Xerox Holdings Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. The combined filing presents Xerox Holdings Corporation and Xerox Corporation; Xerox is the primary operating subsidiary and accounts for nearly all of Holdings’ operations. Figures below are in U.S. dollars unless stated otherwise.
Financial performance
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $1.710 billion | $1.860 billion |
| GAAP net income (loss) attributable to Xerox Holdings | $39 million | $(2) million |
| GAAP diluted EPS | $0.18 | $(0.03) |
| Adjusted net income / diluted EPS | $47 million / $0.22 | $50 million / $0.21 |
| Operating cash flow | $117 million | $173 million |
| Cash, cash equivalents and restricted cash at quarter-end | $2.461 billion | $2.665 billion |
- Revenue decreased 8.1% year over year, or 10.4% at constant currency. Equipment sales increased 17.2% to $381 million; post-sale revenue fell 13.4% to $1.329 billion. Management attributed the continuing post-sale decline primarily to pandemic-related office closures, reduced printing volumes, a smaller installed device base and competitive pricing.
- GAAP pre-tax income was $53 million, versus a $5 million loss; pre-tax margin was 3.1%, versus negative 0.3%. Adjusted operating profit rose to $89 million from $87 million, and adjusted operating margin increased to 5.2% from 4.7%.
- Total gross margin declined to 35.7% from 38.3%; equipment gross margin improved to 27.9% from 26.3%, while post-sale gross margin fell to 38.0% from 40.8%. Lower post-sale volume and price erosion weighed on margins.
- Operating cash flow was down $56 million year over year, chiefly reflecting working-capital movements and lower finance-receivable runoff. Investing used $17 million, primarily for capital expenditures. Financing used $318 million, including $162 million of share repurchases, $95 million of debt payments and $54 million of dividends. Cash and restricted cash declined $230 million during the quarter.
Balance sheet, debt and liquidity
- At March 31, Xerox Holdings reported total assets of $14.272 billion, current assets of $5.420 billion and current liabilities of $2.645 billion. Cash and cash equivalents were $2.379 billion; restricted cash was $82 million.
- Management reported total debt of $4.352 billion, down from $4.444 billion at December 31, 2020. It classified $2.935 billion as financing debt supporting customer finance assets and $1.417 billion as core debt. Xerox Holdings’ balance sheet showed $678 million of short-term and current debt and $3.674 billion of long-term debt.
- The company had access to an undrawn $1.8 billion revolving credit facility maturing in August 2022. Management said it had refinanced 2021 maturities and considered liquidity sufficient to manage pandemic-related disruption.
- Xerox Holdings repurchased 6.7 million shares for $162 million during the quarter; approximately $338 million remained under the authorization at March 31. The common dividend was $0.25 per share.
Changes, outlook and management commentary
- Management described a gradual but uneven recovery as vaccination progress and workplace reopenings supported equipment demand and a modest recovery in page volumes. It cautioned that new virus variants, renewed restrictions and slower enterprise-office reopenings could prolong pressure on results.
- Management expected 2021 revenue of at least $7.2 billion, approximately 2.5% growth excluding currency effects; operating cash flow of approximately $600 million; and capital expenditures of approximately $100 million. It intended to return at least 50% of annual free cash flow to shareholders and make share repurchases opportunistically.
- Q1 GAAP profit improved substantially from the prior-year loss, but adjusted net income decreased $3 million. The comparison benefited from a prior-year $60 million incremental provision for expected credit losses, lower restructuring and transaction costs, and lower non-service retirement-related costs.
- Cost actions included Project Own It restructuring, discretionary-spending reductions and temporary government assistance. The company recorded about $10 million of savings from government measures in Q1 and temporarily suspended the U.S. salaried 401(k) employer match, expecting approximately $20 million of full-year savings. Restructuring and related costs were $17 million, compared with $41 million a year earlier; about 350 employees were affected by Q1 restructuring actions.
- Subsequent to quarter-end, Fuji Xerox paid $100 million for continued use of the Xerox brand for two years; Xerox expects to recognize the revenue over that period. Xerox also acquired a Canadian office-equipment dealer for approximately $30 million in April.
Risks, contingencies and unusual items
- COVID-19 continued to affect revenue and estimates, including credit-loss reserves and goodwill valuation. Management’s interim assessment found no goodwill impairment triggering event, but warned that a more severe or prolonged downturn could reduce estimated fair values and lead to future impairment charges.
- Brazilian tax contingencies included $335 million classified as unreserved at March 31. Management said most of the unreserved exposure was considered remote as to loss; escrow cash deposits were $35 million, with additional surety bonds and letters of credit supporting disputes.
- Xerox and subsidiaries pursued insurance coverage for pandemic-related business-interruption losses, alleging projected losses exceeding $300 million through 2020. Coverage is disputed and the proceedings were ongoing.
- Shareholder litigation concerning the terminated Fuji transaction and the proposed HP acquisition had been dismissed at the trial-court level, but appeals were pending. The filing says potential litigation outcomes could materially affect results, cash flows or financial position; loss probability was not clear for the cited matters.
- The shared-services arrangement with HCL had approximately $1 billion of remaining aggregate spending commitments over five years, subject to termination provisions. Completion of the transition was delayed and expected by year-end 2021.
- Other disclosed risks include customer credit deterioration, competitive pricing, pension funding, foreign-exchange and interest-rate exposure, cybersecurity, regulatory compliance and dependence on third-party suppliers and service providers.
Important facts for investors to verify
- Whether the revenue and page-volume recovery continued after Q1, particularly in post-sale services and large-enterprise accounts.
- Whether full-year revenue, operating-cash-flow and capital-expenditure guidance was achieved, and how much cash was returned to shareholders.
- Credit-loss trends and reserve adequacy, including the effects of pandemic-related customer stress on trade and finance receivables.
- Debt maturities, revolving-credit availability and the distinction between financing debt and core debt.
- Developments in the Brazil tax disputes, pandemic-insurance claims and shareholder-litigation appeals, including any changes to recognized reserves or exposures.
- The timing and financial impact of the Fuji brand-license revenue, HCL transition and Canadian dealer acquisition.