with respect to: | | | | | | |
| Stock options | | — | | | 15 | | | 55 | |
| Restricted stock and performance shares | | — | | | 2,439 | | | 4,403 | |
| Convertible preferred stock | | — | | | — | | | 6,742 | |
| | | | | | |
| Adjusted Weighted average common shares outstanding | | 183,168 | | | 211,437 | | | 233,169 | |
| | | | | | |
| Diluted (Loss) Earnings per Share: | | | | | | |
| Continuing operations | | $ | (2.56) | | | $ | 0.84 | | | $ | 2.78 | |
| Discontinued operations | | — | | | — | | | 3.02 | |
| Diluted (Loss) Earnings per Share | | $ | (2.56) | | | $ | 0.84 | | | $ | 5.80 | |
| | | | | | |
| 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 (shares in thousands): |
| Stock options | | 612 | | | 784 | | | 805 | |
| Restricted stock and performance shares | | 5,979 | | | 3,173 | | | 1,272 | |
| Convertible preferred stock | | 6,742 | | | 6,742 | | | — | |
| | | | | | |
| Total Anti-Dilutive Securities | | 13,333 | | | 10,699 | | | 2,077 | |
| | | | | | |
| Dividends per Common Share | | $ | 1.00 | | | $ | 1.00 | | | $ | 1.00 | |
Xerox 2021 Annual Report 144
Note 27 – Subsequent Events
Secured Borrowings
In January 2022, we entered into a secured loan agreement with financial institutions where we sold $789 of U.S. based finance receivables to an SPE. The purchase by the SPE was funded through a $668 amortizing secured loan to the SPE from the financial institutions. The SPE is fully consolidated in our financial statements. The secured loan was an amendment of the December 2020 secured borrowing, which had a remaining balance of $248, and we received the incremental net cash. The transaction was accounted for as an extinguishment of debt and the issuance of new debt and associated collateral.
The new loan has a variable interest rate based on the financial institutions' cost of funds plus a spread (initial rate of 1.40%) and an expected life of approximately 2.5 years, with half of the loan projected to be repaid within the first year based on collections of the underlying portfolio of receivables.
Acquisition of Powerland
In February 2022, Xerox acquired Powerland, a leading IT services provider in Canada for approximately $60 (CAD 76 million), which includes certain holdbacks and payment of assumed tax liabilities. The acquisition also includes contingent consideration up to approximately $22 (CAD 28 million) based on future performance of the acquisition over the next two years. The acquisition strengthens Xerox’s IT services offerings in North America, which include cloud, cyber security, end user computing and managed services. We are currently assessing the purchase price allocation but expect the majority to be allocated to Intangible assets and Goodwill.
Xerox 2021 Annual Report 145