Xerox Holdings Corporation — Q2 2020 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2020. Xerox Holdings’ operating results are substantially those of Xerox Corporation. Xerox sells document technology and related services, maintenance, supplies, rentals and financing. COVID-19-related closures and office restrictions materially affected customer purchases, equipment installations and printing volumes.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $1.465bn | $2.263bn | $3.325bn | $4.443bn |
| GAAP income from continuing operations attributable to Xerox Holdings | $27m; $0.11 diluted EPS | $141m; $0.60 diluted EPS | $25m; $0.08 diluted EPS | $225m; $0.94 diluted EPS |
| Pre-tax income margin | 2.4% | 8.4% | 0.9% | 5.9% |
| Gross margin | 38.5% | 39.1% | 38.4% | 39.7% |
| Adjusted operating margin (non-GAAP) | 4.2% | 12.4% | 4.5% | 11.7% |
| Operating cash flow, continuing operations | $34m | $276m | $207m | $498m |
Adjusted net income from continuing operations attributable to Xerox Holdings, a non-GAAP measure, was $36m ($0.15 diluted EPS) in Q2 and $86m ($0.36 diluted EPS) in the first half, compared with $186m ($0.79) and $344m ($1.45), respectively, in 2019. First-half capital expenditures were $42m.
At June 30, cash and cash equivalents were $2.272bn (plus $42m restricted cash); total debt was $3.978bn, including $1.793bn short-term/current and $2.185bn long-term. The company had access to an undrawn $1.8bn revolver maturing in August 2022. Current assets were $5.391bn and current liabilities $3.791bn. First-half cash declined $481m to $2.314bn including restricted cash.
Material changes versus comparable periods
- Q2 revenue fell 35.3% year over year; first-half revenue declined 25.2%. Equipment sales fell 38.5% in Q2 and 33.3% for the first half; post-sale revenue declined 34.3% and 22.9%, respectively.
- Lower sales and print volumes drove reduced profitability. Q2 GAAP continuing income attributable to Xerox Holdings fell $114m; first-half income fell $200m. First-half adjusted operating margin was down 7.2 percentage points.
- First-half operating cash flow declined $291m from 2019. Working-capital movements included lower accounts payable and higher inventory; reduced receivables and lower finance assets partly offset these uses.
- Receivables allowances increased amid the pandemic outlook: the allowance was 7.1% of gross trade receivables versus 4.3% at year-end 2019, and 4.5% of gross finance receivables net of unearned income versus 2.6%. First-quarter bad-debt expense was $61m higher year over year.
- Gross debt declined from $4.282bn at year-end 2019. Xerox paid $313m of senior notes in the first half and spent $193m on four SMB-focused acquisitions. No board-authorized share repurchases were made in the first half.
Outlook, commentary, risks and unusual items
- Management withdrew its full-year 2020 revenue, earnings, operating cash flow and capital-allocation outlook in Q1 because of COVID-19 uncertainty. It reported signs of improvement in June but expected a slower, gradual recovery in the second half, with continuing uncertainty from renewed outbreaks and restrictions.
- Management remained committed to the common dividend and its policy of returning at least 50% of operating cash flow after capital expenditures to shareholders, and expected at least $300m of share repurchases during the remainder of 2020.
- Temporary government assistance and furlough programs reduced Q2 costs by approximately $60m ($53m government assistance and $7m furlough programs). Management noted these were temporary measures.
- Goodwill was not impaired in Q2 after an interim test; estimated fair value exceeded carrying value by 10%–20%. Management cautioned that more severe or prolonged economic disruption or weaker forecasts could lead to impairment.
- Management estimated approximately $30m of 2020 cost impact from higher import tariffs. The HCL shared-services arrangement carried approximately $1.2bn of remaining aggregate spending commitments over six years; transition completion was delayed into 2021 by the pandemic.
- In March, Xerox terminated its proposed HP acquisition and related $24bn financing commitments; no termination penalty was paid. Q2 transaction costs included costs associated with the terminated proposal. In July, after quarter-end, Xerox arranged a $340m secured borrowing backed by finance receivables and operating-lease payment rights.
- Key exposures include COVID-19’s effects on demand and collections, competition and structural print-market declines, tariffs and currency movements, debt and access to financing, pension funding, outsourcing execution, and litigation. Brazil tax disputes included $336m of unreserved contingencies; the company said most were assessed as remote and did not expect ultimate resolution to materially affect results, financial position or cash flows. Shareholder suits relating to the Fuji transaction and proposed HP acquisition remained pending; outcomes were described as uncertain.
Important facts for investors to verify
- Whether revenue, equipment placements and print volumes recover as management expected, and whether the recovery is slower or more severe than assumed in goodwill and credit-loss estimates.
- Whether receivables allowances remain adequate as customer payment performance and write-offs evolve.
- Liquidity, debt maturities and covenant compliance; the filing reports compliance with credit-facility covenants at June 30, 2020.
- Whether the stated second-half repurchase expectation and dividend policy are maintained in light of cash generation and ongoing uncertainty.
- Potential effects of the Brazil tax matters, shareholder litigation, tariff costs and the secured borrowing entered into after quarter-end.