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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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(Mark One)
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| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended: December 31, 20192021
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| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from: ______ to: _______
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XEROX HOLDINGS CORPORATION
XEROX CORPORATION
(Exact Name of Registrant as specified in its charter)
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| New York | 001-39013 | 83-3933743 |
| New York | 001-04471 | 16-0468020 |
(State (State or other jurisdiction of incorporation or organization) | (Commission File Number) | (IRS (IRS Employer
Identification No.) |
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| P.O. Box 4505, 201 Merritt 7 Norwalk, Connecticut 06851-1056 | |
| (Address of principal executive offices and Zip Code) | |
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(203) 968-3000203-849-5216 |
| (Registrant's telephone number, including area code) |
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| Securities registered pursuant to Section 12(b) of the Act: |
| Xerox Holdings Corporation | | |
| Common Stock, $1 par value | XRX | New York Stock ExchangeNasdaq Global Select Market |
| Title of each class | Trading Symbol | Name of each exchange on which registered |
Securities registered pursuant to Section 12(g) of the Act:
None
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
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| Xerox Holdings Corporation | Yes | ☒ | No ☐ | | Xerox Corporation | Yes | ☒ | No ☐ |
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
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| Xerox Holdings Corporation | Yes ☐ | No | ☒ | | Xerox Corporation | Yes ☐ | No | ☒ |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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| Xerox Holdings Corporation | Yes | ☒ | No ☐ | | Xerox Corporation | Yes | ☒ | No ☐ |
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
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| Xerox Holdings Corporation | Yes | ☒ | No ☐ | | Xerox Corporation | Yes | ☒ | No ☐ |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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| Xerox Holdings Corporation | | | Xerox Corporation | |
| Large accelerated filer | ☒ | | Large accelerated filer | ☐ |
| Accelerated filer | ☐ | | Accelerated filer | ☐ |
| Non-accelerated filer | ☐ | | Non-accelerated filer | ☒ |
| Smaller reporting company | ☐ | | Smaller reporting company | ☐ |
| Emerging growth company | ☐ | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
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| Xerox Holdings Corporation | ☐ | | Xerox Corporation | ☐ |
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. | | | | | | | | | | | | | | |
| Xerox Holdings Corporation | ☒ | | Xerox Corporation | ☒ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
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| Xerox Holdings Corporation | Yes ☐ | No | ☒ | | Xerox Corporation | Yes ☐ | No | ☒ |
The aggregate market value of the voting stock of the registrant held by non-affiliates as of June 30, 20192021 was $7,818,052,585.$4,279,321,992.
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date:
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| Class | | Outstanding at January 31, 20202022 |
| Xerox Holdings Corporation Common Stock, $1 par value | | 212,789,134156,354,571 |
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following document are incorporated herein by reference:
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| Document | | Part of Form 10-K in which Incorporated |
Xerox Holdings Corporation Notice of 20202022 Annual Meeting of Shareholders and Proxy Statement (to be filed no later than 120 days after the close of the fiscal year covered by this report on Form 10-K) | | III |
Cautionary Statement Regarding Forward-Looking Statements
This document, and other written or oral statements made from time to time by management contain “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. The words “anticipate”, “believe”, “estimate”, “expect”, “intend”, “will”, “should”, “targeting”, “projecting”, “driving” and similar expressions, as they relate to us, our performance and/or our technology, are intended to identify forward-looking statements. These statements reflect management’s current beliefs, assumptions and expectations and are subject to a number of factors that may cause actual results to differ materially.
Such factors include but are not limited to: the effects pandemics, such as the COVID-19 pandemic, on our and our customers' businesses and the duration and extent to which this will impact our future results of operations and overall financial performance; our ability to address our business challenges in order to reverse revenue declines, reduce costs and increase productivity so that we can invest in and grow our business; our ability to attract and retain key personnel; changes in economic and political conditions, trade protection measures, licensing requirements and tax laws in the United States and in the foreign countries in which we do business; the imposition of new or incremental trade protection measures such as tariffs and import or export restrictions; changes in foreign currency exchange rates; our ability to successfully develop new products, technologies and service offerings and to protect our intellectual property rights; reliance on third parties, including subcontractors, for manufacturing of products and provision of services and the shared service arrangements entered into by us as part of Project Own It; our ability to attract and retain key personnel; the risk that multi-year contracts with governmental entitiesconfidential and/or individually identifiable information of ours, our customers, clients and employees could be terminated priorinadvertently disclosed or disclosed as a result of a breach of our security systems due to the endcyber attacks or other intentional acts or that cyberattacks could result in a shutdown of the contract term and that civil or criminal penalties and administrative sanctions could be imposed on us if we fail to comply with the terms of such contracts and applicable law;our systems; the risk that partners, subcontractors and software vendors will not perform in a timely, quality manner; actions of competitors and our ability to promptly and effectively react to changing technologies and customer expectations; our ability to obtain adequate pricing for our products and services and to maintain and improve cost efficiency of operations, including savings from restructuring actions; the risk that confidential and/or individually identifiable information of ours, our customers, clients and employees could be inadvertently disclosed or disclosed as a result of a breach of our security systems due to cyber attacks or other intentional acts; reliance on third parties, including subcontractors, for manufacturing of products and provision of services; the exit of the United Kingdom from the European Union;transformation actions; our ability to manage changes in the printing environment like the decline in the volume of printed pages and expandextension of equipment placements; changes in economic and political conditions, trade protection measures, licensing requirements and tax laws in the United States and in the foreign countries in which we do business; the risk that multi-year contracts with governmental entities could be terminated prior to the end of the contract term and that civil or criminal penalties and administrative sanctions could be imposed on us if we fail to comply with the terms of such contracts and applicable law; interest rates, cost of borrowing and access to credit markets; the imposition of new or incremental trade protection measures such as tariffs and import or export restrictions; funding requirements associated with our employee pension and retiree health benefit plans; changes in foreign currency exchange rates; the risk that our operations and products may not comply with applicable worldwide regulatory requirements, particularly environmental regulations and directives and anti-corruption laws; the outcome of litigation and regulatory proceedings to which we may be a party; and any impacts resulting from the restructuring of our relationship with Fujifilm Holdings Corporation; the shared services arrangements entered into by us as part of Project Own It; the ultimate outcome of any possible transaction between Xerox Holdings Corporation (Xerox) and HP Inc. (HP), including the possibility that the parties will not agree to pursue a business combination transaction or that the terms of any definitive agreement will be materially different from those proposed; uncertainties as to whether HP will cooperate with Xerox regarding the proposed transaction; the ultimate result should Xerox determine to commence a proxy contest for election of directors to HP’s board of directors; Xerox’s ability to consummate the proposed transaction with HP; the conditions to the completion of the proposed transaction, including the receipt of any required shareholder approvals and any required regulatory approvals; Xerox’s ability to finance the proposed transaction with HP; Xerox’s indebtedness, including the substantial indebtedness Xerox expects to incur in connection with the proposed transaction with HP and the need to generate sufficient cash flows to service and repay such debt; the possibility that Xerox may be unable to achieve expected synergies and operating efficiencies within the expected time-frames or at all and to successfully integrate HP’s operations with those of Xerox; that such integration may be more difficult, time-consuming or costly than expected; that operating costs, customer loss and business disruption (including, without limitation, difficulties in maintaining relationships with employees, customers or suppliers) may be greater than expected following the proposed transaction or the public announcement of the proposed transaction; the retention of certain key employees may be difficult; and general economic conditions that are less favorable than expected. Corporation.
Additional risks that may affect Xerox’s operations and other factors that are set forth in the “Risk Factors” section, the “Legal Proceedings” section, the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and other sections of this combined Annual Report on Form 10-K, as well as in Xerox Holdings Corporation’s and Xerox Holdings Corporation’s combined Quarterly Reports on Form 10-Q and Xerox Holdings Corporation’s and Xerox Corporation’s Current Reports on Form 8-K filed with the Securities and Exchange Commission. These forward-looking statements speak only as of the date of this document or as of the date to which they refer, and Xerox assumeswe assume no obligation to update any forward-looking statements as a result of new information or future events or developments, except as required by law.
Xerox Holdings Corporation
Xerox Corporation
Form 10-K
December 31, 20192021
Table of Contents
Part I
Item 1. Business
Recent Changes and Developments:
Company Reorganization
On March 6, 2019, the Xerox Board of Directors approved a reorganization (the Reorganization) of the Company's corporate structure into a holding company structure. The Reorganization was subject to the approval of shareholders, which was obtained at the annual shareholders meeting held May 21, 2019.
On July 31, 2019, the Reorganization was completed, pursuant to which Xerox Corporation (Xerox - the predecessor publicly held parent company) became a direct, wholly-owned subsidiary of Xerox Holdings Corporation (Xerox Holdings). The business operations, directors and executive officers of the Company did not change as a result of the Reorganization. In this Reorganization, shareholders of Xerox became shareholders of Xerox Holdings on a one-for-one basis; maintaining the same number of shares and ownership percentage as held in Xerox immediately prior to the Reorganization. Shares of Xerox Holdings common stock trade on the New York Stock Exchange under the ticker symbol XRX, formerly used by Xerox.
Refer to Note 1 - Basis of Presentation and Summary of Significant Accounting Policies, Corporate Reorganization, in the Consolidated Financial Statements, for additional information regarding the Reorganization.
Currently, Xerox Holdings' sole direct operating subsidiary is Xerox and therefore Xerox reflects the entirety of Xerox Holdings' operations. Accordingly, the following Item 1. Business description solely focuses on the operations of Xerox and is intended to help the reader understand Xerox's business and strategy. Throughout this section references are made to various notes in the Consolidated Financial Statements which appear in Part II, Item 8 of this Form 10-K, and the information contained in such notes is incorporated by reference into the places where such references are made.
Throughout the Business description that follows, references to “we,” “our,” the “Company,” and “Xerox” refer to Xerox Corporation and its subsidiaries. References to “Xerox Corporation” refer to the stand-alone company and do not include subsidiaries. References to “Xerox Holdings Corporation” refer to the stand-alone parent company and do not include its subsidiaries.
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 (FX) for approximately $2.2 billion as well as the sale of its indirect 51% partnership interest in Xerox International Partners (XIP) for approximately $23 million (collectively the Sales).
As a result of the Sales and the related strategic shift in our business, the historical financial results of our equity method investment in FX and our XIP business (which was consolidated) are reflected as a discontinued operation for the periods prior to the Sales, and their impact is excluded from continuing operations for all periods presented.
The arrangements with FX, whereby we purchase inventory from and sell inventory to FX, will continue after the Sales and, as a result of our 2006 Technology Agreement (Technology Agreement) with Fuji Xerox which remains in effect through March 2021, we will continue to receive royalty payments for FX’s use of our Xerox brand trademark, as well as rights to access our patent portfolio in exchange for access to their patent portfolio.
Refer to the Executive Overview section in Item 7 to this 2019 Form 10-K as well as Note 7 - Divestitures and Note 12 - Investments in Affiliates, at Equity, in the Consolidated Financial Statements, for additional information regarding the Sales and other transactions with FH and FX, and Note 27 - Subsequent Events, in the Consolidated Financial Statements, for additional information regarding our Technology Agreement with FX.
Prior to the completion of the sale, Fuji Xerox was an unconsolidated subsidiary of Xerox. Fuji Xerox develops, manufactures and distributes document processing products in Japan, China, Hong Kong, other areas of the Pacific Rim, Australia and New Zealand.
Xerox 2019 Annual Report 1
Business Overview
Xerox is a workplace technology company, building and integrating software and hardware for enterprises large and small. As customers seek to manage information across digital and physical platforms, we deliver a seamless, secure and sustainable experience. Whether inventing the copier, the Ethernet, the laser printer or more, Xerox has long defined the modern work experience and continues to do so with investments in artificial intelligence (AI), augmented reality (AR)-driven service experiences, robotic process automation (RPA), sensors and services for Internet of Things (IoT), digital packaging, 3-D3D printing and Clean Technologies (cleantech)(clean tech).
Geographically, our footprint spans approximately 160 countries and allows us to deliver our technology and solutions to customers of all sizes, regardless of complexity or number of customer locations.
Recent Changes and Developments
In 2021, we proceeded with the standing up of three new businesses: CareAR, Xerox StrategyFinancial Services (now known as FITTLE) and Innovation (PARC). We will proceed with these efforts in 2022 and provide additional information relating to these businesses during the year.
We areCareAR Holdings (CareAR) is Xerox’s newly formed software business and is comprised of: CareAR, Inc., an enterprise augmented reality business Xerox acquired in late 2020; DocuShare®, a cloud-based content management system; and XMPie, a multi-channel marketing software platform. Together, these software assets combine to provide an AR and AI-driven visual support platform that provides real-time access to expertise for service companies, field service employees and end-use customers.
As disclosed at our Investor Conference on February 23, 2022, we have rebranded our Xerox Financial Services (XFS) business, which is now known as FITTLE. The business has historically offered financing for direct channel customer purchases of Xerox equipment through bundled lease agreements and lease financing to end-user customers who purchase Xerox equipment through Xerox indirect dealer channels. At the outset of 2021, FITTLE changed its strategy to broaden its portfolio of assets financed to include numerous growth opportunities independent of Xerox equipment and services, such as the expansion of its dealer relationships to include an increasing number of non-Xerox dealers, leveraging its existing dealer relationships to finance a wider breadth of products and forming relationships with new vendors. Additionally, in 2021, FITTLE became the primary equipment lease provider for our XBS business.
Innovation (known as PARC Innovation, or PARC) includes the scientists and engineers located at our facilities in Palo Alto, Calif.; Webster, N.Y.; Cary, N.C., and Toronto, Canada. PARC is focused on growingcommercializing disruptive technology in the company’sfollowing areas: 3D Printing, IoT Sensors and clean tech.
In 2021, we also made progress toward our goal of monetizing and strategically diversifying our investments in innovation. In May, we announced the formation of Eloque, a joint venture with the government of Victoria, Australia to commercialize IoT sensor-based technology and services for monitoring the structural health of bridges. In September, we announced the formation of CareAR, in conjunction with a $10 million noncontrolling investment from digital workflow leader ServiceNow, Inc. We also began commercializing our 3D liquid metal printing technology through the sales and placements of ElemX 3D printing devices.
Strategy
The Company’s four strategic initiatives, summarized below, remain at the core of how we operate and deliver results for all stakeholders.
1.Optimize Operations for Simplicity
•Continuously improve operating efficiency, revenue flow-through and portfolio by increasingreturn on assets
•Invest in augmented reality, robotic process automation, business process outsourcing, analytics and system enhancements to drive efficiencies
2.Drive Revenue
•Drive increased adoption and utilization of CareAR
•Scale IT Services and robotic process automation in the small and medium-sized business (SMB) market
•Grow our positionfinancing business as a leader in the printer market while investing in key areasglobal financing solutions business
•Expand distribution of growth including software and services, as well as focused areas of innovation. Our core printer market is estimated at approximately $68 billion1, while our adjacent growth markets of Softwaredigital solutions among existing Print and Services are estimated at approximately $34 billionclients
Xerox 2021 Annual Report 1
. Under an enterprise-wide initiative called Project Own It, we are streamlining our operationsTable of Contents 3.Monetize Innovation
•Leverage $250 million corporate venture fund to bolster investment and increasing efficiencyinnovation
•Add value-added equity partners to accelerate development and speed to market while reducing costs. Project Own It objectives are designed to enable us to increase ourpenetration
•Embed PARC’s technology into new and existing businesses
4.Focus on cash flow and profits while reinvesting in our business and returningincreasing capital to shareholders.returns
We have four•Maximize annual free cash flow1 generation
•Deploy excess capital for strategic initiatives that we believe will position Xerox for success:
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1. | Optimize operations for simplicity |
Continuously improve operating model for greater efficiencyM&A
Optimize the supply chain and supplier competitiveness•Opportunistic share repurchases
Leverage digital technologies to make it easier to do business with Xerox
Enhance the customer experience_____________
Expand integrated solutions comprised of hardware, software and services
Focus on driving growth within the small and midsize businesses (SMB)
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3. | Re-energize the innovation engine |
Invest in growing market segments such as 3D printing, AI and IoT
Leverage software capability to launch new services
Monetize new innovations
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4. | Focus on cash flow and increasing capital returns |
Maximize(1)Free cash flow generation
Return at least 50 percent of freeis defined as Operating cash flow to shareholders (Operating cash flows from continuing operations less capital expenditures)expenditures.
FocusThe COVID-19 pandemic has accelerated the transformation of the workplace into a more flexible, hybrid environment. In response, we continue to invest in innovation to bolster and diversify our portfolio of offerings for hybrid workplace environments, including investments in Digital Services such as Capture & Content and Customer Engagement Services, which enable work to flow seamlessly between the office and home. During the year, we released Workflow Central, which extends the document workflow solutions available through our ConnectKey® multifunction printer interface to all devices, including PCs and smartphones, for easier access to workflow solutions on ROIthe go. Additionally, the hybrid work environment has increased SMB needs for IT Services, an area in which we are well positioned to succeed given our direct SMB sales presence. Organic and internal rateinorganic growth in digital and IT services, along with continued market share gains in equipment sales, are central to our objective of return to make capital allocation decisions
_______
(1) Market estimates are derived from third-party forecasts produced by major industry research firms.stabilizing and growing our Print and Services business for the long-term.
Optimize Operations for Simplicity
Through Project Own It is Xerox’s enterprise-wide initiative to simplify operations, drive continuous improvement and free up capital to reinvest in the business. Through this initiative, we have delivered approximately $1$1.8 billion of gross savings during the 1842 month-period ending December 31, 2019 (including $6402021. We exceeded our gross cost savings target of $375 million of savings during fiscal year 2019), consistent with our expectations.for Project Own It in 2021. We expect to deliver approximately $450$300 million of gross cost savings in 2020, and a total of $1.5 billion for the full 3-year program ending in 2021. We expect savings2022. Savings generated by Project Own It to continue to support the expansion of our margins while allowingwill enable us to invest in our operations, targeted adjacencies and innovation focus areas of the business that willand ultimately help us improve our long-term revenue trajectory.
Drive Revenue
We are a leader in our industry and have a strong, and valuable global brand. We have a three-year revenueOur roadmap, that was outlined in 2019 to deliver flat year-over-year revenue in 2021. This roadmapsummarized below, focuses on five key areas to drivegrowing revenue improvement, including:by increasing Xerox’s leadership position in the print market while expanding into targeted adjacent and new markets:
Improve our core technology business by building•Gain share in Print. Building on our leadership positions in the market. WithinPrint is central to gaining market share. In the workplace, we continue to differentiate Xerox multifunction printers with apps and integrated workflow solutions that speed digital transformation and support workers in and out of the office. In production, investments are targeted to push Xerox into growth areas such as embellishments and inkjet. We recently made improvements to FreeFlow®, our ConnectKey technology and productivity apps transform Xerox multi-function printers (MFPs) into workplace assistants that help users automate time-consuming processes. Withinsoftware offering for the production print market which helps automate large and complex print workflows. We gained market share in the last five consecutive quarters and are number one in Office and Production Print and Managed Print Services.
•Expand penetration of Managed and Digital services. Managed and Digital services leverage the full Xerox is unique in being able to pair its industry-leading presses with its abilityportfolio to offer softwarehorizontal and vertical offerings that takesgrow our share of our client's IT spend and expand the Company's customer base. Increasingly, our Managed and Digital solutions offerings are targeting opportunities to help clients fromdigitally transform their document creationworkflows and manage the evolving nature of hybrid workplace formats. Our direct relationships with large enterprises, governments and SMB provide us the opportunity to distribution.expand our share of our clients' spend with a broad breadth of services that are supported by leading levels of security.
Xerox 2019 Annual Report •2
Expand our services and software business by building on our leadershipCareAR’s AR-driven service experience platform is in the Managed Printearly stages of customer adoption. To date, client interest and product trials have been positive, and we are seeing traction in the conversion of trials to subscriptions. We are investing in CareAR’s product, people and distribution partners and expect our refined go-to-market approach to drive significant growth in 2022.
•Scale IT Services (MPS) market to deliver more intelligent workplace solutions and digital services targeted at specific industry needs, and by growing our software business with a focus on personalization and content management software solutions.
Capitalize on the opportunity in the SMB market by increasing ourmarket. Ongoing investments in indirect market channels, and in our Xerox Business Solutions (XBS) and similar European sales channels.channels position Xerox to grow in the SMB market, which accounts for the majority of our business. We are expanding our IT Services business geographically and with enhanced capabilities to support growth in this market, including an expansion of our offerings to include cyber security, RPA and other digital solutions.
Transform the customer experience by buildingXerox 2021 Annual Report 2
•Grow FITTLE as a digital experienceglobal financing solutions business. As a newly stood up business, FITTLE will be charged with expanding its book of lease receivables beyond Xerox and enhancing our e-commerce sales platforms.
Drive innovation and new growth businesses by increasing focus and investment in our four innovation programs: digital packagingbeyond print and print AI workflow assistantsservices. FITTLE’s long-term strategy for knowledge workers,growth includes an expansion of dealer relationships, broadening its base of business beyond standard office equipment and signing direct financing arrangements with equipment vendors.
•Commercialize research at PARC. Since 2019, PARC’s mandate has been to advance its research efforts through to the commercialization stage. In that time, PARC's most substantially commercialized technology has been its Eloque IoT bridge sensor platform and its 3D printingprint technology through sales of ElemX printers. We expect both Eloque and digital manufacturing,3D to grow revenues rapidly in future years. PARC’s clean tech efforts address a large total addressable market (TAM), and our expectation is that this technology will reach commercialization within the next few years.
Monetize Innovation
In 2021, we delivered on our commitment to monetize innovation by commercializing offerings in 3D print and IoT sensors. For 3D print, we began placing and selling ElemX printers. For industrial IoT sensors and services, we deployed our sensor technology across bridges in Victoria, Australia and have signed orders to significantly expand the number of bridges with our sensor technology in 2022. We are also in discussions with select European countries and multiple U.S. states to deploy pilots in early 2022. To further monetize our innovation and develop disruptive offerings, PARC-developed technologies in AI and AR are being integrated into CareAR’s product roadmaps and other parts of our portfolio.
We added equity partners to accelerate the development and market penetration of certain commercial offerings, including: CareAR, with ServiceNow’s $10 million equity investment; and our IoT bridge sensor technology, through the formation of Eloque. In both cases, our investment partners possess specific domain expertise that can drive further development and adoption of our commercialized innovations. We will look to structure more such investments across our portfolio of innovations as part of the commercialization strategy for IoT, and cleantech.each.
Re-energize the Innovation Engine
In 2021, Xerox has long defined the workplace experience and we are continuingestablished a $250 million corporate venture capital fund to invest in keystartups and early and mid-stage growth companies aligned with the Company’s innovation focus areas and targeted adjacencies. The corporate venture capital fund further enhances the Company’s existing innovation ecosystem and drives growth and financial returns through investment, commercial partnerships and co-development of technology that position usnew technologies. Xerox Ventures made investments totaling approximately $8 million in 2021, and plans to do so for decadesdeploy the remainder of its $250 million of planned investment over the next one to come. In addition to investing in our core printing technology, we also are investing in key adjacencies that include digital packaging and print, AI workflow assistants for knowledge workers, 3D printing and digital manufacturing, sensors and services for IoT, and cleantech. We also see opportunity in expanding our core into areas such as workflow automation, IT services, customized communication and security technologies.
We expect our investments in innovation for our core and adjacent growth markets will deliver incremental value for our customers and drive profitable revenue growth for our business.
Our innovation goals are supported by cross disciplinary research programs in our different research centers. Palo Alto Research Center (PARC), the most prominent of these centers, is a wholly-owned subsidiary of Xerox located in Silicon Valley, California. It provides our commercial and government clients with R&D and open innovation services. PARC scientists have deep technological expertise in areas that we consider fundamental to bring high-impact innovations to our customers and the world; such areas include artificial intelligence, intelligent sensing, computer vision, printed electronics, energy and cleantech, and digital design and manufacturing.five years.
Refer to the Research, Development and Engineering Expenses (RD&E) section in Item 7 toof this 2019combined Form 10-K as well as Note 1 - Basis of Presentation and Summary of Significant Accounting Policies in the Consolidated Financial Statements for additional information regarding RD&E spending.
Focus on Cash Flow and Increasing Capital Returns
Our business is based on a model where a large portion of revenues are generated by multi-year contractual arrangements, with approximately 7580 percent coming from post-salepost sale revenue, our most profitable revenue stream. Additionally, there is low annual capital expenditures (less than 21 percent of revenues) are required to support our current business model. These factors result in stable gross margins and operating margins as well as strong and stablecontribute to our ability to generate positive cash flow generation.flow.
We will deploy our substantial cash flow to drive shareholder returns through:
•A commitment to return at least 50 percent of our free cash flow (Operating(defined as Operating cash flows from continuing operations less capital expenditures) to shareholders through a combination of dividends and share repurchases; and
•Selective pursuit of acquisitions in targeted growth areas.
We target to manage our core debt (debt excluding financing related debt) to under two times expected annual free cash flow.Acquisitions and Investments
Acquisitions
Our strong balance sheetWe believe our current capital structure and positive cash flow generation allow us to pursue M&A opportunities to support our growth expectations. We maintain a broad M&A pipeline that includes targets within the print industry and adjacent markets. Our current acquisition strategy has been focused on further penetrating the SMB market throughIn 2021, Xerox completed three acquisitions of local area resellers and partners (including multi-brand dealers). including an office equipment dealer in Canada, a document solutions provider in the U.S. and an IT services business in the U.S. Additionally, we acquired the CraftAR and MagicLens businesses in support of CareAR.
During 2019, Xerox acquired Rabbit Office Automation2021 Annual Report 3
Joint Venture Formation
In 2021, Xerox and Heritage Business Systems, Inc., two multi-brand dealersthe Victorian Government (AU) (VicGov) announced that further our penetrationthey have partnered to launch Eloque, a venture to commercialize new technology that will remotely monitor the structural health of critical infrastructure assets, such as road and railway bridges. Under the terms of the SMB market. agreement, Xerox contributed cash, along with technology and intellectual property for a controlling interest in the entity, while VicGov contributed cash, along with technology and intellectual property for a noncontrolling interest in the entity.
ServiceNow, Inc. Investment in CareAR
In 2021, in connection with Xerox Holdings Corporation's announcement of the formation of the CareAR software business, ServiceNow, Inc. acquired a noncontrolling interest in CareAR Holdings LLC.
Further details about our acquisitions and investments can be found in Note 65 - Acquisitions and Investments, in the Consolidated Financial Statements.
In November 2019, Xerox proposed a business combination transaction with HP Inc. (HP). Further details regarding this proposal can be found within the Executive Overview in Item 7 - Management's Discussion and Analysis on Financial Condition and Results of Operations.
Xerox 2019 Annual Report 3
Segment Information
Our business is organized to ensure we focus on efficiently managing our operations andwhile serving theour customers and markets in which we operate. As previously noted, during 2021 we proceeded with the standing up of three new businesses: CareAR, FITTLE and Innovation (PARC). However, notwithstanding that effort, the operations and financial results for these units continued to be primarily managed by and reported in our “go-to-market” (GTM) sales channels and we did not have discrete and complete financial information for these new businesses. Accordingly, we continued to have one operating and reportable segment in 2021.
We maintain a geographic focus 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 recognize that we have one operating and reportable segment - the design, development and sale of printing technology and related solutions.
As part of our strategy, we integrate our capabilities across technology, software and services whichthat offer our customers the broadest solutions-enabled portfolio in the industry to address their needs of workflow simplification, security and productivity across their digital and physical document processes.
Revenues
We have a broad and diverse base of customers by both geography and industry, ranging from SMBs to printing production companies, governmental entities, educational institutions and Fortune 1000 corporations. Our business does not depend upon a single customer, or a few customers, the loss of which would have a material adverse effect on our business. Our business spans threefour primary offering areas: Xerox Services, Workplace Solutions, and Graphic Communications and Production Solutions,.
Xerox Services includes a continuum of solutions and services that helps our customers optimize their print and communications infrastructure, apply automation and simplification to maximize productivity, and ensure the highest levels of security. Our primary offerings in this area are Intelligent Workplace Services (IWS) and a range of Digital Services that leverage our software capabilities in Workflow Automation, Personalization and Communication Software, Content Management Solutions, and Digitization Services. In 2019, Xerox was the only cloud-based MPS provider with FedRAMP authorization. FITTLE.
Xerox has the capability to support integration and document security on a global scale, which are critical factors for large enterprises.
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• | Intelligent Workplace Services (IWS), which transcends the traditional MPS offering, utilizes our portfolio of analytics, cloud, digitization and ConnectKey® technologies to help companies optimize their print infrastructure, secure their print environment and automate related business processes. We provide the most comprehensive portfolio of MPS services in the industry and are recognized as an industry leader by major analyst firms including IDC, Quocirca and Keypoint Intelligence-InfoTrends. Our IWS offering targets clients ranging from global enterprises to governmental entities and to small and medium-sized businesses, including those served via our channel partners.
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• | Digital Services enables the integration of Xerox technology, software and services to securely design and manage the digitization and workflow of our clients’ content. We utilize our domain expertise and technology to enable efficient and compliant business processing and communications in the demanding regulatory environments and markets of our Healthcare, Insurance, Public Sector and Retail clients. For healthcare, we enable healthcare organizations to provide an improved patient experience, from admission to discharge. For insurance, we help insurance organizations to connect numerous touch points across the client journey, from acquisition to onboarding. For public sector, we assist government agencies in improving the citizen experience, from public assistance to benefits. For retail, we enable retailers drive brand engagement and loyalty through an enhanced experience at every stage of the consumer experience, from point-of-sales to campaigns on demand.
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Workplace Solutions is made up of two strategic product groups, Entry and Mid-Range, much of which share common technology, manufacturingsolutions, apps and product platforms.ConnectKey® software. Workplace Solutions revenues include the sale of products and supplies,(captured primarily as equipment sales) as well as the supplies and associated technical service and financing of those products.products through FITTLE (captured as post sale revenue).
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• | •Entry comprises desktop monochrome and color printers and multifunction printers (MFPs) ranging from small personal devices to office workgroup printers and MFPs. We recently extended our ConnectKey® system of digital workflow applications to select entry devices. •Mid-Range are larger devices that have more features and can handle higher print volumes and larger paper sizes than entry devices. We are a leader in this area of the market and offer a wide range of MFPs, digital printing presses and light production devices, as well as solutions that deliver flexibility and advanced features. Entry comprises desktop monochrome and color printers and multifunction printers (MFPs) ranging from small personal devices to office workgroup printers and MFPs.
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• | Mid-Range are larger devices that have more features and can handle higher print volumes and larger paper sizes than entry devices. We are a leader in this area of the market and offer a wide range of MFPs, digital printing presses and light production devices, as well as solutions that deliver flexibility and advanced features.
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Graphic Communications and Production Solutions (High-End) are designed for customers in the graphic communications, in-plant and production print environments with high-volume printing requirements. Our broad portfolio of presses and solutions provides full-color, on-demand printing of a wide range of applications. Our xerographic presses provide high-speed, high-volume cut-sheet printing, ideal for publishing, and transactional printing, including variable data for personalized content and one-to-one marketing, to the highest quality of color and embellishment requirements. Our inkjet presses offer a broad range of roll fed, continuous feed printing technologies, including waterless inkjetcut-sheet press enables new applications in true high-definition resolution with high fusion ink, AI Powered image quality and aqueous inkjet for vivid color, and toner-based flash fusing for black and white.advanced productivity technologies. Our portfolio spans a variety of print
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speeds, image quality, feeding, finishing and media options. We are a worldwide leader in the cut-sheet color and monochrome production industry. Graphic Communications and Production Solutions revenues include the sale of products software and supplies,(captured primarily in equipment sales) as well as, software, supplies and the associated technical service and financing of those products.
In addition to our three primary offering areas described above, a smaller portion of our revenues comes from non-core streams including paper sales in our developing market countries, wide-format systems, licensing revenue, software and IT services.products (captured as post sale revenue). Our strategy includesFreeFlow® expanding our software business with a focus on personalization and communication software and content management solutions, and growing our IT services in the SMB. Personalization and Communications Software and Content Management Solutionsare XMPie, DocuShare and FreeFlow. XMPie is a robust personalization and communication software that can support the needs of omni-channel communications customers, from onboarding to retention. DocuShare is a content management platform that provides a better way to capture, store and share paper and digital content, either on-premise or in the cloud while automating time-consuming, document-heavy processes like accounts payable, HR onboarding, contract management and mortgage processing. In addition, we operate a network of centers that digitize and automate paper and digital workflows, enabling our customers to operate cost-efficiently in a fully-digitized environment with speed, quality and 24x7 availability. FreeFlowis a portfolio of software offerings that brings intelligent workflow
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automation and integration to the processing of high-end print jobs, from file preparation to final production, helping customers of all sizes address a wide range of business opportunities including automation, personalization and even electronic publishing.
Xerox Services includes a continuum of solutions and services that help our customers optimize their print and communications infrastructure, apply automation and simplification to maximize productivity, and ensure the highest levels of security. Xerox has the capability to support integration and document security on a global scale, which are critical factors for large enterprises. Our primary offerings in this area are Managed Print Services (MPS), Capture & Content Services (CCS) and Customer Engagement Services (CES) as well as IT Services. CCS and CES encompass a range of Digital Services that leverage our software capabilities in Workflow Automation, Personalization and Communication Software, Content Management Solutions, and Digitization Services.The COVID-19 pandemic shifted our customers’ focus toward secure, efficient and flexible solutions to operate in a hybrid work environment. As a result, we enhanced our focus on the development and promotion of offerings to help our customers accelerate their digital transformation.
•Managed Print Solutions (MPS) utilizes our portfolio of security, analytics, cloud, digitization and ConnectKey® technologies to help companies optimize their print infrastructure, secure their print environment and automate related business processes. We provide the most comprehensive portfolio of MPS services in the industry and are recognized as an industry leader by major analyst firms including IDC and Quocirca. Our MPS offering targets clients ranging from global enterprises to governmental entities to small and medium-sized businesses, including those served via our channel partners. This portfolio includes a suite of services to help clients manage hybrid workforces, including cost effective and secure printing devices along with apps and software tools that enable work from anywhere, cloud server-enabled fleet management, security and automation software and remote customer support. In 2021, we launched Workflow Central, which extends the document workflow solutions available through our ConnectKey® technologies to all devices, including PCs and smartphones, for easier access to workflow solutions in hybrid workplace environments.
•Capture & Content Services (CCS) enables content digitization and management, workflow automation and intelligent document processing and includes offerings such as Digital Mailroom, where we use scanning and capture technology combined with AI to extract printed and digital information into usable data that is routed into business workflows (such as accounts payable) or into archives, integrating with cloud-based content management systems such as our DocuShare® software.
•Customer Engagement Services (CES) enable the integration of Xerox technology, software and services to securely design and manage our clients’ personalization and customization of targeted communications. These services include Digital Hub and Cloud Printservices, a one-stop shop where customers can submit print jobs from anywhere and leverage our Web2Print portal with on and off-site printing networks to meet their printing or marketing collateral needs on demand. Our Customer Communications Management and Campaigns on Demand solutions help drive personalized and meaningful communications and touchpoints.
•IT Services provide our, provides SMB customers with cost efficient and secure solutions, to manage their IT needs including PC andend user computing devices, network infrastructure, communications technology, and network administration. Our services includea range of managed IT solutions, such as technology product support, professional engineering and commercial RPA.
FITTLE is a global financing solutions business and currently offers financing for direct channel customer purchases of Xerox equipment through bundled lease agreements, and lease financing to end-user customers who purchase Xerox equipment through our indirect channels.
In addition to our four primary offering areas described above, a smaller but growing portion of our revenues comes from non-core streams including paper sales in our developing market countries, wide-format systems, licensing revenue, as well as the following key focus areas for investment and growth:
•CareAR is Xerox’s newly formed software business and is comprised of: CareAR, an AR and AI-driven visual support software platform that provides real-time access to expertise for service companies, field service employees and end-user customers; DocuShare®, a content management software platform that provides a better way to capture, store and share paper and digital content, either on-premises or in the cloud while automating time-consuming, document-heavy processes like accounts payable, HR onboarding, contract management and on-server support.mortgage processing; and XMPie,a robust personalization and communication software platform that can support the needs of omni-channel communications customers, from onboarding to retention.
•PARC comprises the research efforts undertaken at our facilities located in Palo Alto, Calif.; Webster, N.Y.; Cary, N.C., and Toronto, Canada. PARC is focused on incubating, productizing and commercializing disruptive technology aligned with innovation focus areas such as 3D Printing, Sensors and Services for the IoT, AI and clean tech. Many of the technologies being researched are in early stages of development. Certain technologies, such as IoT sensors, 3D and various government-funded projects currently generate revenue.
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Geographic Information
Overall, approximately 40% of our revenue is generated by customers outside the U.S. Additional details can be found in Note 53 - Segment and Geographic Area Reporting in the Consolidated Financial Statements.
Patents, Trademarks and Licenses
In 2019,2021, Xerox and its subsidiaries were awarded 429314 U.S. utility and design patents. Under the terms of the Technology Agreement, with Fuji Xerox, which remains in effect through March 2021, we will continue to receive royalty payments for FX’s use of our Xerox brand trademark, as well as rights to access our patent portfolio in exchange for access to their patent portfolio. Including our research partner Fuji Xerox, we were awarded 974 U.S. utility patents during the period. Our patent portfolio evolves as new patents are awarded to us and as older patents expire. As of December 31, 2019,2021, Xerox held approximately 9,2747,930 U.S. designutility and utilitydesign patents. These patents expire at various dates up to 20 years or more from their original filing dates. While we believe that our portfolio of patents and applications has value, in general no single patent is essential to our business. In addition, any of our proprietary rights could be challenged, invalidated or circumvented, or may not provide significant competitive advantages.
We areIn 2021, we were party to multiple patent-licensingpatent-related agreements and, in athe majority of them, we licensed or assigned our patents to others in return for revenue and/or access to their patents or to further our business goals. Most patent licenses expire concurrently with the expiration of the last patent identified in the license.license or after a specified term of years. We were also party to a number of cross-licensing agreements with companies that also hold substantial patent portfolios. These agreements vary in subject matter, scope, compensation, significance and duration.
In the U.S., we own about 196approximately 191 U.S. trademarks, either registered or applied for. These trademarks have a perpetual life, subject to renewal every 10 years. We vigorously enforce and protect our trademarks.
Environmental, Social, and Governance (ESG)
At our core is a deep and long-lasting commitment to ESG, a pledge to inspire and support our people, conduct business ethically across the value chain and preserve our planet. This commitment stems from theour corporate values established over sixty years ago, which include: succeeding through satisfied customers; delivering quality and excellence in all we do; requiring a premium return on assets; using technology to develop market leaders; valuing and empowering our employees; and behaving responsibly as a corporate citizen.
We continue this legacy by turning investments in innovation into products and services that help our customers be more productive, profitable and sustainable. Driving efficiency in our business operations, smart investments in technologies that afford our customers added agility-personalization, automation and better workflow as part of our customer-centric approach, will underpin our corporate social responsibility efforts. We do this in our own operations, as well as in workplaces, communities and cities around the world. We recognize the world’s challenges such as climate change and human rights and understand the role we play.
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We are constantly thinking aboutfocused on how we can simplify work, deliver more personalized experiences and improve productivity through new technologies. We strive to connect the physical and digital worlds without adversely affecting the environment, human health and safety.
Our pledge to inspire and support our people, conduct business ethically and protect our planet remains at the core of everything we do. At Xerox, we believe in continuously improving, and we apply this mentality to ensuring we are always finding ways to improve the sustainability of our operations.
The Xerox 20192021 Corporate Social Responsibility (CSR) Report(available at www.xerox.com) describes our management approach forrelated to ESG. Xerox’sOur work aligns with the United Nations Sustainable Development Goals (SDGs), which provide a framework to end poverty, protect the planet and improve the lives and prospects of everyone, everywhere. To ensure we are responsive to all stakeholders, Xerox has also been reporting in accordance with the Sustainability Accounting Standards Board (SASB) and the Task Force on Climate Change Related Disclosures (TCFD). (The 2021 CSR Report, SASB report highlights include:and TCFD report are accessible at www.xerox.com/CSR. The content of our website is not incorporated by reference in this combined Form 10-K unless expressly noted.)
Environment
99.7%With climate change being one of suppliesthe defining issues of our time, we fast-tracked our net zero goal by 10 years to 2040 and consumables returnedintegrated climate change-related risks and opportunities into our Enterprise Risk Management. We are sharing our roadmap to reach net zero for the first time in our 2021 CSR Report. Our roadmap covers our full value chain and focuses on improving processes and energy efficiency as well as designing environmentally responsible products and clean technologies that extend beyond print. Our interim goal is to reduce our Scope 1 and Scope 2 GHG emissions at least 60% by customers at end-of-life were diverted from entering landfills. Instead, we remanufactured, reused, recycled, or provided2030, against the waste to suppliers who converted it intoCompany’s 2016 baseline. This is in line with the ambitious science-based global warming target, validated and approved by the Science Based Targets initiative (SBTi). Our GHG emissions are third-party validated in accordance with ISO 140064-3:2006 and are updated in our progress summary as new data becomes available.
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Xerox has long paired its technology with sustainability, influencing not just our industry but others. Serving as an energy source.
1 billion pages offset throughENERGY STAR Charter Partner, Xerox helped the PrintReleaf program.
U.S. Environmental Protection Agency (EPA) create its standards and still works with the agency today. Since 1993, more than 500 Xerox® products have achieved ENERGY STAR registration. In 2021, 100% of newly-launched,our eligible Xeroxnew products satisfiedhave achieved ENERGY STAR and EPEAT registration. ENERGY STAR requirements serve as the foundation for other eco-labels such as Electronic ProductProducts Environmental Assessment Tool (EPEAT®)(EPEAT) that is composed of criteria spanning corporate and EPA ENERGY STAR® eco-labels.product requirements. EPEAT product criteria combine comprehensive requirements for design, production, energy use, and recycling, with ongoing independent verification of manufacturer claims.
16%Circular economy initiatives remain a part of our business strategy. Our first commercial product in 1959, the Xerox 914, introduced electronics remanufacturing long before the term “circular economy” became popular. Our vision was to transform Xerox manufacturing, operations, offices and facilities into waste-free workplaces. We had this same vision for our clients’ workplaces: a world where electronics and supplies at the end of their useful life would come full circle to become raw materials for tomorrow’s technology. In this model, quality and performance are not compromised, precious natural resources are conserved, and waste becomes obsolete. Six decades later, we continue to demonstrate that a circular economy delivers environmental, economic and societal benefits. To meet this commitment, we have developed several collection and waste reduction in Greenhouse gas emissions from our operations usingprograms, while also designing technology to align with the circular economy’s key elements. The majority of spent toner cartridges and other consumables returned through Green World Alliance (GWA) are recycled, reused or remanufactured. We have established a 2016 baseline; moving us closer to ourproduct goal of 25% reduction by 2025.post-consumer recycled content in our eco-label eligible devices and have an intense effort underway for achievement in the short term.
Social
Worldwide employee matching gift program for any qualified non-profit.Our Employees
Worldwide Total Recordable Injuries (TRI) rateAs of December 31, 2021, we had approximately 23,300 employees; a reduction of approximately 1,800 (7.2%) employees since December 31, 2020. The reduction is a result of net attrition (attrition net of gross hires), of which a large portion is not expected to be back filled, as well as the impact from organizational changes. Approximately 11,900 employees were located in the U.S. and approximately 11,400 employees were located outside the U.S. We had approximately 11,800 employees or almost half of our employees engaged in providing services to customers (direct service and managed services) and approximately 2,900 engaged in direct sales.
Approximately 20% of our employees are represented by unions or similar organizations, such as worker’s councils, and are covered by collective bargaining agreements, with approximately 90% located outside the U.S. As of December 31, 2021, approximately 30% of our employees were women and 30% of our U.S. employees self-identified as diverse.
Employee Safety
Throughout the pandemic, our priority has been the health and safety of our employees, clients, partners and their families. We continue to monitor developments around the clock and utilize a 24/7 email box to keep the entire Xerox community safe while minimizing the impact on operations during this public emergency. This year, we expanded the use of the Xerox Team Availability App to track employee vaccination rates in the U.S. decreased 11%.and Canada. Employees in the U.S. are required to use the app to indicate whether or not they are vaccinated. Employees in Canada are asked to voluntarily disclose this information to aid decision-making.
Supplier spendStarting in May 2021, we ran an internal campaign to encourage employees to get vaccinated once they were able to do so. The campaign kicked off with suppliers representing small Tier I, minority, woman or veteran-owned businesses accounteda message from our CEO, which linked to an intranet feature with employee stories about why it’s important for 10%them to get vaccinated. These included both professional and personal anecdotes. To round out the campaign, we hosted a series of seven vaccination information sessions with independent medical doctors across multiple geographies and in three languages. The doctors provided helpful information and answered employees' questions.
The Xerox COVID-19 Response Team - comprised of representatives from Environmental, Health, Safety & Sustainability, Human Resources, Security, Facilities, Legal, Communications and more - meets several times a week. We closely follow government and public health organizations’ guidance. Our business continuity and pandemic preparedness plans contain the latest standards from industry best practices and our own experience to define requirements.
Given the variety of operations and activities performed by our employees both in our Xerox workplace and client accounts across the world, we have conducted hazard analysis and put in place control processes including exposure assessments/contract tracing, personal protective equipment, work-from-home measures, safety procedures and COVID-19 testing. These practices control transmission and maximize the safety of our total spend.employees
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and the clients we support. In 2021, Xerox’s Days Away from Work Case Injury Rate was .37, which was 8% better than the 2020 rate of .40, and better than the 2021 targeted rate of .49 by 24%. For 2022, Xerox has set the targeted Days Away From Work Injury Rate at .44.
Optimize Operations for Success
Under Project Own It, we have taken steps to ensure we have the right talent in place to support the evolving needs of our business. Steps taken include, but are not limited to:
•Realigning the workforce in support of the Company’s strategy;
•Right-sizing parts of the business based on award winningshifting customer needs; and
•Optimizing shared services.
In addition, we utilized government programs to furlough employees to protect both Xerox and our employees' financial wellness.
Diversity, Inclusion and Belonging
Diversity, inclusion and belonging (DIB) is an essential part of our culture and value system. For over half a century, Xerox has always strived to be a leader in this space and continues to be at the forefront of driving change within our Company and our communities. In 2020, we reaffirmed our commitment to DIB by developing a new roadmap to identify areas where we can have a bigger impact on employees and society. To support this, our roadmap and our actions during 2021 focuses on:
•Diverse Pipeline: Building a diverse pipeline and accelerating the careers of underrepresented talent within the organization.
•Partnership: Building relationships with external organizations to ensure that our incoming talent better reflects the markets and communities we serve. For example, we are working with AI vendors to increase the pool of women and diverse candidates for our job openings using their unique artificial intelligence algorithms.
•Culture Change: Reinforcing a Company-wide culture of belonging. In 2020, we held our first-ever global DIB virtual conference, hosted by our Employee Resources Groups (ERGs), which was open to all Xerox employees. The conference, which was also held in 2021, is an important milestone in our ongoing commitment to cultivating global and diverse teams across the Company.
•Community Outreach: Extending our reach into the communities that we serve. For example, in the U.S., we are partnering with A Better Chance (ABC) and the Thurgood Marshall College Fund Leadership Institute to help underrepresented and financially challenged youth pave a better career future. In the U.K., we partner with Black Young Professionals Network to mentor black professionals and provide career opportunities.
•Accountability: Measuring our progress against our ESG metrics and continuing to be transparent by utilizing our CSR Report to inform the public about our strategy and progress. We are confident that over time, our efforts will yield sustainable progress in this critical business challenge.
Talent Management and Workforce Development
Talent management and workforce development are critical for the future of Xerox and fueling business growth and innovation. We use high-impact practices and technology to drive global workforce capability and integrate learning with work. Our organization and talent planning processes include reviews with business leaders to build our talent pipeline. More broadly, Human Resources (HR) provides a forum for management to review the future needs of the organization, noting strengths, gaps and strategies to build strong teams for the next chapter at Xerox. The Company is also committed to accelerating the careers of high-potential, diverse employees and women along with identifying more diverse candidates for open roles. For example, we are currently working with the second cohort of our one-year, intensive development program, Vista, which is designed to accelerate and broaden our highest-potential, earlier-in-career professionals from all over the Company and the world. Our leaders embrace and support the Wilson Rule, named after Joseph Wilson, a former CEO of the Company, which requires that one out of every three final candidates for professional roles be diverse. Finally, we provide diversity training sessions to managers to reinforce the importance of a diverse workforce.
Global Learning Innovation
The COVID-19 pandemic has accelerated the way HR leaders and organizations must prepare for and anticipate the needs of the business, not just today, but in the near future, and most notably with regard to moving learning out of the live classroom.
Our Learning and Development (L&D) function has been using different forms of digital technology to train and reskill employees such as salespeople who are no longer able to be out in the field due to the ongoing COVID-19 pandemic. At the onset of the COVID-19 pandemic, our L&D function pivoted to a digital learning approach to train
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and reskill employees across the globe. Our employees have access to a global learning platform that includes hundreds of targeted online courses, virtual classroom events, simulations, job aids, and other learning and development resources. Learning topics include critical job-specific information and technical upskilling, management development and professional effectiveness, productivity tools for project management, client service, negotiations, technology solutions, ethics, diversity and inclusion, and information security.
As our business evolves, we will continue to leverage technology and identify new skills or capabilities required to ensure we remain competitive in the global market.
Total Rewards
Our success depends on attracting, retaining, and motivating a highly productive, global workforce. To achieve this, we take pride in offering our employees a comprehensive Total Rewards program that includes various compensation, benefits, and work-life programs. Our programs coupledare designed to achieve the following objectives:
•Drive shareholder value: support our business strategy and culture.
•Align with performance: incentivize the right behaviors – when the Company wins, our employees win.
•Support our talent strategy: attract, retain and motivate a productive workforce.
As with most global affinity groups.companies, our compensation and benefits vary based on employee eligibility, and local practices and regulations. We benchmark our programs to ensure we remain competitive with our peers and the markets we serve, and to maintain alignment with our short-term and long-term business goals.
Our compensation offerings include base pay and short-term and long-term incentive programs. Our short-term programs include: a Management Incentive Plan (MIP), designed to drive Xerox’s pay for performance culture and incentivize our leaders to help Xerox achieve sustainable growth; sales compensation programs to tightly align our sales force with business goals; and a Profit Share Plan (PSP), designed to give a broad population of our employees an opportunity to share in the organization’s success. A Long-Term Incentive (LTI) equity-based program reinforces alignment of our leaders and key talent with shareholders.
Our benefit offerings provide our employees with choice and flexibility to help them reach their health and financial goals. Our offerings include the following core programs: health care, wellness, retirement, paid time off, life and disability insurance, and access to voluntary benefits.
Philanthropy and Community Involvement
From our earliest days as a company, Xerox has demonstrated a steadfast commitment to corporate social responsibility. Our greatest goal is to facilitate employee-driven philanthropy. Together, Xerox and our employees are creating real impact and sustainable change for the greater good. In 2021, Xerox employees volunteered for approximately 10,900 hours and we have set our 2022 goal at 15,000 Xerox employee volunteer hours.
Our efforts are focused on four strategic areas to maximize change:
•Strong vibrant communities: Xerox invests in communities where our people and clients live and work, strengthening ties with our stakeholders and embedding Xerox into the fabric of communities around the world. We encourage our people to give back to the causes they believe in, by providing employees a day each year to volunteer at a cause of their choice. Xerox also offers a limited employee match to certain charitable organizations.
•Education and workforce preparedness: Xerox supports the role of education in society—colleges, universities, science, technology, engineering and math (STEM) education programs, and workforce development programs that prepare the next generation of leaders, inventors and scientists.
•Science and technology: Xerox invests in scientific research and partnerships to serve the long-term strategic interests of the Company and our world.
•Disaster relief: Xerox provides aid to our employees and their neighbors in crises during natural disasters.
Governance
All Xerox ESG Priorities 3rd party validated by BusinessThe Corporate Governance Committee of the Board of Directors has oversight for Social Responsibility (BSR).
100%ESG. The Committee reviews significant shareholder relations issues and environmental and CSR matters, ensuring that our actions align with our core values and citizenship priorities. The CSR Council, comprised of production suppliers required to adhere to Responsible Business Alliance (RBA) Code of Conduct.
Boardsenior executives who manage specific CSR topic areas, has centralized oversight of the Company’s management approach, including policies, goals, strategies and actions to drive progress. The primary mission of the CSR Council is to drive strategies with a client-centric impact, across Xerox globally, to advance our legacy of leadership in corporate social responsibility.citizenship. Actions taken must meet our stakeholders’ expectations, including customers, employees, investors, regulators and communities worldwide.
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Demonstrating our BOD's and executive staff's commitment to ESG:
•In 2021, we increased the diversity of our board of directors to 40%;
•Expanded the criteria for executives’ compensation to include ESG factors;
•Integrated climate change-related risks and opportunities into our Enterprise Risk Management.
Additionally, Xerox takes data protection very seriously. Adherence to our policies governing data protection is enforced through a combination of technical and manual safeguards over our systems and facilities, disciplinary actions against employees, audit rights and other contractual rights against our vendors. We are aligned with both the ISO 27000 Information Security Management System and the National Institute of Standards and Technology Cybersecurity Framework within Xerox, and many of our systems and data centers have been ISO 27000 certified by independent auditors.
Annual training regarding ethics, privacy, and security are required of all politicalour employees. Additional specialized training is required for certain roles and numerous training programs are available for employees to take on their own initiative. In addition, a variety of proprietary and leading industry security features are also used to protect Xerox® devices from malicious attacks. Xerox's robust security and education market solutions were recognized by KeyPoint Intelligence with the Buyers Lab (BLI) 2021-2022 PaceSetter Awards for Worldwide Document Imaging Security for Productions and Office, as well as for the Education Market in North America.
Material Government Regulations
Our business activities are worldwide and are subject to various federal, state, local, and foreign laws and our products and services are governed by a number of rules and regulations. Currently costs incurred to comply with these governmental regulations are not material to our capital expenditures, results of operations and competitive position. Although there is no assurance that existing or future government laws and regulations applicable to our operations, services or products will not have a material adverse effect on our capital expenditures, results of operations and competitive position, we do not currently anticipate material expenditures for government regulations. However, as a result of increased government focus in the U.S. and globally, we believe that environmental and global trade association memberships.regulations could potentially materially impact our business in the future.
For a discussion of the risks associated with government regulations that may materially impact us, please see Risk Factors included in Item 1A of this combined Form 10-K.
Marketing and Distribution
We go to market with a customer-centric, services-led approach, and sellselling our products and services directly to customers through our direct sales force andor indirectly through independent agents, dealers, value-added resellers, systems integrators and the Web.e-commerce marketplaces. In addition, our wholly-owned subsidiary, XBS, an office technology organization comprised of regional core companies in the U.S., sells document management and IT services. We alsowe continue to focus on broadening our distribution and offerings to smallSMBs primarily through XBS, our wholly-owned U.S. subsidiary comprised of regional core companies that provide office technology and mid-sized businessesservices, including IT Services, to SMB customers in the U.S., and through the expansionacquisitions of our network of multi-brand resellers.dealers and IT Services providers internationally.
We are structured to serve our customers globally intothrough two primary go-to-market units: the Americas, comprised of the U.S. and Canada along with Mexico, Central and South America; and EMEA, which includes Europe, the Middle East, Africa and India. We have also implemented aan industry leading and common global delivery model that aims to provideprovides a consistent customer experience worldwide. We believe that these changes createthis structure creates a leaner and more effective go-to-market model that will streamlinestreamlines our supply chain and provideprovides our customers with best-in-class services.
In EMEA and parts of Asia, we distribute our products through Xerox Limited, a company established under the laws of England, as well as through related non-U.S. companies. Xerox Limited enters into distribution agreements with unaffiliated third parties to distribute our products in many of the countries located in these regions and previously entered into agreements with unaffiliated third parties who distribute our products in Sudan. Sudan, among others, has been designated as a state sponsor of terrorism by the U.S. Department of State and is subject to U.S. economic sanctions. We maintain an export and sanctions compliance program, and believe that we have been, and are, in compliance with U.S. laws and government regulations for Sudan. We have no assets, liabilities or operations in Sudan other than liabilities under the distribution agreements. After observing required prior notice periods, Xerox Limited terminated its distribution agreements with distributors servicing Sudan in August 2006. Now, Xerox has only legacy obligations to third parties, such as providing spare parts and supplies to these third parties. In 2019, total Xerox revenues of $9.1 billion included approximately $6 thousand attributable to Sudan.
On January 5, 2020,The Technology Agreement (TA) between Fuji Xerox Co., Ltd. (Fuji Xerox) notifiedand Xerox that it does not intend to renew the Technology Agreementwas terminated on its expiration date, March 31, 2021. The Technology Agreement (TA) governsTA included a provision that allowed Fuji Xerox continued use of the technologyXerox 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 million. Fuji Xerox elected to continue its use the Xerox brand trademark over the two year period and, therefore, in April 2021, made the upfront payment due under the TA. Accordingly, we expect any potential entry by Xerox into the Fuji Xerox territory under the Xerox brand to be deferred to at least April 1, 2023.
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licenses, and sales territories in which each company can engage. Refer to Note 27 - Subsequent Events in the Consolidated Financial Statements for additional information.
Competition
Although we encounter competition in all areas of our business, we are the leader - or among the leaders - in each of our core offering areas.mid-range and high-end product groups. We compete on the basis of technology, performance, price, quality, reliability, brand reputation, distribution, and customer service and support.
OurThe larger competitors in our print business include Canon, HP Inc., Konica Minolta and Ricoh. Our brand recognition, reputation for document management expertise, innovative technology and service delivery excellence are our competitive advantages. These advantages, combined with our breadth of product offerings, global distribution channels and customer relationships, position us as a strong competitor going forward. As we continue our strategy to diversify and grow other businesses, there may be additional non-print competitors.
Customer Financing
We finance a large portion of our direct channel customer purchases of Xerox equipment through bundled lease agreements. We also provide lease financing to end-user customers who purchasedpurchase Xerox equipment through our indirect channels. We compete with other third-party leasing companies with respect to the lease financing provided to these end-user customers. In both instances, financing facilitates customer acquisition of Xerox technology and enhances our value proposition, while providing Xerox a reasonable return on our investment in this business. Additionally, because we primarily finance our own products and have a long history of providing financing to our customers, we are able to minimize much of the risk normally associated with a finance business.
Because our lease contracts allow customers to pay for equipment over time rather than upfront upon installation, we maintain a certain level of debt to support our investment in these lease contracts. We fund our customer financing activity through a combination of cash generated from operations, cash on hand and proceeds from capital market offerings.offerings and securitizations. At December 31, 2019,2021, we had approximately $3.4$3.1 billion of finance receivables and $364$253 million of equipmentEquipment on operating leases, net, or Total Finance assets of $3.7approximately $3.3 billion. We maintain an assumed 7:1 leverage ratio of debt to equity as compared to our Finance assets, which results in approximately $3.3$2.9 billion of our $4.3$4.2 billion of debt being allocated to our financing business.
Refer to "Debt and Customer Financing Activities" in the Capital Resources and Liquidity section of Management's Discussion and Analysis, included in Item 7 of this 2019combined Form 10-K, for additional information.
Manufacturing and Supply
Our manufacturing and distribution facilities are located around the world. Our largest manufacturing site is in Webster, N.Y., where we produce the Xerox iGen, Nuvera, and Baltoro printer systems,production printing presses and new 3D printers as well as key components and consumables for our products, such as toner. We also have manufacturing operations for materials and components in Dundalk, Ireland, for components, consumables and printer systems sustainable manufacturing, and inIreland; Wilsonville, OR, for solid ink consumables and components. Other Xerox manufacturing plants are located inOR; Venray, Netherlands; Ontario, Canada; and Oklahoma City, OK, where we manufacture materials and components.
Additionally,OK. We conduct sustainable manufacturing in all of these facilities. In addition, we work with various manufacturing and distribution partners. This diversification of suppliers brings flexibility inand cost efficiency to our manufacturing and supply chain, and supports our cost efficiency goals, which are both objectives of Project Own It as well as one ofa critical component in our strategic initiativesinitiative to optimize operations for simplicity. FUJIFILM Business Innovation Corp. (formerly Fuji Xerox Co., Ltd.) is our largest partner with whom we maintain product sourcing agreements for specific products across our entry, mid-range and high-end portfolios, some of which are the result of mutual research and development agreements.portfolios. We also outsource certain manufacturing activities to FLEX LTD (Flex), a global contract manufacturer with whom we maintain a longstanding relationship, and we acquire products from various third parties in order to increase the breadth of our product portfolio and meet channel requirementsrequirements. In addition, we outsource certain specialized manufacturing activities to partners, such as Flex Ltd. and Jabil Inc., which are global contract manufacturers with whom we have long-standing relationships.
Our supply chain operations utilize a network of world-class logistics partners who offer warehousing and transportation services. Reverse Logistics is an integral part of our sustainability mission, and we perform these operations at our facility in 2019 we entered intoCincinnati, OH, and with a supply agreement with HP Inc.network of various partners worldwide.
Refer to "Contractual Cash Obligations and Other Commercial Commitments and Contingencies" in the Capital Resources and Liquidity section of Management's Discussion and Analysis, included in Item 7 of this 2019combined Form 10-K as well as Note 12 - Investments in Affiliates, at Equity in the Consolidated Financial Statements for additional information regarding our relationship with Fuji Xerox.FUJIFILM Business Innovation Corp.
International Operations
The financial measures, by geographical area for 2019, 20182021, 2020 and 2017,2019, are included in Note 53 - Segment and Geographic Area Reporting in the Consolidated Financial Statements for additional information. See also the risk factor entitled “Our business, results of operations and financial condition may be negatively impacted by conditions abroad, including local economic and political environments, fluctuating foreign currencies and shifting regulatory schemes” in Part I, Item 1A included herein.Risk Factors of this combined report on Form 10-K.
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Backlog
Backlog, or the value of unfilled equipment orders, is not a meaningful indicator of future business prospects because a significant proportion of our revenue is fulfilled from existing inventories or within a short period of order signing.
Seasonality
Our revenues may be affected by such factors as the introduction of new products, the length of sales cycles and the seasonality of technology purchases and printing volume. These factors have historically resulted in lower revenues, operating profits and operating cash flows in the first and third quarter.quarters. However, the COVID-19 pandemic and related business closures, as well as supply chain disruptions that limited our ability to install orders, impacted demand behaviors and installation timing during 2021, and is expected to have an impact on the seasonal fluctuations in revenue during 2022. For discussion regarding the impact of the COVID-19 pandemic and supply chain disruptions on our business and financial results, see Management's Discussion and Analysis, included in Item 7 of this combined Form 10-K, as well as in Part I, Item 1A Risk Factors of this combined report on Form 10-K.
EmployeesBacklog
We hadIn prior years, backlog has not been a meaningful indicator of future business prospects because a significant proportion of our revenue was fulfilled from existing inventories or within a short period of order signing. Accordingly, our level of backlog remained fairly consistent period to period. However, in 2021 we experienced an unprecedented level of supply chain disruption, in part due the ongoing effects of the COVID-19 pandemic. These supply chain disruptions resulted in an increase to our backlog1 of equipment and IT hardware to nearly $350 million, which is approximately 27,000 employees worldwide2.5 times higher than at December 31, 2019.the end of 2020. In 2022, we expect to continue to have an elevated backlog at least through the first half of the year.
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(1)Order backlog is measured as the value of unfulfilled sales orders, shipped and non-shipped, received from our customers waiting to be installed, including orders with future installation dates. It includes printing devices as well as IT hardware associated with our IT services offerings.
Other Information
Xerox Holdings Corporation
Xerox Holdings is a New York corporation, organized in 2019 and our principal executive offices are located at 201 Merritt 7, P.O. Box 4505, Norwalk, Connecticut 06851-1056. Our telephone number is (203) 968-3000.203-849-5216.
Xerox Corporation
Xerox is a New York corporation, organized in 1906 and our principal executive offices are located at 201 Merritt 7, P.O. Box 4505, Norwalk, Connecticut 06851-1056. Our telephone number is (203) 968-3000.203-849-5216.
Within the Investor Relations section of Xerox Holdings' website, you will find our combined Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to these reports. We make these documents available timely after we have filed them with, or furnished them to, the U.S. Securities and Exchange Commission (the SEC). The SEC's Internet address is www.sec.gov.
Our Internet address is www.xerox.com. The content of our website is not incorporated by reference in this combined Form 10-K unless expressly noted.
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Item 1A. Risk Factors
You should carefully consider the following risk factors as well as the other information included, and risks described, in other sections of this combined Form 10-K, including under the headings “Cautionary Statement Regarding Forward-Looking Statements”, “Legal Proceedings”, “Selected Financial Data”, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in our Consolidated Financial Statements and the related notes thereto.
Any of the following risks could materially and adversely affect our business, financial condition, or results of operations. The selected risks described below, however, are not the only risks facing us. Additional risks and uncertainties not currently known to us or those we currently view to be immaterial may also materially and adversely affect our business, financial condition, or results of operations.
Summary of Risk Factors
These statements reflect management’s current beliefs, assumptions and expectations and are subject to a number of factors that may cause actual results to differ materially. Such factors include but are not limited to:
•The effects of pandemics, such as the COVID-19 pandemic, on our and our customers' businesses and the duration and extent to which a pandemic may impact our future results of operations and overall financial performance;
•Our ability to address our business challenges in order to reverse revenue declines, reduce costs and increase productivity so that we can invest in and grow our business;
•Our ability to successfully develop new products, technologies and service offerings and to protect our intellectual property rights;
•Reliance on third parties, including subcontractors, for manufacturing of products and provision of services and the shared services arrangements entered into by us as part of Project Own It;
•Our ability to attract and retain key personnel;
•The risk that confidential and/or individually identifiable information of ours, our customers, clients and employees could be inadvertently disclosed or disclosed as a result of a breach of our security systems due to cyber attacks or other intentional acts or that cyberattacks could result in a shutdown of our systems;
•The risk that partners, subcontractors and software vendors will not perform in a timely, quality manner;
•Actions of competitors and our ability to promptly and effectively react to changing technologies and customer expectations;
•Our ability to obtain adequate pricing for our products and services and to maintain and improve cost efficiency of operations, including savings from restructuring and transformation actions;
•Our ability to manage changes in the printing environment like the decline in the volume of printed pages and extension of equipment placements;
•Changes in economic and political conditions, trade protection measures, licensing requirements and tax laws in the United States and in the foreign countries in which we do business;
•The risk that multi-year contracts with governmental entities could be terminated prior to the end of the contract term and that civil or criminal penalties and administrative sanctions could be imposed on us if we fail to comply with the terms of such contracts and applicable law;
•Interest rates, cost of borrowing and access to credit markets;
•The imposition of new or incremental trade protection measures such as tariffs and import or export restrictions;
•Funding requirements associated with our employee pension and retiree health benefit plans;
•Changes in foreign currency exchange rates;
•The risk that our operations and products may not comply with applicable worldwide regulatory requirements, particularly environmental regulations and directives and anti-corruption laws;
•The outcome of litigation and regulatory proceedings to which we may be a party; and
•Any impacts resulting from the restructuring of our relationship with FUJIFILM Business Innovation Corp. (formerly Fuji Xerox Co., Ltd.).
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Company-Specific Risk Factors
The effects of pandemics, such as the COVID-19 pandemic, may materially affect how we and our customers operate our businesses, and the duration and extent to which a pandemic may impact our future results of operations and overall financial performance is uncertain.
Since March 2020, when the World Health Organization declared COVID-19 a pandemic, the spread of the virus and its variants throughout the U.S. and the world has prompted authorities to implement numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. The availability of vaccines introduced in 2021 slowed the spread of the virus in many regions, but because vaccination has not been universal and new variants emerged during 2021, surges have continued to arise, leading to further disruptions and uncertainties throughout the world. The COVID-19 pandemic continues to negatively impact the global economy, disrupt customer spending and global supply chains, and create significant volatility and disruption of financial markets. The extent of the impact of the COVID-19 pandemic on our business and financial performance, including our ability to execute our near-term and long-term business strategies and initiatives within the expected time frames, will depend on future developments, including the duration and severity of the pandemic and the extent and effectiveness of containment actions, which are uncertain and cannot be predicted.
Our operations are being negatively affected by a range of external factors related to the COVID-19 pandemic that are not within our control. For example, many countries, states, and localities continue to impose restrictions to limit the spread of COVID-19, which in turn limit our ability, as well as that of our channel partners, to sell, install and service our equipment for our customers negatively impacting our operations and financial performance. Even when governmental restrictions have ended or eased, COVID-19 surges have caused many businesses to continue or resume requiring or encouraging their office employees to work from home for extended periods of time, which is negatively impacting both sales and use of Xerox products, supplies and services. The longer this persists, the greater effect it will have on our print business.
If we are unsuccessful at addressing our business challenges, our business and results of operations may be adversely affected and our ability to invest in and grow our business could be limited.
We are in the process of addressing many challenges facing our business. One set of challenges relates to dynamic and accelerating market trends, such as the declines in installations and printed pages, fewer devices per location and an increase in electronic documentation. A second set of challenges relates to changes in the competitive landscape. Our primary competitors are exerting increased competitive pressure in targeted areas and are entering new markets; our emerging competitors are introducing new technologies and business models. These market and competitive trends make it difficult to reverse the current declinesdecline in revenue experienced over the past several years.years prior to the challenges brought on by the COVID-19 pandemic. A third set of challenges relates to our continued efforts to reduce costs and increase productivity in light of declining revenues. In addition, we are vulnerable to increased risks associated with our efforts to address these challenges givenGiven the markets in which we compete as well as,and the broad range of geographic regions in which we and our customers and partners operate.operate, the COVID-19 pandemic and related supply chain disruptions have overlaid increased risks on our ongoing efforts to address these cost and productivity challenges. Lastly, political and social conditions in the markets in which our products are sold have been and could continue to be difficult to predict, resulting in adverse effects on our business. The results of elections, referendums or other political conditions (including government shutdowns or hostilities between countries) could adversely affect our business.
In connection with our standing up of several businesses, including CareAR and FITTLE, we face additional risks regarding whether these businesses will achieve expectations regarding customer adoption and financial performance, including projected revenue for fiscal year 2022. If we do not succeed in these efforts, or if these efforts are more costly or time-consuming than expected, our business and results of operations may be adversely affected, which could limit our ability to invest in and grow our business.
We may be unable to attract and retain key personnel while our business model undergoes significant changes.
Xerox is undergoing significant changes in our business model and, accordingly, current and prospective employees may experience uncertainty about their future. Our success is dependent, among other things, on our ability to attract, develop and retain highly qualified senior management and other key employees. Competition for key personnel is intense, and our ability to attract and retain key personnel is dependent on a number of factors, including prevailing market conditions and compensation packages offered by companies competing for the same talent. The departure of existing key employees or the failure of potential key employees to accept employment with Xerox, despite our recruiting efforts, could have a material adverse impact on our business, financial condition and operating results.
Our business, results of operations and financial condition may be negatively impacted by conditions abroad, including local economic and political environments, fluctuating foreign currencies and shifting regulatory schemes.
A significant portion of our revenue is generated from operations, and we manufacture or acquire many of our products and/or their components, outside the United States. Our future revenues, costs and results of operations could be significantly affected by changes in foreign currency exchange rates - particularly the Japanese yen, the euro and the British pound - as well as by a number of other factors, including changes in local economic and political conditions, trade protection measures, licensing requirements, local tax regulations and other related legal matters. We use currency derivative contracts to hedge foreign currency denominated assets, liabilities and anticipated transactions. This practice is intended to mitigate or reduce volatility in the results of our foreign operations, but does not completely eliminate it. We do not hedge the translation effect of international revenues and expenses that are denominated in currencies other than the U.S. dollar. If our future revenues, costs and results of operations are significantly affected by economic or political conditions abroad and we are unable to effectively hedge these risks, they could materially adversely affect our results of operations and financial condition.
Tariffs or other restrictions on foreign imports could negatively impact our financial performance.
Our business, results of operations and financial condition may be negatively impacted by a potential increase in the cost of our products as a result of new or incremental trade protection measures such as, increased import tariffs, import or export restrictions and requirements and the revocation or material modification of trade agreements. Changes in U.S. and international trade policy and resultant retaliatory countermeasures, including imposition of increased tariffs, quotas or duties by affected countries, and trading partners are difficult to predict and may adversely affect our business. The U.S. government has and could in the future impose trade barriers including tariffs, quotas, duties or other restrictions on foreign imports. The implementation of a border tax, tariff or higher customs duties on our products
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manufactured abroad or components that we import into the U.S., or any potential corresponding actions by other countries in which we do business, could negatively impact our financial performance.
We operate globally and changes in tax laws could adversely affect our results.
We operate globally and changes in tax laws could adversely affect our results. We operate in approximately 160 countries and generate substantial revenues and profits in foreign jurisdictions. The international tax environment continues to change as a result of both coordinated actions by governments and unilateral measures designed by individual countries, both intended to tackle concerns over base erosion and profit shifting and perceived international tax avoidance techniques. The Organization for Economic Cooperation and Development (OECD) is issuing guidelines that are different, in some respects, than long-standing international tax principles. As countries unilaterally amend their tax laws to adopt certain parts of the OECD guidelines, this may increase tax uncertainty and may adversely impact our income taxes. Local country, state, provincial or municipal taxation may also be subject to review and potential override by regional, federal, national or similar forms of government. In addition, we are subject to the continuous examination of our income tax returns by the United States Internal Revenue Service and other tax authorities around the world. We regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of its provision for income taxes. There can be no assurance that the outcomes from these examinations will not have an adverse effect on the our provision for income taxes and cash tax liability.
If we fail to successfully develop new products, technologies and service offerings and protect our intellectual property rights, we may be unable to retain current customers and gain new customers and our revenues would decline.
The process of developing new products and solutions is inherently complex and uncertain. It requires accurate anticipation of customers' changing needs and emerging technological trends. We must work with our supply partners and commit resources before knowing whether these initiatives will result in products that are commercially successful and generate the revenues required to provide desired returns. In developing these new technologies and products, we rely upon patent, copyright, trademark and trade secret laws in the United States and similar laws in other countries, and agreements with our employees, customers, suppliers and other parties, to establish and maintain our intellectual property rights in technology and products used in our operations. It is possible that our
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intellectual property rights could be challenged, invalidated or circumvented, allowing others to use our intellectual property to our competitive detriment. Also, the laws of certain countries may not protect our proprietary rights to the same extent as the laws of the United States and we may be unable to protect our proprietary technology adequately against unauthorized third-party copying or use, which could adversely affect our competitive position. In addition, some of our products rely on technologies developed by third parties. We may not be able to obtain or to continue to obtain licenses and technologies from these third parties at all or on reasonable terms, or such third parties may demand cross-licenses to our intellectual property. If we fail to accurately anticipate and meet our customers' needs through the development of new products, technologies and service offerings or if we fail to adequately protect our intellectual property rights, we could lose market share and customers to our competitors and that could materially adversely affect our results of operations and financial condition.
In addition, our strategy requires us to expand into adjacent markets with new products, services and technology such as Digital Packaging and Print, AI Workflow Assistants for Knowledge Workers, 3D Printing / Digital Manufacturing, IT servicesServices and software. Our ability to develop or acquire new products, services and technologies for these adjacent markets requires the investment of significant resources, which may not lead to the development of new technologies, products or services on a timely basis. We must also attract, develop and retain individuals with the requisite technical expertise and understanding of customers' needs to develop new technologies and introduce new products, particularly as we increase investment in these areas of the business. Similar to above, if we fail to accurately anticipate and meet our customers' needs in these adjacent markets through the development of new products, technologies and service offerings or if we fail to adequately protect our intellectual property rights, we could lose market share and customers to our competitors and that could materially adversely affect our results of operations and financial condition.
We need to successfully manage changes in the printing environment and market because our operating results may be negatively impacted by lower equipment placements and usage trends.
The printing market and environment are changing as a result of the COVID-19 pandemic, development of new technologies, shifts in customer preferences in printing and the expansion of new printing markets as well as ancillary markets. The process of developing new high-technology products, software, services and solutions and enhancing existing hardware and software products, services and solutions is complex, costly and uncertain, and any failure by us to accurately anticipate customers' changing needs and emerging technological trends could significantly harm our market share, results of operations and financial condition. Examples include mobile printing, color printing, packaging, print on objects, continuous-feed inkjet printing and the expansion of the market for entry products (A4 printers) and high-end products as well as electronic delivery, and cloud-based computing and software. These changing market trends are also opening up new ancillary markets for our products, services and software.
A significant part of our strategy and ultimate success in this changing market is our ability to develop and market technology that produces products, services and software that meet these changes. We expect that revenue growth can be improved through improving the software features of our multifunction devices, expanding color printing to include metallic, fluorescent, and clear ink and digital packaging, and leveraging a strong base in managed print services with new digital, analytics, and security features. Our software strategy involves software for integrated solutions and delivery of industry-focused services into an existing customer base. We also expect to extend our presence in the SMB market through organic and inorganic investments as well as further expansion into channels and eCommerce and investments in innovation including digital packaging, AI workflow assistants for knowledge workers, 3D printing and digital manufacturing, sensors and services for IoT and clean tech. Our future success in executing on this strategy depends on our ability to make the investments and commit the necessary resources in this highly competitive market. Despite this investment, the process of developing new products or technologies is inherently complex and uncertain and there are a number of risks that we are subject to including the risk that our products or technologies will not successfully satisfy our customers’ needs or gain market acceptance. Additionally, the COVID-19 pandemic has negatively impacted our ability to execute our near-term business strategies and initiatives. The long-term impact will depend on future developments, including the duration and severity of the pandemic and the extent and effectiveness of containment actions, which are uncertain and cannot be predicted. If we are unable to develop and market advanced and competitive technologies, it may negatively impact our future revenue growth and market share as well as our planned expansion into new or alternative markets. Additionally, it may negatively impact expansion of our worldwide equipment placements, as well as sales of services and supplies occurring after the initial equipment placement (post sale revenue) in the key growth markets of digital printing, color and multifunction system. If we are unable to maintain a consistent level of revenue, it could materially adversely affect our results of operations and financial condition.
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We face significant competition and our failure to compete successfully could adversely affect our results of operations and financial condition.
We operate in an environment of significant competition, driven by rapid technological developments, changes in industry standards, and demands of customers to become more efficient. Our competitors include large international companies some of which have significant financial resources and compete with us globally to provide document processing products and services in each of the markets we serve. We compete primarily on the basis of technology, performance, price, quality, reliability, brand, distribution and customer service and support. Our future success is largely dependent upon our ability to compete in the markets we currently serve, to promptly and effectively react to changing technologies and customer expectations and to expand into additional market segments. To remain competitive, we must develop services, applications and new products; periodically enhance our existing offerings; remain cost efficient; and attract and retain key personnel and management. Our ability to remain competitive through developing new products and services and attracting and retaining key personnel may be adversely impacted by the global economic uncertainty caused by the COVID-19 pandemic. If we are unable to compete successfully, we could lose market share and important customers to our competitors and such loss could materially adversely affect our results of operations and financial condition.
Our profitability is dependent upon our ability to obtain adequate pricing for our products and services and to improve our cost structure.
Our success depends on our ability to obtain adequate pricing for our products and services that will provide a reasonable return to our shareholders. Depending on competitive market factors, including the negative impacts from the COVID-19 pandemic, future prices we obtain for our products and services may decline from current levels. In addition, pricing actions to offset the effect of currency devaluations may not prove sufficient to offset further devaluations or may not hold in the face of customer resistance and/or competition. If we are unable to obtain adequate pricing for our products and services, it could materially adversely affect our results of operations and financial condition.
We continually review our operations with a view towards reducing our cost structure, including reducing our employee base, exiting certain businesses, improving process and system efficiencies and outsourcing some internal functions. Personal protective measures, such as quarantines, restricted access to workplaces, product packaging requirements, and similar requirements put in place by countries, states, municipalities and businesses in response to the COVID-19 pandemic may change the way we interact with our customers and increase our costs of doing business. In addition, substantial supply chain disruption caused by the COVID-19 pandemic has increased the cost of materials and components required to manufacture our products, transportation of components and products, and labor associated with all steps of the supply chain. The extent of the impact of the COVID-19 pandemic on our cost structure will depend on future developments, including the duration and severity of the pandemic and the extent and effectiveness of containment actions, which are uncertain and cannot be predicted. If we are unable to continue to maintain our cost base at or below the current level and maintain process and systems changes resulting from prior cost reduction actions, it could materially adversely affect our results of operations and financial condition.
Our ability to sustain and improve profit margins is dependent on a number of factors, including our ability to continue to improve the cost efficiency of our operations through such programs as Project Own It, the level of pricing pressures on our products and services, the additional costs imposed by ongoing supply chain disruptions, the proportion of high-end as opposed to entry-level equipment sales (product mix), the trend in our post-sale revenue growth and our ability to successfully complete information technology initiatives. If any of these factors adversely materialize or if we are unable to achieve and maintain productivity improvements through design efficiency, supplier and manufacturing cost improvements and information technology initiatives, our ability to offset labor cost inflation, potential materials cost increases and competitive price pressures would be impaired, all of which could materially adversely affect our results of operations and financial condition.
We have outsourced a significant portion of our manufacturing operations and increasingly rely on third-party manufacturers, subcontractors and suppliers.
We have outsourced a significant portion of our manufacturing operations to third parties, such as FUJIFILM Business Innovation Corp. (formerly Fuji Xerox Co., Ltd.) In the normal course of business, we regularly reevaluate our relationships with these third parties and have discussions with other third parties in order to maintain competitive tension and seek more optimal terms. There is no guarantee that such discussions will lead to better arrangements, and our existing suppliers could react negatively to any alternative arrangements we seek to negotiate with other third parties. In addition, we could incur significant costs in order to transition from one third-party manufacturing partner to another.
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We face the risk that our third-party manufacturing partners may not be able to develop or manufacture products satisfying all of our requirements, quickly respond to changes in customer demand, and obtain supplies and materials necessary for the manufacturing process. In addition, in the normal course of business and exacerbated by supply chain disruptions resulting from the COVID-19 pandemic, our partners may experience labor shortages and/or disruptions, transportation cost increases, materials cost increases, and/or manufacturing cost increases that could lead to higher prices for our products and/or lower reliability of our products. Further, since certain third parties to whom we have outsourced manufacturing are also our competitors in the print market, or may become competitors in the future, we could experience product disruption as a result of competitive pressures that increase the cost of the products supplied. If any of these risks were to be realized, and similar third-party manufacturing relationships could not be established and/or successfully transitioned to, we could experience supply interruptions or increases in costs that might result in our being unable to meet customer demand for our products, damage our relationships with our customers and reduce our market share, all of which could materially adversely affect our results of operations and financial condition.
In addition, in our services business we may partner with other parties, including software and hardware vendors, to provide the complex solutions required by our customers. Therefore, our ability to deliver the solutions and provide the services required by our customers is dependent on both our and our partners' ability to meet our customers' requirements and schedules. If we or our partners fail to deliver services or products as required and on time, our ability to complete the contract may be adversely affected, which may have an adverse impact on our revenue and profits.
We may be unable to attract and retain key personnel while our business model undergoes significant changes.
Xerox is undergoing significant changes in our business model and, accordingly, current and prospective employees may experience uncertainty about their future, and may have other opportunities available to them given the current highly competitive labor market. Our success is dependent, among other things, on our ability to attract, develop and retain highly qualified senior management and other key employees. Competition for key personnel is intense, and our ability to attract and retain key personnel is dependent on a number of factors, including prevailing market conditions and compensation packages offered by companies competing for the same talent. Our ability to do so also depends on how well we maintain a strong corporate culture that is attractive to employees. Hiring and training of new employees may be adversely impacted by global economic uncertainty and changes to office environments caused by COVID-19. The departure of existing key employees or the failure of potential key employees to accept employment with Xerox, despite our recruiting efforts, could have a material adverse impact on our business, financial condition and operating results.
We may not achieve some or all of the expected benefits of our restructuring and transformation plans and our restructuring may adversely affect our business.
We engage in restructuring actions, including Project Own It, as well as other transformation efforts in order to reduce our cost structure, realign it to the changing nature of our business and achieve operating efficiencies. In addition, these actions are expected to simplify our organizational structure, upgrade our IT infrastructure and redesign our business processes. We may not be able to obtain the cost savings and benefits that were initially anticipated in connection with our restructuring actions. Additionally, as a result of our restructuring initiatives, we may experience a loss of continuity, loss of accumulated knowledge and/or inefficiency during transitional periods. Transformation and restructuring may require a significant amount of time and focus from both management and other employees, which may divert attention from operating and growing our business. The wide-ranging nature and number of actions underway at any point in time may become difficult for the organization to satisfactorily manage and implement, as these actions may have impacts across the organization, processes and systems that are not apparent by individual project but may have unintended consequences in the aggregate. Furthermore, the expected savings associated with these initiatives may be offset to some extent by business disruption during the implementation phase as well as investments in new processes and systems until such time as the initiatives are fully implemented and stabilized. If we fail to achieve some or all of the expected benefits of restructuring, it could have a material adverse effect on our competitive position, business, financial condition, results of operations and cash flows.
As part of our efforts to streamline operations and reduce costs, we have offshored and outsourced certain of our operations, services and other functions through captive arrangements as well as arrangements with third-parties (e.g., TCS and HCL) and we will continue to evaluate additional offshoring or outsourcing possibilities in the future. If our outsourcing partners or operations fail to perform their obligations in a timely manner or at satisfactory quality levels or if we are unable to attract or retain sufficient personnel with the necessary skill sets to meet our offshoring
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or outsourcing needs, the quality of our services, products and operations, as well as our reputation, could suffer. Our success depends, in part, on our ability to manage these potential transitions and issues, which in certain circumstances could be largely outside of our control. In addition, much of our offshoring takes place in developing countries and as a result may also be subject to geopolitical uncertainty. Diminished service quality from offshoring and outsourcing could have an adverse material impact to our operating results due to service interruptions and negative customer reactions.
Our government contracts are subject to termination rights, audits and investigations, which, if exercised, could negatively impact our reputation and reduce our ability to compete for new contracts.
A significant portion of our revenuesrevenue is derived from contracts with U.S. federal, state and local governments and their agencies, as well as international governments and their agencies. Government entities typically finance projects through appropriated funds. While these projects are often planned and executed as multi-year projects, government entities usually reserve the right to change the scope of or terminate these projects for lack of approved funding and/or at their convenience. Changes in government or political developments, including budget deficits, shortfalls or uncertainties, government spending reductions (e.g., Congressional sequestration of funds under the Budget Control
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Act of 2011) or other debt or funding constraints, could result in lower governmental sales and in our projects being reduced in price or scope or terminated altogether, which also could limit our recovery of incurred costs, reimbursable expenses and profits on work completed prior to the termination.
Additionally, government agencies routinely audit government contracts. If the government finds that we inappropriately charged costs to a contract, the costs will be non-reimbursable or, to the extent reimbursed, refunded to the government. If the government discovers improper or illegal activities or contractual non-compliance in the course of audits or investigations, we may be subject to various civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines and suspensions or debarment from doing business with the government. Any resulting penalties or sanctions could have a material adverse effect on our business, financial condition, results of operations and cash flows. Further, the negative publicity that arises from findings in such audits or, investigations could have an adverse effect on our reputation and reduce our ability to compete for new contracts and could also have a material adverse effect on our business, financial condition, results of operations and cash flow.
We face significant competition and our failure to compete successfully could adversely affect our results of operations and financial condition.
We operate in an environment of significant competition, driven by rapid technological developments, changes in industry standards, and demands of customers to become more efficient. Our competitors include large international companies some of which have significant financial resources and compete with us globally to provide document processing products and services in each of the markets we serve. We compete primarily on the basis of technology, performance, price, quality, reliability, brand, distribution and customer service and support. Our future success is largely dependent upon our ability to compete in the markets we currently serve, to promptly and effectively react to changing technologies andfund our customer expectations and to expand into additional market segments. To remainfinancing activities at economically competitive we must develop services, applications and new products; periodically enhance our existing offerings; remain cost efficient; and attract and retain key personnel and management. If we are unable to compete successfully, we could lose market share and important customers to our competitors and such loss could materially adversely affect our results of operations and financial condition.
Our profitability is dependent upon our ability to obtain adequate pricing for our products and services and to improve our cost structure.
Our successlevels depends on our ability to borrow and the cost of borrowing in the credit markets.
The long-term viability and profitability of our financing business is dependent, in part, on our ability to borrow and the cost of borrowing in the credit markets. This ability and cost, in turn, is dependent on i) our credit rating, which is currently non-investment grade according to credit rating agency assessments that are subject to periodic reviews and can change following a review, and ii) credit market volatility, which has increased as a result of the COVID-19 pandemic. We primarily fund our financing business through a combination of cash generated from operations, cash on hand, capital market offerings, and sales and securitizations of finance receivables. In addition, our ability to continue to offer customer financing and be successful in the placement of equipment, software and IT services with customers seeking to finance those transactions, is largely dependent on our ability to obtain adequate pricing for our products and services that will providefunding at a reasonable return to our shareholders. Depending on competitive market factors, future prices we obtain for our products and services may decline from current levels. In addition, pricing actions to offset the effect of currency devaluations may not prove sufficient to offset further devaluations or may not hold in the face of customer resistance and/or competition. If we are unable to obtain adequate pricing for our products and services, it could materially adversely affect our results of operations and financial condition.
We continually review our operations with a view towards reducing our cost structure, including reducing our employee base, exiting certain businesses, improving process and system efficiencies and outsourcing some internal functions.cost. If we are unable to continue to maintain our cost base at or below the current level and maintain process and systems changes resulting from prior cost reduction actions,offer financing, it could materially adversely affect our results of operations and financial condition.
Our significant debt could adversely affect our financial health and pose challenges for conducting our business.
Our ability to sustainprovide customer financing is a significant competitive advantage. We have and improve profit margins is dependent onwill continue to have a numbersignificant amount of factors,debt and other obligations, including that arising from our expanded FITTLE business scope, the majority of which continues to be in support our customer financing activities. Our substantial debt and other obligations could have important consequences. For example, it could (i) increase our vulnerability to general adverse economic and industry conditions; (ii) limit our ability to continueobtain additional financing for future working capital, capital expenditures, acquisitions and other general corporate requirements; (iii) increase our vulnerability to improve the cost efficiencyinterest rate fluctuations because a portion of our debt has variable interest rates; (iv) require us to dedicate a substantial portion of our cash flows from operations through such programs as Project Own It,to service debt and other obligations, thereby reducing the levelavailability of pricing pressures on our products and services, the proportion of high-end as opposedcash flows from operations for other purposes; (v) limit our flexibility in planning for, or reacting to, low-end equipment sales (product mix), the trendchanges in our post-sale revenue growthbusinesses and the industries in which we operate; (vi) place us at a competitive disadvantage compared to our competitors that have less debt; and (vii) become due and payable upon a change in control. If new debt is added to our current debt levels, these related risks could increase.
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We need to maintain adequate liquidity in order to meet our operating cash flow requirements, repay maturing debt and meet other financial obligations, such as payment of dividends to the extent declared by our Board of Directors. If we fail to comply with the covenants contained in our various borrowing agreements, it may adversely affect our liquidity, results of operations and financial condition.
Our liquidity is a function of our cash on-hand and our ability to successfully complete information technology initiatives. If anygenerate cash flows from a combination of efficient operations and continuing operating improvements, access to capital markets and funding from third parties, which includes securitization of our finance receivables. We believe our liquidity (including operating and other cash flows that we expect to generate) will be sufficient to meet operating requirements as they occur; however, our ability to maintain sufficient liquidity going forward is subject to the general liquidity of and on-going changes in the credit markets as well as general economic, financial, competitive, legislative, regulatory and other market factors that are beyond our control.
Our $1.8 billion credit facility (the Credit Facility) contains financial maintenance covenants, including maximum leverage (debt for borrowed money divided by consolidated EBITDA, as defined) and a minimum interest coverage ratio (consolidated EBITDA divided by consolidated interest expense, as defined). At December 31, 2021, we were in full compliance with the covenants and other provisions of the Credit Facility. Failure to comply with material provisions or covenants in the Credit Facility could have a material adverse effect on our liquidity, results of operations and financial condition. The Credit Facility, which terminates in August 2022, contains various investment grade covenants at a time when the Company is not investment grade rated. The Company may seek to renegotiate or replace such facility, including reducing the size of such facility, or may determine not to replace such facility at all and may instead pursue other forms of liquidity. Any new credit agreement may result in higher borrowing costs and may contain non-investment grade covenants, such as those that would place greater restrictions on how the Company can run its businesses and/or limit the Company from taking certain actions that might otherwise be beneficial to the Company and/or its shareholders, customers, suppliers, partners and/or lenders.
Our financial condition and results of operations could be adversely affected by employee benefit-related funding requirements.
We sponsor several defined benefit pension and retiree-health benefit plans throughout the world. We are required to make contributions to these plans to comply with minimum funding requirements imposed by laws governing these employee benefit plans. Although most of our major defined benefit plans have been amended to freeze current benefits and eliminate benefit accruals for future service, several plans remain unfunded (by design) or are under-funded. The projected benefit obligations for these benefit plans at December 31, 2021 exceeded the value of the assets of those plans by approximately $1.3 billion. The current underfunded status of these plans is a significant factor in determining the ongoing future contributions we will be required to make to these plans. Accordingly, we expect to have additional funding requirements in future years, and we may make additional, voluntary contributions to the plans. Depending on our cash position at the time, any such funding or contributions to our defined benefit plans could impact our operating flexibility and financial position, including adversely affecting our cash flow for the quarter in which such funding or contributions are made. Weak economic conditions, including the negative impacts from the COVID-19 pandemic, and related under-performance of asset markets could also lead to increases in our funding requirements.
Our business, results of operations and financial condition may be negatively impacted by conditions abroad, including local economic and political environments, fluctuating foreign currencies and shifting regulatory schemes.
A significant portion of our revenue is generated from operations outside of the United States, and we manufacture or acquire many of our products and/or their components, outside the United States. The COVID-19 pandemic has negatively impacted the global economy, disrupted customer spending and global supply chains, and created significant volatility in foreign currency exchange rates. Our future revenues, costs and results of operations could be significantly affected by changes in foreign currency exchange rates - particularly the Japanese yen, the euro and the British pound - as well as by a number of other factors, adversely materializeincluding changes in local economic and political conditions, trade protection measures, licensing requirements, local tax regulations and other related legal matters. We use currency derivative contracts to hedge foreign currency-denominated assets, liabilities and anticipated transactions. This practice is intended to mitigate or ifreduce volatility in the results of our foreign operations, but does not completely eliminate it. We do not hedge the translation effect of international revenues and expenses that are denominated in currencies other than the U.S. dollar. If our future revenues, costs and results of operations are significantly affected by economic or political conditions abroad and we are unable to achieve and maintain productivity improvements through design efficiency, supplier and manufacturing cost improvements and information technology initiatives, our ability to offset labor cost inflation, potential materials cost increases and competitive price pressures would be impaired, all of whicheffectively hedge these risks, they could materially adversely affect our results of operations and financial condition.
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Tariffs or other restrictions on foreign imports could negatively impact our financial performance.
Our business, results of operations and financial condition may not achieve somebe negatively impacted by a potential increase in the cost of our products as a result of new or allincremental trade protection measures, such as increased import tariffs; import or export restrictions, including restrictions put in place as a result of the expected benefitsCOVID-19 pandemic; and requirements under, or the revocation or material modification of, our restructuring planstrade agreements. Changes in U.S. and our restructuringinternational trade policy and resultant retaliatory countermeasures, including imposition of increased tariffs, quotas or duties by affected countries and trading partners are difficult to predict and may adversely affect our business. The U.S. government has and could in the future impose trade barriers including tariffs, quotas, duties or other restrictions on foreign imports. The implementation of a border tax, tariff or higher customs duties on our products manufactured abroad or components that we import into the U.S., or any potential corresponding actions by other countries in which we do business, could negatively impact our financial performance.
We engageoperate globally and changes in restructuring actions, including Project Own It,tax laws could adversely affect our results.
We operate in the U.S. and globally and changes in tax laws could adversely affect our results. We monitor U.S. and non-U.S. tax law changes that may adversely impact our overall tax costs. From time to time, proposals have been made and/or legislation has been introduced to change tax rates, as well as other transformation efforts in orderrelated tax laws, regulations or interpretations thereof, by various jurisdictions, or to reducelimit tax treaty benefits which, if enacted or implemented could materially increase our cost structure, realign ittax costs and/or our effective tax rate and could have a material adverse impact on our financial condition and results of operations. The international tax environment continues to the changing nature of our business and achieve operating efficiencies. In addition, these actions are expected to simplify our organizational structure, upgrade our IT infrastructure and redesign business processes. We may not be able to obtain the cost savings and benefits that were initially anticipated in connection with
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our restructuring actions. Additionally,change as a result of both coordinated actions by governments and unilateral measures designed by individual countries, both intended to tackle concerns over base erosion and profit shifting and perceived international tax avoidance techniques. The Organization for Economic Cooperation and Development (OECD) is issuing guidelines that are different, in some respects, than long-standing international tax principles. As countries unilaterally amend their tax laws to adopt certain parts of the OECD guidelines, this may increase tax uncertainty and may adversely impact our restructuring initiatives,income taxes. Taxation at the country, state, provincial or municipal level also may be subject to review and potential override by regional, federal, national or other government authorities. In addition, we are subject to the continuous examination of our income tax returns by the United States Internal Revenue Service and other tax authorities around the world. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from these examinations will not have an adverse effect on our provision for income taxes and cash tax liability.
General Risk Factors
We are subject to breaches of our security systems, cyber-attacks and service interruptions, which could expose us to liability, litigation, regulatory action and damage our reputation.
We have implemented security systems with the intent of maintaining and protecting our own, and our customers', clients' and suppliers' confidential information, including information related to identifiable individuals, against unauthorized access or disclosure. Despite such efforts, we may experience a lossbe subject to breaches of continuity, lossour security systems resulting in unauthorized access to our facilities or information systems and the information we are trying to protect. Moreover, the risk of accumulated knowledge and/such attacks includes attempted breaches not only of our systems, but also those of our customers, clients and suppliers. The techniques used to obtain unauthorized access are constantly changing, are becoming increasingly more sophisticated and often are not recognized until after an exploitation of information has occurred. Therefore, we may be unable to anticipate these techniques or inefficiency during transitional periods. Transformationimplement sufficient preventative measures.
Threat actors regularly attempt and, restructuring may require a significant amount offrom time to time, have been successful in breaching our security systems, to gain access to our information and focus from both managementinfrastructure through various techniques, including phishing, ransomware and other employees,targeted attacks. The Company has retained and, in the future, may retain third-party experts to assist with the containment of and response to security incidents and, in coordination with law enforcement, with the investigation of such incidents. The Company has incurred, and expects to continue to incur, costs, including to retain such third-party experts, in connection with such incidents. We may also find it necessary to make significant further investments to protect this information and our infrastructure. These investments, and costs we incur in connection with security incidents, could be material.
While we do not believe cybersecurity incidents have resulted in any material impact on our business, operations or financial results or on our ability to service our customers or run our business, past and future incidents resulting in unauthorized access to our facilities or information systems, or those of our suppliers, or accidental loss or disclosure of proprietary or confidential information about us, our clients or our customers could result in, among other things, a total shutdown of our systems that would disrupt our ability to conduct business or pay vendors and
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employees. In addition, cybersecurity risks and data security incidents could lead to unfavorable publicity, governmental inquiry and oversight, litigation by affected parties and possible financial obligations for damages related to the theft or misuse of such information, any of which may divert attention from operating and growing our business. Furthermore, the expected savings associated with these initiatives may be offset to some extent by business disruption during the implementation phase as well as investments in new processes and systems until the initiatives are fully implemented and stabilized. If we fail to achieve some or all of the expected benefits of restructuring, it could have a material adverse effect on our competitive position, business, financial condition, results of operationsprofitability and cash flows.flow.
As partWhile social distancing measures restricting the ability of our effortsemployees to streamline operationswork at our offices are in place to combat the COVID-19 pandemic, it may exacerbate certain risks to our business, including an increased demand for information technology resources, increased risk of phishing and reduce costs,other cybersecurity attacks, and increased risk of unauthorized dissemination of sensitive personal information or proprietary or confidential information about us or our customers or other third-parties and we may be more susceptible to security breaches and other security incidents because we have offshoredless capability to implement, monitor and outsourced certain ofenforce our operations, servicesinformation security and other functions through captive arrangements as well as with third-parties (e.g. HCL) and we will continue to evaluate additional offshoring or outsourcing possibilities in the future. If our outsourcing partners or operations fail to perform their obligations in a timely manner or at satisfactory quality levels or if we are unable to attract or retain sufficient personnel with the necessary skill sets to meet our offshoring or outsourcing needs, the quality of our services, products and operations, as well as our reputation, could suffer. Our success depends, in part, on our ability to manage these potential transitions and issues, which in certain circumstances could be largely outside of our control. In addition, much of our offshoring takes place in developing countries and as a result may also be subject to geopolitical uncertainty. Diminished service quality from offshoring and outsourcing could have an adverse material impact to our operating results due to service interruptions and negative customer reactions.data protection policies.
We are subject to laws of the United States and foreign jurisdictions relating to individually identifiable information, and failure to comply with those laws could subject us to legal actions and negatively impact our operations.
We receive, process, transmit and store information relating to identifiable individuals, both in our role as a technology provider and as an employer. As a result, we are subject to numerous United States (both federal and state) and foreign jurisdiction laws and regulations designed to protect individually identifiable information. These laws have been subject to frequent changes, and new legislation in this area may be enacted at any time. For example, the General Data Protection Regulation that came into force in the European Union in May 2018. Changes to existing laws, introduction of new laws in this area, or failure to comply with existing laws that are applicable to us may subject us to, among other things, additional costs or changes to our business practices, liability for monetary damages, fines and/or criminal prosecution, unfavorable publicity, restrictions on our ability to obtain and process information and allegations by our customers and clients that we have not performed our contractual obligations, any of which may have a material adverse effect on our profitability and cash flow.
We are subject to breaches of our security systems, cyber-attacks and service interruptions, which could expose us to liability, litigation, and regulatory action and damage our reputation.
We have implemented security systems with the intent of maintaining and protecting our own, and our customers', clients' and suppliers' confidential information, including information related to identifiable individuals, against unauthorized access or disclosure. Despite such efforts, we may be subject to breaches of our security systems resulting in unauthorized access to our facilities or information systems and the information we are trying to protect. Moreover, the risk of such attacks includes attempted breaches not only of our systems, but also those of our customers, clients and suppliers. The techniques used to obtain unauthorized access are constantly changing, are becoming increasingly more sophisticated and often are not recognized until after an exploitation of information has occurred. Therefore, we may be unable to anticipate these techniques or implement sufficient preventative measures. Unauthorized access to our facilities or information systems, or those of our suppliers, or accidental loss or disclosure of proprietary or confidential information about us, our clients or our customers could result in, among other things, a total shutdown of our systems that would disrupt our ability to conduct business or pay vendors and employees. In the event of such actions, we could be exposed to unfavorable publicity, governmental inquiry and oversight, litigation by affected parties and possible financial obligations for damages related to the theft or misuse of such information, any of which could have a material adverse effect on our profitability and cash flow. While from time to time attempts are made to access our systems, these attempts have not resulted in any material release of information, degradation or disruption to our systems. We may also find it necessary to make significant further investments to protect this information and our infrastructure.
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We have outsourced a significant portion of our manufacturing operations and increasingly rely on third-party manufacturers, subcontractors and suppliers.
We have outsourced a significant portion of our manufacturing operations to third parties, such as Fuji Xerox Co., Ltd. We face the risk that those manufacturers may not be able to develop manufacturing methods appropriate for our products, quickly respond to changes in customer demand, and obtain supplies and materials necessary for the manufacturing process. In addition, they may experience labor shortages and/or disruptions, manufacturing costs could be higher than planned and lead to higher prices for our products and the reliability of our products could decline. Further, since certain third parties we have outsourced manufacturing to also are our competitors in the print market, or may be in the future, we could experience product disruption as a result of competitive pressures that increase the cost of the products supplied. If any of these risks were to be realized, and similar third-party manufacturing relationships could not be established, we could experience interruptions in supply or increases in costs that might result in our being unable to meet customer demand for our products, damage our relationships with our customers and reduce our market share, all of which could materially adversely affect our results of operations and financial condition.
In addition, in our services business we may partner with other parties, including software and hardware vendors, to provide the complex solutions required by our customers. Therefore, our ability to deliver the solutions and provide the services required by our customers is dependent on our and our partners' ability to meet our customers' requirements and schedules. If we or our partners fail to deliver services or products as required and on time, our ability to complete the contract may be adversely affected, which may have an adverse impact on our revenue and profits.
We need to successfully manage changes in the printing environment and market because our operating results may be negatively impacted by lower equipment placements and usage trends.
The printing market and environment is changing as a result of new technologies, shifts in customer preferences in printing and the expansion of new printing markets as well as ancillary markets. The process of developing new high-technology products, software, services and solutions and enhancing existing hardware and software products, services and solutions is complex, costly and uncertain, and any failure by us to anticipate customers' changing needs and emerging technological trends accurately could significantly harm our market share, results of operations and financial condition. Examples include mobile printing, color printing, packaging, print on objects, continuous feed inkjet printing and the expansion of the market for entry products (A4 printers) and high-end products as well as electronic delivery, and cloud-based computing and software. These changing market trends are also opening up new ancillary markets for our products, services and software.
A significant part of our strategy and ultimate success in this changing market is our ability to develop and market technology that produces products, services and software that meet these changes. We expect that revenue growth can be improved through improvements in the software features of our multifunction devices, increases in the color printer through expansion to metallic, fluorescent, and clear ink and digital packaging, and leveraging a strong base in managed print services with new digital, analytics, security features. Our software strategy involves software for integrated solutions and delivery of industry-focused services into an existing customer base. We also expect to extend our presence in the SMB market through organic and inorganic investments as well as further expansion into channels and eCommerce and invest in innovation including digital packaging, AI workflow assistants for knowledge workers, 3D printing and digital manufacturing, sensors and services for IoT and cleantech. Our future success in executing on this strategy depends on our ability to make the investments and commit the necessary resources in this highly competitive market. Despite this investment, the process of developing new products or technologies is inherently complex and uncertain and there are a number of risks that we are subject to including the risk that our products or technologies will successfully satisfy our customers’ needs or gain market acceptance. If we are unable to develop and market advanced and competitive technologies, it may negatively impact our future revenue growth and market share as well as our planned expansion into new or alternative markets. Additionally, it may negatively impact expansion of our worldwide equipment placements, as well as sales of services and supplies occurring after the initial equipment placement (post sale revenue) in the key growth markets of digital printing, color and multifunction system. If we are unable to maintain a consistent level of revenue, it could materially adversely affect our results of operations and financial condition.
Our ability to fund our customer financing activities at economically competitive levels depends on our ability to borrow and the cost of borrowing in the credit markets.
The long-term viability and profitability of our customer financing activities is dependent, in part, on our ability to borrow and the cost of borrowing in the credit markets. This ability and cost, in turn, is dependent on our credit rating, which is currently non-investment grade, and is subject to credit market volatility. We primarily fund our customer financing activity through a combination of cash generated from operations, cash on hand, capital market offerings, sales and
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securitizations of finance receivables and commercial paper borrowings. Our ability to continue to offer customer financing and be successful in the placement of equipment with customers is largely dependent on our ability to obtain funding at a reasonable cost. If we are unable to continue to offer customer financing, or find an economic alternative, it could materially adversely affect our results of operations and financial condition.
Our significant debt could adversely affect our financial health and pose challenges for conducting our business.
Our ability to provide customer financing is a significant competitive advantage. We have and will continue to have a significant amount of debt and other obligations, the majority of which support our customer financing activities. Our substantial debt and other obligations could have important consequences. For example, it could (i) increase our vulnerability to general adverse economic and industry conditions; (ii) limit our ability to obtain additional financing for future working capital, capital expenditures, acquisitions and other general corporate requirements; (iii) increase our vulnerability to interest rate fluctuations because a portion of our debt has variable interest rates; (iv) require us to dedicate a substantial portion of our cash flows from operations to service debt and other obligations thereby reducing the availability of our cash flows from operations for other purposes; (v) limit our flexibility in planning for, or reacting to, changes in our businesses and the industries in which we operate; (vi) place us at a competitive disadvantage compared to our competitors that have less debt; and (vii) become due and payable upon a change in control. If new debt is added to our current debt levels, these related risks could increase.
Our financial condition and results of operations could be adversely affected by employee benefit-related funding requirements.
We sponsor several defined benefit pension and retiree-health benefit plans throughout the world. We are required to make contributions to these plans to comply with minimum funding requirements imposed by laws governing these employee benefit plans. Although most of our major defined benefit plans have been amended to freeze current benefits and eliminate benefit accruals for future service, the projected benefit obligations under these benefit plans is measured annually and at December 31, 2019 exceeded the value of the assets of those plans by approximately $1.2 billion. The current underfunded status of these plans is a significant factor in determining the ongoing future contributions we will be required to make to these plans. Accordingly, we expect to have additional funding requirements in future years, and we may make additional, voluntary contributions to the plans. Depending on our cash position at the time, any such funding or contributions to our defined benefit plans could impact our operating flexibility and financial position, including adversely affecting our cash flow for the quarter in which such funding or contributions are made. Weak economic conditions and related under-performance of asset markets could also lead to increases in our funding requirements.
We need to maintain adequate liquidity in order to meet our operating cash flow requirements, repay maturing debt and meet other financial obligations, such as payment of dividends to the extent declared by our Board of Directors. If we fail to comply with the covenants contained in our various borrowing agreements, it may adversely affect our liquidity, results of operations and financial condition.
Our liquidity is a function of our ability to successfully generate cash flows from a combination of efficient operations and continuing operating improvements, access to capital markets and funding from third parties. We believe our liquidity (including operating and other cash flows that we expect to generate) will be sufficient to meet operating requirements as they occur; however, our ability to maintain sufficient liquidity going forward subject to the general liquidity of and on-going changes in the credit markets as well as general economic, financial, competitive, legislative, regulatory and other market factors that are beyond our control.
Our $1.8 billion credit facility (the Credit Facility) contains financial maintenance covenants, including maximum leverage (debt for borrowed money divided by consolidated EBITDA, as defined) and a minimum interest coverage ratio (consolidated EBITDA divided by consolidated interest expense, as defined). At December 31, 2019, we were in full compliance with the covenants and other provisions of the Credit Facility. Failure to comply with material provisions or covenants in the Credit Facility could have a material adverse effect on our liquidity, results of operations and financial condition.
Our business, results of operations and financial condition may be negatively impacted by legal and regulatory matters.
We have various contingent liabilities that are not reflected on our balance sheet, including those arising as a result of being involved in a variety of claims, lawsuits, investigations and proceedings concerning: securities law; tax law; governmental entity contracting, servicing and procurement laws; intellectual property law; environmental law; employment law; the Employee Retirement Income Security Act (ERISA); and other laws and regulations, as discussed
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in the “Contingencies” noteNote 21 - Contingencies and Litigation in the Consolidated Financial Statements. 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 materially increase an existing accrual, or should any of these matters result in a final adverse judgment or be settled for significant amounts above any existing accruals, it 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.
Due to the international scope of our operations, we are subject to a complex system of commercial and trade regulations around the world. Recent years have seen an increase in the development and enforcement of laws regarding trade compliance and anti-corruption, such as the U.S. Foreign Corrupt Practices Act and similar laws from other countries. Our numerous foreign subsidiaries, affiliates and joint venture partners are governed by laws, rules and business practices that differ from those of the U.S. The activities of these entities may not comply with U.S. laws or business practices or our Code of Business Conduct. Violations of these laws may result in severe criminal or civil sanctions, could disrupt our business, and result in an adverse effect on our reputation, business and results of operations or financial condition. We cannot predict the nature, scope or effect of future regulatory requirements to which our operations might be subject or the manner in which existing laws might be administered or interpreted.
Concern over climate change, including global warming, has led to legislative and regulatory initiatives directed at limiting greenhouse gas emissions. For example, proposals that would impose mandatory requirements on greenhouse gas emissions continue to be considered by policy makers in the countries, states and territories in which we operate. Laws and/or regulatory actions to address concerns about climate change and greenhouse gas emissions could impact our business, including the availability of our products or the cost to obtain or sell those products. Xerox also recognizes transitional risks associated with changes in voluntary standards and customer preferences in connection with concerns about climate change. If Xerox is unable to offer products that are as energy efficient as our competitors, there is a risk of reduced demand for our products and reduced market share. Inability, or a perception of inability, to achieve progress toward our environmental goals could adversely impact our
Xerox 2021 Annual Report 21
business or damage our reputation. And, like all organizations, we and our partners and suppliers also may be subject to physical risks associated with climate change, such as increased severity and frequency of extreme weather events and more frequent short-term business disruptions as a result of severe weather such as flooding and winter snow storms, which could impair our ability to effectively deliver products and services to our customers or to keep our operating costs aligned with expectations. If any of these risks were realized, we could experience interruptions in supply or increases in costs that might result in our being unable to meet customer demand for our products and services, damage our relationships with our customers and reduce our market share, all of which could adversely affect our results of operations and financial condition.
Our operations and our products are subject to environmental regulations in each of the jurisdictions in which we conduct our business and sell our products. Xerox is party to, or otherwise involved in, proceedings brought by U.S. or state environmental agencies under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), known as "Superfund," or state laws. Some of our manufacturing operations use, and some of our products contain, substances that are regulated in various jurisdictions. For example, variousVarious countries and jurisdictions have adopted, or are expected to adopt, restrictions on the types and amounts of chemicals that may be present in electronic equipment or other items that we use or sell. Recently, a numberOngoing research and review of studies have been published by third parties regarding chemicals utilizedused in our industry, as well as potential health/safety impactsproducts could lead to further restriction of machine emissions. Additional studies are planned,common chemicals in office equipment and depending on the results of such studies, regulatory initiatives could follow. We are monitoring these developments. If we do not comply with applicable rules and regulations in connection with the use of such substances and the sale of products containing such substances, then we could be subject to liability and could be prohibited from selling our products in their existing forms, which could have a material adverse effect on our results of operations and financial condition. Further, various countries and jurisdictions have adopted or are expected to adopt, programs that make producers of electrical goods, including computers and printers, responsible for certain labeling, collection, recycling, treatment and disposal of these recovered products. If we are unable to collect, recycle, treat and dispose of our products in a cost-effective manner and in accordance with applicable requirements, it could materially adversely affect our results of operations and financial condition.
Other potentially relevant initiatives throughout the world include proposals for more extensive chemical registration requirements and/or possible bans on the use of certain chemicals, various efforts to limit energy use in products and other environmentally-related programs impacting products and operations, such as those associated with climate change accords, agreements and regulations. For example, the European Union's Energy-Related Products Directive (ERP) has led to the adoption of “implementing measures” or "voluntary agreements" that require certain classes of products to achieve certain design and/or performance standards, in connection with energy use and potentially other environmental parameters and impacts. A number of our products are already required to comply with ERP requirements and further regulations are being developed by the E.U. authorities. Another example issupplies. In the European Union “REACH” Regulation (Registration, Evaluation, Authorization and Restriction of Chemicals), a broad initiative that requires parties throughout the supply chain to register, assess and disclose information regarding many chemicals in their products. Depending on the types, applications, forms and uses of chemical substances in various products, REACH and similar regulatory programs in other jurisdictions could lead to restrictions and/or bans on certain chemical usage. In the United States, the Toxics Substances Control Act (TSCA) is undergoing a major overhaul with similar potential for regulatory challenges.was revised in 2016. Xerox continues its efforts toward monitoring and evaluating the applicability of these and numerous other regulatory initiatives in an effort to develop compliance strategies. As these and similar initiatives and programs become regulatory requirements throughout the world and/or are adopted as public or private procurement requirements, we must comply. Failure to comply orcould result in the company being subject to liability potentially and face market access limitations that could have a material adverse effect on our operations and financial condition. Similarly, environmentally
Other potentially relevant initiatives throughout the world include proposals for more extensive chemical registration requirements and/or possible bans on the use of certain chemicals, various efforts to limit energy use in products and other environmentally-related programs impacting products and operations, such as those associated with climate change accords, agreements and regulations. For example, the European Union's Energy-Related Products Directive (ERP) and has led to the adoption of “implementing measures” or "voluntary agreements" that require certain classes of products to achieve certain design and/or performance standards, in connection with energy use and potentially other environmental parameters and impacts. A number of our products are already required to comply with ERP requirements and further regulations are being developed by the EU authorities. The EU Circular Economy Action Plan CEAP) introduced legislative and non-legislative measures focusing on how products are designed, promoting circular economy processes, encouraging sustainable consumption, and ensuring waste is prevented. The implementation of the CEAP is expected to impact the materials used, including chemicals and plastics, in products that are placed in the EU market. Environmentally driven procurement requirements also voluntarily adopted by customers in the marketplace (e.g., U.S. EPA EnergyStar, EPEAT)EPEAT, and EU Green Public Procurement) are constantly evolving and becoming more stringent, presenting further market access challenges if our products fail to comply. Concern over climate change, including global warming, has led
Various countries and jurisdictions have adopted or are expected to legislativeadopt requirements clarifying manufacturer roles and regulatory initiatives directed at limiting greenhouse gas emissions.responsibilities related to the recovery products that were placed on the market and remediation of by-products of the manufacturing process. For example, proposalsjurisdictions have adopted or are expected to adopt, programs that would impose mandatory requirements on greenhouse gas emissions continuemake producers of electrical goods, including computers and printers, responsible for certain labeling, collection, recycling, treatment and disposal of these recovered products. If we are unable to be considered by policy makers in the countries, statescollect, recycle, treat and territories in which we operate. Enacted laws and/or regulatory actions to address concerns about climate change and greenhouse gas emissions could negatively impact our business, including the availabilitydispose of our products in a cost-effective manner and in accordance with applicable requirements, it could materially adversely affect our results of operations and financial condition. Further, Xerox is party to, or otherwise involved in, proceedings in a limited number of locations brought by U.S. or state environmental agencies under the cost to obtainComprehensive Environmental Response, Compensation and Liability Act (CERCLA), known as "Superfund," or sell those products.state laws.
Xerox 20192021 Annual Report 1522
The United Kingdom leaving the E.U. could adversely affect us.
In 2016, the U.K. approved an exit from the E.U., commonly referred to as Brexit and the U.K. withdrew from the E.U. on January 31, 2020. The future relationship between the U.K. and the E.U. remains uncertain as the U.K. and the E.U. work through the transition period that provides time for them to negotiate the details of their future relationship. The transition period is currently expected to end on December 31, 2020, and, if no agreement is reached, the default scenario would be a “no-deal” Brexit. In the event of a no-deal Brexit, the U.K. will leave the E.U. with no agreements in place beyond any temporary arrangements that have or may be put in place by the E.U. or individual E.U. Member States, and the U.K. as part of no-deal contingency efforts and those conferred by mutual membership of the World Trade Organization. Given the lack of comparable precedent, it is unclear what financial, trade and legal implications the U.K. leaving the E.U. with no agreements in place would have and how such withdrawal would affect us.
We have operations and customers in the United Kingdom and the E.U. , and as a result, we face risks associated with the potential uncertainty and disruptions that may follow Brexit, including with respect to volatility in exchange rates and interest rates and potential material changes to the regulatory regime applicable to our operations in the United Kingdom as well as potential for disruptions in our supply chain in the United Kingdom. Brexit could adversely affect European or worldwide political, regulatory, economic or market conditions and could contribute to instability in global political institutions, regulatory agencies and financial markets. For example, depending on the terms of Brexit, the United Kingdom could also lose access to the single E.U. market and to the global trade deals negotiated by the E.U. on behalf of its members. Disruptions and uncertainty caused by Brexit may also cause our customers to closely monitor their costs and reduce their spending budget on our products and services. Any of these effects of Brexit, and others we cannot anticipate or that may evolve over time, could adversely affect our business, operating results and financial condition.
Item 1B. Unresolved Staff Comments
None
Item 2. Properties
We own several manufacturing, engineering and research facilities and lease other facilities. Our principal manufacturing and engineering facilities are located in New York, California, Oklahoma, Oregon, Canada, the U.K., Ireland, and a leased site in the Netherlands. Our principal research facilities are located in California, New York, and Canada. Our Corporate Headquarters is a leased facility located in Norwalk, Connecticut.
In an effort to reduce our cost structure and align it to the changing nature of our business and to achieve operating efficiencies, we have reduced our real estate footprint as part of our restructuring programs, including Project Own It, as well as other transformational efforts (refer to Note 14 - Restructuring Programs in the Consolidated Financial Statements). As a result of implementing these programs, several leased and owned properties became surplus. We are obligated to maintain our leased surplus properties through required contractual periods. We have disposed or subleased certain of these properties and are actively pursuing the successful disposition of remaining surplus properties.
In 2019,2021, we owned or leased numerous facilities globally, which house general offices, sales offices, service locations, data centers, call centers, warehouses and distribution centers. The size of our property portfolio at December 31, 20192021 was approximately 1512.9 million square feet, which was comprised of 442349 leased facilities and 2017 owned properties with 7371 facilities (of which 50 are located on our Webster, New York campus). We occupied approximately 10.59.5 million square feet, and 4.52.4 million square feet was surplus.were surplus, and approximately 1.0 million square feet are sublet to third parties. It is our opinion that our properties have been well maintained, are in sound operating condition and contain all the necessary equipment and facilities to perform their functions. We believe that our current facilities are suitable and adequate for our current businesses.
Refer to Note 2 - Adoption of New Leasing Standard11 - Lessee, in the Consolidated Financial Statements, for additional information regarding our leased assets.
Item 3. Legal Proceedings
Refer to the information set forth under Note 21 - Contingencies and Litigation in the Consolidated Financial Statements.
Item 4. Mine Safety Disclosures
Not applicable.
Xerox 20192021 Annual Report 1623
Part II
| |
ITEM 5. | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Corporate Information
Stock Exchange Information
As previously discussed, on July 31, 2019 Xerox completed its Reorganization into a holding company structure. As a result, Xerox became a direct, wholly owned subsidiary of Xerox Holdings.
Xerox Holdings CorporationCorporation's common stock (XRX) is listed on the New York Stock Exchange.Nasdaq Global Select Market.
There is no established public trading market for Xerox Corporation's common stock, as all of the outstanding Xerox common stock is held solely held by Xerox Holdings.
Common Shareholders of Record
SeeAs of December 31, 2021, Xerox Holdings Corporation had approximately 21,336 shareholders of record.
Dividends
For additional information regarding dividends, refer to Item 68 - Selected Financial Statements and Supplementary Data, Xerox Holdings Corporation Five Years in Review - Common ShareholdersStatement of Record at Year-End, for additional information.Shareholders' Equity, which is incorporated herein by reference.
Performance Graph
Total Return to Shareholders | | | | | Year Ended December 31, | | Year Ended December 31, |
| (Includes reinvestment of dividends) | | 2014 | | 2015 | | 2016 | | 2017 | | 2018 | | 2019 | (Includes reinvestment of dividends) | | 2016 | | 2017 | | 2018 | | 2019 | | 2020 | | 2021 |
| Xerox Holdings Corporation | | $ | 100.00 |
| | $ | 79.74 |
| | $ | 68.69 |
| | $ | 89.96 |
| | $ | 63.52 |
| | $ | 122.14 |
| Xerox Holdings Corporation | | $ | 100.00 | | | $ | 130.97 | | | $ | 92.48 | | | $ | 177.81 | | | $ | 118.05 | | | $ | 120.39 | |
| S&P 500 Index | | 100.00 |
| | 101.38 |
| | 113.51 |
| | 138.29 |
| | 132.23 |
| | 173.86 |
| S&P 500 Index | | 100.00 | | | 121.83 | | | 116.49 | | | 153.17 | | | 181.35 | | | 233.41 | |
| S&P 500 Information Technology Index | | 100.00 |
| | 105.92 |
| | 120.59 |
| | 167.42 |
| | 166.94 |
| | 250.89 |
| S&P 500 Information Technology Index | | 100.00 | | | 138.83 | | | 138.43 | | | 208.05 | | | 299.37 | | | 402.73 | |
_____________
Source: Standard & Poor's Investment Services
Notes: Graph assumes $100 invested on December 31, 20142016 in Xerox Holdings, the S&P 500 Index and the S&P 500 Information Technology
Index, respectively, and assumes dividends are reinvested.
Xerox 20192021 Annual Report 1724
Sales Of Unregistered Securities During The Quarter Ended December 31, 20192021
During the quarter ended December 31, 2019,2021, Xerox Holdings Corporation issued the following securities in transactions that were not registered under the Securities Act of 1933, as amended (the Act).
Annual Director Fees
(a)Securities issued on November 11, 2021: Xerox Holdings Corporation issued 8,683 deferred stock units (DSUs), representing the right to receive shares of Common Stock, par value $1 per share, at a future date.
(b)No underwriters participated. The DSUs were issued to Jesse A. Lynn, a non-employee Director of Xerox Holdings Corporation. Mr. Lynn joined the Board of Directors in November 2021.
(c)The DSUs were issued at a deemed purchase price of $19.82 per DSU (aggregate price $172,097), based upon the market value of our Common Stock on the date of issuance, in payment of the Annual Director's fees pursuant to Xerox Holdings Corporation's 2004 Equity Compensation Plan for Non-Employee Directors (as amended and restated in 2021 (the 2021 Restatement)). The number of DSUs awarded was prorated to reflect that Mr. Lynn joined the Board of Directors in November 2021.
(d)Exemption from registration under the Act was claimed based upon Section 4(2) as a sale by an issuer not involving a public offering.
Dividend EquivalentEquivalents
| |
(a)
| Securities issued on October 31, 2019: Xerox Holdings Corporation issued 1,331 deferred stock units (DSUs), representing the right to receive shares of Common Stock, par value $1 per share, at a future date. |
| |
(b)
| No underwriters participated. The shares were issued to each of the non-employee Directors of Xerox Holdings Corporation and to two former non-employee Directors of Xerox Corporation: Gregory Q. Brown, Jonathan Christodoro, Keith Cozza, Joseph J. Echevarria, Nicholas Graziano, Cheryl Gordon Krongard, Scott Letier and Sara Martinez Tucker. |
| |
(c)
| The DSUs were issued at a deemed purchase price of $30.295 per DSU (aggregate price $40,323), based upon the market value on the date of record, in payment of the dividend equivalents due to DSU holders pursuant to Xerox Holdings Corporation’s 2004 Equity Compensation Plan for Non-Employee Directors. |
| |
(d)
| Exemption from registration under the Act was claimed based upon Section 4(2) as a sale by an issuer not involving a public offering. |
(a)Securities issued on November 1, 2021: Xerox Holdings Corporation issued 3,139 deferred stock units (DSUs), representing the right to receive shares of Common Stock, par value $1 per share, at a future date.
(b)No underwriters participated. The DSUs were issued to each of the non-employee Directors of Xerox Holdings Corporation, two former non-employee Directors of Xerox Corporation and one former non-employee Director of Xerox Holdings Corporation: Jonathan Christodoro, Keith Cozza, Joseph J. Echevarria, Nicholas Graziano, Aris Kekedjian, Cheryl Gordon Krongard, Scott Letier, Nichelle Maynard-Elliott, Steven D. Miller and Margarita Paláu-Hernández.
(c)The DSUs were issued at a deemed purchase price of $20.35 per DSU (aggregate price $63,879), based upon the market value of our Common Stock on the date of record, in payment of the dividend equivalents due to DSU holders pursuant to Xerox Holdings Corporation’s 2004 Equity Compensation Plan for Non-Employee Directors (as amended and restated in 2021 (the 2021 Restatement)).
(d)Exemption from registration under the Act was claimed based upon Section 4(2) as a sale by an issuer not involving a public offering.
Issuer Purchases of Equity Securities During the Quarter Ended December 31, 20192021
In connection withOctober 2021, the reorganization of Xerox Corporation’s corporate structure into a holding company structure, in July 2019, Xerox Holdings Corporation’sCorporation's Board of Directors authorized a $1.0 billion$500 million share repurchase program (exclusive of any commissions and other transaction fees and costs related thereto). This program replaced the $1.0 billionapproximate $450 thousand of authority remaining under Xerox Corporation’sHoldings Corporation's previously authorized $2.0$1.1 billion share repurchase program. Shares
Repurchases of Xerox Holdings Corporation’s common stockCommon Stock, par value $1 per share, include the following:
Board Authorized Share Repurchase Program: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total Number of Shares Purchased | | Average Price Paid per Share(1) | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(2) | | Maximum Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs(2)(3) |
| October 1 through 31 | | — | | | $ | — | | | — | | | $ | 500,000,000 | |
| November 1 through 30 | | 10,725,717 | | | 19.59 | | | 10,725,717 | | | 289,936,457 | |
| December 1 through 31 | | 8,675,191 | | | 20.43 | | | 8,675,191 | | | 112,688,535 | |
| Total | | 19,400,908 | | | | | 19,400,908 | | | |
_____________
(1)Exclusive of fees and expenses.
(2)Of the $500 million of share repurchase authority previously granted by the Xerox Holdings Corporation's Board of Directors, exclusive of fees and expenses, approximately $387 million has been used through December 31, 2021. Repurchases may be repurchasedmade on the open market, or through derivative or negotiated transactions.contracts. Open-market repurchases will be made in compliance with the Securities and ExchangesExchange Commission’s Rule 10b-18, and are subject to market conditions, as well as applicable legal and other considerations.
Repurchases(3)Balances do not include the remaining authority of approximately $450 thousand under Xerox Holdings Corporation’s Common Stock, par value $1, perCorporation's previously authorized share include the following:
repurchase program, which was cancelled by Xerox Holdings Corporation's Board Authorized Share Repurchase Program:of Directors in October 2021.
Xerox 2021 Annual Report 25
|
| | | | | | | | | | | | | | |
| | | Total Number of Shares Purchased | | Average Price Paid per Share(1) | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(2) | | Maximum Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs(2) |
| October 1 through 31 | | 2,790,055 |
| | $ | 29.94 |
| | 2,790,055 |
| | $ | 849,042,178 |
|
| November 1 through 30 | | 1,947,038 |
| | 37.32 |
| | 1,947,038 |
| | 776,371,390 |
|
| December 1 through 31 | | 2,030,752 |
| | 37.59 |
| | 2,030,752 |
| | 700,027,664 |
|
| Total | | 6,767,845 |
| | | | 6,767,845 |
| | |
_____________
| |
(1)
| Exclusive of fees and costs. |
| |
(2)
| Of the $1.0 billion of share repurchase authority previously granted by the Xerox Holdings Corporation Board of Directors, exclusive of fees and expenses, approximately $300 million has been used through December 31, 2019. Repurchases may be made on the open market, or through derivative or negotiated contracts. Open-market repurchases will be made in compliance with the Securities and Exchange Commission’s Rule 10b-18, and are subject to market conditions, as well as applicable legal and other considerations. |
Repurchases Related to Stock Compensation Programs(1):
| | | | | Total Number of Shares Purchased | | Average Price Paid per Share(2) | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs | | Total Number of Shares Purchased | | Average Price Paid per Share(2) | | Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs | | Maximum Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs |
| October 1 through 31 | | 8,962 |
| | $ | 29.47 |
| | n/a | | n/a | October 1 through 31 | | 13,635 | | | $ | 21.00 | | | n/a | | n/a |
| November 1 through 30 | | — |
| | — |
| | n/a | | n/a | November 1 through 30 | | — | | | — | | | n/a | | n/a |
| December 1 through 31 | | 289,901 |
| | 37.00 |
| | n/a | | n/a | December 1 through 31 | | 195,562 | | | 23.31 | | | n/a | | n/a |
| Total | | 298,863 |
| | | | Total | | 209,197 | | |
_____________
| |
(1)These repurchases are made under a provision in our restricted stock compensation programs for the indirect repurchase of shares through a net-settlement feature upon the vesting of shares in order to satisfy minimum statutory tax-withholding requirements. (2)Exclusive of fees and expenses. Item 6. [Reserved] Information pertaining to Item 6 is not presented in accordance with amendments to Item 301 of Regulation S-K. (1)
| These repurchases are made under a provision in our restricted stock compensation programs for the indirect repurchase of shares through a net-settlement feature upon the vesting of shares in order to satisfy minimum statutory tax-withholding requirements. |
| |
(2)
| Exclusive of fees and costs. |
Xerox 20192021 Annual Report 1826
Item 6. Selected Financial Data
Xerox Holdings Corporation
Five Years in Review
|
| | | | | | | | | | | | | | | | | | | | |
| (in millions, except per-share data) | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| Per-Share Data | | | | | | | | | | |
| Income from continuing operations | | | | | | | | | | |
| Basic | | $ | 2.86 |
| | $ | 1.17 |
| | $ | 0.20 |
| | $ | 1.81 |
| | $ | 2.52 |
|
| Diluted | | 2.78 |
| | 1.16 |
| | 0.20 |
| | 1.79 |
| | 2.49 |
|
| Net Income (Loss) Attributable to Xerox Holdings | | | | | | | | | | |
| Basic | | 6.03 |
| | 1.40 |
| | 0.71 |
| | (1.95 | ) | | 1.59 |
|
| Diluted | | 5.80 |
| | 1.38 |
| | 0.71 |
| | (1.93 | ) | | 1.58 |
|
| Common stock dividends declared | | 1.00 |
| | 1.00 |
| | 1.00 |
| | 1.24 |
| | 1.12 |
|
| Operations | | | | | | | | | | |
| Revenues | | $ | 9,066 |
| | $ | 9,662 |
| | $ | 9,991 |
| | $ | 10,440 |
| | $ | 11,090 |
|
| Sales | | 3,227 |
| | 3,454 |
| | 3,412 |
| | 3,532 |
| | 3,890 |
|
| Services, maintenance and rentals | | 5,595 |
| | 5,940 |
| | 6,285 |
| | 6,583 |
| | 6,854 |
|
| Financing | | 244 |
| | 268 |
| | 294 |
| | 325 |
| | 346 |
|
| Income from continuing operations | | 651 |
| | 310 |
| | 70 |
| | 486 |
| | 701 |
|
| Income from continuing operations - Xerox Holdings | | 648 |
| | 306 |
| | 66 |
| | 483 |
| | 694 |
|
| Net income (loss) | | 1,361 |
| | 374 |
| | 207 |
| | (468 | ) | | 455 |
|
| Net income (loss) - Xerox Holdings | | 1,353 |
| | 361 |
| | 195 |
| | (471 | ) | | 448 |
|
Financial Position(1)(2) | | |
| | |
| | |
| | |
| | |
|
| Working capital | | $ | 2,705 |
| | $ | 1,462 |
| | $ | 2,507 |
| | $ | 2,357 |
| | $ | 1,448 |
|
| Total Assets | | 15,047 |
| | 14,874 |
| | 15,946 |
| | 18,051 |
| | 25,442 |
|
Consolidated Capitalization(1) | | |
| | |
| | |
| | |
| | |
|
| Short-term debt and current portion of long-term debt | | $ | 1,049 |
| | $ | 961 |
| | $ | 282 |
| | $ | 1,011 |
| | $ | 985 |
|
| Long-term debt | | 3,233 |
| | 4,269 |
| | 5,235 |
| | 5,305 |
| | 6,382 |
|
Total Debt(2) | | 4,282 |
| | 5,230 |
| | 5,517 |
| | 6,316 |
| | 7,367 |
|
| Convertible preferred stock | | 214 |
| | 214 |
| | 214 |
| | 214 |
| | 349 |
|
| Xerox Holdings shareholders' equity | | 5,587 |
| | 5,005 |
| | 5,256 |
| | 4,709 |
| | 8,975 |
|
| Noncontrolling interests | | 7 |
| | 34 |
| | 37 |
| | 38 |
| | 43 |
|
| Total Consolidated Capitalization | | $ | 10,090 |
| | $ | 10,483 |
| | $ | 11,024 |
| | $ | 11,277 |
| | $ | 16,734 |
|
| Selected Data and Ratios | | |
| | |
| | |
| | |
| | |
|
| Common shareholders of record at year-end | | 25,398 |
| | 26,742 |
| | 28,752 |
| | 31,803 |
| | 33,843 |
|
Book value per common share(3) | | $ | 26.28 |
| | $ | 21.80 |
| | $ | 20.64 |
| | $ | 18.57 |
| | $ | 35.45 |
|
Year-end common stock market price(3) | | $ | 36.87 |
| | $ | 19.76 |
| | $ | 29.15 |
| | $ | 23.00 |
| | $ | 42.52 |
|
_____________
| |
(1) | Balance sheet amounts prior to 2019 include balances related to our investments in XIP and Fuji Xerox, which were sold in November 2019. Balance sheet amounts for 2015 include amounts for Conduent, which was spun-off in December 2016. Refer to Note 7 - Divestitures in our Consolidated Financial Statements for additional information. |
| |
(2) | As a result of the adoption of ASC 842, Leases effective January 1, 2019, finance lease obligations are reported in Other current and non-current liabilities. Prior to 2019, finance lease obligations are included in Debt. Refer to Note 1 - Basis of Presentation and Summary of Significant Accounting Policies, Note 2 - Adoption of New Leasing Standard - Lessee, Note 15 - Supplementary Financial Information and Note 16 - Debt, in our Consolidated Financial Statements for additional information. |
| |
(3) | Per share price and computation for 2015 are on a pre-separation basis. Refer to Note 7 - Divestitures in our Consolidated Financial Statements for further information. |
Xerox 2019 Annual Report 19
Xerox Corporation
Five Years in Review
|
| | | | | | | | | | | | | | | | | | | | |
| (in millions) | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| Operations | | | | | | | | | | |
| Revenues | | $ | 9,066 |
| | $ | 9,662 |
| | $ | 9,991 |
| | $ | 10,440 |
| | $ | 11,090 |
|
| Sales | | 3,227 |
| | 3,454 |
| | 3,412 |
| | 3,532 |
| | 3,890 |
|
| Services, maintenance and rentals | | 5,595 |
| | 5,940 |
| | 6,285 |
| | 6,583 |
| | 6,854 |
|
| Financing | | 244 |
| | 268 |
| | 294 |
| | 325 |
| | 346 |
|
| Income from continuing operations | | 651 |
| | 310 |
| | 70 |
| | 486 |
| | 701 |
|
| Income from continuing operations - Xerox | | 648 |
| | 306 |
| | 66 |
| | 483 |
| | 694 |
|
| Net income (loss) | | 1,361 |
| | 374 |
| | 207 |
| | (468 | ) | | 455 |
|
| Net income (loss) - Xerox | | 1,353 |
| | 361 |
| | 195 |
| | (471 | ) | | 448 |
|
Financial Position(1)(2) | | |
| | |
| | |
| | |
| | |
|
| Working capital | | $ | 2,771 |
| | $ | 1,462 |
| | $ | 2,507 |
| | $ | 2,357 |
| | $ | 1,448 |
|
| Total Assets | | 15,047 |
| | 14,874 |
| | 15,946 |
| | 18,051 |
| | 25,442 |
|
Consolidated Capitalization(1) | | |
| | |
| | |
| | |
| | |
|
| Short-term debt and current portion of long-term debt | | $ | 1,049 |
| | $ | 961 |
| | $ | 282 |
| | $ | 1,011 |
| | $ | 985 |
|
| Long-term debt | | 3,233 |
| | 4,269 |
| | 5,235 |
| | 5,305 |
| | 6,382 |
|
Total Debt(2) | | 4,282 |
| | 5,230 |
| | 5,517 |
| | 6,316 |
| | 7,367 |
|
| Convertible preferred stock | | — |
| | 214 |
| | 214 |
| | 214 |
| | 349 |
|
| Xerox shareholders' equity | | 5,867 |
| | 5,005 |
| | 5,256 |
| | 4,709 |
| | 8,975 |
|
| Noncontrolling interests | | 7 |
| | 34 |
| | 37 |
| | 38 |
| | 43 |
|
| Total Consolidated Capitalization | | $ | 10,156 |
| | $ | 10,483 |
| | $ | 11,024 |
| | $ | 11,277 |
| | $ | 16,734 |
|
_____________
| |
(1) | Balance sheet amounts prior to 2019 include balances related to our investments in XIP and Fuji Xerox, which were sold in November 2019. Balance sheet amounts for 2015 include amounts for Conduent, which was spun-off in December 2016. Refer to Note 7 - Divestitures in our Consolidated Financial Statements for additional information. |
| |
(2) | As a result of the adoption of ASC 842, Leases effective January 1, 2019, finance lease obligations are reported in Other current and non-current liabilities. Prior to 2019, finance lease obligations are included in Debt. Refer to Note 1 - Basis of Presentation and Summary of Significant Accounting Policies, Note 2 - Adoption of New Leasing Standard - Lessee, Note 15 - Supplementary Financial Information and Note 16 - Debt, in our Consolidated Financial Statements for additional information. |
Xerox 2019 Annual Report 20
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
In March 2019, Xerox Corporation (Xerox) announced plansThroughout the Management’s Discussion and Analysis (MD&A) that follows, references to create a new public holding company,"Xerox Holdings" refer to Xerox Holdings Corporation (Xerox Holdings), by implementing a holding company reorganization (the Reorganization). On July 31, 2019,and its consolidated subsidiaries, while references to "Xerox" refer to Xerox completedCorporation and its consolidated subsidiaries. References herein to “we,” "us," “our,” or the Reorganization. In the Reorganization, Xerox (the predecessor publicly held parent company) became a direct, wholly owned subsidiary of“Company,” refer collectively to both Xerox Holdings and Xerox unless the context suggests otherwise. References to “Xerox Holdings becameCorporation” refer to the successor public company. We believe implementation of a holdingstand-alone parent company structure will provide us with flexibilityand do not include its subsidiaries. References to develop“Xerox Corporation” refer to the stand-alone company and realize a range of strategic growth opportunities, including by pursuing different capital structures for new businesses, whether incubated or acquired. Refer to Note 1 - Basis of Presentation and Summary of Significant Accounting Policies - Corporate Reorganization, in the Consolidated Financial Statements for additional information regarding the Reorganization.do not include subsidiaries.
Currently, Xerox Holdings' soleprimary direct operating subsidiary is Xerox and therefore Xerox reflects the entiretynearly all of Xerox Holdings' operations. Accordingly, the following Management’s Discussion and Analysis (MD&A) solelyMD&A primarily focuses on the operations of Xerox and is intended to help the reader understand Xerox's business and its results of operations and financial condition. Throughout this Annual Report oncombined Form 10-K, references are made to various notes in the Consolidated Financial Statements which appear in Part II, Item 8 of this combined Form 10-K, and the information contained in such notes is incorporated by reference into the MD&A in the places where such references are made.
ThroughoutXerox 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 million at December 31, 2021. Due to its immaterial nature, and for ease of discussion, Xerox Ventures LLC's results are included within the following discussion.
Executive Overview
Our expectation entering 2021 was that in-office work would normalize following 2020's wave of COVID-19 infections and the global rollout of effective vaccines. However, the emergence of various variants of COVID-19 in 2021 resulted in many of our customers delaying their plans to return employees to the workplace and allowing employees to continue to work remotely or in a hybrid environment. This impact resulted in a reduction in expected Post sale revenue and profits. In the second half of the year, we also experienced an unprecedented level of supply chain disruption, in part due to the ongoing effects of the COVID-19 pandemic, with conditions deteriorating throughout the final two quarters of the year. These disruptions resulted in revenue falling below expectations for the year, with most of the shortfall comprised of high-margin mid-range devices and Post sale revenue. Supply chain disruptions also drove an increase in our backlog1 of equipment and IT hardware to nearly $350 million, which is approximately 2.5 times higher than at the end of 2020. We continue to streamline and optimize our operations and exceeded our target Project Own It savings of $375 million in 2021.
As we head into 2022, demand for our equipment remains strong as evidenced by our backlog1 of approximately $350 million as of year-end, which is primarily comprised of high-margin office equipment. We expect to have an elevated backlog1 at least through the first half of the year. As the backlog1 clears, our equipment revenue mix is expected to improve, which should result in improvements in gross margin. We also expect that there will be a broader return of workers to the office in the second half of 2022 and for Xerox, the correlation between return-to-work trends, page volumes, and post sale revenues remains strong, which suggests employees print when they return to the office and clients continue to value our printing services.
Although our financial results are expected to improve in 2022, our earnings for fourth quarter and full year 2021 includes an after-tax noncash goodwill impairment charge of $750 million ($781 million pre-tax) or $4.38 and $4.08 per share, respectively. This charge largely reflects the impact that the economic disruption caused by the COVID-19 pandemic has had and is expected to continue to have on the Xerox print business. Some of this impact is expected to be mitigated by growth of our digital services and offerings targeted for hybrid work business models. Additionally, the Company is currently pursuing its strategy to develop and expand certain expected growth businesses, such as financing, software and innovation to offset and, eventually, exceed reduced cash flows from the print business, but this strategy will take time to develop. Refer to the Application of Critical Accounting Policiessection of the MD&A that follows, referencesas well as Note 1 - Basis of Presentation and Summary of Significant Accounting Policies in the Consolidated Financial Statements for additional information regarding the Goodwill impairment.
Refer to “we,” “our,”Financial Overview for further discussion regarding additional impacts of the “Company,”COVID-19 pandemic on our business in 2021 and “Xerox” refer2020.
_____________
(1)Order backlog is measured as the value of unfulfilled sales orders, shipped and non-shipped, received from our customers waiting to be installed, including orders with future installation dates. It includes printing devices as well as IT hardware associated with our IT services offerings.
Xerox Corporation and its subsidiaries. References to “Xerox Corporation” refer to the stand-alone company and do not include subsidiaries, unless otherwise noted. References to “Xerox Holdings Corporation” refer to the stand-alone parent company and do not include its subsidiaries, unless otherwise noted.2021 Annual Report 27
Business Overview
With annual revenues of approximately $9$7.0 billion, we areremain a leading global provider of digital print technology and related services, software and solutions. We operate in a core market estimated at approximately $68 billion. Our primary offerings span threefour main areas: Workplace Solutions, Production Solutions, Xerox Services and FITTLE. We disclosed at our Investor Conference on February 23, 2022, that we have rebranded our Xerox Financial Services (XFS) business, which is now known as FITTLE.
•Workplace Solutions includes two strategic product groups, Entry and Mid-Range, much of which share common solutions, apps and ConnectKey® software. Workplace Solutions revenues include the sale of products (captured primarily as equipment sales) as well as the supplies and Graphic Communicationsassociated technical services and the financing of those products through FITTLE (captured as post sale revenue).
•Production Solutions:Solutions are designed for customers in the graphic communications, in-plant and production print environments with high-volume printing requirements.
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• | Xerox Services includes solutions and services that helps customers to optimize their print and communications infrastructure, apply automation and simplification to maximize productivity, and ensure the highest levels•Xerox Services includes a continuum of related security. |
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• | Workplace Solutions includes two strategic product groups, Entry and Mid-Range, which share common technology, manufacturing and product platforms. Workplace Solutions revenues include the sale of products and supplies, as well as the associated technical service and financing of those products.
|
| |
• | Graphic Communications and Production Solutions are designed for customers in the graphic communications, in-plant and production print environments with high-volume printing requirements.
|
We also have digital solutions and services that helps our customers optimize their print and communications infrastructure, apply automation and simplification to maximize productivity, and ensure the highest levels of security. Our primary offerings in this area are Managed Print Services (MPS), Capture & Content Services (CCS) and Customer Engagement Services (CES) as well as IT Services. CCS and CES encompass a range of Digital Services that leverage our software assets to competecapabilities in an adjacent SoftwareWorkflow Automation, Personalization and Services market that is estimated at approximately $34 billion. Our main offerings for this market are focused on: industry-specific Digital Solutions, Personalization & Communication Software, and Content Management Software. Solutions, and Digitization Services.
•FITTLE(formerly XFS) is a global financing solutions business and currently offers financing for direct channel customer purchases of Xerox equipment through bundled lease agreements and lease financing to end-user customers who purchase Xerox equipment through our indirect channels.
In addition to our four primary offering areas described above, a smaller but growing portion of our revenues comes from non-core streams including paper sales in our developing market countries, wide-format systems, licensing revenue, as well as from IT Services, CareAR, which is comprised of DocuShare® and revenue from the license or sale of our technology.XMPie, and PARC (Innovation).
Headquartered in Norwalk, Connecticut, with approximately 27,00023,300 employees, Xerox serves customers in approximately 160 countries. We have a broad and diverse base of customers by both geography and industry, ranging from SMBssmall and medium-sized businesses (SMBs) to printing production (including graphic communications) companies, governmental entities, educational institutions and Fortune 1000 corporations. Our business does not depend upon a single customer, or a few customers, the loss of which would have a material adverse effect on our business. In 2019,2021, approximately 40% of our revenue was generated outside the United States.
Xerox 2019 Annual Report 21
Market and Business Strategy
Our market and business strategy is to maintain overall market share leadership in our core market and increase our participation in the growth areas, while expanding into adjacent markets and leveraging our innovation capabilities to enter new markets. We haveThe Company’s four strategic initiatives, thatsummarized below, remain at the core of how we believe will position Xeroxoperate and deliver results for success:
Optimize operations for simplicityall stakeholders.
–1.Optimize Operations for Simplicity
•Continuously improve operating model for greater efficiency, revenue flow-through and return on assets
–Optimize the supply chain and supplier competitiveness
–Leverage digital technologies to make it easier to do business with Xerox
Drive Revenue
–Enhance the customer experience
–Expand integrated solutions comprised of hardware, software and services
–Focus on driving growth within the small and midsize businesses (SMB)
Re-energize the innovation engine
–•Invest in growing market segments such as 3D printing, AIaugmented reality, robotic process automation, business process outsourcing, analytics and IoTsystem enhancements to drive efficiencies
–2.Drive Revenue
•Drive increased adoption and utilization of CareAR
•Scale IT Services and robotic process automation in the SMB market
•Grow our financing business as a global financing solutions business
•Expand distribution of digital solutions among existing Print and Services clients
3.Monetize Innovation
•Leverage software capability$250 million corporate venture fund to launch new servicesbolster investment and innovation
–•Monetize new innovationsAdd value-added equity partners to accelerate development and market penetration
•Embed PARC’s technology into new and existing businesses
4.Focus on cash flow and increasing capital returns
| |
– | Maximize cash flow generation |
| |
– | Return at least 50% of free cash flow to shareholders (Operating cash flows from continuing operations less capital expenditures) |
| |
– | Focus on ROI and internal rate of return to make capital allocation decisions |
•Maximize annual free cash flow1 generation
•Deploy excess capital for strategic M&A
•Opportunistic share repurchases
_____________
(1)Free cash flow is defined as Operating cash flow from continuing operations less capital expenditures.
Xerox 2021 Annual Report 28
Post-sale Based Business Model
In 2019, 77%2021, 78% of our total revenue was post-sale based, which includes contracted services, equipment maintenance, services, consumable supplies and financing, among other elements.financing. These revenue streams generally follow equipment placements and provide some stability to our revenue and cash flows. Key indicators of future post sale revenue include installs and related removals of printers and multifunction devices, the number and type of machines in the field (MIF), page volumes (including the mix of pages printed on our MIF, including color devices) and the type and nature of related software and services provided to customers. Post sale revenue also includes transactional IT hardware sales and implementation services primarily from our XBS organization.
Project Own It
During the second half of 2018, we initiated a transformation project - Project Own It - centered on creating a more effective organization to enhance our focus on our customers and our partners, instill a culture of continuous improvement and improve our financial results.results through on-going cost reductions and savings. The primary goal of this project is to improve productivity by driving end-to-end transformation of our processes and systems to create greater focus, speed, accountability andimprove effectiveness and to reduce costs. These efforts are considered critical to making us more competitive and giving us the capacity to invest in growth and maximize shareholder returns. Key opportunities under Project Own It include establishing more effective shared service centers (captive and through our outsource partners), rationalizing our IT infrastructure, reducing our real estate footprint, creating greater velocity inand improving our supply chain management and unlocking greaterthe productivity inof our supplier base. In 2021, we exceeded our gross savings target of $375 million. Since its inception, total savings from Project Own It are approximately $1.8 billion. We expect to generate approximately $300 million of gross savings in 2022.
This project is also involves evaluating the sourcing of all of our products in an effort to optimize our options. Our approach is to analyze our potential options both by product category and holistically to determine what sourcing makes the most strategic and economic sense. An example of this effort is the expanded arrangement we recently entered into with HP Inc. in June 2019, which not only diversifies our supply chain but also enables us to add volume to our toner operations and broaden our software and services portfolio (See Supply Agreement with HP Inc. below).
We incurred restructuring and related costs of $229 million for the year ended December 31, 2019 primarily related to costs incurred to implement initiatives under our business transformation projects including Project Own It. Refer to Restructuring and Related Costs section of the MD&A and Note 14 - Restructuring Programs in the Consolidated Financial Statements for additional information.
Shared Services Arrangement with HCL Technologies
In March 2019, as part of Project Own It, Xerox entered into a shared services arrangement with HCL Technologies (HCL) pursuant to which we transitioned certain global administrative and support functions, including among others, selected information technology and finance functions, (excluding accounting), from Xerox to HCL. The transition is expected to continueIn July 2021, Xerox entered into 2020 and HCL is expected to make certain up-front and ongoing investments in software, tools and other technology to consolidate, optimize and automate the transferred functions with the goal of providing
Xerox 2019 Annual Report 22
improved service levels and significant cost savings. The shared servicesan arrangement with HCL includes a total aggregate spending commitmentTata Consulting Services (TCS), whereby TCS will provide business processing outsourcing services in support of our global finance organization. This will include the transition of the finance processes currently being provided by us of approximately $1.3 billion over the next 7 years (includes approximately $100 million spent in 2019). However, we can terminate the arrangement at any time at our discretion, subject to payment of termination fees that decline over the term, or for cause.HCL.
The spending commitment excludesWe incurred restructuring and related costs, we are expectednet of $38 million for the year ended December 31, 2021 primarily related to incur in connection with the transition of the contemplated functions - refercosts incurred to implement initiatives under our business transformation projects including Project Own It. Refer to Restructuring and Related Costs, Net section of the MD&A and Note 14 - Restructuring Programs in the Consolidated Financial Statements for additional information. The transfer
New Businesses Strategy
In 2021, we stood up three new businesses: CareAR, Xerox Financial Services (now known as FITTLE) and Innovation (PARC). As a result of this effort, we believe we are positioned to begin reporting separate financial and non-financial information for each business in 2022.
CareAR Holdings (CareAR) is Xerox’s newly formed software business and is comprised of: CareAR, Inc., an enterprise augmented reality business Xerox acquired in late 2020; DocuShare®, a cloud-based content management system; and XMPie, a multi-channel marketing software platform. Together, these software assets combine to provide an AR and AI-driven visual support platform that provides real-time access to expertise for service companies, field service employees associatedand end-use customers.
FITTLE has historically offered financing for direct channel customer purchases of Xerox equipment through bundled lease agreements and lease financing to end-user customers who purchase Xerox equipment through Xerox indirect dealer channels. At the outset of 2021, FITTLE changed its strategy to broaden its portfolio of assets financed to include numerous growth opportunities independent of Xerox equipment and services, such as the expansion of its dealer relationships to include an increasing number of non-Xerox dealers, leveraging its existing dealer relationships to finance a wider breadth of products and forming relationships with new vendors. Additionally, in 2021, FITTLE became the primary equipment lease provider for our XBS business.
Innovation (known as PARC Innovation, or PARC) includes the scientists and engineers located at our facilities in Palo Alto, Calif.; Webster, N.Y.; Cary, N.C., and Toronto, Canada. PARC is focused on incubating, productizing and commercializing disruptive technology aligned with innovation focus areas such as 3D Printing, Sensors and Services for the IoT, AI and clean tech.
Xerox 2021 Annual Report 29
In 2021 we also made progress toward our goal of monetizing and strategically diversifying our investments in innovation. In May, we announced the formation of Eloque, a joint venture with the HCL arrangementgovernment of Victoria, Australia to commercialize IoT sensor-based technology and services for monitoring the structural health of bridges. In September, we announced the formation of CareAR, in certain countriesconjunction with a $10 million noncontrolling investment from digital workflow leader ServiceNow, Inc. Although minimal in terms of revenue, we also began commercializing our 3D liquid metal printing technology through the sales and placements of ElemX 3D printing devices.
Financial Overview
Impact of COVID-19 on Our Business Operations
The COVID-19 pandemic continued to have a significant effect on the Company’s operations in 2021. Although business results improved in the first half of 2021 and the Company was subjectmeeting expectations, the emergence of new COVID-19 variants during the year resulted in many of our customers delaying their plans to compliancereturn employees to workplaces and allowing employees to continue to work remotely or in a hybrid environment. This impact combined with works councilthe global supply chain and other employment regulatory requirementslogistic issues, created in those countries, which delayedpart by the transferCOVID-19 pandemic, had a negative effect on the Company’s results particularly in the latter part of the third quarter 2021 and throughout the fourth quarter 2021. We expect the ongoing effects of the COVID-19 pandemic, including the potential emergence of new variants, as well as the expectedglobal supply chain disruption, to delay economic recovery and continue to impact our revenues and margins, with improvements anticipated in the second half of 2022.
In response to the COVID-19 pandemic, various governments enacted various measures to provide aid and economic stimulus directly to companies through cash grants and credits or indirectly through payments to temporarily furloughed employees. In March 2020, in response to the COVID-19 pandemic, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), and certain provisions from that Act were extended as part of the American Rescue Plan, which was enacted in March 2021. Similar pay protection programs were enacted in Canada and Europe that primarily provide direct grants to companies to cover the salary and wages of employees (retained or temporarily furloughed). In 2021, we recognized savings from the arrangement.
We incurred net charges of approximately $100$34 million for the year ended December 31, 2019 for services associated with this arrangement, which only reflects the cost associated with the employees transferredfrom these various government assistance programs as compared to date. The cost has been allocated to the various functional expense lines$107 million recognized in 2020.
Estimated savings were recorded as follows in the Consolidated Statements of Income based on an assessment(Loss) Income:
| | | | | | | | | | | | | | |
| (in millions) | | Year Ended December 31, 2021 | | Year Ended December 31, 2020 |
| Cost of sales | | $ | — | | | $ | 1 | |
| Cost of services, maintenance and rentals | | 20 | | | 73 | |
| Research, development and engineering expenses | | 1 | | | 1 | |
| Selling, administrative and general expenses | | 13 | | | 32 | |
| Total Estimated savings | | $ | 34 | | | $ | 107 | |
We continue to monitor government programs and actions being implemented or expected to be implemented to counter the economic impacts of the nature and amount of the costs incurred for the various transferred functions prior to their transfer to HCL.COVID-19 pandemic.
Supply Agreement with HP Inc.
In June 2019, we entered into an arrangement to expand our existing sourcing relationship with HP Inc. (HP). As part of the new arrangement, we will start sourcing certain A4 and entry-level A3 products from HP to diversify our supply chain. Many of these devices will operate with our ConnectKey software, a key differentiator in the marketplace.
In addition, we will provide toner for both our printers included in this agreement and certain HP printers, which will allow us to add volume to our emulsion aggregation (EA) toner plant in Webster, NY. Further, as part of our growth strategy to increase our penetration of the small-to-medium size business (SMB) market, Xerox will also become a Device as a Service (DaaS) partner for HP in the U.S. We will be able to sell HP PCs, displays and accessories, with or without DaaS, to our U.S. SMB clients. Lastly, HP will also make DocuShare Flex, Xerox's cloud-based content management platform, available on commercial PCs distributed in the U.S., giving a major lift to our software growth strategy.
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 (FX) for approximately $2.2 billion as well as the sale of its indirect 51% partnership interest in Xerox International Partners (XIP) for approximately $23 million (collectively the Sales).
As a result of the Sales and the related strategic shift in our business, the historical financial results of our equity method investment in FX and our XIP business (which was consolidated) for the periods prior to the Sales, are reflected as a discontinued operation and their impact is excluded from continuing operations for all periods presented.
The transactions with FH also included an OEM license agreement by and between FX and Xerox, granting FX 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 an upfront license fee of $77 million. The license fee is recorded within Rental and other revenues (Services, maintenance and rentals).
In addition, arrangements with FX whereby we purchase inventory from and sell inventory to FX, will continue after the Sales and, as a result of our Technology Agreement with Fuji Xerox which remains in effect through March 2021 we will continue to receive royalty payments for FX’s use of our Xerox brand trademark, as well as rights to access our patent portfolio in exchange for access to their patent portfolio. Lastly, the transactions included the dismissal of the $1 billion lawsuit FH had filed against Xerox after the termination in May 2018 of the proposed merger among FH/FX and Xerox announced in January 2018.
Refer to Note 7 - Divestitures and Note 21 - Contingencies and Litigation for additional information regarding the divestiture and other transactions with FH, as well as Note 27 - Subsequent Events for additional information regarding our Technology Agreement with FX, in the Consolidated Financial Statements.
Xerox 2019 Annual Report 23
The $77 million ($58 million after-tax) OEM license had the following impact on our financial results for the Fourth Quarter 2019 and Full Year 2019:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
(in millions, except per share amounts) | | Three Months Ended
December 31, 2019 | | Year Ended
December 31, 2019 |
| Financial Results from Continuing Operations | | As Reported | | OEM License Impact | | As Reported Excluding OEM License Impact | | As Reported | | OEM License Impact | | As Reported Excluding OEM License Impact |
| Total Revenue | | (2.2 | )% | | 3.1 | % | | (5.2 | )% | | (6.2 | )% | | 0.8 | % | | (7.0 | )% |
Total Revenue - CC (1) | | (1.6 | )% | | 3.1 | % | | (4.7 | )% | | (4.7 | )% | | 0.8 | % | | (5.5 | )% |
| | | | | | | | | | | | | |
| Post sale revenue | | (2.2 | )% | | 4.1 | % | | (6.3 | )% | | (6.4 | )% | | 1.0 | % | | (7.4 | )% |
Post sale revenue - CC (1) | | (1.7 | )% | | 4.1 | % | | (5.8 | )% | | (4.9 | )% | | 1.0 | % | | (5.9 | )% |
| | | | | | | | | | | | | |
| Gross Margin | | 41.6 | % | | 1.9 | % | | 39.7 | % | | 40.3 | % | | 0.6 | % | | 39.7 | % |
Adjusted Operating Margin(1) | | 16.8 | % | | 2.7 | % | | 14.1 | % | | 13.1 | % | | 0.7 | % | | 12.4 | % |
| | | | | | | | | | | | | |
| EPS - GAAP | | $ | 1.17 |
| | $ | 0.25 |
| | $ | 0.92 |
| | $ | 2.78 |
| | $ | 0.25 |
| | $ | 2.53 |
|
EPS - Adjusted(1) | | $ | 1.33 |
| | $ | 0.25 |
| | $ | 1.08 |
| | $ | 3.55 |
| | $ | 0.25 |
| | $ | 3.30 |
|
| Operating Cash Flow | | $ | 398 |
| | $ | 58 |
| | $ | 340 |
| | $ | 1,244 |
| | $ | 58 |
| | $ | 1,186 |
|
_____________
CC - See "Currency Impact" section for description of Constant Currency.
| |
(1) | Refer to the "Non-GAAP Financial Measures" section for an explanation of the non-GAAP financial measure. |
Proposed Transaction with HP Inc.
In November 2019, Xerox proposed a business combination transaction with HP Inc. (HP) in which HP shareholders would receive $22 per share comprised of $17 per share in cash, and 0.137 shares of Xerox for each HP share. In January 2020, Xerox obtained $24 billion in financing commitments to support the proposed business combination transaction with HP.
HP has rejected the proposal and refused to engage in mutual due diligence or negotiations regarding the proposal. In January 2020, Xerox nominated a slate of directors to HP’s board to be voted on at HP’s 2020 annual meeting of stockholders. Xerox intends to continue to pursue the proposed business combination transaction. In February 2020, Xerox increased its offer to HP shareholders to $24 per share comprised of $18.40 per share in cash and 0.149 shares of Xerox for each HP share.
Refer to Note 27 - Subsequent Events in the Consolidated Financial Statements for additional information regarding the committed financing obtained in January 2020.
Financial OverviewOperating Results
Total revenue of $9.1$7.0 billion in 2019 decreased 6.2%2021 increased 0.2% from the prior year, including a 1.5-percentage1.6-percentage point unfavorablefavorable impact from currency and a 0.8-percentagean approximate 0.5-percentage point favorable impact from 2021 and 2020 acquisitions. Total revenue for 2021 reflected the upfront OEM license feeimpacts from the COVID-19 pandemic as well as the global product supply and logistics constraints, which limited our ability to fulfill orders and drove an increase in our order backlog in the second half of $77 million. The decrease inthe year. Total revenue reflected a 6.4% decrease in Post sale revenue, including a 1.5-percentage point unfavorable impact from currency and a 1.0-percentage point favorable impact from the OEM license; and a 5.3% decrease1.1% increase in Equipment sales revenue, including a 1.3-percentage1.5-percentage point unfavorablefavorable impact from currency, while Post sale revenue was flat, including a 1.7-percentage point favorable impact from currency. The declineWhile the COVID-19 pandemic significantly impacted our 2021 revenues as a result of business closures and office building capacity restrictions, the progress of vaccinations and the gradual reopening of workplaces resulted in Post sale revenue reflected the continuing trends of lowerhigher year-over-year page volumes an ongoing competitive price environment and a lower populationfor most of devices,2021.
Net (loss) income from continuing operations attributable to Xerox Holdings was as wellfollows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | B/(W) |
| (in millions) | | 2021 | | 2020 | | 2019 | | 2021 | | 2020 |
| Net (loss) income from continuing operations attributable to Xerox Holdings | | $ | (455) | | | $ | 192 | | | $ | 648 | | | $ | (647) | | | $ | (456) | |
Adjusted(1) Net income from continuing operations attributable to Xerox Holdings | | 293 | | | 313 | | | 828 | | | (20) | | | (515) | |
Xerox 2021 Annual Report 30
Net loss from continuing operations attributable to Xerox Holdings for 2021 of $(455) million decreased $647 million as lower transactional revenue from unbundled supplies and paper primarily in our Latin America region. The decline in Equipment sales primarily reflected the impact of lower revenues from our mid-range products, which were partially impacted by organizational changes within the XBS sales organization that included the transition of a significant number of customer accounts from U.S. Enterprise in the first half of 2019. The impacts from the XBS organizational changes begancompared to lessen in the second half of 2019.
Net income from continuing operations attributable to Xerox Holdings of $192 million in 2020. The decrease primarily reflected the after-tax Goodwill impairment charge of $750 million ($781 million pre-tax), which was as follows:
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | B/(W) |
| (in millions) | | 2019 | | 2018 | | 2017 | | 2019 | | 2018 |
| Net income from continuing operations attributable to Xerox | | $ | 648 |
| | $ | 306 |
| | $ | 66 |
| | $ | 342 |
| | $ | 240 |
|
Adjusted(1) Net income from continuing operations attributable to Xerox | | 828 |
| | 745 |
| | 770 |
| | 83 |
| | (25 | ) |
Xerox 2019 Annual Report 24
Net income from continuing operations attributable to Xerox for 2019 increased $342 million as compared to the prior year reflectingpartially offset by lower Other expenses,bad debt expense, non-service retirement-related costs, Restructuring and related costs, net, Income tax expense, and Transaction and related costs, net and Income taxes,net. These benefits were partially offset by reduced temporary government assistance as well as higher Restructuringsupply chain cost, including higher freight and related costs. In addition, lower revenues were more than offset by cost and expense savings from our Project Own It transformation actions.shipping costs, which accordingly reduced gross profit.
Adjusted1 net income from continuing operations attributable to Xerox Holdings for 2019 increased $832021 decreased $20 million as compared to the prior year primarily related to increased operating profits reflecting the continued benefits ofreduced temporary government assistance and higher supply chain cost, including freight and shipping costs, which were only partially offset by lower bad debt expense savings from Project Own It, which more than offset revenue declines.and Income tax expense. Adjustments in 20192021 include an after-tax Goodwill impairment charge of $750 million ($781 million pre-tax), Restructuring and related costs, net and Amortization of intangible assets, Transaction and related costs, net as well as non-service retirement-related costs and other discrete, unusual or infrequent items.costs.
Operating cash flow provided by continuing operations of Xerox Holdings was $1,244$629 million in 20192021 as compared to $1,082$548 million in 2018.2020. The increase is primarily due to higher profits, which includes the benefitreceipt of the one-timean upfront OEM license feeprepaid fixed royalty from FUJIFILM Business Innovation Corp. (formerly Fuji Xerox Co., Ltd.) of $77$100 million, lowerand primarily reflects higher cash payments for restructuring, lower cash payments for Transaction and related costs, net, improvedfrom working capital2 and lower placements of equipment on operating leases, all of which wereaccrued compensation, partially offset by a lower run-off of finance receivables.receivables and higher cash tax payments.
Cash used in investing activities of continuing operations of Xerox Holdings was $85 million in 20192021, reflecting capital expenditures of $65$68 million and acquisitions of $42$53 million, which were partially offset by $21 millionproceeds from the salesales of non-core business assets.assets of $44 million. Cash used in financing activities of Xerox Holdings was $1,834$1,310 million in 20192021, reflecting payments of $960$518 million on Senior Notes, $600secured borrowing arrangements, partially offset by proceeds of $311 million on a new secured financing arrangement, as well as payments of $888 million for share repurchases and dividend payments of $243$206 million.
_____________
| |
(1) | Refer to the "Non-GAAP Financial Measures" section for an explanation of this non-GAAP financial measure. |
| |
(2) | Working capital reflects Accounts receivable, net, Inventories, Accounts payable and Accrued compensation and benefits cost. |
20202022 Outlook
We currently expect total revenues2022 revenue to declinegrow to $7.1 billion in 2020 by approximately 5.0%, or approximately 4.0% excluding the impact of revenue from the $77 million OEM license fee in 2019.actual currency (and remain flat at $7.0 billion at constant currency1). We expect a minimal impact from translation currency on total revenuesrevenue growth in 2020 based on January 2020 exchange rates. Both reported and adjusted1 earnings are2022 to be weighted to the second half of 2022 as the supply chain is likely to remain challenged through the first half of the year. Post sale revenue growth is expected to improve slightly from 2019, after excludingtrack a return of workers to the impactoffice, which we assume will likewise occur in the second half of the OEM license, reflectingyear.
Similar to revenue, we expect profitability to be weighted to the continued benefitssecond half of cost reductions, which are expected2022. We expect gross margin to offsetbe negatively affected by supply chain disruption through at least the impactfirst half of the projected declineyear. We began implementing price increases for equipment supplies and services in revenues.2021, which will partially offset elevated shipping and logistic costs. Furthermore, as supply chain conditions and page volumes improve, we expect gross margin to benefit from a more favorable equipment and revenue mix.
We are confident in our ability to generate cash and plan to continue our capital allocation policy of returning at least 50% of our annual free cash flow to shareholders. We expect 2020 operating2022 Operating cash flows from continuing operations to be approximately $1.3 billion,$475 million, with capital expenditures of approximately $100$75 million. Our capital allocation plan for 2020 includes expectedDuring 2022, we expect to opportunistically make share repurchases utilizing our remaining share repurchase by Xerox Holdings of at least $300 million.
Macro Economic and Market Factors
Tariffs - Our business, results of operations and financial condition may be negatively impacted by a potential increase in the cost of our products as a result of new or incremental trade protection measures such as, increased import tariffs, import or export restrictions and requirements and the revocation or material modification of trade agreements. In 2019, incremental tariff costs negatively impacted gross margin but the impact was minimal on a full year basis since the new tariffs were not effective until the fourth quarter. However, we do expect margins to be negatively impacted in future periods as a result of an increase in the cost of our imported products due to higher import tariffs. We are taking actions to mitigate the impact of these tariffs, such as raising prices on certain products, however, we currently estimate a year-over-year cost impactauthorization of approximately $20 million from higher tariffs in 2020.$113 million.
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(1)Refer to the "Non-GAAP Financial Measures" section for an explanation of this non-GAAP financial measure.
Brexit(2) - In 2016, the U.K. approved an exit from the E.U., commonly referred to as BrexitWorking capital, net reflects Accounts receivable, net, Inventories and the U.K. withdrew from the E.U. on January 31, 2020. The future relationship between the U.K. and the E.U. remains uncertain as the U.K. and the E.U. work through the transition period that provides time for them to negotiate the details of their future relationship. The transition period is currently expected to end on December 31, 2020, and, if no agreement is reached, the default scenario would be a “no-deal” Brexit. In the event of a no-deal Brexit, the U.K. will leave the E.U. with no agreements in place beyond any temporary arrangements that have or may be put in place by the E.U. or individual E.U. Member States, and the U.K. as part of no-deal contingency efforts and those conferred by mutual membership of the World Trade Organization. Given the lack of comparable precedent, it is unclear what financial, trade and legal implications the U.K. leaving the E.U. with no agreements in place would have and how such withdrawal would affect us. Brexit creates global political and economic uncertainty, which may cause, among other consequences, volatility in exchange rates and interest rates and changes in regulations. Additionally, there may be potential risks to our supply chain including additional administrative requirements, customs delays, and possibly tariffs. We currently do not believe that these and other related effects will have a material impact on the Company’s consolidated financial position or operating results. However, we continue to assess the situation and expect to take any necessary steps to mitigateAccounts payable.
Xerox 2019 Annual Report 25
the potential volatility, increased costs or disruptions to our supply chain that may result from this matter. For the year ended December 31, 2019, revenues and assets in Europe, including the U.K., represented approximately 25% of our consolidated revenues and total assets, respectively.
Coronavirus (COVID-19) - Xerox has no sales operations in China or South Korea, but sources a significant amount of product and/or components there. At this time, the coronavirus outbreak in China and South Korea has not impacted the company’s operations. Xerox is actively assessing possible implications to its supply chain and planned customer delivery on a daily basis to minimize any potential disruption and impact. Our suppliers in the affected regions are slowly resuming their operations. We continue to regularly communicate with suppliers and transportation partners and are currently activating business continuity plans and mitigation strategies as appropriate, including but not limited to premium airfreight, alternate sourcing, asset recovery and reverse logistics covering equipment, supplies and parts. If the coronavirus becomes more prevalent in the western hemisphere and businesses require their office employees to work from home for an extended period of time, sales and use of Xerox products and services could decline.
Currency Impact
To understand the trends in the business, we believe that it is helpful to analyze the impact of changes in the translation of foreign currencies into U.S. Dollars on revenue and expenses. We refer to this analysis as "constant currency", “currency impact” or “the impact from currency.” This impact is calculated by translating current period activity in local currency using the comparable prior year period's currency translation rate and is calculated for all countries where the functional currency is the local country currency. We do not hedge the translation effect of revenues or expenses denominated in currencies where the local currency is the functional currency. Management believes the constant currency measure provides investors an additional perspective on revenue trends. Currency impact can be determined as the difference between actual growth rates and constant currency growth rates.
Approximately 40% of our consolidated revenues are derived from operations outside of the United StatesU.S. where the U.S. Dollar is normally not the functional currency. As a result, foreign currency translation had a 1.5-percentage point unfavorable impact on revenue in 2019 and a 0.7-percentage1.6-percentage point favorable impact on revenue in 2018.2021 and a 0.2-percentage point favorable impact on revenue in 2020.
Xerox 2021 Annual Report 31
Application of Critical Accounting Policies
In preparing our Consolidated Financial Statements and accounting for the underlying transactions and balances, we apply various accounting policies. Senior management has discussed the development and selection of the critical accounting policies, estimates and related disclosures included herein with the Audit Committee of the Xerox Holdings Board of Directors. We consider the policies discussed below as critical to understanding our Consolidated Financial Statements, as their application places the most significant demands on management's judgment, since financial reporting results rely on estimates of the effects of matters that are inherently uncertain. In instances where different estimates could have reasonably been used, we disclosed the impact of these different estimates on our operations. In certain instances, such as revenue recognition for leases, the accounting rules are prescriptive; therefore, it would not have been possible to reasonably use different estimates. Changes in assumptions and estimates are reflected in the period in which they occur. The impact of such changes could be material to our results of operations and financial condition in any quarterly or annual period.
As discussed above (see Impact of COVID-19 on Our Business Operations), during 2021 the Company continued to be impacted by the economic disruption caused by the COVID-19 pandemic. This disruption required us to continue our increased review of the majority of our estimates to ensure we appropriately considered the impacts caused by the COVID-19 pandemic. As the extent and duration of the impacts from the COVID-19 pandemic continue, the Company’s estimates and assumptions may evolve as conditions change.
Specific risks associated with these critical accounting policies are discussed throughout the MD&A, where such policies affect our reported and expected financial results. For a detailed discussion of the application of these and other accounting policies, refer to Note 1 - Basis of Presentation and Summary of Significant Accounting Policies in the Consolidated Financial Statements.
Revenue Recognition
Application of the various accounting principles in GAAP related to the measurement and recognition of revenue requires us to make judgments and estimates. estimates including ASC Topic 606 - Revenue from Contracts with Customers and ASC Topic 842 Leases. We adopted ASU 2014-09, Revenue from Contracts with Customers (ASC Topic 606) on January 1, 2018and ASU 2016-02,Leases (ASC Topic 842) on January 1, 2019.Refer to Note 1 - Basis of Presentation and Summary of Significant Accounting Policies in the Consolidated Financial Statements for additional information regarding our revenue recognition and lease revenue recognition policies. Complex arrangements with nonstandard terms and conditions may require significant contract interpretation to determine the appropriate accounting. On January 1, 2018, we adopted ASU 2014-09, Revenue from Contracts with Customers (ASC Topic 606), which superseded nearly all existing revenue recognition guidance under U.S. GAAP. Refer to Note 4 - Revenue, in the Consolidated Financial Statements as well as Note 1 - Basis of Presentation and Summary of Significant Accounting Policies - Revenue Recognition - for additional information regarding our revenue recognition policies. Specifically, the revenue related to the following areas involves significant judgments and estimates:
Bundled Lease Arrangements: We sell our equipment direct to end customers under bundled lease arrangements, which typically include the equipment, service, supplies and a financing component for which the customer pays a single negotiated monthly 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. Lease deliverables include the equipment and financing, while the non-lease deliverables generally consist of the services, which include supplies. Sales made under bundled lease arrangements directly to end customers or through third party leasing companies comprise approximately 35%42.0% or $664 million of our equipment
Xerox 2019 Annual Report 26
sales revenue. 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 includeThe allocation of revenue among the elements – equipment financing, maintenance and other executory costs, while non-lease deliverables generally consist of thevs. post sale (service, supplies and non-maintenance services.financing) – has remained fairly consistent at approximately 25% and 75%, respectively, over the past three years.
Sales to Distributors and Resellers: We utilize distributors and resellers to sell many of our technology products, supplies and servicesparts to end-user customers. Sales to distributors and resellers are generally recognized as revenue when products are shipped to such distributors and resellers. Distributors and resellers participate in various discount, rebate, price-support, cooperative marketing and other programs, and we record provisions and allowances for these programs as a reduction to revenue when the sales occur. Similarly, we also record estimates for sales returns and other discounts and allowances when the sales occur. We consider various factors, including a review of specific transactions and programs, historical experience and market and economic conditions when calculating these provisions and allowances. Total sales of equipment, supplies and parts to distributors and resellers were $1,343$1,130 million for the year ended December 31, 20192021 and provisions and allowances recorded on these sales were approximately 25% of the associated gross revenues.
Xerox 2021 Annual Report 32
Allowance for Doubtful Accounts and Credit Losses
We continuously monitor collectionsThe allowance for doubtful accounts and payments from our customers and maintain a provision for estimated credit losses is based uponon an assessment of historical collection experience as well as consideration of current and future economic conditions and changes in our historical experience adjusted forcustomer-specific collection trends. Our methodology includes an expected loss model that incorporates an assessment of current and future economic conditions.
We recorded bad debt provisions of $46$7 million, $36$116 million and $33$46 million in Selling, administrative and general (SAG) expenses in our Consolidated Statements of (Loss) Income for the three years ended December 31, 2021, 2020 and 2019, 2018 and 2017, respectively.
Although bad debt provisions increased in 2019, the provision continues to reflect the maintenance of a prudent credit policy. Reserves, as a percentage of trade and finance receivables, were 4.3% at December 31, 2021, as compared to 4.8% and 3.0% at December 31, 2019, as compared to 3.0%2020 and 3.2% at December 31, 2018 and 2017,2019, respectively. We continue to assess our receivablereceivables portfolio in light of the current economic environment and its impact on our estimation of the adequacy of the allowance for doubtful accounts.
As discussed above,The significant increase in bad debt provision and reserve percentage in 2020, as compared to 2019, was principally due to the impact of the COVID-19 pandemic on our customers. In assessing the level of provision and related reserve for 2020, we estimatedcritically assessed current and forecasted economic conditions as a result of the COVID-19 pandemic at the time to ensure we objectively included those expected impacts in the determination of our reserve. That assessment resulted in the recognition of a $60 million incremental bad debt provision for doubtful accounts based on historical experiencein the first quarter 2020. This increased provision was primarily related to finance receivables due to their larger balance and customer-specific collection issues. This methodology was consistently applied for all periods presented. long-term nature. In 2021 we recorded approximately $31 million of bad debt reversals reflecting improvements in the macroeconomic environment as well as lower write-offs as a result of the COVID-19 pandemic.
During the five year period ended December 31, 2019,2021, our reserve for doubtful accounts ranged from 3.0% to 3.7%4.8% of gross receivables. Holding all assumptions constant, a 0.5-percentage point increase or decrease in the reserve from the December 31, 20192021 rate of 3.0%4.3% would change the 20192021 provision by approximately $24$20 million.
Refer to Note 81 - Basis of Presentation and Summary of Significant Accounting Policies, Note 7 - Accounts Receivable, Net and Note 98 - Finance Receivables, Net in the Consolidated Financial Statements for additional information regarding our allowancepolicy with respect to the Allowance for doubtful accounts.Doubtful Accounts and Credit Losses.
Pension Plan Assumptions
We sponsor defined benefit pension plans in various forms in several countries covering employees who meet eligibility requirements. 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. TheOur 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 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 pension plan has also been amended to reflect the Company's ability to reduce the indexation of future pension benefits within the plan in scenarios when the returns on plan assets are insufficient to cover that indexation.plan.
Several statistical and other factors that attempt to anticipate future events are used in calculating the expense, liability and asset values related to our defined benefit pension plans. These factors include assumptions we make about the expected return on plan assets, discount rate, lump-sum settlement rates, the rate of future compensation increases and mortality. Differences between these assumptions and actual experiences are reported as net actuarial gains and losses and are subject to amortization to net periodic benefit cost over future periods.
Cumulative net actuarial losses for our defined benefit pension plans of $2.5$1.7 billion as of December 31, 2019 increased2021 decreased by $131$661 million from December 31, 2018,2020, primarily due to the impactincrease of lowerthe discount rates and the resultant increasedecrease in the PensionProjected Benefit Obligation as well as negative currency, partially offset by the(PBO), excess of actual returns over expected returns, and the recognition of actuarial losses through amortization and U.S. settlement losses.losses as well as currency. The total actuarial loss at December 31, 20192021 is subject to offsetting gains or losses in the future due to both changes in actuarial assumptions and future experience and will be recognized in future periods through amortization or settlement losses.
We used a consolidated weighted average expected rate of return on plan assets of 3.9% for 2021, 4.1% for 2020 and 4.6% for 2019, 4.5% for 2018 and 5.0% for 2017, on a worldwide basis. During 2019,2021, the actual return on plan assets was a $1.2 billion gain of $504 million as compared
Xerox 2019 Annual Report 27
to an expected return of $443$325 million, with the difference largely due to positive equity market returns, and the positive impact of decreasing interest rates on our fixed income investments.investments and the impact of our hedging portfolio in the U.S. When estimating the 20202022 expected rate of return, in addition to assessing recent performance, we considered the historical returns earned on plan assets, the rates of return expected in the future, particularly in
Xerox 2021 Annual Report 33
light of current economic conditions, and our investment strategy and asset mix with respect to the plans' funds. The weighted average expected rate of return on plan assets we will use in 20202022 is 4.1%3.9% with the decreaseno change from 2019 in our non-U.S. plans.2021.
Another significant assumption affecting our defined benefit pension obligations and the net periodic benefit cost is the rate that we use to discount our future anticipated benefit obligations. In the U.S. and the U.K., which comprise approximately 75% of our projected benefit obligation,PBO, we consider theyield curves derived from Moody's Aa or better rated Corporate Bond IndexBonds and U.K. Corporate bonds rated AA by at least one of the International Index Company's iBoxx Sterling Corporate AA Cash Bond Index,main ratings agencies, respectively, in the determination of the appropriate discount rate assumptions. The consolidated weighted average discount rate we used to measure our pension obligations as of December 31, 20192021 and to calculate our 20202022 expense was 2.3%2.1%; the rate used to calculate our obligations as of December 31, 20182020 and our 20192021 expense was 3.2%1.6%. The decreaseincrease reflects lowerhigher interest rates in both U.S. and non-U.S. regions.
Holding all other assumptions constant, the following table summarizes the estimated impacts of a 0.25% change in the discount rate and a 0.25% change in the expected return on plan assets:
| | | | | Discount Rate | | Expected Return | | Discount Rate | | Expected Return |
| (in millions) | | 0.25% Increase | | 0.25% Decrease | | 0.25% Increase | | 0.25% Decrease | (in millions) | | 0.25% Increase | | 0.25% Decrease | | 0.25% Increase | | 0.25% Decrease |
| Increase/(Decrease) | | | | | | | | | Increase/(Decrease) | | | | | | | | |
| 2020 Projected net periodic pension cost | | $ | (15 | ) | | $ | 15 |
| | $ | (20 | ) | | $ | 20 |
| |
| Projected benefit obligation as of December 31, 2019 | | (365 | ) | | 405 |
| | N/A |
| | N/A |
| |
| 2022 Projected net periodic pension cost | | 2022 Projected net periodic pension cost | | $ | (5) | | | $ | 10 | | | $ | (20) | | | $ | 20 | |
| Projected benefit obligation as of December 31, 2021 | | Projected benefit obligation as of December 31, 2021 | | (365) | | | 400 | | | N/A | | N/A |
One of the most significant and volatile elements of our net periodic defined benefit pension plan expense is settlement losses. Our primary domestic plans allow participants the option of settling their vested benefits through the receipt of a lump-sum payment. We recognize the losses associated with these settlements 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. As noted above, cumulative unamortized net actuarial losses were $2.5$1.7 billion at December 31, 2019,2021, of which the U.S. primary domestic plans, with a lump-sum feature, represented approximately $910$590 million. The pro-rata factor is computed as the percentage reduction in the projected benefit obligation due to the settlement of a participant's vested benefit. Settlement accounting is only applied when the event of settlement occurs - i.e. the lump-sum payment is made. Since settlement is dependent on an employee's decision and election, the level of settlements and the associated losses can fluctuate significantly from period to period. During the three years ended December 31, 2019, 20182021, 2020 and 2017,2019, U.S. plan settlements were $355approximately $300 million, $660$220 million and $550$355 million, respectively, and the associated settlement losses on those plan settlements were $93$54 million, $173$53 million and $133$93 million, respectively. In 2020,2022, on average, we estimate that approximately $100 million of plan settlements will result in settlement losses of approximately $25$20 million.
The following is a summary of our benefit plan costs for the three years ended December 31, 2019, 20182021, 2020 and 2017,2019, as well as estimated amounts for 2020:2022:
| | | | | Estimated | | Actual | | Estimated | | Actual |
| (in millions) | | 2020 | | 2019 | | 2018 | | 2017 | (in millions) | | 2022 | | 2021 | | 2020 | | 2019 |
Defined benefit pension plans(1) | | $ | 25 |
| | $ | 16 |
| | $ | 2 |
| | $ | 61 |
| Defined benefit pension plans(1) | | $ | (80) | | | $ | (64) | | | $ | 5 | | | $ | 16 | |
| U.S. settlement losses | | 110 |
| | 93 |
| | 173 |
| | 133 |
| U.S. settlement losses | | 50 | | | 54 | | | 53 | | | 93 | |
| Defined contribution plans | | 45 |
| | 49 |
| | 66 |
| | 67 |
| |
| Retiree health benefit plans | | (65 | ) | | (65 | ) | | 8 |
| | 30 |
| |
Defined contribution plans(2) | | Defined contribution plans(2) | | 40 | | | 18 | | | 19 | | | 49 | |
Retiree health benefit plans(3) | | Retiree health benefit plans(3) | | (5) | | | (55) | | | (63) | | | (65) | |
| | Total Benefit Plan Expense | | $ | 115 |
| | $ | 93 |
| | $ | 249 |
| | $ | 291 |
| Total Benefit Plan Expense | | $ | 5 | | | $ | (47) | | | $ | 14 | | | $ | 93 | |
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(1) | Excludes U.S. settlement losses. |
(2)The decrease in 2021 and 2020 reflects the Company's decision to suspend and not make the 2021 or 2020 employer matching contribution to our U.S. based 401(k) savings plans for salaried employees. The employer matching contribution is expected to be resumed and provided for in 2022.
(3)The 2018 U.S. Retiree Health Plan amendment was fully amortized by December 31, 2021. Accordingly, we estimate amortization of prior service credits in 2022 to decrease by approximately $50 million, as compared to 2021.
Xerox 20192021 Annual Report 2834
The following is a summary of our benefit plan funding for the three years ended December 31, 2019, 20182021, 2020 and 2017,2019, as well as estimated amounts for 2020:2022:
|
| | | | | | | | | | | | | | | | |
| | | Estimated | | Actual |
| (in millions) | | 2020 | | 2019 | | 2018 | | 2017 |
| U.S. Defined benefit pension plans | | $ | 25 |
| | $ | 26 |
| | $ | 27 |
| | $ | 675 |
|
| Non-U.S. Defined benefit pension plans | | 110 |
| | 115 |
| | 117 |
| | 161 |
|
| Defined contribution plans | | 45 |
| | 49 |
| | 66 |
| | 67 |
|
| Retiree health benefit plans | | 35 |
| | 30 |
| | 57 |
| | 64 |
|
| Total Benefit Plan Funding | | $ | 215 |
| | $ | 220 |
| | $ | 267 |
| | $ | 967 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Estimated | | Actual |
| (in millions) | | 2022 | | 2021 | | 2020 | | 2019 |
| U.S. Defined benefit pension plans | | $ | 25 | | | $ | 24 | | | $ | 35 | | | $ | 26 | |
| Non-U.S. Defined benefit pension plans | | 110 | | | 111 | | | 104 | | | 115 | |
Defined contribution plans(1) | | 20 | | | 18 | | | 19 | | | 49 | |
| Retiree health benefit plans | | 25 | | | 25 | | | 25 | | | 30 | |
| Total Benefit Plan Funding | | $ | 180 | | | $ | 178 | | | $ | 183 | | | $ | 220 | |
Contributions_____________
(1)The difference between the estimated funding amount and the estimated expense in 2022 of $20 million is due to estimated contributions for our U.S. definedbased 401(k) savings plans for salaried employees expensed in 2022 as earned but which are expected to be contributed in January of 2023.
The 2021 U.S. Defined benefit plans in 2019 and estimated for 2020 are primarily for payments associated with our non-qualified plan in the U.S. and docontributions 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.
Refer to Note 19 - Employee Benefit Plans in the Consolidated Financial Statements for additional information regarding defined benefit pension plan assumptions, expense and funding.
Income Taxes
We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgments are required in determining the consolidated provision for income taxes. Our provision is based on nonrecurring events as well as recurring factors, including the taxation of foreign income. In addition, our provision will change based on discrete or other nonrecurring events such as audit settlements, tax law changes, changes in valuation allowances, etc., that may not be predictable.
We record the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and the amounts reported in our Consolidated Balance Sheets, as well as 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 regularly review ourapply judgment in assessing the realizability of these deferred tax assets and the need for recoverability consideringany 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. Refer to Note 20 - Income and Other Taxes in the Consolidated Financial Statements for additional information regarding the valuation of our allowance against our deferred tax assets.
Increases to ourOur valuation allowance (decreased) increased through income tax expense were $16by approximately $(9) million, $3$25 million and $6$16 million for the years ended December 31, 2019, 20182021, 2020 and 2017,2019, respectively. There were other (decreases) increasesdecreases to our valuation allowance, including the effects of currency, of $(14)$(30) million, $(41)$(28) million and $13$(14) million for the years ended December 31, 2019, 20182021, 2020 and 2017,2019, respectively. These did not affect income tax expense in total as there was a corresponding adjustment to Deferred tax assets or Other comprehensive (loss) income.
The following is a summary of gross deferred tax assets and the related valuation allowances for the three years ended December 31, 2021, 2020 and 2019:
| | | | | Year Ended December 31, | | | Year Ended December 31, |
| (in millions) | | 2019 | | 2018 | | 2017 | (in millions) | | 2021 | | 2020 | | 2019 |
| Gross deferred tax assets | | $ | 1,706 |
| | $ | 1,566 |
| | $ | 2,051 |
| Gross deferred tax assets | | $ | 1,062 | | | $ | 1,379 | | | $ | 1,463 | |
| Valuation allowance | | (399 | ) | | (397 | ) | | (435 | ) | Valuation allowance | | (357) | | | (396) | | | (399) | |
| Net deferred tax assets | | $ | 1,307 |
| | $ | 1,169 |
| | $ | 1,616 |
| Net deferred tax assets | | $ | 705 | | | $ | 983 | | | $ | 1,064 | |
We are subject to ongoing tax examinations and assessments in various jurisdictions. Accordingly, we may incur additional tax expense based upon our assessment of the more-likely-than-not outcomes of such matters. In addition, when applicable, we adjust the previously recorded tax expense to reflect examination results. Our ongoing assessments of the more-likely-than-not outcomes of the examinations and related tax positions require judgment and can materially increase or decrease our effective tax rate, as well as impact our operating results.
Xerox 2021 Annual Report 35
Unrecognized tax benefits were $127$107 million, $108$115 million and $125$127 million at December 31, 2021, 2020 and 2019, 2018 and 2017, respectively.
On December 22, 2017, the Tax Cuts and Jobs Act (the Tax Act) was enacted in the U.S. The Tax Act significantly revised the U.S. corporate income tax system by, among other things, lowering the U.S. statutory corporate income tax rate from 35% to 21% and implementing a territorial tax system that includes a one-time transition tax on deemed repatriated earnings of foreign subsidiaries.
Refer to Note 20 - Income and Other Taxes in the Consolidated Financial Statements for additional information regarding deferred income taxes and unrecognized tax benefits and the estimated impacts of the Tax Act.
Xerox 2019 Annual Report 29
Business Combinations and Goodwill
We allocate the fair value of purchase consideration to tangible assets, liabilities assumed and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is allocated to Goodwill. The allocation of the purchase consideration requires management to make significant estimates and assumptions, especially with respect to intangible assets. These estimates can include, but are not limited to, future expected cash flows of acquired customers, development of new offerings, acquired technology and trade names from a market participant perspective, as well as estimates of useful lives and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable and when appropriate, include assistance from independent third-party valuation firms. During the measurement period, which is up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to Goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings. Refer to Note 65 - Acquisitions and Investments in the Consolidated Financial Statements for additional information regarding the allocation of the purchase price consideration for our acquisitions.
Our Goodwill balance was $3.9$3.3 billion at December 31, 2019.2021. We assess Goodwill for impairment at least annually, during the fourth quarter based on balances as of October 1st, and more frequently on an interim basis if we believe indicators of impairment exist. The application of an interim or the annual Goodwill impairment test begins with the identification of reporting units, which requires judgment. Consistent with the determination that we hadhave one operating segment, we determined that there is one reporting unit and therefore we tested Goodwill for impairment at the Company or entity level.
The process of evaluating the potential impairment of goodwillGoodwill is highly subjective and requires significant judgment. Our review of impairment starts with an assessment of qualitative factors to determine whether events or circumstances lead to a determination that it is more-likely-than-not that the fair value of the Company is less than the net book value. Our qualitative assessment of the recoverability of goodwill,Goodwill, whether performed annually or based on specific events or circumstances, considers various macroeconomic, industry-specific and company-specific factors. These factors include: (i) severe adverse industry or economic trends; (ii) significant company-specific actions, including exiting an activity in conjunction with restructuring of operations; (iii) current, historical or projected deterioration of our financial performance; or (iv) a sustained decrease in our market capitalization below our net book value. After assessing the totality of events and circumstances, if we determine that it is not more-likely-than-not that the fair value of the Company is less than its net book value, no further assessment is performed. If we determine that it is more likely-than-notmore-likely-than-not that the fair value of the Company is less than net book value or if we moveelect to bypass the qualitative assessment, we proceed to a quantitative assessment or test of goodwill.Goodwill.
If a quantitative testassessment of goodwillGoodwill is required, the determination of the fair value of the Company will involve the use of significant estimates and assumptions. Our quantitative goodwillGoodwill impairment test uses both the income approach and the market approach to estimate fair value. The income approach is based on the discounted cash flow method that uses the Company's estimates forof forecasted future financial performance including revenues, gross margins, operating expenses, and taxes, as well as working capital and capital asset requirements. These estimates are developed as part of our long-term planning process based on assumed market segment growth rates and our assumed market segment share, estimated costs based on historical data and various internal estimates. Projected cash flows are then discounted to a present value employing a discount rate that properly accounts for the estimated market weighted-average cost of capital, as well as any riskrisks unique to the subject cash flows. When performing our market approach, we rely specifically on the guideline public company method. Our guideline public company method incorporates revenues and earnings multiples from publicly traded companies with operations and other characteristics similar to our entity. The selected multiples consider our entity's relative growth, profitability, size and risk relative to those of the selected publicly traded companies.
In performingThe 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 2019 annual Goodwill impairment testcustomers delaying their plans to return employees to workplaces and continuing to work remotely and in a hybrid environment. This impact combined with the global supply chain and logistic issues, created in part by
Xerox 2021 Annual Report 36
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 October 1st, we qualitatively assessedthe recoverability of our Goodwill balance for our annual fourth quarter 2021 impairment andtest. After completing our annual impairment test, we concluded that Goodwill was not impaired. In performing the qualitative assessment, we considered the prior year excess ofestimated fair value overof the Company - our single segment and reporting unit - had declined below its carrying value. As a result, we recognized an after-tax non-cash impairment charge of $750 million ($781 million pre-tax) related to our goodwill for the year ended December 31, 2021.
In estimating the fair value and, as noted previously, relevant events and conditions, including but not limited to, macroeconomic trends, industryof our single reporting unit, our analysis reflected a 75/25 allocation between the income and market conditions, overall financial performance, cost factors, company-specific events,approach and legal and regulatory factors including our current market capitalization in relationthe application of a discount rate applied to our net book value. Our assessment indicated thatprojected cash flows of approximately 7.75%. The heavier weighting to the income approach was consistent with the prior year assessment,and reflects the inherent limitations of a market comparison. We likewise believe the discount rate applied was reasonable based on the estimated capital costs of applicable market participants and an appropriate company-specific risk premium that reflects current market and industry conditions. We ran sensitivity cases on the discount rate and, although in certain scenarios our fair value declined further, we expectbelieve the implied premiums that would be indicated at our estimated fair value are reasonable.
Our current results and our internal future forecasts clearly indicate that Xerox has been and will continue to be significantly impacted by the economic disruption caused by the COVID-19 pandemic. This includes a recognition that two years into the pandemic, the transition to more remote and hybrid work environments will continue to have an expected impact on the print business as compared to its pre-pandemic levels. Some of this impact is expected to be mitigated by providing additional digital services and offerings targeted for the hybrid business model. Our business forecasts reflect these developments, including an easing of the supply chain and logistics issues encountered in 2021 and although our operating results are expected to improve, projected revenues and cash flows are not expected to return to the levels achieved prior to the commencement of the COVID-19 pandemic. While the Company is currently pursuing a strategy to develop and expand certain expected growth businesses such as financing, software and innovation to offset revenue declines overand eventually exceed the next year with cost reductions and productivity improvements. Accordingly, expected netreduced cash flows werefrom the print business, this strategy carries an increased level of implementation risk consistent with prior period projections.all new business pursuits.
In performing its assessment, the Company believes it has made reasonable estimates based on the facts and circumstances that were available as of the reporting date in light of the continuing impacts from the COVID-19 pandemic and other factors noted above. However, the determination of fair value includes assumptions that are subject to risk and uncertainty. The discounted cash flow calculations are dependent on subjective factors including the timing and amount of future cash flows and the discount rate. If assumptions or estimates used in the fair value calculations change, including assumptions related to future cash flows as well as the duration and severity of the COVID-19 pandemic and the supply chain and logistics issues and our ability to initiate management actions to recover from those issues, it may result in a further decline in our estimated fair value and trigger future impairment charges. We will continue to monitor developments in 2022 including updates to our forecasts as well as our market capitalization and an update of our assessment and related estimates may be required in the future.
Subsequent to our fourth quarter impairment test, we did not identify any indicators of potential impairmenttriggering events that required an update to the annual impairment test.
Refer to Note 13 - Goodwill and Intangible Assets, Net in the Consolidated Financial Statements for additional information regarding Goodwill.
Xerox 20192021 Annual Report 3037
Revenue Results Summary
Total Revenue
Revenue for the three years ended December 31, 2019, 20182021, 2020 and 20172019 was as follows:
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| | Revenue | | % Change | | CC % Change | | % of Total Revenue |
| (in millions) | 2021 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 | | 2019 |
| Equipment sales | $ | 1,581 | | | $ | 1,564 | | | $ | 2,062 | | | 1.1 | % | | (24.2) | % | | (0.4) | % | | (24.6) | % | | 22 | % | | 22 | % | | 23 | % |
| Post sale revenue | 5,457 | | | 5,458 | | | 7,004 | | | — | % | | (22.1) | % | | (1.7) | % | | (22.1) | % | | 78 | % | | 78 | % | | 77 | % |
| Total Revenue | $ | 7,038 | | | $ | 7,022 | | | $ | 9,066 | | | 0.2 | % | | (22.5) | % | | (1.4) | % | | (22.7) | % | | 100 | % | | 100 | % | | 100 | % |
| Reconciliation to Consolidated Statements of (Loss) Income: | | | | | | | | | | | | | | |
| Sales | $ | 2,582 | | | $ | 2,449 | | | $ | 3,227 | | | 5.4 | % | | (24.1) | % | | 3.9 | % | | (24.3) | % | | | | | | |
| Less: Supplies, paper and other sales | (1,001) | | | (885) | | | (1,165) | | | 13.1 | % | | (24.0) | % | | 11.5 | % | | (23.6) | % | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Equipment sales | $ | 1,581 | | | $ | 1,564 | | | $ | 2,062 | | | 1.1 | % | | (24.2) | % | | (0.4) | % | | (24.6) | % | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Services, maintenance and rentals | $ | 4,235 | | | $ | 4,347 | | | $ | 5,595 | | | (2.6) | % | | (22.3) | % | | (4.3) | % | | (22.5) | % | | | | | | |
| Add: Supplies, paper and other sales | 1,001 | | | 885 | | | 1,165 | | | 13.1 | % | | (24.0) | % | | 11.5 | % | | (23.6) | % | | | | | | |
| Add: Financing | 221 | | | 226 | | | 244 | | | (2.2) | % | | (7.4) | % | | (4.1) | % | | (7.7) | % | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Post sale revenue | $ | 5,457 | | | $ | 5,458 | | | $ | 7,004 | | | — | % | | (22.1) | % | | (1.7) | % | | (22.1) | % | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Americas | $ | 4,432 | | | $ | 4,589 | | | $ | 5,963 | | | (3.4) | % | | (23.0) | % | | (4.1) | % | | (22.7) | % | | 63 | % | | 65 | % | | 66 | % |
| EMEA | 2,434 | | | 2,246 | | | 2,817 | | | 8.4 | % | | (20.3) | % | | 4.6 | % | | (21.5) | % | | 35 | % | | 32 | % | | 31 | % |
| Other | 172 | | | 187 | | | 286 | | | (8.0) | % | | (34.6) | % | | (8.0) | % | | (34.6) | % | | 2 | % | | 3 | % | | 3 | % |
Total Revenue(1) | $ | 7,038 | | | $ | 7,022 | | | $ | 9,066 | | | 0.2 | % | | (22.5) | % | | (1.4) | % | | (22.7) | % | | 100 | % | | 100 | % | | 100 | % |
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| | | | | | | | | | | | | | | | | | | |
|
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| | Revenue | | % Change | | CC % Change | | % of Total Revenue |
| (in millions) | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 | | 2017 |
| Equipment sales | $ | 2,062 |
| | $ | 2,178 |
| | $ | 2,196 |
| | (5.3 | )% | | (0.8 | )% | | (4.0 | )% | | (1.2 | )% | | 23 | % | | 23 | % | | 22 | % |
| Post sale revenue | 7,004 |
| | 7,484 |
| | 7,795 |
| | (6.4 | )% | | (4.0 | )% | | (4.9 | )% | | (4.7 | )% | | 77 | % | | 77 | % | | 78 | % |
| Total Revenue | $ | 9,066 |
| | $ | 9,662 |
| | $ | 9,991 |
| | (6.2 | )% | | (3.3 | )% | | (4.7 | )% | | (4.0 | )% | | 100 | % | | 100 | % | | 100 | % |
| Reconciliation to Consolidated Statements of Income: | | | | | | | | | | | | | | |
Sales(1) | $ | 3,227 |
| | $ | 3,454 |
| | $ | 3,412 |
| | (6.6 | )% | | 1.2 | % | | (5.3 | )% | | 1.1 | % | | | | | | |
Less: Supplies, paper and other sales(1) | (1,165 | ) | | (1,276 | ) | �� | (1,260 | ) | | (8.7 | )% | | 1.3 | % | | (7.4 | )% | | 1.4 | % | | | | | | |
Add: Equipment-related training(2) | — |
| | — |
| | 44 |
| | NM |
| | NM |
| | NM |
| | NM |
| | | | | | |
| Equipment sales | $ | 2,062 |
| | $ | 2,178 |
| | $ | 2,196 |
| | (5.3 | )% | | (0.8 | )% | | (4.0 | )% | | (1.2 | )% | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Services, maintenance and rentals(1) | $ | 5,595 |
| | $ | 5,940 |
| | $ | 6,285 |
| | (5.8 | )% | | (5.5 | )% | | (4.4 | )% | | (5.7 | )% | | | | | | |
Add: Supplies, paper and other sales(1) | 1,165 |
| | 1,276 |
| | 1,260 |
| | (8.7 | )% | | 1.3 | % | | (7.4 | )% | | 1.4 | % | | | | | | |
| Add: Financing | 244 |
| | 268 |
| | 294 |
| | (9.0 | )% | | (8.8 | )% | | (7.5 | )% | | (10.0 | )% | | | | | | |
Less: Equipment-related training(2) | — |
| | — |
| | (44 | ) | | NM |
| | NM |
| | NM |
| | NM |
| | | | | | |
| Post sale revenue | $ | 7,004 |
| | $ | 7,484 |
| | $ | 7,795 |
| | (6.4 | )% | | (4.0 | )% | | (4.9 | )% | | (4.7 | )% | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| Americas | $ | 5,963 |
| | $ | 6,308 |
| | $ | 6,146 |
| | (5.5 | )% | | 2.6 | % | | (5.2 | )% | | 2.6 | % | | 66 | % | | 65 | % | | 62 | % |
| EMEA | 2,817 |
| | 3,137 |
| | 3,736 |
| | (10.2 | )% | | (16.0 | )% | | (6.4 | )% | | (17.8 | )% | | 31 | % | | 33 | % | | 37 | % |
| Other | 286 |
| | 217 |
| | 109 |
| | 31.8 | % | | 99.1 | % | | 31.8 | % | | 99.1 | % | | 3 | % | | 2 | % | | 1 | % |
Total Revenue(3) | $ | 9,066 |
| | $ | 9,662 |
| | $ | 9,991 |
| | (6.2 | )% | | (3.3 | )% | | (4.7 | )% | | (4.0 | )% | | 100 | % | | 100 | % | | 100 | % |
| | | | | | | | | | | | | | | | | | | | |
| Memo: | | | | | | | | | | | | | | | | | | | |
Xerox Services(4) | $ | 3,406 |
| | $ | 3,621 |
| | $ | 3,610 |
| | (5.9 | )% | | 0.3 | % | | (4.0 | )% | | (0.3 | )% | | 38 | % | | 37 | % | | 36 | % |
CC - See "Currency Impact" section for description of Constant Currency.constant currency.
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(1) | Certain prior year amounts have been conformed to the current year presentation. Refer to Note 1 - Basis of Presentation and Summary of Significant Accounting Policies in the Consolidated Financial Statements for additional information. |
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(2) | In 2018, upon adoption of ASU 2014-09 Revenue Recognition, revenue from training related to equipment installation is now included in Equipment Sales. In 2017, this revenue was reported as Services, maintenance and rentals. |
(3)(1)Refer to the "Geographic Sales Channels and Product and Offerings Definitions" section.
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(4) | Includes equipment sale revenue of $433 million, $484 million and $458 million for the three years ended December 31, 2019, 2018 and 2017 respectively. |
Revenue
Total revenue decreased 6.2%increased 0.2% for the year ended December 31, 2019 including a 1.5-percentage point unfavorable impact from currency and an approximate 0.8-percentage point favorable impact from the OEM license fee. Total revenue decreased 3.3% for the year ended December 31, 20182021 as compared to the prior year, including a 0.7-percentage1.6-percentage point favorable impact from currency. currency, and an approximate 0.5-percentage point favorable impact from 2021 and 2020 acquisitions. Revenue reflected global product supply logistics constraints which limited our ability to fulfill orders and drove an increase in our order backlog1 in the second half of the year. The COVID-19 pandemic also affected our revenues by limiting office occupancy; however, the progress of vaccinations and the gradual reopening of workplaces resulted in higher year-over-year page volumes for most of the year. Total revenue decreased 22.5% for the year ended December 31, 2020 compared to the prior year, including a 0.2-percentage point favorable impact from currency and an approximate 1.2-percentage point favorable impact from 2020 partner dealer acquisitions, partially offset by an approximate 0.6-percentage point unfavorable impact from a one-time upfront OEM license fee of $77 million received in the prior year. The decline in revenue primarily reflected the effects the global pandemic on IT spending and office attendance.
During 2021, our business continued to be impacted by the COVID-19 pandemic. The prolonged impact of the virus, including the Delta and Omicron variants, drove many of our customers to delay their plans to return employees to workplaces. We continued to see a correlation between the roll-out of vaccinations and the return of employees to the workplace, and the gradual recovery of our post sale revenues, but page-volume-driven Post sale revenue was lower than anticipated in the beginning of the year. In addition, global supply chain issues, created in part by the COVID-19 pandemic, resulted in an unprecedented level of disruption, leading to shortages and delays in the receipt of our products and third-party IT hardware. Supply chain disruptions resulted in lower than anticipated equipment and IT hardware sales, higher transportation and logistics costs. Continued strength in demand for our equipment led to a nearly 150% increase in our order backlog1. We expect the effects of the COVID-19 pandemic, including the potential emergence of new variants, as well as global supply chain disruptions, to continue to affect our revenues and margins at least through the first half of 2022.
Geographically, revenue increased in our EMEA region and declined in our Americas region during 2021. In EMEA, we have a larger presence across SMB businesses, which generally recovered faster and showed greater resiliency against pandemic resurgences than larger enterprises. Revenue decreased in our North American operations, which were more significantly impacted by shipping and logistics constraints, which were further amplified by labor shortages within the North American transportation industry. North America also has a higher proportion of large enterprise customers, who are generally experiencing a slower pace of return to workplaces.
______________
(1)Order backlog is measured as the value of unfulfilled sales orders, shipped and non-shipped, received from our customers waiting to be
installed, including orders with future installation dates. It includes printing devices as well as IT hardware associated with our IT service offerings.
Xerox 2021 Annual Report 38
Total revenues included the following:
Post sale revenue
Post sale revenue primarily reflects contracted services, equipment maintenance, supplies and financing. These revenues are associated not only with the population of devices in the field, which is affected by installs and removals, but also by the page volumes generated byfrom the usage of such devices and the revenue per printed page. Post sale revenue also includes transactional IT hardware sales and implementation services primarily from our XBS organization. For the year ended December 31, 2019,2021, Post sale revenue decreased 6.4%was flat as compared to the prior year includingwith a 1.5-percentage1.7-percentage point unfavorablefavorable impact from currency. For the year ended December 31, 2020, Post sale revenue decreased 22.1% as compared to the prior year with no impact from currency and an approximate 1.0-percentage0.8-percentage point favorableunfavorable impact from thean upfront OEM license fee. For the year ended December 31, 2018, Post sale revenue decreased 4.0% compared tofee in the prior year, including a 0.7-percentage point favorableexcluding the impact fromof currency.
Xerox 2019 Annual Report 31
Post sale revenue is comprised of the following:
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• | Services, maintenance and rentals revenueincludes rental and maintenance revenue (including bundled supplies) as well as the post sale component of the document services revenue from our Xerox Services offerings. •includes rental and maintenance revenue (including bundled supplies) as well as the post sale component of the document services revenue from our Xerox Services offerings. |
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◦ | For the year ended December 31, 2019, these revenues decreased 5.8%, including a 1.4-percentage point unfavorable impact from currency and an approximate 1.3-percentage point favorable impact from the OEM license fee. The decline at constant currency1 reflected the continuing trends of lower page volumes (including a higher mix of lower usage products), an ongoing competitive price environment and a lower population of devices, which are partially associated with continued lower Enterprise signings and lower installs from prior and current periods. These declines were larger in the U.S. during the first half as a result of organizational changes being implemented as part of our Project Own It transformation actions. The impact began to moderate late in the second quarter, and was much less in the second half of 2019. |
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◦ | For the year ended December 31, 2018, these revenues decreased 5.5%, including a 0.2-percentage point favorable impact from currency. The decline at constant currency1 reflected the continuing trends of lower page volumes (including a higher mix of lower usage products), an ongoing competitive price environment and a lower population of devices, which are partially associated with continued lower signings and installs from prior periods. The lower population of devices is partially due to the loss of market share for multiple quarters leading up to the ConnectKey launch in mid-2017. Additionally, the prior year included $20 million of higher revenues associated with a licensing agreement. These impacts were partially offset by higher revenues from Xerox Services (formerly Managed Document Services) and our Xerox Business Solutions (XBS) business, formerly known as Global Imaging Systems, inclusive of acquisitions.
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• | Supplies, paper and other sales includes unbundled supplies and other sales.
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◦ | For the year ended December 31, 2019, these revenues decreased 8.7%, including a 1.3-percentage point unfavorable impact from currency. The decline at constant currency1 primarily reflected the impact of lower supplies revenues, primarily associated with lower page volume trends as well as the impact of lower paper sales from developing markets (primarily from the Latin America region).
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◦ | For the year ended December 31, 2018, these revenues increased 1.3%, including a 0.1-percentage point unfavorable impact from currency. The increase reflects higher paper sales and higher IT sales from our XBS business.
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• | Financing revenue is generated from financed equipment sale transactions. For the year ended December 31, 2019, Financing revenue decreased 9.0%, including a 1.5-percentage point unfavorable impact from currency, while Financing revenue for the year ended December 31, 2018 decreased 8.8% including a 1.2-percentage point favorable impact from currency. The decline in both periods reflected a continued decline in finance receivables balance due to lower equipment sales in prior periods and a greater mix of equipment sales to channels where our financing penetration rate and return is lower.
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Equipment sales revenue
Equipment revenue for the three years ended December 31, 2019 was as follows: |
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| | | Revenue | | % Change | | CC % Change | | % of Equipment Revenue |
| (in millions) | | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 | | 2017 |
| Entry | | $ | 217 |
| | $ | 237 |
| | $ | 231 |
| | (8.4)% | | 2.6% | | (6.9)% | | 2.0% | | 11% | | 11% | | 10% |
| Mid-range | | 1,404 |
| | 1,493 |
| | 1,468 |
| | (6.0)% | | 1.7% | | (4.9)% | | 1.1% | | 68% | | 69% | | 67% |
| High-end | | 421 |
| | 423 |
| | 473 |
| | (0.5)% | | (10.6)% | | 1.2% | | (10.7)% | | 20% | | 19% | | 22% |
| Other | | 20 |
| | 25 |
| | 24 |
| | (20.0)% | | 4.2% | | (20.0)% | | 4.2% | | 1% | | 1% | | 1% |
Equipment sales(1) | | $ | 2,062 |
| | $ | 2,178 |
| | $ | 2,196 |
| | (5.3)% | | (0.8)% | | (4.0)% | | (1.2)% | | 100% | | 100% | | 100% |
_____________CC - See "Currency Impact" section for description of Constant Currency.
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(1) | In 2018, upon adoption of ASU 2014-09 Revenue Recognition, revenue from training related to equipment installation is now included in Equipment sales (previously included in Post sale revenue). Prior year amounts have been adjusted to conform to this change. |
Equipment sales revenue
Equipment sales revenue decreased 5.3% for the year ended December 31, 20192021, these revenues decreased 2.6% as compared to the prior year, including a 1.3-percentage1.7-percentage point favorable impact from currency, the decline at constant currency1 reflected the impact of lower royalty revenue and lower third-party financing commissions (resulting from higher XFS lease penetration of our XBS operations), as well as a lower net population of devices, and higher mix of services with lower per-page revenues, partially offset by modestly higher page volumes corresponding with the gradual reopening of workplaces, and higher IT revenues, driven by higher demand for our offerings, partially offset by IT hardware product constraints.
•For the year ended December 31, 2020, these revenues decreased 22.3% as compared to the prior year, including a 0.2-percentage point favorable impact from currency and an approximate 1.1-percentage point unfavorable impact from the one-time OEM license fee in the prior year. The decline at constant currency1 reflected a lower population of devices (which is partially associated with lower installs in prior and current periods), a competitive price environment and lower page volumes (including a higher mix of lower average-page-volume products) that are worse than pre-COVID-19 decline trends due to the impact of business closures since March 2020. While these revenues are contractual in nature, on average, our bundled services contracts include a minimum fixed charge and a significant variable component based on print volumes.
Supplies, paper and other sales includes unbundled supplies and other sales.
•For the year ended December 31, 2021, these revenues increased 13.1% as compared to the prior year, including a 1.6-percentage point favorable impact from currency. This increase at constant currency1 primarily reflected higher supplies and paper revenues consistent with the gradual reopening of workplaces, which drove higher demand. We also saw a marginal improvement in inventories carried by channel partners, as confidence in the recovery continued to moderately improve. Paper revenue increased $18 million in 2021 as compared to 2020.
•For the year ended December 31, 2020, these revenues decreased 24.0% as compared to the prior year, including a 0.4-percentage point unfavorable impact from currency. The decline at constant currency1 was primarily driven byreflected lower sales of our office-centric devices (entry and mid-range products)supplies revenues associated with lower page volume trends, partially offset by higher IT revenues from our XBS channel and from recently acquired IT dealers outside of the U.S. The decrease in supplies was significantly impacted by lower sales of our production-centric devices (high-end)through indirect channels, as well asresellers, in response to the benefit of targeted price actions.lower demand caused by the pandemic, have reduced their inventory purchases to manage liquidity.
Financing revenue is generated from financed equipment sale transactions. For the year ended December 31, 20182021, Financing revenue decreased 2.2% as compared to the prior year, including a 1.9-percentage point favorable impact from currency, while Financing revenue for the year ended December 31, 2020 decreased 7.4% as compared to the prior year, including a 0.3-percentage point favorable impact from currency. The decline at constant currency, 1 reflected a lower finance receivables balance due to run-off of our lease portfolio and lower equipment sales in prior periods. The decline in 2021 also reflected the impact of lower equipment sales in the second half of 2021. However, lease originations increased in 2021 as compared to the prior year, primarily as a result of higher XFS (renamed FITTLE in 2022) lease penetration from our XBS sales unit.
_____________
(1)See "Currency Impact" section for description of constant currency.
Xerox 2021 Annual Report 39
Equipment sales revenue
Equipment revenue for the three years ended December 31, 2021, 2020 and 2019 was as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Revenue | | % Change | | CC % Change | | % of Equipment Revenue |
| (in millions) | | 2021 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 | | 2019 |
| Entry | | $ | 282 | | | $ | 228 | | | $ | 217 | | | 23.7% | | 5.1% | | 22.2% | | 4.7% | | 18% | | 14% | | 11% |
| Mid-range | | 972 | | | 986 | | | 1,404 | | | (1.4)% | | (29.8)% | | (2.9)% | | (30.3)% | | 62% | | 63% | | 68% |
| High-end | | 304 | | | 325 | | | 421 | | | (6.5)% | | (22.8)% | | (7.7)% | | (23.4)% | | 19% | | 21% | | 20% |
| Other | | 23 | | | 25 | | | 20 | | | (8.0)% | | 25.0% | | (8.0)% | | 25.0% | | 1% | | 2% | | 1% |
| Equipment sales | | $ | 1,581 | | | $ | 1,564 | | | $ | 2,062 | | | 1.1% | | (24.2)% | | (0.4)% | | (24.6)% | | 100% | | 100% | | 100% |
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CC - See "Currency Impact" section for description of constant currency.
Equipment sales revenue increased 1.1% for the year ended December 31, 2021 as compared to the prior year, including a 1.5-percentage point favorable impact from currency. The decrease at constant currency1 in Equipment sales revenue in 2021 reflected the significant adverse impact of product supply constraints (consistent with market-wide shortages of computer chips and resins) and global freight disruptions, which were further amplified by labor shortages within the transportation industry. Demand increased during the year as businesses reopened, resulting in a backlog of orders at the end of 2021 that was nearly 150% higher than the prior year and higher than pre-pandemic levels. The supply chain disruption most significantly impacted the availability of our mid-range and high-end devices, causing a negative mix impact on total Equipment sales revenue. Equipment sales revenue increased in EMEA, as the impact of supply chain disruptions was offset by higher demand from our indirect channels serving SMB, and from large government deals (in Europe and certain developing market regions). Equipment sales revenue decreased 0.8%in our Americas operations as shipping and logistics disruptions were more prevalent in the U.S. than other markets. We expect supply chain disruptions to affect Equipment sales revenue through the first half of 2022.
For the year ended December 31, 2020, Equipment sales revenue decreased 24.2% as compared to the prior year, including a 0.4-percentage point favorable impact from currency. Equipment sales revenue in both years was impacted bycurrency as well as the impact of price declines of approximatelyless than 5% (which were in-line. The COVID-19 pandemic significantly impacted our equipment sales revenue during 2020 as a result of business closures and office building capacity restrictions that impacted our customers' purchasing decisions and caused delayed installations. Additionally, our mix of revenues from lower-end black-and-white devices increased as a result of hybrid workplace trends associated with our historic declines).
Xerox 2019 Annual Report 32
The change at constant currency1 reflected the following:
Entry
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◦ | For the year ended December 31, 2019, the decrease reflected lower sales of devices primarily in the indirect channels in EMEA, reflecting continued weakness and delayed decisions as a result of uncertainty in the economic environment, as well as lower revenues from our indirect channels in the U.S., reflecting targeted price investments in the fourth quarter of 2019, partially offset by higher installs.•For the year ended December 31, 2021, the increase as compared to the prior year was driven by higher demand for our lower-end printers and MFPs through our indirect channels primarily in EMEA as well as in the Americas, which included markedly higher installs related to government deals in the developing regions of EMEA. We also saw higher demand for entry devices associated with hybrid work environments. While sales increased across this portfolio, we experienced an unfavorable mix from significantly higher sales of our lower-end black-and-white devices. •For the year ended December 31, 2020, the increase as compared to the prior year was primarily due to higher installs of our black-and-white devices in developing regions in EMEA, including large-order government deals in Eurasia, partially offset by lower sales of devices in our indirect channels in EMEA, Latin America and the U.S. affected in part by the COVID-19 pandemic. |
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◦ | For the year ended December 31, 2018, the increase reflected higher sales of our ConnectKey devices through our indirect channels in the U.S. and developing markets.
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Mid-range
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◦ | For the year ended December 31, 2019, the decrease reflected lower sales from our XBS sales organization, which continued to recover from the impact of organizational changes in the first half of 2019 that were implemented as part of our Project Own It transformation actions (including the transitioning of accounts to implement coverage changes, consolidation of real estate location and reduction of management layers), as well as lower revenues from our indirect channels in the U.S. and EMEA. The decrease was partially offset by higher revenues from our U.S. Enterprise organization, which had higher activity from light-production devices associated with the recent launch of PrimeLink (an entry-level production printer) and the benefit of a large account refresh in the second half.•For the year ended December 31, 2021, the decrease as compared to the prior year was primarily driven by the significant impact of global product supply constraints and freight disruptions that had a more severe effect on our U.S. operations. These negative impacts were partially offset by higher demand consistent with the gradual reopening of workplaces, as compared to business shutdowns that reduced purchases of office devices in the prior year. •For the year ended December 31, 2020, the decrease as compared to the prior year was primarily driven by the COVID-19 pandemic and related office closures, which significantly impacted our sales through indirect channels in the U.S. and Europe, as resellers, in response to lower demand caused by the pandemic, reduced their inventory purchases to manage liquidity, partially offset by strong demand for our PrimeLink and new generation ConnectKey® devices. Xerox 2021 Annual Report 40
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◦ | For the year ended December 31, 2018, the increase reflected higher sales of our ConnectKey devices through our Enterprise channel in the U.S., higher sales of lower-end devices in developing markets and higher sales from our XBS business.
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High-end
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◦ | For the •For the year ended December 31, 2021, the decrease as compared to the prior year ended December 31, 2019, the increase primarily reflected the impact of global product supply constraints and freight disruptions, resulting in lower sales of color systems in the U.S., as well as lower sales of larger color production engines, which continued to be depressed as a result of our customers' delayed capital investment decisions. These negative impacts were partially offset by improvement in sales of devices in the lower-end of the range and to SMB customers, as well as higher sales of black-and-white systems corresponding with our customers' refresh cycles. •For the year ended December 31, 2020, the decrease as compared to the prior year primarily reflected lower installs of our Versant entry-production systems and iGen production presses, as well as lower installs of our Iridesse production presses in EMEA, which were partially offset by demand for our larger Baltoro cut-sheet inkjet press and higher sales in the U.S. of our continuous-feed color systems associated with continued demand for our Iridesse production press, as well as global demand for our newly-launched Baltoro inkjet press. The increase also reflected higher revenues from our U.S. Enterprise organization and from our indirect channels in the U.S., which was partially offset by lower revenues in EMEA, as well as lower sales from Versant (our lower-end production devices) and iGen print production systems. _____________ (1)See "Currency Impact" section for description of constant currency. |
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◦ | For the year ended December 31, 2018, the decrease primarily reflected lower sales from iGen, along with lower revenues from black-and-white systems consistent with market decline trends. These declines were only partially mitigated by demand for the Iridesse production press, as well as higher sales from our recently upgraded Brenva cut-sheet inkjet press.
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Revenue Metrics
Installs reflect only new placementplacements of devices only (i.e., measure does not take into account removal of devices which may occur as a result of contract renewals or cancellations). Revenue associated with equipment installations may be reflected up-front in Equipment sales or over time either through rental income or as part of our Xerox Servicesservices revenues (which are both reported within our Post sale revenues), depending on the terms and conditions of our agreements with customers. InstallInstalls include activity includesfor Xerox Services and Xerox-brandednon-Xerox branded products shipped toinstalled by our XBS sales unit. Detail by product group (see Geographic Sales Channels and ProductProducts and Offerings Definitions)Definitions) is shown below:below.
Installs for the year ended December 31, 20192021 were:
Entry
Color•7% increase in color multifunction devices were flat, reflecting higher installs of ConnectKey productscolor personal devices at the low-end of the portfolio and higher installs of ConnectKey® devices through our indirect channels in EMEA and North America.
•36% increase in black-and-white multifunction devices reflecting higher activity primarily from low-end devices through indirect channels primarily from developing regions in EMEA, which included large order government deals, and in the Americas.
Mid-Range(1)
•8% increase in mid-range color installs primarily in EMEA, reflecting higher installs of our recently launched new-generation of ConnectKey® multi-function printers, as well as our PrimeLink entry-production color devices.
•7% increase in mid-range black-and-white installs reflecting higher installs of our recently launched new-generation of ConnectKey® multi-function devices, as well as our PrimeLink entry production black-and-white devices.
High-End(1)
•12% increase in high-end color installs reflecting primarily growth from our lower-end Versant devices as well as our Iridesse and iGen production systems.
•19% increase in high-end black-and-white systems reflecting higher installs of our Nuvera devices primarily related to cyclical account refreshes in the U.S and EMEA.
Installs for the year ended December 31, 2020 were:
Entry
•21% decrease in color multifunction devices reflecting lower installs of ConnectKey® devices through our indirect channels in the U.S., offset by lower installs of devices from and EMEA.
4% decrease•20% increase in black-and-white multifunction devices reflecting lowerhigher activity primarily from U.S. Enterprise and EMEA, as well as fromsales in the lower end of the portfolio through indirect channels in our developing regions in the Americas,EMEA and Latin America associated with work-from-home sales programs, partially offset by higher activity fromlower installs through our indirect channels in Canada, as well as XBS.the U.S.
Mid-Range(1)
7%•26% decrease in mid-range color installs primarily reflecting lower installs of multifunction color devices through our U.S. enterprise, partially offset by higher installsstrong demand for our recently launched PrimeLink entry-production color devices and our new generation of light-production devices that sit at the higher end of the portfolio range.ConnectKey® multifunction devices.
17%•22% decrease in mid-range black-and-white installs reflecting in part global market trends.trends, partially offset by strong demand for our recently launched PrimeLink light-production multi-function devices and our new generation of ConnectKey® multifunction devices.
Xerox 2021 Annual Report 41
High-End(1)
4%•42% decrease in high-end color installs primarily reflecting lower activity frominstalls of our lower-end Versant devices, along with lower installs of our Iridesse and iGen and Versant production systems, partially offset by global demand for our newly-launched Baltoro inkjet press and continued strong demand for our Iridesse production press.Baltoro cut-sheet inkjet press and higher installs in the U.S. of our continuous-feed systems.
14%•13% decrease in high-end black-and-white systems reflecting globallower installs of our Nuvera devices along with market trends.
Xerox 2019 Annual Report 33
Installs(1)Mid-range and High-end color installations exclude FUJIFILM Business Innovation Corp. digital front-end sales; including FUJIFILM Business Innovation Corp. digital front-end sales, Mid-range color devices increased 8% and decreased 26% for the yearyears ended December 31, 2018 were:
Entry
12% increase in color multifunction devices, reflecting higher installs of our ConnectKey products through our indirect channels in the U.S.2021 and Europe, as well as through our XBS business.
17% increase in black-and-white multifunction devices, driven largely by higher activity from low-end devices in developing markets as well as higher installs of our ConnectKey devices through our indirect channels in the U.S. and Europe.
Mid-Range(1)
10% increase in mid-range color installs, reflecting higher demand from our ConnectKey devices through our large enterprise channel and our XBS business, as well as lower-end A3 devices in developing markets.
8% increase in mid-range black-and-white, reflecting higher demand for our ConnectKey devices in our XBS business and developing markets.
High-End(1)
9% decrease in high-end2020, respectively, while High-end color systems as demandincreased 12% and decreased 42% for our new Iridesse production pressthe years ended December 31, 2021 and cut-sheet inkjet products was offset by lower installs of iGen and lower-end production systems including Versant systems.2020, respectively.
18% decrease in high-end black-and-white systems reflecting market trends, partially offset by increased demand in our indirect U.S. channels and our developing markets.
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(1) | Mid-range and High-end color installations exclude Fuji Xerox digital front-end sales; including Fuji Xerox digital front-end sales, Mid-range color devices decreased 7% and increased 9% for the years ended December 31, 2019 and 2018, respectively, while High-end color systems decreased 4% and 9% for the years ended December 31, 2019 and 2018, respectively. |
Geographic Sales Channels and Product and Offerings Definitions
Our business is aligned to a geographic focus and is primarily organized on the basis of go-to-market sales channels, which are structured to serve a range of customers for our products and services. In 2019, we changed our geographic structure to create a more streamlined, flatter and more effective organization, as follows:
•Americas, which includes our sales channels in the U.S. and Canada, as well as Mexico, and Central and South America.
•EMEA, which includes our sales channels in Europe, the Middle East, Africa and India.
•Other, which primarily includes sales to and royalties from Fuji Xerox,FUJIFILM Business Innovation Corp., and our licensing revenue.
Our products and offerings include:
•“Entry”, which includes A4 devices and desktop printers. Prices in this product group can range from approximately $150 to $3,000.
•“Mid-Range”, which includes A3 Office and Light Production devices that generally serve workgroup environments in mid to large enterprises. Prices in this product group can range from approximately $2,000 to $75,000+.
•“High-End”, which includes production printing and publishing systems that generally serve the graphic communications marketplace and large enterprises. Prices for these systems can range from approximately $30,000 to $1,000,000+.
Equipment Sales Revenue - Classification Update
During first quarter 2021, we revised the classification of equipment sales revenue by category for our XBS sales unit to conform the classification of devices across Xerox Services which includes solutions and services that span from managing print to automating processes to managing content. Our primary offerings are Intelligent Workplace Services (IWS), which is our rebranded Managed Print Services, as well as Digital and Cloud Print Services (including centralized print services). Xerox Services also includes Communications and Marketing Solutions.sales channels. The revision had no impact on reported total equipment sales revenue.
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| | For the Year ended December 31, 2020 |
| (in millions) | | As Reported | | Change | | As Revised |
| Entry | | $ | 188 | | | $ | 40 | | | $ | 228 | |
| Mid-range | | 1,043 | | | (57) | | | 986 | |
| High-end | | 312 | | | 13 | | | 325 | |
| Other | | 21 | | | 4 | | | 25 | |
| Equipment Sales | | $ | 1,564 | | | $ | — | | | $ | 1,564 | |
Xerox 20192021 Annual Report 3442
Costs, Expenses and Other Income
Summary of Key Financial Ratios
The following is a summary of our key financial ratios used to assess our performance:
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| | Year Ended December 31, |
| (in millions) | 2019 | | 2018 | | 2017 | | 2019 B/(W) | | | 2018 B/(W) | |
| Gross Profit | $ | 3,650 |
| | $ | 3,869 |
| | $ | 4,071 |
| | $ | (219 | ) | | | $ | (202 | ) | |
| RD&E | 373 |
| | 397 |
| | 424 |
| | 24 |
| | | 27 |
| |
| SAG | 2,085 |
| | 2,379 |
| | 2,514 |
| | 294 |
| | | 135 |
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| | | | | | | | | | | | |
| Equipment Gross Margin | 32.6 | % | | 33.9 | % | | 31.5 | % | | (1.3 | ) | pts. | | 2.4 |
| pts. |
| Post sale Gross Margin | 42.5 | % | | 41.8 | % | | 43.3 | % | | 0.7 |
| pts. | | (1.5 | ) | pts. |
| Total Gross Margin | 40.3 | % | | 40.0 | % | | 40.7 | % | | 0.3 |
| pts. | | (0.7 | ) | pts. |
| RD&E as a % of Revenue | 4.1 | % | | 4.1 | % | | 4.2 | % | | — |
| pts. | | 0.1 |
| pts. |
| SAG as a % of Revenue | 23.0 | % | | 24.6 | % | | 25.2 | % | | 1.6 |
| pts. | | 0.6 |
| pts. |
| | | | | | | | | | | | |
| Pre-tax Income | $ | 822 |
| | $ | 549 |
| | $ | 525 |
| | $ | 273 |
| | | $ | 24 |
| |
| Pre-tax Income Margin | 9.1 | % | | 5.7 | % | | 5.3 | % | | 3.4 |
| pts. | | 0.4 |
| pts. |
Adjusted(1) Operating Profit | $ | 1,192 |
| | $ | 1,093 |
| | $ | 1,133 |
| | $ | 99 |
| | | $ | (40 | ) | |
Adjusted(1) Operating Margin | 13.1 | % | | 11.3 | % | | 11.3 | % | | 1.8 |
| pts. | | — |
| pts. |
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| | Year Ended December 31, |
| (in millions) | 2021 | | 2020 | | 2019 | | 2021 B/(W) | | | 2020 B/(W) | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Gross Profit | $ | 2,403 | | | $ | 2,626 | | | $ | 3,650 | | | $ | (223) | | | | $ | (1,024) | | | | | | | | | | | | |
| RD&E | 310 | | | 311 | | | 373 | | | 1 | | | | 62 | | | | | | | | | | | | |
| SAG | 1,718 | | | 1,851 | | | 2,085 | | | 133 | | | | 234 | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Equipment Gross Margin | 24.2 | % | | 27.4 | % | | 32.6 | % | | (3.2) | | pts. | | (5.2) | | pts. | | | | | | | | | | |
| Post sale Gross Margin | 37.0 | % | | 40.3 | % | | 42.5 | % | | (3.3) | | pts. | | (2.2) | | pts. | | | | | | | | | | |
| Total Gross Margin | 34.1 | % | | 37.4 | % | | 40.3 | % | | (3.3) | | pts. | | (2.9) | | pts. | | | | | | | | | | |
| RD&E as a % of Revenue | 4.4 | % | | 4.4 | % | | 4.1 | % | | — | | pts. | | (0.3) | | pts. | | | | | | | | | | |
| SAG as a % of Revenue | 24.4 | % | | 26.4 | % | | 23.0 | % | | 2.0 | | pts. | | (3.4) | | pts. | | | | | | | | | | |
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Pre-tax (Loss) Income(1) | $ | (475) | | | $ | 252 | | | $ | 822 | | | $ | (727) | | | | $ | (570) | | | | | | | | | | | | |
Pre-tax (Loss) Income Margin(1) | (6.7) | % | | 3.6 | % | | 9.1 | % | | (10.3) | | pts. | | (5.5) | | pts. | | | | | | | | | | |
Adjusted(2) Operating Profit | $ | 375 | | | $ | 464 | | | $ | 1,192 | | | $ | (89) | | | | $ | (728) | | | | | | | | | | | | |
Adjusted(2) Operating Margin | 5.3 | % | | 6.6 | % | | 13.1 | % | | (1.3) | | pts. | | (6.5) | | pts. | | | | | | | | | | |
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(1)2021 includes a pre-tax non-cash Goodwill impairment charge of $781 million.
(2)Refer to the "Non-GAAP Financial Measures" section for an explanation of the non-GAAP financial measure.
Pre-tax (Loss) Income Margin
Pre-tax incomeloss marginfor the year ended December 31, 20192021 of 9.1% increased 3.4-percentage(6.7)% decreased 10.3-percentage points compared to 2018, including an approximate 0.8-percentage point favorable impact from the $77pre-tax income margin of 3.6% in 2020. The decrease primarily reflected the non-cash Goodwill impairment charge of $781 million OEM license fee. This increase was primarily driven($750 million after-tax), and the impact of lower adjusted1 operating margin (see below), of 1.3-percentage points, partially offset by lower Other expenses,Restructuring and related costs, net, and Transaction and related costs, net. The increase also reflected lower operating costs, primarily associated with the net benefits from our Project Own It transformation actions, which more than offset the adverse impact of lower revenues. These improvements were partially offset by higher Restructuring and related costs. Transaction currency had a 0.3-percentage point unfavorable impact.Other expenses, net.
Pre-tax income margin for the year ended December 31, 20182020 of 5.7% increased 0.4-percentage3.6% decreased 5.5-percentage points compared to 2017. This increase was2019. The decrease primarily drivenreflected the impact of lower adjusted1 operating margin (see below), of 6.5-percentage points, as well as higher Amortization of intangible assets and Transaction and related cost, net, partially offset by lower Restructuring and related costs, net and lower Other expenses, net, including lower non-service retirement-related costs. These improvements were partially offset by lower revenues, which were only partially offset by cost reductions from our business transformation actions and higher Transaction and related costs, net. Transaction currency had a 0.5-percentage point favorable impact.
Pre-tax (loss) income margin includes Restructuring and related costs, net, the Amortization of intangible assets, Transaction and other related costs, net and Other expenses, net, all of which are separately discussed in subsequent sections. Adjusted1 Operating margin, discussed below, excludes these items. 2021 Adjusted1 Operating margin also excludes the non-cash Goodwill impairment charge of $781 million ($750 million after-tax).
Adjusted1 Operating Margin
Adjusted1 operating marginfor the year ended December 31, 20192021 of 13.1% increased 1.8-percentage5.3% decreased 1.3-percentage points compared to 2018,2020. The decrease primarily reflectingreflects an approximate 1.5-percentage point negative impact of supply chain disruptions, including higher shipping and logistics costs, and an unfavorable mix of equipment revenue due to product constraints, as well as a negative 0.4-percentage points from lower royalty revenue from FUJIFILM Business Innovation Corp. Adjusted1 operating margin also reflected an approximate 1.1-percentage point negative impact of lower savings from temporary government assistance and furlough measures, and an approximate 0.7-percentage point unfavorable impact from lower third-party lease commissions and incremental costs associated with investments to support future growth. These unfavorable factors were partially offset by an approximate 1.5-percentage point favorable impact from lower bad debt expense due to a higher provision in the $77 million OEM license fee, as well asprior year, reflecting the expected impact ofto our trade and finance receivable portfolio from the COVID-19 pandemic. Additionally, cost and expense reductions associated with our Project Own It transformation actions, which more than offset the pace of revenue decline. The increase also reflected a $44 million favorable impact from higher costs in the prior year related to the exit of a surplus real estate facility and the termination of certain IT projects. Adjustedfavorably impacted adjusted1 operating margin also included a 0.3-percentage point unfavorable impact from transaction currency.margin.
Adjusted1 operating margin for the year ended December 31, 20182020 of 11.3% was flat6.6% decreased 6.5-percentage points as compared to 2017,2019. The decrease reflects the impact of lower revenues, primarily reflectingas a result of the significant effect of the COVID-19 pandemic on our business and a 0.9-percentage point unfavorable impact due to an increase in bad debt expense of $61 million in the first quarter of 2020 to reflect the expected impact to our customer base and related outstanding trade and finance receivable portfolio as a result of the economic disruption caused by the
Xerox 2021 Annual Report 43
pandemic. These negative impacts were partially offset by lower costs and expenses, which include savings associated with our Project Own It transformation actions as well as additional savings from various cost reductions actions to mitigate the impact of the pandemic. These actions include approximately $107 million from our business transformation actionstemporary government assistance measures and furlough programs and other reductions in discretionary spending such as near-term targeted marketing programs, the use of contract employees and the temporary suspension of 401(k) matching contributions for the year 2020, as well as lower compensation expense. Entirely offsetting these improvements wasincentives consistent with lower revenuessales and aoperating results. The decrease also included an approximate 0.4-percentage point unfavorable impact within SAG expenses primarily associated with the exit of a surplus real estate facility (0.2-percentage point)from transaction currency and the termination of certain IT projects (0.2-percentage point). Adjusted1 operating margin also included a 0.4-percentagewas affected by an approximate 0.7-percentage point favorableunfavorable impact from transaction currency.the one-time OEM license fee received in the prior year.
_____________
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(1) | (1) Refer to Operating Income and Margin reconciliation table in the "Non-GAAP Financial Measures" section. |
Xerox 2019 Annual Report 35
Gross Margin
Total gross margin for the year ended December 31, 20192021 of 40.3% increased 0.3-percentage34.1% decreased 3.3-percentage points compared to 2018, primarily2020, reflecting an approximate 0.6-percentage point favorableunfavorable impacts of approximately 1.5-percentage points associated with supply chain costs and capacity restrictions (including significantly higher freight and shipping costs and constrained availability of higher margin equipment) and 0.8-percentage points associated with investments to support future growth. The remainder of the decline reflects the impact of lower savings from temporary government assistance and furlough measures, lower royalty revenue from FUJIFILM Business Innovation Corp. and higher mix of services with lower per-page revenues. These headwinds were partially offset by the $77 million OEM license fee, as well as an unfavorable impact from transaction currency of 0.3-percentage points. Gross margin also reflects cost reductionssavings from our business transformation actions as part of Project Own It which were entirely offset by the impact of targeted pricingtransformation actions.
Total gross margin for the year ended December 31, 20182020 of 40.0%37.4% decreased 0.7-percentage2.9-percentage points compared to 2017,2019, primarily reflecting a less profitable mix of revenues and the impact of pricing,lower revenues (including from our higher margin post sale stream) primarily as a result of the significant effect of the COVID-19 pandemic due to business closures, as well as lower post sale margin, partially offset by higher equipment marginprice promotion programs, and cost reductions from our business transformation actions. Gross margin includes the favorablean approximate 0.5-percentage point adverse combined impact from transaction currency and higher tariffs. The decrease was also affected by an approximate 0.6-percentage point unfavorable impact from the one-time OEM license fee received in the prior year. These headwinds were partially offset by the cost savings from our Project Own It transformation actions, as well as additional cost reduction actions to mitigate the impact of 0.4-percentage points.the pandemic, including savings of approximately $74 million from temporary government assistance measures and furlough programs and other reductions in discretionary spend such as the use of contract employees and the temporary suspension of 401(k) matching contributions.
Equipment gross margin for the year ended December 31, 20192021 of 32.6%24.2% decreased 1.3-percentage3.2-percentage points compared to 2018,2020, primarily reflecting the impact of higher transportation costs and an unfavorable mix of growth in low-end devices associated with product supply constraints, partially offset by higher revenues and favorable transaction currency.
Equipment gross margin for the year ended December 31, 2020 of 27.4% decreased 5.2-percentage points compared to 2019, primarily reflecting the impact of lower revenues (primarily as a result of targeted pricing actions, which were partially offset by savings from cost productivity,COVID-19-related business closures) as well as a more profitable mixthe adverse impact of revenues fromprice promotion programs, incremental tariff costs and the higher end of the portfolio. Equipment gross margin included the0.6-percentage point unfavorable impact from transaction currency of 0.8-percentage points.
Equipment gross margin for the year ended December 31, 2018 of 33.9% increased 2.4-percentage points compared to 2017, reflecting savings from cost reduction initiatives, partially offset by the impact of pricing and a less profitable mix of revenues. Equipment gross margin included the favorable impactcost reductions from transaction currency of 1.5-percentage points.Project Own It.
Post sale gross margin for the year ended December 31, 20192021 of 42.5% increased 0.7-percentage37.0% decreased 3.3-percentage points compared to 2018, including an approximate 0.6-percentage point favorable impact2020, reflecting lower savings from the $77 million OEM license fee, as well as cost reductions from our business transformation actions,temporary government assistance and furlough measures, lower royalty revenues and third-party lease commissions and a higher mix of services with lower per-page revenues, partially offset by lower revenues and lower pricing on contract renewals.restructuring savings associated with Project Own It transformation actions.
Post sale gross margin for the year ended December 31, 20182020 of 41.8%40.3% decreased 1.5-percentage2.2-percentage points compared to 2017,2019, reflecting lower revenues, including an unfavorable mix of lower maintenance revenues and licensing revenues, as well as the impact of pricing, partially offset by cost reductions.
Gross margins are expected to continue to be negatively impacted in future periodslower revenues (primarily as a result of an increase in theCOVID-19-related business closures impacting page volumes) and price erosion on contract renewals, partially offset by productivity and cost ofsavings and restructuring savings associated with Project Own It transformation actions, as well as savings from our imported products due to higher import tariffs. We are takingadditional cost reduction actions to mitigate the impact of these tariffs,the pandemic. These actions include approximately $73 million of savings from temporary government assistance measures and furlough programs and other reductions in discretionary spend such as raising prices on certain products, however, we currently estimate a year-over-year costthe use of contract employees and the temporary suspension of 401(k) matching contributions. The decrease was also affected by an approximate 0.6-percentage point unfavorable impact from the one-time OEM license fee received in the prior year.
Xerox 2021 Annual Report 44
Research, Development and Engineering Expenses (RD&E)
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Change |
| (in millions) | 2019 | | 2018 | | 2017 | | 2019 | | 2018 |
| R&D | $ | 311 |
| | $ | 325 |
| | $ | 334 |
| | $ | (14 | ) |
| $ | (9 | ) |
| Sustaining engineering | 62 |
| | 72 |
| | 90 |
| | (10 | ) |
| (18 | ) |
| Total RD&E Expenses | $ | 373 |
| | $ | 397 |
| | $ | 424 |
| | $ | (24 | ) | | $ | (27 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Change |
| (in millions) | 2021 | | 2020 | | 2019 | | 2021 | | 2020 |
| R&D | $ | 251 | | | $ | 257 | | | $ | 311 | | | $ | (6) | | | $ | (54) | |
| Sustaining engineering | 59 | | | 54 | | | 62 | | | 5 | | | (8) | |
| Total RD&E Expenses | $ | 310 | | | $ | 311 | | | $ | 373 | | | $ | (1) | | | $ | (62) | |
| | | | | | | | | |
RD&E as a percentage of revenue for the year ended December 31, 20192021 of 4.1%4.4% was flat as compared to 2018.2020.
RD&E of $373$310 million for the year ended December 31, 2019,2021, decreased $24$1 million from 2018,2020, primarily reflecting cost reductionssavings from our Project Own It transformation actions, including lower sustaining engineering expenses,restructuring and productivity as well as benefits from the timing of program development cycles, partially offset by modest investments in our innovation in complementary market areas.portfolio.
RD&E as a percentage of revenue for the year ended December 31, 20182020 of 4.1%4.4% was 0.1-percentage0.3-percentage points lowerhigher compared to 2017.2019, as the impact of revenue declines outpaced the rate of cost reductions.
RD&E of $397$311 million for the year ended December 31, 20182020, decreased $27$62 million from 20172019 reflecting savings from Project Own It that enhanced simplification and reflected lower sustaining engineering expensesrationalization in our core technology spend, and other temporary cost actions, as well as cost reductions and lower expensesthe impact from the saletiming of a business and associated transfers of resources to third parties during the prior year. These impacts wereinvestments, partially offset by modest investmentshigher spend in our innovation in complementary market areas.
Xerox 2019 Annual Report 36
Selling, Administrative and General Expenses (SAG)
SAG as a percentage of revenue of 23.0%24.4% decreased 1.6-percentage2.0-percentage points for the year ended December 31, 20192021 compared to 20182020 primarily reflecting expense reductions from our business transformation actions. The decrease in SAG as a percentageresult of revenue includes the benefit from a 0.4-percentagean approximate 1.5-percentage point unfavorablefavorable impact from lower bad debt expense due to a higher provision in the exitprior year to reflect the expected impact to our trade and finance receivable portfolio from the COVID-19 pandemic as well as bad debt reversals in the current year. The remaining decrease was primarily due to the impact of lower selling expenses, as a real estate facilityresult of cost savings and restructuring associated with our Project Own It transformation actions, and savings from additional cost reduction actions to mitigate the cancellationimpact of certain IT projectsthe pandemic (including reductions in 2018.discretionary spend such as near-term targeted marketing programs and employee benefit programs).
SAG expenses of $2,085$1,718 million for the year ended December 31, 20192021 were $294$133 million lower than 2018, including an approximate $30 million unfavorable impact from currency. The decrease2020, primarily reflected expense reductions fromreflecting lower bad debt expenses, as well as cost savings and restructuring savings associated with our Project Own It transformation actions and from additional cost reduction actions to mitigate the impact of the pandemic (including reductions in discretionary spend such as near-term targeted marketing programs), partially offset by an approximate $30 million adverse impact from translation currency, higher compensation related accruals (corresponding with higher expected operating results) and other investments in the business to support future growth, as well as the impact of lower benefits from temporary government assistance and furlough measures and higher legal expenses and expenses from prior year acquisitions.
Our bad debt expense for the year ended December 31, 2021 of $7 million decreased $109 million as compared to the prior year period, primarily due to the prior year reflecting an approximate $60 million incremental provision to cover estimated write-offs primarily on our finance receivable portfolio from the COVID-19 pandemic, while 2021 reflected finance receivable reserve reductions of approximately $31 million and lower reserves for trade receivables. The 2021 reductions in our finance and trade reserves reflect improvements in the macroeconomic environment as well as lower compensation expense;write-offs. Although actual finance receivable write-offs incurred to date continued to lag expectations, we believe our current reserve position remains sufficient to cover expected future losses that may result from future economic conditions. We continue to monitor developments regarding the reduction also includes the favorable impact of $44 million higher costs in 2018 related to the accelerated depreciation associated with the exit of a surplus real estate facilitypandemic, including business closures and the termination of certain IT projects. Bad debt expense for the year ended December 31, 2019 was $46 million or $10 million higher than the prior year primarily due to an increased level of sales-type leasesreopenings and mitigating government support actions as well as future economic conditions, and as a result of our adoption of ASC Topic 842 - Leases and associated changesreserves may need to be updated in the collectibility assessment of certain leases as well as an increased mix of high-end equipment sales (Refer to Note 3 - Adoption of New Leasing Standard - Lessor in the Consolidated Financial Statements for additional information regarding our adoption of ASC 842).future periods. On a trailing twelve-month basis (TTM), bad debt expense remained at less than onewas approximately 0.9% percent of total receivables.receivables (excluding the 2021 reductions of $31 million), which is consistent with the pre-pandemic trend and reflects the consistent level of reserves subsequent to the first quarter 2020 charge.
SAG as a percentage of revenue of 24.6% decreased 0.6-percentage26.4% increased 3.4-percentage points for the year ended December 31, 20182020 compared to 2017 primarily reflecting the expense reductions associated with our business transformation actions. SAG as2019 and included a percentage of revenue includes a 0.4-percentage0.9-percentage point unfavorable impact associated with due to the exitincrease in bad debt expense of a surplus real estate facility and$61 million in the terminationfirst quarter 2020. The increase also reflected the impact of certain IT projects in 2018.
SAG expenses of $2,379 million for the year ended December 31, 2018 were $135 million lower than 2017, including an approximate $14 million unfavorable impact from currency. The reduction primarily reflected expense reductions associated with our business transformation actions along with lower annual performance incentive compensation expense. These improvements wererevenues, partially offset by $44 million of charges related to the accelerated depreciationbenefits from the early termination of a capital leasecost reductions associated with a surplus facility ($22 million) and the cancellation of certain IT projects ($22 million) as we continue to evaluate the returns on our IT investments. Bad debt expense for the year ended December 31, 2018 was $36 million and was $3 million higher than the prior year and on a trailing twelve month basis (TTM) remained at less than one percent of receivables.
Restructuring and Related Costs
During the second half of 2018, we started our Project Own It transformation initiative. The primary goalactions and savings from additional cost reduction actions to mitigate the impact of this initiative is to improve productivity by driving end-to-end transformationthe pandemic. These actions included approximately $32 million from temporary government assistance measures and furlough programs, and other reductions in discretionary spend such as near-term targeted marketing programs, the use of our processescontract employees and systems to create organizational effectivenessthe
Xerox 2021 Annual Report 45
temporary suspension of the 401(k) matching contributions, as well as lower compensation incentives consistent with lower sales and to reduce costs. We incurred restructuring and related costsoperating results.
SAG expenses of $229$1,851 million for the year ended December 31, 2020 were $234 million lower than 2019, reflecting cost savings and restructuring savings associated with our Project Own It transformation actions and from additional cost reduction actions to mitigate the impact of the pandemic, as noted above. These savings were partially offset by higher bad debt expense, as well as expenses from recent acquisitions.
Bad debt expense for the year ended December 31, 2020 was $116 million or $70 million higher than the prior year primarily as a result of the increase in the bad debt provision recorded in first quarter 2020, which reflects the estimated impact on our customer base and related outstanding receivables portfolio as a result of the economic disruption caused by the COVID-19 pandemic. The majority of the increased provision was related to finance receivables due to their larger balance and longer-term nature. During the remainder of 2020, write-offs as well as the bad debt reserves for our trade and finance receivables portfolios were in line with our projections and consistent with future expectations regarding our estimated impacts from the COVID-19 pandemic. Bad debt expense of approximately 2.7% percent of total gross receivables on a trailing-twelve-month basis (TTM) was higher than the 2019 trend of less than one percent, reflecting the significant increase in 2020 due to impacts from the COVID-19 pandemic.
Restructuring and Related Costs, Net
We incurred restructuring and related costs, net of $38 million for the year ended December 31, 2021, as compared to $93 million for the year ended December 31, 2020. These costs were primarily related to costs to implementthe implementation of initiatives under our business transformation projects including Project Own It. The decrease in restructuring and related costs in 2020 is partially due to a higher level of asset impairments and severance and related costs in 2019 for employees transferred as part of an outsourcing arrangement. The following is a breakdown of those costs:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (in millions) | | 2021 | | 2020 | | 2019 |
Restructuring and severance costs(1) | | $ | 30 | | | $ | 107 | | | $ | 81 | |
Asset impairments - leased right-of-use assets(2) | | 3 | | | 4 | | | 39 | |
Asset impairments - owned assets(2) | | 12 | | | 2 | | | 22 | |
Other contractual termination costs(3) | | 3 | | | 3 | | | 19 | |
Net reversals(4) | | (21) | | | (29) | | | (34) | |
| Restructuring and asset impairment costs | | 27 | | | 87 | | | 127 | |
Retention related severance/bonuses(5) | | 6 | | | 4 | | | 39 | |
Contractual severance costs(6) | | 1 | | | (2) | | | 43 | |
Consulting and other costs(7) | | 4 | | | 4 | | | 20 | |
| Total | | $ | 38 | | | $ | 93 | | | $ | 229 | |
|
| | | | |
| (in millions) | | Year Ended December 31, 2019 |
Restructuring and severance costs(1) | | $ | 81 |
|
Asset impairments(2) | | 61 |
|
Other contractual termination costs(3) | | 19 |
|
Net reversals(4) | | (34 | ) |
| Restructuring and asset impairment costs | | 127 |
|
Retention related severance/bonuses(5) | | 39 |
|
Contractual severance costs(6) | | 43 |
|
Consulting and other costs(7) | | 20 |
|
| Total | | $ | 229 |
|
____________________________
| |
(1) | Reflects headcount reductions of approximately 1,000 employees worldwide for the year ended December 31, 2019. |
| |
(2) | Primarily related to the exit and abandonment of leased and owned facilities. For (1)Reflects headcount reductions of approximately 400, 1,850 and 1,000 employees worldwide for the years ended December 31, 2021, 2020 and 2019, respectively.the year ended December 31, 2019, the charge includes the accelerated write-off of $39 million for leased right-of-use assets and $22 million for owned assets upon exit from the facilities, net of any potential sublease income and other recoveries.
|
| |
(3) | Primarily includes additional costs incurred upon the exit from our facilities including decommissioning costs and associated contractual termination costs. |
| |
(4) | Reflects net reversals for changes in estimated reserves from prior period initiatives as well as $10 million in favorable adjustments from the early termination of prior period impaired leases for the year ended December 31, 2019.
|
| |
(5) | Includes retention related severance and bonuses for employees expected to continue working beyond their minimum retention period before termination. |
| |
(6) | Reflects severance costs and other related costs we are contractually required to pay on employees transferred (approximately 2,200) as part of the shared service arrangement entered into with HCL Technologies. |
| |
(7) | Represents professional support services associated with our business transformation initiatives. |
(2)Primarily related to the exit and abandonment of leased and owned facilities, net of any potential sublease income and other recoveries.
Xerox 2019 Annual Report (3)37Primarily includes additional costs incurred upon the exit from our facilities including decommissioning costs and associated contractual termination costs.
(6)Primarily reflects severance and other related costs associated with employees transferred (approximately 2,200) as part of Contentsa shared service arrangement entered into with HCL Technologies.
(7)Represents professional support services associated with our business transformation initiatives.
20192021 actions impacted several functional areas, with approximately 15%25% focused on gross margin improvements and approximately 80%70% focused on SAG reductions, and the remainder focused on RD&E optimization.
optimizations. Restructuring and asset impairment costs were $161 million for the year ended December 31, 2019 and included $81 million of severance costs related to headcount reductionsWe expect 2022 pre-tax savings of approximately 1,000 employees worldwide, $19$15 million of other contractual termination costsfrom our 2021 restructuring actions.
2020 actions impacted several functional areas, with approximately 55% focused on gross margin improvements and $61 million of asset impairment charges. These costs were partially offset by $34 million of net reversals, primarily resulting from changes in estimated reserves from prior period initiatives as well as $10 million in favorable adjustments from the early termination of prior period impaired leases.approximately 45% focused on SAG reductions.
The implementation of our Project Own It initiatives as well as other business transformation initiatives is expected to continue to deliver significant cost savings in 2020.2022. While many initiatives are underway and have yet to yield the full transformation benefits expected upon their completion, the changes implemented thus far have improved our cost structure and are beginning to yield longer termlonger-term benefits. However, expected savings associated with these
Xerox 2021 Annual Report 46
initiatives may be offset to some extent by business disruption during the implementation phase as well as investments in new processes and systems until the initiatives are fully implemented and stabilized.
We expect 2020 pre-tax savings of approximately $90 million from our 2019 restructuring actions.
Restructuring and related costs of $157 million for the year ended December 31, 2018 include net restructuring and asset impairment charges of $156 million and $1 million of additional costs, primarily related to professional support services associated with the business transformation initiatives. Net restructuring and asset impairment charges included the following:
$175 million of severance costs related to headcount of approximately 2,700 employees globally. The average restructuring cost per employee was lower in 2018 as compared to 2017 due to the geographic mix of actions as well as reductions in benefits under our employee severance programs particularly with respect to actions in the U.S. The actions impacted multiple functional areas, with approximately 25% of the costs focused on gross margin improvements, 70% focused on SAG reductions and the remainder focused on RD&E optimization.
$14 million for lease termination costs primarily reflecting continued optimization of our worldwide operating locations.
The above charges were partially offset by $33 million of net reversals for changes in estimated reserves from prior period initiatives, primarily reflecting unanticipated attrition and other job changes prior to completion of the restructuring initiatives.
Restructuring Summary
The restructuring reserve balance as of December 31, 20192021 for all programs was $70$44 million, which is expected to be paid over the next twelve months. During 2020, we expect to incur additional restructuring and related charges of approximately $175 million for actions and initiatives that have not yet been finalized. Approximately $75 million of the full year charges are expected to be recognized in the first quarter of the year.
Refer to Note 14 - Restructuring Programs in the Consolidated Financial Statements for additional information regarding our restructuring programs.
Transaction and Related Costs, Net
Transaction and related costs, net were $12 million in 2019 andprimarily reflect approximately $5 million of costs from third party providers for professional services associated with our announced proposal to acquire HP (refer to the “Proposed Transaction with HP Inc.” section in the Executive Overview for additional information). These costs are primarily related to legal costscertain major and other related professional services and are expected to continue in future periods and may include additional types of costs. The remainder of the costs in 2019 related to the proposed combination transaction with Fuji Xerox, which was terminated in May 2018, and primarily include on-going costs for litigation associated with the terminated transaction as well as adjustments and recoveries associated with costs incurred in 2018 (refer to the “Sales of Ownership Interests in Fuji Xerox Co., Ltd. and Xerox International Partners" section in the Executive Overview for additional information regarding the FX transaction litigation). We continue to pursue additional recoveries from insurance carriers and other parties for costs and expenses related to the terminated transaction and therefore additional recoveries and adjustments may be recorded in future periods, when finalized.
strategic M&A projects. There were no Transaction and related costs, net were $68incurred during 2021 as compared to $18 million incurred in 2020 and $12 million in 20182019. Transaction and reflectrelated costs, net in 2020 primarily related to the proposed combination transaction with Fuji Xerox primarily for third-party accounting, legal consulting and other similar types of services as well as financingprofessional costs and costs associated with litigation that resulted from the proposed transaction. These costs were partially offset by insurance recoveries and a settlement refund from a financial adviser that had been associated with the terminated transaction.
Xerox 2019 Annual Report 38
Amortization of Intangible Assets
Amortization of intangible assets for the three years ended December 31, 20192021, 20182020 and 20172019 was $45$55 million, $48$56 million and $53$45 million, respectively. The decreaseincreased level of $3 millionamortization in 2021 and $52020 was primarily due to intangible assets associated with our 2021 and 2020 acquisitions. Additionally, the increase in amortization of $11 million in 2019 and 2018, respectively,2020 as compared to prior year periods is2019 was primarily the result of a lower level of acquisitions over the past several years. In 2019, this impact was partially offset bydue to the accelerated write-off of trade names associated with our realignment and consolidation of certain XBS tradenames as part of our continued efforts to realign and consolidate this sales unitsunit as part of Project Own It.
Refer to Note 13 - Goodwill and Intangible Assets, Net in the Consolidated Financial Statements for additional information regarding our intangible assets.
Worldwide Employment
Worldwide employment was approximately 27,00023,300 as of December 31, 20192021 and decreased by approximately 5,4001,8001 from December 31, 2018.2020. The reduction resulted from net attrition (attrition net of gross hires), a large portion of which is not expected to be backfilled, as well as the impact of organizational changes, including employees transferred as partchanges.
_____________
(1)Decrease based on revised headcount at December 31, 2020 of the shared service arrangement entered into with HCL Technologies earlier this year. Refer25,100 from 24,700 due to the Shared Services Arrangement with HCL Technologies sectionchange in the Executive Overview for additional information.definition of full-time equivalent
employee.
Other Expenses, Net
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| (in millions) | 2019 | | 2018 | | 2017 |
| Non-financing interest expense | $ | 105 |
| | $ | 114 |
| | $ | 119 |
|
| Non-service retirement-related costs | 18 |
| | 150 |
| | 188 |
|
| Interest income | (16 | ) | | (15 | ) | | (8 | ) |
| Gains on sales of businesses and assets | (21 | ) | | (35 | ) | | (15 | ) |
| Litigation matters | (8 | ) | | 1 |
| | 2 |
|
| Contract termination costs - IT services | (12 | ) | | 43 |
| | — |
|
| Currency losses, net | 7 |
| | 5 |
| | 4 |
|
| Loss on sales of accounts receivable | 3 |
| | 3 |
| | 10 |
|
| Loss on early extinguishment of debt | — |
| | — |
| | 20 |
|
| All other expenses, net | 8 |
| | 5 |
| | 10 |
|
| Other expenses, Net | $ | 84 |
| | $ | 271 |
| | $ | 330 |
|
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (in millions) | 2021 | | 2020 | | 2019 |
| Non-financing interest expense | $ | 96 | | | $ | 94 | | | $ | 105 | |
| Interest income | (4) | | | (14) | | | (16) | |
| Non-service retirement-related costs | (89) | | | (29) | | | 18 | |
| Gains on sales of businesses and assets | (40) | | | (30) | | | (21) | |
| Currency losses, net | 7 | | | 3 | | | 7 | |
| Loss on sales of accounts receivable | 2 | | | 2 | | | 3 | |
| Loss on early extinguishment of debt | — | | | 26 | | | — | |
| Litigation matters | 2 | | | (1) | | | (8) | |
| Contract termination costs - IT services | — | | | 3 | | | (12) | |
| Tax indemnification from Conduent | — | | | (9) | | | — | |
| All other expenses, net | 2 | | | — | | | 8 | |
| Other expenses, net | $ | (24) | | | $ | 45 | | | $ | 84 | |
Non-financing interest expense
Non-financing interest expense for the year ended December 31, 20192021 of $105$96 million was $9$2 million lowerhigher than 2018.2020. When non-financing interest expense is combined with financing interest expense (Cost of financing), total interest expense of $207 million decreased by $10$8 million from the prior year. The decrease isyear period primarily due toreflecting a lower average debt balance reflecting the repayment of approximately $960 million of debt maturing in 2019.balance.
Non-financing interest expense for the year ended December 31, 20182020 of $114$94 million was $5$11 million lower than 2017.2019. When non-financing interest expense is combined with financing interest expense (Cost of financing), total interest expense of $215 million decreased by $6$21 million from the prior year. The decrease isyear period reflecting a lower average debt balance primarily due to the full-year effect of the 2019 debt repayments that were not refinanced.
Xerox 2021 Annual Report 47
NOTE: For the years ended December 31, 2021 and 2020 both Xerox Holdings and Xerox reported total interest expense of $207 million and $215 million, respectively, however, the amount reported by Xerox includes $80 million and $32 million, respectively, of interest paid to Xerox Holdings on an Intercompany Loan. The Intercompany Loan represents a lowerloan of the net proceeds Xerox Holdings Corporation received from its Senior Notes to Xerox, which was used to repay existing debt balance reflecting the repayments of approximately $265 million of debt in 2018 and $800 million in 2017.Xerox Corporation.
Refer to Note 16 - Debt in the Consolidated Financial Statements for additional information regarding the Xerox Holdings Corporation/Xerox Corporation Intercompany Loan, our debt activity as well asand information regarding the allocation of interest expense.
Interest Income
Interest income for the year ended December 31, 2021 was $10 million lower than 2020, primarily due to lower interest rates and a lower cash balance.
Non-service retirement-related costs
Non-service retirement-related costs decreased $132$60 million for the year ended December 31, 20192021 as compared to the prior year2020 primarily driven by lower discount rates and higher expected returns on plan assets due to higher asset balances.
Non-service retirement-related costs decreased $47 million for the favorable impact of a 2018 amendmentyear ended December 31, 2020 as compared to our U.S. Retiree Health Plan and2019 primarily driven by lower losses from pension settlements in the U.S. of $93$53 million, an $80a $40 million decrease compared to the prior year.
Non-service retirement-related costs decreased $38 million for the year ended December 31, 2018 as compared to the prior year primarily due to the favorable impact of higher pension contributions and asset returns in the prior year, as well as the favorable impact of an amendment to our U.S. Retiree Health Plan. The favorable impacts were partially offset by higher losses from pension settlements in the U.S. of $173 million, a $40 million increase compared to the prior year. The higher level of settlements was primarily due to an expected increase in interest rates.2019.
Refer to Note 19 - Employee Benefit Plans in the Consolidated Financial Statements for additional information regarding non-service retirement-related costs.
Xerox 2019 Annual Report 39
GainGains on sales of businesses and assets
The gainGains on sales of businesses and assets in both 2019increased $10 million and 2018$9 million for the years ended December 31, 2021 and 2020, respectively, as compared to the respective prior year periods, and reflect the sales of non-core business assets.assets in all periods presented.
Loss on early extinguishment of debt
During fourth quarter 2020 we recorded a $26 million loss associated with the early extinguishment of $1,062 million of the Senior Notes due May 2021. The gain in 2017 includes a gain of $13 million fromnet loss included the salepayment of a research facility in Grenoble, France.
Litigation matters
Litigation matters for 2019 were $9redemption premium of $24 million lower thanas well as the prior year reflecting the favorable resolutionwrite-off of certain litigation matters in 2019.
Contract terminationunamortized debt issuance costs and other debt carrying value adjustments.
Contract termination costs for 2019- IT services
Contract termination costs were a $3 million charge in 2020 and a $12 million credit reflecting an adjustmentin 2019, both of which are adjustments to a $43 million penalty recorded in the fourth quarter 2018 associated withrelated to the termination of a relatedan IT services arrangement. The penalty was associated with a minimum purchase commitment that would not be fulfilled due to the termination of athe related IT services arrangement. The creditadjustments in 2020 and 2019 reflects a changereflect changes in the estimate regarding the expected spending in the run-off of this terminated IT services arrangement and the amount due under the minimum purchase agreement. The commitment was settled in 2020 for approximately $34 million. The minimum purchase commitment had originally been entered into in connection with the sale of our Information Technology Outsourcing (ITO) business in 2015.
Loss on salesTax indemnification from Conduent
Represents an indemnification payment expected to be received from Conduent as part of accounts receivablethe settlement of pre-separation unrecognized tax positions related to Conduent when included in our consolidated return. The equal and offsetting charge to this receipt is recorded in Income tax expense, as part of our obligation to pay the taxing authorities.
Income Taxes
RepresentsThe 2021 effective tax rate was 3.6%. On an adjusted1 basis, the loss incurred on our sales2021 effective tax rate was 6.5%. Both rates were lower than the U.S. statutory tax rate of accounts receivable. The21% primarily due to the benefits from tax law changes, additional incentives as a result of changes in elections made with the filed tax returns, the decrease in lossdeferred tax valuation allowances as well as the remeasurement of uncertain tax positions. The adjusted1 effective tax rate also reflects partial offsets for the terminationgeographical mix of several receivable sale programs in 2017. Refer to earnings. The adjustedSales of Accounts Receivable1 ineffective tax rate excludes the Capital Resources and Liquidity section and Note 8 - Accounts Receivable, Net in the Consolidated Financial Statements for additional information regarding our sales of receivables.
Loss on early extinguishment of debt
During 2017, we recorded a $7 million net losstax impacts associated with the repaymentfollowing charges: non-cash Goodwill impairment, Restructuring and related costs, net,
Xerox 2021 Annual Report 48
Amortization of intangible assets and non-service retirement-related costs, as described in Senior Notes,our Non-GAAP Financial Measures section.
The 2020 effective tax rate was 25.4%. On an adjusted1 basis, the 2020 effective tax rate was 26.3%. These rates were higher than the U.S. statutory tax rate of 21% primarily due to state taxes, non-deductible items on lower pre-tax income and an increase in deferred tax asset valuation allowances partially offset by the impact from various tax law changes. The adjusted1 effective tax rate excludes the tax impacts associated with the following charges: Restructuring and related costs, net, Amortization of intangible assets, Transaction and related costs, net as well as a $13 million loss associated with the tendernon-service retirement-related costs and exchange of certain Senior Notes.
Income Taxesother discrete, unusual or infrequent items as described in our Non-GAAP Financial Measures section.
The 2019 effective tax rate was 21.8% and includesincluded a credit of $35 million related to the 2017 Tax Cuts and Jobs Act (the Tax Act) which is discussed below.. On an adjusted1basis, the 2019 effective tax rate was 26.1%. Both rates were higher than the U.S. statutory tax rate of 21% primarily due to state taxes. In addition to excluding the impact of the Tax Act, the adjusted1 effective tax rate excludes the tax impacts associated with the following charges: Restructuring and related costs, net, Amortization of intangible assets, Transaction and related costs, net, non-service retirement relatedretirement-related costs as well as other discrete, unusual or infrequent items as described in our Non-GAAP Financial Measures section.
The 2018 effective tax rate was 45.0% and included a charge of $89 million related to the 2017 Tax Act which is discussed below. On an adjusted1 basis, the 2018 effective tax rate was 27.0%. Both rates were higher than the U.S. statutory tax rate of 21% primarily due to the geographical mix of profits. In addition to excluding the impact of the Tax Act, the adjusted1 effective tax rate excludes the tax impacts associated with the following charges: Restructuring and related costs, Amortization of intangible assets, Transaction and related costs, net, non-service retirement related costs as well as other discrete, unusual or infrequent items as described in our Non-GAAP Financial Measures section.
The 2017 effective tax rate was 89.1% and included a charge of $400 million related to the 2017 Tax Act which is discussed below. On an adjusted1 basis, the 2017 effective tax rate was 24.7%. This rate was lower than the U.S. statutory tax rate of 35% primarily due to foreign tax credits, the redetermination of certain unrecognized tax positions upon conclusion of several audits and the geographical mix of profits. In addition to excluding the impact of the Tax Act, the adjusted1 effective tax rate excludes the tax impacts associated with the following charges: Restructuring and related costs, Amortization of intangible assets, non-service retirement related costs and other discrete items.
Xerox operations are widely dispersed. However, no one country outside of the U.S. is a significant factor in determining our overall effective tax rate. The tax impact from these non U.S.non-U.S. operations on our full yearfull-year effective tax rate for 20192021 was not material.(0.9)%. Refer to Note 20 - Income and Other Taxes in the Consolidated Financial Statements for additional information regarding the geographic mix of income before taxes and the related impacts on our effective tax rate.
Our effective tax rate is based on nonrecurring events as well as recurring factors, including the taxation of foreign income. In addition, our effective tax rate will change based on discrete or other nonrecurring events that may not be predictable. Excluding the effects of the Restructuring and related costs, Amortization of intangible assets, Transaction and related costs, net, non-service retirement-related costs and other discrete items, we anticipate that our adjusted1 effective tax rate will be approximately 24% to 27% for full year 2020.
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(1) | Refer to the Effective Tax Rate reconciliation table in the "Non-GAAP Financial Measures" section. |
Xerox 2019 Annual Report (1)40
Tax Cuts and Jobs Act (the Tax Act)
On December 22, 2017, the Tax Cuts and Jobs Act (the Tax Act) was enacted. The Tax Act significantly revised the U.S. corporate income tax system by, among other things, lowering the U.S. statutory corporate income tax rate from 35% to 21% and implementing a territorial tax system that includes a one-time transition tax on deemed repatriated earnings of foreign subsidiaries.
We recorded the following charges (credits) to Income tax expense associated with the Tax Act:
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| | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | |
| (in millions) | | 2019 | | 2018 | | 2017 | | Total |
| Tax Act Impacts | | $ | (35 | ) | | $ | 89 |
| | $ | 400 |
| | $ | 454 |
|
The net charge of $454 million included the following components:
Foreign tax effects: The deemed repatriation tax associated with the Tax Act was $164 million and was based on total post-1986 earnings and profits (E&P) that had previously been deferred from U.S. income taxes. We utilized our existing foreign tax credit carryforwards to settle this deemed repatriation tax. Our net charge for the Tax Act also included a charge of $99 million for other tax liabilities and adjustments resulting from our actual and anticipated distributions of our net accumulated foreign E&P. As a consequence of the Tax Act, we now no longer consider our post 1986 E&P indefinitely reinvested.
Deferred tax assets and liabilities: Our net charge includes a $191 million charge for the remeasurement of certain deferred tax assets and liabilities based on the new statutory income tax rate of 25%, inclusive of estimated state taxes.
Refer to Note 20 - Income and Other Taxesthe Effective Tax Rate reconciliation table in the Consolidated"Non-GAAP Financial Statements for additional information regarding the estimated impacts of Tax Act.Measures" section.
Equity in Net Income of Unconsolidated Affiliates
In November 2019, Xerox Holdings sold its remaining indirect 25% equity interest in Fuji Xerox, which had been previously accounted for as an equity method investment. Accordingly, our remaining Investment in Affiliates, at Equity at December 31, 2019 largely consists of several minor investments in entities in the Middle East region.
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| (in millions) | | 2021 | | 2020 | | 2019 |
Equity in net income of unconsolidated affiliates - Fuji Xerox(1) | | $ | — | | | $ | — | | | $ | 147 | |
| Equity in net income of unconsolidated affiliates - continuing operations | | 3 | | | 4 | | | 8 | |
| Total Equity in net income of unconsolidated affiliates | | $ | 3 | | | $ | 4 | | | $ | 155 | |
| | | | | | |
| Fuji Xerox after-tax restructuring and other charges included in equity income | | — | | | — | | | 20 | |
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(1)Equity in net income for Fuji Xerox is reported in Income from discontinued operations, net of tax for all years presented. The equity in net income for Fuji Xerox in 2019 is through the date of sale.
Refer to Note 1 - Basis of Presentation and Summary of Significant Accounting Policies and Note 76 - Divestitures in the Consolidated Financial Statements for additional information regarding the sale of Fuji Xerox.
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| (in millions) | | 2019 | | 2018 | | 2017 |
Equity in net income of unconsolidated affiliates - Fuji Xerox(1) | | $ | 147 |
| | $ | 25 |
| | $ | 102 |
|
| Equity in net income of unconsolidated affiliates - continuing operations | | 8 |
| | 8 |
| | 13 |
|
| Total Equity in net income of unconsolidated affiliates | | $ | 155 |
| | $ | 33 |
| | $ | 115 |
|
| | | | | | | |
| Fuji Xerox after-tax restructuring and other charges included in equity income | | 20 |
| | 95 |
| | 10 |
|
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(1) | Equity in net income for Fuji Xerox is reported in Income from discontinued operations, net of tax for all years presented. The equity in net income for Fuji Xerox in 2019 is through the date of sale. |
For the year ended December 31, 2019 equity income from Fuji Xerox increased $122 million as compared to 2018, primarily due to lower restructuring costs of $75 million as well as an out-of-period adjustment of $28 million in 2018. For the year ended December 31, 2018, equity income from Fuji Xerox decreased $77 million as compared to 2017, primarily due to higher restructuring costs of $85 million as well as an out-of-period adjustment of approximately $28 million partially offset by improved operations. Refer to Note 12 - Investment in Affiliates, at Equity in the Consolidated Financial Statements for additional information regarding our equity investments.
Net (Loss) Income from Continuing Operations
Net incomeloss from continuing operations attributable to Xerox Holdings for the year ended December 31, 20192021 was $648$(455) million, or $2.78$(2.56) per diluted share, which includes an after-tax Goodwill impairment charge of $750 million (pre-tax charge of $781 million) or ($4.08) per share. On an adjusted1 basis, Net income from continuing operations attributable to Xerox Holdings was $828$293 million, or $3.55$1.51 per diluted share, and includes adjustments for the Goodwill impairment charge, Restructuring and related costs, net, Amortization of intangible assets, as well as non-service retirement-related costs and other discrete, unusual or infrequent items, as described in our Non-GAAP Financial Measures.
Xerox 2021 Annual Report 49
Net income from continuing operations attributable to Xerox Holdings for the year ended December 31, 2020 was $192 million, or $0.84 per diluted share. On an adjusted1 basis, Net income from continuing operations attributable to Xerox Holdings was $313 million, or $1.41 per diluted share, and includes adjustments for Restructuring and related costs, net, Amortization of intangible assets, Transaction and related costs, net as well as non-service retirement-related costs and other discrete, unusual or infrequent items, includingwhich included a Loss on the impact from the Tax Act,early extinguishment of debt, as describedescribed in our Non-GAAP Financial Measures.
Net income from continuing operations attributable to Xerox Holdings for the year ended December 31, 20182019 was $306$648 million, or $1.16$2.78 per diluted share. On an adjusted1 basis, Net income from continuing operations attributable to Xerox Holdings was $745$828 million, or $2.88$3.55 per diluted share, and includes adjustments for Restructuring and related costs, net, Amortization of
Xerox 2019 Annual Report 41
intangible assets, Transaction and related costs, net as well as non-service retirement-related costs and other discrete, unusual or infrequent items, including the impact from the Tax Act, as described in our Non-GAAP Financial Measures.
Net income from continuing operations attributable to Xerox for the year ended December 31, 2017 was $66 million, or $0.20 per diluted share and includes an estimated non-cash charge of $400 million for the impacts associated with the Tax Act. Refer to the Tax Cuts and Jobs Act (the Tax Act) section above, as well as Note 20 - Income and Other Taxes in the Consolidated Financial Statements for additional information. On an adjusted1 basis, Net income from continuing operations attributable to Xerox was $770 million, or $2.93 per diluted share, and includes adjustments for Restructuring and related costs, Amortization of intangible assets, Transaction and related costs, net as well as non-service retirement-related costs, and other discrete, unusual or infrequent items, as described in our Non-GAAP Financial Measures.
Refer to Note 26 - (Loss) Earnings per Share in the Consolidated Financial Statements, for additional information regarding the calculation of basic and diluted earnings per share.
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(1) | Refer to the Net Income and EPS reconciliation table in the "Non-GAAP Financial Measures" section. |
(1)Refer to the Net (Loss) Income and EPS reconciliation table in the "Non-GAAP Financial Measures" section.
Discontinued Operations
Discontinued operations relate to the November 2019 Sales of our indirect 25% equity interest in Fuji Xerox (FX) and our indirect 51% partnership interest in Xerox International Partners (XIP), which had been consolidated.
Refer to Note 76 - Divestitures in the Consolidated Financial Statements for additional information regarding discontinued operations.
Other Comprehensive Income
The historical statementOther comprehensive income attributable to Xerox was $344 million in 2021 and included the following: i) $489 million of Comprehensive Income has not been revisednet gains from the changes in defined benefit plans primarily due to reflectremeasurement and net actuarial gains as a result of higher discount rates, as well as the Salesfavorable impact of currency; ii) $141 million of net translation adjustment losses reflecting the weakening of our investmentsmajor foreign currencies against the U.S. Dollar during 2021; and iii) $4 million in Fujiunrealized losses, net.
Other comprehensive income attributable to Xerox was $314 million in 2020 and XIPincluded the following: i) net translation adjustment gains of $241 million reflecting the strengthening of our major foreign currencies against the U.S. Dollar during 2020; ii) $69 million of net gains from changes in defined benefit plans primarily reflecting net actuarial gains due to actual returns in excess of expected returns offsetting the impacts from lower discount rates as well as the amortization or recognition through settlement losses of accumulated losses from AOCL. These impacts were partially offset by other losses, primarily due to unfavorable currency; and instead reflects discontinued operations as a final adjustment to the Accumulated Other Comprehensive Loss (AOCL) balances at December 31, 2019. Accordingly, all reported amountsiii) $4 million in 2018 and 2017 reflect movements in AOCL for both continuing operations and discontinued operations. Refer to Note 7 - Divestitures in the Consolidated Financial Statements for additional information regarding discontinued operations.unrealized gains, net.
Other comprehensive income attributable to Xerox was $46 million in 2019 and included the following: i) net translation adjustment gains of $62 million reflecting aggregate translation gains of $45 million from the strengthening of most of our major foreign currencies against the U.S. Dollar during 2019, as well as a reclassification of $17 million of accumulated translation losses from AOCL into earnings as a result of the divestiture of our investments in FX and XIP; ii) $10 million of net losses from changes in defined benefit plans reflecting net losses of $138 million associated with defined benefit plan changes during 2019, primarily as a result of lower discount rates, as well as other losses of $21 million, primarily due to unfavorable currency. These losses were partially offset by the reclassification of $148 million of accumulated losses from AOCL into earnings as a result of the divestiture of our investments in FX and XIP; and iii) $6 million in unrealized losses, net.
Other comprehensive income attributable to Xerox was $183 million in 2018 and included the following:i) $409 million of net gains from the changes in defined benefit plans primarily due to prior service credits resulting from an amendment to our U.S. and Canadian Retiree Health plans, settlements and the positive impacts from currency on accumulated net actuarial losses, as well as a $43 million out-of-period pension adjustment (refer to Note 1 - Basis of Presentation and Summary of Significant Accounting Policies in the Consolidated Financial Statements for additional information on the out-of-period adjustment); ii) $16 million in unrealized gains, net, and iii) net translation adjustment losses of $242 million reflecting the weakening of most of our major foreign currencies against the U.S. Dollar.
Other comprehensive income attributable to Xerox was $589 million in 2017 and included the following: i) net translation adjustment gains of $483 million reflecting the strengthening of most of our major foreign currencies against the U.S. Dollar, partially offset by the weakening of the Brazilian Real; and ii) $106 million of net gains from the changes in defined benefit plans primarily due to net actuarial gains and settlements partially offset by the negative impacts from currency on accumulated net actuarial losses.
Refer to our discussion of Pension Plan Assumptions in the Application of Critical Accounting Policies section of the MD&A as well as Note 19 - Employee Benefit Plans in the Consolidated Financial Statements for additional information regarding changes in our defined benefit plans. Refer to Note 17 - Financial Instruments in the Consolidated Financial Statements for additional information regarding our foreign currency derivatives and associated unrealized gains and losses.
Xerox 2021 Annual Report 50
New Business Strategy/Segment Reporting
In January 2021 we announced our intention to stand up our Software, Financing and Innovation businesses as separate units by 2022. During 2021, the operations and financial results for these units continued to be primarily managed by and reported in our “go-to-market” (GTM) sales channels and we did not have discrete and complete financial information for these new businesses. Accordingly, the chief operating decision maker (CODM) continued to manage the Company’s operations, including the products and services from these new units, primarily through the GTM sales channels and as a result, we continued to have one operating and reportable segment.
Based on our efforts in 2021, as of year-end these new businesses have largely been stood-up as separate units and we will proceed with these efforts in 2022 and provide additional information related to these businesses during the year. Accordingly, as a result of this effort, we will be reassessing our operating and reportable segments in 2022 and a revision of our segment reporting is expected in 2022.
Recent Accounting Pronouncements
Refer to Note 1 - Basis of Presentation and Summary of Significant Accounting Policies in the Consolidated Financial Statements for a description of recent accounting pronouncements including the respective dates of adoption and the effects on results of operations and financial conditions.
Xerox 20192021 Annual Report 4251
Capital Resources and Liquidity
Our liquidity is primarily dependent on our ability to continue to generate positive cash flows from operations. Additional liquidity is also provided through access to the financial capital markets and a committed global credit facility.through secured borrowings on our finance receivable balances. Our 2021 financial results continued to be impacted by the ongoing COVID-19 pandemic and those impacts are expected to continue at least through the first half of 2022. However, we believe we have sufficient liquidity to manage the business through the economic disruption caused by this pandemic. The following is a summary of our liquidity position:
•As of December 31, 20192021 and 2018,2020, total cash, cash equivalents and restricted cash were $2,795$1,909 million and $1,148$2,691 million, respectively. The increaserespectively, and apart from 2018 reflects the proceeds received from the salesrestricted cash of our ownership Interests in Fuji Xerox Co., Ltd.$69 million and Xerox International Partners of $2,233$66 million, less payments of $554 million on maturing Senior Notes in the fourth quarter 2019. Refer to Note 7 - Divestitures in the Consolidated Financial Statementsrespectively, was readily accessible for additional information regarding the divestiture.use.
We expect operating cash flows from continuing operations to be approximately $1.3 billion in 2020, reflecting continued improvements in working capital and increased earnings.
•As of December 31, 20192021 and 2018,2020, there were no borrowings or letters of credit outstanding under our $1.8 billion Credit Facility. The company did not borrow under its Credit Facility, during 2019which terminates in August 2022, contains various investment grade covenants at a time when the Company is not investment grade rated. The Company may seek to renegotiate or replace such facility, including reducing the size of such facility, or may determine not to replace such facility at all and may instead pursue other forms of liquidity. Any new credit agreement may result in higher borrowing costs and may contain non-investment grade covenants, such as those that would place greater restrictions on how the Company can run its $1.8 billion Commercial Paper program was terminated in 2019.businesses and/or limit the Company from taking certain actions that might otherwise be beneficial to the Company and/or its shareholders, customers, suppliers, partners and/or lenders.
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• | We have consistently delivered positive cash flows from operations driven by our post-sale-based revenue model and cost reduction initiatives, such as Project Own It. Operating cash flows from continuing operations were $1,244 million and $1,082 million for the years ended December 31, 2019 and 2018, respectively. Operating cash flow from continuing operations was a use of $249 million in 2017 and reflected the impact of certain one-time actions to improve our capital structure and simplify certain processes including $500 million of additional voluntary contributions to our U.S. tax-qualified defined benefit plans as well as the impact of approximately $350 million from the termination of certain accounts receivable sales programs as well as certain classification changes as a result of our adoption of ASU 2016-15 Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments.
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Operating•We continue to focus our efforts on incremental actions to prioritize and preserve cash as we manage through the pandemic.
•We expect operating cash flows adjusted forfrom continuing operations to be approximately $475 million in 2022, reflecting increased investment across each of our new businesses as well as the above noted impacts are included inabsence of the following reconciliation:
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| | | | | | | | | | | | |
| | | Year Ended December 31, |
| (in millions) | | 2019 | | 2018 | | 2017 |
Reported(1) | | $ | 1,244 |
| | $ | 1,082 |
| | $ | (249 | ) |
| Incremental voluntary contributions to U.S. defined benefit pension plans | | — |
| | — |
| | 500 |
|
| Elimination of certain accounts receivable sales programs | | — |
| | — |
| | 350 |
|
| Collections on beneficial interests received in sales of receivables | | — |
| | — |
| | 234 |
|
| Restricted cash - classification change | | — |
| | — |
| | 67 |
|
| Operating Cash Flow - Adjusted | | $ | 1,244 |
| | $ | 1,082 |
| | $ | 902 |
|
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(1) | Net cash provided by (used in) operating activities from continuing operations. |
Xerox 2019 Annual Report 43
Cash Flow Analysis
The following summarizes our cash flows for the three years ended December 31, 2019, 20182021, 2020 and 2017,2019, as reported in our Consolidated Statements of Cash Flows in the accompanying Consolidated Financial Statements:
| | | | Year Ended December 31, | | Change | | Year Ended December 31, | | Change |
| (in millions) | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | (in millions) | 2021 | | 2020 | | 2019 | | 2021 | | 2020 |
| Net cash provided by (used in) operating activities of continuing operations | $ | 1,244 |
| | $ | 1,082 |
| | $ | (249 | ) | | $ | 162 |
| | $ | 1,331 |
| |
| Net cash provided by (used in) operating activities of discontinued operations | 89 |
| | 58 |
| | (18 | ) | | 31 |
| | 76 |
| |
| Net cash provided by (used in) operating activities | 1,333 |
| | 1,140 |
| | (267 | ) | | 193 |
| | 1,407 |
| |
| Net cash provided by operating activities of continuing operations | | Net cash provided by operating activities of continuing operations | $ | 629 | | | $ | 548 | | | $ | 1,244 | | | $ | 81 | | | $ | (696) | |
| Net cash provided by operating activities of discontinued operations | | Net cash provided by operating activities of discontinued operations | — | | | — | | | 89 | | | — | | | (89) | |
| Net cash provided by operating activities | | Net cash provided by operating activities | 629 | | | 548 | | | 1,333 | | | 81 | | | (785) | |
| | | | | | | | | | | | | | | | | | | | |
| Net cash (used in) provided by investing activities of continuing operations | (85 | ) | | (29 | ) | | 165 |
| | (56 | ) | | (194 | ) | |
| Net cash used in investing activities of continuing operations | | Net cash used in investing activities of continuing operations | (85) | | | (246) | | | (85) | | | 161 | | | (161) | |
| Net cash provided by investing activities of discontinued operations | 2,233 |
| | — |
| | — |
| | 2,233 |
| | — |
| Net cash provided by investing activities of discontinued operations | — | | | — | | | 2,233 | | | — | | | (2,233) | |
| Net cash provided by (used in) investing activities | 2,148 |
| | (29 | ) | | 165 |
| | 2,177 |
| | (194 | ) | |
| Net cash (used in) provided by investing activities | | Net cash (used in) provided by investing activities | (85) | | | (246) | | | 2,148 | | | 161 | | | (2,394) | |
| | | | | | | |
|
| |
|
| | | | | | | | | | |
| Net cash used in financing activities | (1,834 | ) | | (1,301 | ) | | (985 | ) | | (533 | ) | | (316 | ) | Net cash used in financing activities | (1,310) | | | (416) | | | (1,834) | | | (894) | | | 1,418 | |
| | | | | | | | | | | | | | | | | | | | |
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | — |
| | (30 | ) | | 53 |
| | 30 |
| | (83 | ) | Effect of exchange rate changes on cash, cash equivalents and restricted cash | (16) | | | 10 | | | — | | | (26) | | | 10 | |
| | | | | | | | | | | | | | | | | | | | |
| Increase (decrease) in cash, cash equivalents and restricted cash | 1,647 |
| | (220 | ) | | (1,034 | ) | | 1,867 |
| | 814 |
| |
| (Decrease) increase in cash, cash equivalents and restricted cash | | (Decrease) increase in cash, cash equivalents and restricted cash | (782) | | | (104) | | | 1,647 | | | (678) | | | (1,751) | |
| Cash, cash equivalents and restricted cash at beginning of year | 1,148 |
| | 1,368 |
| | 2,402 |
| | (220 | ) | | (1,034 | ) | Cash, cash equivalents and restricted cash at beginning of year | 2,691 | | | 2,795 | | | 1,148 | | | (104) | | | 1,647 | |
| Cash, Cash Equivalents and Restricted Cash at End of Year | $ | 2,795 |
| | $ | 1,148 |
| | $ | 1,368 |
| | $ | 1,647 |
| | $ | (220 | ) | Cash, Cash Equivalents and Restricted Cash at End of Year | $ | 1,909 | | | $ | 2,691 | | | $ | 2,795 | | | $ | (782) | | | $ | (104) | |
Cash Flows from Operating Activities
Net cash provided by operating activities of continuing operations was $1,244$629 million for the year ended December 31, 2019.2021. The $162$81 million increase in operating cash from 20182020 was primarily due to the following:
•$95211 million decrease in pre-tax income before depreciation and amortization, provisions, goodwill impairment, restructuring and related costs, net and defined benefit pension costs.
•$241 million increase from accounts payable primarily due to higher spending as compared to the prior year and the timing of supplier and vendor payments.
•$222 million increase from inventory primarily due to significant cash usage in 2020 as inventory levels increased because of lower placementsdemand resulting from the COVID-19 pandemic.
Xerox 2021 Annual Report 52
•$92136 million increase in other current and long-term liabilities, reflecting higher accruals from the increased level of operations as compared to the prior year.
•$94 million increase from accrued compensation primarily related to higher employee incentive accruals and year-over-year timing of employee incentive payments.
•$57 million net increase primarily due to the receipt of an upfront prepaid fixed royalty from FX of $100 million for their continued use of the Xerox brand trademark subsequent to the termination of our technology agreement with them.
•$22 million increase primarily due to lower levels of inventories partially reflecting lower sales volume and improved inventory management.
$58 million increase from the after-tax impact of the OEM license agreement with FX.
$47 million increase due to lower net payments for transactionrestructuring and related costs as current year payments are primarily limited to costs related to on-going litigation.costs.
•$65 million decrease due to a lower net run-off of finance receivables.
$54 million decrease from the change in accounts payable primarily related to lower inventory and other spending as well as the year-over-year timing of supplier and vendor payments.
$21328 million decrease from accounts receivable primarily due to a lower year-over-year decline in revenues as well as the timing of invoicing and collections.
•$163 million decrease from a lower net run-off of finance receivables due to an increased level of direct lease originations from our XBS sales unit as well as higher equipment sales.
Net cash provided by operating activities of continuing operations was $1,082$548 million for the year ended December 31, 2018.2020. The $1,331$696 million increasedecrease in operating cash from 20172019 was primarily due to the following:
•$692729 million increasedecrease in pre-tax income before depreciation and amortization, provisions, gain on sales of businesses and assets, restructuring and related costs, net, defined benefit pension costs and loss on early extinguishment of debt.
•$243 million decrease from higher levels of inventory primarily due to prior year contributionslower sales volume.
•$147 million decrease in other current and long-term liabilities, reflecting lower accruals, particularly incentive-related payments associated with our direct channel partners and decrease in deferred revenue reflecting lower sales activity.
•$95 million decrease from accrued compensation primarily due to decreased spending and the year-over-year timing of $635payments.
•$76 million decrease from lower accounts payable primarily related to our domestic tax-qualified defined benefit plans, which includes an incremental voluntary contributionlower inventory and other spending partially offset by the timing of $500 million.supplier and vendor payments.
•$562359 million increase from accounts receivable primarily due to the prior year termination of all accounts receivable sales arrangements in North America and all but one arrangement in Europelower revenue and the prior year reclassificationtiming of $213invoicing and collections.
•$117 million increase primarily related to a higher level of collectionsnet run-off due to lower originations of deferred proceeds from the salesfinance receivables of accounts receivable to investing.$82 million and lower equipment on operating leases of $35 million.
•$9057 million increase from lower inventory levelsnet taxes primarily due to lower payments in 2020 as a decline in equipment sales and the impactresult of the product launch in the prior year.lower pre-tax income.
$65 million increase due to the prior year payment of restricted cash balances in connection with the termination of our accounts receivable sales arrangements.
•$51 million increase from lower restructuring payments.
$45 million decreaseprimarily due to netlower payments for transactionrestructuring and related costs.
$43 million decrease due to dividends received in the prior year from equity investments representing the accumulation of earnings over multiple years.
$31 million decrease due to higher equipment on operating leases.
Xerox 2019 Annual Report 44
Cash Flows from Investing Activities
Net cash used in investing activities of continuing operations for Xerox Holdings was $85 million for the year ended December 31, 2019.2021. The $56$161 million change in cash from 20182020 was primarily due to the following:
•$42150 million decrease from acquisitions.
$38 million decreasechange due to lowerthree acquisitions completed in the current year for $53 million as compared to five acquisitions in the prior year for $203 million.
•$11 million increase due to proceeds from the sales of assets.non-core business assets of $38 million in the current year as compared to $27 million in the prior year.
$25•Other investing, net of Xerox Holdings includes $8 million increase reflecting lowerof noncontrolling investments as part of our corporate venture capital expenditures.fund.
Net cash used in investing activities of continuing operations was $29$246 million for the year ended December 31, 2018.2020. The $194$161 million decreasechange in cash from 20172019 was primarily due to five acquisitions completed for $203 million in the following:
$213 million decrease is primarily a result of the termination of certain accounts receivables sales arrangementscurrent year compared to two acquisitions in fourth quarter 2017.
$127 million decrease due to the prior year receipt of the final payment on the performance-based instrument associated with our 1997 sale of The Resolution Group (TRG).
$20 million decrease due to proceeds from the prior year sale of the Xerox Research Centre in Grenoble, France.
$57 million increase from the sale of non-core business assets of $31 million and the sale of surplus buildings in Ireland of $26 million in 2018.
$87 million increase due to no acquisitions in 2018.
$29 million increase due to the prior year refund of cash received in 2016 for a cancelled business agreement.$42 million.
Cash Flows from Financing Activities
Net cash used in financing activities for Xerox Holdings on a consolidated basis, was $1,834$1,310 million for the year ended December 31, 2019.2021. The $533$894 million increase in the use of cash from 20182020 was primarily due to the following:
•$643588 million increase due to share repurchases in the current year of $888 million compared to share repurchases in the prior year of $300 million.
•$341 million increase from net debt activity. 20192021 reflects payments of $960$518 million on secured financing arrangements and $1 million of deferred debt issuance costs offset by proceeds of $311 million on a new secured financing arrangement. 2020 reflects payments of $2,137 million on Senior Notes, compared to prior year payments$73 million for secured financing arrangements and $16 million of $265deferred debt issuance costs offset by proceeds of $1,507 million onfrom a Senior Notes $25offering and $840 million related to the termination of a capital lease obligation and $19 million of bridge facility costs.from secured financing arrangements.
•$2624 million decrease due to lower common stock dividends.
$100 million decrease from lower share repurchasesdividends due to timing.lower outstanding shares.
Xerox 2021 Annual Report 53
•Other financing, net includes receipts for noncontrolling investments of $5 million in Eloque, a joint venture for the remote monitoring of critical infrastructure assets and $10 million in CareAR Holdings LLC, a newly formed software business.
Net cash used in financing activities for Xerox on a consolidated basis, was $1,834$1,318 million for the year ended December 31, 2019. Dividends2021. 2021 reflects payments of $181$518 million on secured financing arrangements and share repurchases$1 million of $300deferred debt issuance costs offset by proceeds of $311 million were through the dateon a new secured financing arrangement. 2020 reflects payments of the holding company reorganization previously noted (July 31. 2019 - Refer to Note 1 - Basis$2,137 million on Senior Notes, $73 million for secured financing arrangements and $3 million of Presentation and Summarydeferred debt issuance costs offset by proceeds of Significant Accounting Policies - Corporate Reorganization, in the Consolidated Financial Statements for additional information regarding the Reorganization).$840 million from secured financing arrangements. Distributions to Xerox Holdings were $373$1,120 million and are subsequent to the date of the reorganization and arewere primarily used to fund Xerox Holdings continuing dividends to shareholders and share repurchases. Xerox's distributions to the parent are expected to continue on a regular basis in the future with those distributions primarily being used by Xerox holdingsHoldings to fund dividends and share repurchases.
Net cash used in financing activities for both Xerox Holdings and Xerox, on a consolidated basis, were $1,301was $416 million for the year ended December 31, 2018.2020. The $316$1,418 million increasedecrease in the use of cash from 20172019 was primarily due to the following:
•$700 million increase due to the resumption of share repurchases in 2018.
$161 million increase resulting from the prior year final cash adjustment with Conduent Incorporated.
$5151,083 million decrease from net debt activity. 20182020 reflects payments of $265$2,137 million on Senior Notes, $25$73 million related to the termination of a capital lease obligationfor secured financing arrangements and $19$16 million of bridge facility costs. 2017 reflectsdeferred debt issuance costs offset by proceeds of $1.0 billion on new$1,507 million from a Senior Notes offset byoffering and $840 million from secured financing arrangements. 2019 reflects payments of $1,475$960 million on Senior Notes, net payments of $326Notes.
•$300 million on the tender and exchange of certain Senior Notes, and other payments and transaction costs of $24 million.decrease due to lower share repurchases.
•$2213 million decrease due to lower common stock dividends due to lower outstanding shares.
•$11 million decrease from lower distributions of $19noncontrolling interests.
Net cash used in financing activities for Xerox was $416 million for the year ended December 31, 2020. 2020 reflects payments of $2,137 million on Senior Notes, $73 million for secured financing arrangements and $3 million of deferred debt issuance costs offset by proceeds of $840 million from secured financing arrangements. Distributions to Xerox Holdings were $549 million and preferred stockwere primarily used to fund Xerox Holdings continuing dividends to shareholders and share repurchases. Xerox's distributions to the parent are expected to continue with those distributions primarily being used by Xerox Holdings to fund dividends and share repurchases. Contributions from parent of $3 million.$1,494 million primarily represent the contribution by Xerox Holdings of aggregate net debt proceeds received from its Senior Note offerings in the third quarter of 2020 to Xerox.
Cash, Cash Equivalents and Restricted Cash
Refer to Note 15 - Supplementary Financial Information in the Consolidated Financial Statements for additional information regarding Cash, cash equivalents and restricted cash.
Adoption of New Leasing StandardOperating Leases
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-of-use (ROU) assets and lease obligations by lessees for those leases originally classified asWe have operating leases under prior lease guidance.
Xerox 2019 Annual Report 45
Operating leases ROU assets, netup to eleven years and a variety of renewal and/or termination options. As of December 31, 2021 and 2020, total operating lease liabilities were reported in the Consolidated Balance Sheets as follows:
|
| | | | |
| (in millions) | | December 31, 2019 |
| Other long-term assets | | $ | 319 |
|
| | | |
| Accrued expenses and other current liabilities | | $ | 87 |
|
| Other long-term liabilities | | 260 |
|
| Total Operating lease liabilities | | $ | 347 |
|
$283 million and $333 million, respectively. Refer to Note 1 - Basis of Presentation and Summary of Significant Accounting Policies and Note 2 – Adoption of New Leasing Standard11 - Lessee in the Consolidated Financial Statements for additional information regarding the adoptionour right-of-use (ROU) assets and lease obligations associated with our operating leases.
Xerox 2021 Annual Report 54
Debt and Customer Financing Activities
The following summarizes our total debt:
| | | | | | | | | | | | | | |
| | December 31, |
| (in millions) | | 2021 | | 2020 |
| Xerox Holdings Corporation | | $ | 1,500 | | | $ | 1,500 | |
| Xerox Corporation | | 2,200 | | | 2,200 | |
Xerox - Other Subsidiaries(1) | | 561 | | | 767 | |
Subtotal - Principal debt balance(2) | | 4,261 | | | 4,467 | |
| Debt issuance costs | | | | |
| Xerox Holdings Corporation | | (11) | | | (13) | |
| Xerox Corporation | | (6) | | | (11) | |
Xerox - Other Subsidiaries(1) | | (1) | | | (3) | |
| Subtotal - Debt issuance costs | | (18) | | | (27) | |
| Net unamortized premium | | 3 | | | 3 | |
Fair value adjustments(3) | | | | |
| - terminated swaps | | — | | | 1 | |
| | | | |
| Total Debt | | $ | 4,246 | | | $ | 4,444 | |
|
| | | | | | | | |
| | | December 31, |
| (in millions) | | 2019 | | 2018 |
Principal debt balance(1) | | $ | 4,313 |
| | $ | 5,281 |
|
| Net unamortized discount | | (16 | ) | | (25 | ) |
| Debt issuance costs | | (17 | ) | | (25 | ) |
Fair value adjustments(2) | | | | |
| - terminated swaps | | 1 |
| | 2 |
|
| - current swaps | | 1 |
| | (3 | ) |
| Total Debt | | $ | 4,282 |
| | $ | 5,230 |
|
_____________(1)Represents subsidiaries of Xerox Corporation.
| |
(1) | Effective with the adoption of ASU 2016-02, Leases (ASC Topic 842), capital lease obligations are no longer classified as debt and are now reported in Other current and non-current liabilities. Refer to Note 1 - Basis of Presentation and Summary of Significant Accounting Policies, Note 2 - Adoption of New Leasing Standard - Lessee and Note 15 - Supplementary Financial Information in the Consolidated Financial Statements for additional information. |
| |
(2) | 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. |
(2)There were no Notes Payable at December 31, 2021 and December 31, 2020, respectively.
(3)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.
Refer to Note 16 - Debt in the Consolidated Financial Statements for additional information regarding our debt.debt activity.
Credit Rating Downgrade
As a result of the downgrade of our debt ratings in February 2022 by one of the rating agencies, the coupon rate on our $1.0 billion Senior Notes due 2023 of 4.375% will increase by 0.25% to 4.625% effective March 15, 2022.
Finance Assets and Related Debt
We provide lease equipment financing to our customers. Our lease contracts permit customers to pay for equipment over time rather than at the date of installation. Our investment in these contracts is reflected in total finance assets, net. We primarily fund our customer financing activity through cash generated from operations, cash on hand, sales and securitizations of finance receivables and proceeds from capital markets offerings.
We have arrangements, in certain international countries and domestically, with our small and mid-sized customers in which third-party financial institutions independently provide lease financing directly to our customers, on a non-recourse basis to Xerox. In these arrangements, we sell and transfer title of the equipment to these financial institutions. Generally, we have no continuing ownership rights in the equipment subsequent to its sale; therefore, the unrelated third-party finance receivable and debt are not included in our Consolidated Financial Statements.
The following represents our total finance assets, net associated with our lease and finance operations:
| | | | | | | | | | | | | | |
| | December 31, |
| (in millions) | | 2021 | | 2020 |
Total finance receivables, net(1) | | $ | 3,070 | | | $ | 3,165 | |
| Equipment on operating leases, net | | 253 | | | 296 | |
Total Finance assets, net (2) | | $ | 3,323 | | | $ | 3,461 | |
|
| | | | | | | | |
| | | December 31, |
| (in millions) | | 2019 | | 2018 |
Total finance receivables, net(1) | | $ | 3,351 |
| | $ | 3,472 |
|
| Equipment on operating leases, net | | 364 |
| | 442 |
|
Total Finance assets, net (2) | | $ | 3,715 |
| | $ | 3,914 |
|
____________(1)Includes (i) Billed portion of finance receivables, net, (ii) Finance receivables, net and (iii) Finance receivables due after one year, net as included in our Consolidated Balance Sheets.
| |
(1) | Includes (i) Billed portion of finance receivables, net, (ii) Finance receivables, net and (iii) Finance receivables due after one year, net as included in our Consolidated Balance Sheets. |
| |
(2) | The change from December 31, 2018 includes an increase of $3 million due to currency. |
Xerox 20192021 Annual Report 4655
Our lease contracts permit customers to pay for equipment over time rather than at the date of installation; therefore, we maintain a certain level of debt (that we refer to as financing debt) to support our investment in these lease contracts, which are reflected in totalTotal finance receivables, net. For this financing aspect of our business, we maintain an assumed 7:1 leverage ratio of debt to equity as compared to our finance assets. Approximately 35% of our Total Finance assets, net balance at December 31, 2021 include indirect lease financing primarily provided to end-user customers who purchased equipment sold through distributors, resellers and dealers.
Based on this leverage, the following represents the breakdown of total debt between financing debt and core debt: | | | | | | | | | | | | | | |
| | December 31, |
| (in millions) | | 2021 | | 2020 |
Finance receivables debt(1) | | $ | 2,687 | | | $ | 2,769 | |
| Equipment on operating leases debt | | 221 | | | 259 | |
| Financing debt | | 2,908 | | | 3,028 | |
| Core debt | | 1,338 | | | 1,416 | |
| Total Debt | | $ | 4,246 | | | $ | 4,444 | |
_____________
|
| | | | | | | | |
| | | December 31, |
| (in millions) | | 2019 | | 2018 |
Finance receivables debt(1) | | $ | 2,932 |
| | $ | 3,038 |
|
| Equipment on operating leases debt | | 319 |
| | 387 |
|
| Financing debt | | 3,251 |
| | 3,425 |
|
| Core debt | | 1,031 |
| | 1,805 |
|
| Total Debt | | $ | 4,282 |
| | $ | 5,230 |
|
_____________(1)Finance receivables debt is the basis for our calculation of “Cost of financing” expense in the Consolidated Statements of (Loss) Income. | |
(1) | Finance receivables debt is the basis for our calculation of “Cost of financing” expense in the Consolidated Statements of Income. |
At December 31, 2021, leverage was assessed against the Total Debt of Xerox Holdings Corporation and Xerox Corporation since the debt held by Xerox Holdings Corporation is guaranteed by Xerox Corporation and the funds from that borrowing were contributed in full by Xerox Holdings Corporation to Xerox Corporation. In 2020,2022, we expect to continue leveraging our finance assets on a Total Debt basis at an assumed 7:1 ratio of debt to equity.
Capital MarketMarket/Debt Activity
During 20192021 we repaid $960received $311 million from a secured financing arrangement. The secured loan was an amendment of maturing Senior Notesthe July 2020 secured borrowing with the same financial institution, which had a remaining balance of $136 million, and there were no new Senior Notes issued. we received the incremental net cash.
Refer to Note 16 - Debt in the Consolidated Financial Statements for additional information.information regarding our debt activity, as well as Note 27 - Subsequent Events in the Consolidated Financial Statements for additional information related to our secured financing arrangements.
Financial Instruments
Refer to Note 17 - Financial Instruments in the Consolidated Financial Statements for additional information.
Sales of Accounts Receivable
The net impact from the sales of accounts receivable on reported net cash flows is summarized below:
| | | | | | Year Ended December 31, |
| (in millions) | | (in millions) | | 2021 | | 2020 | | 2019 |
| | | | | Year Ended December 31, | |
| (in millions) | | 2019 | | 2018 | | 2017 | |
Estimated increase (decrease) to net cash flows(1)(2) | | $ | 37 |
| | $ | (23 | ) | | $ | (341 | ) | |
Estimated (decrease) increase to net cash flows(1) | | Estimated (decrease) increase to net cash flows(1) | | $ | (26) | | | $ | (41) | | | $ | 37 | |
_____________
| |
(1) | Represents the difference between current and prior year fourth quarter accounts receivable sales adjusted for the effects of: (i) the deferred proceeds, (ii) collections prior to the end of the year and (iii) currency. |
| |
(2) | 2017 includes a decrease of approximately $350 million associated with the termination of certain accounts receivable sale programs in the fourth quarter 2017. |
(1)Represents the difference between current and prior year fourth quarter accounts receivable sales adjusted for the effects of: (i) the deferred proceeds, (ii) collections prior to the end of the year and (iii) currency. The decrease in 2020 reflects a decrease in the level of accounts receivable sold due to lower sales revenue as a result of impacts from the COVID-19 pandemic.
Refer to Note 87 - Accounts Receivable, Net in the Consolidated Financial Statements for additional information regarding our accounts receivable sales arrangements.
Share Repurchase Programs - Treasury Stock
In connection withJanuary 2021, the reorganizationXerox Holdings Corporation's Board of Xerox Corporation’s corporate structure into a holding company structure,Directors authorized an additional $100 million of share repurchase authority, bringing the total authorization of its original share repurchase program, initiated in July 2019, to $1.1 billion (exclusive of any commissions and other transaction fees and costs related thereto).
In October 2021, the Xerox Holdings Corporation’sCorporation's Board of Directors authorized a $1.0 billion$500 million share repurchase program (exclusive of any commissions and other transaction fees and costs related thereto.)thereto). This program replaced the $1.0 billionapproximate $450 thousand of authority remaining under Xerox Corporation’sHoldings Corporation's previously authorized $1.1 billion share repurchase program.
During 2021, Xerox Holdings Corporation repurchased 19.4 million shares of our common stock for an aggregate cost of approximately $388 million, including fees. The remaining authorization at December 31, 2021 is approximately $113 million.
Xerox 2021 Annual Report 56
Including the shares repurchased under Xerox Holdings Corporation's current and previously authorized share repurchase program.programs in 2021, Xerox Holdings Corporation repurchased 40.2 million shares of our common stock for an aggregate cost of approximately $888 million, including fees.
During 2020, Xerox Holdings Corporation repurchased 15.6 million shares of our common stock for an aggregate cost of $300 million, including fees.
During 2019, Xerox Holdings Corporation repurchased 9.1 million shares of our common stock for an aggregate cost of $300 million, including fees. No additional shares have been repurchased since December 31, 2019.
Including the shares repurchased under Xerox Corporation's previously authorized share repurchase program, Xerox Holdings Corporation repurchased 18.3 million shares of our common stock for an aggregate cost of $600 million, including fees, during 2019. The cumulative total of shares repurchased by Xerox Holdings, including the shares repurchased under Xerox Corporation's previously authorized program from July 2018, is 44.4 million shares at a cost of $1.3 billion, including fees.
During 2018, Xerox Corporation repurchased 26.1 million shares of our common stock for an aggregate cost of $700 million, including fees. No shares were repurchased in 2017.
For information related to the Reorganization of Xerox Corporation and Xerox Holdings, refer to Note 1 - Basis of Presentation and Summary of Significant Accounting Policies in the Consolidated Financial Statements. For additional information regarding our share repurchase program, referRefer to Note 23 - Shareholders' Equity in the Consolidated Financial Statements.
Xerox 2019 Annual Report 47
Dividends
Aggregate dividends of $226$181 million, $251$209 million and $259$226 million were declared on common stock in 2019, 20182021, 2020 and 2017,2019, respectively. The decrease in dividends since 20172019 primarily reflects lower shares of common stock outstanding as a result of our share repurchase programs.
Aggregate dividends of $14 million in 2019, 2018 and 2017, respectively, were declared on preferred stock.stock in 2021, 2020 and 2019, respectively.
Liquidity and Financial Flexibility
We manage our worldwide liquidity using internal cash management practices, which are subject to (i) the statutes, regulations and practices of each of the local jurisdictions in which we operate, (ii) the legal requirements of the agreements to which we are a party and (iii) the policies and cooperation of the financial institutions we utilize to maintain and provide cash management services.
Our principal debt maturities are in line with historical and projected cash flows and are spread over the next five years as follows (in millions):follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | | Xerox Holdings Corporation | | Xerox Corporation | | Xerox - Other Subsidiaries(1) | | Total |
| 2022 - Q1 | | $ | — | | | $ | 300 | | | $ | 96 | | | $ | 396 | |
| 2022 - Q2 | | — | | | — | | | 92 | | | 92 | |
| 2022 - Q3 | | — | | | — | | | 85 | | | 85 | |
| 2022 - Q4 | | — | | | — | | | 78 | | | 78 | |
| 2023 | | — | | | 1,000 | | | 185 | | | 1,185 | |
| 2024 | | — | | | 300 | | | 25 | | | 325 | |
| 2025 | | 750 | | | — | | | — | | | 750 | |
| 2026 | | — | | | — | | | — | | | — | |
| 2027 and thereafter | | 750 | | | 600 | | | — | | | 1,350 | |
Total(2) | | $ | 1,500 | | | $ | 2,200 | | | $ | 561 | | | $ | 4,261 | |
|
| | | | |
| Year | | Amount(1) |
| 2020 - Q1 | | $ | — |
|
| 2020 - Q2 | | 313 |
|
| 2020 - Q3 | | 738 |
|
| 2020 - Q4 | | — |
|
| 2021 | | 1,062 |
|
| 2022 | | 300 |
|
| 2023 | | 1,000 |
|
| 2024 | | 300 |
|
| 2025 and thereafter | | 600 |
|
| Total | | $ | 4,313 |
|
_____________(1)Represents subsidiaries of Xerox Corporation.
| |
(1) | Includes fair value adjustments. |
Foreign Cash
At December 31, 2019, we had $2.7 billion of cash and cash equivalents on a consolidated basis of which approximately $655 million was held outside of the U.S. by our foreign subsidiaries. As a result of the Tax Act enacted in December 2017, the estimated tax impacts associated with future repatriation of our foreign cash have been reflected in our financial statements as of December 31, 2019 and 2018.
Refer to Note 20 - Income and Other Taxes in our Consolidated Financial Statements for additional information.(2)Includes fair value adjustments.
Loan Covenants and Compliance
At December 31, 2019,2021, we were in full compliance with the covenants and other provisions of our Credit Facility and Senior Notes. We have the right to terminate the Credit Facility without penalty. Failure to comply with material provisions or covenants of the Credit Facility and Senior Notes could have a material adverse effect on our liquidity and operations and our ability to continue to fund our customers' purchases of Xerox equipment.
Refer to Note 16 - Debt in the Consolidated Financial Statements for additional information regarding debt arrangements.arrangements and our Credit Facility.
Xerox 20192021 Annual Report 4857
Contractual Cash Obligations and Other Commercial Commitments and Contingencies
At December 31, 2019,2021, we had the following contractual cash obligations and other commercial commitments and contingencies:
| | (in millions) | | 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | Thereafter | (in millions) | | 2022 | | 2023 | | 2024 | | 2025 | | 2026 | | Thereafter | |
Total debt(1) | | $ | 1,051 |
| | $ | 1,062 |
| | $ | 300 |
| | $ | 1,000 |
| | $ | 300 |
| | $ | 600 |
| Total debt(1) | | $ | 651 | | | $ | 1,185 | | | $ | 325 | | | $ | 750 | | | $ | — | | | $ | 1,350 | | |
Interest on debt(1) | | 176 |
| | 124 |
| | 94 |
| | 68 |
| | 41 |
| | 480 |
| Interest on debt(1) | | 178 | | | 138 | | | 120 | | | 100 | | | 77 | | | 472 | | |
Minimum operating lease commitments(2) | | 109 |
| | 87 |
| | 73 |
| | 56 |
| | 24 |
| | 45 |
| Minimum operating lease commitments(2) | | 98 | | | 78 | | | 45 | | | 31 | | | 26 | | | 35 | | |
| Defined benefit pension plans | | 135 |
| | — |
| | — |
| | — |
| | — |
| | — |
| Defined benefit pension plans | | 135 | | | — | | | — | | | — | | | — | | | — | | |
| Retiree health payments | | 35 |
| | 32 |
| | 31 |
| | 29 |
| | 28 |
| | 118 |
| Retiree health payments | | 25 | | | 25 | | | 24 | | | 22 | | | 21 | | | 87 | | |
| Estimated Purchase Commitments: | | | | | | | | | | | | | Estimated Purchase Commitments: | | |
Fuji Xerox(3) | | 1,337 |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
FUJIFILM Business Innovation Corp.(3) | | FUJIFILM Business Innovation Corp.(3) | | 1,180 | | | — | | | — | | | — | | | — | | | — | | |
Flex(4) | | 139 |
| | — |
| | — |
| | — |
| | — |
| | — |
| Flex(4) | | 140 | | | — | | | — | | | — | | | — | | | — | | |
HCL(5) | | 209 |
| | 189 |
| | 188 |
| | 186 |
| | 183 |
| | 226 |
| HCL(5) | | 215 | | | 193 | | | 189 | | | 186 | | | 46 | | | — | | |
TCS(6) | | TCS(6) | | 36 | | | 33 | | | 29 | | | 26 | | | 25 | | | 14 | | |
Other(6)(7) | | 232 |
| | 49 |
| | 37 |
| | 14 |
| | — |
| | — |
| | 150 | | | 87 | | | 25 | | | 19 | | | 10 | | | — | | |
Total(7) | | $ | 3,423 |
| | $ | 1,543 |
| | $ | 723 |
| | $ | 1,353 |
| | $ | 576 |
| | $ | 1,469 |
| | $ | 2,808 | | | $ | 1,739 | | | $ | 757 | | | $ | 1,134 | | | $ | 205 | | | $ | 1,958 | | |
_____________
| |
(1) | Refer to Note 16 - Debt in the Consolidated Financial Statements for additional information regarding debt and interest on debt. |
| |
(2) | Refer to Note 2 – Adoption of New Leasing Standard - Lessee in the Consolidated Financial Statements for additional information related to minimum operating lease commitments. |
| |
(3) | Fuji Xerox: The amount included in the table reflects our estimate of purchases over the next year and is not a contractual commitment. Refer to Note 12 - Investments in Affiliates, at Equity in the Consolidated Financial Statements for additional information related to transactions with Fuji Xerox. |
| |
(4) | Flex: We outsource certain manufacturing activities to Flex. The amount included in the table reflects our estimate of purchases over the next year and is not a contractual commitment. In the past two years, actual purchases from Flex averaged approximately $243 million per year. |
| |
(5) | HCL: We outsource certain global administrative and support functions, including, among others, selected information technology and finance functions (excluding accounting), as part of a shared services arrangement with HCL Technologies (HCL). The amounts included in the table reflect our estimate of purchases over the next seven years. |
| |
(6) | Other purchase commitments: We enter into other purchase commitments with vendors in the ordinary course of business. Our policy with respect to all purchase commitments is to record losses, if any, when they are probable and reasonably estimable. We currently do not have, nor do we anticipate, material loss contracts. |
| |
(7) | Total obligations do not include payments for the deemed repatriation tax recorded as part of the estimated charge for the Tax Act as we expect to utilize our existing foreign tax credit carryforwards to settle this obligation. Refer to Note 20 - Income and Other Taxes in the Consolidated Financial Statements for additional information regarding the estimated charge associated with the Tax Act. |
(1)Refer to Note 16 - Debt in the Consolidated Financial Statements for additional information regarding debt and interest on debt.
(2)Refer to Note 11 – Lessee in the Consolidated Financial Statements for additional information related to minimum operating lease commitments.
(3)FUJIFILM Business Innovation Corp.: The amount included in the table reflects our estimate of purchases over the next year and is not a contractual commitment.
(4)Flex: We outsource certain manufacturing activities to Flex. The amount included in the table reflects our estimate of purchases over the next year and is not a contractual commitment. In the past two years, actual purchases from Flex averaged approximately $123 million per year.
(5)HCL: Shared services arrangement with HCL Technologies.
(6)TCS: Shared services arrangement with Tata Consulting Services.
(7)Other purchase commitments: We enter into other purchase commitments with vendors in the ordinary course of business. Our policy with respect to all purchase commitments is to record losses, if any, when they are probable and reasonably estimable. We currently do not have, nor do we anticipate, material loss contracts.
Pension and Retiree Health Benefit Plans
We sponsor defined benefit pension plans and retiree health plans that require periodic cash contributions. Our 20192021 cash contributions for these plans were $141$135 million for our defined benefit pension plans and $30$25 million for our retiree health plans.
In 2020,2022, based on current actuarial calculations, we expect to make contributions of approximately $135 million to our worldwide defined benefit pension plans and $35$25 million to our retiree health benefit plans. There are no contributions required in 20202022 for our U.S. tax-qualified defined benefit plans to meet the minimum funding requirements.
Contributions to our defined benefit pension plans in subsequent years will depend on a number of factors, including the investment performance of plan assets and discount rates as well as potential legislative and plan changes.
At December 31, 2019,2021, the net unfunded balancesbalance of our U.S. and Non-U.S. defined benefit pension plans were $1,105was $119 million, and $107 million, respectively, or $1,212 million in the aggregate, which is a $58$786 million increasedecrease from the balance at December 31, 2018.2020. The increasedecrease is primarily due to an increase incontributions, favorable asset returns and higher discount rates, which lowered the benefit obligation due to the impact of lower discount rates, offset by favorable asset returns. Approximately $815 million of the $1,212obligation. The $119 million net unfunded balance is attributable toposition at December 31, 2021 includes the following:
•$(763) million for certain unfunded plans that by design do not require or allow for advanced funding.
•$(571) million for under-funded plans, primarily our U.S. tax qualified plans ($512 million under-funded).
•$1,215 million for over-funded plans, primarily our U.K. plan ($1,044 million over-funded).
Cash contributions to our retiree health plans are made each year to cover medical claims costs incurred during the year. The amounts reported in the above table as retiree health payments represent our estimate of future benefit payments. Our retiree health benefit plans are non-funded and are primarily related to domestic operations. The unfunded balance of our retiree health plans of $385$303 million at December 31, 2019 is consistent with2021 decreased $67 million from the prior year.balance at December 31, 2020 primarily due to a plan amendment to our U.S. Retiree Health plan, which reduced future benefits and the benefit obligation by approximately $50 million, as well as benefit payments and higher discount rates.
Refer to Note 19 - Employee Benefit Plans in the Consolidated Financial Statements for additional information regarding contributions to our defined benefit pension and retiree health plans.
Xerox 2021 Annual Report 58
FUJIFILM Business Innovation Corp.
As previously disclosed, in November 2019, Xerox Holdings completed the sale of its indirect 25% equity interest in Fuji Xerox (now known as FUJIFILM Business Innovation Corp.). However, arrangements with FUJIFILM Business Innovation Corp. whereby we purchase inventory from and sell inventory to FUJIFILM Business Innovation Corp. continued after the sale.
We purchased products, including parts and supplies, from Fuji XeroxFUJIFILM Business Innovation Corp. totaling $966 million, $1.1 billion and $1.3 billion $1.5 billionin 2021, 2020 and $1.6 billion in 2019, 2018 and 2017, respectively. Our product supply agreements with Fuji XeroxFUJIFILM Business Innovation Corp. are designed to support the entire product lifecycle, end-to-end, including the availability of spare parts, consumables and technical support throughout
Xerox 2019 Annual Report 49
the time such products are with our customers. Our purchase orders under such agreements are made in the normal course of business and typically have a lead time of three months. Related party transactions
Shared Services Arrangements
In March 2019, as part of Project Own It, Xerox entered into a shared services arrangement with FujiHCL Technologies (HCL) pursuant to which we transitioned certain global administrative and support functions, including, among others, selected information technology and finance functions, from Xerox are discussedto HCL. This transition was expected to be completed during 2020, however, it sustained some delays caused by the COVID-19 pandemic, and it is now expected to be finalized by the end of 2021. HCL is expected to make certain ongoing investments in Note 12 - Investmentssoftware, tools and other technology to consolidate, optimize and automate the transferred functions with the goal of providing improved service levels and significant cost savings. The shared services arrangement with HCL includes a remaining aggregate spending commitment of approximately $829 million over the next 5 years. However, we can terminate the arrangement at any time at our discretion, subject to payment of termination fees that decline over the term, or for cause.
In July 2021, Xerox entered into an arrangement with Tata Consulting Services (TCS), whereby TCS will provide business processing outsourcing services in Affiliates, at Equitysupport of our global finance organization. This included the transition of all the finance processes currently being provided by HCL. These activities started to transition during the third quarter 2021 and were completed in fourth quarter 2021. The transition does not impact our minimum revenue commitments to HCL and will result in all of our finance business processing outsourcing services being provided by one vendor. TCS will leverage their existing technology and make additional investments as required to consolidate, optimize and automate the supported services with the goal of providing improved service levels and cost savings. The arrangement is initially for 6 years with a total contract value of approximately $163 million. We can terminate the arrangement subject to payment of termination fees that decline over the term.
We incurred net charges of $207 million and $185 million for the years ended December 31, 2021 and 2020, respectively, related to these shared services arrangements. The cost has been allocated to the various functional expense lines in the Consolidated Financial Statements.Statements of (Loss) Income based on an assessment of the nature and amount of the costs incurred for the various transferred functions prior to their transfer to HCL and TCS.
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:
| | | (in millions) | | December 31,
2019 | | December 31,
2018 | (in millions) | | December 31,
2021 | | December 31,
2020 |
| Tax contingency - unreserved | | $ | 442 |
| | $ | 500 |
| Tax contingency - unreserved | | $ | 292 | | | $ | 355 | |
| Escrow cash deposits | | 51 |
| | 58 |
| Escrow cash deposits | | 32 | | | 39 | |
| Surety bonds | | 135 |
| | 106 |
| Surety bonds | | 96 | | | 112 | |
| Letters of credit | | 91 |
| | 104 |
| Letters of credit | | 74 | | | 78 | |
| Liens on Brazilian assets | | — |
| | — |
| 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.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
Xerox 2021 Annual Report 59
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 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, 2019.2021 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.
Other Contingencies and Commitments
As more fully discussed in Note 21 - Contingencies and Litigation in the Consolidated Financial Statements, 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. In addition, guarantees, indemnifications and claims may arise during the ordinary course of business from relationships with suppliers, customers and non-consolidated affiliates. Nonperformance under a contract including a guarantee, indemnification or claim could trigger an obligation of the Company.
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. Should developments in any of these areas 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, financial position and cash flows in the period or periods in which such change in determination, judgment or settlement occurs.
Unrecognized Tax Benefits
As of December 31, 2019,2021, we had $127$107 million of unrecognized tax benefits. This represents the tax benefits associated with various tax positions taken, or expected to be taken, on domestic and foreign tax returns that have not been recognized in our financial statements due to uncertainty regarding their resolution. The resolution or settlement of these tax positions with the taxing authorities is at various stages and, therefore, we are unable to make a reliable estimate of the eventual cash flows by period that may be required to settle these matters. In addition, certain of these matters may not require cash settlement due to the existence of credit and net operating loss carryforwards, as well as other offsets, including the indirect benefit from other taxing jurisdictions that may be available.
Refer to Note 20 - Income and Other Taxes in the Consolidated Financial Statements for additional information regarding unrecognized tax benefits.
Xerox 2019 Annual Report 50
Off-Balance Sheet Arrangements
We may occasionally utilize off-balance sheet arrangements in our operations (as defined by the SEC Financial Reporting Release 67 (FRR-67), “Disclosure in Management’s Discussion and Analysis about Off-Balance Sheet Arrangements and Aggregate Contractual Obligations”). Accounts receivable sales facilities arrangements that we enter into may have off-balance sheet elements. During 2017, we terminated all accounts receivable sales arrangements in North America and all but one arrangement in Europe. Refer to Note 87 - Accounts Receivable, Net in the Consolidated Financial Statements for further information regarding accounts receivable sales.
As of December 31, 2019,2021, we do not believe we have any off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future effect on financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
In addition, see the preceding table for the Company's contractual cash obligations and other commercial commitments and contingencies and Note 21 - Contingencies and Litigation in the Consolidated Financial Statements for additional information regarding contingencies, guarantees, indemnifications and warranty liabilities.
Xerox 2021 Annual Report 60
Non-GAAP Financial Measures
We have reported our financial results in accordance with generally accepted accounting principles (GAAP). In addition, we have discussed our financial results using the non-GAAP measures described below. We believe these non-GAAP measures allow investors to better understand the trends in our business and to better understand and compare our results. Accordingly, we believe it is necessary to adjust several reported amounts, determined in accordance with GAAP, to exclude the effects of certain items as well as their related income tax effects.
A reconciliationReconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP are set forth below in the following tables.
These non-GAAP financial measures should be viewed in addition to, and not as a substitute for, the company’sCompany’s reported results prepared in accordance with GAAP.
Adjusted Earnings Measures
•Net (Loss) income and Earnings per share (EPS)
•Effective tax rate
The above measures were adjusted for the following items:
Restructuring and related costs:costs, net: Restructuring and related costs, net include restructuring and asset impairment charges as well as costs associated with our transformation programs beyond those normally included in restructuring and asset impairment charges. Restructuring consists of costs primarily related to severance and benefits paid to employees pursuant to formal restructuring and workforce reduction plans. Asset impairment includes costs incurred for those assets sold, abandoned or made obsolete as a result of our restructuring actions, exiting from a business or other strategic business changes. Additional costs for our transformation programs are primarily related to the implementation of strategic actions and initiatives and include third-party professional service costs as well as one-time incremental costs. All of these costs can vary significantly in terms of amount and frequency based on the nature of the actions as well as the changing needs of the business. Accordingly, due to that significant variability, we will exclude these charges since we do not believe they provide meaningful insight into our current or past operating performance nor do we believe they are reflective of our expected future operating expenses as such charges are expected to yield future benefits and savings with respect to our operational performance.
Amortization of intangible assets: The amortization of intangible assets is driven by our acquisition activity which can vary in size, nature and timing as compared to other companies within our industry and from period to period. The use of intangible assets contributed to our revenues earned during the periods presented and will contribute to our future period revenues as well. Amortization of intangible assets will recur in future periods.
Transaction and related costs, net: Transaction and related costs, net reflectsare costs and expenses incurred in connectionprimarily associated with i) our announced proposal to acquire HP Inc. and ii) our planned transaction with Fujifilm/Fuji Xerox, which was terminated in May 2018, including costs related to litigation resulting from the terminated transaction and other shareholder actions. Thecertain strategic M&A projects. These costs are primarily for third-party legal, accounting, consulting and other similar type professional services as well as potential legal settlements.settlements that may arise in connection with those M&A transactions. These costs are considered incremental to our normal operating charges and were incurred or are expected to be incurred solely as a result of the planned transactions. Accordingly, we are excluding these expenses from our Adjusted Earnings Measures in order to evaluate our performance on a comparable basis.
Xerox 2019 Annual Report 51
Non-service retirement-related costs: Our defined benefit pension and retiree health costs include several elements impacted by changes in plan assets and obligations that are primarily driven by changes in the debt and equity markets as well as those that are predominantly legacy in nature and related to employees who are no longer providing current service to the companyCompany (e.g. retirees and ex-employees). These elements include (i) interest cost, (ii) expected return on plan assets, (iii) amortization of prior plan amendments, (iv) amortized actuarial gains/losses and (v) the impacts of any plan settlements/curtailments. Accordingly, we consider these elements of our periodic retirement plan costs to be outside the operational performance of the business or legacy costs and not necessarily indicative of current or future cash flow requirements. This approach is consistent with the classification of these costs as non-operating in otherOther expenses, net. Adjusted earnings will continue to include the service cost elements of our retirement costs, which is related to current employee service as well as the cost of our defined contribution plans.
Other discrete, unusual or infrequent items: In addition, we have alsoWe excluded the following additional items given their discrete, unusual or infrequent nature and their impact on our results for the period:
•Non-cash Goodwill impairment charge.
•Losses on early extinguishment of debt.
•Contract termination costs - IT services.
•Impacts associated with the Tax Cuts and Jobs Act (the Tax Act) enacted in December 2017.
Losses on early extinguishmentXerox 2021 Annual Report 61
A benefit from the remeasurement of a tax matter that related to a previously adjusted item.
We believe the exclusion of these items allows investors to better understand and analyze the results for the period as compared to prior periods and expected future trends in our business.
Adjusted Operating Income and Margin
We calculate and utilize adjusted operating income and margin measures by adjusting our reported pre-tax (loss) income and margin amounts. In addition to the costs and expenses noted above as adjustments for our Adjusted Earningsadjusted earnings measures, adjusted operating income and margin also exclude the remaining amounts included in Other expenses, net, which are primarily non-financing interest expense and certain other non-operating costs and expenses. We exclude these amounts in order to evaluate our current and past operating performance and to better understand the expected future trends in our business.
Constant Currency (CC)
Refer to the Currency Impact section in the MD&A for discussion of this measure and its use in our analysis of revenue growth.
Summary
Management believes that all of these non-GAAP financial measures provide an additional means of analyzing the current period’s results against the corresponding prior period’s results. However, these non-GAAP financial measures should be viewed in addition to, and not as a substitute for, the company’sCompany’s reported results prepared in accordance with GAAP. Our non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP measures and should be read only in conjunction with our consolidated financial statementsConsolidated Financial Statements prepared in accordance with GAAP. Our management regularly uses our supplemental non-GAAP financial measures internally to understand, manage and evaluate our business and make operating decisions. These non-GAAP measures are among the primary factors management uses in planning for and forecasting future periods. Compensation of our executives is based in part on the performance of our business based on these non-GAAP measures.
Xerox 2019 Annual Report 52
Net (Loss) Income and EPS reconciliation
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| (in millions, except per share amounts) | | Net (Loss) Income | | EPS | | Net Income | | EPS | | Net Income | | EPS |
Reported(1) | | $ | (455) | | | $ | (2.56) | | | $ | 192 | | | $ | 0.84 | | | $ | 648 | | | $ | 2.78 | |
| Adjustments: | | | | | | | | | | | | |
| Goodwill impairment | | 781 | | | | | — | | | | | — | | | |
| Restructuring and related costs, net | | 38 | | | | | 93 | | | | | 229 | | | |
| Amortization of intangible assets | | 55 | | | | | 56 | | | | | 45 | | | |
| Transaction and related costs, net | | — | | | | | 18 | | | | | 12 | | | |
| Non-service retirement-related costs | | (89) | | | | | (29) | | | | | 18 | | | |
| Loss on early extinguishment of debt | | — | | | | | 26 | | | | | — | | | |
| Contract termination costs - IT services | | — | | | | | 3 | | | | | (12) | | | |
Income tax on adjustments(2) | | (37) | | | | | (46) | | | | | (77) | | | |
| | | | | | | | | | | | |
| Tax Act | | — | | | | | — | | | | | (35) | | | |
| | | | | | | | | | | | |
| Adjusted | | $ | 293 | | | $ | 1.51 | | | $ | 313 | | | $ | 1.41 | | | $ | 828 | | | $ | 3.55 | |
Dividends on preferred stock used in adjusted EPS calculation(3) | | | | $ | 14 | | | | | $ | 14 | | | | | $ | — | |
Weighted average shares for adjusted EPS(3) | | | | 185 | | | | | 211 | | | | | 233 | |
Estimated fully diluted shares at December 31, 2021(4) | | | | 162 | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| (in millions, except per share amounts) | | Net Income | | EPS | | Net Income | | EPS | | Net Income | | EPS |
Reported(1) | | $ | 648 |
| | $ | 2.78 |
| | $ | 306 |
| | $ | 1.16 |
| | $ | 66 |
| | $ | 0.20 |
|
| Adjustments: | | | | | | | | | | | | |
| Restructuring and related costs | | 229 |
| | | | 157 |
| | | | 216 |
| | |
| Amortization of intangible assets | | 45 |
| | | | 48 |
| | | | 53 |
| | |
| Transaction and related costs, net | | 12 |
| | | | 68 |
| | | | 9 |
| | |
| Non-service retirement-related costs | | 18 |
| | | | 150 |
| | | | 188 |
| | |
| Contract termination costs - IT services | | (12 | ) | | | | 43 |
| | | | — |
| | |
| Loss on early extinguishment of debt | | — |
| | | | — |
| | | | 20 |
| | |
Income tax on adjustments(2) | | (77 | ) | | | | (116 | ) | | | | (166 | ) | | |
| Tax Act | | (35 | ) | | | | 89 |
| | | | 400 |
| | |
| Remeasurement of unrecognized tax positions | | — |
| | | | — |
| | | | (16 | ) | | |
| Adjusted | | $ | 828 |
| | $ | 3.55 |
| | $ | 745 |
| | $ | 2.88 |
| | $ | 770 |
| | $ | 2.93 |
|
Dividends on preferred stock used in adjusted EPS calculation(3) | | | | $ | — |
| | | | $ | — |
| | | | $ | — |
|
Weighted average shares for adjusted EPS(3) | | | | 233 |
| | | | 258 |
| | | | 263 |
|
Fully diluted shares at December 31, 2019(4) | | | | 224 |
| | | | | | | | |
_____________(1)Net (loss) income and EPS from continuing operations attributable to Xerox Holdings. 2021 Net (loss) and EPS include an after-tax non-cash goodwill impairment charge of $750 million or $4.08 per share.
| |
(1) | Net income and EPS from continuing operations attributable to Xerox. |
| |
(2) | Refer to Effective Tax Rate reconciliation. |
| |
(3) | For those periods that exclude the preferred stock dividend, the average shares for the calculations of diluted EPS include 7 million shares associated with our Series A Convertible preferred stock, as applicable. |
| |
(4) | Represents common shares outstanding at December 31, 2019 as well as shares associated with our Series A convertible preferred stock plus potential dilutive common shares used for the calculation of diluted earnings per share for the year ended December 31, 2019. |
(2)Refer to Effective Tax Rate reconciliation.
(3)For those periods that include the preferred stock dividend, the average shares for the calculations of diluted EPS exclude the 7 million shares associated with Xerox Holdings Corporation's Series A Convertible preferred stock.
(4)Represents common shares outstanding at December 31, 2021 plus potential dilutive common shares used for the calculation of adjusted diluted earnings per share for the year ended December 31, 2021. The amount excludes shares associated with Xerox Holdings Corporation's Series A convertible preferred stock as they were anti-dilutive.
Xerox 2021 Annual Report 62
Effective Tax Rate reconciliation
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| (in millions) | | Pre-Tax
(Loss) Income | | Income Tax
(Benefit) Expense | | Effective
Tax Rate | | Pre-Tax Income | | Income Tax
Expense | | Effective
Tax Rate | | Pre-Tax Income | | Income Tax
Expense | | Effective
Tax Rate |
Reported(1) | | $ | (475) | | | $ | (17) | | | 3.6 | % | | $ | 252 | | | $ | 64 | | | 25.4 | % | | $ | 822 | | | $ | 179 | | | 21.8 | % |
Goodwill impairment(2) | | 781 | | | 31 | | | | | — | | | — | | | | | — | | | — | | | |
Non-GAAP Adjustments(2) | | 4 | | | 6 | | | | | 167 | | | 46 | | | | | 292 | | | 77 | | | |
| Tax Act | | — | | | — | | | | | — | | | — | | | | | — | | | 35 | | | |
| | | | | | | | | | | | | | | | | | |
Adjusted(3) | | $ | 310 | | | $ | 20 | | | 6.5 | % | | $ | 419 | | | $ | 110 | | | 26.3 | % | | $ | 1,114 | | | $ | 291 | | | 26.1 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| (in millions) | | Pre-Tax Income | | Income Tax Expense | | Effective Tax Rate | | Pre-Tax Income | | Income Tax Expense | | Effective Tax Rate | | Pre-Tax Income | | Income Tax Expense | | Effective Tax Rate |
Reported(1) | | $ | 822 |
| | $ | 179 |
| | 21.8 | % | | $ | 549 |
| | $ | 247 |
| | 45.0 | % | | $ | 525 |
| | $ | 468 |
| | 89.1 | % |
Non-GAAP Adjustments(2) | | 292 |
| | 77 |
| | | | 466 |
| | 116 |
| | | | 486 |
| | 166 |
| | |
| Tax Act | | — |
| | 35 |
| | | | — |
| | (89 | ) | | | | — |
| | (400 | ) | | |
| Remeasurement of unrecognized tax positions | | — |
| | — |
| | | | — |
| | — |
| | | | — |
| | 16 |
| | |
Adjusted(3) | | $ | 1,114 |
| | $ | 291 |
| | 26.1 | % | | $ | 1,015 |
| | $ | 274 |
| | 27.0 | % | | $ | 1,011 |
| | $ | 250 |
| | 24.7 | % |
| |
(1) | Pre-tax Income and Income tax expense from continuing operations. |
| |
(2) | Refer to Net Income and EPS reconciliation for details. |
| |
(3) | The tax impact on Adjusted Pre-Tax Income from continuing operations is calculated under the same accounting principles applied to the Reported Pre-Tax Income under ASC 740, which employs an annual effective tax rate method to the results. |
(1)Pre-tax (Loss) Income and Income tax (benefit) expense from continuing operations.
(2)Refer to Net (Loss) Income and EPS reconciliation for details.
(3)The tax impact on Adjusted Pre-Tax Income from continuing operations is calculated under the same accounting principles applied to the Reported Pre-Tax (Loss) Income under ASC 740, which employs an annual effective tax rate method to the results.
Operating (Loss) Income and Margin reconciliation
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| (in millions) | | (Loss) Profit | | Revenue | | Margin | | Profit | | Revenue | | Margin | | Profit | | Revenue | | Margin |
Reported(1) | | $ | (475) | | | $ | 7,038 | | | (6.7) | % | | $ | 252 | | | $ | 7,022 | | | 3.6 | % | | $ | 822 | | | $ | 9,066 | | | 9.1 | % |
| Adjustments: | | | | | | | | | | | | | | | | | | |
| Goodwill impairment | | 781 | | | | | | | — | | | | | | | — | | | | | |
| Restructuring and related costs, net | | 38 | | | | | | | 93 | | | | | | | 229 | | | | | |
| Amortization of intangible assets | | 55 | | | | | | | 56 | | | | | | | 45 | | | | | |
| Transaction and related costs, net | | — | | | | | | | 18 | | | | | | | 12 | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Other expenses, net(2) | | (24) | | | | | | | 45 | | | | | | | 84 | | | | | |
| Adjusted | | $ | 375 | | | $ | 7,038 | | | 5.3 | % | | $ | 464 | | | $ | 7,022 | | | 6.6 | % | | $ | 1,192 | | | $ | 9,066 | | | 13.1 | % |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| (in millions) | | Profit | | Revenue | | Margin | | Profit | | Revenue | | Margin | | Profit | | Revenue | | Margin |
Reported(1) | | $ | 822 |
| | $ | 9,066 |
| | 9.1 | % | | $ | 549 |
| | $ | 9,662 |
| | 5.7 | % | | $ | 525 |
| | $ | 9,991 |
| | 5.3 | % |
| Adjustments: | | | | | | | | | | | | | | | | | | |
| Restructuring and related costs | | 229 |
| | | | | | 157 |
| | | | | | 216 |
| | | | |
| Amortization of intangible assets | | 45 |
| | | | | | 48 |
| | | | | | 53 |
| | | | |
| Transaction and related costs, net | | 12 |
| | | | | | 68 |
| | | | | | 9 |
| | | | |
Other expenses, net(2) | | 84 |
| | | | | | 271 |
| | | | | | 330 |
| | | | |
| Adjusted | | $ | 1,192 |
| | $ | 9,066 |
| | 13.1 | % | | $ | 1,093 |
| | $ | 9,662 |
| | 11.3 | % | | $ | 1,133 |
| | $ | 9,991 |
| | 11.3 | % |
_____________(1)Pre-tax (Loss) Income and revenue from continuing operations.
| |
(1) | Pre-tax Income and revenue from continuing operations. |
| |
(2) | Includes non-service retirement-related costs of $18 million, $150 million and $188 million for the years ended December 31, 2019, 2018 and 2017, respectively. |
Xerox 20192021 Annual Report 5363
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Financial Risk Management
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. We utilized derivative financial instruments to hedge economic exposures, as well as reduce earnings and cash flow volatility resulting from shifts in market rates.
Recent market events have not caused us to materially modify or change our financial risk management strategies with respect to our exposures to interest rate and foreign currency risk. Refer to Note 17 - Financial Instruments in the Consolidated Financial Statements for additional discussion on our financial risk management.
Foreign Exchange Risk Management
Assuming a 10% appreciation or depreciation in foreign currency exchange rates from the quoted foreign currency exchange rates at December 31, 2019,2021, it would not significantly change the fair value of foreign currency-denominated assets and liabilities as all material currency asset and liability exposures were economically hedged as of December 31, 2019.2021. A 10% appreciation or depreciation of the U.S. Dollar against all currencies from the quoted foreign currency exchange rates at December 31, 20192021 would have an impact on our cumulative translation adjustment portion of equity of approximately $311$393 million. The net amount invested in foreign subsidiaries and affiliates, primarily Xerox Limited and Xerox Canada Inc. and translated into U.S. Dollars using the year-end exchange rates, was approximately $3.1$3.9 billion at December 31, 2019.2021.
Interest Rate Risk Management
The consolidated average interest rate associated with our total debt for 2021, 2020 and 2019 2018 and 2017 approximated 4.9%4.8%, 4.6%4.8%, and 4.6%4.9%, respectively. Interest expense includes the impact of our interest rate derivatives.
Virtually all customer-financing assets earn fixed rates of interest. The interest rates on a significant portion of the Company's term debt are fixed.
As of December 31, 2019, $200 million2021, of our total debt of $4.3$4.2 billion, a total of $560 million of secured borrowings carried variable interest rates, including the effect of paywhich $293 million has a variable interest rate swaps, if any, which we may use to reducebased on LIBOR plus a spread and the effectiveremaining $267 million has a variable interest rate based on our fixed coupon debt.the financial institution's cost of funds plus a spread.
The fair market values of our fixed-rate financial instruments are sensitive to changes in interest rates. At December 31, 2019,2021, a 10% change in market interest rates would change the fair values of such financial instruments by approximately $58$68 million.
Item 8. Financial Statements and Supplementary Data
Xerox 20192021 Annual Report 5464
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Xerox Holdings Corporation
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Xerox Holdings Corporation and its subsidiaries (the “Company”) as of December 31, 20192021 and 2018,2020, and the related consolidated statements of (loss) income, of comprehensive (loss) income, of shareholders' equity and of cash flows for each of the three years in the period ended December 31, 2019,2021, including the related notes and financial statement schedule listed in the index appearing under Item 15(a)(2) (collectively referred to as the "consolidated financial statements"). We also have audited the Company's internal control over financial reporting as of December 31, 2019,2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20192021 and 2018,2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20192021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019,2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Changes in Accounting Principles
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019 and the manner in which it accounts for revenues from contracts with customers in 2018.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company's consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding
Xerox 2019 Annual Report 55
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Xerox 2021 Annual Report 65
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit mattermatters communicated below is a matterare matters arising from the current period audit of the consolidated financial statements that waswere communicated or required to be communicated to the audit committee and that (i) relatesrelate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit mattermatters below, providing a separate opinionopinions on the critical audit mattermatters or on the accounts or disclosures to which it relates.they relate.
Realizability of Deferred Tax Assets
As described in Note 20 to the consolidated financial statements, the Company has recorded $1,307$705 million of deferred tax assets, as of December 31, 2019, net of a valuation allowance of $399 million.$357 million, as of December 31, 2021. Management records the estimated future tax effects of temporary differences between the tax bases of assets and 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 assetsasset to an amount that will, more-likely-than-not, be realized in the future. Management applied judgment in assessing the realizabiltyrealizability of these deferred tax assets and the need for any valuation allowances, in particular the realizability of USU.S. tax credit carryforwards with a limited life and a foreign net operating loss with an indefinite carryforward period.life. In determining the amount of deferred tax assets that are more-likely-than-not to be realized, management considered historical profitability, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies.
The principal considerations for our determination that performing procedures relating to the realizability of deferred tax assets is a critical audit matter are there wasthe significant judgment by management in assessing the available positive and negative evidence surrounding the realizability of deferred tax assets related to USthe Company's U.S. tax credit carryforwards with a limited life, and a foreign net operating loss with an indefinite carryforward period. Thiswhich in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and in evaluating audit evidence relating to management’s significant assumptions related to projected future taxable income and application of income tax law.income. In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the realizability of deferred tax assets, including controls over projected future taxable income. These procedures also included, among others, evaluating management’s assessment of the realizability of deferred tax assets related to the Company's U.S. tax credit carryforwards with a limited life, including evaluating the reasonableness of the assumptions relatingrelated to projected future taxable income. Evaluating management’s assumptions related to projected future taxable income involved evaluating whether the assumptions were reasonable by considering historical profitability as well as other audit evidence related to management’s forecasts. Professionals with specialized skill and knowledge were also used to assist in evaluatingthe evaluation of management’s application of income tax law in determining projected future taxable income and the assessment of the realizability of deferred tax assets relatingrelated to USthe Company's U.S. tax credit carryforwards with a limited life.
As described in Notes 1 and 13 to the consolidated financial statements, the Company has recorded $3,287 million of goodwill as of December 31, 2021 for its single reporting unit. Management assesses 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. 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 management would recognize an impairment loss for the excess. Management performs 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. In a quantitative impairment test, management assesses goodwill by comparing the carrying amount of the entity to its fair value, and the fair value of the entity is determined by using a weighted combination of an income approach and a market approach. After completing the annual quantitative test in the fourth quarter 2021, management concluded that the fair value of the Company had declined below its carrying value. As a result, the
Xerox 2021 Annual Report 66
Company recognized an after-tax non-cash impairment charge of $750 million ($781 million pre-tax) for the year ended December 31, 2021. As disclosed by management, the income approach is based on the discounted cash flow method that uses management's estimates of forecasted future financial performance including revenues, gross margins, operating expenses, taxes, working capital, and capital asset requirements. Projected cash flows are then discounted to a present value employing a discount rate that properly accounts for the estimated market weighted-average cost of capital, as well as any risk unique to the subject cash flows.
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment is a critical audit matter are the significant judgment by management in determining the fair value estimate of the reporting unit, which in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and in evaluating management’s discounted cash flow method and significant assumptions related to forecasted revenues, gross margins and operating expenses, and the discount rate. In addition, the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessment, including controls over the valuation of the Company’s reporting unit and the controls over the development of the assumptions related to forecasted revenues, gross margins and operating expenses, and the discount rate. These procedures also included, among others (i) testing management’s process for determining the fair value estimate; (ii) evaluating the appropriateness of the discounted cash flow method; (iii) testing the completeness and accuracy of underlying data used in the estimate; and (iv) evaluating the reasonableness of the significant assumptions used by management related to the forecasted revenues, gross margins and operating expenses, and the discount rate. Evaluating management’s assumptions related to forecasted revenues, gross margins and operating expenses involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the reporting unit, (ii) the consistency with external market and industry data, and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were also used to assist in the evaluation of the Company’s discounted cash flow method and the discount rate assumption.
| | |
| /s/ PricewaterhouseCoopers LLP |
|
/s/ PStamford, ConnecticutRICEWATERHOUSECOOPERS LLP
|
Stamford, Connecticut |
February 28, 202023, 2022 |
We have served as the Company’s or its predecessor's auditor since 2001.
Xerox 20192021 Annual Report 5667
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholder of Xerox Corporation
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Xerox Corporation and its subsidiaries (the “Company”) as of December 31, 20192021 and 2018,2020, and the related consolidated statements of (loss) income, of comprehensive (loss) income, shareholders'of shareholder's equity and of cash flows for each of the three years in the period ended December 31, 2019,2021, including the related notes and financial statement schedule listed in the index appearing under Item 15(a)(2) (collectively referred to as the "consolidated financial statements"). We also have audited the Company's internal control over financial reporting as of December 31, 2019,2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20192021 and 2018,2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20192021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019,2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Changes in Accounting Principles
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019 and the manner in which it accounts for revenues from contracts with customers in 2018.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company's consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding
Xerox 2019 Annual Report 57
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Xerox 2021 Annual Report 68
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit mattermatters communicated below is a matterare matters arising from the current period audit of the consolidated financial statements that waswere communicated or required to be communicated to the audit committee and that (i) relatesrelate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit mattermatters below, providing a separate opinionopinions on the critical audit mattermatters or on the accounts or disclosures to which it relates.they relate.
Realizability of Deferred Tax Assets
As described in Note 20 to the consolidated financial statements, the Company has recorded $1,307$705 million of deferred tax assets, as of December 31, 2019, net of a valuation allowance of $399 million.$357 million, as of December 31, 2021. Management records the estimated future tax effects of temporary differences between the tax bases of assets and 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 assetsasset to an amount that will, more-likely-than-not, be realized in the future. Management applied judgment in assessing the realizabiltyrealizability of these deferred tax assets and the need for any valuation allowances, in particular the realizability of USU.S. tax credit carryforwards with a limited life and a foreign net operating loss with an indefinite carryforward period.life. In determining the amount of deferred tax assets that are more-likely-than-not to be realized, management considered historical profitability, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies.
The principal considerations for our determination that performing procedures relating to the realizability of deferred tax assets is a critical audit matter are there wasthe significant judgment by management in assessing the available positive and negative evidence surrounding the realizability of deferred tax assets related to USthe Company's U.S. tax credit carryforwards with a limited life, and a foreign net operating loss with an indefinite carryforward period. Thiswhich in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and in evaluating audit evidence relating to management’s significant assumptions related to projected future taxable income and application of income tax law.income. In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the realizability of deferred tax assets, including controls over projected future taxable income. These procedures also included, among others, evaluating management’s assessment of the realizability of deferred tax assets related to the Company's U.S. tax credit carryforwards with a limited life, including evaluating the reasonableness of the assumptions relatingrelated to projected future taxable income. Evaluating management’s assumptions related to projected future taxable income involved evaluating whether the assumptions were reasonable by considering historical profitability as well as other audit evidence related to management’s forecasts. Professionals with specialized skill and knowledge were also used to assist in evaluatingthe evaluation of management’s application of income tax law in determining projected future taxable income and the assessment of the realizability of deferred tax assets relatingrelated to USthe Company's U.S. tax credit carryforwards with a limited life.
As described in Notes 1 and 13 to the consolidated financial statements, the Company has recorded $3,287 million of goodwill as of December 31, 2021 for its single reporting unit. Management assesses 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. 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 management would recognize an impairment loss for the excess. Management performs 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. In a quantitative impairment test, management assesses goodwill by comparing the carrying amount of the entity to its fair value, and the fair value of the entity is determined by using a weighted combination of an income approach and a market approach. After completing the annual quantitative test in the fourth quarter 2021, management concluded that the fair value of the Company had declined below its carrying value. As a result, the Company recognized an after-tax non-cash impairment charge of $750 million ($781 million pre-tax) for the year
Xerox 2021 Annual Report 69
ended December 31, 2021. As disclosed by management, the income approach is based on the discounted cash flow method that uses management’s estimates of forecasted future financial performance including revenues, gross margins, operating expenses, taxes, working capital, and capital asset requirements. Projected cash flows are then discounted to a present value employing a discount rate that properly accounts for the estimated market weighted-average cost of capital, as well as any risk unique to the subject cash flows.
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment is a critical audit matter are the significant judgment by management in determining the fair value estimate of the reporting unit, which in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and in evaluating management’s discounted cash flow method and significant assumptions related to forecasted revenues, gross margins and operating expenses, and the discount rate. In addition, the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessment, including controls over the valuation of the Company’s reporting unit and the controls over the development of the assumptions related to forecasted revenues, gross margins and operating expenses, and the discount rate. These procedures also included, among others (i) testing management’s process for determining the fair value estimate; (ii) evaluating the appropriateness of the discounted cash flow method; (iii) testing the completeness and accuracy of underlying data used in the estimate; and (iv) evaluating the reasonableness of the significant assumptions used by management related to the forecasted revenues, gross margins and operating expenses, and the discount rate. Evaluating management’s assumptions related to forecasted revenues, gross margins and operating expenses involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the reporting unit, (ii) the consistency with external market and industry data, and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were also used to assist in the evaluation of the Company’s discounted cash flow method and the discount rate assumption.
| | |
| /s/ PricewaterhouseCoopers LLP |
|
/s/ PStamford, ConnecticutRICEWATERHOUSECOOPERS LLP
|
Stamford, Connecticut |
February 28, 202023, 2022 |
We have served as the Company’s auditor since 2001.
Xerox 20192021 Annual Report 5870
Xerox Holdings Corporation
Reports of Management
Management's Responsibility for Financial Statements
The management of Xerox Holdings Corporation is responsible for the integrity and objectivity of all information presented in this annual report. The Consolidated Financial Statements were prepared in conformity with accounting principles generally accepted in the United States of America and include amounts based on management's best estimates and judgments. Management believes the Consolidated Financial Statements fairly reflect the form and substance of transactions and that the financial statements fairly represent Xerox Holdings Corporation's financial position and results of operations.
The Audit Committee of the Xerox Holdings Corporation Board of Directors, which is composed solely of independent directors, meets regularly with the independent auditors, PricewaterhouseCoopers LLP, the internal auditors and representatives of management to review accounting, financial reporting, internal control and audit matters, as well as the nature and extent of the audit effort. The Audit Committee is responsible for the engagement of the independent auditors. The independent auditors and internal auditors have free access to the Audit Committee.
Management's Report on Internal Control Over Financial Reporting
The management of Xerox Holdings Corporation is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the rules promulgated under the Securities Exchange Act of 1934. Under the supervision and with the participation of our management, including our principal executive, financial and accounting officers, we have conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in “Internal Control - Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on the above evaluation, management has concluded that our internal control over financial reporting was effective as of December 31, 2019.2021. The effectiveness of our internal control over financial reporting as of December 31, 20192021 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report, which is included herein.
|
| | | | | | | | | | | | | |
/s/ GIOVANNI VISENTIN | | /s/ WXILLIAMAVIER FH. OSBOURN, JR.EISS | | /s/ JOSEPH H. MANCINI, JR. |
| Chief Executive Officer | | Chief Financial Officer | | Chief Accounting Officer |
Xerox 20192021 Annual Report 5971
Xerox Corporation
Reports of Management
Management's Responsibility for Financial Statements
The management of Xerox Corporation is responsible for the integrity and objectivity of all information presented in this annual report. The Consolidated Financial Statements were prepared in conformity with accounting principles generally accepted in the United States of America and include amounts based on management's best estimates and judgments. Management believes the Consolidated Financial Statements fairly reflect the form and substance of transactions and that the financial statements fairly represent Xerox Corporation's financial position and results of operations.
The Audit Committee of the Xerox Holdings Corporation Board of Directors, which is composed solely of independent directors, meets regularly with the independent auditors, PricewaterhouseCoopers LLP, the internal auditors and representatives of management to review accounting, financial reporting, internal control and audit matters, as well as the nature and extent of the audit effort. The Audit Committee is responsible for the engagement of the independent auditors. The independent auditors and internal auditors have free access to the Audit Committee.
Management's Report on Internal Control Over Financial Reporting
The management of Xerox Corporation is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the rules promulgated under the Securities Exchange Act of 1934. Under the supervision and with the participation of our management, including our principal executive, financial and accounting officers, we have conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in “Internal Control - Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on the above evaluation, management has concluded that our internal control over financial reporting was effective as of December 31, 2019.2021. The effectiveness of our internal control over financial reporting as of December 31, 20192021 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report, which is included herein.
|
| | | | | | | | | | | | | |
/s/ GIOVANNI VISENTIN | | /s/ WXILLIAMAVIER FH. OSBOURN, JR.EISS | | /s/ JOSEPH H. MANCINI, JR. |
| Chief Executive Officer | | Chief Financial Officer | | Chief Accounting Officer |
Xerox 20192021 Annual Report 6072
Xerox Holdings Corporation
Consolidated Statements of (Loss) Income | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| (in millions, except per-share data) | | 2021 | | 2020 | | 2019 |
| Revenues | | | | | | |
| Sales | | $ | 2,582 | | | $ | 2,449 | | | $ | 3,227 | |
| Services, maintenance and rentals | | 4,235 | | | 4,347 | | | 5,595 | |
| Financing | | 221 | | | 226 | | | 244 | |
| Total Revenues | | 7,038 | | | 7,022 | | | 9,066 | |
| Costs and Expenses | | | | | | |
| Cost of sales | | 1,862 | | | 1,742 | | | 2,097 | |
| Cost of services, maintenance and rentals | | 2,662 | | | 2,533 | | | 3,188 | |
| Cost of financing | | 111 | | | 121 | | | 131 | |
| Research, development and engineering expenses | | 310 | | | 311 | | | 373 | |
| Selling, administrative and general expenses | | 1,718 | | | 1,851 | | | 2,085 | |
| Goodwill impairment | | 781 | | | — | | | — | |
| Restructuring and related costs, net | | 38 | | | 93 | | | 229 | |
| Amortization of intangible assets | | 55 | | | 56 | | | 45 | |
| Transaction and related costs, net | | — | | | 18 | | | 12 | |
| Other expenses, net | | (24) | | | 45 | | | 84 | |
| Total Costs and Expenses | | 7,513 | | | 6,770 | | | 8,244 | |
| Income before Income Taxes and Equity (Loss) Income | | (475) | | | 252 | | | 822 | |
| Income tax (benefit) expense | | (17) | | | 64 | | | 179 | |
| Equity in net income of unconsolidated affiliates | | 3 | | | 4 | | | 8 | |
| (Loss) Income from Continuing Operations | | (455) | | | 192 | | | 651 | |
| Income from discontinued operations, net of tax | | — | | | — | | | 710 | |
| Net (Loss) Income | | (455) | | | 192 | | | 1,361 | |
| Less: Income from continuing operations attributable to noncontrolling interests | | — | | | — | | | 3 | |
| Less: Income from discontinued operations attributable to noncontrolling interests | | — | | | — | | | 5 | |
| Net (Loss) Income Attributable to Xerox Holdings | | $ | (455) | | | $ | 192 | | | $ | 1,353 | |
| | | | | | |
| Amounts attributable to Xerox Holdings: | | | | | | |
| (Loss) Income from continuing operations | | $ | (455) | | | $ | 192 | | | $ | 648 | |
| Income from discontinued operations | | — | | | — | | | 705 | |
| Net (Loss) Income Attributable to Xerox Holdings | | $ | (455) | | | $ | 192 | | | $ | 1,353 | |
| | | | | | |
| Basic (Loss) Earnings per Share: | | | | | | |
| Continuing operations | | $ | (2.56) | | | $ | 0.85 | | | $ | 2.86 | |
| Discontinued operations | | — | | | — | | | 3.17 | |
| Total Basic (Loss) Earnings per Share | | $ | (2.56) | | | $ | 0.85 | | | $ | 6.03 | |
| | | | | | |
| Diluted (Loss) Earnings per Share: | | | | | | |
| Continuing operations | | $ | (2.56) | | | $ | 0.84 | | | $ | 2.78 | |
| Discontinued operations | | — | | | — | | | 3.02 | |
| Total Diluted (Loss) Earnings per Share | | $ | (2.56) | | | $ | 0.84 | | | $ | 5.80 | |
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| (in millions, except per-share data) | | 2019 | | 2018 | | 2017 |
| Revenues | | | | | | |
Sales(1) | | $ | 3,227 |
| | $ | 3,454 |
| | $ | 3,412 |
|
Services, maintenance and rentals(1) | | 5,595 |
| | 5,940 |
| | 6,285 |
|
| Financing | | 244 |
| | 268 |
| | 294 |
|
| Total Revenues | | 9,066 |
| | 9,662 |
| | 9,991 |
|
| Costs and Expenses | | | | | | |
Cost of sales(1) | | 2,097 |
| | 2,188 |
| | 2,133 |
|
Cost of services, maintenance and rentals(1) | | 3,188 |
| | 3,473 |
| | 3,654 |
|
| Cost of financing | | 131 |
| | 132 |
| | 133 |
|
| Research, development and engineering expenses | | 373 |
| | 397 |
| | 424 |
|
| Selling, administrative and general expenses | | 2,085 |
| | 2,379 |
| | 2,514 |
|
| Restructuring and related costs | | 229 |
| | 157 |
| | 216 |
|
| Amortization of intangible assets | | 45 |
| | 48 |
| | 53 |
|
| Transaction and related costs, net | | 12 |
| | 68 |
| | 9 |
|
| Other expenses, net | | 84 |
| | 271 |
| | 330 |
|
| Total Costs and Expenses | | 8,244 |
| | 9,113 |
| | 9,466 |
|
| Income before Income Taxes and Equity Income | | 822 |
| | 549 |
| | 525 |
|
| Income tax expense | | 179 |
| | 247 |
| | 468 |
|
| Equity in net income of unconsolidated affiliates | | 8 |
| | 8 |
| | 13 |
|
| Income from Continuing Operations | | 651 |
| | 310 |
| | 70 |
|
| Income from discontinued operations, net of tax | | 710 |
| | 64 |
| | 137 |
|
| Net Income | | 1,361 |
| | 374 |
| | 207 |
|
| Less: Income from continuing operations attributable to noncontrolling interests | | 3 |
| | 4 |
| | 4 |
|
| Less: Income from discontinued operations attributable to noncontrolling interests | | 5 |
| | 9 |
| | 8 |
|
| Net Income Attributable to Xerox Holdings | | $ | 1,353 |
| | $ | 361 |
| | $ | 195 |
|
| | | | | | | |
| Amounts attributable to Xerox Holdings: | | | | | | |
| Income from continuing operations | | $ | 648 |
| | $ | 306 |
| | $ | 66 |
|
| Income from discontinued operations | | 705 |
| | 55 |
| | 129 |
|
| Net Income Attributable to Xerox Holdings | | $ | 1,353 |
| | $ | 361 |
| | $ | 195 |
|
| | | | | | | |
| Basic Earnings per Share: | | | | | | |
| Continuing operations | | $ | 2.86 |
| | $ | 1.17 |
| | $ | 0.20 |
|
| Discontinued operations | | 3.17 |
| | 0.23 |
| | 0.51 |
|
| Total Basic Earnings per Share | | $ | 6.03 |
| | $ | 1.40 |
| | $ | 0.71 |
|
| | | | | | | |
| Diluted Earnings per Share: | | | | | | |
| Continuing operations | | $ | 2.78 |
| | $ | 1.16 |
| | $ | 0.20 |
|
| Discontinued operations | | 3.02 |
| | 0.22 |
| | 0.51 |
|
| Diluted Earnings per Share | | $ | 5.80 |
| | $ | 1.38 |
| | $ | 0.71 |
|
_____________
| |
(1) | Certain prior year amounts have been conformed to the current year presentation. Refer to Note 1 - Basis of Presentation and Summary of Significant Accounting Policies for additional information. |
The accompanying notes are an integral part of these Consolidated Financial Statements.
Xerox 20192021 Annual Report 6173
Xerox Holdings Corporation
Consolidated Statements of Comprehensive (Loss) Income
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| (in millions) | | 2019 | | 2018 | | 2017 |
| Net Income | | $ | 1,361 |
| | $ | 374 |
| | $ | 207 |
|
| Less: Income from continuing operations attributable to noncontrolling interests | | 3 |
| | 4 |
| | 4 |
|
| Less: Income from discontinued operations attributable to noncontrolling interests | | 5 |
| | 9 |
| | 8 |
|
| Net Income Attributable to Xerox Holdings | | $ | 1,353 |
| | $ | 361 |
| | $ | 195 |
|
| | | | | | | |
Other Comprehensive Income (Loss), Net(1) | | | | | | |
| Translation adjustments, net | | $ | 62 |
| | $ | (242 | ) | | $ | 483 |
|
| Unrealized (losses) gains, net | | (6 | ) | | 16 |
| | 1 |
|
| Changes in defined benefit plans, net | | (10 | ) | | 409 |
| | 106 |
|
| Other Comprehensive Income, Net | | 46 |
| | 183 |
| | 590 |
|
| Less: Other comprehensive income, net attributable to noncontrolling interests | | — |
| | — |
| | 1 |
|
| Other Comprehensive Income, Net Attributable to Xerox Holdings | | $ | 46 |
| | $ | 183 |
| | $ | 589 |
|
| | | | | | | |
| Comprehensive Income, Net | | $ | 1,407 |
| | $ | 557 |
| | $ | 797 |
|
| Less: Comprehensive income, net from continuing operations attributable to noncontrolling interests | | 3 |
| | 4 |
| | 5 |
|
| Less: Comprehensive income, net from discontinued operations attributable to noncontrolling interests | | 5 |
| | 9 |
| | 8 |
|
| Comprehensive Income, Net Attributable to Xerox Holdings | | $ | 1,399 |
| | $ | 544 |
| | $ | 784 |
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| (in millions) | | 2021 | | 2020 | | 2019 |
| Net (Loss) Income | | $ | (455) | | | $ | 192 | | | $ | 1,361 | |
| Less: Income from continuing operations attributable to noncontrolling interests | | — | | | — | | | 3 | |
| Less: Income from discontinued operations attributable to noncontrolling interests | | — | | | — | | | 5 | |
| Net (Loss) Income Attributable to Xerox Holdings | | $ | (455) | | | $ | 192 | | | $ | 1,353 | |
| | | | | | |
Other Comprehensive (Loss) Income, Net(1) | | | | | | |
| Translation adjustments, net | | $ | (141) | | | $ | 241 | | | $ | 62 | |
| Unrealized (losses) gains, net | | (4) | | | 4 | | | (6) | |
| Changes in defined benefit plans, net | | 489 | | | 69 | | | (10) | |
| | | | | | |
| | | | | | |
| Other Comprehensive Income, Net Attributable to Xerox Holdings | | $ | 344 | | | $ | 314 | | | $ | 46 | |
| | | | | | |
| Comprehensive (Loss) Income, Net | | $ | (111) | | | $ | 506 | | | $ | 1,407 | |
| Less: Comprehensive income, net from continuing operations attributable to noncontrolling interests | | — | | | — | | | 3 | |
| Less: Comprehensive income, net from discontinued operations attributable to noncontrolling interests | | — | | | — | | | 5 | |
| Comprehensive (Loss) Income, Net Attributable to Xerox Holdings | | $ | (111) | | | $ | 506 | | | $ | 1,399 | |
_____________
| |
(1) | Refer to Note 25 - Other Comprehensive (Loss) Income for gross components of Other Comprehensive Income, reclassification adjustments out of Accumulated Other Comprehensive Loss and related tax effects. |
.
The accompanying notes are an integral part of these Consolidated Financial Statements.
Xerox 20192021 Annual Report 6274
Xerox Holdings Corporation
Consolidated Balance Sheets |
| | | | | | | | |
| | | December 31, |
| (in millions, except share data in thousands) | | 2019 | | 2018 |
| Assets | | | | |
| Cash and cash equivalents | | $ | 2,740 |
| | $ | 1,081 |
|
| Accounts receivable, net | | 1,236 |
| | 1,270 |
|
| Billed portion of finance receivables, net | | 111 |
| | 105 |
|
| Finance receivables, net | | 1,158 |
| | 1,218 |
|
| Inventories | | 694 |
| | 829 |
|
| Assets of discontinued operations | | — |
| | 19 |
|
| Other current assets | | 201 |
| | 191 |
|
| Total current assets | | 6,140 |
| | 4,713 |
|
| Finance receivables due after one year, net | | 2,082 |
| | 2,149 |
|
| Equipment on operating leases, net | | 364 |
| | 442 |
|
| Land, buildings and equipment, net | | 426 |
| | 498 |
|
| Intangible assets, net | | 199 |
| | 220 |
|
| Goodwill | | 3,900 |
| | 3,858 |
|
| Deferred tax assets | | 598 |
| | 740 |
|
| Assets of discontinued operations | | — |
| | 1,352 |
|
| Other long-term assets | | 1,338 |
| | 902 |
|
| Total Assets | | $ | 15,047 |
| | $ | 14,874 |
|
| Liabilities and Equity | | | | |
| Short-term debt and current portion of long-term debt | | $ | 1,049 |
| | $ | 961 |
|
| Accounts payable | | 1,053 |
| | 1,073 |
|
| Accrued compensation and benefits costs | | 349 |
| | 348 |
|
| Liabilities of discontinued operations | | — |
| | 21 |
|
| Accrued expenses and other current liabilities | | 984 |
| | 848 |
|
| Total current liabilities | | 3,435 |
| | 3,251 |
|
| Long-term debt | | 3,233 |
| | 4,269 |
|
| Pension and other benefit liabilities | | 1,707 |
| | 1,482 |
|
| Post-retirement medical benefits | | 352 |
| | 350 |
|
| Other long-term liabilities | | 512 |
| | 269 |
|
| Total Liabilities | | 9,239 |
| | 9,621 |
|
| | | | | |
| Commitments and Contingencies (See Note 21) | |
|
| |
|
|
| Convertible Preferred Stock | | 214 |
| | 214 |
|
| | | | | |
| Common stock | | 215 |
| | 232 |
|
| Additional paid-in capital | | 2,782 |
| | 3,321 |
|
| Treasury stock, at cost | | (76 | ) | | (55 | ) |
| Retained earnings | | 6,312 |
| | 5,072 |
|
| Accumulated other comprehensive loss | | (3,646 | ) | | (3,565 | ) |
| Xerox Holdings shareholders’ equity | | 5,587 |
| | 5,005 |
|
| Noncontrolling interests | | 7 |
| | 34 |
|
| Total Equity | | 5,594 |
| | 5,039 |
|
| Total Liabilities and Equity | | $ | 15,047 |
| | $ | 14,874 |
|
| | | | | |
| Shares of common stock issued | | 214,621 |
| | 231,690 |
|
| Treasury stock | | (2,031 | ) | | (2,067 | ) |
| Shares of Common Stock Outstanding | | 212,590 |
| | 229,623 |
|
| | | | | | | | | | | | | | |
| | December 31, |
| (in millions, except share data in thousands) | | 2021 | | 2020 |
| Assets | | | | |
| Cash and cash equivalents | | $ | 1,840 | | | $ | 2,625 | |
| Accounts receivable (net of allowance of $58 and $69, respectively) | | 818 | | | 883 | |
| Billed portion of finance receivables (net of allowance of $4 and $4, respectively) | | 94 | | | 99 | |
| Finance receivables, net | | 1,042 | | | 1,082 | |
| Inventories | | 696 | | | 843 | |
| | | | |
| Other current assets | | 211 | | | 251 | |
| Total current assets | | 4,701 | | | 5,783 | |
| Finance receivables due after one year (net of allowance of $114 and $129, respectively) | | 1,934 | | | 1,984 | |
| Equipment on operating leases, net | | 253 | | | 296 | |
| Land, buildings and equipment, net | | 358 | | | 407 | |
| | | | |
| Intangible assets, net | | 211 | | | 237 | |
| Goodwill | | 3,287 | | | 4,071 | |
| Deferred tax assets | | 519 | | | 508 | |
| | | | |
| Other long-term assets | | 1,960 | | | 1,455 | |
| Total Assets | | $ | 13,223 | | | $ | 14,741 | |
| Liabilities and Equity | | | | |
| Short-term debt and current portion of long-term debt | | $ | 650 | | | $ | 394 | |
| Accounts payable | | 1,069 | | | 983 | |
| Accrued compensation and benefits costs | | 239 | | | 261 | |
| | | | |
| | | | |
| Accrued expenses and other current liabilities | | 871 | | | 840 | |
| Total current liabilities | | 2,829 | | | 2,478 | |
| Long-term debt | | 3,596 | | | 4,050 | |
| Pension and other benefit liabilities | | 1,373 | | | 1,566 | |
| Post-retirement medical benefits | | 277 | | | 340 | |
| | | | |
| Other long-term liabilities | | 481 | | | 497 | |
| Total Liabilities | | 8,556 | | | 8,931 | |
| | | | |
| Commitments and Contingencies (See Note 21) | | 0 | | 0 |
| | | | |
| Noncontrolling Interests (See Note 5) | | 10 | | | — | |
| | | | |
| Convertible Preferred Stock | | 214 | | | 214 | |
| | | | |
| Common stock | | 168 | | | 198 | |
| Additional paid-in capital | | 1,802 | | | 2,445 | |
| Treasury stock, at cost | | (177) | | | — | |
| Retained earnings | | 5,631 | | | 6,281 | |
| Accumulated other comprehensive loss | | (2,988) | | | (3,332) | |
| Xerox Holdings shareholders’ equity | | 4,436 | | | 5,592 | |
| Noncontrolling interests | | 7 | | | 4 | |
| Total Equity | | 4,443 | | | 5,596 | |
| Total Liabilities and Equity | | $ | 13,223 | | | $ | 14,741 | |
| | | | |
| Shares of common stock issued | | 168,069 | | | 198,386 | |
| Treasury stock | | (8,675) | | | — | |
| Shares of Common Stock Outstanding | | 159,394 | | | 198,386 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
Xerox 20192021 Annual Report 6375
Xerox Holdings Corporation
Consolidated Statements of Cash Flows | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| (in millions) | | 2021 | | 2020 | | 2019 |
| Cash Flows from Operating Activities | | | | | | |
| Net (loss) income | | $ | (455) | | | $ | 192 | | | $ | 1,361 | |
| Income from discontinued operations, net of tax | | — | | | — | | | (710) | |
| (Loss) income from continuing operations | | (455) | | | 192 | | | 651 | |
| Adjustments required to reconcile Net (loss) income to Cash flows from operating activities | | | | | | |
| Depreciation and amortization | | 327 | | | 368 | | | 430 | |
| Provisions | | 46 | | | 147 | | | 73 | |
| Deferred tax (benefit) expense | | (89) | | | 34 | | | 124 | |
| Net gain on sales of businesses and assets | | (40) | | | (30) | | | (21) | |
| Stock-based compensation | | 54 | | | 42 | | | 50 | |
| Goodwill impairment | | 781 | | | — | | | — | |
| Restructuring and asset impairment charges | | 27 | | | 87 | | | 127 | |
| Payments for restructurings | | (72) | | | (81) | | | (93) | |
| Defined benefit pension cost | | (10) | | | 58 | | | 109 | |
| Contributions to defined benefit pension plans | | (135) | | | (139) | | | (141) | |
| Decrease in accounts receivable and billed portion of finance receivables | | 41 | | | 369 | | | 10 | |
| Decrease (increase) in inventories | | 88 | | | (134) | | | 109 | |
| Increase in equipment on operating leases | | (129) | | | (118) | | | (153) | |
| Decrease in finance receivables | | 20 | | | 183 | | | 101 | |
| Decrease (increase) in other current and long-term assets | | 68 | | | 8 | | | (14) | |
| Increase (decrease) in accounts payable | | 118 | | | (123) | | | (47) | |
| Decrease in accrued compensation | | (95) | | | (189) | | | (94) | |
| Increase (decrease) in other current and long-term liabilities | | 89 | | | (165) | | | 40 | |
| Net change in income tax assets and liabilities | | 10 | | | (2) | | | (34) | |
| Net change in derivative assets and liabilities | | 2 | | | 1 | | | 11 | |
| Other operating, net | | (17) | | | 40 | | | 6 | |
| Net cash provided by operating activities of continuing operations | | 629 | | | 548 | | | 1,244 | |
| Net cash provided by operating activities of discontinued operations | | — | | | — | | | 89 | |
| Net cash provided by operating activities | | 629 | | | 548 | | | 1,333 | |
| Cash Flows from Investing Activities | | | | | | |
| Cost of additions to land, buildings, equipment and software | | (68) | | | (74) | | | (65) | |
| Proceeds from sales of businesses and assets | | 44 | | | 30 | | | 21 | |
| | | | | | |
| Acquisitions, net of cash acquired | | (53) | | | (203) | | | (42) | |
| | | | | | |
| | | | | | |
| | | | | | |
| Other investing, net | | (8) | | | 1 | | | 1 | |
| Net cash used in investing activities of continuing operations | | (85) | | | (246) | | | (85) | |
| Net cash provided by investing activities of discontinued operations | | — | | | — | | | 2,233 | |
| Net cash (used in) provided by investing activities | | (85) | | | (246) | | | 2,148 | |
| Cash Flows from Financing Activities | | | | | | |
| | | | | | |
| Proceeds from issuance of long-term debt | | 311 | | | 2,359 | | | 10 | |
| Payments on long-term debt | | (519) | | | (2,226) | | | (960) | |
| | | | | | |
| Dividends | | (206) | | | (230) | | | (243) | |
| | | | | | |
| Payments to acquire treasury stock, including fees | | (888) | | | (300) | | | (600) | |
| | | | | | |
| Other financing, net | | (8) | | | (19) | | | (41) | |
| | | | | | |
| | | | | | |
| Net cash used in financing activities | | (1,310) | | | (416) | | | (1,834) | |
| | | | | | |
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | | (16) | | | 10 | | | — | |
| | | | | | |
| (Decrease) increase in cash, cash equivalents and restricted cash | | (782) | | | (104) | | | 1,647 | |
| Cash, cash equivalents and restricted cash at beginning of year | | 2,691 | | | 2,795 | | | 1,148 | |
| Cash, Cash Equivalents and Restricted Cash at End of Year | | $ | 1,909 | | | $ | 2,691 | | | $ | 2,795 | |
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| (in millions) | | 2019 | | 2018 | | 2017 |
| Cash Flows from Operating Activities | | | | | | |
| Net income | | $ | 1,361 |
| | $ | 374 |
| | $ | 207 |
|
| Income from discontinued operations, net of tax | | (710 | ) | | (64 | ) | | (137 | ) |
| Income from continuing operations | | 651 |
| | 310 |
| | 70 |
|
| Adjustments required to reconcile Net income to Cash flows from operating activities | | | | | | |
| Depreciation and amortization | | 430 |
| | 526 |
| | 527 |
|
| Provisions | | 73 |
| | 70 |
| | 73 |
|
| Deferred tax expense | | 124 |
| | 135 |
| | 399 |
|
| Net gain on sales of businesses and assets | | (21 | ) | | (35 | ) | | (15 | ) |
| Stock-based compensation | | 50 |
| | 57 |
| | 52 |
|
| Restructuring and asset impairment charges | | 127 |
| | 156 |
| | 197 |
|
| Payments for restructurings | | (93 | ) | | (169 | ) | | (220 | ) |
| Defined benefit pension cost | | 109 |
| | 175 |
| | 194 |
|
| Contributions to defined benefit pension plans | | (141 | ) | | (144 | ) | | (836 | ) |
| Decrease (increase) in accounts receivable and billed portion of finance receivables | | 10 |
| | 31 |
| | (531 | ) |
| Decrease (increase) in inventories | | 109 |
| | 17 |
| | (73 | ) |
| Increase in equipment on operating leases | | (153 | ) | | (248 | ) | | (217 | ) |
| Decrease in finance receivables | | 101 |
| | 166 |
| | 162 |
|
| (Increase) decrease in other current and long-term assets | | (14 | ) | | 29 |
| | (20 | ) |
| (Decrease) increase in accounts payable | | (47 | ) | | 1 |
| | 1 |
|
| Decrease in accrued compensation | | (94 | ) | | (111 | ) | | (28 | ) |
| Increase (decrease) in other current and long-term liabilities | | 40 |
| | 52 |
| | (79 | ) |
| Net change in income tax assets and liabilities | | (34 | ) | | 41 |
| | 11 |
|
| Net change in derivative assets and liabilities | | 11 |
| | (14 | ) | | 75 |
|
| Other operating, net | | 6 |
| | 37 |
| | 9 |
|
| Net cash provided by (used in) operating activities of continuing operations | | 1,244 |
| | 1,082 |
| | (249 | ) |
| Net cash provided by (used in) operating activities of discontinued operations | | 89 |
| | 58 |
| | (18 | ) |
| Net cash provided by (used in) operating activities | | 1,333 |
| | 1,140 |
| | (267 | ) |
| Cash Flows from Investing Activities | | | | | | |
| Cost of additions to land, buildings, equipment and software | | (65 | ) | | (90 | ) | | (105 | ) |
| Proceeds from sales of businesses and assets | | 21 |
| | 59 |
| | 23 |
|
| Acquisitions, net of cash acquired | | (42 | ) | | — |
| | (87 | ) |
| Collections of deferred proceeds from sales of receivables | | — |
| | — |
| | 213 |
|
| Collections on beneficial interest from sales of finance receivables | | — |
| | — |
| | 21 |
|
| Other investing, net | | 1 |
| | 2 |
| | 100 |
|
| Net cash (used in) provided by investing activities of continuing operations | | (85 | ) | | (29 | ) | | 165 |
|
| Net cash provided by investing activities of discontinued operations | | 2,233 |
| | — |
| | — |
|
| Net cash provided by (used in) investing activities | | 2,148 |
| | (29 | ) | | 165 |
|
| Cash Flows from Financing Activities | | | | | | |
| Net (payments) proceeds on short-term debt | | — |
| | (5 | ) | | 2 |
|
| Proceeds from issuance of long-term debt | | 10 |
| | 9 |
| | 1,008 |
|
| Payments on long-term debt | | (960 | ) | | (311 | ) | | (1,832 | ) |
| Dividends | | (243 | ) | | (269 | ) | | (291 | ) |
| Payments to acquire treasury stock, including fees | | (600 | ) | | (700 | ) | | — |
|
| Other financing, net | | (41 | ) | | (25 | ) | | 128 |
|
| Net cash used in financing activities | | (1,834 | ) | | (1,301 | ) | | (985 | ) |
| | | | | | | |
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | | — |
| | (30 | ) | | 53 |
|
| Increase (decrease) in cash, cash equivalents and restricted cash | | 1,647 |
| | (220 | ) | | (1,034 | ) |
| Cash, cash equivalents and restricted cash at beginning of year | | 1,148 |
| | 1,368 |
| | 2,402 |
|
| Cash, Cash Equivalents and Restricted Cash at End of Year | | $ | 2,795 |
| | $ | 1,148 |
| | $ | 1,368 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
Xerox 2021 Annual Report 76
Xerox Holdings Corporation
Consolidated Statements of Shareholders' Equity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | Common Stock | | Additional
Paid-in
Capital | | Treasury Stock | | Retained
Earnings | | AOCL(1) | | Xerox Holdings
Shareholders’
Equity | | Non-
controlling
Interests | | Total
Equity |
| Balance at December 31, 2018 | $ | 232 | | | $ | 3,321 | | | $ | (55) | | | $ | 5,072 | | | $ | (3,565) | | | $ | 5,005 | | | $ | 34 | | | $ | 5,039 | |
| Cumulative effect of change in accounting principle | — | | | — | | | — | | | 127 | | | (127) | | | — | | | — | | | — | |
| Comprehensive income, net | — | | | — | | | — | | | 1,353 | | | 46 | | | 1,399 | | | 8 | | | 1,407 | |
Cash dividends declared-common(2) | — | | | — | | | — | | | (226) | | | — | | | (226) | | | — | | | (226) | |
Cash dividends declared-preferred(3) | — | | | — | | | — | | | (14) | | | — | | | (14) | | | — | | | (14) | |
| Stock option and incentive plans, net | 1 | | | 22 | | | — | | | — | | | — | | | 23 | | | — | | | 23 | |
| Payments to acquire treasury stock, including fees | — | | | — | | | (600) | | | — | | | — | | | (600) | | | — | | | (600) | |
| Cancellation of treasury stock | (18) | | | (561) | | | 579 | | | — | | | — | | | — | | | — | | | — | |
| Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | (3) | | | (3) | |
Divestiture(4) | — | | | — | | | — | | | — | | | — | | | — | | | (32) | | | (32) | |
| Balance at December 31, 2019 | $ | 215 | | | $ | 2,782 | | | $ | (76) | | | $ | 6,312 | | | $ | (3,646) | | | $ | 5,587 | | | $ | 7 | | | $ | 5,594 | |
| | | | | | | | | | | | | | | |
| Comprehensive income, net | — | | | — | | | — | | | 192 | | | 314 | | | 506 | | | — | | | 506 | |
Cash dividends declared-common(2) | — | | | — | | | — | | | (209) | | | — | | | (209) | | | — | | | (209) | |
Cash dividends declared-preferred(3) | — | | | — | | | — | | | (14) | | | — | | | (14) | | | — | | | (14) | |
| Stock option and incentive plans, net | 1 | | | 21 | | | — | | | — | | | — | | | 22 | | | — | | | 22 | |
| Payments to acquire treasury stock, including fees | — | | | — | | | (300) | | | — | | | — | | | (300) | | | — | | | (300) | |
| Cancellation of treasury stock | (18) | | | (358) | | | 376 | | | — | | | — | | | — | | | — | | | — | |
| Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | (3) | | | (3) | |
| Balance at December 31, 2020 | $ | 198 | | | $ | 2,445 | | | $ | — | | | $ | 6,281 | | | $ | (3,332) | | | $ | 5,592 | | | $ | 4 | | | $ | 5,596 | |
| | | | | | | | | | | | | | | |
| Comprehensive (loss) income, net | — | | | — | | | — | | | (455) | | | 344 | | | (111) | | | — | | | (111) | |
Cash dividends declared-common(2) | — | | | — | | | — | | | (181) | | | — | | | (181) | | | — | | | (181) | |
Cash dividends declared-preferred(3) | — | | | — | | | — | | | (14) | | | — | | | (14) | | | — | | | (14) | |
| Stock option and incentive plans, net | 2 | | | 35 | | | — | | | — | | | — | | | 37 | | | — | | | 37 | |
| Payments to acquire treasury stock, including fees | — | | | — | | | (888) | | | — | | | — | | | (888) | | | — | | | (888) | |
| Cancellation of treasury stock | (32) | | | (679) | | | 711 | | | — | | | — | | | — | | | — | | | — | |
Investment from noncontrolling interests(5) | — | | | 1 | | | — | | | — | | | — | | | 1 | | | 4 | | | 5 | |
| Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | (1) | | | (1) | |
| Balance at December 31, 2021 | $ | 168 | | | $ | 1,802 | | | $ | (177) | | | $ | 5,631 | | | $ | (2,988) | | | $ | 4,436 | | | $ | 7 | | | $ | 4,443 | |
_____________
(1)AOCL - Accumulated other comprehensive loss.
(2)Cash dividends declared on common stock for 2021, 2020 and 2019 were $0.25 per share on a quarterly basis and $1.00 per share on an annual basis.
(3)Cash dividends declared on preferred stock for 2021, 2020 and 2019 were $20 per share on a quarterly basis and $80 per share on an annual basis.
(4)Refer to Note 1 - Basis of Presentation and Summary of Significant Accounting Policies and Note 6 - Divestitures for additional information regarding divestitures.
(5)Refer to Note 5 - Acquisitions and Investments for additional information regarding this noncontrolling interests.
The accompanying notes are an integral part of these Consolidated Financial Statements.
Xerox 2021 Annual Report 77
Xerox Corporation
Consolidated Statements of (Loss) Income | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| (in millions) | | 2021 | | 2020 | | 2019 |
| Revenues | | | | | | |
| Sales | | $ | 2,582 | | | $ | 2,449 | | | $ | 3,227 | |
| Services, maintenance and rentals | | 4,235 | | | 4,347 | | | 5,595 | |
| Financing | | 221 | | | 226 | | | 244 | |
| Total Revenues | | 7,038 | | | 7,022 | | | 9,066 | |
| Costs and Expenses | | | | | | |
| Cost of sales | | 1,862 | | | 1,742 | | | 2,097 | |
| Cost of services, maintenance and rentals | | 2,662 | | | 2,533 | | | 3,188 | |
| Cost of financing | | 111 | | | 121 | | | 131 | |
| Research, development and engineering expenses | | 310 | | | 311 | | | 373 | |
| Selling, administrative and general expenses | | 1,718 | | | 1,851 | | | 2,085 | |
| Goodwill impairment | | 781 | | | — | | | — | |
| Restructuring and related costs, net | | 38 | | | 93 | | | 229 | |
| Amortization of intangible assets | | 55 | | | 56 | | | 45 | |
| Transaction and related costs, net | | — | | | 18 | | | 12 | |
| Other expenses, net | | (24) | | | 45 | | | 84 | |
| Total Costs and Expenses | | 7,513 | | | 6,770 | | | 8,244 | |
| Income before Income Taxes and Equity (Loss) Income | | (475) | | | 252 | | | 822 | |
| Income tax (benefit) expense | | (17) | | | 64 | | | 179 | |
| Equity in net income of unconsolidated affiliates | | 3 | | | 4 | | | 8 | |
| (Loss) Income from Continuing Operations | | (455) | | | 192 | | | 651 | |
| Income from discontinued operations, net of tax | | — | | | — | | | 710 | |
| Net (Loss) Income | | (455) | | | 192 | | | 1,361 | |
| Less: Income from continuing operations attributable to noncontrolling interests | | — | | | — | | | 3 | |
| Less: Income from discontinued operations attributable to noncontrolling interests | | — | | | — | | | 5 | |
| Net (Loss) Income Attributable to Xerox | | $ | (455) | | | $ | 192 | | | $ | 1,353 | |
| | | | | | |
| Amounts attributable to Xerox: | | | | | | |
| (Loss) Income from continuing operations | | $ | (455) | | | $ | 192 | | | $ | 648 | |
| Income from discontinued operations | | — | | | — | | | 705 | |
| Net (Loss) Income Attributable to Xerox | | $ | (455) | | | $ | 192 | | | $ | 1,353 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
Xerox 2021 Annual Report 78
Xerox Corporation
Consolidated Statements of Comprehensive (Loss) Income | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| (in millions) | | 2021 | | 2020 | | 2019 |
| Net (Loss) Income | | $ | (455) | | | $ | 192 | | | $ | 1,361 | |
| Less: Income from continuing operations attributable to noncontrolling interests | | — | | | — | | | 3 | |
| Less: Income from discontinued operations attributable to noncontrolling interests | | — | | | — | | | 5 | |
| Net (Loss) Income Attributable to Xerox | | $ | (455) | | | $ | 192 | | | $ | 1,353 | |
| | | | | | |
Other Comprehensive (Loss) Income, Net(1) | | | | | | |
| Translation adjustments, net | | $ | (141) | | | $ | 241 | | | $ | 62 | |
| Unrealized (losses) gains, net | | (4) | | | 4 | | | (6) | |
| Changes in defined benefit plans, net | | 489 | | | 69 | | | (10) | |
| | | | | | |
| | | | | | |
| Other Comprehensive Income, Net Attributable to Xerox | | $ | 344 | | | $ | 314 | | | $ | 46 | |
| | | | | | |
| Comprehensive (Loss) Income, Net | | $ | (111) | | | $ | 506 | | | $ | 1,407 | |
| Less: Comprehensive income, net from continuing operations attributable to noncontrolling interests | | — | | | — | | | 3 | |
| Less: Comprehensive income, net from discontinued operations attributable to noncontrolling interests | | — | | | — | | | 5 | |
| Comprehensive (Loss) Income, Net Attributable to Xerox | | $ | (111) | | | $ | 506 | | | $ | 1,399 | |
_____________
(1)Refer to Note 25 - Other Comprehensive Income (Loss) for gross components of Other Comprehensive Income, reclassification adjustments out of Accumulated Other Comprehensive Loss and related tax effects.
The accompanying notes are an integral part of these Consolidated Financial Statements.
Xerox 2021 Annual Report 79
Xerox Corporation
Consolidated Balance Sheets | | | | | | | | | | | | | | |
| | December 31, |
| (in millions) | | 2021 | | 2020 |
| Assets | | | | |
| Cash and cash equivalents | | $ | 1,840 | | | $ | 2,625 | |
| Accounts receivable (net of allowance of $58 and $69, respectively) | | 818 | | | 883 | |
| Billed portion of finance receivables (net of allowance of $4 and $4, respectively) | | 94 | | | 99 | |
| Finance receivables, net | | 1,042 | | | 1,082 | |
| Inventories | | 696 | | | 843 | |
| | | | |
| Other current assets | | 211 | | | 251 | |
| Total current assets | | 4,701 | | | 5,783 | |
| Finance receivables due after one year (net of allowance of $114 and $129, respectively) | | 1,934 | | | 1,984 | |
| Equipment on operating leases, net | | 253 | | | 296 | |
| Land, buildings and equipment, net | | 358 | | | 407 | |
| | | | |
| Intangible assets, net | | 211 | | | 237 | |
| Goodwill | | 3,287 | | | 4,071 | |
| Deferred tax assets | | 519 | | | 508 | |
| | | | |
| Other long-term assets | | 1,952 | | | 1,455 | |
| Total Assets | | $ | 13,215 | | | $ | 14,741 | |
| Liabilities and Equity | | | | |
| Short-term debt and current portion of long-term debt | | $ | 650 | | | $ | 394 | |
| Accounts payable | | 1,069 | | | 983 | |
| Accrued compensation and benefits costs | | 239 | | | 261 | |
| | | | |
| | | | |
| Accrued expenses and other current liabilities | | 823 | | | 749 | |
| Total current liabilities | | 2,781 | | | 2,387 | |
| Long-term debt | | 2,102 | | | 2,557 | |
| Related party debt | | 1,494 | | | — | |
| Pension and other benefit liabilities | | 1,373 | | | 1,566 | |
| Post-retirement medical benefits | | 277 | | | 340 | |
| | | | |
| Other long-term liabilities | | 481 | | | 497 | |
| Total Liabilities | | 8,508 | | | 7,347 | |
| | | | |
| Commitments and Contingencies (See Note 21) | | 0 | | 0 |
| | | | |
| Noncontrolling Interests (See Note 5) | | 10 | | | — | |
| | | | |
| | | | |
| Additional paid-in capital | | 3,202 | | | 4,888 | |
| | | | |
| Retained earnings | | 4,476 | | | 5,834 | |
| Accumulated other comprehensive loss | | (2,988) | | | (3,332) | |
| Xerox shareholder's equity | | 4,690 | | | 7,390 | |
| Noncontrolling interests | | 7 | | | 4 | |
| Total Equity | | 4,697 | | | 7,394 | |
| Total Liabilities and Equity | | $ | 13,215 | | | $ | 14,741 | |
| | | | |
| | | | |
| | | | |
| | | | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
Xerox 2021 Annual Report 80
Xerox Corporation
Consolidated Statements of Cash Flows | | | | | | | | | | | | | | | | | | | | | |
| | | | Year Ended December 31, |
| (in millions) | | | 2021 | | 2020 | | 2019 |
| Cash Flows from Operating Activities | | | | | | | |
| Net (loss) income | | | $ | (455) | | | $ | 192 | | | $ | 1,361 | |
| Income from discontinued operations, net of tax | | | — | | | — | | | (710) | |
| (Loss) income from continuing operations | | | (455) | | | 192 | | | 651 | |
| Adjustments required to reconcile Net (loss) income to Cash flows from operating activities | | | | | | | |
| Depreciation and amortization | | | 327 | | | 368 | | | 430 | |
| Provisions | | | 46 | | | 147 | | | 73 | |
| Deferred tax (benefit) expense | | | (89) | | | 34 | | | 124 | |
| Net gain on sales of businesses and assets | | | (40) | | | (30) | | | (21) | |
| Stock-based compensation | | | 54 | | | 42 | | | 50 | |
| Goodwill impairment | | | 781 | | | — | | | — | |
| Restructuring and asset impairment charges | | | 27 | | | 87 | | | 127 | |
| Payments for restructurings | | | (72) | | | (81) | | | (93) | |
| Defined benefit pension cost | | | (10) | | | 58 | | | 109 | |
| Contributions to defined benefit pension plans | | | (135) | | | (139) | | | (141) | |
| Decrease in accounts receivable and billed portion of finance receivables | | | 41 | | | 369 | | | 10 | |
| Decrease (increase) in inventories | | | 88 | | | (134) | | | 109 | |
| Increase in equipment on operating leases | | | (129) | | | (118) | | | (153) | |
| Decrease in finance receivables | | | 20 | | | 183 | | | 101 | |
| Decrease (increase) in other current and long-term assets | | | 68 | | | 8 | | | (14) | |
| Increase (decrease) in accounts payable | | | 118 | | | (123) | | | (47) | |
| Decrease in accrued compensation | | | (95) | | | (189) | | | (94) | |
| Increase (decrease) in other current and long-term liabilities | | | 89 | | | (165) | | | 40 | |
| Net change in income tax assets and liabilities | | | 10 | | | (2) | | | (34) | |
| Net change in derivative assets and liabilities | | | 2 | | | 1 | | | 11 | |
| Other operating, net | | | (17) | | | 40 | | | 6 | |
| Net cash provided by operating activities of continuing operations | | | 629 | | | 548 | | | 1,244 | |
| Net cash provided by operating activities of discontinued operations | | | — | | | — | | | 89 | |
| Net cash provided by operating activities | | | 629 | | | 548 | | | 1,333 | |
| Cash Flows from Investing Activities | | | | | | | |
| Cost of additions to land, buildings, equipment and software | | | (68) | | | (74) | | | (65) | |
| Proceeds from sales of businesses and assets | | | 44 | | | 30 | | | 21 | |
| | | | | | | |
| Acquisitions, net of cash acquired | | | (53) | | | (203) | | | (42) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Other investing, net | | | — | | | 1 | | | 1 | |
| Net cash used in investing activities of continuing operations | | | (77) | | | (246) | | | (85) | |
| Net cash provided by investing activities of discontinued operations | | | — | | | — | | | 2,233 | |
| Net cash (used in) provided by investing activities | | | (77) | | | (246) | | | 2,148 | |
| Cash Flows from Financing Activities | | | | | | | |
| | | | | | | |
| Proceeds from issuance of long-term debt | | | 311 | | | 852 | | | 10 | |
| Payments on long-term debt | | | (519) | | | (2,213) | | | (960) | |
| | | | | | | |
| Dividends | | | — | | | — | | | (181) | |
| | | | | | | |
| Payments to acquire treasury stock, including fees | | | — | | | — | | | (300) | |
| Contributions from parent | | | — | | | 1,494 | | | — | |
| Distributions to parent | | | (1,120) | | | (549) | | | (373) | |
| Other financing, net | | | 10 | | | — | | | (30) | |
| | | | | | | |
| | | | | | | |
| Net cash used in financing activities | | | (1,318) | | | (416) | | | (1,834) | |
| | | | | | | |
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | | | (16) | | | 10 | | | — | |
| | | | | | | |
| (Decrease) increase in cash, cash equivalents and restricted cash | | | (782) | | | (104) | | | 1,647 | |
| Cash, cash equivalents and restricted cash at beginning of year | | | 2,691 | | | 2,795 | | | 1,148 | |
| Cash, Cash Equivalents and Restricted Cash at End of Year | | | $ | 1,909 | | | $ | 2,691 | | | $ | 2,795 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
Xerox 20192021 Annual Report 6481
Xerox Holdings Corporation
Consolidated Statements of Shareholders'Shareholder's Equity
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | Common Stock | | Additional Paid-in Capital | | Treasury Stock | | Retained Earnings | | AOCL(3) | | Xerox Holdings Shareholders’ Equity | | Non- controlling Interests | | Total Equity |
| Balance at December 31, 2016 | $ | 254 |
| | $ | 3,858 |
| | $ | — |
| | $ | 4,934 |
| | $ | (4,337 | ) | | $ | 4,709 |
| | $ | 38 |
| | $ | 4,747 |
|
| Comprehensive income, net | — |
| | — |
| | — |
| | 195 |
| | 589 |
| | 784 |
| | 13 |
| | 797 |
|
Cash dividends declared-common(1) | — |
| | — |
| | — |
| | (259 | ) | | — |
| | (259 | ) | | — |
| | (259 | ) |
Cash dividends declared-preferred(2) | — |
| | — |
| | — |
| | (14 | ) | | — |
| | (14 | ) | | — |
| | (14 | ) |
| Stock option and incentive plans, net | 1 |
| | 36 |
| | — |
| | — |
| | — |
| | 37 |
| | — |
| | 37 |
|
| Distributions and purchase - noncontrolling interests | — |
| | (1 | ) | | — |
| | — |
| | — |
| | (1 | ) | | (14 | ) | | (15 | ) |
| Balance at December 31, 2017 | $ | 255 |
| | $ | 3,893 |
| | $ | — |
| | $ | 4,856 |
| | $ | (3,748 | ) | | $ | 5,256 |
| | $ | 37 |
| | $ | 5,293 |
|
Cumulative effect of change in accounting principles(4) | — |
| | — |
| | — |
| | 120 |
| | — |
| | 120 |
| | — |
| | 120 |
|
| Comprehensive income, net | — |
| | — |
| | — |
| | 361 |
| | 183 |
| | 544 |
| | 13 |
| | 557 |
|
Cash dividends declared-common(1) | — |
| | — |
| | — |
| | (251 | ) | | — |
| | (251 | ) | | — |
| | (251 | ) |
Cash dividends declared-preferred(2) | — |
| | — |
| | — |
| | (14 | ) | | — |
| | (14 | ) | | — |
| | (14 | ) |
| Stock option and incentive plans, net | 1 |
| | 49 |
| | — |
| | — |
| | — |
| | 50 |
| | — |
| | 50 |
|
| Payments to acquire treasury stock, including fees | — |
| | — |
| | (700 | ) | | — |
| | — |
| | (700 | ) | | — |
| | (700 | ) |
| Cancellation of treasury stock | (24 | ) | | (621 | ) | | 645 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Distributions to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (16 | ) | | (16 | ) |
| Balance at December 31, 2018 | $ | 232 |
| | $ | 3,321 |
| | $ | (55 | ) | | $ | 5,072 |
| | $ | (3,565 | ) | | $ | 5,005 |
| | $ | 34 |
| | $ | 5,039 |
|
Cumulative effect of change in accounting principle(5) | — |
| | — |
| | — |
| | 127 |
| | (127 | ) | | — |
| | — |
| | — |
|
| Comprehensive income, net | — |
| | — |
| | — |
| | 1,353 |
| | 46 |
| | 1,399 |
| | 8 |
| | 1,407 |
|
Cash dividends declared-common(1) | — |
| | — |
| | — |
| | (226 | ) | | — |
| | (226 | ) | | — |
| | (226 | ) |
Cash dividends declared-preferred(2) | — |
| | — |
| | — |
| | (14 | ) | | — |
| | (14 | ) | | — |
| | (14 | ) |
| Stock option and incentive plans, net | 1 |
| | 22 |
| | — |
| | — |
| | — |
| | 23 |
| | — |
| | 23 |
|
| Payments to acquire treasury stock, including fees | — |
| | — |
| | (600 | ) | | — |
| | — |
| | (600 | ) | | — |
| | (600 | ) |
| Cancellation of treasury stock | (18 | ) | | (561 | ) | | 579 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Distributions to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (3 | ) | | (3 | ) |
Divestiture(6) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (32 | ) | | (32 | ) |
| Balance at December 31, 2019 | $ | 215 |
| | $ | 2,782 |
| | $ | (76 | ) | | $ | 6,312 |
| | $ | (3,646 | ) | | $ | 5,587 |
| | $ | 7 |
| | $ | 5,594 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | Common Stock | | Additional
Paid-in
Capital | | Treasury Stock | | Retained
Earnings | | AOCL(1) | | Xerox
Shareholder's
Equity | | Non-
controlling
Interests | | Total
Equity |
| Balance at December 31, 2018 | $ | 232 | | | $ | 3,321 | | | $ | (55) | | | $ | 5,072 | | | $ | (3,565) | | | $ | 5,005 | | | $ | 34 | | | $ | 5,039 | |
| Cumulative effect of change in accounting principle | — | | | — | | | — | | | 127 | | | (127) | | | — | | | — | | | — | |
| Comprehensive income, net | — | | | — | | | — | | | 1,353 | | | 46 | | | 1,399 | | | 8 | | | 1,407 | |
| Cash dividends declared-common | — | | | — | | | — | | | (115) | | | — | | | (115) | | | — | | | (115) | |
| Cash dividends declared-preferred | — | | | — | | | — | | | (7) | | | — | | | (7) | | | — | | | (7) | |
| Dividends declared to parent | — | | | — | | | — | | | (183) | | | — | | | (183) | | | — | | | (183) | |
| Transfers to parent | — | | | (175) | | | — | | | — | | | — | | | (175) | | | — | | | (175) | |
| Stock option and incentive plans, net | — | | | 18 | | | — | | | — | | | — | | | 18 | | | — | | | 18 | |
| Payments to acquire treasury stock, including fees | — | | | — | | | (300) | | | — | | | — | | | (300) | | | — | | | (300) | |
| Cancellation of treasury stock | (11) | | | (344) | | | 355 | | | — | | | — | | | — | | | — | | | — | |
| Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | (3) | | | (3) | |
| Reorganization | (221) | | | 446 | | | — | | | — | | | — | | | 225 | | | — | | | 225 | |
Divestiture(2) | — | | | — | | | — | | | — | | | — | | | — | | | (32) | | | (32) | |
| Balance at December 31, 2019 | $ | — | | | $ | 3,266 | | | $ | — | | | $ | 6,247 | | | $ | (3,646) | | | $ | 5,867 | | | $ | 7 | | | $ | 5,874 | |
| Comprehensive income, net | — | | | — | | | — | | | 192 | | | 314 | | | 506 | | | — | | | 506 | |
| Dividends declared to parent | — | | | — | | | — | | | (605) | | | — | | | (605) | | | — | | | (605) | |
Capital contributions from parent(3) | — | | | 1,494 | | | — | | | — | | | — | | | 1,494 | | | — | | | 1,494 | |
| Transfers from parent | — | | | 128 | | | — | | | — | | | — | | | 128 | | | — | | | 128 | |
| Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | (3) | | | (3) | |
| Balance at December 31, 2020 | $ | — | | | $ | 4,888 | | | $ | — | | | $ | 5,834 | | | $ | (3,332) | | | $ | 7,390 | | | $ | 4 | | | $ | 7,394 | |
| | | | | | | | | | | | | | | |
| Comprehensive (loss) income, net | — | | | — | | | — | | | (455) | | | 344 | | | (111) | | | — | | | (111) | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Dividends declared to parent | — | | | — | | | — | | | (903) | | | — | | | (903) | | | — | | | (903) | |
Intercompany loan capitalization(4) | — | | | (1,494) | | | — | | | — | | | — | | | (1,494) | | | — | | | (1,494) | |
| Transfers to parent | — | | | (193) | | | — | | | — | | | — | | | (193) | | | — | | | (193) | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Investment from noncontrolling interests(5) | — | | | 1 | | | — | | | — | | | — | | | 1 | | | 4 | | | 5 | |
| Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | (1) | | | (1) | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Balance at December 31, 2021 | $ | — | | | $ | 3,202 | | | $ | — | | | $ | 4,476 | | | $ | (2,988) | | | $ | 4,690 | | | $ | 7 | | | $ | 4,697 | |
_____________
| |
(1) | Cash dividends declared on common stock for 2019, 2018 and 2017 were $0.25 per share on a quarterly basis and $1.00 per share on an annual basis. |
| |
(2) | Cash dividends declared on preferred stock for 2019, 2018 and 2017 were $20 per share on a quarterly basis and $80 per share on an annual basis. |
| |
(3) | AOCL - Accumulated other comprehensive loss. |
| |
(4) | Includes $117 related to the adoption of the Revenue Recognition Standard ASU 2014-09 - Revenue from Contracts with Customers (ASC Topic 606), see Note 1 - Basis of Presentation and Summary of Significant Accounting Policies, and $3 related to our share of Fuji Xerox's adoption of ASU 2016-01 - Financial Instruments - Classification and Measurement. |
| |
(5) | Refer to Note 1 - Basis of Presentation and Summary of Significant Accounting Policies - Income Taxes for additional information related to the adoption of ASU 2018-02. |
| |
(6) | Refer to Note 1 - Basis of Presentation and Summary of Significant Accounting Policies and Note 7 - Divestitures for additional information regarding divestitures. |
(2)Refer to Note 1 - Basis of Presentation and Summary of Significant Accounting Policies and Note 6 - Divestitures for additional information regarding divestitures.
(3)Primarily represents the contribution by Xerox Holdings Corporation of aggregate net debt proceeds received from its Senior Notes offerings in the third quarter of 2020 to Xerox Corporation. Refer to Note 16 - Debt for additional information regarding the Senior Notes offerings.
(4)Refer to Note 16 - Debt for information regarding capitalization of balance to Intercompany Loan with Xerox Holdings Corporation.
(5)Refer to Note 5 - Acquisitions and Investments for additional information regarding this investment from noncontrolling interests.
The accompanying notes are an integral part of these Consolidated Financial Statements.
Xerox 20192021 Annual Report 6582
Xerox Corporation
Consolidated Statements of Income
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| (in millions) | | 2019 | | 2018 | | 2017 |
| Revenues | | | | | | |
Sales(1) | | $ | 3,227 |
| | $ | 3,454 |
| | $ | 3,412 |
|
Services, maintenance and rentals(1) | | 5,595 |
| | 5,940 |
| | 6,285 |
|
| Financing | | 244 |
| | 268 |
| | 294 |
|
| Total Revenues | | 9,066 |
| | 9,662 |
| | 9,991 |
|
| Costs and Expenses | | | | | | |
Cost of sales(1) | | 2,097 |
| | 2,188 |
| | 2,133 |
|
Cost of services, maintenance and rentals(1) | | 3,188 |
| | 3,473 |
| | 3,654 |
|
| Cost of financing | | 131 |
| | 132 |
| | 133 |
|
| Research, development and engineering expenses | | 373 |
| | 397 |
| | 424 |
|
| Selling, administrative and general expenses | | 2,085 |
| | 2,379 |
| | 2,514 |
|
| Restructuring and related costs | | 229 |
| | 157 |
| | 216 |
|
| Amortization of intangible assets | | 45 |
| | 48 |
| | 53 |
|
| Transaction and related costs, net | | 12 |
| | 68 |
| | 9 |
|
| Other expenses, net | | 84 |
| | 271 |
| | 330 |
|
| Total Costs and Expenses | | 8,244 |
| | 9,113 |
| | 9,466 |
|
| Income before Income Taxes and Equity Income | | 822 |
| | 549 |
| | 525 |
|
| Income tax expense | | 179 |
| | 247 |
| | 468 |
|
| Equity in net income of unconsolidated affiliates | | 8 |
| | 8 |
| | 13 |
|
| Income from Continuing Operations | | 651 |
| | 310 |
| | 70 |
|
| Income from discontinued operations, net of tax | | 710 |
| | 64 |
| | 137 |
|
| Net Income | | 1,361 |
| | 374 |
| | 207 |
|
| Less: Income from continuing operations attributable to noncontrolling interests | | 3 |
| | 4 |
| | 4 |
|
| Less: Income from discontinued operations attributable to noncontrolling interests | | 5 |
| | 9 |
| | 8 |
|
| Net Income Attributable to Xerox | | $ | 1,353 |
| | $ | 361 |
| | $ | 195 |
|
| | | | | | | |
| Amounts attributable to Xerox: | | | | | | |
| Income from continuing operations | | $ | 648 |
| | $ | 306 |
| | $ | 66 |
|
| Income from discontinued operations | | 705 |
| | 55 |
| | 129 |
|
| Net Income Attributable to Xerox | | $ | 1,353 |
| | $ | 361 |
| | $ | 195 |
|
_____________
| |
(1) | Certain prior year amounts have been conformed to the current year presentation. Refer to Note 1 - Basis of Presentation and Summary of Significant Accounting Policies for additional information. |
The accompanying notes are an integral part of these Consolidated Financial Statements.
Xerox 2019 Annual Report 66
Xerox Corporation
Consolidated Statements of Comprehensive Income
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| (in millions) | | 2019 | | 2018 | | 2017 |
| Net Income | | $ | 1,361 |
| | $ | 374 |
| | $ | 207 |
|
| Less: Income from continuing operations attributable to noncontrolling interests | | 3 |
| | 4 |
| | 4 |
|
| Less: Income from discontinued operations attributable to noncontrolling interests | | 5 |
| | 9 |
| | 8 |
|
| Net Income Attributable to Xerox | | $ | 1,353 |
| | $ | 361 |
| | $ | 195 |
|
| | | | | | | |
Other Comprehensive Income (Loss), Net(1) | | | | | | |
| Translation adjustments, net | | $ | 62 |
| | $ | (242 | ) | | $ | 483 |
|
| Unrealized (losses) gains, net | | (6 | ) | | 16 |
| | 1 |
|
| Changes in defined benefit plans, net | | (10 | ) | | 409 |
| | 106 |
|
| Other Comprehensive Income, Net | | 46 |
| | 183 |
| | 590 |
|
| Less: Other comprehensive income, net attributable to noncontrolling interests | | — |
| | — |
| | 1 |
|
| Other Comprehensive Income, Net Attributable to Xerox | | $ | 46 |
| | $ | 183 |
| | $ | 589 |
|
| | | | | | | |
| Comprehensive Income, Net | | $ | 1,407 |
| | $ | 557 |
| | $ | 797 |
|
| Less: Comprehensive income, net from continuing operations attributable to noncontrolling interests | | 3 |
| | 4 |
| | 5 |
|
| Less: Comprehensive income, net from discontinued operations attributable to noncontrolling interests | | 5 |
| | 9 |
| | 8 |
|
| Comprehensive Income, Net Attributable to Xerox | | $ | 1,399 |
| | $ | 544 |
| | $ | 784 |
|
_____________
| |
(1) | Refer to Note 25 - Other Comprehensive (Loss) Income for gross components of Other Comprehensive Income, reclassification adjustments out of Accumulated Other Comprehensive Loss and related tax effects. |
The accompanying notes are an integral part of these Consolidated Financial Statements.
Xerox 2019 Annual Report 67
Xerox Corporation
Consolidated Balance Sheets |
| | | | | | | | |
| | | December 31, |
| (in millions) | | 2019 | | 2018 |
| Assets | | | | |
| Cash and cash equivalents | | $ | 2,740 |
| | $ | 1,081 |
|
| Accounts receivable, net | | 1,236 |
| | 1,270 |
|
| Billed portion of finance receivables, net | | 111 |
| | 105 |
|
| Finance receivables, net | | 1,158 |
| | 1,218 |
|
| Inventories | | 694 |
| | 829 |
|
| Assets of discontinued operations | | — |
| | 19 |
|
| Other current assets | | 201 |
| | 191 |
|
| Total current assets | | 6,140 |
| | 4,713 |
|
| Finance receivables due after one year, net | | 2,082 |
| | 2,149 |
|
| Equipment on operating leases, net | | 364 |
| | 442 |
|
| Land, buildings and equipment, net | | 426 |
| | 498 |
|
| Intangible assets, net | | 199 |
| | 220 |
|
| Goodwill | | 3,900 |
| | 3,858 |
|
| Deferred tax assets | | 598 |
| | 740 |
|
| Assets of discontinued operations | | — |
| | 1,352 |
|
| Other long-term assets | | 1,338 |
| | 902 |
|
| Total Assets | | $ | 15,047 |
| | $ | 14,874 |
|
| Liabilities and Equity | | | | |
| Short-term debt and current portion of long-term debt | | $ | 1,049 |
| | $ | 961 |
|
| Accounts payable | | 1,053 |
| | 1,073 |
|
| Accrued compensation and benefits costs | | 349 |
| | 348 |
|
| Liabilities of discontinued operations | | — |
| | 21 |
|
| Accrued expenses and other current liabilities | | 918 |
| | 848 |
|
| Total current liabilities | | 3,369 |
| | 3,251 |
|
| Long-term debt | | 3,233 |
| | 4,269 |
|
| Pension and other benefit liabilities | | 1,707 |
| | 1,482 |
|
| Post-retirement medical benefits | | 352 |
| | 350 |
|
| Other long-term liabilities | | 512 |
| | 269 |
|
| Total Liabilities | | 9,173 |
| | 9,621 |
|
| | | | | |
| Commitments and Contingencies (See Note 21) | |
|
| |
|
|
| Convertible Preferred Stock | | — |
| | 214 |
|
| | | | | |
| Common stock | | — |
| | 232 |
|
| Additional paid-in capital | | 3,266 |
| | 3,321 |
|
| Treasury stock, at cost | | — |
| | (55 | ) |
| Retained earnings | | 6,247 |
| | 5,072 |
|
| Accumulated other comprehensive loss | | (3,646 | ) | | (3,565 | ) |
| Xerox shareholders’ equity | | 5,867 |
| | 5,005 |
|
| Noncontrolling interests | | 7 |
| | 34 |
|
| Total Equity | | 5,874 |
| | 5,039 |
|
| Total Liabilities and Equity | | $ | 15,047 |
| | $ | 14,874 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
Xerox 2019 Annual Report 68
Xerox Corporation
Consolidated Statements of Cash Flows |
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| (in millions) | | 2019 | | 2018 | | 2017 |
| Cash Flows from Operating Activities | | | | | | |
| Net income | | $ | 1,361 |
| | $ | 374 |
| | $ | 207 |
|
| Income from discontinued operations, net of tax | | (710 | ) | | (64 | ) | | (137 | ) |
| Income from continuing operations | | 651 |
| | 310 |
| | 70 |
|
| Adjustments required to reconcile Net income to Cash flows from operating activities | | | | | | |
| Depreciation and amortization | | 430 |
| | 526 |
| | 527 |
|
| Provisions | | 73 |
| | 70 |
| | 73 |
|
| Deferred tax expense | | 124 |
| | 135 |
| | 399 |
|
| Net gain on sales of businesses and assets | | (21 | ) | | (35 | ) | | (15 | ) |
| Stock-based compensation | | 50 |
| | 57 |
| | 52 |
|
| Restructuring and asset impairment charges | | 127 |
| | 156 |
| | 197 |
|
| Payments for restructurings | | (93 | ) | | (169 | ) | | (220 | ) |
| Defined benefit pension cost | | 109 |
| | 175 |
| | 194 |
|
| Contributions to defined benefit pension plans | | (141 | ) | | (144 | ) | | (836 | ) |
| Decrease (increase) in accounts receivable and billed portion of finance receivables | | 10 |
| | 31 |
| | (531 | ) |
| Decrease (increase) in inventories | | 109 |
| | 17 |
| | (73 | ) |
| Increase in equipment on operating leases | | (153 | ) | | (248 | ) | | (217 | ) |
| Decrease in finance receivables | | 101 |
| | 166 |
| | 162 |
|
| (Increase) decrease in other current and long-term assets | | (14 | ) | | 29 |
| | (20 | ) |
| (Decrease) increase in accounts payable | | (47 | ) | | 1 |
| | 1 |
|
| Decrease in accrued compensation | | (94 | ) | | (111 | ) | | (28 | ) |
| Increase (decrease) in other current and long-term liabilities | | 40 |
| | 52 |
| | (79 | ) |
| Net change in income tax assets and liabilities | | (34 | ) | | 41 |
| | 11 |
|
| Net change in derivative assets and liabilities | | 11 |
| | (14 | ) | | 75 |
|
| Other operating, net | | 6 |
| | 37 |
| | 9 |
|
| Net cash provided by (used in) operating activities of continuing operations | | 1,244 |
| | 1,082 |
| | (249 | ) |
| Net cash provided by (used in) operating activities of discontinued operations | | 89 |
| | 58 |
| | (18 | ) |
| Net cash provided by (used in) operating activities | | 1,333 |
| | 1,140 |
| | (267 | ) |
| Cash Flows from Investing Activities | | | | | | |
| Cost of additions to land, buildings, equipment and software | | (65 | ) | | (90 | ) | | (105 | ) |
| Proceeds from sales of businesses and assets | | 21 |
| | 59 |
| | 23 |
|
| Acquisitions, net of cash acquired | | (42 | ) | | — |
| | (87 | ) |
| Collections of deferred proceeds from sales of receivables | | — |
| | — |
| | 213 |
|
| Collections on beneficial interest from sales of finance receivables | | — |
| | — |
| | 21 |
|
| Other investing, net | | 1 |
| | 2 |
| | 100 |
|
| Net cash (used in) provided by investing activities of continuing operations | | (85 | ) | | (29 | ) | | 165 |
|
| Net cash provided by investing activities of discontinued operations | | 2,233 |
| | — |
| | — |
|
| Net cash provided by (used in) investing activities | | 2,148 |
| | (29 | ) | | 165 |
|
| Cash Flows from Financing Activities | | | | | | |
| Net (payments) proceeds on short-term debt | | — |
| | (5 | ) | | 2 |
|
| Proceeds from issuance of long-term debt | | 10 |
| | 9 |
| | 1,008 |
|
| Payments on long-term debt | | (960 | ) | | (311 | ) | | (1,832 | ) |
| Dividends | | (181 | ) | | (269 | ) | | (291 | ) |
| Payments to acquire treasury stock, including fees | | (300 | ) | | (700 | ) | | — |
|
| Distributions to parent | | (373 | ) | | — |
| | — |
|
| Other financing, net | | (30 | ) | | (25 | ) | | 128 |
|
| Net cash used in financing activities | | (1,834 | ) | | (1,301 | ) | | (985 | ) |
| | | | | | | |
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | | — |
| | (30 | ) | | 53 |
|
| Increase (decrease) in cash, cash equivalents and restricted cash | | 1,647 |
| | (220 | ) | | (1,034 | ) |
| Cash, cash equivalents and restricted cash at beginning of year | | 1,148 |
| | 1,368 |
| | 2,402 |
|
| Cash, Cash Equivalents and Restricted Cash at End of Year | | $ | 2,795 |
| | $ | 1,148 |
| | $ | 1,368 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
Xerox 2019 Annual Report 69
Xerox Corporation
Consolidated Statements of Shareholders' Equity
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | Common Stock | | Additional Paid-in Capital | | Treasury Stock | | Retained Earnings | | AOCL(1) | | Xerox Shareholders’ Equity | | Non- controlling Interests | | Total Equity |
| Balance at December 31, 2016 | $ | 254 |
| | $ | 3,858 |
| | $ | — |
| | $ | 4,934 |
| | $ | (4,337 | ) | | $ | 4,709 |
| | $ | 38 |
| | $ | 4,747 |
|
| Comprehensive income, net | — |
| | — |
| | — |
| | 195 |
| | 589 |
| | 784 |
| | 13 |
| | 797 |
|
| Cash dividends declared-common | — |
| | — |
| | — |
| | (259 | ) | | — |
| | (259 | ) | | — |
| | (259 | ) |
| Cash dividends declared-preferred | — |
| | — |
| | — |
| | (14 | ) | | — |
| | (14 | ) | | — |
| | (14 | ) |
| Stock option and incentive plans, net | 1 |
| | 36 |
| | — |
| | — |
| | — |
| | 37 |
| | — |
| | 37 |
|
| Distributions and purchase - noncontrolling interests | — |
| | (1 | ) | | — |
| | — |
| | — |
| | (1 | ) | | (14 | ) | | (15 | ) |
| Balance at December 31, 2017 | $ | 255 |
| | $ | 3,893 |
| | $ | — |
| | $ | 4,856 |
| | $ | (3,748 | ) | | $ | 5,256 |
| | $ | 37 |
| | $ | 5,293 |
|
Cumulative effect of change in accounting principles(2) | — |
| | — |
| | — |
| | 120 |
| | — |
| | 120 |
| | — |
| | 120 |
|
| Comprehensive income, net | — |
| | — |
| | — |
| | 361 |
| | 183 |
| | 544 |
| | 13 |
| | 557 |
|
| Cash dividends declared-common | — |
| | — |
| | — |
| | (251 | ) | | — |
| | (251 | ) | | — |
| | (251 | ) |
| Cash dividends declared-preferred | — |
| | — |
| | — |
| | (14 | ) | | — |
| | (14 | ) | | — |
| | (14 | ) |
| Stock option and incentive plans, net | 1 |
| | 49 |
| | — |
| | — |
| | — |
| | 50 |
| | — |
| | 50 |
|
| Payments to acquire treasury stock, including fees | — |
| | — |
| | (700 | ) | | — |
| | — |
| | (700 | ) | | — |
| | (700 | ) |
| Cancellation of treasury stock | (24 | ) | | (621 | ) | | 645 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Distributions to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (16 | ) | | (16 | ) |
| Balance at December 31, 2018 | $ | 232 |
| | $ | 3,321 |
| | $ | (55 | ) | | $ | 5,072 |
| | $ | (3,565 | ) | | $ | 5,005 |
| | $ | 34 |
| | $ | 5,039 |
|
Cumulative effect of change in accounting principle(3) | — |
| | — |
| | — |
| | 127 |
| | (127 | ) | | — |
| | — |
| | — |
|
| Comprehensive income, net | — |
| | — |
| | — |
| | 1,353 |
| | 46 |
| | 1,399 |
| | 8 |
| | 1,407 |
|
| Cash dividends declared-common | — |
| | — |
| | — |
| | (115 | ) | | — |
| | (115 | ) | | — |
| | (115 | ) |
| Cash dividends declared-preferred | — |
| | — |
| | — |
| | (7 | ) | | — |
| | (7 | ) | | — |
| | (7 | ) |
| Dividends declared to parent | — |
| | — |
| | — |
| | (183 | ) | | — |
| | (183 | ) | | — |
| | (183 | ) |
| Transfers (to) from parent | — |
| | (175 | ) | | — |
| | — |
| | — |
| | (175 | ) | | — |
| | (175 | ) |
| Stock option and incentive plans, net | — |
| | 18 |
| | — |
| | — |
| | — |
| | 18 |
| | — |
| | 18 |
|
| Payments to acquire treasury stock, including fees | — |
| | — |
| | (300 | ) | | — |
| | — |
| | (300 | ) | | — |
| | (300 | ) |
| Cancellation of treasury stock | (11 | ) | | (344 | ) | | 355 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Distributions to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (3 | ) | | (3 | ) |
| Reorganization | (221 | ) | | 446 |
| | — |
| | — |
| | — |
| | 225 |
| | — |
| | 225 |
|
Divestiture(4) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (32 | ) | | (32 | ) |
| Balance at December 31, 2019 | $ | — |
| | $ | 3,266 |
| | $ | — |
| | $ | 6,247 |
| | $ | (3,646 | ) | | $ | 5,867 |
| | $ | 7 |
| | $ | 5,874 |
|
_____________
| |
(1) | AOCL - Accumulated other comprehensive loss. |
| |
(2) | Includes $117 related to the adoption of the Revenue Recognition Standard ASU 2014-09 - Revenue from Contracts with Customers (ASC Topic 606), see Note 1 - Basis of Presentation and Summary of Significant Accounting Policies, and $3 related to our share of Fuji Xerox's adoption of ASU 2016-01 - Financial Instruments - Classification and Measurement. |
| |
(3) | Refer to Note 1 - Basis of Presentation and Summary of Significant Accounting Policies - Income Taxes for additional information related to the adoption of ASU 2018-02. |
| |
(4) | Refer to Note 1 - Basis of Presentation and Summary of Significant Accounting Policies and Note 7 - Divestitures for additional information regarding divestitures. |
The accompanying notes are an integral part of these Consolidated Financial Statements.
Xerox 2019 Annual Report 70
Xerox Holdings Corporation
Xerox Corporation
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.
Corporate Reorganization
On March 6, 2019, the Xerox Board of Directors approved a reorganization (the “Reorganization”) of the Company's corporate structure into a holding company structure. The Reorganization was subject to the approval of shareholders, which was obtained at the annual shareholders meeting held May 21, 2019.
On July 31, 2019, Xerox completed the Reorganization, pursuant to which Xerox (the predecessor publicly held parent company) became a direct, wholly-owned subsidiary of Xerox Holdings, the successor public company. The business operations, directors and executive officers of the Company did not change as a result of the Reorganization.
In this Reorganization, shareholders of Xerox became shareholders of Xerox Holdings on a 1-for-one basis; maintaining the same number of shares and ownership percentage as held in Xerox immediately prior to the Reorganization. In addition, the individual holder of the shares of Xerox’s Series B Preferred Stock exchanged those shares for the same number of shares of Xerox Holdings Series A Preferred Stock. Each share of Xerox Holdings Series A Preferred Stock has the same designations, rights, powers and preferences, and the same qualifications, limitations and restrictions as the shares of Xerox Series B Preferred Stock, with the addition of certain voting rights (Refer to Note 22 - Preferred Stock for additional information regarding the Xerox Holdings Series A Preferred Stock). In connection with the Reorganization, Xerox Holdings assumed each of the Xerox stock plans, all unexercised and unexpired options to purchase Xerox common stock and each right to acquire or vest in a share of Xerox common stock, including restricted stock unit awards, performance share awards and deferred stock units that are outstanding under the Xerox stock plans. In addition, Xerox Holdings became a guarantor of Xerox’s existing Credit Facility.
The Reorganization was accounted for as a transaction among entities under common control and is expected to be a tax-free transaction for U.S. federal income tax purposes. Shares of Xerox Holdings common stock trade on the New York Stock Exchange under the ticker symbol “XRX”, formerly used by Xerox.
Subsequent to the Reorganization, Xerox Holdings contributed the Xerox Series B Preferred Stock it held to Xerox in exchange for additional capital and Xerox subsequently extinguished the Series B Preferred Stock. The contribution and extinguishment were recorded at carrying value (Refer to Note 22 - Preferred Stock for additional information). In addition, the capital structure of Xerox was modified such that its issued and outstanding common shares now held by Xerox Holdings were exchanged for 100 shares of Xerox $1 par value common stock. Accordingly, we reclassified approximately $221 from Xerox’s Common stock to Additional paid-in capital.
Description of Business
Currently, Xerox Holdings' soleprimary direct operating subsidiary is Xerox and therefore Xerox reflects the entiretyrepresents 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 2019 Annual Report 71
Basis of Consolidation
The Consolidated Financial Statements include the accounts of Xerox Corporation and all of our controlled subsidiary companies. 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”)(FH), including the sale of its indirect 25% equity interest in Fuji Xerox (FX)(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”)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 the periods prior to the Sales2019 are reflected as a discontinued operation and as such, their impact is excluded from continuing operations for all periods presented. The accompanying Notes to the Consolidated Financial Statements have all been revised to reflect the effect of the Sales and all prior year balances have been revised accordingly to reflect continuing operations only.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 76 - Divestitures for additional information regarding discontinued operations and other divestitures.
Prior Period Adjustments
In 2018, we determined that the Projected Benefit Obligation (PBO) for our UK funded pension plan at December 31, 2017 was overstated by approximately GBP 40 million (approximately USD $53 or $43 after-tax). The error was the result of the plan administrator under-reporting benefit payments. The correction of the PBO was recorded as an out-of-period adjustment in 2018 with the offset to the balance sheet recorded as a credit to Changes in defined benefit plans, net in Other comprehensive income for the period. We assessed the impact of this error and concluded that it was not material to the financial statements previously issued for any interim or annual period and the correction was not material to the annual financial statements for 2018.
Change in Presentation
During first quarter 2019, we realigned portions of our business to support our new revenue strategy. This realignment included the combination and consolidation of certain sales units to better service customers consistently across the company. In connection with that realignment, we changed the classification of revenues and related costs from certain service arrangements to consistently conform the presentation of those amounts among our various business units. Prior year amounts were also revised as follows to conform to the 2019 presentation.
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| | | | | | | | | | | | |
| | | Year Ended December 31, 2018 |
| | | As Reported(1) | | Change | | As Revised |
| Sales | | $ | 3,805 |
| | $ | (351 | ) | | $ | 3,454 |
|
| Services, maintenance and rentals | | 5,589 |
| | 351 |
| | 5,940 |
|
| | | | | | | |
| Cost of sales | | $ | 2,305 |
| | $ | (117 | ) | | $ | 2,188 |
|
| Cost of services, maintenance and rentals | | 3,356 |
| | 117 |
| | 3,473 |
|
|
| | | | | | | | | | | | |
| | | Year Ended December 31, 2017 |
| | | As Reported(1) | | Change | | As Revised |
| Sales | | $ | 3,801 |
| | $ | (389 | ) | | $ | 3,412 |
|
| Services, maintenance and rentals | | 5,896 |
| | 389 |
| | 6,285 |
|
| | | | | | | |
| Cost of sales | | $ | 2,273 |
| | $ | (140 | ) | | $ | 2,133 |
|
| Cost of services, maintenance and rentals | | 3,514 |
| | 140 |
| | 3,654 |
|
_____________
| |
(1) | As reported amounts have been restated to reflect the sale of our investment of XIP. Refer to Note 7 - Divestitures for additional information. |
The revised presentation does not impact Total Revenues, Total Costs and Expenses or Net Income.
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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.
Changes in 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:
Financial Instruments - Credit Losses and DerivativesGovernment Assistance
In June 2016,November 2021, the FASB issued ASU 2016-132021-10, Financial Instruments Credit Losses - Measurement of Credit Losses on Financial Instruments, Government Assistance (Topic 832), Disclosures by Business Entities about Government Assistance.with additional amendments being issued in 2018 and 2019. This update requires measurement and recognition of expected credit losses for financial assets on an expected loss model rather than an incurred loss model. The update impactsincreases 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 assets including net investment in leases that are not accounted for at fair value through Net Income. Thisstatements. We expect to adopt this update is effective for our fiscal year beginning January 1, 2020. The2022. We are currently evaluating the impact of the adoption of ASU 2016-13 isthis update on our Consolidated Financial Statements, which will largely depend on the amounts of government assistance expected to primarily impactbe received in the estimationfuture. However, prior to the COVID pandemic, the amounts of our Allowance for doubtful accounts for Accounts Receivablesgovernment assistance the Company received were not material and Finance Receivables. We currentlysince the update is limited to increased disclosures, we do not expect the new guidanceadoption to have a material impact on our financial condition, results of operations, orand cash flows since we already apply an expected loss model in the estimation of our Allowance for doubtful accounts for Accounts Receivables and Finance Receivables and currently include assessment of current economic conditions. However, the full impact of this standard will be dependent on future economic conditions.flows.
Intangibles - Internal-Use SoftwareBusiness Combinations
In August 2018,October 2021, the FASB issued ASU 2018-152021-08, Intangibles - Goodwill and Other - Internal Use Software (Subtopic 350-40)Business Combinations (Topic 805), Customer's Accounting for Implementation Costs IncurredContract Assets and Contract Liabilities from Contracts with Customers. The new guidance requires contract assets and contract liabilities acquired in a Cloud Computing Arrangement That is a Service Contract.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 update alignsapproach differs from the requirements for capitalizing implementation costs incurredcurrent requirement to measure contract assets and contract liabilities acquired 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.business combination at fair value. This update is effective for our fiscal year beginning January 1, 2020. Since we currently capitalize these implementation costs and such amounts are not material, we do not expect2023, with early adoption permitted. The impact of adopting the new guidancestandard 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 havethe 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 material impactresult 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, orand 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 iswas intended to simplify various aspects related to accounting for income taxes. 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. ThisWe adopted this update is effective for our fiscal year beginning January 1, 2021. We are currentlyThe 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 processcontract). This interpretive guidance was issued in order to reduce the costs and complexities of evaluatingapplying 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 pronouncement onapproach, 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 consolidated financial statements.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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Accounting Standard Updates Recently Adopted:
Leasespayments 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”)(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 2 - Adoption of New Leasing Standard11 - 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 3 - Adoption of New Leasing Standard4 - Lessor for additional information related to our lessor accounting.
Financial Instruments - DerivativesCredit Losses
In August 2017,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 issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, in June 2016, with additional updates and amendments being issued in 2018, 2019 and 2019. 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 amendmentsupdate 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 expandis highly dependent on future economic conditions. Refer to Note 7 - Accounts Receivable, Net and refine hedge accountingNote 8 - Finance Receivables, Net for both financialadditional 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 non-financial risk components, alignOther - 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 recognitionFASB in August 2018 and presentation ofaligns the effects of hedging instrumentsrequirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the same income statement line itemrequirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that the hedged item is reported and include certain targeted improvementsan internal-use software license). The update provides criteria for determining which implementation costs to ease the application of current guidancecapitalize as an asset related to the assessmentservice contract and which costs to expense. The capitalized implementation costs are required to be expensed over the term of hedge effectiveness. We adoptedthe hosting arrangement. The update also clarifies the presentation requirements for reporting such costs in the entity’s financial statements. The adoption of ASU 2017-12 effective for our fiscal year beginning January 1, 2019, and it2018-15 did not have a material impact on our financial condition, results of operations or cash flows.flows as we had previously capitalized these implementation costs and such amounts were not material.
Income Taxes
In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. We adopted ASU 2018-02 effective for our fiscal year beginning January 1, 2019 and upon adoption reclassified $127 from Accumulated other comprehensive loss (AOCL) to Retained earnings related to the stranded tax effects resulting from the Tax Cuts and Jobs Act (Tax Act) enacted in December 2017. The reclassification was primarily related to the stranded tax effects associated with amounts in AOCL from our retirement-related benefit plans. Accordingly, the adoption of this update eliminated the stranded tax effects resulting from the Tax Act. However, because the update only relates to the reclassification of the income tax effects of the Tax Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in Income from continuing operations is not affected.
Revenue Recognition
On January 1, 2018, we adopted ASU 2014-09, Revenue from Contracts with Customers (ASC Topic 606), which superseded nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASC Topic 606 is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASC Topic 606 defines a five-step process to recognize revenue and requires more judgment and estimates within the revenue recognition process than required under previous U.S. GAAP, including identifying performance obligations in the contract, estimating the amount of
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variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation.
We adopted this standard using the modified retrospective method of adoption and therefore we did not revise periods prior to adoption (e.g. 2017). Under ASC Topic 606, based on the nature of our contracts and consistent with prior practice, we recognize revenue upon invoicing the customer for the large majority of our revenue. Additionally, the unit of accounting, that is, the identification of performance obligations, is consistent with prior revenue recognition practice. Accordingly, the adoption of this standard did not have a material impact for the large majority of our revenues. A significant portion of our Equipment sales are either recorded as sales-type leases or through direct sales to distributors and resellers and these revenue streams are not impacted by the adoption of ASC Topic 606. The only change of significance identified in our adoption involves a change in the classification of certain revenues that were previously reported in Services revenues. These revenues relate to certain analyst services performed in connection with the installation of equipment that are being considered part of the equipment sale performance obligation effective beginning January 1, 2018. Accordingly, these revenues are now reported as part of Sales. For the year ended December 31, 2017, we reported $44 as Services, which would have been reported as Sales under the new standard.
Another change identified upon adoption was with respect to deferred contract costs, which include incremental costs of obtaining a contract and costs to fulfill a contract. Deferred contract costs had been minimal under our prior practices as most costs to obtain a contract and fulfill a contract were expensed as incurred. However, as a result of the contract cost guidance included in ASC Topic 606 and ASC Topic 340-40 "Contracts with Customers", upon adoption on January 1, 2018, we recorded a transition asset of $153, and a net of tax increase of $117 to Retained earnings, related to the incremental cost to obtain contracts. Substantially all of this adjustment is related to the deferral of sales commissions paid to sales people and agents in connection with the placement of equipment with post sale service arrangements. The impact to the Statement of Income from this change is not material.
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. Those updates are as follows:
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• | Investments:•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). ASU 2020-01, Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815). This update is effective for our fiscal year beginning January 1, 2021. |
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• | 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 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. |
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• | Collaborative Arrangements:ASU 2018-18, (Topic 808) Clarifying the Interaction between Topic 808 and Topic 606. This update is effective for our fiscal year beginning January 1, 2020.
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• | Compensation - Retirement Benefits - Defined Benefit Plans - General:ASU 2018-14, (Topic 715-20) Changes to the Disclosure Requirements for Defined Benefit Plans. We elected to early adopt this update effective for our fiscal year ended December 31, 2019. Refer to Note 19 - Employee Benefit Plans for changes in the disclosures for our Defined Benefit Plans.
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• | Fair Value Measurement:ASU 2018-13, (Topic 820) Disclosure Framework. This update is effective for our fiscal year beginning January 1, 2020.
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Summary of Accounting Policies
Revenue Recognition (Policies subsequent to the adoption of ASU 2014-09 - ASC Topic 606)
The revenue recognition policies that follow are applicable for the periods subsequent to the adoption of ASC Topic 606, which was adopted on a modified prospective basis effective January 1, 2018 - the years ended December 31, 2019 and 2018. Refer to the section Revenue Recognition (Policies prior to the adoption of ASU 2014-09 - ASC Topic 606) below, for the revenue recognition policies prior to the adoption of ASU Topic 606, which were applicable for the year ended December 31, 2017.
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
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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 endend-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 areis 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 endend-user customers are recognized in a consistent manner tofor 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, and weprograms. We estimate the variable consideration associated with these programs and record those amounts as a reduction to revenue when the sales occur. Similarly, we account for our estimates of sales returns and other allowances when the 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.
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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 significant portion of our direct sales of equipment to endend-user customers are made through bundled lease arrangements thatwhich typically include equipment, maintenanceservices (maintenance and managed services) and financing components, for whichwhere 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-page. The fixed minimum monthly payments are multiplied by the number of months in the contract term to arrive at the total fixed minimum payments that the customer is obligated to make (fixed payments) over the lease term. In applying our lease accounting methodology, we only consider the fixed payments for purposes of allocating to the relative fair value elements of the contract.
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, maintenance and other executory costs, while the non-lease deliverables generally consist of the suppliesservices, which include supplies. Consistent with the guidance in ASC 842 and non-maintenance services. TheASC 606, regarding the allocation of fixed and variable consideration, we only consider the fixed payments for purposes of allocation to the lease deliverables beginselements of the contract. The fixed minimum monthly payments are multiplied by allocating revenuesthe number of months in the contract term to arrive at the maintenance and other executory costs plus a profit thereon. These elements are generally recognizedtotal fixed lease payments that the customer is obligated to make over the term of the lease as service revenue. The remaining amounts areterm. Amounts allocated to the equipment and financing elements which are then subjected to the accounting estimates noted below under “Leases”.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 lease accounting provisions we assess for the classification ofuse to classify transactions as sales-type or operating leases are: (1)(i) a review of the lease term to determine if it is equal to or greater than 75%for the major part of the economic life of the underlying equipment (defined as greater than 75%); and (2)(ii) a review of the present value of the minimum lease payments to determine if they are equal to or greater than 90%substantially all of the fair market value of the equipment at the inception of the lease.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 as noted above for Equipment.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. Residual values are not significant.
With respect to fair value, weWe perform an analysis of the stand-alone selling price of equipment fair value based on cash selling prices as well as other methodologies including a margin analysis during the applicable period. TheWith 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 are indicative of fairreflect 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. These interest rates have generally been adjusted if the rates vary by 25 basis points or more, cumulatively, from the rate last in effect. The pricing interest rates generally equal the implicit rates within the leases, as corroborated by our comparisons of cash to lease selling prices.prices and other analyses as noted above.
Note:Additional Lease Payments: The above two revenue recognition policies applyCertain leases may require the customer to 2018pay property taxes and were updatedinsurance 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 resultlessee on behalf of our adoption of ASC Topic 842 effective January 1, 2019. Referthe lessor to Note 3 - Adoption of New Leasing Standard - Lessor for the updated policies.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 42 - Revenue for additional information regarding revenue recognition policies with respect to contract assets and liabilities as well as contract costs.
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Revenue Recognition (Policies prior to the adoption of ASU 2014-09 - ASC Topic 606)
We generate revenue through services, the sale and rental of equipment, supplies and income associated with the financing of our equipment sales. Revenue is recognized when it is realized or realizable and earned. We consider revenue realized or realizable and earned when we have persuasive evidence of an arrangement, delivery has occurred, the sales price is fixed or determinable and collectibility is reasonably assured. Delivery does not occur until equipment has been shipped or services have been provided to the customer, risk of loss has transferred to the customer, and either customer acceptance has been obtained, customer acceptance provisions have lapsed, or the company has objective evidence that the criteria specified in the customer acceptance provisions have been satisfied. The sales price is not considered to be fixed or determinable until all contingencies related to the sale have been resolved. More specifically, revenue related to services and sales of our products is recognized as follows:
Equipment:Revenues from the sale of equipment, including those from sales-type leases, are recognized at the time of sale or at the inception of the lease, as appropriate. For equipment sales that require us to install the product at the customer location, revenue is 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. Revenues from equipment under other leases and similar arrangements are accounted for by the operating lease method and are recognized as earned over the lease term, which is generally on a straight-line basis.
Maintenance Services:Maintenance service revenues are derived primarily from maintenance contracts on the equipment sold to our customers and are recognized over the term of the contracts. A substantial portion of our products are sold with full service maintenance agreements for which the customer typically pays a base service fee plus a variable amount based on usage. As a consequence, other than the product warranty obligations associated with certain of our low end products, we do not have any significant product warranty obligations, including any obligations under customer satisfaction programs.
Bundled Lease Arrangements:We sell our products and services under bundled lease arrangements, which typically include equipment, service, supplies and financing components for which 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 contractual page volume minimums, which are often expressed in terms of price-per-page. The fixed minimum monthly payments are multiplied by the number of months in the contract term to arrive at the total fixed minimum payments that the customer is obligated to make (fixed payments) over the lease term. The payments associated with page volumes in excess of the minimums are contingent on whether or not such minimums are exceeded (contingent payments). In applying our lease accounting methodology, we only consider the fixed payments for purposes of allocating to the relative fair value elements of the contract. Contingent payments, if any, are recognized as revenue in the period when the customer exceeds the minimum copy volumes specified in the contract.
Revenues under bundled arrangements are allocated considering the relative selling prices of the lease and non-lease deliverables included in the bundled arrangement. Lease deliverables include the equipment, financing, maintenance and other executory costs, while non-lease deliverables generally consist of the supplies and non-maintenance services. The allocation for the lease deliverables begins by allocating revenues to the maintenance and other executory costs plus a profit thereon. These elements are generally recognized over the term of the lease as service revenue. The remaining amounts are allocated to the equipment and financing elements which are subjected to the accounting estimates noted below under “Leases.”
Our 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 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. These interest rates have generally been adjusted if the rates vary by 25 basis points or more, cumulatively, from the rate last in effect. The pricing interest rates generally equal the implicit rates within the leases, as corroborated by our comparisons of cash to lease selling prices.
Sales to distributors and resellers:We utilize distributors and resellers to sell many of our technology products, supplies and services to end-user customers. We refer to our distributor and reseller network as our two-tier distribution model. Sales to distributors and resellers are generally recognized as revenue when products are sold to such distributors and resellers. However, revenue is only recognized when the distributor or reseller has economic substance apart from the company, the sales price is not contingent upon resale or payment by the end user customer and we have no further obligations related to bringing about the resale, delivery or installation of the product.
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Distributors and resellers participate in various rebate, price-protection, cooperative marketing and other programs, and we record provisions for these programs as a reduction to revenue when the sales occur. Similarly, we account for our estimates of sales returns and other allowances when the 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 compete with other third-party leasing companies with respect to the lease financing provided to these end-user customers.
Supplies:Supplies revenue generally is recognized upon shipment or utilization by customers in accordance with the sales contract terms.
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 deliverables or elements. In most cases, these software products are sold as part of multiple element arrangements and include software maintenance agreements for the delivery of technical service, as well as unspecified upgrades or enhancements on a when-and-if-available basis. In those software accessory and free-standing software arrangements that include more than one element, we allocate the revenue among the elements based on vendor-specific objective evidence (VSOE) of fair value. Revenue allocated to software is normally recognized upon delivery while revenue allocated to the software maintenance element is recognized ratably over the term of the arrangement.
Leases:As noted above, equipment may be placed with customers under bundled lease arrangements. The two primary accounting provisions which we use to classify transactions as sales-type or operating leases are: (1) a review of the lease term to determine if it is equal to or greater than 75% of the economic life of the equipment and (2) 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 equipment at the inception 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. Residual values are not significant.
With respect to fair value, we perform an analysis of equipment fair value based on cash selling prices during the applicable period. The 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 are indicative of fair value.
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.
Services: Revenues associated with our document management services are generally recognized as services are rendered, which is generally on the basis of the number of transactions processed. In service arrangements where final acceptance of a printing solution by the customer is required, revenue is deferred until all acceptance criteria have been met. Revenues on unit-price contracts are recognized at the contractual selling prices as work is completed and accepted by the customer.
In connection with our services arrangements, we may incur and capitalize costs to originate these long-term contracts and to perform the migration, transition and setup activities necessary to enable us to perform under the terms of the arrangement. These capitalized costs are amortized over the contractual service period of the arrangement to cost of services. From time to time, we also provide inducements to customers in various forms, including contractual credits, which are capitalized and amortized as a reduction of revenue over the term of the contract.
Long-lived assets used in the fulfillment of service arrangements are capitalized and depreciated over the shorter of their useful life or the term of the contract if an asset is contract specific.
Our services contracts may also include the sale of equipment and software. In these instances, we follow the policies noted above under Equipment-Related Revenues.
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Other Revenue Recognition Policies
Multiple Element Arrangements:As described above, we enter into the following revenue arrangements that may consist of multiple deliverables:
Bundled lease arrangements, which typically include both lease deliverables and non-lease deliverables as described above.
Contracts for multiple types of document related services including professional and value-added services. For instance, we may contract for an implementation of a printing solution and also provide services to operate the solution over a period of time; or we may contract to scan, manage and store customer documents.
In substantially all of our multiple element arrangements, we are able to separate the deliverables since we normally will meet both of the following criteria:
The delivered item(s) has value to the customer on a stand-alone basis; and
If the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in our control.
Consideration in a multiple-element arrangement is allocated at the inception of the arrangement to all deliverables on the basis of the relative selling price. When applying the relative selling price method, the selling price for each deliverable is primarily determined based on vendor-specific objective evidence (VSOE) or third-party evidence (TPE) of the selling price. The above noted revenue policies are then applied to each separated deliverable, as applicable.
Revenue-based Taxes:We report revenue net of any revenue-based taxes assessed by governmental authorities that are imposed on and concurrent with specific revenue-producing transactions. The primary revenue-based taxes are sales tax and value-added tax (VAT).
Shipping and Handling
Costs related to shipping and handling are recognized as incurred and included in Cost of sales in the Consolidated Statements of Income.
Other Significant Accounting Policies
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 $62, $72 and $90 in for the years ended December 31, 2019, 2018 and 2017, respectively.
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 87 - 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 termnear-term forecasts of product demand and include consideration of new product introductions, as well as changes in remanufacturing strategies. The provision for excess
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and/or obsolete service parts inventory is based primarily on projected servicing requirements over the life of the related equipment populations. Refer to Note 109 - 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 109 - Inventories and Equipment on Operating Leases, Net and Note 1110 - 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, substantiallynet, 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 whichour 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 leases. Refer to Note 2 - Adoption of New Leasing Standard - Lessee for accounting policies with respect to leased assetslease liabilities in any tested asset group and include the adoption of ASC Topic 842.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.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 1110 - 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 normally assess goodwill for impairment at least annually, during the fourth quarter based on balances as of October 1st,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 1 operating segment, we determined that there is 1 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 notmore-likely-than-not that the fair value of the entity is less than its carrying amount. If we conclude it is more likely than notmore-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
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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.
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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 – Adoption of New Leasing Standard - LesseeRevenue
Refer to Note 1 - Basis of Presentation and Summary of Significant Accounting Policies - New Accounting Standards and Accounting Changes for additional information related to the adoption of ASU 2016-02, Leases (ASC Topic 842).
Lessee Accounting Policies:
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 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 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.
Xerox 2019 Annual Report 83
We review the 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.
Lessee Summary:
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, 2019 |
| Operating lease expense | | $ | 125 |
|
| Short-term lease expense | | 21 |
|
Variable lease expense(1) | | 48 |
|
| Sublease income | | (1 | ) |
| Total Lease expense | | $ | 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, 2019, we had no additional operating leases that had not yet commenced.
Operating leases ROU assets, net and operating lease liabilities were reported in the Consolidated Balance Sheets as follows:
|
| | | | |
| | | December 31,
2019 |
| Other long-term assets | | $ | 319 |
|
| | | |
| Accrued expenses and other current liabilities | | $ | 87 |
|
| Other long-term liabilities | | 260 |
|
| Total Operating lease liabilities | | $ | 347 |
|
Supplemental information related to operating leases is as follows:
|
| | | | |
| | | December 31,
2019 |
| Cash paid for amounts included in the measurement of lease liabilities - Operating cash flows | | $ | 126 |
|
Right-of-use assets obtained in exchange for new lease liabilities (1) | | 75 |
|
| Weighted-average remaining lease term | | 4 years |
|
| Weighted-average discount rate | | 5.47 | % |
_____________
| |
(1) | Includes the impact of new leases as well as remeasurements and modifications to existing leases. |
Xerox 2019 Annual Report 84
Maturities and additional information related to operating lease liabilities are as follows:
|
| | | | |
| | | December 31,
2019 |
| 2020 | | $ | 109 |
|
| 2021 | | 87 |
|
| 2022 | | 73 |
|
| 2023 | | 56 |
|
| 2024 | | 24 |
|
| Thereafter | | 45 |
|
| Total Lease payments | | 394 |
|
| Less: Imputed interest | | 47 |
|
| Total Operating lease liabilities | | $ | 347 |
|
Finance Leases
Xerox has one finance lease for equipment and related infrastructure within an outsourced warehouse supply arrangement in the U.S. The lease expires in December 2023 and has a remaining lease obligation of $7 as of December 31, 2019 based on a discount rate of 4.07%. The Right-of-use asset balance associated with this finance lease of $7 is included in Land, buildings and equipment, net in the Consolidated Balance Sheet.
Prior Period Disclosures under ASC 840
For the years ended December 31, 2018 and 2017, operating lease expense, net of sublease income, was $147 and $161, respectively.
Future minimum operating lease commitments that had initial or remaining non-cancelable lease terms in excess of one year at December 31, 2018 were as follows:
|
| | | | |
| | | December 31,
2018 |
| 2019 | | $ | 114 |
|
| 2020 | | 88 |
|
| 2021 | | 64 |
|
| 2022 | | 50 |
|
| 2023 | | 36 |
|
| Thereafter | | 27 |
|
| Total Operating lease commitments | | $ | 379 |
|
Note 3 – Adoption of New Leasing Standard - Lessor
Refer to Note 1 - Basis of Presentation and Summary of Significant Accounting Policies - New Accounting Standards and Accounting Changes for additional information related to the adoption of ASU 2016-02, Leases (ASC Topic 842).
Lessor Accounting Policies: The following represent the updated disclosures to our Revenue Recognition policies as a result of the adoption of ASC Topic 842 effective January 1, 2019:
Bundled Lease Arrangements: A portion of our direct sales of equipment to end 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.
Xerox 2019 Annual Report 85
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 (Refer to Note 1 - Basis of Presentation and Summary of Significant Accounting Policies).
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. 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 during the applicable period. The 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 reflects 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 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 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.
Presentation: 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 Income | | Year Ended December 31, |
| | 2019 | | 2018 |
| Lease income - sales type | | Sales | | $ | 672 |
| | $ | 699 |
|
| Interest income on lease receivables | | Financing | | 244 |
| | 268 |
|
| Lease income - operating leases | | Services, maintenance and rentals | | 396 |
| | 438 |
|
| Variable lease income | | Services, maintenance and rentals | | 107 |
| | 120 |
|
| Total Lease income | | | | $ | 1,419 |
| | $ | 1,525 |
|
Profit at lease commencement on sales type leases was estimated to be approximately $276 and $302 for the two years ended December 31, 2019 and 2018, respectively.
Xerox 2019 Annual Report 86
Note 4 – Revenue
Revenues disaggregated by primary geographic markets, major product lines, and sales channels are as follows:
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
Primary geographical markets(1) | | | | | | |
| United States | | $ | 5,429 |
| | $ | 5,610 |
| | $ | 5,790 |
|
| Europe | | 2,326 |
| | 2,625 |
| | 2,697 |
|
| Canada | | 518 |
| | 569 |
| | 648 |
|
| Other | | 793 |
| | 858 |
| | 856 |
|
| Total Revenues | | $ | 9,066 |
| | $ | 9,662 |
| | $ | 9,991 |
|
| | | | | | | |
| Major product and services lines | | | | | | |
Equipment(2) | | $ | 2,062 |
| | $ | 2,178 |
| | $ | 2,152 |
|
| Supplies, paper and other sales | | 1,165 |
| | 1,276 |
| | 1,260 |
|
Maintenance agreements(3) | | 2,372 |
| | 2,603 |
| | 2,809 |
|
Service arrangements(4) | | 2,517 |
| | 2,674 |
| | 2,722 |
|
| Rental and other | | 706 |
| | 663 |
| | 754 |
|
| Financing | | 244 |
| | 268 |
| | 294 |
|
Total Revenues(5) | | $ | 9,066 |
| | $ | 9,662 |
| | $ | 9,991 |
|
| | | | | | | |
| Sales channels: | | | | | | |
Direct equipment lease(6) | | $ | 672 |
| | $ | 699 |
| | $ | 718 |
|
Distributors & resellers(7) | | 1,343 |
| | 1,445 |
| | 1,502 |
|
| Customer direct | | 1,212 |
| | 1,310 |
| | 1,192 |
|
| Total Sales | | $ | 3,227 |
| | $ | 3,454 |
| | $ | 3,412 |
|
| | | | | | | | | | | | | | | | | | | | |
| | 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) | For the year ended December 31, 2017, Equipment sale revenues excluded $44 of equipment-related training revenue, which was classified as Services under previous revenue guidance - refer to Note 1 - Basis of Presentation and Summary of Significant Accounting Policies - Revenue Recognition. |
| |
(3) | 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). |
| |
(4) | Primarily includes revenues from our Managed Services offerings (formerly our Managed Documents Services arrangements). Also includes revenues from embedded operating leases, which were not significant. |
| |
(5) | Certain prior year amounts have been revised to conform to the current year presentation. Refer to Note 1 - Basis of Presentation and Summary of Significant Accounting Policies - Change in Presentation, for additional information. |
| |
(6) | Primarily reflects sales through bundled lease arrangements. |
| |
(7) | Primarily reflects sales through our two-tier distribution channels. |
(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 $137$144 and $116$130 at December 31, 20192021 and 2018,2020, respectively. The majority of the balance at December 31, 20192021 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.
|
| | | | | | | | |
| | | Year Ended December 31, |
| | | 2019 | | 2018 |
| Incremental direct costs of obtaining a contract | | $ | 78 |
| | $ | 84 |
|
| Amortization of incremental direct costs | | 88 |
| | 95 |
|
Xerox 2021 Annual Report 94
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, 20192021 and 20182020 was $163$132 and $172,$145, respectively. This amount is expected to be amortized over its estimated period of benefit, which we currently estimate to be approximately four years.
Xerox 2019 Annual Report 87
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 $13$15 and $12$13 at December 31, 20192021 and 2018,2020, respectively, and related amortization was $5$6, $4 and $5 for the three years ended December 31, 20192021, 2020 and 2018,2019, 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 53 – 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 havehad 1 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”)(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, |
| | | 2019 | | 2018 | | 2017 | | 2019 | | 2018 |
| United States | | $ | 5,429 |
| | $ | 5,610 |
| | $ | 5,790 |
| | $ | 769 |
| | $ | 670 |
|
| Europe | | 2,326 |
| | 2,625 |
| | 2,697 |
| | 305 |
| | 277 |
|
| Other areas | | 1,311 |
| | 1,427 |
| | 1,504 |
| | 157 |
| | 147 |
|
| Total | | $ | 9,066 |
| | $ | 9,662 |
| | $ | 9,991 |
| | $ | 1,231 |
| | $ | 1,094 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 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, (2019 only) and (iv) Internal use software, net. |
Xerox 20192021 Annual Report 8895
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 65 – Acquisitions and Investments
2019The 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 continues to focuscontinued its strategy of focusing on further penetrating the small-to-medium sized business (SMB) market through organic and inorganic growth, which includes acquisitions of local area resellers and partners, (includingincluding multi-brand dealers).dealers as well as companies with an adjacent or sole IT services business. During 2019, business2021, 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 2 acquisitions totaled $38 andin the U.S. for approximately $19. 2021 also 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 expands our distribution capabilities of office technology sales, services and supplies to SMB customers in these markets. 2019smaller acquisitions also include $4 related to an acquisition of assets.
2019 Summarytotaling approximately $3.
All of our 20192021 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 the goodwill recorded in 2019, 100%Goodwill, of which, none is expected to be deductible for tax purposes. Our 2019 acquisitions contributed aggregate revenues of approximately $18 to our 2019 total revenues from their respective acquisition dates.
The following table summarizes the purchase price allocations for our 2019 acquisitions as of the acquisition dates:
|
| | | | | | |
| | | Weighted-Average Life (Years) | | Total 2019 Acquisitions |
| Accounts/finance receivables | | | | $ | 3 |
|
| Intangible assets: | | | | |
| Customer relationships | | 10 | | 19 |
|
| Trademarks | | 5 | | 2 |
|
| Goodwill | | | | 14 |
|
| Other assets | | | | 3 |
|
| Total Assets acquired | | | | 41 |
|
| Liabilities assumed | | | | (3 | ) |
| Total Purchase Price | | | | $ | 38 |
|
20182020 Acquisitions
There were 0 business acquisitions in 2018.
2017 Acquisitions
Business acquisitions in 20172020 totaled $87,$194, net of cash acquired, and included 3 acquisitions in cash,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 MT Business Technologies, Inc. (MT Business), an Ohio-based multi-brand dealer, and 2 smaller multi-brand dealers in Iowa and North and South Carolina. The acquisitions in 2017 were part of the strategy to increase our SMB coverage through resellers and partners (including multi-brand dealers) and continued distribution acquisitions.
2017 SummaryCareAR for $9.
All of our 20172020 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
Xerox 2021 Annual Report 96
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 20172019 acquisitions described above 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 based on third-party valuations and management's estimates. The primary elements that generated the goodwill are the value of synergies and the acquired assembled workforce. Refer to Note 13 - Goodwill and Intangible Assets, Net for additional information. Goodwill.
Revenue Summary
Our 2017 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 $76, $79$5 in cash, along with technology and $54 to our 2019, 2018intellectual property for a controlling interest in the entity, whereas VicGov contributed approximately $5 in cash, along with technology and 2017 totalintellectual 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 respectively.and expenses of the new entity post formation did not materially impact the Company’s reported results for the year ended December 31, 2021.
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.
Xerox 20192021 Annual Report 8997
Note 76 – 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 (FX)(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 historical financial results of our equity method investment in FXFuji Xerox and our XIP business (which was consolidated) for the periods prior to the Sales are reflected as a discontinued operation and as such, their impact is excluded from continuing operations for all periods presented.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) Income)) 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. NaNNo Goodwill was allocated for our investment in FXFuji 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 itFuji Xerox was not controlled by Xerox.
The transactions with FH also included an OEM license agreement by and between FXFuji Xerox and Xerox, granting FXFuji 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. In addition, arrangements with FX whereby we purchase inventory from and sell inventory to FX, will continue after the Sales and, as a result of ourrevenues for 2019.
Our Technology Agreement (TA) with Fuji Xerox which remains in effect after the Sales throughexpired on March 2021, we will continue to receive royalty payments for FX’s31, 2021. The TA included a provision that allowed Fuji Xerox continued use of ourthe Xerox brand trademark for two years after the date of termination of the TA as well as rightsit transitions to access our patent portfolioa new brand in exchange for accessan upfront prepaid fixed royalty of $100. Fuji Xerox elected to their patent portfolio.
Refer to Note 12 - Investment in Affiliates, at Equity, for additional information on transactions with FX as well as Note 27 - Subsequent Events for additional information regarding our Technology Agreement with FX.
Business Process Outsourcing (BPO)
On December 31, 2016, Xerox completed the Separation ofcontinue its BPO business through the Distribution of alluse of the issuedXerox brand trademark over the two year period and, outstanding stock of Conduent Incorporated to Xerox Corporation stockholders. As a result oftherefore, in April 2021, made the Separation and Distribution,$100 upfront payment due under the financial position and results of operations of the BPO Business were presented as Discontinued Operations. Discontinued OperationsTA, which is included in Operating cash flows for the year ended December 31, 2017 include immaterial follow-on impacts from2021.
We are recognizing the BPO separation - see note (1)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 table below.
In connectionat least April 1, 2023. The product supply agreements with Fuji Xerox will continue to be effective despite the Separation, Conduent made a net cash distributiontermination of the TA, and Fuji Xerox and Xerox will continue to Xerox of approximately $1.8 billion prioroperate as each other’s product supplier under existing purchase/supply agreements. Prior to the Distribution Date.sale of our investment in Fuji Xerox, used a portionpricing of the cash distribution proceeds to repaytransactions under these arrangements were based on terms the $1.0 billion Senior Unsecured Term Facility in January 2017, which was requiredCompany believed to be repaid upon completionnegotiated 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 Separation.2019 Discontinued Operation.
Summarized financial information for our Discontinued Operations is as follows:
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| Revenue | | $ | 79 |
| | $ | 168 |
| | $ | 274 |
|
| | | | | | | |
Income from operations(1) | | $ | 176 |
| | $ | 74 |
| | $ | 138 |
|
| Gain on disposal | | 629 |
| | — |
| | — |
|
| Income before income taxes | | 805 |
| | 74 |
| | 138 |
|
Income tax expense(1) | | 95 |
| | 10 |
| | 1 |
|
| Income from discontinued operations, net of tax | | 710 |
| | 64 |
| | 137 |
|
| Income from discontinued operations attributable to noncontrolling interests, net of tax | | 5 |
| | 9 |
| | 8 |
|
Income from discontinued operations, attributable to Xerox, net of tax(1) | | $ | 705 |
| | $ | 55 |
| | $ | 129 |
|
_____________
| | | | | | | | | | | | |
(1) | 2017 | | | | | 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, includes $3 related to the BPO separation, that includes a loss from operationsnet of $(9) and income tax benefit of $12 with both amounts primarily related to changes in estimated amounts recorded in 2016. | | | | | | $ | 705 | |
Xerox 20192021 Annual Report 9098
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 | | | | | | — | |
| | | | | | |
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| Cost and Expenses: | | | | | | |
| Cost of revenues | | $ | 44 |
| | $ | 110 |
| | $ | 218 |
|
| Other expenses | | 6 |
| | 9 |
| | 20 |
|
| Total Costs and Expenses | | $ | 50 |
| | $ | 119 |
| | $ | 238 |
|
| Selected amounts included in Costs and Expenses: | | | | | | |
| Depreciation and amortization | | $ | — |
| | $ | — |
| | $ | 1 |
|
| Restructuring and related costs | | — |
| | 1 |
| | — |
|
| Other: | | | | | | |
| Equity in net income of FX | | $ | 147 |
| | $ | 25 |
| | $ | 102 |
|
| Net income attributable to noncontrolling interest - XIP | | 5 |
| | 9 |
| | 8 |
|
| Capital expenditures | | — |
| | — |
| | — |
|
The following is a summary of the major categories of assets and liabilities of XIP and our Investment in FX as of the date of sale. The balances as of December 31, 2018 are included in Assets and Liabilities of discontinued operations in the Consolidated Balance Sheets:
|
| | | | | | | | |
| | | At Date of Sale | | December 31, 2018 |
| Assets | | | | |
| Cash and cash equivalents | | $ | 1 |
| | $ | 3 |
|
| Accounts receivable, net | | 3 |
| | 6 |
|
| Inventories | | 5 |
| | 7 |
|
| Other current assets | | — |
| | 3 |
|
| Total current assets | | 9 |
| | 19 |
|
| Land, building and equipment, net | | 1 |
| | 1 |
|
| Goodwill | | 9 |
| | 9 |
|
| Other long-term assets | | 1,471 |
| | 1,342 |
|
| Total Assets of discontinued operations | | $ | 1,490 |
| | $ | 1,371 |
|
| | | | | |
| Liabilities | | | | |
| Accounts payable | | $ | 8 |
| | $ | 18 |
|
| Accrued compensation and benefits costs | | 1 |
| | 1 |
|
| Accrued expenses and other current liabilities | | 2 |
| | 2 |
|
| Total current liabilities | | 11 |
| | 21 |
|
| Other long-term liabilities | | 1 |
| | — |
|
| Total Liabilities of discontinued operations | | $ | 12 |
| | $ | 21 |
|
XIP had noncontrolling interests of $32 at the date of sale and $36 at December 31, 2018. Refer to Note 12 - Investments in Affiliates, at Equity for additional information regarding FX,Fuji Xerox, including summarized financial information of FX.Fuji Xerox.
Other Divestitures
Xerox Research Centre Europe in Grenoble
In August 2017, we completed the sale of the Xerox Research Centre Europe in Grenoble, France to Naver Corporation (Naver). The selling price was approximately $23 and resulted in a pre-tax gain of $13 ($4 after-tax), which is included in Other expenses, net in the Consolidated Statements of Income for the year ended December 31, 2017. The sale included the transfer of approximately 80 researchers and administrative staff who became part of Naver.
Xerox 2019 Annual Report 91
Note 87 – 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 | |
|
| | | | | | | | |
| | | December 31, |
| | | 2019 | | 2018 |
| Invoiced | | $ | 980 |
| | $ | 992 |
|
| Accrued | | 311 |
| | 334 |
|
| Allowance for doubtful accounts | | (55 | ) | | (56 | ) |
| Accounts receivable, net | | $ | 1,236 |
| | $ | 1,270 |
|
(1)Accrued receivables includes amounts to be invoiced in the subsequent quarter for current services provided.
We perform ongoing credit evaluations of our customers and adjust credit limits based upon customer payment history and current creditworthiness.
The allowance for uncollectibledoubtful 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 is determined principally onremains at an elevated level as compared to historical levels primarily as a result of the basis of past collection experience as well as consideration of current economic conditionsmacroeconomic and changes in our customer collection trends.market disruption caused by the COVID-19 pandemic.
Accounts Receivable SalesSale Arrangements
Accounts receivable salessale 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, $165$102 and $131$136 remained uncollected as of December 31, 20192021 and 2018,2020, respectively.
Accounts receivable sales activity was as follows:
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
Accounts receivable sales(1) | | $ | 393 |
| | $ | 405 |
| | $ | 1,733 |
|
Deferred proceeds (2) | | — |
| | — |
| | 164 |
|
| Loss on sale of accounts receivable | | 3 |
| | 3 |
| | 10 |
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2021 | | 2020 | | 2019 |
Accounts receivable sales(1) | | $ | 478 | | | $ | 333 | | | $ | 393 | |
| | | | | | |
| | | | | | |
_____________
| |
(1) | 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. |
| |
(2) | During 2017, we terminated all accounts receivable sales arrangements in North America and all but one arrangement in Europe, In these terminated arrangements, a portion of the sales proceeds was normally held back by the purchaser and payment was deferred until collection of the related sold receivables. |
Xerox 2019 Annual Report 92
Note 98 – 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. Amounts disclosed below at December 31, 2018 were accounted for under ASC 840, Leases, which was superseded by ASC 842, Leases, which was adopted effective January 1, 2019. Differences upon adoption were not material. Refer to Note 1 - Basis of Presentation and Summary of Significant Accounting Policies, New Accounting Standards and Accounting Changes for additional information.
Finance receivables, net were as follows:
|
| | | | | | | | |
| | | December 31, |
| | | 2019 | | 2018 |
| Gross receivables | | $ | 3,865 |
| | $ | 4,003 |
|
| Unearned income | | (425 | ) | | (439 | ) |
| Subtotal | | 3,440 |
| | 3,564 |
|
| Residual values | | — |
| | — |
|
| Allowance for doubtful accounts | | (89 | ) | | (92 | ) |
| Finance Receivables, Net | | 3,351 |
| | 3,472 |
|
| Less: Billed portion of finance receivables, net | | 111 |
| | 105 |
|
| Less: Current portion of finance receivables not billed, net | | 1,158 |
| | 1,218 |
|
| Finance Receivables Due After One Year, Net | | $ | 2,082 |
| | $ | 2,149 |
|
| | | | | | | | | | | | | | |
| | 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, |
| | | 2019 | | 2018 |
12 Months(1) | | $ | 1,490 |
| | $ | 1,543 |
|
| 24 Months | | 1,052 |
| | 1,108 |
|
| 36 Months | | 728 |
| | 755 |
|
| 48 Months | | 422 |
| | 425 |
|
| 60 Months | | 158 |
| | 158 |
|
| Thereafter | | 15 |
| | 14 |
|
| Total | | $ | 3,865 |
| | $ | 4,003 |
|
_____________
| |
(1) | Includes amounts previously billed of $115 and $107 as of December 31, 2019 and 2018, respectively. |
Xerox 2019 Annual Report 93
| | | | | | | | | | | | | | |
| | 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 Europe.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 accounts and provision for credit losses represents an estimateas 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 lossesCOVID-19 pandemic to ensure we objectively included those expected to be incurred fromimpacts in the Company's finance receivable portfolio. Thedetermination 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 allowance is determined on a collective basis by applying projected loss rates to our different portfolios by country, which represent our portfolio segments. This ispast year of the level at which we develop and document our methodology to determine the allowance for credit losses. This loss rate is primarily based upon historical loss experience adjusted for judgments about the probable effects of relevant observable data including current 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. TheCOVID-19 pandemic.
Our allowance for doubtful finance receivables is inherently more difficult to estimate than the allowance for trade accounts receivable because the underlying lease portfolio has an average maturity, at any time, of approximately two to three years and contains past due billed amounts, as well as unbilled amounts. We consider all available information in our quarterly assessments of the adequacy of the allowance for doubtful accounts. The identification of account-specific exposure is not a significant factor in establishing the allowance for doubtful finance receivables. Our policy and methodology used to establish our allowance for doubtful accounts has been consistently applied over all periods presented.
Since our allowance for doubtful finance receivables iseffectively determined by country, thegeography. The risk characteristics in our finance receivable portfolio segments willare generally be consistent with the risk factors associated with the economies of the countries/regions included in those countries/regions. Charge-offs in the U.S. remained steady and did not change significantly during 2019 and 2018.geographies. Since EuropeEMEA is comprised of various countries and regional economies, the risk profile within our Europeanthat portfolio segment is somewhat more diversified due to the varying economic conditions among and within the countries. Charge-offs
The bad debt provision of $(1) for the year ended December 31, 2021 included a reserve reduction of approximately $31 reflecting improvements in Europe were $14the 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 2019line 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 $18 in 2018, with the decrease reflecting the stabilization of the Europe portfolio segment.pre-pandemic levels.
The following table is a rollforward of the allowance for doubtful finance receivablesaccounts as well as the related investment in finance receivables:receivables were as follows:
| | | Allowance for Credit Losses: | | United States | | Canada | | Europe | | Other(1) | | Total | Allowance for Credit Losses: | | United States | | Canada(1) | | Europe(1)(2) | | | Total |
| Balance at December 31, 2017 | | $ | 56 |
| | $ | 15 |
| | $ | 35 |
| | $ | 2 |
| | $ | 108 |
| |
| Balance at December 31, 2019 | | Balance at December 31, 2019 | | $ | 59 | | | $ | 10 | | | $ | 20 | | | | $ | 89 | |
| Provision | | 12 |
| | 3 |
| | 9 |
| | — |
| | 24 |
| Provision | | 41 | | | 8 | | | 32 | | | | 81 | |
| Charge-offs | | (17 | ) | | (6 | ) | | (18 | ) | | — |
| | (41 | ) | Charge-offs | | (23) | | | (5) | | | (14) | | | | (42) | |
Recoveries and other(2) | | 2 |
| | — |
| | (1 | ) | | — |
| | 1 |
| |
| Balance at December 31, 2018 | | $ | 53 |
| | $ | 12 |
| | $ | 25 |
| | $ | 2 |
| | $ | 92 |
| |
Recoveries and other(3) | | Recoveries and other(3) | | — | | | 2 | | | 3 | | | | 5 | |
| | Balance at December 31, 2020 | | Balance at December 31, 2020 | | $ | 77 | | | $ | 15 | | | $ | 41 | | | | $ | 133 | |
| Provision | | 20 |
| | 1 |
| | 7 |
| | — |
| | 28 |
| Provision | | 5 | | | (3) | | | (3) | | | | (1) | |
| Charge-offs | | (15 | ) | | (5 | ) | | (14 | ) | | — |
| | (34 | ) | Charge-offs | | (7) | | | (3) | | | (6) | | | | (16) | |
Recoveries and other(2) | | 1 |
| | 2 |
| | — |
| | — |
| | 3 |
| |
| Balance at December 31, 2019 | | $ | 59 |
| | $ | 10 |
| | $ | 18 |
| | $ | 2 |
| | $ | 89 |
| |
Recoveries and other(3) | | Recoveries and other(3) | | 2 | | | 2 | | | (2) | | | | 2 | |
| | Balance at December 31, 2021 | | Balance at December 31, 2021 | | $ | 77 | | | $ | 11 | | | $ | 30 | | | | $ | 118 | |
| Finance Receivables Collectively Evaluated for Impairment: | | | | | | | | | | | Finance Receivables Collectively Evaluated for Impairment: | | | | | | | | | |
December 31, 2018(3)(4) | | $ | 1,946 |
| | $ | 335 |
| | $ | 1,239 |
| | $ | 44 |
| | $ | 3,564 |
| |
December 31, 2019(3) | | $ | 1,922 |
| | $ | 320 |
| | $ | 1,155 |
| | $ | 43 |
| | $ | 3,440 |
| |
December 31, 2020(4) | | December 31, 2020(4) | | $ | 1,823 | | | $ | 297 | | | $ | 1,178 | | | | $ | 3,298 | |
December 31, 2021(4) | | December 31, 2021(4) | | $ | 1,876 | | | $ | 251 | | | $ | 1,061 | | | | $ | 3,188 | |
| |
(1) | Includes developing market countries and smaller units. |
| |
(2) | Includes the impacts of foreign currency translation and adjustments to reserves necessary to reflect events of non-payment such as customer accommodations and contract terminations. |
| |
(3) | Total Finance receivables exclude the allowance for credit losses of $89 and $92 at December 31, 2019 and 2018, respectively. |
| |
(4) | As a result of an internal reorganization, XBS amounts, previously classified as Other, were reclassified to the U.S. in first quarter 2019. Prior year amounts have also been reclassified to conform to the current year presentation. |
(2)Includes developing market countries.
Xerox 2019 Annual Report (3)94Includes the impacts of foreign currency translation and adjustments to reserves necessary to reflect events of non-payment such as customer accommodations and contract terminations.
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 endend-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. Indirect also includes leases originated through our XBS sales channel, which utilizes a combination of internal and third party leasing in its lease arrangements with end customers.
In Europe, customers are further grouped by class based on the country or region of the customer. The primary customer classes include the U.K./Ireland, France and the following European regions - Central, Nordic and Southern. These groupings or classes are used to understand the nature and extent of our exposure to credit risk arising from finance receivables.
We evaluate our customers within the various classes based on the following credit quality indicators:
| |
• | Investment grade: 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 & Poors (S&P) rating of BBB- or better. Loss rates in this category are normally less than 1%.
|
| |
• | Non-investment grade:•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 Xerox 2021 Annual Report 101
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 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 addition, the higher loss rates are largely offset by the higher rates of return we obtain with such leases. Loss rates in this category are generally in the range of 2% to 5%. |
| |
• | Substandard: 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 investment and non-investment grade 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 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 | | December 31, 2018 |
| | Investment Grade | | Non-investment Grade | | Sub-standard | | Total Finance Receivables | | Investment Grade | | Non-investment Grade | | Sub-standard | | Total Finance Receivables |
| Direct | $ | 640 |
| | $ | 331 |
| | $ | 132 |
| | $ | 1,103 |
| | $ | 785 |
| | $ | 348 |
| | $ | 104 |
| | $ | 1,237 |
|
| Indirect | 258 |
| | 445 |
| | 116 |
| | 819 |
| | 162 |
| | 400 |
| | 147 |
| | 709 |
|
Total United States(1) | 898 |
| | 776 |
| | 248 |
| | 1,922 |
| | 947 |
| | 748 |
| | 251 |
| | 1,946 |
|
| Total Canada | 163 |
| | 91 |
| | 66 |
| | 320 |
| | 162 |
| | 99 |
| | 74 |
| | 335 |
|
| France | 206 |
| | 137 |
| | 24 |
| | 367 |
| | 232 |
| | 157 |
| | 29 |
| | 418 |
|
| U.K/Ireland | 154 |
| | 79 |
| | 8 |
| | 241 |
| | 150 |
| | 87 |
| | 7 |
| | 244 |
|
Central(2) | 176 |
| | 113 |
| | 9 |
| | 298 |
| | 196 |
| | 123 |
| | 8 |
| | 327 |
|
Southern(3) | 65 |
| | 125 |
| | 15 |
| | 205 |
| | 52 |
| | 136 |
| | 17 |
| | 205 |
|
Nordic(4) | 23 |
| | 19 |
| | 2 |
| | 44 |
| | 28 |
| | 15 |
| | 2 |
| | 45 |
|
Total Europe(5) | 624 |
| | 473 |
| | 58 |
| | 1,155 |
| | 658 |
| | 518 |
| | 63 |
| | 1,239 |
|
| Other | 31 |
| | 12 |
| | — |
| | 43 |
| | 31 |
| | 13 |
| | — |
| | 44 |
|
| Total | $ | 1,716 |
| | $ | 1,352 |
| | $ | 372 |
| | $ | 3,440 |
| | $ | 1,798 |
| | $ | 1,378 |
| | $ | 388 |
| | $ | 3,564 |
|
_____________ | |
(1) | As a result of an internal reorganization, XBS amounts, previously classified as Other, were reclassified to the U.S. in first quarter 2019. Prior year amounts have also been reclassified to conform to the current year presentation. |
| |
(2) | Switzerland, Germany, Austria, Belgium and Holland. |
| |
(3) | Italy, Greece, Spain and Portugal. |
| |
(4) | Sweden, Norway, Denmark and Finland. |
| |
(5) | Prior year amounts have been recasted to conform to the current year presentation. |
Xerox 20192021 Annual Report 95102
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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.
Xerox 2021 Annual Report 103
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, 2019 |
| | Current | | 31-90 Days Past Due | | >90 Days Past Due | | Total Billed | | Unbilled | | Total Finance Receivables | | >90 Days and Accruing |
| Direct | $ | 37 |
| | $ | 11 |
| | $ | 8 |
| | $ | 56 |
| | $ | 1,047 |
| | $ | 1,103 |
| | $ | 57 |
|
| Indirect | 25 |
| | 5 |
| | 3 |
| | 33 |
| | 786 |
| | 819 |
| | — |
|
| Total United States | 62 |
| | 16 |
| | 11 |
| | 89 |
| | 1,833 |
| | 1,922 |
| | 57 |
|
| Canada | 8 |
| | 1 |
| | 1 |
| | 10 |
| | 310 |
| | 320 |
| | 17 |
|
| France | 3 |
| | — |
| | — |
| | 3 |
| | 364 |
| | 367 |
| | 15 |
|
| U.K./Ireland | 2 |
| | — |
| | — |
| | 2 |
| | 239 |
| | 241 |
| | — |
|
Central(1) | 2 |
| | — |
| | 1 |
| | 3 |
| | 295 |
| | 298 |
| | 13 |
|
Southern(2) | 3 |
| | 1 |
| | 1 |
| | 5 |
| | 200 |
| | 205 |
| | 4 |
|
Nordic(3) | — |
| | — |
| | — |
| | — |
| | 44 |
| | 44 |
| | — |
|
| Total Europe | 10 |
| | 1 |
| | 2 |
| | 13 |
| | 1,142 |
| | 1,155 |
| | 32 |
|
| Other | 2 |
| | 1 |
| | — |
| | 3 |
| | 40 |
| | 43 |
| | — |
|
| Total | $ | 82 |
| | $ | 19 |
| | $ | 14 |
| | $ | 115 |
| | $ | 3,325 |
| | $ | 3,440 |
| | $ | 106 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 |
| | Current | | 31-90
Days
Past Due | | >90 Days
Past Due | | Total Billed | | Unbilled | | Total
Finance
Receivables | | >90 Days
and
Accruing |
| Direct | $ | 38 |
| | $ | 11 |
| | $ | 7 |
| | $ | 56 |
| | $ | 1,181 |
| | $ | 1,237 |
| | $ | 54 |
|
| Indirect | 18 |
| | 4 |
| | 2 |
| | 24 |
| | 685 |
| | 709 |
| | — |
|
| Total United States | 56 |
| | 15 |
| | 9 |
| | 80 |
| | 1,866 |
| | 1,946 |
| | 54 |
|
| Canada | 7 |
| | 2 |
| | 1 |
| | 10 |
| | 325 |
| | 335 |
| | 22 |
|
| France | 5 |
| | — |
| | — |
| | 5 |
| | 413 |
| | 418 |
| | 14 |
|
| U.K./Ireland | 2 |
| | — |
| | — |
| | 2 |
| | 242 |
| | 244 |
| | — |
|
Central(1) | 1 |
| | 1 |
| | 1 |
| | 3 |
| | 324 |
| | 327 |
| | 6 |
|
Southern(2) | 3 |
| | 1 |
| | 1 |
| | 5 |
| | 200 |
| | 205 |
| | 6 |
|
Nordic(3) | — |
| | — |
| | — |
| | — |
| | 45 |
| | 45 |
| | — |
|
| Total Europe | 11 |
| | 2 |
| | 2 |
| | 15 |
| | 1,224 |
| | 1,239 |
| | 26 |
|
| Other | 2 |
| | — |
| | — |
| | 2 |
| | 42 |
| | 44 |
| | — |
|
| Total | $ | 76 |
| | $ | 19 |
| | $ | 12 |
| | $ | 107 |
| | $ | 3,457 |
| | $ | 3,564 |
| | $ | 102 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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) | As a result of an internal reorganization, XBS amounts, previously classified as Other, were reclassified to the U.S. in first quarter 2019. Prior year amounts have also been reclassified to conform to the current year presentation. |
| |
(2) | Switzerland, Germany, Austria, Belgium and Holland. |
| |
(3) | Italy, Greece, Spain and Portugal. |
| |
(4) | Sweden, Norway, Denmark and Finland. |
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.
Xerox 20192021 Annual Report 96104
Note 109 – Inventories and Equipment on Operating Leases, Net
The following is a summary of Inventories by major category: |
| | | | | | | | |
| | | December 31, |
| | | 2019 | | 2018 |
| Finished goods | | $ | 576 |
| | $ | 710 |
|
| Work-in-process | | 47 |
| | 49 |
|
| Raw materials | | 71 |
| | 70 |
|
| Total Inventories | | $ | 694 |
| | $ | 829 |
|
| | | | | | | | | | | | | | |
| | 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. Amounts disclosed below at December 31, 2018 were accounted for under ASC 840, Leases, which was superseded by ASC 842, Leases, adopted on January 1, 2019. Differences upon adoption were not material. Refer to Note 1 - Basis of Presentation and Summary of Significant Accounting Policies, Recent Accounting Pronouncements for additional information.
Equipment on operating leases and the related accumulated depreciation were as follows:
|
| | | | | | | | |
| | | December 31, |
| | | 2019 | | 2018 |
| Equipment on operating leases | | $ | 1,443 |
| | $ | 1,519 |
|
| Accumulated depreciation | | (1,079 | ) | | (1,077 | ) |
| Equipment on operating leases, net | | $ | 364 |
| | $ | 442 |
|
| | | | | | | | | | | | | | |
| | 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 threefour 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, |
| | | 2019 | | 2018 |
| 12 months | | $ | 226 |
| | $ | 260 |
|
| 24 months | | 139 |
| | 178 |
|
| 36 months | | 84 |
| | 111 |
|
| 48 months | | 39 |
| | 61 |
|
| 60 months | | 12 |
| | 21 |
|
| Thereafter | | 2 |
| | 2 |
|
| Total | | $ | 502 |
| | $ | 633 |
|
| | | | | | | | | | | | | | |
| | 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, 2019, 20182021, 2020 and 20172019 amounted to $62, $66 and $107, $120respectively. 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 $119, respectively.Collateral
Refer to Note 16 - Debt, for additional information related to this arrangement.
Xerox 20192021 Annual Report 97105
Note 1110 - 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 | |
|
| | | | | | | | | | |
| | | | | December 31, |
| | | Estimated Useful Lives (Years) | | 2019 | | 2018 |
| Land | |
| | $ | 12 |
| | $ | 12 |
|
| Building and building equipment | | 25 to 50 | | 794 |
| | 793 |
|
| Leasehold improvements | | Varies | | 135 |
| | 178 |
|
| Plant machinery | | 5 to 12 | | 1,124 |
| | 1,143 |
|
| Office furniture and equipment | | 3 to 15 | | 565 |
| | 607 |
|
| Other | | 4 to 20 | | 45 |
| | 45 |
|
| Construction in progress | |
| | 23 |
| | 26 |
|
| Subtotal | | | | 2,698 |
| | 2,804 |
|
| Accumulated depreciation | | | | (2,272 | ) | | (2,306 | ) |
| Land, buildings and equipment, net | | | | $ | 426 |
| | $ | 498 |
|
Depreciation expense was $101, $148$76, $87 and $136$101 for the three years ended December 31, 2019, 20182021, 2020 and 2017,2019, respectively.
We lease buildings and equipment, substantially all of which are accounted for as operating leases. Finance leased assets were $7$9 and $9$10 at December 31, 20192021 and 2018,2020, respectively. Refer to Note 2 - Adoption of New Leasing Standard11 - Lessee for additional information regarding leased assets.
Internal Use Software
As of December 31, 20192021 and 2018,2020, capitalized costs related to internal use software, net of accumulated amortization, were $122$120 and $154,$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 1 - Basis of Presentation and Summary of Significant Accounting Policies and Note 76 - 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 at December 31, 2019 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 as follows:$45 and $47 at December 31, 2021 and 2020, respectively.
|
| | | | | | | | |
| | | December 31, |
| | | 2019 | | 2018 |
Fuji Xerox(1) | | $ | — |
| | $ | 1,360 |
|
Other(2) | | 46 |
| | 43 |
|
| Investments in affiliates, at equity | | $ | 46 |
| | $ | 1,403 |
|
_____________
| |
(1) | Balance at December 31, 2018 reported in Other long-term assets of discontinued operations. |
| |
(2) | Balance at December 31, 2019 and 2018, respectively, reported in Other long-term assets. |
Our equity in net income of our unconsolidated affiliates wasis as follows:
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
Fuji Xerox(1) | | $ | 147 |
| | $ | 25 |
| | $ | 102 |
|
| Other | | 8 |
| | 8 |
| | 13 |
|
| Total Equity in net income of unconsolidated affiliates | | $ | 155 |
| | $ | 33 |
| | $ | 115 |
|
| | | | | | | | | | | | | | | | | | | | |
| | | 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 all years. The equity in net income for Fuji Xerox in 2019 is through the date of sale. |
Xerox 2019 Annual Report (1)98
Fuji Xerox
Fuji Xerox is headquartered in Tokyo and operates in Japan, China, Australia, New Zealand, Vietnam and other areas of the Pacific Rim. Equity in net income offor Fuji Xerox is affected by certain adjustments to reflectreported in Income from discontinued operations, net of tax for 2019 and is through the deferraldate of profit associated with intercompany sales. These adjustments may result in recorded equity income that is different from that implied by our (former) 25% ownership interest. In addition, the Equity in net income of sale.
Fuji Xerox for the three years ended December 31, 2019, 2018 and 2017, includes after-tax restructuring and other charges of $20, $95 and $10, respectively.
We also received dividends of $69 from Fuji Xerox for the three yearsyear ended December 31, 2019, 2018 and 2017, which arewas reflected as a reduction in our investment upon receipt,receipt. No dividends were received from Fuji Xerox in 2021 or 2020 due to the Sale of $69, $23 and $46, respectively.our equity interest in Fuji Xerox in 2019.
Summarized financial information for Fuji Xerox iswas 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 | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
|
| | | | | | | | | | | | |
| | | Through Date of Sale | | Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| Summary of Operations | | | | | | |
| Revenues | | $ | 7,667 |
| | $ | 9,161 |
| | $ | 9,638 |
|
| Costs and expenses | | 6,814 |
| | 8,880 |
| | 9,072 |
|
| Income before income taxes | | 853 |
| | 281 |
| | 566 |
|
| Income tax expense | | 258 |
| | 160 |
| | 144 |
|
| Net Income | | 595 |
| | 121 |
| | 422 |
|
| Less: Net income - noncontrolling interests | | 3 |
| | 2 |
| | 5 |
|
| Net Income - Fuji Xerox | | $ | 592 |
| | $ | 119 |
| | $ | 417 |
|
| | | | | | | |
| Balance Sheet | | At Date of Sale | | December 31, 2018 | | December 31, 2017 |
| Assets | | | | | | |
| Current assets | | $ | 4,876 |
| | $ | 4,179 |
| | $ | 4,315 |
|
| Long-term assets | | 3,964 |
| | 4,034 |
| | 4,488 |
|
| Total Assets | | $ | 8,840 |
| | $ | 8,213 |
| | $ | 8,803 |
|
| Liabilities and Equity | | | | | | |
| Short-term debt | | $ | 49 |
| | $ | 130 |
| | $ | 428 |
|
| Other current liabilities | | 1,932 |
| | 1,827 |
| | 2,079 |
|
| Long-term debt | | 16 |
| | 24 |
| | 76 |
|
| Other long-term liabilities | | 514 |
| | 395 |
| | 369 |
|
| Noncontrolling interests | | 18 |
| | 30 |
| | 33 |
|
| Fuji Xerox shareholders' equity | | 6,311 |
| | 5,807 |
| | 5,818 |
|
| Total Liabilities and Equity | | $ | 8,840 |
| | $ | 8,213 |
| | $ | 8,803 |
|
Yen/U.S. Dollar exchange ratesrate used to translate arewas as follows:
|
| | | | | | | | | | | |
| Financial Statement | | Exchange Basis | | 2019 | | 2018 | | 2017 |
| Summary of Operations | | Weighted average rate | | 109.03 |
| | 110.28 |
| | 112.14 |
|
| Balance Sheet | | Year-end rate | | 108.83 |
| | 110.26 |
| | 112.87 |
|
| | | | | | | | | | | | | | | | | | |
| Financial Statement | | Exchange Basis | | | | | | 2019 |
| Summary of Operations | | Weighted average rate | | | | | | 109.03 | |
| | | | | | | | |
Transactions with Fuji Xerox
We have a Technology Agreement with Fuji Xerox whereby we receive royalty payments for their use of our Xerox brand trademark, as well as rights to access our patent portfolio in exchange for access to their patent portfolio. These payments are included in Services, maintenance and rentals revenues in the Consolidated Statements of Income. Refer to Note 27 - Subsequent Events for additional information regarding our Technology Agreement with FX.
We also have arrangements with Fuji Xerox whereby we purchase inventory from and sell inventory to Fuji Xerox. Pricing of the transactions under these arrangements is based upon terms the Company believes 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. As disclosed in Note 7 - Divestitures, these agreements will continue after the sale of our Investment in Fuji Xerox.
Xerox 20192021 Annual Report 99108
Transactions with Fuji Xerox were as follows:
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| Royalty revenue earned | | $ | 99 |
| | $ | 96 |
| | $ | 103 |
|
| Inventory purchases from Fuji Xerox | | 1,337 |
| | 1,501 |
| | 1,585 |
|
| Inventory sales to Fuji Xerox | | 33 |
| | 43 |
| | 58 |
|
| R&D payments received from Fuji Xerox | | — |
| | 1 |
| | 1 |
|
| R&D payments paid to Fuji Xerox | | 4 |
| | 8 |
| | 14 |
|
As of December 31, 2019 and 2018, net amounts due to Fuji Xerox were $353 and $320, respectively.
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, 2016(1) | | $ | 3,778 |
|
| Foreign currency translation | | 105 |
|
| Acquisitions: | |
|
| MT Business | | 33 |
|
| Other | | 11 |
|
Divestiture(2) | | (6 | ) |
| Balance at December 31, 2017 | | $ | 3,921 |
|
| Foreign currency translation | | (63 | ) |
| Balance at December 31, 2018 | | $ | 3,858 |
|
| Foreign currency translation | | 28 |
|
| Acquisitions | | 14 |
|
| Balance at December 31, 2019 | | $ | 3,900 |
|
_____________Goodwill: | | | | | | | | |
(1) | | Total |
| | |
| | |
Balance at December 31, 2016 has been reduced by $9 to reflect the allocation of goodwill to the sale of XIP, which is accounted for as a discontinued operation. Refer to Note 7 - Divestitures for additional information regarding this divestiture.2018 | | $ | 3,858 | |
| Foreign currency translation | | 28 | |
| Acquisitions | | 14 | |
| | |
(2) | Relates to the sale of Xerox Research Centre Europe in Grenoble, France to Naver. Refer to Note 7 - Divestitures for additional information regarding this divestiture. | |
| | |
| 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
Net intangibleIntangible assets, net were $199$211 at December 31, 2019.2021. 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 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | December 31, 2019 | | December 31, 2018 |
| | | Weighted Average Amortization | | Gross Carrying Amount | | Accumulated Amortization | | Net Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Amount |
| Customer relationships | | 10 years | | $ | 140 |
| | $ | 86 |
| | $ | 54 |
| | $ | 317 |
| | $ | 263 |
| | $ | 54 |
|
| Distribution network | | 25 years | | 123 |
| | 99 |
| | 24 |
| | 123 |
| | 93 |
| | 30 |
|
| Trademarks | | 20 years | | 258 |
| | 146 |
| | 112 |
| | 260 |
| | 133 |
| | 127 |
|
| Technology and non-compete | | 12 years | | 18 |
| | 9 |
| | 9 |
| | 15 |
| | 6 |
| | 9 |
|
| Total Intangible Assets | | | | $ | 539 |
| | $ | 340 |
| | $ | 199 |
| | $ | 715 |
| | $ | 495 |
| | $ | 220 |
|
The decrease(1)CareAR Holdings, LLC was transferred from Xerox Holdings to Xerox in 2021. Accordingly, the gross carrying amount of customer relationships from December 31, 2018 is due to certain balances being fully amortized at December 31, 2019. 2020 reflect the balances for both Xerox Holdings and Xerox.
Amortization expense related to intangible assets was $45, $48,$55, $56 and $53$45 for the three years ended December 31, 2019, 20182021, 2020 and 2017,2019, respectively. Excluding the impact of additionalfuture acquisitions, amortization expense is expected to approximate $36 in 2020 and in 2021, $32$43 in 2022, $30$40 in 2023, $38 in 2024, $33 in 2025 and $18$33 in 2024. The decrease from 20232026. Distribution network assets are expected to 2024 is related to the customer relationships and technology, which will be fully amortized by 2024.2025.
Xerox 20192021 Annual Report 100109
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.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 the planned initiative.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 these balancesthey 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, 2019, 20182021, 2020 and 20172019 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 | |
_____________
|
| | | | | | | | | | | | | | | | |
| | | Severance and Related Costs | | Other Contractual Termination Costs(2) | | Asset Impairments(3)(4) | | Total |
| Balance at December 31, 2016 | | $ | 104 |
| | $ | 23 |
| | $ | — |
| | $ | 127 |
|
| Restructuring provision | | 221 |
| | 4 |
| | 7 |
| | 232 |
|
| Reversals of prior charges | | (29 | ) | | (6 | ) | | — |
| | (35 | ) |
Net Current Period Charges(1) | | 192 |
| | (2 | ) | | 7 |
| | 197 |
|
| Charges against reserve and currency | | (188 | ) | | (20 | ) | | (7 | ) | | (215 | ) |
| Balance at December 31, 2017 | | $ | 108 |
| | $ | 1 |
| | $ | — |
| | $ | 109 |
|
| Restructuring provision | | 175 |
| | 14 |
| | — |
| | 189 |
|
| Reversals of prior charges | | (33 | ) | | — |
| | — |
| | (33 | ) |
Net Current Period Charges(1) | | 142 |
| | 14 |
| | — |
| | 156 |
|
| Charges against reserve and currency | | (156 | ) | | (14 | ) | | — |
| | (170 | ) |
| 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 |
|
_____________(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. | |
(1) | Represents net amount recognized within the Consolidated Statements of Income for the years shown for restructuring and asset impairment charges. |
| |
(2) | Primarily includes additional costs incurred upon the exit from our facilities including decommissioning costs and associated contractual termination costs. |
| |
(3) | 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) | (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. 2019 amounts primarily relate to the exit and abandonment of leased and owned facilities. The charge includes the accelerated write-off of $39 for leased right-of-use assets and $22 for owned assets and are net of any potential sublease income or other recovery amounts.
|
Xerox 20192021 Annual Report 101110
The following table summarizes the reconciliation to the Consolidated Statements of Cash Flows: |
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| Charges against reserve and currency | | $ | (152 | ) | | $ | (170 | ) | | $ | (215 | ) |
| Asset impairments | | 56 |
| | — |
| | 7 |
|
| Effects of foreign currency and other non-cash items | | 3 |
| | 1 |
| | (12 | ) |
| Restructuring Cash Payments | | $ | (93 | ) | | $ | (169 | ) | | $ | (220 | ) |
| | | | | | | | | | | | | | | | | | | | |
| | | 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, |
| | | Year Ended December 31, 2019 | | 2021 | | 2020 | | 2019 |
Retention related severance/bonuses(1) | | $ | 39 |
| Retention related severance/bonuses(1) | | $ | 6 | | | $ | 4 | | | $ | 39 | |
Contractual severance costs(2) | | 43 |
| Contractual severance costs(2) | | 1 | | | (2) | | | 43 | |
Consulting and other costs(3) | | 20 |
| Consulting and other costs(3) | | 4 | | | 4 | | | 20 | |
| | | $ | 102 |
| | $ | 11 | | | $ | 6 | | | $ | 102 | |
_____________
| |
(1) | Includes retention related severance and bonuses for employees expected to continue working beyond their minimum retention period before termination. |
| |
(2) | Reflects estimated severance and other related costs we are contractually required to pay on 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. |
Cash(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, in 2019 andrespectively, while the reserve was $18 and $21 at December 31, 2019 was $37, which2021 and 2020, respectively. The balance at December 31, 2021 is expected to be paid over the next twelve months.
Xerox 20192021 Annual Report 102111
Note 15 - Supplementary Financial Information
The components of Other assets and liabilities wereare 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 | |
|
| | | | | | | | |
| | | December 31, |
| | | 2019 | | 2018 |
| Other Current Assets | | | | |
| Income taxes receivable | | $ | 27 |
| | $ | 14 |
|
| Royalties, license fees and software maintenance | | 25 |
| | 20 |
|
| Restricted cash | | — |
| | 1 |
|
| Prepaid expenses | | 29 |
| | 31 |
|
| Derivative instruments | | 2 |
| | 15 |
|
| Advances and deposits | | 30 |
| | 28 |
|
| Other | | 88 |
| | 82 |
|
| Total Other Current Assets | | $ | 201 |
| | $ | 191 |
|
| Other Long-term Assets | | |
| | |
|
| Income taxes receivable | | $ | 9 |
| | $ | 8 |
|
| Prepaid pension costs | | 451 |
| | 281 |
|
| Derivative instruments | | 1 |
| | — |
|
| Internal use software, net | | 122 |
| | 154 |
|
| Restricted cash | | 55 |
| | 63 |
|
| Debt issuance costs, net | | 3 |
| | 4 |
|
| Customer contract costs, net | | 176 |
| | 184 |
|
Operating lease right-of-use asset(1) | | 319 |
| | — |
|
| Deferred compensation plan investments | | 19 |
| | 16 |
|
Investments in affiliates, at equity(2) | | 46 |
| | 43 |
|
| Other | | 137 |
| | 149 |
|
| Total Other Long-term Assets | | $ | 1,338 |
| | $ | 902 |
|
| Accrued Expenses and Other Current Liabilities | | |
| | |
|
| Income taxes payable | | $ | 7 |
| | $ | 33 |
|
| Other taxes payable | | 79 |
| | 77 |
|
Operating lease obligation(1) | | 87 |
| | — |
|
Financing lease obligation(1) | | 2 |
| | — |
|
| Interest payable | | 38 |
| | 41 |
|
| Restructuring reserves | | 70 |
| | 93 |
|
| Restructuring related costs | | 37 |
| | — |
|
| Derivative instruments | | 8 |
| | 1 |
|
| Product warranties | | 6 |
| | 5 |
|
| Dividends payable | | 66 |
| | 69 |
|
| Distributor and reseller rebates/commissions | | 167 |
| | 158 |
|
| Unearned income and other revenue deferrals | | 158 |
| | 155 |
|
| Other | | 259 |
| | 216 |
|
| Total Accrued Expenses and Other Current Liabilities | | $ | 984 |
| | $ | 848 |
|
| Other Long-term Liabilities | | |
| | |
|
| Deferred taxes | | $ | 37 |
| | $ | 51 |
|
| Income taxes payable | | 64 |
| | 18 |
|
Operating lease obligation(1) | | 260 |
| | — |
|
Finance lease obligation(1) | | 5 |
| | — |
|
| Environmental reserves | | 9 |
| | 9 |
|
| Restructuring reserves | | — |
| | 2 |
|
| Other | | 137 |
| | 189 |
|
| Total Other Long-term Liabilities | | $ | 512 |
| | $ | 269 |
|
(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.
_____________
| |
(1) | 2019 amounts relate to the adoption of ASC 842, Leases effective January 1, 2019. Refer to Note 1 - Basis of Presentation and Summary of Significant Accounting Policies and Note 2 - Adoption of New Leasing Standard - Lessee for additional information. |
| |
(2) | Refer to Note 12 - Investments in Affiliates, at Equity for additional information. |
Xerox 20192021 Annual Report 103112
Cash, Cash Equivalents and Restricted Cash
Restricted cash amounts were as follows: |
| | | | | | | | |
| | | December 31, |
| | | 2019 | | 2018 |
| Cash and cash equivalents | | $ | 2,740 |
| | $ | 1,081 |
|
| Restricted cash | | | | |
| Litigation deposits in Brazil | | 55 |
| | 61 |
|
| Other restricted cash | | — |
| | 3 |
|
| Total Restricted Cash | | 55 |
| | 64 |
|
| Cash, cash equivalents and restricted cash of continuing operations | | 2,795 |
| | 1,145 |
|
| Cash, cash equivalents and restricted cash of discontinued operations | | — |
| | 3 |
|
| Cash, cash equivalents and restricted cash | | $ | 2,795 |
| | $ | 1,148 |
|
Restricted cash primarily relates to escrow cash deposits made in Brazil associated with ongoing litigation.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 wasis reported in the Consolidated Balance Sheets as follows:
|
| | | | | | | | |
| | | December 31, |
| | | 2019 | | 2018 |
| Other current assets | | $ | — |
| | $ | 1 |
|
| Other long-term assets | | 55 |
| | 63 |
|
| Total Restricted cash | | $ | 55 |
| | $ | 64 |
|
| | | | | | | | | | | | | | |
| | 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, |
| | | 2019 | | 2018 |
Pension liabilities(1) | | $ | 1,616 |
| | $ | 1,386 |
|
| Accrued compensation liabilities | | 69 |
| | 73 |
|
Deferred compensation liabilities(2) | | 22 |
| | 23 |
|
| Pension and other benefit liabilities | | $ | 1,707 |
| | $ | 1,482 |
|
| | | | | | | | | | | | | | |
| | 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) | As of December 31, 2019 and 2018, includes amounts measured at fair value on a recurring basis of $18 and $16, respectively, and amounts for executive deferred compensation of $4 and $7, respectively. Refer to Note 18 - Fair Value of Financial Assets and Liabilities for additional information regarding deferred compensation liabilities. |
(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, |
| | | 2019 | | 2018 | | 2017 |
| Provision for receivables | | $ | 49 |
| | $ | 40 |
| | $ | 46 |
|
| Provision for inventory | | 24 |
| | 30 |
| | 27 |
|
| Provision for product warranty | | 12 |
| | 14 |
| | 15 |
|
| Depreciation of buildings and equipment | | 101 |
| | 148 |
| | 136 |
|
| Depreciation and obsolescence of equipment on operating leases | | 225 |
| | 249 |
| | 265 |
|
| Amortization of internal use software | | 59 |
| | 81 |
| | 65 |
|
| Amortization of product software | | — |
| | — |
| | 4 |
|
| Amortization of acquired intangible assets | | 45 |
| | 48 |
| | 53 |
|
Amortization of customer contract costs(1) | | 93 |
| | 100 |
| | 4 |
|
| Cost of additions to land, buildings and equipment | | 41 |
| | 55 |
| | 69 |
|
| Cost of additions to internal use software | | 24 |
| | 35 |
| | 36 |
|
| Common stock dividends - Xerox Holdings | | 229 |
| | 255 |
| | 274 |
|
| Preferred stock dividends - Xerox Holdings | | 14 |
| | 14 |
| | 17 |
|
| Payments to noncontrolling interests | | 14 |
| | 17 |
| | 18 |
|
| Repurchases related to stock-based compensation - Xerox Holdings | | 28 |
| | 9 |
| | 15 |
|
| | | | | | | | | | | | | | | | | | | | |
| | 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) | (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. Amortization of customer contract costs for the years ended December 31, 2019 and 2018is reported in (Increase) decrease in other current and long-term assets on the Consolidated Statements of Cash Flows. Refer to Note 4 - Revenue - Contract Costs for additional information.
|
Xerox 20192021 Annual Report 104113
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) |
| | | | | | | | |
| | | December 31, |
| | | 2019 | | 2018 |
| Current maturities of long-term debt | | $ | 1,049 |
| | $ | 961 |
|
| Short-term debt and current portion of long-term debt | | $ | 1,049 |
| | $ | 961 |
|
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 | | Xerox Holdings Corporation | | | | | | | | |
| | | | | | | | | December 31, | |
| | | Stated Rate | | Weighted Average Interest Rates at December 31, 2019(1) | | 2019 | | 2018 | |
| Xerox | | | | | | | | |
| |
| Senior Notes due 2019 | |
|
| |
|
| | $ | — |
| | $ | 406 |
| |
| Senior Notes due 2019 | |
|
| |
|
| | — |
| | 554 |
| |
| Senior Notes due 2020 | | 2.80 | % | | 2.50 | % | | 313 |
| | 313 |
| |
| Senior Notes due 2020 | | 3.50 | % | | 3.47 | % | | 362 |
| | 362 |
| |
| Senior Notes due 2020 | | 2.75 | % | | 2.67 | % | | 376 |
| | 375 |
| |
| Senior Notes due 2021 | | 4.50 | % | | 4.54 | % | | 1,062 |
| | 1,062 |
| |
| | Senior Notes due 2025 | | Senior Notes due 2025 | | 5.00 | % | | 4.95 | % | | $ | 750 | | | $ | 750 | |
| Senior Notes due 2028 | | Senior Notes due 2028 | | 5.50 | % | | 5.40 | % | | 750 | | | 750 | |
| Subtotal - Xerox Holdings Corporation | | Subtotal - Xerox Holdings Corporation | | $ | 1,500 | | | $ | 1,500 | |
| Xerox Corporation | | Xerox Corporation | |
| | Senior Notes due 2022 | | 4.07 | % | | 4.07 | % | | 300 |
| | 300 |
| Senior Notes due 2022 | | 4.07 | % | | 4.07 | % | | $ | 300 | | | $ | 300 | |
Senior Notes due 2023(2) | | 4.13 | % | | 3.68 | % | | 1,000 |
| | 1,000 |
| 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 2024 | | 3.80 | % | | 3.84 | % | | 300 | | | 300 | |
| Senior Notes due 2035 | | 4.80 | % | | 4.84 | % | | 250 |
| | 250 |
| Senior Notes due 2035 | | 4.80 | % | | 4.84 | % | | 250 | | | 250 | |
| Senior Notes due 2039 | | 6.75 | % | | 6.78 | % | | 350 |
| | 350 |
| Senior Notes due 2039 | | 6.75 | % | | 6.78 | % | | 350 | | | 350 | |
| Subtotal - Notes | | | | | | $ | 4,313 |
| | $ | 5,272 |
| |
| Subtotal - Xerox Corporation | | Subtotal - Xerox Corporation | | $ | 2,200 | | | $ | 2,200 | |
Xerox - Other Subsidiaries(3) | | Xerox - Other Subsidiaries(3) | |
| Secured Borrowing - July 2020 | | Secured Borrowing - July 2020 | | 1.76 | % | | — | % | | $ | — | | | $ | 267 | |
| Secured Borrowing - December 2020 | | Secured Borrowing - December 2020 | | 1.74 | % | | 1.74 | % | | 268 | | | 500 | |
| Secured Borrowing - September 2021 | | Secured Borrowing - September 2021 | | 1.40 | % | | 1.40 | % | | 293 | | | — | |
| Subtotal - Xerox - Other Subsidiaries | | Subtotal - Xerox - Other Subsidiaries | | $ | 561 | | | $ | 767 | |
| | | | | | | | | | |
Capital lease obligations(3) | | | |
|
| | $ | — |
| | $ | 9 |
| |
| | | | | | | | | | | |
| Principal debt balance | | | | | | $ | 4,313 |
| | $ | 5,281 |
| Principal debt balance | | $ | 4,261 | | | $ | 4,467 | |
| Unamortized discount | | | | | | (16 | ) | | (25 | ) | |
| Debt issuance costs | | | | | | (17 | ) | | (25 | ) | |
| Xerox Holdings Corporation - Debt issuance costs | | Xerox Holdings Corporation - Debt issuance costs | | (11) | | | (13) | |
| Xerox Corporation - Debt issuance costs | | Xerox Corporation - Debt issuance costs | | (6) | | | (11) | |
| Xerox - Other subsidiaries - Debt issuance costs | | Xerox - Other subsidiaries - Debt issuance costs | | (1) | | | (3) | |
| Subtotal - Debt issuance costs | | Subtotal - Debt issuance costs | | (18) | | | (27) | |
| Unamortized premium | | Unamortized premium | | 3 | | | 3 | |
Fair value adjustments(4) | | | | | |
|
| |
|
| Fair value adjustments(4) | |
| Terminated swaps | | | | | | 1 |
| | 2 |
| Terminated swaps | | — | | | 1 | |
| Current swaps | | | | | | 1 |
| | (3 | ) | Current swaps | | — | | | — | |
| Less: current maturities | | | | | | (1,049 | ) | | (961 | ) | Less: current maturities | | | | (650) | | | (394) | |
| Total Long-term Debt | | | | | | $ | 3,233 |
| | $ | 4,269 |
| 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 December 2018, the original coupon rate of 3.625% increased by 0.50% to 4.125% effective March 15, 2019. |
| |
(3) | As a result of the adoption of ASC 842, Leases effective January 1, 2019, capital lease obligations are reported in Other current and non-current liabilities. Refer to Note 1 - Basis of Presentation and Summary of Significant Accounting Policies, Note 2 - Adoption of New Leasing Standard - Lessee and Note 15 - Supplementary Financial Information 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. |
(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) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
2020(1) | | 2021 | | 2022 | | 2023 | | 2024 | | Thereafter | | Total |
| $ | 1,051 |
| | $ | 1,062 |
| | $ | 300 |
| | $ | 1,000 |
| | $ | 300 |
| | $ | 600 |
| | $ | 4,313 |
|
_____________Current portion of long-term debt maturities for 2022 are $396, $92, $85 and $78 for the first, second, third and fourth quarters, respectively. | |
(1) | Long-term debt maturities(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, are $0, $313, $738 and $0 for the first, second, third and fourth quarters, respectively. |
Xerox 2019 Annual Report 105
Credit Facility
We have a $1.8 billion unsecured revolving Credit Facility with a group of lenders, whichthat matures in August 2022. The Credit Facility includes a $250 letter of credit sub-facility as well as an accordion feature that allows us to increase (from time to time, with willing lenders) the overall size of the facility by $750. We also have the right to request a one year extension on any anniversary of the restated amendment date.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 ourXerox 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, 20192021 and 2018,2020, 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 new 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, 2019,2021, 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, 20192021 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) | Maximum leverage ratio (a quarterly test that is calculated as principal debt divided by consolidated EBITDA, both as defined in the amended and restated Credit Facility) of 4.25x.(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. |
| |
(b) | 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.
|
| |
(c) | 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, that are substantially similar to those included in the prior, 2014 $2.0 billion Credit Facility, 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.
OnSecured 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 31, 2019, Xerox completed the Reorganization, pursuant to which Xerox became a direct, wholly-owned subsidiary of Xerox Holdings. In connection2020 secured borrowing with the Reorganization, Xerox Holdings becamesame financial institution, which had a guarantorremaining balance of Xerox’s existing Credit Facility.$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.
Commercial PaperIn 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.
Xerox terminated its $1.8 billion commercial paper (CP) programThe 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 U.S. in March of 2019. NaN borrowings were made under this program during 2019 priorSPEs to its termination.absorb losses or receive benefits that could potentially be significant to the
Xerox 20192021 Annual Report 106116
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 $221, $231$203, $181 and $268$221 for the years ended December 31, 2019, 20182021, 2020 and 2017,2019, 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 | |
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
Interest expense(1) | | $ | 236 |
| | $ | 244 |
| | $ | 252 |
|
Interest income(2) | | 260 |
| | 283 |
| | 302 |
|
_____________(1)Includes Equipment financing interest as well as non-financing interest expense included in Other expenses, net in the Consolidated Statements of (Loss) Income.
| |
(1) | Includes Equipment financing interest expense, as well as non-financing interest expense included in Other expenses, net in the Consolidated Statements of Income. |
| |
(2) | Includes Finance income, as well as other interest income that is included in Other expenses, net in the Consolidated Statements of 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.
Terminated Swaps
During the period from 2004 to 2011, we early terminated several At December 31, 2021, there was 1 interest rate swaps that were designated as fair value hedges of certain debt instruments. The associated net fair value adjustments to the debt instruments are being amortized to interest expense over the remaining term of the related notes. In 2019, 2018 and 2017, the amortization of these fair value adjustments reduced interest expense by $1, $3 and $13, respectively. The remaining unamortized gain balance associated with these terminated swaps was $1 at December 31, 2019.
Xerox 2019 Annual Report cap contract outstanding.107
Fair Value Hedges
As of December 31, 2019 and 2018,In 2020 we terminated our remaining pay variable/receivedreceive fixed interest rate swaps with the notional amountsamount of $200 and $300, respectively, and net asset (liability) fair value of $1$4 prior to termination. In 2019, we terminated an interest rate swap with a notional amount of $100 and $(3), respectively, werean immaterial net asset fair value. In both instances, the swaps had been designated and accounted for as fair value hedges. The decrease in the notional amount reflects the early termination of an interest rate swap with a $100 notional amount in 2019. The fair value associated with the terminated swap was immaterial at the time ofhedges prior to termination. The swaps arewere structured to hedge the fair value of related debt by converting them from fixed rate instruments to variable rate instruments. NoPrior to termination no ineffective portion was recorded to earnings for the three 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 following is a summary of ourremaining unamortized debt fair value hedgesadjustment associated with all terminated swaps was $0 and $1 at December 31, 2019:
|
| | | | | | | | | | | | | | | | | | | | |
| Debt Instrument | | Year First Designated | | Notional Amount | | Net Fair Value | | Weighted Average Interest Rate Paid | | Interest Rate Received | | Basis | | Maturity |
| Senior Note 2021 | | 2014 | | $ | 200 |
| | $ | 1 |
| | 3.35 | % | | 4.50 | % | | Libor | | 2021 |
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, 2019,2021, we had outstanding forward exchange and purchased option contracts with gross notional values of $1,091,$1,113, with terms of less than 12 months. Approximately 82%At December 31, 2021, approximately 84% of these contracts at December 31, 2019 mature within three months, 9%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, 2019:
|
| | | | | | | | |
| Currencies Hedged (Buy/Sell) | | Gross Notional Value | | Fair Value Asset(1) |
| Japanese Yen/U.S. Dollar | | $ | 369 |
| | $ | (2 | ) |
| Japanese Yen/Euro | | 264 |
| | (3 | ) |
| U.S. Dollar/Euro | | 122 |
| | — |
|
| Euro/U.S. Dollar | | 71 |
| | — |
|
| Euro/U.K. Pound Sterling | | 64 |
| | — |
|
| U.S. Dollar/Canadian Dollar | | 50 |
| | (1 | ) |
| Euro/Danish Krone | | 29 |
| | — |
|
| U.K. Pound Sterling/Euro | | 27 |
| | — |
|
| U.S. Dollar/Russian Ruble | | 22 |
| | (1 | ) |
| U.S. Dollar/Japanese Yen | | 14 |
| | — |
|
| Euro/Swiss Franc | | 12 |
| | — |
|
| U.S. Dollar/Israeli Shekel | | 9 |
| | — |
|
| All Other | | 38 |
| | 1 |
|
| Total Foreign exchange hedging | | $ | 1,091 |
| | $ | (6 | ) |
| | | | | | | | | | | | | | |
| 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, 2019. |
(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. NaNNo 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 waswere included in the assessment of hedge effectiveness. The net (liability) asset fair value of these contracts were $(4)$(3) and $8$2 as of December 31, 20192021 and 2018,2020, respectively.
Xerox 2019 Annual Report 108
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 | |
|
| | | | | | | | | | |
| | | | | December 31, |
| Designation of Derivatives | | Balance Sheet Location | | 2019 | | 2018 |
| Derivatives Designated as Hedging Instruments | | | | |
| Foreign exchange contracts – forwards | | Other current assets | | $ | 1 |
| | $ | 7 |
|
| | | Accrued expensed and other current liabilities | | (5 | ) | | — |
|
| Foreign currency options | | Other current assets | | — |
| | 1 |
|
| Interest rate swaps | | Other long-term assets | | 1 |
| | — |
|
| | | Other long-term liabilities | | — |
| | (3 | ) |
| | | Net Designated Derivative (Liability) Asset | | $ | (3 | ) | | $ | 5 |
|
| | | | | | | |
| Derivatives NOT Designated as Hedging Instruments | | | | |
| Foreign exchange contracts – forwards | | Other current assets | | $ | 1 |
| | $ | 7 |
|
| | | Accrued expensed and other current liabilities | | (3 | ) | | (1 | ) |
| | | Net Undesignated Derivative (Liability) Asset | | $ | (2 | ) | | $ | 6 |
|
| | | | | | | |
| Summary of Derivatives | | Total Derivative Assets | | $ | 3 |
| | $ | 15 |
|
| | | Total Derivative Liabilities | | (8 | ) | | (4 | ) |
| | | Net Derivative (Liability) Asset | | $ | (5 | ) | | $ | 11 |
|
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:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Year Ended December 31, |
Derivatives in Fair Value Relationships | | Location of Gain (Loss) Recognized in Income | | Derivative Gain (Loss) Recognized in Income | | Hedged Item (Loss) Gain Recognized in Income |
| | | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 |
| Interest rate contracts | | Interest expense | | $ | 4 |
| | $ | (3 | ) | | $ | (3 | ) | | $ | (4 | ) | | $ | 3 |
| | $ | 3 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 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) | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
Derivatives in Cash Flow Hedging Relationships | | Derivative Gain (Loss) Recognized in OCI (Effective Portion) | | Location of Derivative Gain (Loss) Reclassified from AOCI into Income (Effective Portion) | | Gain (Loss) Reclassified from AOCI to Income (Effective Portion) |
| | 2019 | | 2018 | | 2017 | | | 2019 | | 2018 | | 2017 |
| Foreign exchange contracts – forwards/options | | $ | 2 |
| | $ | 9 |
| | $ | (28 | ) | | Cost of sales | | $ | 9 |
| | $ | (14 | ) | | $ | (35 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 0 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, 0no amount was recorded for an underlying exposure that did not occur or was not expected to occur.
At December 31, 2019,2021, 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.
Xerox 2019 Annual Report 109
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 Gain (Loss) | | 2019 | | 2018 | | 2017 |
| Foreign exchange contracts – forwards | | Other expense – Currency (losses) gains, net | | $ | (6 | ) | | $ | 21 |
| | $ | (44 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 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, 2019, 20182021, 2020 and 2017,2019, we recorded Currency losses, net of $7, $5$3 and $4,$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 liabilitiesliabilities' 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, |
| | | 2019 | | 2018 |
| Assets | | | | |
| Foreign exchange contracts - forwards | | $ | 2 |
| | $ | 14 |
|
| Foreign currency options | | — |
| | 1 |
|
| Interest rate swaps | | 1 |
| | — |
|
| Deferred compensation investments in mutual funds | | 19 |
| | 16 |
|
| Total | | $ | 22 |
| | $ | 31 |
|
| Liabilities | | | | |
| Foreign exchange contracts - forwards | | $ | 8 |
| | $ | 1 |
|
| Interest rate swaps | | — |
| | 3 |
|
| Deferred compensation plan liabilities | | 18 |
| | 16 |
|
| Total | | $ | 26 |
| | $ | 20 |
|
| | | | | | | | | | | | | | |
| | 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 | |
|
| | | | | | | | | | | | | | | |
| | December 31, 2019 | | December 31, 2018 |
| | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
| Cash and cash equivalents | $ | 2,740 |
| | $ | 2,740 |
| | $ | 1,081 |
| | $ | 1,081 |
|
| Accounts receivable, net | 1,236 |
| | 1,236 |
| | 1,270 |
| | 1,270 |
|
| Short-term debt and current portion of long-term debt | 1,049 |
| | 1,054 |
| | 961 |
| | 966 |
|
| Long-term debt | 3,233 |
| | 3,331 |
| | 4,269 |
| | 3,922 |
|
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 20192021 Annual Report 110121
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.
Over the past several years, whereWhere legally possible, we have amended our major defined benefit pension plans to freeze current benefits and eliminate benefitsbenefit 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. The freeze of current benefits is the primary driver of the reduction in pension service costs since 2012. 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. TheOur 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 plandoesn’t meet the definition of a defined contribution plan and therefore is accounted for as a defined benefit pension plan has also been amended to reflect the Company's ability to reduce the indexation of future pension benefits within the plan in scenarios when the returns on plan assets are insufficient to cover that indexation.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 20192021 Annual Report 111122
| | | | | Pension Benefits | | | | | Pension Benefits | | |
| | | U.S. Plans | | Non-U.S. Plans | | Retiree Health | | U.S. Plans | | Non-U.S. Plans | | Retiree Health |
| | | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 | | | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 |
| Change in Benefit Obligation: | | | | | | | | | | | | | Change in Benefit Obligation: | | | | | | | | | | | | |
| Benefit obligation, January 1 | | $ | 3,234 |
| | $ | 4,180 |
| | $ | 6,007 |
| | $ | 6,703 |
| | $ | 385 |
| | $ | 723 |
| Benefit obligation, January 1 | | $ | 3,747 | | | $ | 3,598 | | | $ | 7,159 | | | $ | 6,492 | | | $ | 370 | | | $ | 385 | |
| Service cost | | 2 |
| | 2 |
| | 22 |
| | 27 |
| | 2 |
| | 4 |
| Service cost | | 2 | | | 2 | | | 20 | | | 20 | | | 2 | | | 2 | |
| Interest cost | | 218 |
| | 63 |
| | 153 |
| | 149 |
| | 15 |
| | 23 |
| Interest cost | | 80 | | | 196 | | | 88 | | | 113 | | | 8 | | | 12 | |
| Plan participants' contributions | | — |
| | — |
| | 3 |
| | 4 |
| | 10 |
| | 3 |
| Plan participants' contributions | | — | | | — | | | 3 | | | 3 | | | 8 | | | 10 | |
| Actuarial loss (gain) | | 564 |
| | (288 | ) | | 472 |
| | (293 | ) | | 8 |
| | (63 | ) | |
| Actuarial (gain) loss | | Actuarial (gain) loss | | (86) | | | 240 | | | (233) | | | 439 | | | (1) | | | 4 | |
| Currency exchange rate changes | | — |
| | — |
| | 114 |
| | (339 | ) | | 5 |
| | (11 | ) | Currency exchange rate changes | | — | | | — | | | (193) | | | 374 | | | — | | | 3 | |
| Plan Amendments/Curtailments | | — |
| | — |
| | (2 | ) | | 41 |
| | — |
| | (234 | ) | Plan Amendments/Curtailments | | — | | | — | | | (4) | | | 2 | | | (50) | | | (11) | |
| | Benefits paid/settlements | | (420 | ) | | (723 | ) | | (270 | ) | | (281 | ) | | (40 | ) | | (60 | ) | Benefits paid/settlements | | (371) | | | (289) | | | (297) | | | (284) | | | (34) | | | (35) | |
| Other | | — |
| | — |
| | (7 | ) | | (4 | ) | | — |
| | — |
| Other | | — | | | — | | | — | | | — | | | — | | | — | |
| Benefit Obligation, December 31 | | $ | 3,598 |
| | $ | 3,234 |
| | $ | 6,492 |
| | $ | 6,007 |
| | $ | 385 |
| | $ | 385 |
| Benefit Obligation, December 31 | | $ | 3,372 | | | $ | 3,747 | | | $ | 6,543 | | | $ | 7,159 | | | $ | 303 | | | $ | 370 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Change in Plan Assets: | | | | | | | | | | | | | Change in Plan Assets: | |
| Fair value of plan assets, January 1 | | $ | 2,358 |
| | $ | 3,224 |
| | $ | 5,729 |
| | $ | 6,308 |
| | $ | — |
| | $ | — |
| Fair value of plan assets, January 1 | | $ | 2,802 | | | $ | 2,493 | | | $ | 7,199 | | | $ | 6,385 | | | $ | — | | | $ | — | |
| Actual return on plan assets | | 529 |
| | (170 | ) | | 680 |
| | (85 | ) | | — |
| | — |
| Actual return on plan assets | | 89 | | | 563 | | | 415 | | | 637 | | | — | | | — | |
| Employer contributions | | 26 |
| | 27 |
| | 115 |
| | 117 |
| | 30 |
| | 57 |
| Employer contributions | | 24 | | | 35 | | | 111 | | | 104 | | | 25 | | | 25 | |
| Plan participants' contributions | | — |
| | — |
| | 3 |
| | 4 |
| | 10 |
| | 3 |
| Plan participants' contributions | | — | | | — | | | 3 | | | 3 | | | 8 | | | 10 | |
| Currency exchange rate changes | | — |
| | — |
| | 135 |
| | (329 | ) | | — |
| | — |
| Currency exchange rate changes | | — | | | — | | | (178) | | | 354 | | | — | | | — | |
| Benefits paid/settlements | | (420 | ) | | (723 | ) | | (270 | ) | | (281 | ) | | (40 | ) | | (60 | ) | Benefits paid/settlements | | (371) | | | (289) | | | (297) | | | (284) | | | (33) | | | (35) | |
| Other | | — |
| | — |
| | (7 | ) | | (5 | ) | | — |
| | — |
| Other | | — | | | — | | | (1) | | | — | | | — | | | — | |
| Fair Value of Plan Assets, December 31 | | $ | 2,493 |
| | $ | 2,358 |
| | $ | 6,385 |
| | $ | 5,729 |
| | $ | — |
| | $ | — |
| Fair Value of Plan Assets, December 31 | | $ | 2,544 | | | $ | 2,802 | | | $ | 7,252 | | | $ | 7,199 | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Net Funded Status at December 31(1) | | $ | (1,105 | ) | | $ | (876 | ) | | $ | (107 | ) | | $ | (278 | ) | | $ | (385 | ) | | $ | (385 | ) | Net Funded Status at December 31(1) | | $ | (828) | | | $ | (945) | | | $ | 709 | | | $ | 40 | | | $ | (303) | | | $ | (370) | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Amounts Recognized in the Consolidated Balance Sheets: | | |
| | | | |
| | | | |
| | |
| Amounts Recognized in the Consolidated Balance Sheets: | | | | | | | | |
| Other long-term assets | | $ | — |
| | $ | — |
| | $ | 451 |
| | $ | 281 |
| | $ | — |
| | $ | — |
| Other long-term assets | | $ | — | | | $ | — | | | $ | 1,211 | | | $ | 617 | | | $ | — | | | $ | — | |
| Accrued compensation and benefit costs | | (25 | ) | | (25 | ) | | (22 | ) | | (24 | ) | | (33 | ) | | (35 | ) | Accrued compensation and benefit costs | | (24) | | | (24) | | | (21) | | | (24) | | | (26) | | | (30) | |
| Pension and other benefit liabilities | | (1,080 | ) | | (851 | ) | | (536 | ) | | (535 | ) | | — |
| | — |
| Pension and other benefit liabilities | | (804) | | | (921) | | | (481) | | | (553) | | | — | | | — | |
| Post-retirement medical benefits | | — |
| | — |
| | — |
| | — |
| | (352 | ) | | (350 | ) | Post-retirement medical benefits | | — | | | — | | | — | | | — | | | (277) | | | (340) | |
| Net Amounts Recognized | | $ | (1,105 | ) | | $ | (876 | ) | | $ | (107 | ) | | $ | (278 | ) | | $ | (385 | ) | | $ | (385 | ) | Net Amounts Recognized | | $ | (828) | | | $ | (945) | | | $ | 709 | | | $ | 40 | | | $ | (303) | | | $ | (370) | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Accumulated Benefit Obligation | | $ | 3,598 |
| | $ | 3,234 |
| | $ | 6,326 |
| | $ | 5,847 |
| | | | | Accumulated Benefit Obligation | | $ | 3,372 | | | $ | 3,747 | | | $ | 6,412 | | | $ | 7,018 | | |
_____________
| |
(1) | Includes under-funded and unfunded plans. |
(1)Includes under-funded and unfunded plans.
Benefit plans pre-tax amounts recognized in AOCL at December 31:31st: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 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) | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Benefits | | |
| | | U.S. Plans | | Non-U.S. Plans | | Retiree Health |
| | | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 |
| Net actuarial loss (gain) | | $ | 1,059 |
| | $ | 933 |
| | $ | 1,462 |
| | $ | 1,457 |
| | $ | (29 | ) | | $ | (42 | ) |
| Prior service (credit) cost | | (3 | ) | | (5 | ) | | 22 |
| | 19 |
| | (164 | ) | | (240 | ) |
| Total Pre-tax loss (gain) | | $ | 1,056 |
| | $ | 928 |
| | $ | 1,484 |
| | $ | 1,476 |
| | $ | (193 | ) | | $ | (282 | ) |
Xerox 20192021 Annual Report 112123
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 | |
|
| | | | | | | | | | | | | | | | |
| | | December 31, 2019 | | December 31, 2018 |
| | | Accumulated Benefit Obligation | | Fair Value of Plan Assets | | Accumulated Benefit Obligation | | Fair Value of Plan Assets |
| Underfunded Plans: | | | | | | | | |
| U.S. | | $ | 3,261 |
| | $ | 2,493 |
| | $ | 2,918 |
| | $ | 2,358 |
|
| Non U.S. | | 767 |
| | 697 |
| | 713 |
| | 624 |
|
| | | | | | | | | |
| Unfunded Plans: | | | | | | | | |
| U.S. | | $ | 337 |
| | $ | — |
| | $ | 316 |
| | $ | — |
|
| Non U.S. | | 469 |
| | — |
| | 446 |
| | — |
|
| | | | | | | | | |
| Total Underfunded and Unfunded Plans: | | | | | | | | |
| U.S. | | $ | 3,598 |
| | $ | 2,493 |
| | $ | 3,234 |
| | $ | 2,358 |
|
| Non U.S. | | 1,236 |
| | 697 |
| | 1,159 |
| | 624 |
|
| Total | | $ | 4,834 |
| | $ | 3,190 |
| | $ | 4,393 |
| | $ | 2,982 |
|
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 | |
|
| | | | | | | | | | | | | | | | |
| | | December 31, 2019 | | December 31, 2018 |
| | | Benefit Obligation | | Fair Value of Plan Assets | | Benefit Obligation | | Fair Value of Plan Assets |
| Underfunded Plans: | | | | | | | | |
| U.S. | | $ | 3,261 |
| | $ | 2,493 |
| | $ | 2,918 |
| | $ | 2,358 |
|
| Non U.S. | | 780 |
| | 697 |
| | 888 |
| | 782 |
|
| | | | | | | | | |
| Unfunded Plans: | | | | | | | | |
| U.S. | | $ | 337 |
| | $ | — |
| | $ | 316 |
| | $ | — |
|
| Non U.S. | | 479 |
| | — |
| | 456 |
| | — |
|
| | | | | | | | | |
| Total Underfunded and Unfunded Plans: | | | | | | | | |
| U.S. | | $ | 3,598 |
| | $ | 2,493 |
| | $ | 3,234 |
| | $ | 2,358 |
|
| Non U.S. | | 1,259 |
| | 697 |
| | 1,344 |
| | 782 |
|
| Total | | $ | 4,857 |
| | $ | 3,190 |
| | $ | 4,578 |
| | $ | 3,140 |
|
Our pensionPension plan assets and benefit obligations at December 31, 2019by country were as follows:
|
| | | | | | | | | | | | |
| | | Fair Value of Pension Plan Assets | | Pension Benefit Obligations | | Net Funded Status |
| U.S. funded | | $ | 2,493 |
| | $ | 3,261 |
| | $ | (768 | ) |
| U.S. unfunded | | — |
| | 337 |
| | (337 | ) |
| Total U.S. | | 2,493 |
| | 3,598 |
| | (1,105 | ) |
| U.K. | | 4,169 |
| | 3,798 |
| | 371 |
|
| Netherlands | | 1,083 |
| | 1,101 |
| | (18 | ) |
| Canada | | 721 |
| | 738 |
| | (17 | ) |
| Germany | | — |
| | 367 |
| | (367 | ) |
| Other | | 412 |
| | 488 |
| | (76 | ) |
| Total | | $ | 8,878 |
| | $ | 10,090 |
| | $ | (1,212 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 20192021 Annual Report 113124
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 |
| | | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 |
| Components of Net Periodic Benefit Costs: | | | | | | | | | | | | | | | | | | |
| Service cost | | $ | 2 |
| | $ | 2 |
| | $ | 2 |
| | $ | 22 |
| | $ | 27 |
| | $ | 29 |
| | $ | 2 |
| | $ | 4 |
| | $ | 5 |
|
Interest cost(1) | | 218 |
| | 63 |
| | 226 |
| | 153 |
| | 149 |
| | 158 |
| | 15 |
| | 23 |
| | 28 |
|
Expected return on plan assets(2) | | (210 | ) | | (67 | ) | | (227 | ) | | (233 | ) | | (244 | ) | | (221 | ) | | — |
| | — |
| | — |
|
| Recognized net actuarial loss (gain) | | 24 |
| | 22 |
| | 21 |
| | 43 |
| | 56 |
| | 79 |
| | (5 | ) | | — |
| | 1 |
|
| Amortization of prior service credit | | (2 | ) | | (2 | ) | | (2 | ) | | (2 | ) | | (4 | ) | | (4 | ) | | (77 | ) | | (19 | ) | | (4 | ) |
| Recognized settlement loss | | 93 |
| | 173 |
| | 133 |
| | 1 |
| | 1 |
| | 2 |
| | — |
| | — |
| | — |
|
| Recognized curtailment gain | | — |
| | — |
| | — |
| | — |
| | (1 | ) | | (2 | ) | | — |
| | — |
| | — |
|
| Defined Benefit Plans | | 125 |
| | 191 |
| | 153 |
| | (16 | ) | | (16 | ) | | 41 |
| | (65 | ) | | 8 |
| | 30 |
|
| Defined contribution plans | | 26 |
| | 37 |
| | 38 |
| | 23 |
| | 29 |
| | 29 |
| | n/a |
| | n/a |
| | n/a |
|
| Net Periodic Benefit Cost (Credit) | | 151 |
| | 228 |
| | 191 |
| | 7 |
| | 13 |
| | 70 |
| | (65 | ) | | 8 |
| | 30 |
|
| Other changes in plan assets and benefit obligations recognized in Other Comprehensive (Loss) Income: | | | | | | | | | | | | | | | | | | |
Net actuarial loss (gain) (3) | | 243 |
| | (50 | ) | | 238 |
| | 24 |
| | 33 |
| | (273 | ) | | 8 |
| | (63 | ) | | (16 | ) |
| Prior service cost (credit) | | — |
| | — |
| | — |
| | — |
| | 41 |
| | (1 | ) | | — |
| | (234 | ) | | — |
|
| Amortization of net actuarial (loss) gain | | (117 | ) | | (195 | ) | | (154 | ) | | (44 | ) | | (57 | ) | | (81 | ) | | 5 |
| | — |
| | (1 | ) |
| Amortization of net prior service credit | | 2 |
| | 2 |
| | 2 |
| | 2 |
| | 4 |
| | 4 |
| | 77 |
| | 19 |
| | 4 |
|
| Curtailment gain | | — |
| | — |
| | — |
| | — |
| | 1 |
| | — |
| | — |
| | — |
| | — |
|
Total Recognized in Other Comprehensive (Loss) Income(4) | | 128 |
| | (243 | ) | | 86 |
| | (18 | ) | | 22 |
| | (351 | ) | | 90 |
| | (278 | ) | | (13 | ) |
| Total Recognized in Net Periodic Benefit Cost and Other Comprehensive (Loss) Income | | $ | 279 |
| | $ | (15 | ) | | $ | 277 |
| | $ | (11 | ) | | $ | 35 |
| | $ | (281 | ) | | $ | 25 |
| | $ | (270 | ) | | $ | 17 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 $243, $258 and $257 and interest expense (income) directly allocated to TRA participant accounts of $128, $(46) and $127 for the years ended December 31, 2019, 2018 and 2017, respectively. |
| |
(2) | Expected return on plan assets includes expected investment income on non-TRA assets of $315, $357 and $321 and actual investment (loss) income on TRA assets of $128, $(46) and $127 for the years ended December 31, 2019, 2018 and 2017, respectively. |
| |
(3) | The non-U.S. plans Net actuarial (gain) loss for 2018 reflects an out-of-period adjustment in third quarter 2018 of $(53) to correct an overstated benefit obligation for our U.K. Final Salary Pension Plan at December 31, 2017. Refer to Note 1 - Basis of Presentation and Summary of Significant Accounting Policies for additional information regarding this adjustment. |
| |
(4) | Amounts represent the pre-tax effect included in Other comprehensive (loss) income. Refer to Note 25 - Other Comprehensive (Loss) Income for the related tax effects and the net of tax amounts. |
(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:
OnIn October 26, 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 currently estimateestimated 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 over 24 years (approximately(total approximately USD $2 per year) through 2019 and future years’ Net periodic benefit costs. The amount recorded continuesyear covering both adjustments).
At December 31, 2021, the aggregate cost for this matter is estimated to reflect our best estimatebe approximately 0.8% of the impactU.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 this ruling.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.
Xerox 2019 Annual Report 114
Retiree Health Plans:
In December 2018, we amended our Canadian Retiree Health Plan to eliminate coverage for certain future and existing retirees. This negative plan amendment resulted in a reduction in the postretirement benefit obligation of $19, which is expected to be amortized to future net periodic benefit costs as a prior service credit.
In October 2018,2021, we amended our U.S. Retiree Health Plan effective January 1, 2019, to reduce certain benefits for existing non-unionunion 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 $283, which consisted of $216 for the plan amendment and an actuarial gain of $67 related to the required plan remeasurement upon amendment.$11. The amount for the plan amendment is expected towill be amortized to future net periodic benefit costs as a prior service credit.
Plan Assets
Current Allocation
As of the 20192021 and 20182020 measurement dates, the global pension plan assets were $8,878$9,796 and $8,087,$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, 2019 |
| | | 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 | | $ | 9 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 9 |
| | $ | 421 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 421 |
|
| Equity Securities: | | | | | | | | | | | | | | | | | | | | |
| U.S. | | 182 |
| | — |
| | — |
| | 39 |
| | 221 |
| | 132 |
| | 52 |
| | — |
| | — |
| | 184 |
|
| International | | 193 |
| | — |
| | — |
| | 191 |
| | 384 |
| | 462 |
| | 302 |
| | — |
| | 118 |
| | 882 |
|
| Fixed Income Securities: | | | | | | | | | | | | | | | | | | | | |
| U.S. treasury securities | | — |
| | 316 |
| | — |
| | — |
| | 316 |
| | — |
| | 47 |
| | — |
| | — |
| | 47 |
|
| Debt security issued by government agency | | — |
| | 67 |
| | — |
| | — |
| | 67 |
| | — |
| | 1,825 |
| | — |
| | — |
| | 1,825 |
|
| Corporate bonds | | — |
| | 1,119 |
| | — |
| | — |
| | 1,119 |
| | — |
| | 841 |
| | — |
| | — |
| | 841 |
|
| Derivatives | | — |
| | 45 |
| | — |
| | — |
| | 45 |
| | — |
| | 186 |
| | — |
| | — |
| | 186 |
|
| Real estate | | — |
| | — |
| | 5 |
| | 10 |
| | 15 |
| | — |
| | — |
| | 219 |
| | 116 |
| | 335 |
|
| Private equity/venture capital | | — |
| | — |
| | — |
| | 199 |
| | 199 |
| | — |
| | — |
| | 5 |
| | 1,527 |
| | 1,532 |
|
| Guaranteed insurance contracts | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 90 |
| | — |
| | 90 |
|
Other(2)(3) | | (36 | ) | | — |
| | — |
| | 154 |
| | 118 |
| | 11 |
| | 31 |
| | — |
| | — |
| | 42 |
|
| Total Fair Value of Plan Assets | | $ | 348 |
| | $ | 1,547 |
| | $ | 5 |
| | $ | 593 |
| | $ | 2,493 |
| | $ | 1,026 |
| | $ | 3,284 |
| | $ | 314 |
| | $ | 1,761 |
| | $ | 6,385 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 $76 (measured at NAV) which are invested approximately 75% in fixed income securities and approximately 25% in equity securities. |
| |
(3) | Other Level 1 includes net non-financial (liabilities) assets of $(36) U.S. and $11 Non-U.S., respectively, such as due to/from broker, interest receivables and accrued expenses. |
(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 20192021 Annual Report 115126
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2018 |
| | | 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 | | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | 370 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 370 |
|
| Equity Securities: | | | | | | | | | | | | | | | | | | | | |
| U.S. | | 82 |
| | — |
| | — |
| | 35 |
| | 117 |
| | 103 |
| | 42 |
| | — |
| | — |
| | 145 |
|
| International | | 97 |
| | — |
| | — |
| | 52 |
| | 149 |
| | 359 |
| | 111 |
| | — |
| | 112 |
| | 582 |
|
| Fixed Income Securities: | | | | | | | | | | | | | | | | | | | |
|
|
| U.S. treasury securities | | — |
| | 248 |
| | — |
| | — |
| | 248 |
| | — |
| | 57 |
| | — |
| | — |
| | 57 |
|
| Debt security issued by government agency | | — |
| | 81 |
| | — |
| | — |
| | 81 |
| | — |
| | 1,861 |
| | — |
| | — |
| | 1,861 |
|
| Corporate bonds | | — |
| | 1,363 |
| | — |
| | — |
| | 1,363 |
| | — |
| | 736 |
| | — |
| | — |
| | 736 |
|
| Derivatives | | — |
| | (26 | ) | | — |
| | — |
| | (26 | ) | | — |
| | 99 |
| | — |
| | — |
| | 99 |
|
| Real estate | | 19 |
| | — |
| | — |
| | 9 |
| | 28 |
| | — |
| | — |
| | 210 |
| | 157 |
| | 367 |
|
| Private equity/venture capital | | — |
| | — |
| | — |
| | 353 |
| | 353 |
| | — |
| | — |
| | 6 |
| | 1,386 |
| | 1,392 |
|
| Guaranteed insurance contracts | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 92 |
| | — |
| | 92 |
|
Other(2) | | 12 |
| | — |
| | — |
| | 32 |
| | 44 |
| | 5 |
| | 23 |
| | — |
| | — |
| | 28 |
|
| Total Fair Value of Plan Assets | | $ | 211 |
| | $ | 1,666 |
| | $ | — |
| | $ | 481 |
| | $ | 2,358 |
| | $ | 837 |
| | $ | 2,929 |
| | $ | 308 |
| | $ | 1,655 |
| | $ | 5,729 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 Level 1 includes net non-financial (liabilities) assets of $12 U.S. and $5 Non-U.S., respectively, such as due to/from broker, interest receivables and accrued expenses. |
(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, 2017 | | $ | — |
| | $ | 137 |
| | $ | 7 |
| | $ | 100 |
| | $ | 244 |
|
| Purchases | | — |
| | 22 |
| | — |
| | 1 |
| | 23 |
|
| Sales | | — |
| | (1 | ) | | — |
| | (6 | ) | | (7 | ) |
| Realized losses | | (4 | ) | | — |
| | — |
| | — |
| | — |
|
| Unrealized gains (losses) | | 4 |
| | 62 |
| | (4 | ) | | — |
| | 58 |
|
| Currency translation | | — |
| | (10 | ) | | 3 |
| | (3 | ) | | (10 | ) |
| Balance at December 31, 2018 | | $ | — |
| | $ | 210 |
| | $ | 6 |
| | $ | 92 |
| | $ | 308 |
|
| Purchases | | 5 |
| | — |
| | — |
| | 2 |
| | 2 |
|
| Sales | | — |
| | — |
| | (5 | ) | | (4 | ) | | (9 | ) |
| Unrealized gains | | — |
| | 9 |
| | 4 |
| | 2 |
| | 15 |
|
| Currency translation | | — |
| | — |
| | — |
| | (2 | ) | | (2 | ) |
| Balance at December 31, 2019 | | $ | 5 |
| | $ | 219 |
| | $ | 5 |
| | $ | 90 |
| | $ | 314 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 areis 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 20192021 Annual Report 116127
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% |
_____________
|
| | | | | | | | |
| | | 2019 | | 2018 |
| | | U.S. | | Non-U.S. | | U.S. | | Non-U.S. |
| Equity investments | | 23% | | 14% | | 12% | | 13% |
| Fixed income investments | | 61% | | 46% | | 73% | | 46% |
| Real estate | | 6% | | 5% | | 3% | | 6% |
| Private equity/venture capital | | 8% | | 24% | | 6% | | 24% |
| Other | | 2% | | 11% | | 6% | | 11% |
| Total Investment Strategy | | 100% | | 100% | | 100% | | 100% |
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 timelycost-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, |
| | | 2019 | | Estimated 2020 |
| U.S. Plans | | $ | 26 |
| | $ | 25 |
|
| Non-U.S. Plans | | 115 |
| | 110 |
|
| Total | | $ | 141 |
| | $ | 135 |
|
| | | | | |
| Retiree Health | | $ | 30 |
| | $ | 35 |
|
| | | | | | | | | | | | | | |
| | 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 20192021 U.S. pension planDefined benefit plans contributions did 0tnot include any contributions for our domestic tax-qualified defined benefit plans because NaNnone were required to meet the minimum funding requirements. There are 0no contributions required in 20202022 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 |
| 2020 | | $ | 480 |
| | $ | 266 |
| | $ | 746 |
| | $ | 35 |
|
| 2021 | | 262 |
| | 272 |
| | 534 |
| | 32 |
|
| 2022 | | 269 |
| | 277 |
| | 546 |
| | 31 |
|
| 2023 | | 272 |
| | 283 |
| | 555 |
| | 29 |
|
| 2024 | | 264 |
| | 289 |
| | 553 |
| | 28 |
|
| Years 2025-2029 | | 1,198 |
| | 1,526 |
| | 2,724 |
| | 118 |
|
Xerox 2019 Annual Report 117
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 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 |
| | | 2019 | | 2018 | | 2017 |
| | | U.S. | | Non-U.S. | | U.S. | | Non-U.S. | | U.S. | | Non-U.S. |
| Discount rate | | 3.1 | % | | 1.8 | % | | 4.2 | % | | 2.6 | % | | 3.6 | % | | 2.3 | % |
| Rate of compensation increase | | 0.2 | % | | 2.6 | % | | 0.2 | % | | 2.6 | % | | 0.2 | % | | 2.6 | % |
| Interest crediting rate | | 2.8 | % | | 1.5 | % | | 2.8 | % | | 1.5 | % | | 2.8 | % | | 1.5 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 |
| | | 2019 | | 2018 | | 2017 |
| Discount rate | | 3.0 | % | | 4.1 | % | | 3.5 | % |
| | | | | | | | | | | | | | | | | | | | |
| | 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 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Benefits |
| | | 2020 | | 2019 | | 2018 | | 2017 |
| | | U.S. | | Non-U.S. | | U.S. | | Non-U.S. | | U.S. | | Non-U.S. | | U.S. | | Non-U.S. |
| Discount rate | | 3.1 | % | | 1.8 | % | | 4.2 | % | | 2.6 | % | | 3.6 | % | | 2.3 | % | | 4.0 | % | | 2.5 | % |
| Expected return on plan assets | | 6.0 | % | | 3.3 | % | | 6.0 | % | | 4.0 | % | | 5.8 | % | | 3.8 | % | | 7.0 | % | | 4.1 | % |
| Rate of compensation increase | | 0.2 | % | | 2.6 | % | | 0.2 | % | | 2.6 | % | | 0.2 | % | | 2.6 | % | | 0.2 | % | | 2.6 | % |
| Interest crediting rate | | 2.8 | % | | 1.5 | % | | 2.8 | % | | 1.5 | % | | 2.8 | % | | 1.5 | % | | 2.8 | % | | 1.5 | % |
|
| | | | | | | | | | | | |
| | | Retiree Health |
| | | 2020 | | 2019 | | 2018 | | 2017 |
| Discount rate | | 3.0 | % | | 4.1 | % | | 3.5 | % | | 3.9 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 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, |
| | | 2019 | | 2018 |
| Health care cost trend rate assumed for next year | | 6.0 | % | | 6.3 | % |
| Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) | | 4.3 | % | | 4.7 | % |
| Year that the rate reaches the ultimate trend rate | | 2026 |
| | 2025 |
|
| | | | | | | | | | | | | | |
| | 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, $662019.
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 2018 and $67 in 2017.savings of $20 for the year ended December 31, 2021.
Xerox 20192021 Annual Report 118129
Note 20 - Income and Other Taxes
Income(Loss) income before income taxes and equity income (pre-tax (loss) income) from continuing operations was as follows: |
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| Domestic income | | $ | 679 |
| | $ | 331 |
| | $ | 354 |
|
| Foreign income | | 143 |
| | 218 |
| | 171 |
|
| Income before Income Taxes and Equity Income | | $ | 822 |
| | $ | 549 |
| | $ | 525 |
|
| | | | | | | | | | | | | | | | | | | | |
| | 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, |
| | | 2019 | | 2018 | | 2017 |
| Federal Income Taxes | | | | | | |
| Current | | $ | (3 | ) | | $ | 37 |
| | $ | (12 | ) |
| Deferred | | 98 |
| | 83 |
| | 411 |
|
| Foreign Income Taxes | | | | | | |
| Current | | 43 |
| | 46 |
| | 62 |
|
| Deferred | | 5 |
| | 57 |
| | (21 | ) |
| State Income Taxes | | | | | | |
| Current | | 15 |
| | 29 |
| | 19 |
|
| Deferred | | 21 |
| | (5 | ) | | 9 |
|
| Income Tax Expense | | $ | 179 |
| | $ | 247 |
| | $ | 468 |
|
| | | | | | | | | | | | | | | | | | | | |
| | 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, | | Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 | | | 2021 | | 2020 | | 2019 |
| U.S. federal statutory income tax rate | | 21.0 | % | | 21.0 | % | | 35.0 | % | U.S. federal statutory income tax rate | | 21.0 | % | | 21.0 | % | | 21.0 | % |
| Nondeductible expenses | | 1.3 | % | | 3.7 | % | | 1.3 | % | Nondeductible expenses | | (1.9) | % | | 4.1 | % | | 1.3 | % |
| Effect of tax law changes | | (4.6 | )% | | 14.5 | % | | 76.2 | % | Effect of tax law changes | | 3.1 | % | | (10.5) | % | | (4.6) | % |
| Change in valuation allowance for deferred tax assets | | 2.0 | % | | 0.6 | % | | 1.1 | % | Change in valuation allowance for deferred tax assets | | 2.0 | % | | 9.9 | % | | 2.0 | % |
| State taxes, net of federal benefit | | 3.5 | % | | 2.3 | % | | 3.6 | % | State taxes, net of federal benefit | | (0.6) | % | | 5.5 | % | | 3.5 | % |
| Audit and other tax return adjustments | | 0.6 | % | | (1.8 | )% | | (9.4 | )% | Audit and other tax return adjustments | | 5.6 | % | | 1.4 | % | | 0.6 | % |
| Tax-exempt income, credits and incentives | | (2.1 | )% | | (2.2 | )% | | (3.2 | )% | Tax-exempt income, credits and incentives | | 4.5 | % | | (5.9) | % | | (2.1) | % |
Foreign rate differential adjusted for U.S. taxation of foreign profits(1) | | 0.1 | % | | 4.8 | % | | (16.5 | )% | Foreign rate differential adjusted for U.S. taxation of foreign profits(1) | | (0.9) | % | | (2.6) | % | | 0.1 | % |
| Stock-based compensation | | Stock-based compensation | | (0.2) | % | | 2.3 | % | | (0.3) | % |
| Goodwill impairment | | Goodwill impairment | | (29.1) | % | | — | % | | — | % |
| Other | | — | % | | 2.1 | % | | 1.0 | % | Other | | 0.1 | % | | 0.2 | % | | 0.3 | % |
| Effective Income Tax Rate | | 21.8 | % | | 45.0 | % | | 89.1 | % | 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. |
(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 $94, $80$61, $32 and $84$94 in income taxes to federal, foreign and state jurisdictions during the three years ended December 31, 2021, 2020 and 2019, 2018 and 2017, respectively.
Xerox 2021 Annual Report 130
Total income tax expense (benefit) was allocated to the following items: |
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| Pre-tax income | | $ | 179 |
| | $ | 247 |
| | $ | 468 |
|
Discontinued operations(1) | | 95 |
| | 10 |
| | 1 |
|
| Common shareholders' equity: | |
|
| |
|
| |
|
|
| Changes in defined benefit plans | | (55 | ) | | 131 |
| | 63 |
|
| Cash flow hedges | | (1 | ) | | 5 |
| | 5 |
|
| Translation adjustments | | 8 |
| | (9 | ) | | 1 |
|
| Retained Earnings | | — |
| | 36 |
| | — |
|
| Total Income Tax Expense | | $ | 226 |
| | $ | 420 |
| | $ | 538 |
|
_____________ | |
(1) | Refer to Note 7 - Divestitures for additional information regarding discontinued operations. |
| | | | | | | | | | | | | | | | | | | | |
| | 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 | |
_____________
Xerox 2019 Annual Report (1)119Refer 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 notmore-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. Our ongoingAs 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 more-likely-than-not outcomes resulting from these ongoing tax examinations as part of the examinations and relatedour continuing assessment of uncertain tax positions require judgment and can increase or decreaseto determine our effective tax rate, as well as impact our operating results.provision for income taxes. The specific timing of when the resolution of each tax position will be reached is uncertain. As of December 31, 2019,2021, 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:
| | | | | 2019 | | 2018 | | 2017 | | 2021 | | 2020 | | 2019 |
| Balance at January 1 | | $ | 108 |
| | $ | 125 |
| | $ | 165 |
| Balance at January 1 | | $ | 115 | | | $ | 127 | | | $ | 108 | |
| Additions related to current year | | 42 |
| | 2 |
| | 1 |
| Additions related to current year | | 7 | | | 3 | | | 42 | |
| Additions related to prior years positions | | 17 |
| | 3 |
| | 10 |
| Additions related to prior years positions | | — | | | 8 | | | 17 | |
| Reductions related to prior years positions | | (36 | ) | | (13 | ) | | (46 | ) | Reductions related to prior years positions | | (14) | | | (10) | | | (36) | |
Settlements with taxing authorities(1) | | (1 | ) | | (6 | ) | | (5 | ) | Settlements with taxing authorities(1) | | 7 | | | (8) | | | (1) | |
| Reductions related to lapse of statute of limitations | | (3 | ) | | (3 | ) | | (3 | ) | Reductions related to lapse of statute of limitations | | (7) | | | (7) | | | (3) | |
| Currency | | — |
| | — |
| | 3 |
| Currency | | (1) | | | 2 | | | — | |
| | Balance at December 31 | | $ | 127 |
| | $ | 108 |
| | $ | 125 |
| Balance at December 31 | | $ | 107 | | | $ | 115 | | | $ | 127 | |
_____________
| |
(1) | The majority of settlements did not result in the utilization of cash. |
(1)The majority of settlements did not result in the utilization of cash.
Included in the balances at December 31, 2021, 2020 and 2019 2018 and 2017 are $3,$1, $8 and $8,$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 $2, $2$1, $4 and $5$2 accrued for the payment of interest and penalties associated with unrecognized tax benefits at December 31, 2019, 20182021, 2020 and 2017,2019, respectively.
In the U.S., we are no longer subject to U.S. federal income tax examinations for years before 2015.2017. With respect to our major foreign jurisdictions, we are no longer subject to tax examinations by tax authorities for years before 2011.
Tax Cuts and Jobs Act (the Tax Act)
On December 22, 2017, the Tax Cuts and Jobs Act (the Tax Act) was enacted. The Tax Act significantly revised the U.S. corporate income tax system by, among other things, lowering the U.S. statutory corporate income tax rate from 35% to 21% and implementing a territorial tax system that includes a one-time transition tax on deemed repatriated earnings of foreign subsidiaries.
We recorded the following charges (credits) to Income tax expense associated with the Tax Act:
|
| | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | |
| | | 2019 | | 2018 | | 2017 | | Total |
| Tax Act Impacts | | $ | (35 | ) | | $ | 89 |
| | $ | 400 |
| | $ | 454 |
|
The net charge of $454 included the following components:
Foreign tax effects: The deemed repatriation tax associated with the Tax Act was $164 and was based on total post-1986 earnings and profits (E&P) that had previously been deferred from U.S. income taxes. We utilized our existing foreign tax credit carryforwards to settle this deemed repatriation tax. Our net charge for the Tax Act also included a charge of $99 for other tax liabilities and adjustments resulting from our actual and anticipated distributions of our net accumulated foreign E&P. As a consequence of the Tax Act, we now no longer consider our post 1986 E&P indefinitely reinvested.
Xerox 20192021 Annual Report 120131
Deferred tax assets and liabilities: Our net charge includes a $191 charge for the remeasurement of certain deferred tax assets and liabilities based on the new statutory income tax rate of 25%, inclusive of estimated state taxes.
Deferred Income Taxes
At December 31, 20192021 we have not provided deferred taxes on our undistributed pre-1987 E&P of approximately $350,$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, 20182020 of $1.5 billion$350 is due to our sale of Fuji Xerox in November 2019 – refer to Note 7 – Divestitures for additional information regarding this sale.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, |
| | | 2019 | | 2018 |
| Deferred Tax Assets | | | | |
| Research and development | | $ | 143 |
| | $ | 252 |
|
| Post-retirement medical benefits | | 98 |
| | 99 |
|
| Net operating losses | | 389 |
| | 389 |
|
| Operating reserves, accruals and deferrals | | 95 |
| | 138 |
|
| Tax credit carryforwards | | 239 |
| | 254 |
|
| Deferred and share-based compensation | | 26 |
| | 32 |
|
| Pension | | 298 |
| | 266 |
|
| Depreciation | | 9 |
| | 90 |
|
| Operating lease liabilities | | 347 |
| | — |
|
| Other | | 62 |
| | 46 |
|
| Subtotal | | 1,706 |
| | 1,566 |
|
| Valuation allowance | | (399 | ) | | (397 | ) |
| Total | | $ | 1,307 |
| | $ | 1,169 |
|
| | | | | |
| Deferred Tax Liabilities | | | | |
| Finance lease and installment sales | | $ | 243 |
| | $ | 291 |
|
| Intangibles and goodwill | | 128 |
| | 129 |
|
| Unremitted earnings of foreign subsidiaries | | 39 |
| | 59 |
|
| Operating lease ROU assets | | 319 |
| | — |
|
| Other | | 17 |
| | 1 |
|
| Total | | $ | 746 |
| | $ | 480 |
|
| | | | | |
| Total Deferred Taxes, Net | | $ | 561 |
| | $ | 689 |
|
| | | | | |
| Reconciliation to the Consolidated Balance Sheets | | | | |
| Deferred tax assets | | $ | 598 |
| | $ | 740 |
|
Deferred tax liabilities(1) | | (37 | ) | | (51 | ) |
| Total Deferred Taxes, Net | | $ | 561 |
| | $ | 689 |
|
| | | | | | | | | | | | | | |
| | 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. |
(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 differencedifferences and tax planning strategies. The deferred tax assets requiring significant judgment are USU.S. tax credit carryforwards with a limited life and a foreign net operating loss with an indefinite carryforward period.
Xerox 2019 Annual Report 121
The net change in the total valuation allowance for the years ended December 31, 2021, 2020 and 2019 2018was a decrease of $39, a decrease of $3 and 2017 was an increase of $2, a decrease of $38 and an increase of $19, 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, 2019,2021, we had tax credit carryforwards of $239$143 available to offset future income taxes, of which $1$2 are available to carryforward indefinitely while the remaining $238$141 will expire 20202022 through 20402042 if not utilized. We also had net operating loss carryforwards for income tax purposes of $522$496 that will expire 20202022 through 2040,2042, if not utilized, and $1.7$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, 2019,2021, 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,
2019 | | December 31,
2018 |
| Tax contingency - unreserved | | $ | 442 |
| | $ | 500 |
|
| Escrow cash deposits | | 51 |
| | 58 |
|
| Surety bonds | | 135 |
| | 106 |
|
| Letters of credit | | 91 |
| | 104 |
|
| Liens on Brazilian assets | | — |
| | — |
|
| | | | | | | | | | | | | | |
| | 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.cases and currency, partially offset by interest. With respect to the unreserved tax contingency, the majority has been assessed by management as
Xerox 2019 Annual Report 122
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, 2019.2021 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
Pending Litigation Relating to the Fuji Transaction:
| |
1. | DeasonMiami Firefighters’ Relief & Pension Fund v. Fujifilm Holdings Corp., et al.; Deason v. Xerox Corp., et al.; In re Xerox Corporation Consolidated Shareholder Litigation: |
In February 2018, 5 complaints (the "Fuji Transaction Shareholder Lawsuits"), including 4 putative class actions (which have been consolidated), were filed by Xerox shareholders in the Supreme Court of the State of New York, County of New York (the "Court") in connection with the proposed transaction to combine Xerox and Fuji Xerox (the “Fuji Transaction”). All of the complaints named as defendants Xerox, its directors, and FUJIFILM Holdings Corporation (“Fujifilm”). The complaint in one of the actions also named as a defendant Ursula M. Burns, the former Chief Executive Officer of Xerox. The plaintiffs alleged, among other things, that Xerox's directors breached their fiduciary duties in negotiating, approving, and purportedly making false and misleading disclosures about the Fuji Transaction, and that Fujifilm aided and abetted those breaches. The complaint in one of the actions further alleged that Xerox and the director defendants engaged in common law fraud by purportedly failing to disclose information about the joint venture agreements between Xerox and Fujifilm. The Fuji Transaction Shareholder Lawsuits sought injunctive relief preventing the previously proposed transactions, and/or additional disclosures by Xerox’s directors, unspecified damages from Xerox’s directors, costs and attorneys’ fees, as well as other relief.
One of the Fuji Transaction Shareholder Lawsuits was brought by Darwin Deason, a Xerox shareholder ("Deason I"). Another complaint was filed by Mr. Deason against Xerox and its directors in the same Court on March 2, 2018 ("Deason II") alleging that defendants breached their fiduciary duties by refusing Mr. Deason’s request for a waiver of the deadline for nomination of a new slate of Xerox directors. In Deason II, Mr. Deason sought to enjoin Xerox and its directors from enforcing Xerox’s advance notice by-laws, thereby allowing Mr. Deason to proceed with the nominations, as well as costs, fees, and other relief.
On April 27, 2018, the Court issued decisions and orders granting plaintiffs’ preliminary injunction motions, which (i) enjoined Xerox from “taking any further action to consummate the change of control transaction between Xerox and Fuji that was announced on January 31, 2018 pending a final determination of the claims asserted in the underlying action;” (ii) enjoined Xerox from enforcing its advance notice bylaw provision requiring shareholders to nominate directors for election at the 2018 annual shareholder meeting by December 11, 2017; and (iii) required Xerox to waive such advance notice bylaw provision to permit the noticing of a slate of director nominees for election at the 2018 annual shareholder meeting, and denying defendants’ motions to dismiss.
On May 1, 2018, Xerox entered into a Director Appointment, Nomination and Settlement Agreement (the “Initial Settlement Agreement”) with Mr. Deason and Carl C. Icahn, and certain of his affiliates who were also Xerox shareholders (the "Icahn Group"), among others, that would have resolved Deason I, Deason II and the pending proxy contest in connection with Xerox’s 2018 Annual Meeting of Shareholders. The Initial Settlement Agreement expired by its terms on May 3, 2018 without becoming effective.et al.:
On May 7, 2018, defendants filed with the Supreme Court of the State of New York, Appellate Division, First Judicial Department, notices of appeal of, and motions to stay pending appeal, the lower Court’s decision and order. Defendants also moved the appellate court for interim relief ordering that the appeal be heard on an expedited basis. At a hearing before the appellate court on May 7, 2018, the appellate court ruled that the appeals would be heard on an expedited basis and granted a partial interim stay allowing Xerox and Fujifilm to take steps to seek regulatory approvals related to the Fuji Transaction pending a ruling from the appellate court on defendants’ motions to stay pending appeal.
On May 13, 2018, a second Director Appointment, Nomination and Settlement Agreement (the "Final Settlement Agreement") with respect to Deason I, Deason II and the pending proxy contest in connection with Xerox's 2018 Annual Meeting of Shareholders that was initiated by the Icahn Group was signed on behalf of Mr. Deason, the Icahn Group and all defendants except Fujifilm, and a memorandum of understanding regarding settlement of the putative class case was signed by all defendants except Fujifilm. Pursuant to the settlements, the settling defendants withdrew their appeal and motion to stay in Deason I and Deason II. The settling defendants also withdrew their motion to stay in
Xerox 2019 Annual Report 123
the putative class case. The Court entered a stipulation of discontinuance as to the settling parties in Deason II on May 14, 2018, and agreed on June 22, 2018 to do the same in Deason I.
On June 14, 2018, Fujifilm filed answers in Deason I and the putative class case, along with cross-claims against the members of the Xerox Board (as constituted before May 13, 2018) and a third-party complaint against Xerox director Jonathan Christodoro, seeking contribution for any potential award against Fujifilm for aiding and abetting purported breaches of fiduciary duties.
On June 19, 2018, the putative class plaintiffs filed a motion for preliminary approval of a stipulation of settlement that would resolve the claims asserted by the plaintiffs in the putative class case against all defendants, other than Fujifilm. Carmen Ribbe, the plaintiff in the below derivative action, and Fujifilm filed oppositions to the motion on July 10, 2018.
On June 22, 2018, the Court entered an order denying a joint motion by the putative class plaintiffs and the settling defendants to dissolve the injunction in the putative class case as against the settling defendants, and entered an order denying Fujifilm’s motion to dissolve the injunctions in the putative class case and Deason I in their entirety.
On July 16, 2018, the Court held a hearing concerning the putative class plaintiffs’ motion for preliminary approval of the settlement in the putative class case. The Court indicated that it was not inclined to consider motions for approval of the settlement prior to considering whether the putative class should be certified.
On August 2, 2018, the Appellate Division entered orders recognizing the Xerox defendants’ withdrawal of their appeal in the Deason cases and denying all appellants’ motions to stay pending determination of appeals in the Deason and putative class cases.
On August 2, 2018, the Appellate Division entered orders (i) at their request, deeming withdrawn the Xerox defendants’ appeal and motion to stay in the Deason cases; (ii) upon their request, deeming withdrawn the Xerox defendants’ motion to stay, pending determination of appeal, the putative class case; and (iii) denying Fujifilm’s motion to stay pending determination of its appeals in the Deason and putative case cases.
On September 21, 2018, putative class plaintiffs filed a motion for certification of a settlement class and a motion to transmit notice of the proposed settlement to the proposed class. On October 17, 2018, derivative plaintiff Carmen Ribbe and Fujifilm filed oppositions to the putative class plaintiffs’ motion to transmit notice to the proposed class. The class has not yet been certified, and preliminary approval has not been granted.
The Appellate Division heard oral argument on September 25, 2018 on Fujifilm’s appeal of the Court’s decision. On October 16, 2018, the Appellate Division entered a decision and order reversing the Court’s rulings, ordering that the claims brought against Fujifilm in the cases by Mr. Deason and the purported class be dismissed, and further ordering that the preliminary injunction of the proposed Fuji Transaction be dissolved (the “Appellate Decision and Order”).
On November 15, 2018, the putative class plaintiffs filed with the Appellate Division a motion seeking the opportunity to reargue Fujifilm’s appeal or, in the alternative, for leave to appeal the Appellate Decision and Order to the New York State Court of Appeals.
On December 6, 2018, pursuant to the Appellate Decision and Order, the Court entered a judgment dismissing the complaints against Fujifilm in Deason I and the putative class case. The Court further issued orders denying the putative class plaintiffs’ motion for class certification, without prejudice to renewing the motion after the outcome of any appeals of the Appellate Decision and Order.
On January 8, 2019, the Court entered an order staying all further proceedings in Deason I and the putative class case until thirty days after exhaustion of appeals, including any appeals to the New York State Court of Appeals, of the Appellate Decision and Order. On January 9, 2019, the Court entered an order denying the putative class plaintiffs’ motion to transmit notice to the proposed class, without prejudice to renewal of their motion at a later time.
On October 31, 2018 and January 3, 2019, respectively, Xerox and the Xerox director defendants in the putative class case filed with the Appellate Division a request and motion seeking an extension, until after any decision regarding approval of settlement of the putative class action, of the deadline by which to perfect their appeal of the Court’s April 27, 2018 decision and order. On May 16, 2019, the Appellate Division entered an order granting the motion and extended the deadline until the October 2019 Term.
On February 21, 2019, the Appellate Division issued an order denying the putative class plaintiffs’ motion seeking to reargue Fujifilm’s appeal or, in the alternative, for leave to appeal the Appellate Decision and Order to the New York State Court of Appeals. No further notice of appeal was filed, and the Appellate Decision and Order became final and unappealable on March 26, 2019.
Xerox 2019 Annual Report 124
On May 3, 2019, putative class plaintiffs filed a renewed motion for approval of the form of a notice to putative class members. On May 6, 2019, putative class plaintiffs filed a renewed motion for class certification and notice of motion to approve class settlement and proposed final approval order. On May 24, 2019, the Court entered an order approving the form notice and proposed manner of its dissemination.
On June 6, 2019, the Court entered an order pursuant to which plaintiffs submitted their motion to approve attorneys’ fees and expenses on July 19, 2019; requiring filing of any objections to or opt-outs from the proposed putative class settlement by August 9, 2019; and setting September 6, 2019 for its hearing on putative class plaintiffs’ motion for class certification and settlement approval. The hearing took place, and on September 12, 2019, the Court entered a decision and order denying both motions.
At a conference held on November 19, 2019, the Court so-ordered the parties' joint stipulation and proposed order of discontinuance without prejudice, without payment by any party.
| |
2. | Ribbe v. Jacobson, et al.: |
On April 11, 2019, Carmen Ribbe filed a putative derivative and class action stockholder complaint in the Supreme Court of the State of New York for New York County, naming as defendants Xerox, current Board members Gregory Q. Brown, Joseph J. Echevarria, Cheryl Gordon Krongard, Sara Martinez Tucker, Keith Cozza, Giovanni G. Visentin, Jonathan Christodoro, Nicholas Graziano, and A. Scott Letier, and former Board members Jeffrey Jacobson, William Curt Hunter, Robert J. Keegan, Charles Prince, Ann N. Reese, and Stephen H. Rusckowski. Plaintiff previously filed a putative shareholder derivative lawsuit on May 24, 2018 against certain of these defendants, as well as others, in the same court; that lawsuit was dismissed without prejudice on December 6, 2018. The new complaint included putative derivative claims on behalf of Xerox for breach of fiduciary duty against the members of the Xerox Board who approved Xerox’s entry into agreements to settle the Deason and In re Xerox Corporation Consolidated Shareholder Litigation (“XCCSL”) actions (described above). Plaintiff alleges that the settlements ceded control of the Board and the Company to Darwin Deason and Carl C. Icahn without a vote by, or compensation to, other Xerox stockholders; improperly provided certain benefits and releases to the resigning and continuing directors; and subjected Xerox to potential breach of contract damages in an action by Fuji relating to Xerox’s termination of the proposed Fuji Transaction. Plaintiff also alleges that the current Board members breached their fiduciary duties by allegedly rejecting plaintiff’s January 14, 2019 shareholder demand on the Board to remedy harms arising from entry into the Deason and XCCSL settlements. The new complaint further included direct claims for breach of fiduciary duty on behalf of a putative class of current Xerox stockholders other than Mr. Deason, Mr. Icahn, and their affiliated entities (the “Ribbe Class”) against the defendants for causing Xerox to enter into the Deason and XCCSL settlements, which plaintiff alleges perpetuated control of Xerox by Mr. Icahn and Mr. Deason and denied the voting franchise of Xerox shareholders. Among other things, plaintiff seeks damages in an unspecified amount for the alleged fiduciary breaches in favor of Xerox against defendants jointly and severally; rescission or reformation of the Deason and XCCSL settlements; restitution of funds paid to the resigning directors under the Deason settlement; an injunction against defendants’ engaging in the alleged wrongful practices and equitable relief affording the putative Ribbe Class the ability to determine the composition of the Board; costs and attorneys’ fees; and other further relief as the Court may deem proper.
Defendants accepted service of the complaint as of May 16, 2019. On June 4, 2019, the Court entered an order setting a briefing schedule for defendants’ motions to dismiss the complaint. On July 12, 2019, plaintiff filed a motion to preclude defendants from referencing in their motions to dismiss the formation of, or work by, the committee of the Board established to investigate plaintiff’s shareholder demand. On July 18, 2019, the Court denied plaintiff’s motion and adjourned sine die the deadline by which defendants must file any motions to dismiss the complaint.
On January 6, 2020, plaintiff filed his first amended complaint (“FAC”). The FAC includes many of plaintiff’s original allegations regarding the 2018 shareholder litigation and settlements, as well as additional allegations, including, among others, that the members of the Special Committee of the Board that investigated plaintiff’s demand lacked independence and wrongfully refused to pursue the claims in the demand; allegations that an agreement announced in November 2019 for, among other things, the sale by Xerox of its interest in Fuji Xerox to Fujifilm and dismissal of Fujifilm’s breach of contract lawsuit against Xerox (the “FX Sale Transaction”), was unfavorable to Xerox; and allegations about a potential acquisition by Xerox of HP similar to those in the Miami Firefighters derivative action described below. In addition to the claims in the April 11, 2019 complaint, the FAC adds as defendants Carl C. Icahn, Icahn Capital LP, and High River Limited Partnership (the “Icahn defendants”) and asserts claims against those defendants and the Board similar to those in Miami Firefighters relating to the Icahn defendants’ purchases of HP stock allegedly with knowledge of material nonpublic information concerning Xerox’s potential acquisition of HP. In addition to the relief sought in Ribbe’s prior complaint, the FAC seeks relief similar to that sought in Miami Firefighters relating to the Icahn defendants’ alleged purchases of HP stock.
Xerox 2019 Annual Report 125
On January 21, 2020, plaintiff in the Miami Firefighters action filed a motion seeking to intervene in Ribbe and to have stayed, or alternatively, severed and consolidated with the Miami Firefighters action, any claims first filed in Miami Firefighters and later asserted by Ribbe. At a conference held on February 25, 2020, the Court denied the motion to intervene without prejudice.
Xerox will vigorously defend against this matter. At this time, it is premature to make any conclusion regarding the probability of incurring material losses in this litigation. Should developments cause a change in our determination as to an unfavorable outcome, or result in a final adverse judgment or settlement, there could be a material adverse effect on our results of operations, cash flows and financial position in the period in which such change in determination, judgment, or settlement occurs.
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3. | Fujifilm Holdings Corp. v. Xerox Corporation: |
On June 18, 2018, Fujifilm filed a complaint against Xerox in the U.S. District Court for the Southern District of New York, relating to the Fuji Transaction agreements. The complaint alleges that Xerox: (1) willfully breached the Fuji Transaction agreements by purporting to terminate them to appease Messrs. Icahn and Deason and using as a pretext issues with Fujifilm’s untimely submitted financials, and by settling Deason I and Deason II without notice to or consent by Fujifilm; (2) willfully breached the implied covenant of good faith and fair dealing by failing to support and use best efforts to conclude the Fuji Transaction, thus depriving Fujifilm of the benefit of its bargain; and (3) effected a change in Xerox’s recommendation regarding the Fuji Transaction, entitling Fujifilm to terminate the Fuji Transaction agreements and to receive from Xerox a $183 termination fee. Fujifilm seeks a judgment for damages to be determined at trial in an amount in excess of $1.0 billion plus punitive damages; a declaration regarding the alleged change in recommendation such that Fujifilm may terminate the transaction and Xerox must pay the $183 termination fee and other remedies; costs and attorneys’ fees; and other relief the court may deem appropriate.
At a conference on September 24, 2018, the Court stayed all discovery pending resolution of Xerox’s motion to dismiss. Xerox filed its motion to dismiss on October 1, 2018. On February 22, 2019, following oral argument, the Court denied the motion to dismiss.
On March 12, 2019, the Court entered a scheduling order setting various case deadlines. Xerox filed its answer denying the claims on March 15, 2019. Discovery has commenced and is ongoing. On June 24, 2019 and August 12, 2019, the Court entered stipulated revised scheduling orders extending certain case deadlines.
In November 2019, the parties entered into a Dismissal and Release Agreement pursuant to which, on November 12, 2019, they filed a joint stipulation of dismissal with prejudice. No payment by Xerox was required.
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4. | 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 currentthen-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 JanuaryAugust 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 intervenethe Icahn defendants’ losses resulting from their investment in Ribbe v. Jacobson, et al., described above,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 have stayed, or alternatively, severedthe 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 consolidated with thisthe 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 any claims first filedthat would be in this actionthe 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 20192021 Annual Report 126134
later asserted by Ribbe. At a conference held on February 25, 2020, the Court denied the motion to intervene without prejudice.
Xerox Holdings will vigorously defendCorporation 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 this matter. At thisFactory 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 it is premature to make any conclusion regarding the probability of incurring material losses in this litigation. Should developments cause a change in our determination as to an unfavorable outcome, or result in a final adverse judgment or settlement, there could be a material adverse effect on our results of operations, cash flows and financial position in the period in which such change in determination, judgment,to answer or settlement occurs.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
Xerox Holdings' and ourThe 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'Holdings Corporation's and Xerox'sXerox 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 weXerox Corporation may have recourse against our
Xerox 2019 Annual Report 127
insurance carriers for certain payments made by Xerox Holdings Corporation or us.Xerox Corporation. However, certain indemnification payments (such as those related to "clawback" provisions in certain compensation arrangements) may not be covered under Xerox Holdings'Holdings Corporation's and ourXerox Corporation's directors' and officers' insurance coverage. Xerox Holdings Corporation and weXerox 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 the Company.Xerox Corporation. Finally, in connection with Xerox Holdings Corporation's and/or ourXerox 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 2018were $8, $8 and 2017 were $12, $14 and $15, respectively. Total product warranty liabilities as of December 31, 20192021 and 20182020 were $7$6 and $6, respectively.
Guarantees
We have issued or provided approximately $348$292 of guarantees as of December 31, 20192021 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 iii)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
Corporate Reorganization
As disclosed in Note 1 - Basis of Presentation and Summary of Significant Accounting Policies, on July 31, 2019, Xerox completed the Reorganization, pursuant to which Xerox became a direct, wholly-owned subsidiary of Xerox Holdings. In conjunction with the reorganization, the individual holder of the shares of Xerox’s Series B Convertible Perpetual Preferred Stock (Series B Preferred Stock) exchanged those shares for the same number of shares of Xerox Holdings Series A Convertible Perpetual Preferred Voting Stock (Series A Preferred Stock). Each share of Xerox Holdings Series A Preferred Stock has the same designations, rights, powers and preferences, and the same qualifications, limitations and restrictions as the shares of Xerox Series B Preferred Stock, with the addition of certain voting rights. Subsequent to the Reorganization, Xerox Holdings contributed the Xerox Series B Preferred Stock it held to Xerox in exchange for additional capital and Xerox subsequently extinguished the Series B Preferred Stock. The contribution and extinguishment were recorded at carrying value and as a result of this subsequent exchange, Xerox has no Preferred Stock outstanding at December 31, 2019.
Series A Convertible Perpetual Voting Preferred Stock
As of December 31, 2019,2021, Xerox Holdings Corporation had one1 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
Xerox 2019 Annual Report 128
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'sHoldings Corporation's common stock, the holder of the Series A Preferred Stock has the right to require usXerox 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 will votevotes 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 willis only be entitled to 1 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, 2019)2021).
Xerox 2021 Annual Report 137
Note 23 – Shareholders’ Equity
As disclosed in Note 1 - Basis of Presentation and Summary of Significant Accounting Policies, as part of the reorganization of Xerox Holdings and Xerox into a holding company structure effective July 31, 2019, shareholders of Xerox became shareholders of Xerox Holdings on a one-for-one basis; maintaining the same number of shares and ownership percentage as held in Xerox immediately prior to the Reorganization.
Xerox Holdings
Preferred Stock
Xerox Holdings Corporation is authorized to issue approximately 22 million shares of cumulative preferredPreferred 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 commonCommon stock, $1.00 par value per share. At December 31, 2019, 152021, 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 commonCommon stock under the cost method and includes such treasuryTreasury stock as a component of our commonCommon shareholders' equity. Retirement of treasuryTreasury 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 July 2019, as part ofOctober 2021, the reorganization of Xerox Holdings and Xerox into a holding company structure, Xerox Holdings'Corporation's Board of Directors authorized a $1.0 billion$500 share repurchase program (exclusive of any commissions and other transaction fees and costs related thereto.)fees). This program replaced the $1.0 billionapproximate $450 thousand of authority remaining under Xerox'sXerox Holdings Corporation's previously authorized $1.1 billion share repurchase program.
The following provides cumulative information relating to Xerox's previously authorizedXerox Holdings Corporation's current share repurchase program from its inception in October 2021 through JulyDecember 31, 2019, the effective date of the Reorganization2021 (shares in thousands):
|
| | | | |
| Authorized share repurchase program | | $ | 2,000 |
|
| Share repurchase cost | | $ | 1,000 |
|
| Share repurchase fees | | $ | 1 |
|
| Number of shares repurchased | | 35,339 |
|
The following provides cumulative information relating to Xerox Holdings' | | | | | | | | |
Authorized share repurchase program from its inception on July 31, 2019 through December 31, 2019 (shares in thousands): | | | | | | | Authorized share repurchase program | | $ | 1,000 |
| | Share repurchase cost | | $ | 300 |
| | Share repurchase fees | | $ | — |
| | Number of shares repurchased | | 9,097 |
|
| | $ | 500 | |
| Share repurchase cost | | $ | 387 | |
| Share repurchase fees | | $ | 1 | |
| Number of shares repurchased | | 19,401 |
Of the $1.0 billion$500 of share repurchase granted in 2019October 2021 by Xerox Holdings'Holdings Corporation's Board of Directors, approximately $700$113 of that authority remained available as ofat December 31, 2019.
Xerox 2019 Annual Report 129
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, 2016 | | 253,594 |
| | — |
|
| Stock based compensation plans, net | | 1,019 |
| | — |
|
| Balance at December 31, 2017 | | 254,613 |
| | — |
|
| Stock based compensation plans, net | | 1,103 |
| | — |
|
| Acquisition of Treasury stock | | — |
| | 26,093 |
|
| Cancellation of Treasury stock | | (24,026 | ) | | (24,026 | ) |
| 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 |
|
| | | | | | | | | | | | | | |
| | 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
In connection with the Reorganization, the capital structure of Xerox was modified such that its issued and outstanding common shares are now entirely held by Xerox Holdings. Refer to Note 1 - Basis of Presentation and Summary of Significant Accounting Policies for additional information regarding the Reorganization.
At December 31, 2019,2021, Xerox Corporation has 1,000 authorized shares of commonCommon stock, $1.00 par value per share, of which 100 shares are issued and outstanding and held by Xerox Holdings.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 Holding'sHoldings Corporation's common stock. At December 31, 20192021 and 2018, 132020, 8 million and 1411 million shares, respectively, were available for grant of awards.
Stock-based compensation expense was as follows:
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| Stock-based compensation expense, pre-tax | | $ | 50 |
| | $ | 57 |
| | $ | 52 |
|
| Income tax benefit recognized in earnings | | 13 |
| | 14 |
| | 20 |
|
| | | | | | | | | | | | | | | | | | | | |
| | 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 notlast awarded under the 20192018 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
In connection with the JanuaryPSU awards granted in 2021, 2020 and 2019 PSU grant, the Board approvedwere comprised of a change to the market-basedperformance-based component of the PSUs, replacing the Total Shareholder Return (TSR) metric with an Absolute Share Price (ASP) metric which focuses on stock price appreciation. The Board retainedthat included a Revenue and Free Cash Flow metric as performance-based measures as well as the three-year measurement period for all components.and a market-based component that included an Absolute Share Price metric. The componentsmetrics are weighted as follows: 25% Revenue, 25% Free Cash Flow and 50% Absolute Share Price. Accordingly, each PSU grant iswas one-half performance basedperformance-based (Revenue and Free Cash Flow) and one-half market-based (ASP)(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. The 2019 PSUs retained the three-year cliff vesting from the date of grant.
Xerox 2019 Annual Report 130
PSU awards granted in 2018 were comprised of a performance-based component that included Revenue Growth and Free Cash Flow metrics and a market-based component that included a TSR metric. The metrics were equally weighted; accordingly, each PSU grant was two-thirds performance-based (Revenue Growth and Free Cash Flow) and one-third market-based (TSR). 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. The 2018 PSUs have a three-year cliff vesting from the date of grant.
In December 2018,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 modifiedmarket metrics that have been permanently adversely impacted by the performance-based metrics and the market-based metricCOVID-19 pandemic. These grants of RSUs were made in December 2020. The grant-date value of the 2018 PSU grantnew 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 a one-year performance period (2018), and a two-year time-based requirement (2019 and 2020).
PSU awards granted in 2017 were exclusively performance based and included metrics for Revenue Growth, Earnings per Share and Cash Flow from Operations that were measured over a three-year performance period. The 2017 PSUs have a three-year cliff vesting fromtake the dateplace of grant.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 ASPAbsolute Share Price metric, included as the market-based component of the 2021, 2020 and 2019 PSU grant, is based on Xerox Holding'sHoldings 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 ASPAbsolute Share Price metric of the PSU award represents a market condition, a Monte Carlo simulation was used to determine the grant-date fair value.
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The TSR metric included as the market-based component of the 2018 PSU grant was based on the percentage change in Xerox HoldingsCorporation 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 HoldingsCorporation 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 the 2019 and 2018 PSU awards granted were as follows:
| | | | | 2019 Award | | 2018 Award | | 2021 Award | | 2020 Award | | 2019 Award | | 2018 Award |
| Term | | 3 years |
| | 3 years |
| Term | | 3 years | | 3 years | | 3 years | | 3 years |
Risk-free interest rate(1) | | 2.51 | % | | 2.39 | % | Risk-free interest rate(1) | | 0.20 | % | | 1.60 | % | | 2.51 | % | | 2.39 | % |
Dividend yield(2) | | 3.97 | % | | 3.24 | % | Dividend yield(2) | | 4.66 | % | | 2.80 | % | | 3.97 | % | | 3.24 | % |
Volatility(3) | | 32.95 | % | | 29.12 | % | Volatility(3) | | 44.76 | % | | 29.49 | % | | 32.95 | % | | 29.12 | % |
Weighted average fair value(4) | | $ | 16.27 |
| | $ | 32.01 |
| 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. |
(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 2019 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 |
|
| | | |
Total Return Targets(1) | | Payout Percentage |
| $40.00 and above | | 200 | % |
| $35.00 | | 100 | % |
| $30.00 | | 50 | % |
| Below $30.00 | | 0 | % |
Xerox 2019 Annual Report 131
Our 2018 TSR metric compared to the peer group TSR will determine the payout as follows:
|
| | | | | | | |
Percentile | | Payout as a Percent of Target | | Percentile(1) |
| 200% | | 80th and above | | 200 | % |
50th100% | | 100 | %50th |
25th35% | | 35 | %25th |
| 0% | | Below 25th | | 0 | % |
____________
| |
(1) | For performance between the levels described above, the degree of vesting is interpolated on a linear basis. |
(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. |
(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 20192021 Annual Report 132141
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 | |
|
| | | | | | | | | | | | | | | | | | | | | |
| | | 2019 | | 2018 | | 2017 |
| | | Shares | | Weighted Average Grant Date Fair Value(1) | | Shares | | Weighted Average Grant Date Fair Value(1) | | Shares | | Weighted Average Grant Date Fair Value |
Restricted Stock Units (2) | | | | | | | | | | | | |
| Outstanding at January 1 | | 3,559 |
| | $ | 29.51 |
| | 2,856 |
| | $ | 30.65 |
| | 1,807 |
| | $ | 30.10 |
|
| Granted | | 1,366 |
| | 23.22 |
| | 1,595 |
| | 27.82 |
| | 1,436 |
| | 31.39 |
|
| Vested | | (1,666 | ) | | 29.28 |
| | (214 | ) | | 30.39 |
| | (117 | ) | | 36.99 |
|
| Forfeited | | (414 | ) | | 27.85 |
| | (678 | ) | | 30.04 |
| | (270 | ) | | 29.03 |
|
| Outstanding at December 31 | | 2,845 |
| | 26.87 |
| | 3,559 |
| | 29.51 |
| | 2,856 |
| | 30.65 |
|
| Performance Shares | | | | | | | | | | | | |
| Outstanding at January 1 | | 2,462 |
| | $ | 29.83 |
| | 3,117 |
| | $ | 31.54 |
| | 5,054 |
| | $ | 33.98 |
|
| Granted | | 1,433 |
| | 19.46 |
| | 1,060 |
| | 27.36 |
| | 1,349 |
| | 32.80 |
|
| Vested | | (633 | ) | | 29.56 |
| | (853 | ) | | 32.59 |
| | (1,413 | ) | | 37.44 |
|
| Forfeited/Expired | | (432 | ) | | 27.50 |
| | (862 | ) | | 30.26 |
| | (1,873 | ) | | 34.59 |
|
| Outstanding at December 31 | | 2,830 |
| | 24.99 |
| | 2,462 |
| | 29.83 |
| | 3,117 |
| | 31.54 |
|
| Stock Options | | | | | | | | | | | | |
| Outstanding at January 1 | | 1,022 |
| | $ | 27.84 |
| | — |
| | $ | — |
| | — |
| | $ | — |
|
| Granted | | — |
| | — |
| | 1,414 |
| | 27.88 |
| | — |
| | — |
|
| Forfeited/Expired | | (92 | ) | | 27.92 |
| | (392 | ) | | 27.98 |
| | — |
| | — |
|
| Exercised | | (69 | ) | | 27.98 |
| | — |
| | — |
| | — |
| | — |
|
| Outstanding at December 31 | | 861 |
| | 27.83 |
| | 1,022 |
| | 27.84 |
| | — |
| | — |
|
| Exercisable at December 31 | | 233 |
| | 27.83 |
| | 39 |
| | 27.98 |
| | — |
| | — |
|
| |
(1) | 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. |
(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, 20192021 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 | | | |
|
| | | | | | |
| Awards | | Unrecognized Compensation | | Remaining Weighted-Average Vesting Period (Years) |
| Restricted Stock Units | | $ | 30 |
| | 1.6 |
| Performance Shares | | 28 |
| | 1.7 |
| Stock Options | | 2 |
| | 1.3 |
| Total | | $ | 60 |
| | |
The aggregate intrinsic value of outstanding stock-based awards was as follows:
|
| | | | |
| Awards | | December 31, 2019 |
| Restricted Stock Units | | $ | 105 |
|
| Performance Shares | | 104 |
|
| Stock Options | | 8 |
|
| | | | | | | | |
| 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, 2019 | | December 31, 2018 | | December 31, 2017 | | | December 31, 2021 | | December 31, 2020 | | December 31, 2019 |
| Awards | | Total Intrinsic Value(1) | | Cash Received | | Tax Benefit | | Total Intrinsic Value | | Cash Received | | Tax Benefit | | Total Intrinsic Value | | Cash Received | | Tax Benefit | 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 | | $ | 55 |
| | $ | — |
| | $ | 11 |
| | $ | 6 |
| | $ | — |
| | $ | 2 |
| | $ | 3 |
| | $ | — |
| | $ | 1 |
| Restricted Stock Units | | $ | 30 | | | $ | — | | | $ | 5 | | | $ | 33 | | | $ | — | | | $ | 5 | | | $ | 55 | | | $ | — | | | $ | 11 | |
| Performance Share Units | | 23 |
| | — |
| | 6 |
| | 21 |
| | — |
| | 4 |
| | 40 |
| | — |
| | 12 |
| Performance Share Units | | 17 | | | — | | | 2 | | | 18 | | | — | | | 4 | | | 23 | | | — | | | 6 | |
| Stock Options | | 1 |
| | 2 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| Stock Options | | — | | | — | | | — | | | — | | | — | | | — | | | 1 | | | 2 | | | — | |
____________
| |
(1) | RSUs include a RSA grant of 351 shares, which vested in 2019. |
Xerox 20192021 Annual Report 133142
Note 25 – Other Comprehensive Income (Loss) Income
As previously disclosed in Note 1 - Basis of Presentation and Summary of Significant Accounting Policies, the historical statement of Comprehensive Income has not been revised to reflect the discontinued operations reporting for the Sales of our investments in Fuji Xerox and Xerox International Partners. However, inIn 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 76 - Divestitures for additional information regarding these Sales and the associated gain recognized.
Other Comprehensive Income (Loss) Income 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 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| | | Pre-tax | | Net of Tax | | Pre-tax | | Net of Tax | | Pre-tax | | Net of Tax |
| Translation Adjustments Gains (Losses) | | | | | | | | | | | | |
| Aggregate adjustment in period | | $ | 53 |
| | $ | 45 |
| | $ | (251 | ) | | $ | (242 | ) | | $ | 484 |
| | $ | 483 |
|
| Divestiture - reclassification | | 17 |
| | 17 |
| | — |
| | — |
| | — |
| | — |
|
| Net Translation Adjustments Gains (Losses) | | 70 |
| | 62 |
| | (251 | ) | | (242 | ) | | 484 |
| | 483 |
|
| Unrealized Gains (Losses) | | | | | | | | | | | | |
| Changes in fair value of cash flow hedges gains (losses) | | 2 |
| | 1 |
| | 9 |
| | 8 |
| | (28 | ) | | (23 | ) |
Changes in cash flow hedges reclassed to earnings(1) | | (9 | ) | | (7 | ) | | 14 |
| | 10 |
| | 35 |
| | 25 |
|
| Other losses | | — |
| | — |
| | (2 | ) | | (2 | ) | | (1 | ) | | (1 | ) |
| Net Unrealized (Losses) Gains | | (7 | ) | | (6 | ) | | 21 |
| | 16 |
| | 6 |
| | 1 |
|
| | | | | | | | | | | | | |
| Defined Benefit Plans (Losses) Gains | | | | | | | | | | | | |
| Net actuarial/prior service (losses) gains | | (275 | ) | | (202 | ) | | 273 |
| | 198 |
| | 52 |
| | 64 |
|
Prior service amortization/curtailment(2) | | (81 | ) | | (61 | ) | | (26 | ) | | (20 | ) | | (10 | ) | | (7 | ) |
Actuarial loss amortization/settlement(2) | | 156 |
| | 118 |
| | 252 |
| | 190 |
| | 236 |
| | 158 |
|
Fuji Xerox changes in defined benefit plans, net(3) | | 8 |
| | 8 |
| | (25 | ) | | (25 | ) | | 29 |
| | 29 |
|
Other (losses) gains(4) | | (21 | ) | | (21 | ) | | 66 |
| | 66 |
| | (138 | ) | | (138 | ) |
| Divestiture - reclassification | | 148 |
| | 148 |
| | — |
| | — |
| | — |
| | — |
|
| Changes in Defined Benefit Plans (Losses) Gains | | (65 | ) | | (10 | ) | | 540 |
| | 409 |
| | 169 |
| | 106 |
|
| | | | | | | | | | | | | |
| Other Comprehensive (Loss) Income | | (2 | ) | | 46 |
| | 310 |
| | 183 |
| | 659 |
| | 590 |
|
| Less: Other comprehensive income attributable to noncontrolling interests | | — |
| | — |
| | — |
| | — |
| | 1 |
| | 1 |
|
| Other Comprehensive (Loss) Income Attributable to Xerox Holdings | | $ | (2 | ) | | $ | 46 |
| | $ | 310 |
| | $ | 183 |
| | $ | 658 |
| | $ | 589 |
|
_____________(1)Reclassified to Cost of sales - refer to Note 17 - Financial Instruments for additional information regarding our cash flow hedges.
| |
(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. |
(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) | |
|
| | | | | | | | | | | | |
| | | December 31, |
| | | 2019 | | 2018 | | 2017 |
| Cumulative translation adjustments | | $ | (1,961 | ) | | $ | (2,023 | ) | | $ | (1,781 | ) |
| Other unrealized (losses) gains, net | | (2 | ) | | 4 |
| | (12 | ) |
Benefit plans net actuarial losses and prior service credits(1)(2) | | (1,683 | ) | | (1,546 | ) | | (1,955 | ) |
| Total Accumulated Other Comprehensive Loss Attributable to Xerox Holdings | | $ | (3,646 | ) | | $ | (3,565 | ) | | $ | (3,748 | ) |
_____________
| |
(1) | Amounts prior to 2019 include our share of Fuji Xerox balances. |
| |
(2) | The change from December 31, 2018 includes $(127) related to the adoption of ASU 2018-02 and the reclassification of stranded tax effects resulting from the Tax Act - Refer to Note 1 - Basis of Presentation and Summary of Significant Accounting Policies for additional information. |
We utilize the aggregate portfolio approach for releasing disproportionate income tax effects from AOCL.
Xerox 20192021 Annual Report 134143
Note 26 – (Loss) Earnings per Share
The following table sets forth the computation of basic and diluted earnings per share of Xerox Holdings' commonHoldings Corporation's Common stock (shares in thousands):
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| Basic Earnings per Share: | | | | | | |
| Net Income from continuing operations attributable to Xerox Holdings | | $ | 648 |
| | $ | 306 |
| | $ | 66 |
|
| Accrued dividends on preferred stock | | (14 | ) | | (14 | ) | | (14 | ) |
| Adjusted Net income from continuing operations available to common shareholders | | 634 |
| | 292 |
| | 52 |
|
| Income from discontinued operations attributable to Xerox Holdings, net of tax | | 705 |
| | 55 |
| | 129 |
|
| Adjusted Net income available to common shareholders | | $ | 1,339 |
| | $ | 347 |
| | $ | 181 |
|
| Weighted-average common shares outstanding | | 221,969 |
| | 248,707 |
| | 254,341 |
|
| Basic Earnings per Share: | | | | | | |
| Continuing operations | | $ | 2.86 |
| | $ | 1.17 |
| | $ | 0.20 |
|
| Discontinued operations | | 3.17 |
| | 0.23 |
| | 0.51 |
|
| Basic Earnings per Share | | $ | 6.03 |
| | $ | 1.40 |
| | $ | 0.71 |
|
| | | | | | | |
| Diluted Earnings per Share: | | | | | | |
| Net Income from continuing operations attributable to Xerox Holdings | | $ | 648 |
| | $ | 306 |
| | $ | 66 |
|
| Accrued dividends on preferred stock | | — |
| | (14 | ) | | (14 | ) |
| Adjusted Net income from continuing operations available to common shareholders | | 648 |
| | 292 |
| | 52 |
|
| Income from discontinued operations attributable to Xerox Holdings, net of tax | | 705 |
| | 55 |
| | 129 |
|
| Adjusted Net income available to common shareholders | | $ | 1,353 |
| | $ | 347 |
| | $ | 181 |
|
| Weighted-average common shares outstanding | | 221,969 |
| | 248,707 |
| | 254,341 |
|
| Common shares issuable with respect to: | | | | | | |
| Stock options | | 55 |
| | — |
| | — |
|
| Restricted stock and performance shares | | 4,403 |
| | 2,953 |
| | 2,229 |
|
| Convertible preferred stock | | 6,742 |
| | — |
| | — |
|
| Adjusted Weighted average common shares outstanding | | 233,169 |
| | 251,660 |
| | 256,570 |
|
| | | | | | | |
| Diluted Earnings per Share: | | | | | | |
| Continuing operations | | $ | 2.78 |
| | $ | 1.16 |
| | $ | 0.20 |
|
| Discontinued operations | | 3.02 |
| | 0.22 |
| | 0.51 |
|
| Diluted Earnings per Share | | $ | 5.80 |
| | $ | 1.38 |
| | $ | 0.71 |
|
| | | | | | | |
| 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 | | 805 |
| | 1,022 |
| | — |
|
| Restricted stock and performance shares | | 1,272 |
| | 3,068 |
| | 3,706 |
|
| Convertible preferred stock | | — |
| | 6,742 |
| | 6,742 |
|
| Total Anti-Dilutive Securities | | 2,077 |
| | 10,832 |
| | 10,448 |
|
| | | | | | | |
| Dividends per Common Share | | $ | 1.00 |
| | $ | 1.00 |
| | $ | 1.00 |
|
| | | | | | | | | | | | | | | | | | | | |
| | | 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 20192021 Annual Report 135144
Note 27 – Subsequent Events
Committed Debt Financing for Proposed Transaction with HP Inc.Secured Borrowings
OnIn January 5, 2020, Xerox2022, we entered into a commitment letter (the “Commitment Letter”),secured loan agreement with Citigroup Global Markets Inc., Mizuho Bank, Ltd. and Bankfinancial institutions where we sold $789 of America, N.A. (collectively,U.S. based finance receivables to an SPE. The purchase by the “Commitment Parties”), pursuant to which, subjectSPE was funded through a $668 amortizing secured loan to the terms and conditions set forth therein,SPE from the Commitment Parties have committed to provide a $19.5 billion senior unsecured 364-day termfinancial institutions. The SPE is fully consolidated in our financial statements. The secured loan bridge facility and a $4.5 billion senior unsecured 60-day term loan bridge facility to finance Xerox’s proposed acquisition of HP Inc. The 60-day term loan bridge facility is intended to bridge gaining access to cash on HP’s balance sheet that Xerox intends to use in a consensual transaction as a source of its acquisition financing. The fundingwas 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 facilities provided for inand the Commitment Letter is contingentissuance of new debt and associated collateral.
The new loan has a variable interest rate based on the satisfactionfinancial institutions' cost of funds plus a limited numberspread (initial rate of customary conditions, including the consummation1.40%) and an expected life of approximately 2.5 years, with half of the proposed acquisition of HP. Commitment and structuring fees uploan projected to $140 are payable on this funding commitmentbe repaid within the first year based on meeting certain milestones during the year with respect to the proposed transaction with HP.
On January 6, 2020, Xerox issued a press release announcing that it has sent a letter to the Board of Directors of HP confirming that it has obtained $24 billion in binding financing commitments from Citi, Mizuho and Bank of America to complete its proposed business combination with HP.
Termination of Technology Agreement with Fuji Xerox
As disclosed in Note 12 - Investments in Affiliates, at Equity, Xerox has a Technology Agreement (TA) with Fuji Xerox whereby Xerox receives royalty payments for their use of our Xerox brand trademark, as well as rights to access our patent portfolio in exchange for access to their patent portfolio. On January 5, 2020, Fuji Xerox notified Xerox of its intention to terminate the TA on the agreement’s expiration date of March 31, 2021. The series of transactions entered into between Xerox and FH in November 2019, as disclosed in Note 7 - Divestitures, included an amendment to the TA that would allow Fuji Xerox continued usecollections of the Xerox brand trademark for two years after the dateunderlying portfolio of termination of the TA as it transitions to a new brand in exchange for an upfront prepaid fixed royalty of $100. The extended license is effective only if exercised by Fuji Xerox at the termination of the TA at which point payment would be required. If FX does not extend the license, Xerox would be allowed sell and distribute xerographic equipment under the Xerox brand in the Fuji Xerox territory as early as April 1, 2021; if Fuji Xerox extends the license, entry into the Fuji Xerox territory would be deferred to 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.receivables.
Acquisition of Arena GroupPowerland
In January,February 2022, Xerox acquired Arena Group, one of thePowerland, a leading providers of office technology, software, solutions andIT services provider in the U.K.,Canada for approximately $46 (GBP 35$60 (CAD 76 million), which is netincludes certain holdbacks and payment of cash acquired. Thisassumed tax liabilities. The acquisition expands Xerox's presencealso 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 the small-to-medium sized (SMB) business market in Western Europe.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 intangibleIntangible assets and goodwill.Goodwill.
Xerox 20192021 Annual Report 136145
Xerox Holdings Corporation
Quarterly Results of Operations (Unaudited)
|
| | | | | | | | | | | | | | | | | | | | |
| (in millions, except per-share data) | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter(2) | | Full Year |
| 2019 | | | | | | | | | | |
| Total Revenues | | $ | 2,180 |
| | $ | 2,263 |
| | $ | 2,179 |
| | $ | 2,444 |
| | $ | 9,066 |
|
| Costs and Expenses | | 2,107 |
| | 2,073 |
| | 1,956 |
| | 2,108 |
| | 8,244 |
|
| Income before Income Taxes and Equity Income | | 73 |
| | 190 |
| | 223 |
| | 336 |
| | 822 |
|
| Income tax (benefit) expense | | (10 | ) | | 50 |
| | 66 |
| | 73 |
| | 179 |
|
| Equity in net income of unconsolidated affiliates | | 2 |
| | 2 |
| | 1 |
| | 3 |
| | 8 |
|
| Income from Continuing Operations | | 85 |
| | 142 |
| | 158 |
| | 266 |
| | 651 |
|
| Income from discontinued operations, net of tax | | 51 |
| | 42 |
| | 64 |
| | 553 |
| | 710 |
|
| Net Income | | 136 |
| | 184 |
| | 222 |
| | 819 |
| | 1,361 |
|
| Less: Income from continuing operations attributable to noncontrolling interests | | 1 |
| | 1 |
| | 1 |
| | — |
| | 3 |
|
| Less: Income from discontinued operations attributable to noncontrolling interests | | 2 |
| | 2 |
| | — |
| | 1 |
| | 5 |
|
| Net Income Attributable to Xerox Holdings | | $ | 133 |
| | $ | 181 |
| | $ | 221 |
| | $ | 818 |
| | $ | 1,353 |
|
| | | | | | | | | | | |
Basic Earnings per Share(1): | | | | | | | | | |
|
|
| Continuing operations | | $ | 0.35 |
| | $ | 0.62 |
| | $ | 0.70 |
| | $ | 1.22 |
| | $ | 2.86 |
|
| Discontinued operations | | 0.22 |
| | 0.17 |
| | 0.29 |
| | 2.56 |
| | 3.17 |
|
| Total Basic Earnings per Share | | $ | 0.57 |
| | $ | 0.79 |
| | $ | 0.99 |
| | $ | 3.78 |
| | $ | 6.03 |
|
| | | | | | | | | | | |
Diluted Earnings per Share(1): | | | | | | | | | |
|
|
| Continuing operations | | $ | 0.34 |
| | $ | 0.60 |
| | $ | 0.68 |
| | $ | 1.17 |
| | $ | 2.78 |
|
| Discontinued operations | | 0.21 |
| | 0.17 |
| | 0.28 |
| | 2.44 |
| | 3.02 |
|
| Total Diluted Earnings per Share | | $ | 0.55 |
| | $ | 0.77 |
| | $ | 0.96 |
| | $ | 3.61 |
| | $ | 5.80 |
|
| | | | | | | | | | | |
| 2018 | | | | | | | | | | |
| Total Revenues | | $ | 2,381 |
| | $ | 2,469 |
| | $ | 2,314 |
| | $ | 2,498 |
| | $ | 9,662 |
|
| Costs and Expenses | | 2,255 |
| | 2,347 |
| | 2,137 |
| | 2,374 |
| | 9,113 |
|
| Income before Income Taxes and Equity Income | | 126 |
| | 122 |
| | 177 |
| | 124 |
| | 549 |
|
| Income tax expense | | 39 |
| | 35 |
| | 139 |
| | 34 |
| | 247 |
|
| Equity in net income of unconsolidated affiliates | | 2 |
| | 2 |
| | 2 |
| | 2 |
| | 8 |
|
| Income from Continuing Operations | | 89 |
| | 89 |
| | 40 |
| | 92 |
| | 310 |
|
| (Loss) Income from discontinued operations, net of tax | | (63 | ) | | 25 |
| | 53 |
| | 49 |
| | 64 |
|
| Net Income | | 26 |
| | 114 |
| | 93 |
| | 141 |
| | 374 |
|
| Less: Income from continuing operations attributable to noncontrolling interests | | 1 |
| | 1 |
| | 1 |
| | 1 |
| | 4 |
|
| Less: Income from discontinued operations attributable to noncontrolling interests | | 2 |
| | 1 |
| | 3 |
| | 3 |
| | 9 |
|
| Net Income Attributable to Xerox Holdings | | $ | 23 |
| | $ | 112 |
| | $ | 89 |
| | $ | 137 |
| | $ | 361 |
|
| | | | | | | | | | | |
Basic Earnings (Loss) per Share(1): | | | | | | | | | |
|
|
| Continuing operations | | $ | 0.33 |
| | $ | 0.33 |
| | $ | 0.14 |
| | $ | 0.37 |
| | $ | 1.17 |
|
| Discontinued operations | | (0.25 | ) | | 0.09 |
| | 0.20 |
| | 0.19 |
| | 0.23 |
|
| Total Basic Earnings per Share | | $ | 0.08 |
| | $ | 0.42 |
| | $ | 0.34 |
| | $ | 0.56 |
| | $ | 1.40 |
|
| | | | | | | | | | | |
Diluted Earnings (Loss) per Share(1): | | | | | | | | | | |
| Continuing operations | | $ | 0.33 |
| | $ | 0.33 |
| | $ | 0.14 |
| | $ | 0.37 |
| | $ | 1.16 |
|
| Discontinued operations | | (0.25 | ) | | 0.09 |
| | 0.20 |
| | 0.19 |
| | 0.22 |
|
| Total Diluted Earnings per Share | | $ | 0.08 |
| | $ | 0.42 |
| | $ | 0.34 |
| | $ | 0.56 |
| | $ | 1.38 |
|
_____________
| |
(1) | The sum of quarterly earnings per share may differ from the full-year amounts due to rounding, or in the case of diluted earnings per share, because securities that are anti-dilutive in certain quarters may not be anti-dilutive on a full-year basis. |
| |
(2) | Fourth Quarter 2019 Revenues includes $77 million related to an OEM license agreement by and between Fuji Xerox and Xerox and Fourth Quarter 2019 Income from discontinued operations, net of tax includes an after-tax gain of $539 million on the sale of our investments in Fuji Xerox and Xerox International Partners. Refer to Note 7 - Divestitures in the Consolidated Financial Statements for additional information. |
Xerox 2019 Annual Report 137
Xerox Corporation
Quarterly Results of Operations (Unaudited)
|
| | | | | | | | | | | | | | | | | | | | |
| (in millions) | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter(1) | | Full Year |
| 2019 | | | | | | | | | | |
| Total Revenues | | $ | 2,180 |
| | $ | 2,263 |
| | $ | 2,179 |
| | $ | 2,444 |
| | $ | 9,066 |
|
| Costs and Expenses | | 2,107 |
| | 2,073 |
| | 1,956 |
| | 2,108 |
| | 8,244 |
|
| Income before Income Taxes and Equity Income | | 73 |
| | 190 |
| | 223 |
| | 336 |
| | 822 |
|
| Income tax (benefit) expense | | (10 | ) | | 50 |
| | 66 |
| | 73 |
| | 179 |
|
| Equity in net income of unconsolidated affiliates | | 2 |
| | 2 |
| | 1 |
| | 3 |
| | 8 |
|
| Income from Continuing Operations | | 85 |
| | 142 |
| | 158 |
| | 266 |
| | 651 |
|
| Income from discontinued operations, net of tax | | 51 |
| | 42 |
| | 64 |
| | 553 |
| | 710 |
|
| Net Income | | 136 |
| | 184 |
| | 222 |
| | 819 |
| | 1,361 |
|
| Less: Income from continuing operations attributable to noncontrolling interests | | 1 |
| | 1 |
| | 1 |
| | — |
| | 3 |
|
| Less: Income from discontinued operations attributable to noncontrolling interests | | 2 |
| | 2 |
| | — |
| | 1 |
| | 5 |
|
| Net Income Attributable to Xerox | | $ | 133 |
| | $ | 181 |
| | $ | 221 |
| | $ | 818 |
| | $ | 1,353 |
|
| | | | | | | | | | | |
| 2018 | | | | | | | | | | |
| Total Revenues | | $ | 2,381 |
| | $ | 2,469 |
| | $ | 2,314 |
| | $ | 2,498 |
| | $ | 9,662 |
|
| Costs and Expenses | | 2,255 |
| | 2,347 |
| | 2,137 |
| | 2,374 |
| | 9,113 |
|
| Income before Income Taxes and Equity Income | | 126 |
| | 122 |
| | 177 |
| | 124 |
| | 549 |
|
| Income tax expense | | 39 |
| | 35 |
| | 139 |
| | 34 |
| | 247 |
|
| Equity in net income of unconsolidated affiliates | | 2 |
| | 2 |
| | 2 |
| | 2 |
| | 8 |
|
| Income from Continuing Operations | | 89 |
| | 89 |
| | 40 |
| | 92 |
| | 310 |
|
| (Loss) Income from discontinued operations, net of tax | | (63 | ) | | 25 |
| | 53 |
| | 49 |
| | 64 |
|
| Net Income | | 26 |
| | 114 |
| | 93 |
| | 141 |
| | 374 |
|
| Less: Income from continuing operations attributable to noncontrolling interests | | 1 |
| | 1 |
| | 1 |
| | 1 |
| | 4 |
|
| Less: Income from discontinued operations attributable to noncontrolling interests | | 2 |
| | 1 |
| | 3 |
| | 3 |
| | 9 |
|
| Net Income Attributable to Xerox | | $ | 23 |
| | $ | 112 |
| | $ | 89 |
| | $ | 137 |
| | $ | 361 |
|
_____________
| |
(1) | Fourth Quarter 2019 Revenues includes $77 million related to an OEM license agreement by and between Fuji Xerox and Xerox and Fourth Quarter 2019 Income from discontinued operations, net of tax includes an after-tax gain of $539 million on the sale of our investments in Fuji Xerox and Xerox International Partners. Refer to Note 7 - Divestitures in the Consolidated Financial Statements for additional information. |
Xerox 2019 Annual Report 138
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Xerox Holdings Corporation
Management's Responsibility for Financial Statements
The management of Xerox Holdings Corporation is responsible for the integrity and objectivity of all information presented in this annual report. The Consolidated Financial Statements were prepared in conformity with accounting principles generally accepted in the United States of America and include amounts based on management's best estimates and judgments. Management believes the Consolidated Financial Statements fairly reflect the form and substance of transactions and that the financial statements fairly represent the financial position and results of operations of Xerox Holdings Corporation.
The Audit Committee of the Board of Directors, which is composed solely of independent directors, meets regularly with the independent auditors, PricewaterhouseCoopers LLP, the internal auditors and representatives of management to review accounting, financial reporting, internal control and audit matters, as well as the nature and extent of the audit effort. The Audit Committee is responsible for the engagement of the independent auditors. The independent auditors and internal auditors have access to the Audit Committee.
Evaluation of Disclosure Controls and Procedures
The management of Xerox Holdings Corporation evaluated, with the participation of our principal executive officer and principal financial officer, or persons performing similar functions, the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and principal financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure that information we are required to disclose in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms relating to Xerox Holdings Corporation, including our consolidated subsidiaries, and was accumulated and communicated to Xerox Holdings Corporation’s management, including the principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Management's Report on Internal Control over Financial Reporting
The management of Xerox Holdings Corporation is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the rules promulgated under the Securities Exchange Act of 1934. Under the supervision and with the participation of our management, including our principal executive, financial and accounting officers, we have conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in “Internal Control - Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on the above evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2019.2021.
The effectiveness of our internal control over financial reporting as of December 31, 20192021 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears in Part II, Item 8 of this combined Form 10-K.
Changes in Internal Control over Financial Reporting
In connection with the evaluation required by paragraph (d) of Rule 13a-15 under the Exchange Act, there was no change identified in our internal control over financial reporting that occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Xerox 20192021 Annual Report 139146
financial reporting. In response to this arrangement, the Company has and will continue to align and streamline the design and operation of its financial control environment and ensure that controls are adequately maintained in the transition of services to TCS.
Xerox Corporation
Management's Responsibility for Financial Statements
The management of Xerox Corporation is responsible for the integrity and objectivity of all information presented in this annual report. The Consolidated Financial Statements were prepared in conformity with accounting principles generally accepted in the United States of America and include amounts based on management's best estimates and judgments. Management believes the Consolidated Financial Statements fairly reflect the form and substance of transactions and that the financial statements fairly represent the financial position and results of operations of Xerox Corporation.
The Audit Committee of the Xerox Holdings Corporation Board of Directors, which is composed solely of independent directors, meets regularly with the independent auditors, PricewaterhouseCoopers LLP, the internal auditors and representatives of management to review accounting, financial reporting, internal control and audit matters, as well as the nature and extent of the audit effort. The Audit Committee is responsible for the engagement of the independent auditors. The independent auditors and internal auditors have access to the Audit Committee.
Evaluation of Disclosure Controls and Procedures
The management of Xerox Corporation evaluated, with the participation of our principal executive officer and principal financial officer, or persons performing similar functions, the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and principal financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure that information we are required to disclose in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms relating to Xerox Corporation, including our consolidated subsidiaries, and was accumulated and communicated to Xerox Corporation’s management, including the principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Management's Report on Internal Control over Financial Reporting
The management of Xerox Corporation is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the rules promulgated under the Securities Exchange Act of 1934. Under the supervision and with the participation of our management, including our principal executive, financial and accounting officers, we have conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in “Internal Control - Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on the above evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2019.2021.
The effectiveness of our internal control over financial reporting as of December 31, 20192021 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears in Part II, Item 8 of this combined Form 10-K.
Changes in Internal Control over Financial Reporting
In connection with the evaluation required by paragraph (d) of Rule 13a-15 under the Exchange Act, there was no change identified in our internal control over financial reporting that occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Xerox 2021 Annual Report 147
design and operation of its financial control environment and ensure that controls are adequately maintained in the transition of services to TCS.
Item 9B. Other Information
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
Xerox 20192021 Annual Report 140148
Part III
Item 10. Directors, Executive Officers and Corporate Governance
The information regarding directors is incorporated herein by reference to the section entitled “Proposal 1 - Election of Directors” in our definitive Proxy Statement (2020(2022 Proxy Statement) to be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, in connection with our Annual Meeting of Stockholders. The Proxy Statement will be filed within 120 days after the end of our fiscal year ended December 31, 2019.
The information regarding compliance with Section 16(a) of the Securities and Exchange Act of 1934 is incorporated herein by reference to the section entitled “Delinquent Section 16(a) Reports” of our 2020 Proxy Statement.2021.
The information regarding the Audit Committee, its members and the Audit Committee financial experts is incorporated by reference herein from the subsection entitled “Committee Functions, Membership and Meetings” in the section entitled “Proposal 1 - Election of Directors” in our 20202022 Proxy Statement.
We have adopted a code of ethics applicable to our principal executive officer, principal financial officer and principal accounting officer. The Finance Code of Conduct can be found on our website at: http://www.xerox.com/investor and then clicking on Corporate Governance. The content of our website is not incorporated by reference in this combined Form 10-K unless expressly noted. Information concerning our Finance Code of Conduct can be found under "Corporate Governance" in our 20202022 definitive Proxy Statement and is incorporated here by reference.
Executive Officers of Xerox
The following is a list of the executive officers of Xerox, their current ages, their present positions and the year appointed to their present positions. Each officer is elected to hold office until the meeting of the Board of Directors held on the day of the next annual meeting of shareholders, subject to the provisions of the By-Laws.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name | | Age | | Present Position | | Year Appointed to Present Position | | Xerox Officer Since |
| Giovanni (John) Visentin | | 59 | | Vice Chairman and Chief Executive Officer | | 2018 | | 2018 |
| Steven J. Bandrowczak | | 61 | | President and Chief Operations Officer | | 2018 | | 2018 |
| Michael Feldman | | 55 | | Executive Vice President, President Americas Operations | | 2017 | | 2013 |
| Jacques-Edouard Gueden | | 57 | | Executive Vice President, President EMEA Operations | | 2021 | | 2021 |
| Xavier Heiss | | 58 | | Executive Vice President, Chief Financial Officer | | 2020 | | 2015 |
| Suzan Morno-Wade | | 54 | | Executive Vice President, Chief Human Resources Officer | | 2018 | | 2018 |
| Louis J. Pastor | | 37 | | Executive Vice President, Chief Corporate Development Officer and Chief Legal Officer | | 2021 | | 2018 |
| Joanne Collins Smee | | 65 | | Executive Vice President, Chief Commercial, SMB and Channels Officer | | 2020 | | 2018 |
| Naresh K. Shanker | | 61 | | Senior Vice President, Chief Technology Officer | | 2019 | | 2019 |
| Joseph H. Mancini, Jr. | | 63 | | Vice President, Chief Accounting Officer | | 2013 | | 2010 |
|
| | | | | | | | |
| Name | | Age | | Present Position | | Year Appointed to Present Position | | Xerox Officer Since |
| Giovanni (John) Visentin | | 57 | | Vice Chairman and Chief Executive Officer | | 2018 | | 2018 |
| Steven J. Bandrowczak | | 59 | | President and Chief Operations Officer | | 2018 | | 2018 |
| Michael Feldman | | 53 | | Executive Vice President, President Americas Operations | | 2017 | | 2013 |
| Suzan Morno-Wade | | 52 | | Executive Vice President, Chief Human Resources Officer | | 2018 | | 2018 |
| William F. Osbourn, Jr. | | 55 | | Executive Vice President, Chief Financial Officer | | 2017 | | 2017 |
| Louis J. Pastor | | 35 | | Executive Vice President, General Counsel | | 2018 | | 2018 |
| Xavier Heiss | | 56 | | Executive Vice President, President EMEA Operations | | 2020(1) | | 2015 |
| Joann Collins Smee | | 63 | | Executive Vice President, Chief Commercial, SMB and Channels Officer | | 2020 | | 2018 |
| Naresh K. Shanker | | 58 | | Senior Vice President, Chief Technology Officer | | 2019 | | 2019 |
| Joseph H. Mancini, Jr. | | 61 | | Vice President, Chief Accounting Officer | | 2013 | | 2010 |
_____________
| |
(1) | Appointment effective February 29, 2020. |
Of the officers named above, Messrs. Feldman, Gueden, Heiss and Mancini, Jr., and HeissMs. Morno-Wade, have been officers or executives of Xerox, or its subsidiaries, for at least the past five years.
Mr. Visentin joined Xerox as Vice Chairman and CEO in May 2018. Prior to joining Xerox, Mr. Visentin served as a senior advisor to the chairman of Exela Technologies from August 2017 to May 2018, an operating partner for Advent International from September 2017 to May 2018 and a consultant to Icahn Capital in connection with a proxy contest at Xerox from March 2018 to May 2018. From 2013 to 2017, he served as the executive chairman and chief executive officer of Novitex Enterprise Solutions and as an advisor with Apollo Global Management. Mr. Visentin was also a director and chairman of the board of Presidio, Inc. from 2015 to 2017. From 2011 to 2012, he served as executive vice president and general manager of Hewlett Packard Company’s enterprise services business. From 2007 to 2011, Mr. Visentin served as general manager of integrated technology services for IBM.
Mr. Bandrowczak joined Xerox in 2018 after 2 years at Alight Solutions, a spin-out of AON, where he was the chief operating officer and chief information officer, responsible for the application portfolio and technical infrastructure of the organization. Prior to his experience at Alight Solutions, Mr. Bandrowczak was the president of Telecommunication Media and Technology at Sutherland Global Services for 6 months. He previously served as the senior vice president for Global Business Services at Hewlett-Packard Enterprises for 4 years. He has also held senior positions at Avaya, Nortel, Lenovo, DHL and Avnet.
Xerox 2019 Annual Report 141
Ms. Morno-Wade joined Xerox in 2016 after 11 years as vice president, compensation, benefits and HR information systems at Hess Corporation. She has also held senior HR positions at Quantum, Mitsubishi, General Electric and Quaker Oats.
Mr. Osbourn joined Xerox in 2016 following 13 years at Time Warner Cable Inc. (TWC). After serving in a variety of roles, including controller and chief accounting officer for eight years, he was co-chief financial officer of TWC. Prior, he spent two years as executive director for External Financial Reporting and Accounting Policy at Time Warner Inc. Before Time Warner, he spent 14 years at PricewaterhouseCoopers LLP in roles of increasing responsibility and was admitted to partnership in 2000.
Mr. Pastor joined Xerox as Executive Vice President and General Counsel in 2018 after2018. In 2021, he was appointed Executive Vice President, Chief Corporate Development Officer and Chief Legal Officer. Prior to Xerox, Mr. Pastor spent 5 years at Icahn Enterprises L.P., where he was most recently the deputy general counsel, responsible for,
Xerox 2021 Annual Report 149
among other things, numerous long-term strategic initiatives, including the acquisitions and dispositions of various operating companies, and investments in and engagements with various public and private companies. Prior to Icahn Enterprises, Mr. Pastor was an associate at Simpson, Thacher & Bartlett LLP, where he advised public companies on mergers and acquisitions, securities offerings, corporate governance and other general corporate matters.
Ms. Collins Smee joined Xerox in 2018 from the U.S. Federal Government where she was leading Technology Transformation Services, overseeing technology and process design teams focused on transforming the way federal government agencies build, buy and use technology. Prior to that, Ms. Collins Smee spent more than 25 years at IBM in a variety of global executive roles, including client sales, support and delivery of technical products and services.
Mr. Shanker joined Xerox as chief digital officer and the executive committee in January 2019, and was appointed senior vice president and chief technology officer in May 2019. Prior to joining Xerox, Mr. Shanker was chief digital and information officer for a start-up company focusing on disruptive nano materials and clean energy solutions where he continues to be a strategic advisor. Previously, Mr. Shanker was the CIO for Hewlett Packard (HP) and Palm, Inc.
Item 11. Executive Compensation
The information included under the following captions under “Proposal 1-Election of Directors” in our 20202022 definitive Proxy Statement is incorporated herein by reference: “Compensation Discussion and Analysis”, “Summary Compensation Table”, “Grants of Plan-Based Awards in 2019”2021”, “Outstanding Equity Awards at 20192021 Fiscal Year-End”, “Option Exercises and Stock Vested in 2019”2021”, “Pension Benefits for the 20192021 Fiscal Year”, “Nonqualified Deferred Compensation for the 20192021 Fiscal Year”, “Potential Payments upon Termination or Change in Control”, "CEO Pay Ratio", “Summary of Director Annual Compensation", "Compensation Committee Interlocks and Insider Participation” and “Compensation Committee”. The information included under the heading “Compensation Committee Report” in our 20202022 definitive Proxy Statement is incorporated herein by reference; however, this information shall not be deemed to be “soliciting material” or to be “filed” with the Commission or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Exchange Act of 1934, as amended.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information regarding security ownership of certain beneficial owners and management and securities authorized for issuance under equity compensation plans is incorporated herein by reference to the subsections entitled “Ownership of Company Securities,” and “Equity Compensation Plan Information” under “Proposal 1- Election of Directors” in our 20202022 definitive Proxy Statement.
Item 13. Certain Relationships, Related Transactions and Director Independence
Information regarding certain relationships and related transactions is incorporated herein by reference to the subsection entitled “Certain Relationships and Related Person Transactions” under “Proposal 1- Election of Directors” in our 20202022 definitive Proxy Statement. The information regarding director independence is incorporated herein by reference to the subsections entitled “Corporate Governance” and “Director Independence” in the section entitled “Proposal 1 - Election of Directors” in our 20202022 definitive Proxy Statement.
Item 14. Principal Accounting Fees and Services
The information regarding principal auditor fees and services is incorporated herein by reference to the section entitled “Proposal 2 - Ratification of Election of Independent Registered Public Accounting Firm” in our 20202022 definitive Proxy Statement.
Xerox 20192021 Annual Report 142150
Part IV
Item 15. ExhibitsExhibit and Financial Statement Schedules
(a) (1) Index to Financial Statements Schedulesfiled as part of this report:
| |
(a) | (1) Index to Financial Statements filed as part of this report: |
| |
▪All other schedules are omitted as they are not applicable, or the information required is included in the financial statements or notes thereto. | |
| |
▪
| All other schedules are omitted as they are not applicable, or the information required is included in the financial statements or notes thereto. |
(2) Financial Statement Schedule:
Item 16. Form 10-K Summary
None
Xerox 20192021 Annual Report 143151
Signatures
Xerox Holdings Corporation
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. | | | | | |
| |
| XEROX HOLDINGS CORPORATION | |
| |
/s/ GIOVANNI VISENTIN | |
Giovanni Visentin
Vice Chairman and Chief Executive Officer
| |
February 28, 202023, 2022 | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
February 28, 2020
|
| | | | | | | |
Signature | | Title |
| Principal Executive Officer: | | |
/S/ GIOVANNI VISENTIN | | Vice Chairman, Chief Executive Officer and Director |
| Giovanni Visentin | | |
| Principal Financial Officer: | | |
/S/ WXILLIAMAVIER FH. OSBOURN, JR.EISS | | Executive Vice President and Chief Financial Officer |
William F. Osbourn, Jr.Xavier Heiss | | |
| Principal Accounting Officer: | | |
/S/ JOSEPH H. MANCINI, JR. | | Vice President and Chief Accounting Officer |
| Joseph H. Mancini, Jr. | | |
| | |
| Directors: | | |
/S/ KEITH COZZA | | Chairman and Director |
| Keith Cozza | | |
/S/ JONATHAN CHRISTODORO
| | Director |
Jonathan Christodoro | | |
/S/ JOSEPH J. ECHEVARRIA | | Director |
| Joseph J. Echevarria | | |
/S/ NICHOLAS GRAZIANO
| | Director |
Nicholas Graziano | | |
/S/ CHERYL GORDON KRONGARD | | Director |
| Cheryl Gordon Krongard | | |
/S/ A. SCOTT LETIER | | Director |
| A. Scott Letier | | |
/S/ JESSE A. LYNN | | Director |
| Jessie A. Lynn | | |
/S/ NICHELLE MAYNARD-ELLIOTT | | Director |
| Nichelle Maynard-Elliott | | |
/S/ STEVEN D. MILLER | | Director |
| Steven D. Miller | | |
/S/ JAMES L. NELSON | | Director |
| James L. Nelson | | |
/S/ MARGARITA PALÁU-HERNÁNDEZ | | Director |
| Margarita Paláu-Hernández | | |
Xerox 20192021 Annual Report 144152
Signatures
Xerox Corporation
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. | | | | | |
| |
| XEROX CORPORATION | |
| |
/s/ GIOVANNI VISENTIN | |
Giovanni Visentin
Vice Chairman and Chief Executive Officer
| |
February 28, 202023, 2022 | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
February 28, 2020
|
| | | | | | | |
Signature | | Title |
| Principal Executive Officer: | | |
/S/ GIOVANNI VISENTIN | | Vice Chairman, Chief Executive Officer and Director |
| Giovanni Visentin | | |
| Principal Financial Officer: | | |
/S/ WXILLIAMAVIER FH. OSBOURN, JR.EISS | | Executive Vice President and Chief Financial Officer |
William F. Osbourn, Jr.Xavier Heiss | | |
| Principal Accounting Officer: | | |
/S/ JOSEPH H. MANCINI, JR. | | Vice President and Chief Accounting Officer |
| Joseph H. Mancini, Jr. | | |
| | |
| Directors: | | |
/S/ KEITH COZZA | | Chairman and Director |
| Keith Cozza | | |
/S/ JONATHAN CHRISTODORO
| | Director |
Jonathan Christodoro | | |
/S/ JOSEPH J. ECHEVARRIA | | Director |
| Joseph J. Echevarria | | |
/S/ NICHOLAS GRAZIANO
| | Director |
Nicholas Graziano | | |
/S/ CHERYL GORDON KRONGARD | | Director |
| Cheryl Gordon Krongard | | |
/S/ A. SCOTT LETIER | | Director |
| A. Scott Letier | | |
/S/ JESSE A. LYNN | | Director |
| Jessie A. Lynn | | |
/S/ NICHELLE MAYNARD-ELLIOTT | | Director |
| Nichelle Maynard-Elliott | | |
/S/ STEVEN D. MILLER | | Director |
| Steven D. Miller | | |
/S/ JAMES L. NELSON | | Director |
| James L. Nelson | | |
/S/ MARGARITA PALÁU-HERNÁNDEZ | | Director |
| Margarita Paláu-Hernández | | |
Xerox 20192021 Annual Report 145153
Xerox Holdings Corporation
Schedule II Valuation and Qualifying Accounts
Receivables - Allowance for doubtful accounts:
| | (in millions) | | (in millions) | | Balance
at beginning
of period | | Additions charged to bad debt provision (1) | | Amounts charged to other income statement accounts (1) | | Deductions and other, net of recoveries (2) | | Balance
at end
of period |
| Year Ended December 31, 2021 | | Year Ended December 31, 2021 | | | | | | | | | | |
| Accounts Receivable | | Accounts Receivable | | $ | 69 | | | $ | 8 | | | $ | 1 | | | $ | (20) | | | $ | 58 | |
| Finance Receivables | | Finance Receivables | | 133 | | | (1) | | | 4 | | | (18) | | | 118 | |
| | | | $ | 202 | | | $ | 7 | | | $ | 5 | | | $ | (38) | | | $ | 176 | |
| | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | | Balance at beginning of period | | Additions charged to bad debt provision (1) | | Amounts (credited) charged to other income statement accounts (1) | | Deductions and other, net of recoveries (2) | | Balance at end of period | |
| Year Ended December 31, 2020 | | Year Ended December 31, 2020 | | | | | | | | | | |
| Accounts Receivable | | Accounts Receivable | | $ | 55 | | | $ | 35 | | | $ | — | | | $ | (21) | | | $ | 69 | |
| Finance Receivables | | Finance Receivables | | 89 | | | 81 | | | — | | | (37) | | | 133 | |
| | | | | $ | 144 | | | $ | 116 | | | $ | — | | | $ | (58) | | | $ | 202 | |
| | | | | | | | | | | | | |
| Year Ended December 31, 2019 | | | | | | | | | | | Year Ended December 31, 2019 | | | | | | | | | | |
| Accounts Receivable | | $ | 56 |
| | $ | 18 |
| | $ | — |
| | $ | (19 | ) | | $ | 55 |
| Accounts Receivable | | $ | 56 | | | $ | 18 | | | $ | — | | | $ | (19) | | | $ | 55 | |
| Finance Receivables | | 92 |
| | 28 |
| | 3 |
| | (34 | ) | | 89 |
| Finance Receivables | | 92 | | | 28 | | | 3 | | | (34) | | | 89 | |
| | | $ | 148 |
| | $ | 46 |
| | $ | 3 |
| | $ | (53 | ) | | $ | 144 |
| | | $ | 148 | | | $ | 46 | | | $ | 3 | | | $ | (53) | | | $ | 144 | |
| | | |
| | |
| | |
| | |
| | |
| |
| Year Ended December 31, 2018 | | |
| | |
| | |
| | |
| | |
| |
| Accounts Receivable | | $ | 59 |
| | $ | 12 |
| | $ | 2 |
| | $ | (17 | ) | | $ | 56 |
| |
| Finance Receivables | | 108 |
| | 24 |
| | 2 |
| | (42 | ) | | 92 |
| |
| | | $ | 167 |
| | $ | 36 |
| | $ | 4 |
| | $ | (59 | ) | | $ | 148 |
| |
| | | |
| | |
| | |
| | |
| | |
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| Year Ended December 31, 2017 | | |
| | |
| | |
| | |
| | |
| |
| Accounts Receivable | | $ | 64 |
| | $ | 16 |
| | $ | (2 | ) | | $ | (19 | ) | | $ | 59 |
| |
| Finance Receivables | | 110 |
| | 17 |
| | 15 |
| | (34 | ) | | 108 |
| |
| | | $ | 174 |
| | $ | 33 |
| | $ | 13 |
| | $ | (53 | ) | | $ | 167 |
| |
_____________
| |
(1)Bad debt provisions relate to estimated losses due to credit and similar collectibility issues. Other charges (credits) relate to adjustments to reserves necessary to reflect events of non-payment such as customer accommodations and contract terminations. (2)Deductions and other, net of recoveries primarily relates to receivable write-offs, but also includes the impact of foreign currency translation adjustments and recoveries of previously written off receivables.
(1)
| Bad debt provisions relate to estimated losses due to credit and similar collectibility issues. Other charges (credits) relate to adjustments to reserves necessary to reflect events of non-payment such as customer accommodations and contract terminations. |
| |
(2)
| Deductions and other, net of recoveries primarily relates to receivable write-offs, but also includes the impact of foreign currency translation adjustments and recoveries of previously written off receivables. |
Deferred Tax Asset Valuation Allowances:
|
| | | | | | | | | | | | | | |
| (in millions) | | Balance at beginning of period | | Additions charged to income tax expense | | Amounts (credited) charged to other accounts (1) | | Balance at end of period |
| Year Ended December 31, 2019 | | $ | 397 |
| | 16 |
| | (14 | ) | | $ | 399 |
|
| | | |
| | |
| | |
| | |
|
| Year Ended December 31, 2018 | | $ | 435 |
| | 3 |
| | (41 | ) | | $ | 397 |
|
| | | |
| | |
| | |
| | |
|
| Year Ended December 31, 2017 | | $ | 416 |
| | 6 |
| | 13 |
| | $ | 435 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | | Balance at beginning of period | | Additions charged to income tax (benefit) expense | | Amounts credited to other accounts (1) | | | | Balance
at end
of period |
| Year Ended December 31, 2021 | | $ | 396 | | | (9) | | | (30) | | | | | $ | 357 | |
| | | | | | | | | | | |
| Year Ended December 31, 2020 | | $ | 399 | | | 25 | | | (28) | | | | | $ | 396 | |
| | | | | | | | | | | |
| Year Ended December 31, 2019 | | $ | 397 | | | 16 | | | (14) | | | | | $ | 399 | |
_____________
| |
(1) | Reflects other (decreases) increases to our valuation allowance, including the effects of currency. These did not affect income tax expense in total as there was a corresponding adjustment to Deferred tax assets or Other comprehensive (loss) income. |
Xerox 20192021 Annual Report 146154
Xerox Corporation
Schedule II Valuation and Qualifying Accounts
Receivables - Allowance for doubtful accounts: | | (in millions) | | (in millions) | | Balance
at beginning
of period | | Additions charged to bad debt provision (1) | | Amounts charged to other income statement accounts (1) | | Deductions and other, net of recoveries (2) | | Balance
at end
of period |
| Year Ended December 31, 2021 | | Year Ended December 31, 2021 | | | | | | | | | | |
| Accounts Receivable | | Accounts Receivable | | $ | 69 | | | $ | 8 | | | $ | 1 | | | $ | (20) | | | $ | 58 | |
| Finance Receivables | | Finance Receivables | | 133 | | | (1) | | | 4 | | | (18) | | | 118 | |
|
| | | $ | 202 | | | $ | 7 | | | $ | 5 | | | $ | (38) | | | $ | 176 | |
| | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | | Balance at beginning of period | | Additions charged to bad debt provision (1) | | Amounts (credited) charged to other income statement accounts (1) | | Deductions and other, net of recoveries (2) | | Balance at end of period | |
| Year Ended December 31, 2020 | | Year Ended December 31, 2020 | | | | | | | | | | |
| Accounts Receivable | | Accounts Receivable | | $ | 55 | | | $ | 35 | | | $ | — | | | $ | (21) | | | $ | 69 | |
| Finance Receivables | | Finance Receivables | | 89 | | | 81 | | | — | | | (37) | | | 133 | |
| | | | | $ | 144 | | | $ | 116 | | | $ | — | | | $ | (58) | | | $ | 202 | |
| | | | | | | | | | | | | |
| Year Ended December 31, 2019 | | | | | | | | | | | Year Ended December 31, 2019 | | | | | | | | | | |
| Accounts Receivable | | $ | 56 |
| | $ | 18 |
| | $ | — |
| | $ | (19 | ) | | $ | 55 |
| Accounts Receivable | | $ | 56 | | | $ | 18 | | | $ | — | | | $ | (19) | | | $ | 55 | |
| Finance Receivables | | 92 |
| | 28 |
| | 3 |
| | (34 | ) | | 89 |
| Finance Receivables | | 92 | | | 28 | | | 3 | | | (34) | | | 89 | |
| | | $ | 148 |
| | $ | 46 |
| | $ | 3 |
| | $ | (53 | ) | | $ | 144 |
| | | $ | 148 | | | $ | 46 | | | $ | 3 | | | $ | (53) | | | $ | 144 | |
| | | |
| | |
| | |
| | |
| | |
| |
| Year Ended December 31, 2018 | | |
| | |
| | |
| | |
| | |
| |
| Accounts Receivable | | $ | 59 |
| | $ | 12 |
| | $ | 2 |
| | $ | (17 | ) | | $ | 56 |
| |
| Finance Receivables | | 108 |
| | 24 |
| | 2 |
| | (42 | ) | | 92 |
| |
| | | $ | 167 |
| | $ | 36 |
| | $ | 4 |
| | $ | (59 | ) | | $ | 148 |
| |
| | | |
| | |
| | |
| | |
| | |
| |
| Year Ended December 31, 2017 | | |
| | |
| | |
| | |
| | |
| |
| Accounts Receivable | | $ | 64 |
| | $ | 16 |
| | $ | (2 | ) | | $ | (19 | ) | | $ | 59 |
| |
| Finance Receivables | | 110 |
| | 17 |
| | 15 |
| | (34 | ) | | 108 |
| |
| | | $ | 174 |
| | $ | 33 |
| | $ | 13 |
| | $ | (53 | ) | | $ | 167 |
| |
_____________
| |
(1) | Bad debt provisions relate to estimated losses due to credit and similar collectibility issues. Other charges (credits) relate to adjustments to reserves necessary to reflect events of non-payment such as customer accommodations and contract terminations. |
| |
(2) | Deductions and other, net of recoveries primarily relates to receivable write-offs, but also includes the impact of foreign currency translation adjustments and recoveries of previously written off receivables. |
Deferred Tax Asset Valuation Allowances:
|
| | | | | | | | | | | | | | |
| (in millions) | | Balance at beginning of period | | Additions charged to income tax expense | | Amounts (credited) charged to other accounts (1) | | Balance at end of period |
| Year Ended December 31, 2019 | | $ | 397 |
| | 16 |
| | (14 | ) | | $ | 399 |
|
| | | |
| | |
| | |
| | |
|
| Year Ended December 31, 2018 | | $ | 435 |
| | 3 |
| | (41 | ) | | $ | 397 |
|
| | | |
| | |
| | |
| | |
|
| Year Ended December 31, 2017 | | $ | 416 |
| | 6 |
| | 13 |
| | $ | 435 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | | Balance at beginning of period | | Additions charged to income tax (benefit) expense | | Amounts credited to other accounts (1) | | | | Balance
at end
of period |
| Year Ended December 31, 2021 | | $ | 396 | | | (9) | | | (30) | | | | | $ | 357 | |
| | | | | | | | | | | |
| Year Ended December 31, 2020 | | $ | 399 | | | 25 | | | (28) | | | | | $ | 396 | |
| | | | | | | | | | | |
| Year Ended December 31, 2019 | | $ | 397 | | | 16 | | | (14) | | | | | $ | 399 | |
_____________
| |
(1) | Reflects other (decreases) increases to our valuation allowance, including the effects of currency. These did not affect income tax expense in total as there was a corresponding adjustment to Deferred tax assets or Other comprehensive (loss) income. |
Xerox 20192021 Annual Report 147155
Index of Exhibits
Xerox Holdings Corporation
Xerox Corporation
Document and Location
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| Form of Amended and Restated Credit Agreement dated as of August 9, 2017 ("Credit Agreement") between Xerox Corporation and the Initial Lenders named therein, Citibank, N.A., as Administrative Agent, and Citigroup Global Markets Inc., J.P. Morgan Chase Bank. N.A., Merrill Lynch, Pierce, Fenner & Smith Incorporated, BNP Paribas Securities Corp., Mizuho Bank, Ltd. and The Bank of Tokyo-Mitsubishi UFJ, Ltd., as Joint Lead Arrangers and Joint Bookrunners. |
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Xerox 2021 Annual Report 156
Xerox 2019 Annual Report 148
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| 4(h) | Instruments with respect to long-term debt where the total amount of securities authorized thereunder does not exceed 10 percent of the total assets of Xerox Holdings Corporation and/or Xerox Corporation, as applicable, and its subsidiaries on a consolidated basis have not been filed. Xerox Holdings Corporation and/or Xerox Corporation, as applicable,agrees to furnish to the Commission a copy of each such instrument upon request. |
| 10 | The management contracts or compensatory plans or arrangements listed below that are applicable to the executive officers named in the Summary Compensation Table which appears in Xerox Holdings Corporation's 20202022 Proxy Statement or to our directors are preceded by an asterisk (*). |
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Xerox 2019 Annual Report 149
Xerox 2021 Annual Report 157
Xerox 2019 Annual Report 150
Xerox 2021 Annual Report 158
Xerox 2019 Annual Report 151
Xerox 2021 Annual Report 159
Xerox 2021 Annual Report 160
Xerox 2019 Annual Report 152 |
Xerox 2019 Annual Report 153
Xerox 2021 Annual Report 161
| | | | | | | | | | | | | | | | | | | | | 101 | The following financial information from Xerox Holdings Corporation and Xerox Corporation's combined Annual Report on Form 10-K for the year ended December 31, 20192021 was formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Xerox Holdings Corporation Consolidated Statements of (Loss) Income, (ii) Xerox Holdings Corporation Consolidated Statements of Comprehensive (Loss) Income, (iii) Xerox Holdings Corporation Consolidated Balance Sheets, (iv) Xerox Holdings Corporation Consolidated Statements of Cash Flows, (v) Xerox Holdings Corporation Consolidated Statements of Shareholders' Equity (vi) Xerox Corporation Consolidated Statements of (Loss) Income, (vii) Xerox Corporation Consolidated Statements of Comprehensive (Loss) Income, (viii) Xerox Corporation Consolidated Balance Sheets, (ix) Xerox Corporation Consolidated Statements of Cash Flows, (xi) Xerox Corporation Consolidated Statements of Shareholders'Shareholder's Equity and (xii) Notes to the Consolidated Financial Statements. | | 104 | The cover page of this Annual Report on Form 10-K, formatted in iXBRL (Inline eXtensible Business Reporting Language) and contained in Exhibit 101. |
Xerox 20192021 Annual Report 154162 |
