Xerox Holdings Corporation — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. The combined filing presents separate financial statements for Xerox Holdings Corporation and Xerox Corporation; operating results are substantially the same, but parent-level income and debt/equity presentation differ. Amounts below are in U.S. dollars unless stated otherwise.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $1.767 billion | $2.179 billion | $5.092 billion | $6.622 billion |
| Income from continuing operations attributable to Xerox Holdings | $90 million | $157 million | $115 million | $382 million |
| Diluted EPS from continuing operations | $0.41 | $0.68 | $0.49 | $1.62 |
| Adjusted net income attributable to Xerox Holdings (non-GAAP) | $105 million | $184 million | $191 million | $528 million |
| Adjusted diluted EPS (non-GAAP) | $0.48 | $0.80 | $0.84 | $2.24 |
- Q3 revenue declined 18.9% year over year; nine-month revenue declined 23.1%. In Q3, equipment sales fell 15.2% and post-sale revenue fell 20.0%. Management said declines moderated sequentially as businesses reopened.
- Q3 gross margin was 36.8%, down 3.2 percentage points; equipment gross margin was 25.5%, down 9.0 points. Q3 pre-tax margin was 6.7%, down 3.5 points, and adjusted operating margin was 7.4%, down 4.6 points.
- Operating cash flow from continuing operations was $106 million in Q3 versus $348 million a year earlier. For the first nine months, it was $313 million versus $846 million. Nine-month capital expenditures were $60 million.
- At September 30, Xerox Holdings reported $3.242 billion cash and cash equivalents ($3.297 billion including restricted cash) and $5.054 billion total debt. Debt was $4.282 billion at year-end 2019. Current assets were $6.541 billion and current liabilities $3.327 billion.
Changes and notable items
- The pandemic drove lower equipment purchases, delayed installations and reduced print volumes. Equipment installations and print volumes improved from the second quarter, but remained below prior-year levels.
- Q3 results included $35 million of savings from government assistance and furlough programs; nine-month savings were $95 million. These are temporary measures. The company also reduced discretionary spending and suspended U.S. salaried-employee 401(k) matching contributions for 2020.
- Bad-debt expense increased $61 million in Q1, primarily reflecting expected COVID-19 effects. The allowance rose to 6.6% of gross trade receivables from 4.3% at year-end and to 4.4% of gross finance receivables, net of unearned income, from 2.6%.
- Xerox Holdings issued $1.5 billion of senior notes in August, with proceeds used principally to refinance debt. In October, it redeemed $750 million of 4.50% notes due 2021 for $769 million, including a $19 million premium; the filing reports an $18 million loss in Q4. An August downgrade of the company’s 2023 notes increased their coupon by 0.25 percentage points to 4.375%.
- During Q3, Xerox Holdings repurchased 8.0 million shares for $150 million. The company expected to repurchase a further $150 million in Q4.
Outlook, risks and contingencies
- Management withdrew its full-year 2020 revenue, earnings, operating cash flow and capital-allocation outlook because of pandemic uncertainty. It remained committed to positive Q4 earnings and operating cash flow from continuing operations after capital expenditures, maintaining the current common dividend, and returning at least 50% of such cash flow to shareholders.
- Management anticipated significant year-over-year revenue declines to continue amid renewed global restrictions and delayed customer purchases. It cited business closures, office capacity limits, print-volume trends, competitive pricing and tariffs as headwinds; estimated full-year 2020 tariff costs were approximately $30 million.
- Liquidity included $3.297 billion of cash, cash equivalents and restricted cash and access to an undrawn $1.8 billion revolver. A revised credit covenant requires at least $1.0 billion of unrestricted cash during the modification period, and sets a net-debt-to-EBITDA limit of 4.25:1.00, subject to the agreement’s terms.
- Goodwill was not impaired in the Q2 quantitative review; estimated fair value exceeded carrying value by 10%–20%. Q3’s qualitative review found no triggering event, but management planned a Q4 quantitative test. A more prolonged or severe downturn could reduce estimated fair value and lead to impairment.
- Brazilian tax disputes included $325 million of unreserved contingencies, which management said were mostly assessed as remote; related escrow cash deposits were $36 million. The filing also describes shareholder litigation related to the Fuji transaction and proposed HP acquisition; outcomes were considered premature to assess and could be material.
- The HCL shared-services arrangement had approximately $1.2 billion of remaining spending commitments over six years; the transition, delayed by COVID-19, was expected to extend into 2021. Charges associated with the arrangement were approximately $139 million for the first nine months of 2020.
Investor verification priorities
- Track whether revenue, equipment placements and print volumes recover, and whether Q4 positive earnings and post-capex operating cash flow are achieved.
- Assess the durability of margins and cost savings after temporary assistance, furloughs and the 401(k) match suspension end; monitor tariffs and competitive pricing.
- Review receivable delinquencies, credit-loss allowances and collections as pandemic-related customer stress develops.
- Check the Q4 goodwill impairment test and the assumptions for recovery, cash flows and market valuation.
- Monitor debt maturities, covenant compliance, rating effects, liquidity and the company’s ability to fund dividends and planned repurchases.
- Follow developments in the Brazil contingencies, shareholder litigation and the HCL transition and commitments.