Xerox Holdings Corp. and Xerox Corp. — Q2 2021 Form 10-Q
Business context and period. This combined, unaudited filing covers the three and six months ended June 30, 2021. Xerox Corporation represents nearly all of Xerox Holdings’ operations. Results reflected a gradual recovery from pandemic-related business closures and reduced office activity in 2020; management cautioned that recovery remained uneven and economically uncertain. Unless noted, amounts below are in millions of dollars.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $1,793 | $1,465 | $3,503 | $3,325 |
| Net income attributable to Xerox Holdings | $91 | $27 | $130 | $25 |
| Diluted EPS | $0.46 | $0.11 | $0.64 | $0.08 |
| Operating cash flow | $214 | $34 | $331 | $207 |
- Revenue and mix: Q2 revenue rose 22.4% year over year (18.1% at constant currency), including equipment sales growth of 38.4% and post-sale revenue growth of 18.1%. For the first half, revenue rose 5.4% (2.1% constant currency); equipment sales rose 27.6%, while post-sale revenue was nearly flat.
- Margins and earnings: Q2 gross margin was 35.6%, down 2.9 percentage points; reported pre-tax margin was 5.5%, up 3.1 points. Adjusted operating margin was 7.0%, versus 4.2%. First-half gross margin was 35.7%, down 2.7 points; pre-tax margin was 4.3%, versus 0.9%, and adjusted operating margin was 6.1%, versus 4.5%. Adjusted net income attributable to Holdings was $94 million in Q2 and $141 million in the first half. These adjusted figures are non-GAAP measures.
- Cash flow and investment: First-half cash from investing was $72 million used, including $33 million of capital expenditures and $37 million for acquisitions. Financing used $747 million, including $413 million of Holdings share repurchases, $108 million of dividends, and debt repayments. Cash, cash equivalents and restricted cash fell $488 million from year-end to $2.203 billion; cash and cash equivalents were $2.124 billion.
- Debt and liquidity: Total debt was $4.239 billion at June 30, 2021, versus $4.444 billion at year-end 2020. Current and long-term debt on Holdings’ balance sheet totaled $4.239 billion. Xerox Corporation’s balance sheet separately reports $1.494 billion of related-party debt to Holdings, reflecting an intercompany loan reclassification. The company reported access to an undrawn $1.8 billion revolving credit facility maturing August 2022. Total equity was $5.295 billion for Holdings.
- Other financial measures: The Q2 reported effective tax rate was 9.1%; management said the rate benefited from a tax-law change and deferred-tax-asset remeasurement. First-half pension contributions were $69 million, with $130 million estimated for full-year 2021.
Material changes and notable items
- Management attributed the revenue and earnings improvement in part to comparison with severe pandemic disruption in the prior year, reopening workplaces, higher equipment installations and page volumes, cost reductions, and lower bad-debt expense. The first-half 2020 comparison included an approximately $60 million incremental bad-debt provision.
- Margins faced pressure from higher freight costs, competitive pricing, lower temporary government assistance and furlough savings, and a less favorable post-sale revenue mix. Chip and resin shortages and freight disruption constrained equipment supply and increased the order backlog.
- Xerox received a $100 million prepaid royalty in April from FUJIFILM Business Innovation for continued Xerox-brand use during a two-year transition; revenue is expected to be recognized ratably over that period.
- Holdings repurchased 17.1 million shares for $413 million in the first half; approximately $88 million of authorization remained at June 30. The company suspended its 2021 U.S. salaried 401(k) match, expecting approximately $20 million of annual savings.
- First-half restructuring and asset-impairment charges were $25 million, including severance tied to approximately 400 employee reductions. A new Canadian office-equipment dealer acquisition and U.S. document-solutions acquisition cost $37 million in total.
Outlook, risks and contingencies
- Guidance: Management expected a modest 2021 recovery, full-year revenue of at least $7.2 billion (approximately 2.5% growth excluding currency), operating cash flow of about $600 million, and capital expenditures of about $100 million. It reiterated a policy of returning at least 50% of annual free cash flow to shareholders and planned opportunistic repurchases using the remaining authorization.
- Operating and market risks: Pandemic developments and variants, slower workplace returns, customer printing volumes, product supply constraints, freight costs, competitive pricing, inflation, labor costs and the reduction of government support could affect results. Goodwill was not considered impaired in the June qualitative review, but future deterioration in cash-flow assumptions could prompt impairment testing or charges.
- Commitments and litigation: The filing reports approximately $925 million of remaining spending commitments under the HCL shared-services arrangement over five years, terminable subject to declining fees. A June software agreement includes a five-year commitment of approximately $60 million; a July TCS outsourcing arrangement has a six-year contract value of approximately $160 million. A pandemic-related insurance coverage claim alleges losses exceeding $300 million; recovery is not established in the filing. Brazilian tax contingencies included $392 million unreserved at June 30, which management said was mostly assessed as remote; escrow cash deposits were $41 million. The company also disclosed appealed or pending shareholder litigation and approximately $306 million of guarantees, for which it considered default risk remote.
- Controls: Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the projected recovery, revenue and cash-flow targets are achieved, particularly if pandemic effects, workplace reopening or equipment supply constraints change.
- Whether higher freight and input costs, competitive price pressure and reduced government support continue to compress gross margins.
- Cash generation after working-capital movements, pension contributions, dividends, debt payments and further repurchases; also confirm revolver availability and upcoming debt maturities.
- How the $100 million brand-license receipt is recognized over the transition period and how the intercompany debt presentation affects interpretation of Xerox Corporation’s standalone balance sheet.
- Developments in the insurance coverage dispute, Brazilian tax matters and shareholder litigation, including any accruals, cash deposits or material judgments.
Non-GAAP adjusted measures are management-defined and should be considered alongside, not in place of, GAAP results.