Xerox Holdings Corp. (XRX) — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. The combined filing presents Xerox Holdings Corporation and Xerox Corporation; Xerox is the primary operating subsidiary and represents nearly all of Holdings’ operations. Financial amounts below are in millions of dollars unless noted.
Business context and results
Xerox sells printing equipment and supplies, provides document and managed services, and finances equipment. The quarter reflected ongoing COVID-19 effects, delayed workplace returns, and worsening supply-chain and freight disruptions. Management reported strong demand but a growing equipment and IT hardware order backlog.
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $1,758 | $1,767 | $5,261 | $5,092 |
| Net income attributable to Xerox Holdings | $90 | $90 | $220 | $115 |
| Diluted EPS | $0.48 | $0.41 | $1.10 | $0.49 |
| Operating cash flow | $100 | $106 | $431 | $313 |
- Q3 revenue decreased 0.5% year over year (1.6% at constant currency). Equipment sales fell 7.6%; post-sale revenue grew 1.7%. For the nine months, revenue rose 3.3% (0.8% at constant currency), including 13.6% growth in equipment sales.
- Q3 GAAP pre-tax margin was 4.8%, down from 6.7%; adjusted operating margin was 4.2%, down from 7.4%. Gross margin fell to 32.4% from 36.8%. Management attributed margin pressure mainly to freight and supply-chain costs, constrained availability of higher-margin equipment, lower temporary government assistance, competitive pricing, and lower royalty revenue.
- Nine-month GAAP pre-tax margin improved to 4.5% from 2.9%; adjusted operating margin was 5.5%, unchanged. Nine-month net income benefited from higher revenue, lower bad-debt expense, lower restructuring and retirement-related costs, and lower taxes.
Financial position, liquidity and capital allocation
- At September 30, cash and cash equivalents were $2,209; cash, cash equivalents and restricted cash totaled $2,262, including $53 restricted. Total debt was $4,319, compared with $4,444 at December 31, 2020. Total assets were $14,081 and total liabilities $8,662.
- Nine-month operating cash flow of $431 included a $100 upfront royalty payment from FUJIFILM Business Innovation for continued use of the Xerox brand. Investing activities used $54, including $52 of capital expenditures; financing activities used $793, including $500 of share repurchases and $157 of dividends.
- Management cited access to an undrawn $1.8 billion revolving credit facility, which matures in August 2022. It described liquidity as sufficient to manage pandemic-related disruption.
- The company repurchased $500 of shares in the first nine months. In October, the Board authorized a new $500 share-repurchase program, to be used opportunistically.
Outlook, risks and notable items
- 2021 outlook: Revenue guidance was reduced to approximately $7.1 billion, or $7.0 billion at constant currency. Xerox reaffirmed expected operating cash flow of about $580 and capital expenditures of about $80, implying approximately $500 of free cash flow based on those estimates. It reiterated a policy of returning at least 50% of annual free cash flow to shareholders.
- Management expects COVID-19 effects, including potential new variants, and global supply-chain disruptions to affect revenue and margins into 2022. The Delta variant delayed customers’ workplace returns; shortages, shipping delays and transportation labor constraints limited equipment deliveries and increased costs.
- Goodwill was not considered impaired at September 30, and management found no triggering event requiring an interim quantitative test. It plans a quantitative goodwill assessment in Q4; the estimated fair-value cushion was likely lower than at year-end 2020. Weaker forecasts or prolonged disruption could lead to impairment.
- Brazilian tax contingencies included $349 of unreserved claims. Management said most were assessed as remote losses and did not expect ultimate resolution to materially affect results, but disputes may require escrow deposits and other security. Restricted cash included $36 related to Brazil litigation deposits.
- Xerox is pursuing insurance coverage for COVID-related business-interruption losses; the U.S. complaint alleged losses exceeding $300 through 2020. A shareholder derivative case relating to alleged HP-stock trading was on appeal, and management said it was premature to conclude whether material loss was probable. The Ribbe matter was concluded after the appeal was withdrawn.
- Other items to monitor include the CareAR software business and ServiceNow’s $10 noncontrolling investment, the planned transition of finance processes from HCL to TCS, and Xerox’s remaining HCL spending commitment of approximately $900 over five years. Management identified CareAR customer adoption, integration and financial performance as risks.
Most important facts for investors to verify
- Whether supply constraints and freight costs ease, backlog converts to shipments, and the reduced revenue outlook is achieved.
- Whether margins and post-sale revenues recover as workplace occupancy and print volumes improve.
- Whether the $580 operating-cash-flow and $80 capital-expenditure estimates support the free-cash-flow outlook, including the effect of the $100 royalty prepayment.
- Debt maturities, access to the revolving facility, and the sustainability of buybacks and dividends alongside pension contributions and operating needs.
- Updates on the Q4 goodwill assessment, Brazil tax disputes, COVID-related insurance litigation, the HP-related appeal, and CareAR’s execution and commitments.