Xerox Holdings Corporation — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing covers the full year; Q4 figures are identified separately below. Xerox Holdings’ primary operating subsidiary is Xerox Corporation, which accounts for nearly all operations. Xerox is a global workplace technology, printing, services and software provider, operating in about 160 countries.
Financial performance and position
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $7.022 billion | $9.066 billion |
| Equipment sales revenue | $1.564 billion | $2.062 billion |
| Post-sale revenue | $5.458 billion | $7.004 billion |
| Continuing-operations net income attributable to Xerox Holdings | $192 million | $648 million |
| GAAP diluted EPS from continuing operations | $0.84 | $2.78 |
| Adjusted diluted EPS | $1.41 | $3.55 |
| Operating cash flow from continuing operations | $548 million | $1.244 billion |
| Capital expenditures | $74 million | $65 million |
| Total gross margin | 37.4% | 40.3% |
| Adjusted operating margin | 6.6% | 13.1% |
Revenue fell 22.5% year over year. Equipment sales declined 24.2% and post-sale revenue declined 22.1%. The company reported $252 million of pre-tax income and $64 million of income-tax expense. Free cash flow, defined as operating cash flow from continuing operations less capital expenditures, was approximately $474 million in 2020, calculated from the reported figures.
For Q4 2020, revenue was $1.930 billion versus $2.444 billion in Q4 2019. Continuing-operations income attributable to Xerox Holdings was $77 million versus $266 million; diluted continuing-operations EPS was $0.36 versus $1.17.
At year-end, Xerox Holdings reported $2.625 billion of cash and $66 million of restricted cash, $4.444 billion of total debt, $14.741 billion of total assets and $5.592 billion of shareholders’ equity. Working capital was $3.305 billion. The $1.8 billion revolving credit facility was undrawn; the company reported covenant compliance. Debt includes financing borrowings supporting customer lease assets, which totaled $3.461 billion net.
Changes, management commentary and outlook
- COVID-19: Business closures and office-capacity restrictions reduced equipment purchases, installations and print volumes. Management said the impact was greatest in Q2; recovery moderated later in the year and was interrupted by renewed restrictions in Q4. The company expects effects to continue in 2021.
- Margins and costs: Lower revenue, pricing promotions, tariffs and increased credit-loss provisions pressured profitability. Bad-debt provision was $116 million, up from $46 million in 2019. Cost reductions partly offset the decline.
- Restructuring: Project Own It delivered approximately $1.4 billion of cumulative gross savings over the 30 months through year-end 2020, including $450 million in 2020. Management expected $375 million of gross savings in 2021. 2020 restructuring and related costs were $93 million.
- Cash preservation and capital returns: The company used temporary government assistance and furlough programs, saving approximately $107 million, and reduced discretionary spending. It repurchased $300 million of shares and declared $209 million of common dividends in 2020.
- Debt and unusual items: Xerox Holdings issued $1.5 billion of 2025 and 2028 notes; proceeds were contributed to Xerox Corporation to refinance debt, including early repayment of 2021 notes. Early extinguishment resulted in a $26 million loss. 2019 comparisons are affected by the $77 million one-time OEM license fee and $710 million of discontinued-operations income, including the Fuji Xerox/Xerox International Partners sale gain; 2020 continuing operations exclude those divested businesses.
- 2021 outlook: Management expected modest recovery, with Q1 still challenged, and revenue of at least $7.2 billion excluding currency impact. It forecast operating cash flow of about $600 million and capital expenditures of about $100 million, and reiterated a target to return at least 50% of annual free cash flow to shareholders. These are forward-looking estimates, not guarantees.
- Strategic changes: Announced plans to separate Software, Financing and Innovation into distinct businesses by 2022; expand Xerox Financial Services to third-party leasing; and establish a $250 million corporate venture fund, with deployment expected over five years. Acquisitions in 2020 included reseller/dealer businesses and CareAR.
Risks and contingencies
- Ongoing decline in printing volumes, device placements and revenue, heightened by pandemic-related changes in customer workplaces and purchasing.
- Execution risk in cost reductions, restructuring, new products and adjacent-market growth; competition, pricing pressure, tariffs, foreign exchange and reliance on third-party manufacturing and service partners.
- Debt, access to reasonably priced financing and credit-market conditions; the revolving facility’s covenant requirements and 2022 maturity.
- Defined-benefit pension plans had an aggregate unfunded position of approximately $905 million at year-end; forecast 2021 pension and retiree-health contributions were about $130 million and $30 million, respectively.
- Goodwill was approximately $4.1 billion. No impairment was recorded after 2020 quantitative tests, but the estimated fair-value cushion was 15%–20% and depends on forecasts and discount-rate assumptions.
- Brazilian tax disputes included $355 million of unreserved contingencies, which management said were mostly remote as to loss; escrow deposits, surety bonds and letters of credit were also disclosed. Other litigation and regulatory matters could have material effects if outcomes or estimates change.
- Other uncertainties include deferred-tax-asset realizability, cybersecurity, privacy, environmental and trade regulation, Brexit-related disruption, and the planned termination of the Fuji Xerox Technology Agreement. Management expected a $100 million prepaid royalty related to continued Xerox-brand use after termination.
PricewaterhouseCoopers issued unqualified opinions on the financial statements and internal control over financial reporting; management and the auditor reported effective controls. The auditor identified goodwill impairment and deferred-tax-asset realizability as critical audit matters.
Important facts for investors to verify
- Whether revenue, print volumes and equipment installations recover as assumed, and whether the 2021 revenue and cash-flow outlook is achieved.
- How much of operating cash flow and free cash flow is sustainable as working capital, receivables and customer-financing balances change.
- Debt maturities, financing-business leverage, borrowing costs and continued covenant compliance.
- Credit losses and reserve adequacy, particularly for finance receivables as government support recedes.
- Progress and realized net savings from Project Own It, including implementation costs and any operational disruption.
- Goodwill and deferred tax asset assumptions, pension funding needs, and developments in material litigation and Brazilian tax matters.
- Execution, funding and financial reporting implications of the planned business separations, venture fund and expansion of Xerox Financial Services.