Xerox Holdings Corporation and Xerox Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. The companies filed combined reports; Xerox Corporation represents substantially all of Xerox Holdings’ operations. Unless noted, amounts are in U.S. dollars and millions.
Business context and key financials
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $1,860 | $2,180 |
| GAAP continuing operations net income (loss) attributable to Xerox Holdings | $(2) | $84 |
| Adjusted net income attributable to Xerox Holdings (non-GAAP) | $50 | $158 |
| Adjusted diluted EPS (non-GAAP) | $0.21 | $0.66 |
| Gross margin | 38.3% | 40.2% |
| Adjusted operating margin (non-GAAP) | 4.7% | 11.0% |
| Operating cash flow, continuing operations | $173 | $222 |
Revenue fell 14.7% year over year (13.9% at constant currency): equipment sales declined 27.5% and post-sale revenue declined 11.4%. The pandemic’s March business closures, delayed installations and lower print volumes weighed on results. The 2019 comparison includes $51 million of after-tax discontinued-operations income in reported net income; the table compares continuing operations.
At March 31, cash and cash equivalents were $2,622; total debt was $4,288, including $3,041 of financing debt and $1,247 of core debt. Short-term debt and current maturities were $1,050. Total assets were $14,784 and total equity was $5,400. The company also reported an undrawn $1.8 billion credit facility, maturing in August 2022, and compliance with its covenants.
Material changes and notable items
- Bad-debt provision increased by $61 year over year to $74, reflecting expected COVID-19 effects. The allowance rose to 5.4% of gross trade receivables from 4.3% at year-end; the finance-receivables allowance rose to 4.4% from 2.6%.
- Cash decreased by $130 during the quarter. Operating cash flow was $173; investing used $214, including $193 for acquisitions and $23 of capital expenditures; financing used $60, primarily dividends.
- Four reseller and dealer acquisitions in the U.K. and Canada were completed for $193 net of acquired cash, to expand the SMB business. Their operating results were not material to the quarter.
- Restructuring and related costs were $41, versus $112 a year earlier. The company recorded $29 of restructuring and asset-impairment charges and reduced worldwide employment by about 700 from year-end.
- Q1 2020 included $17 of transaction-related costs, primarily tied to the proposed HP transaction. Xerox withdrew its tender offer for HP on March 31 and terminated $24 billion of financing commitments without termination fees.
- Foreign-currency translation losses of $197 contributed to a $138 other comprehensive loss. Xerox performed a qualitative goodwill review and concluded no quantitative impairment test was required as of March 31; it cautioned that a more severe or prolonged downturn could affect goodwill recoverability.
Outlook, liquidity and risks
Xerox withdrew its previously issued 2020 outlook for revenue, earnings, operating cash flow and capital allocation because of COVID-19 uncertainty. Management’s base scenario anticipated the greatest revenue impact in Q2, an inflection late in that quarter, gradual recovery in Q3 and a return closer to planned levels in Q4. Management said recovery timing and extent remained highly uncertain. The company said it remained committed to its common dividend and its policy of returning at least 50% of operating cash flow after capital expenditures to shareholders.
Management cited cash preservation measures, contractual service revenue and available liquidity as support through the downturn. Approximately $1 billion of debt was due in 2020, including $313 in Q2 and $737 in Q3. Xerox identified pandemic-related sales and print-volume weakness, customer credit deterioration, competition and secular print declines, tariffs, foreign exchange, pension funding, access to credit, and execution of cost-reduction and outsourcing initiatives as key risks. It estimated approximately $30 of full-year 2020 cost impact from higher tariffs.
Contingencies include Brazilian tax disputes, with $349 of unreserved tax contingencies disclosed; management assessed the majority as remote. It also disclosed securities and derivative litigation related to the Fuji transaction and proposed HP acquisition, for which the likelihood of material loss was described as premature to determine. Guarantees totaled approximately $294, with default considered remote by management.
Most important facts for investors to verify
- How Q2 and subsequent results compare with management’s recovery assumptions, given that formal 2020 guidance was withdrawn.
- Whether receivable delinquencies, bad-debt expense and expected credit losses rise beyond the Q1 estimates.
- Cash generation, dividend sustainability and the company’s ability to refinance or repay 2020 maturities while maintaining access to credit.
- Whether revenue declines, pricing pressure and equipment-sales mix continue to weaken margins, and whether Project Own It savings offset those pressures.
- Updates to the goodwill assessment, Brazilian tax matters, HP/Fuji-related litigation and the potential financial effects of other contingencies.